HomeMy WebLinkAboutFinance Committee - September 6, 2018CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA - Final
100 Civic Center Drive - Newport Coast Conference Room, Bay 2E
Thursday, September 6, 2018 - 3:00 PM
Finance Committee Members:
Will O'Neill, Chair / Mayor Pro Tem
Diane Dixon, Council Member
Scott Peotter, Council Member
William Collopy, Committee Member
Patricia Eckert, Committee Member
Joe Stapleton, Committee Member
Larry Tucker, Committee Member
Staff Members:
Grace Leung, City Manager
Carol Jacobs, Assistant City Manager
Dan Matusiewicz, Finance Director / Treasurer
Steve Montano, Deputy Director, Finance
Marlene Burns, Administrative Specialist to the Finance Director
The Finance Committee meeting is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that
the Finance Committee agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that
the public be allowed to comment on agenda items before the Committee and items not on the agenda but are within
the subject matter jurisdiction of the Finance Committee. The Chair may limit public comments to a reasonable amount
of time, generally three (3) minutes per person.
The City of Newport Beach’s goal is to comply with the Americans with Disabilities Act (ADA) in all respects. If, as an
attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, we will
attempt to accommodate you in every reasonable manner. Please contact Dan Matusiewicz, Finance Director, at least
forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is
feasible at (949) 644-3123 or dmatusiewicz@newportbeachca.gov.
NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT
Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance
Department 24 hours prior to the scheduled meeting.
I.CALL MEETING TO ORDER
II.ROLL CALL
III.PUBLIC COMMENTS
Public comments are invited on agenda and non-agenda items generally considered to be
within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments
to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for
the record. The Finance Committee has the discretion to extend or shorten the speakers’ time
limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all
speakers. As a courtesy, please turn cell phones off or set them in the silent mode.
IV.CONSENT CALENDAR
MINUTES OF JUNE 28, 2018A.
Recommended Action:
Approve and file.
DRAFT MINUTES 062818
September 6, 2018
Page 2
Finance Committee Meeting
V.CURRENT BUSINESS
ANNUAL REVIEW OF INVESTMENT POLICYA.
Summary:
Review investment policy.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
INVESTMENT PERFORMANCE REVIEWB.
Summary:
Staff and/or the investment advisor will describe the performance of the City's
investment portfolio.
Recommended Action:
Discuss and provide direction regarding policy recommendations as appropriate. If
applicable direct staff to propose changes to City Council for consideration at a
future date.
STAFF REPORT
ATTACHMENT A
ATTACHMENT B
RESERVE POLICYC.
Summary:
Further discussion and consideration of reserve policy pursuant to findings in Draft
Report: GFOA Risk Based Analysis of General Fund Reserve Requirements.
Recommended Action:
Discuss and provide staff direction to revise the reserve policy as appropriate and
bring changes to Council for consideration at a future date.
STAFF REPORT
ATTACHMENT A
REVIEW OF FINANCE COMMITTEE PURPOSE AND RESPONSIBILITIESD.
Summary:
Review City Council Resolution 2017-58 (Finance Committee Purpose and
Responsibilities), suggest and recommend changes as needed for submission to
the City Council for final approval.
Recommended Action:
Discuss and recommend changes as appropriate.
STAFF REPORT
ATTACHMENT A
September 6, 2018
Page 3
Finance Committee Meeting
BUDGET AMENDMENTS (QUARTER ENDED JUNE 30, 2018)E.
Summary:
Receive and file a staff report on the budget amendments for the prior quarter.
Recommended Action:
Receive and file.
STAFF REPORT
ATTACHMENT A
REVIEW OF FINANCE COMMITTEE WORKPLANF.
Summary:
Staff will review with the Committee the agenda topics scheduled for the remainder
of the calendar year.
Recommended Action:
Discuss and comment as necessary.
ATTACHMENT A
VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS
WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR
REPORT (NON-DISCUSSION ITEM)
VII.ADJOURNMENT
Finance Committee Meeting Minutes June 28, 2018
Page 1 of 9
CITY OF NEWPORT BEACH FINANCE COMMITTEE
JUNE 28, 2018 MEETING MINUTES I. CALL MEETING TO ORDER
The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660.
II. ROLL CALL
PRESENT: Council Member Diane Dixon (Acting Chair), Committee Member William
Collopy, Committee Member Joe Stapleton, and Committee Member Larry Tucker
ABSENT: Mayor Pro Tem Will O'Neill (excused), Council Member Scott Peotter, and
Committee Member (VACANT)
STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve
Montano, Accounting Manager Rukshana Virany, Budget Manager Susan Giangrande, and Administrative Specialist to the Finance Director Marlene
Burns
MEMBERS OF THE PUBLIC: Carl Cassidy and Jim Mosher
OUTSIDE ENTITIES: Shayne Kavanagh (GFOA) via teleconference call and Hillary Davis (Daily
Pilot)
Chair Dixon announced that Mayor Pro Tem O'Neill is the new Committee Chair but is excused from the meeting this evening and she will serve as Chair. She expressed her gratitude for the
opportunity to serve as Chair and pride at the accomplishments made by the Committee.
III. PUBLIC COMMENTS
Chair Dixon opened public comments.
Jim Mosher referenced the Ballot Initiative and noted there is no copy in the agenda packet. In terms of the Council's last meeting, there was a Brown Act issue related to the Finance Committee;
however, the issue was not explained. He felt it important for everyone to understand the issue to ensure transparency.
Chair Dixon stated she understood the matter but did not agree with the conclusion. It involved
emails from a member of the public containing the anticipated content of a proposed Charter amendment and was circulated to every Council Member. The Finance Committee did not discuss
the issue prior to the Council meeting, and it was not a violation of the Brown Act.
Carl Cassidy thanked Chair Dixon for her service and hoped her next term will be as fruitful and productive. He requested a copy of each item on the agenda in order to provide public comments.
Chair Dixon explained that there is opportunity for public comment on each agenda item.
Noting there were no other members of the public who elected to speak on this item, Chair Dixon
closed public comments.
Finance Committee Meeting Minutes June 28, 2018
Page 2 of 9
IV. CONSENT CALENDAR
A. MINUTES OF JUNE 14, 2018 Recommended Action:
Approve and file.
MOTION: Committee Member Tucker moved, and Committee Member Collopy seconded, to approve the minutes, as submitted. The motion carried (4 – 0, O’Neill and Peotter absent)
unanimously. V. CURRENT BUSINESS
A. AGREED UPON AUDIT PROCEDURES FOR INTERNAL CONTROL Summary:
The Finance Department is working with the City’s audit firm, White Nelson Diehl Evans LLP, to develop agreed upon procedures for the audit of the City’s internal control processes and
procedures. The Auditor will present the audit findings. Recommended Action:
Direct staff to forward results to City Council.
Finance Director Matusiewicz reported there was a misunderstanding with the auditors and they will not be attending the meeting.
Committee Member Tucker noted they have reviewed wire transfers and ACH and inquired whether staff has reviewed check-writing, petty cash, and purchasing card policies. Director
Matusiewicz noted they have not but it is forthcoming in a future procedures audit.
Finance Director Matusiewicz described the steps taken in the audit, the City’s wire transfer
processes, and reported the all critical steps require dual authorization. For example, no one person can issue a wire, modify a template, or make any transaction without secondary
approval. They found; however, once a template is created, there is no annual review process to eliminate stale templates.
In response to Chair Dixon's question, Director Matusiewicz reported the next study will review disbursements and purchasing cards.
Chair Dixon opened public comments.
Carl Cassidy referenced change orders and contracts and Finance Director Matusiewicz
reported change orders and contracts had not yet been tested. There will be a continuous rotation for review of processes.
City Manager Kiff reported in terms of contracts, Public Works Inspectors and Contract Managers review the work requested under change orders. They “sign off” and pass them to
the Finance Department indicating whether, pursuant to internal controls, they are acceptable or not.
Committee Member Tucker added he was concerned about false invoices or fraud, although he was not concerned about disputed change orders.
Discussion ensued regarding the City conducting an operations audit during the Enterprise Resource Planning (ERP) process and provide information related to change orders at the City
Council level.
Jim Mosher felt it was good that the letter from the auditor was provided and commented on
the importance of having dual controls.
Chair Dixon closed public comments.
Finance Committee Meeting Minutes June 28, 2018
Page 3 of 9
There was no further action taken on this item.
B. RESERVE POLICY Summary:
Further discussion and consideration of Draft Report: GFOA Risk Based Analysis of General Fund Reserve Requirements. Recommended Action: Receive, file and discuss next steps; direct staff to draft changes to Council Policy F-2 (Reserve
Policy), as necessary.
Committee Member Collopy expressed support to postpone City Council Policy F-2 revision or publication prior to the Finance Committee's next meeting in September.
Shayne Kavanagh, GFOA consultant, displayed a spreadsheet noting the model is based on a thousand different simulations of the future of Newport Beach based on various risk levels.
He addressed “Average Remaining Reserves” after one through ten years. The average General Fund Reserves across the thousands of possible results is $50.1 million down to $42
million over ten years.
Committee Member Collopy inquired whether it is based on the probability of fire, flood and
recession and Mr. Kavanagh explained it shows, for example, in year 1, on average, based on all the possible futures calculated, Newport Beach will have $50.1 million over ten years. He
explained, further down the line, the amount decreases in consideration of the various things (events) that could possibly go wrong.
Director Matusiewicz reviewed the variables under different confidence level assumptions. Staff identified several risks that were modeled; however, staff noted that it was not possible to
model all risks
Committee Member Collopy referenced information presented at the last Committee meeting
where at a 70% to 90% confidence level the City would require approximately $13 to $16 million and felt the number should be higher. Now, between a 70% to 90% confidence level, the
numbers for reserve presented are $11 to $22 million.
Mr. Kavanagh explained the change occurs by changing the assumption of the amount of
money the City wants to cut from its budget. He explained the red line on the spreadsheet is the Critical Threshold ($10 million) and the green line is the 10th percentile, which indicates
90% of the time, the City will end above the green line and 10% of the time, it will be below the green line. Changing to $32 million, the green line would move right to the red line so in ten
years, there would be a 10% chance of being at or above the Critical Threshold.
Finance Director Matusiewicz explained the $32 million reflects known risks and adding the
$10 million buffer for unknowns would bring the cost to $42 million.
Chair Dixon inquired whether ten years would be the duration of the crisis and Mr. Kavanagh
explained it is the duration of the timeframe being considered; any number of crises could or could not happen during the ten years.
Mr. Kavanagh reported the purple line on the spreadsheet indicates the 49th of the "thousand possible futures." In Year 9, it goes down, but otherwise, it is at the City's discretion.
Committee Member Collopy noted that in Year 8, there was a projected fire, flood, earthquake or recession and could cause the City to require $15 million in reserves.
Finance Director Matusiewicz reported the simulations are based on experience and stated past performance is not necessarily a predictor of the future.
Committee Member Collopy suggested doubling the risk and magnitude and stated the Committee will need that information for evaluation purposes.
Finance Committee Meeting Minutes June 28, 2018
Page 4 of 9
Finance Director Matusiewicz reported from a policy standpoint, $42 million gives the City 90%
confidence level, a $10 million cushion, and the City could cut back the assumed amount that could be cut from the budget on an ongoing basis depending on the City’s appetite for risk and
the ability to reduce the budget.
Committee Member Collopy expressed support for the substantive analysis “behind” the
numbers presented, instead of just considering a reserve policy based upon 25%. He indicated he was much more comfortable with $30 - $40 million than $13 - $16 million, and noted it is the
City Council’s prerogative to determine the repurposing of any remaining funds. If the funds are placed into another reserve account and not spent, that, in itself, is a risk mitigator.
In response to Chair Dixon's question regarding what was cut in the last budget, City Manager Dave Kiff stated the goal was $8 million but the City Council achieved $6 million. It was noted
that not all of the $6 million would come out of Department operations.
Committee Member Tucker reported the assumptions are good but wondered about the
consequences of Phase 2. He wondered whether there is a compelling reason to switch from what the City has been doing and stated he would be more comfortable seeking funds for
something needing replacement as opposed to considering a few more projects. He expressed concerns with exposing the City to further risk.
Chair Dixon declared she did not think this was done to free up money to spend, but rather to find a comfortable risk-factor level and consider where to put the difference.
Committee Member Stapleton noted that Chair Dixon stated an important point.
Finance Director Matusiewicz pointed out that with explicit Council Authorization, the City could
buy Treasuries and Agencies with a maturity up to 10 years for circumstances that warranted a longer investment horizon.
Committee Member Collopy inquired about the differences in yield and Finance Director Matusiewicz reported yield changed rapidly.
Chair Dixon added the matter of what to do with the differential could be something the Finance Committee could consider. If the City were to keep it and send more money to CalPERS, the
return on their investment is greater than what the City would get with a Section 115 Trust.
Finance Director Matusiewicz reported that the City already uses a Section 115 Trust
administered with CalPERS for OPEB liabilities so the City gets marginally the same economy of scale as the Public Employers’ Retirement Fund.
Committee Member Stapleton inquired whether future City Councils would be able to spend the money as they saw fit.
Chair Dixon noted it is City Council policy and inquired whether part of the money ($8.8 million) should be sent to CalPERS or to a separate Section 115 Trust. It was noted the matter would
warrant a separate discussion.
Committee Member Collopy stated the reserve would be more than $45 million and inquired
whether there is appetite for the Committee to consider sending more than $8.8 million to CalPERS.
Committee Member Tucker stated he was not sure and noted the City has an obligation to CalPERS, which accrues interest at 7.5%. Any money in CalPERS or that should have been
in CalPERS is supposed to earn 7.5%. If the money were not there, the City would be guaranteeing the 7.5%, as the City is paying interest. To the extent that the City takes that
money, pays down the principal obligation, the money would be in the fund, and the fund has to earn 7.5% or the shortfall would be due. The guaranteed savings would be 7.5% minus the
shortfall. He commented on the differences in the quality of reserves and suggested considering all the choices and developing a recommendation.
Finance Committee Meeting Minutes June 28, 2018
Page 5 of 9
Discussion ensued between Chair Dixon and Committee Members Stapleton and Collopy
regarding the source of the $10 million buffer.
Committee Member Tucker commented on the $10 million as a buffer in case the assumptions
are wrong.
Committee Member Collopy felt the intention, when starting this project, was not necessarily to
free up money, but hoped this will be used in the next budget cycle to determine if the reserve can be moved to higher-yielding instruments and not necessarily on things like building a new
library. Ultimately, it would be City Council prerogative.
Finance Director Matusiewicz reported typically, prior to issuing and recommending a budget,
staff would look at over-funded accounts and staff would make a recommendation using the over-funding to back-fill some of the accounts that may be short. He suggested the Finance
Committee review General Liability and Workers Compensation, have a more robust discussion regarding a Section 115 Trust in order to make recommendations before getting
into the budget, and by December, start fine-tuning those recommendations and amendments to Council Policy F-2 on the reserves. He suggested Committee Members review Council
Policy F-2, and that copies of the changes that were last drafted will be provided.
Committee Member Tucker indicated the Budget Policy is not very clear, or descriptive. He
suggested clarifying and simplifying the policy.
Finance Director Matusiewicz indicated the Subcommittee is welcome to make suggestions to
the Finance Committee.
In response to Committee Member Stapleton's inquiry regarding the $15 million, Finance
Director Matusiewicz reported City Reserves are restricted by Government Code 53601 in that maximum maturity can go no longer than five years. It also limits the types of instruments that
can be purchased. Other than a Section 115 Trust, the only other thing City Council could do is give staff the discretion to buy Treasuries out to 10 years.
City Manager Kiff reported a Section 115 Trust can only be used for pensions, but CalPERS is considering doing its own Section 115 for non-OPEB items.
Chair Dixon reported Irvine Ranch Water District (IRWD) has a Section 115 Trust, not managed by CalPERS and funds can be invested in different types of instruments; however, it must be
defined by the Internal Revenue Service; though, their investment profile is determined by the IRWD Board.
Committee Member Collopy inquired why CalPERS would offer a Section 115 Trust in addition to investing in CalPERS. He noted it has to be just for employee benefits or retirement.
Chair Dixon noted the need to bring in outside experts, such as John Bartel, to discuss the benefits and disadvantages of Section 115 Trust.
City Manager Kiff suggested having a Section 115 Trust workshop day to assist in forming recommendations.
Committee Member Tucker opined that one meeting might not be enough.
Finance Director Matusiewicz reported it is politically unpopular to send money to CalPERS
and some agencies participate in Section 115 Trusts for that reason or because they perceives it to have more flexibility with no added market risk or cost.
City Manager Kiff added Mr. Bartel commented that Newport Beach was not the typical category of agency that makes use of a Section 115 Trust.
Finance Committee Meeting Minutes June 28, 2018
Page 6 of 9
Chair Dixon opined it would be better than what the City could do on its own. She suggested
putting a package together including Council Policy F-2, suggested changes, and Section 115 Trust.
Committee Member Collopy suggested considering a higher yield use of funds, if possible, as the reserve is higher than it needs to be.
Chair Dixon opened public comments.
Carl Cassidy inquired where the public fits in as it relates to this discussion. He heard the
public would be against additional contributions to unfunded liabilities and stated he still has questions not yet answered.
Chair Dixon reported any questions from the public could be presented. She suggested scheduling a study session for the Committee to discuss proposed changes for Council Policy
F-2 and there would be opportunity for public input.
City Manager Kiff voiced respect for Mr. Cassidy's comments, and noted the Committee has
been discussing this for at least four years. He and Finance Director Matusiewicz are available to respond to questions.
Committee Member Tucker commented on the complexity of the item and believed the purpose of the Finance Committee is to assist the City Council Members on the Committee to
understand various financial matters as they impact the City.
Jim Mosher noted he attends meetings and asks questions for increased understanding.
Chair Dixon closed public comments.
There was no further action taken on this item.
C. PENSION DISCUSSION Summary: Agenda item reserved for any discussion regarding the status of the City's pension liability,
funding policy and Section 115 Pension Prefunding Funding Trust. Recommended Action:
Receive, file and provide direction as necessary.
Finance Director Matusiewicz reported the Finance Committee has discussed paying more now to “level out” payments and ensure savings down the road. The City is trying to keep the
amortization schedule under twenty years and explained the benefits of doing so. He stated he wants to maximum long-term savings, noted the repayment of the unfunded liability should
be aggressive, but stressed the need to be mindful of current needs. Additionally, he addressed preserving financial flexibility, maximizing the use of additional discretionary
payments, and noted it is a good option but additional options should be further explored.
Finance Director Matusiewicz commented on keeping the City's CalPERS contributions level, for budgeting purposes, not wanting to increase risk, and choosing the most cost-effective path.
He reported that in February, CalPERS approved a new shorter amortization policy. Additional Discretionary Payments (ADPs) are strategically applied to the longest bases that provide the
most long-term economic savings. The City's payment schedule is made up of various bases and terms.
In response to Chair Dixon's inquiry, Finance Director Matusiewicz reported that the investment
credits that have not yet amortized out 30 years are not being fully utilized.
Finance Committee Meeting Minutes June 28, 2018
Page 7 of 9
Finance Director Matusiewicz addressed 2014 and 2017 Experience Gain Valuation and the
impact of further assumption changes that will be reflected in the 2018 valuation (to be received in August of 2019).
In reply to Committee Member Tucker's question, Finance Director Matusiewicz reported that
investment gains or losses in 2019 would be amortized over twenty years with a five-year phase-in.
Finance Director Matusiewicz reported by making the targeted ADP payments and by having
under-utilized credits, the City would not be able to prevent the default payment from reaching $40 million unless the City considered another fresh start to fully utilize the underutilized
investment credits from 2014 and 2017 that are currently being amortized over 30 years. To get those credits on future payments, the City would have to combine all bases through a full
fresh start or do a partial fresh start on selected bases
In reply to Chair Dixon's inquiry regarding taking from the surplus or making an extra payment, Finance Director Matusiewicz stated ADPs alone will not keep the minimum payment from
increasing above $35 million unless the City would open combining / shortening credit bases that are being amortized over a longer period of time. Options could include continuing with
ADPs, do a fresh start to realize investment credits sooner and level out minimum payments requirements. Alternatively, the City could divert ADP payments into a Section 115 Trust.
Committee Member Collopy inquired why the City does not do that (fresh start all bases) every
year.
Chair Dixon referenced the fresh start process in 2014 and reported the new Council has been making extra payments as well.
It was noted if a new fresh start is executed next year, all know investment credits would be
captured and credited against minimum require payments
City Manager Kiff reported that the only way long-term investment credits could be captured was to offset pension costs in the near term.
Finance Director Matusiewicz reported that $32 million came from the actuary and it does not
include the final quarter point discount reduction nor the expected investment gains from 2017.
Chair Dixon reported the reason why the City Council has not wanted to do a “fresh start” is because when the City pays extra, it is discretionary, and funds typically come out of the
surplus.
Committee Member Collopy noted the importance of flexibility.
Finance Director Matusiewicz stated that by Year 6, the current minimum payment would overtake the fresh start level dollar payment, and as a result, the perceived flexibility would be
lost.
Committee Member Collopy suggested doing a fresh start in Year 6.
Finance Director Matusiewicz stated he could not to the desired level payment without capturing the out-year credits and that every year that a fresh start is delayed; the minimum
level dollar payment option would increase.
Chair Dixon reported $28 million is mandatory and $8 million is discretionary.
Finance Committee Meeting Minutes June 28, 2018
Page 8 of 9
Finance Director Matusiewicz reported assuming $35 million was the target cap; the additional
discretionary payments would start dwindling away to zero and minimum payments would eventually breach the $35 million.
Finance Director Matusiewicz reported there is no vehicle to transfer a security from a Section
115 Trust to CalPERS, without selling that asset at then market prices, which could involve considerable market risk and investment losses to the potential short investment horizon.
Finance Director Matusiewicz addressed the risks associated with using a Section 115 Trust
as a rainy-day fund. He also suggest any funds put into a trust would not likely have a material impact on asset diversification given the current City funds with CalPERS exceeds $550 million
in assets. He noted that assets in a Section 115 Trust are not counted when measuring an agency’s net pension obligation.
In response to Committee Member Collopy's question as to who makes investment decisions,
Finance Director Matusiewicz addressed two primary providers (PARS and PFM) and Committee Member Collopy noted additional services would be necessary to manage a
Section 115 Trust.
Chair Dixon opened public comments.
Carl Cassidy reported IRWD has a Treasurer and a section in their Code that allows them to own real estate. He commented on the City doubling up on its reserves and expressed concern
the City is holding back employee money.
Committee Member Collopy reported the discussion on fresh start and using available credits results in almost exactly the same number as the City's unfunded liability plus ADP. The
additional $8.8 million, he stated, should not be seen as just an additional reserve.
Chair Dixon closed public comments.
Committee Member Tucker noted the City is already contributing a lot of money.
Chair Dixon added there is no reason to pay before needing to do so.
There was no further action taken on this item.
D. DISCUSS POTENTIAL BALLOT INITIATIVE THAT MAY REQUIRE A VOTE OF THE ELECTORATE PRIOR TO THE ISSUANCE OF CERTAIN CERTIFICATES OF
PARTICIPATION (COPS) AND OTHER LEASE REVENUE OBLIGATIONS Summary:
On the June 26 City Council agenda, Council members will discuss a potential ballot initiative that would require a vote of the electorate prior to the issuance of certain COPs and other lease
revenue obligations. Recommended Action:
Discuss and develop pros and cons to City Council as necessary.
Chair Dixon reported she wanted to inform the public regarding the pros and cons of a Charter
Amendment but noted the lateness in hour and suggested the new Chair of the Finance Committee will want to discuss it at the next meeting in September.
Discussion ensued regarding making sure not to tie the hands of future City Councils, the money being there when needed because it is in the City's Financial Plan, the possibility of
issuing debt, City Council flexibility in terms of how to use the money, managing the matter, and coverage of damages was the original intent.
Finance Committee Meeting Minutes June 28, 2018
Page 9 of 9
There was no further action taken on this item.
E. WORK PLAN REVIEW Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the
calendar year. Recommended Action:
Receive, file provide staff input as necessary.
Chair Dixon reported that at the next meeting, the Finance Committee would discuss CalPERS, Annual Review of the Investment Policy, budget amendments, recommendations on the City's
Reserve Policy and parametric insurance (flood and earthquake) and possibly, other reserve options.
Regarding the latter, Committee Member Tucker suggested waiting until the full Finance
Committee could attend.
Committee Member Collopy referenced the analysis and recommended discussing other
reserves.
Finance Director Matusiewicz noted that the analysis might not necessarily apply to other
reserves as they have different risk levels and cover only staff response time.
There was no further action taken on this item.
VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-
DISCUSSION ITEM)
Committee Member Tucker requested considering the Resolution that established the Finance Committee to determine if it should be refined and closely aligned with what the Committee actually
does, when there is time and space on the agenda.
VII. ADJOURNMENT
The Finance Committee adjourned at 5:35 p.m. to the next regular meeting of the Finance
Committee.
Filed with these minutes are copies of all materials distributed at the meeting.
The agenda for the Regular Meeting was posted on June 25, 2018, at 1:56 p.m., in the binder and on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 Civic
Center Drive.
Attest:
___________________________________ _____________________
Diane Dixon, Acting Chair Date Finance Committee
September 6, 2018, Finance Committee Agenda Comments
These comments on an item on the Newport Beach City Council Finance Committee agenda are
submitted by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660
(949-548-6229)
Item IV.A. MINUTES OF JUNE 28, 2018
Changes to the draft minutes passages shown in italics are suggested in strikeout underline format.
Page 5, paragraph 2 from end: “Finance Director Matusiewicz reported it is politically unpopular
to send money to CalPERS and some agencies participate in Section 115 Trusts for that reason
or because they perceives perceive it to have more flexibility with no added market risk or
cost.”
Page 6, Item C, paragraph 1, sentence 3: “He stated he wants to maximum maximize long-
term savings, noted the repayment of the unfunded liability should be aggressive, but stressed
the need to be mindful of current needs.”
Page 7, paragraph 7: “It was noted if a new fresh start is executed next year, all know known
investment credits would be captured and credited against minimum require required
payments.”
Page 7, paragraph 2 from end: “Finance Director Matusiewicz stated he could not keep to the
desired level payment without capturing the out-year credits and that every year that a fresh
start is delayed; the minimum level dollar payment option would increase.” [?? There seems to
be a word missing. Also the semicolon should be changed to a comma or deleted.]
Page 8, paragraph 3, sentence 2: “He also suggest suggested any funds put into a trust
would not likely have a material impact on asset diversification given the current City funds with
CalPERS exceeds $550 million in assets.”
Item No. 4A1
Draft Minutes of June 28, 2018
Correspondence
September 6, 2018
1
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5A
September 6, 2018
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
949-644-3123 or danm@newportbeachca.gov
SUBJECT: Annual Investment Policy Review and Update
DISCUSSION:
In furtherance of Section K-2 of Council Policy F-1, Statement of Investment Policy (the
Policy), the Finance Department has completed an annual review of the Policy to ensure its consistency with the overall objectives of preservation of principal, liquidity and return,
and its relevance to current law and financial and economic trends.
The investment of City funds is governed by California Code (Sections 53600-53610) that
prescribe the investment vehicles in which local agencies are permitted to invest available funds. Staff, working with the City’s investment advisor, Chandler Asset Management
(Chandler), has completed a comprehensive review of the Policy including compliance
with relevant sections of the Government Code, as well as, incorporating best investment
practices.
Staff is proposing no modifications to the Policy at this time as recommended by Chandler
Asset Management and supported by the City’s Finance Director/Treasurer.
RECOMMENDATION: Receive and file.
Prepared by: Submitted by:
/s/Steve Montano
/s/Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Annual Investment Policy Review and Update September 6, 2018
Page 2
Attachment: A. Council Policy F-1, Statement of Investment Policy
ATTACHMENT A
COUNCIL POLICY F-1, STATEMENT OF INVESTMENT POLICY
F-1
1
STATEMENT OF INVESTMENT POLICY
PURPOSE:
The City Council has adopted this Investment Policy (the Policy) in order to establish the
scope of the investment policy, investment objectives, standards of care, authorized
investments, investment parameters, reporting, investment policy compliance and
adoption, and the safekeeping and custody of assets.
This Policy is organized in the following sections:
A. Scope of Investment Policy
1. Pooling of Funds
2. Funds Included in the Policy
3. Funds Excluded from the Policy
B. Investment Objectives
1. Safety
2. Liquidity
3. Yield
C. Standards of Care
1. Prudence
2. Ethics and Conflicts of Interest
3. Delegation of Authority
4. Internal Controls
D. Banking Services
E. Broker/Dealers
F. Safekeeping and Custody of Assets
G. Authorized Investments
1. Investments Specifically Permitted
2. Investments Specifically Not Permitted
3. Exceptions to Prohibited and Restricted Investments
H. Investment Parameters
1. Diversification
2. Maximum Maturities
3. Credit Quality
4. Competitive Transactions
I. Portfolio Performance
J. Reporting
K. Investment Policy Compliance and Adoption
1. Compliance
2. Adoption
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A. SCOPE OF INVESTMENT POLICY
1. Pooling of Funds
All cash shall be pooled for investment purposes. The investment income
derived from the pooled investment shall be allocated to the contributing
funds, net of all banking and investing expenses, based upon the proportion
of the respective average balances relative to the total pooled balance.
Investment income shall be distributed to the individual funds not less than
annually.
2. Funds Included in the Policy
The provisions of this Policy shall apply to all financial assets of the City as
accounted for in the City’s Comprehensive Annual Financial Report,
including;
a) General Fund
b) Special Revenue Funds
c) Capital Project Funds
d) Enterprise Funds
e) Internal Service Funds
f) Trust and Agency Funds
g) Permanent Endowment Funds
h) Any new fund created unless specifically exempted
If the City invests funds on behalf of another agency and, if that agency
does not have its own investment policy, this Policy shall govern the
agency’s investments.
3. Funds Excluded from this Policy
Bond Proceeds – Investment of bond proceeds will be made in accordance
with applicable bond indentures.
B. INVESTMENT OBJECTIVES
The City’s funds shall be invested in accordance with all applicable City policies
and codes, State statutes, and Federal regulations, and in a manner designed to
accomplish the following objectives, which are listed in priority order:
1. Safety
Preservation of principal is the foremost objective of the investment
program. Investments of the City shall be undertaken in a manner that
seeks to ensure the preservation of capital in the overall portfolio. The
objective shall be to mitigate credit risk and interest rate risk. To attain this
objective, the City shall diversify its investments by investing funds among
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several financial institutions and a variety of securities offering
independent returns.
a) Credit Risk
The City shall minimize credit risk, the risk of loss due to the
failure of the security issuer or backer, by:
Limiting investments in securities that have higher credit risks,
pre-qualifying the financial institutions, broker/dealers,
intermediaries, and advisors with which the City will do
business
Diversifying the investment portfolio so as to minimize the
impact any one industry/investment class can have on the
portfolio
b) Interest Rate Risk
To minimize the negative impact of material changes in the market
value of securities in the portfolio, the City shall:
Structure the investment portfolio so that securities mature
concurrent with cash needs to meet anticipated demands,
thereby avoiding the need to sell securities on the open
market prior to maturity
Invest in securities of varying maturities
2. Liquidity
The City’s investment portfolio shall remain sufficiently liquid to enable the
City to meet all operating requirements which might be reasonably
anticipated without requiring a sale of securities. Since all possible cash
demands cannot be anticipated, the portfolio should consist largely of
securities with active secondary or resale markets. A portion of the portfolio
also may be placed in money market mutual funds or LAIF which offer
same-day liquidity for short-term funds.
3. Yield
The City’s investment portfolio shall be designed with the objective of
attaining a benchmark rate of return throughout budgetary and economic
cycles, commensurate with the City’s investment risk constraints and the
liquidity characteristics of the portfolio. Return on investment is of
secondary importance compared to the safety and liquidity objectives
described above. The core of investments is limited to relatively low risk
securities in anticipation of earning a fair return relative to the risk being
assumed.
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C. STANDARDS OF CARE
1. Prudence
The standard of prudence to be used for managing the City's investment
program is California Government Code Section 53600.3, the prudent
investor standard, which states that “when investing, reinvesting,
purchasing, acquiring, exchanging, selling, or managing public funds, a
trustee shall act with care, skill, prudence, and diligence under the
circumstances then prevailing, including, but not limited to, the general
economic conditions and the anticipated needs of the agency, that a prudent
person acting in a like capacity and familiarity with those matters would
use in the conduct of funds of a like character and with like aims, to
safeguard the principal and maintain the liquidity needs of the agency.”
The City's overall investment program shall be designed and managed with
a degree of professionalism that is worthy of the public trust. The City
recognizes that no investment is totally without risk and that the
investment activities of the City are a matter of public record. Accordingly,
the City recognizes that occasional measured losses may occur in a
diversified portfolio and shall be considered within the context of the
overall portfolio's return, provided that adequate diversification has been
implemented and that the sale of a security is in the best long-term interest
of the City.
The Finance Director and authorized investment personnel acting in
accordance with established procedures and exercising due diligence shall
be relieved of personal responsibility for an individual security's credit risk
or market price changes, provided that deviations from expectations are
reported in a timely fashion to the City Council and appropriate action is
taken to control adverse developments.
2. Ethics and Conflicts of Interest
Elected officials and employees involved in the investment process shall
refrain from personal business activity that could conflict with proper
execution of the City’s investment program or could impair or create the
appearance of an impairment of their ability to make impartial investment
decisions. Employees and investment officials shall subordinate their
personal investment transactions to those of the City. In addition, City
Council members, the City Manager, and the Finance Director shall file a
Statement of Economic Interests each year as required by California
Government Code Section 87203 and regulations of the Fair Political
Practices Commission.
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3. Delegation of Authority
Authority to manage the City’s investment program is derived from the
Charter of the City of Newport Beach section 605 (j). The Finance Director
shall assume the title of and act as City Treasurer and with the approval of
the City Manager appoint deputies annually as necessary to act under the
provisions of any law requiring or permitting action by the City Treasurer.
The Finance Director may then delegate the authority to conduct
investment transactions and to manage the operation of the investment
portfolio to other specifically authorized staff members. No person may
engage in an investment transaction except as expressly provided under the
terms of this Policy.
The City may engage the support services of outside investment advisors
with respect to its investment program, so long as it can be demonstrated
that these services produce a net financial advantage or necessary financial
protection of the City's financial resources. Such companies must be
registered under the Investment Advisors Act of 1940, be well-established
and exceptionally reputable. Members of the staff of such companies who
will have primary responsibility for managing the City’s investments must
have a working familiarity with the special requirements and constraints of
investing municipal funds in general and this City's funds in particular.
These firms must insure that the portion of the portfolio under their
management complies with various concentration and other constraints
specified herein, and contractually agree to conform to all provisions of
governing law and the collateralization and other requirements of this
Policy. Selection and retention of broker/dealers by investment advisors
shall be at their sole discretion and dependent upon selection and retention
criteria as stated in the Uniform Application for Investment Advisor
Registration and related Amendments (SEC Form ADV 2A).
4. Internal Controls
The Finance Director is responsible for establishing and maintaining a
system of internal controls. The internal controls shall be designed to
prevent losses of public funds arising from fraud, employee error, and
misrepresentation by third parties, unanticipated changes in financial
markets, or imprudent action by City employees and officers. The internal
structure shall be designed to provide reasonable assurance that these
objectives are met. The concept of reasonable assurance recognizes that (1)
the cost of a control should not exceed the benefits likely to be derived, and
(2) the valuation of costs and benefits requires estimates and judgments by
management.
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D. BANKING SERVICES
Banking services for the City shall be provided by FDIC insured banks approved
to provide depository and other banking services. To be eligible, a bank shall
qualify as a depository of public funds in the State of California as defined in
California Government Code Section 53630.5 and shall secure deposits in excess of
FDIC insurance coverage in accordance with California Government Code Section
53652.
E. BROKER/DEALERS
In the event that an investment advisor is not used to purchase securities, the City
will select broker/dealers on the basis of their expertise in public cash
management and their ability to provide service to the City’s account.
Each approved broker/dealer must possess an authorizing certificate from the
California Commissioner of Corporations as required by Section 25210 of the
California Corporations Code.
To be eligible, a firm must meet at least one of the following criteria:
1. Be recognized as Primary Dealers by the Federal Reserve Bank of New York
or have a primary dealer within their holding company structure, or
2. Report voluntarily to the Federal Reserve Bank of New York, or
3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3-1
(Uniform Net Capital Rule).
F. SAFEKEEPING AND CUSTODY OF ASSETS
The Finance Director shall select one or more banks to provide safekeeping and
custodial services for the City. A Safekeeping Agreement approved by the City
shall be executed with each custodian bank prior to utilizing that bank's
safekeeping services.
Custodian banks will be selected on the basis of their ability to provide services
for the City's account and the competitive pricing of their safekeeping related
services.
The purchase and sale of securities and repurchase agreement transactions shall
be settled on a delivery versus payment basis. All securities shall be perfected in
the name of the City. Sufficient evidence to title shall be consistent with modern
investment, banking and commercial practices.
All investment securities, except non-negotiable Certificates of Deposit, Money
Market Funds and local government investment pools, purchased by the City will
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be delivered by book entry and will be held in third-party safekeeping by a City
approved custodian bank, its correspondent bank or its Depository Trust
Company (DTC) participant account.
All Fed wireable book entry securities owned by the City shall be held in the
Federal Reserve system in a customer account for the custodian bank which will
name the City as “customer.”
All DTC eligible securities shall be held in the custodian bank’s DTC participant
account and the custodian bank shall provide evidence that the securities are held
for the City as “customer.”
G. AUTHORIZED INVESTMENTS
All investments and deposits of the City shall be made in accordance with
California Government Code Sections 16429.1, 53600-53609 and 53630-53686. Any
revisions or extensions of these code sections will be assumed to be part of this
Policy immediately upon being enacted. The City has further restricted the eligible
types of securities and transactions. The foregoing list of authorized securities and
transactions shall be strictly interpreted. Any deviation from this list must be pre-
approved by resolution of the City Council. In the event an apparent discrepancy
is found between this Policy and the Government Code, the more restrictive
parameter(s) will take precedence.
Where this section specifies a percentage limitation for a particular security type,
that percentage is applicable only at the date of purchase.
1. Investments Specifically Permitted
a) United States Treasury bills, notes, or bonds with a final maturity not
exceeding five years from the date of trade settlement. There is no
limitation as to the percentage of the City’s portfolio that may be
invested in this category.
b) Federal Instrumentality (government-sponsored enterprise)
debentures, discount notes, callable and step-up securities, with a
final maturity not exceeding five years from the date of trade
settlement. There is no limitation as to the percentage of the portfolio
that can be invested in this category.
c) Federal Agency Obligations for which the full faith and credit of the
United States are pledged for the payment of principal and interest
and which have a final maturity not exceeding five years from the
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date of trade settlement. There is no limitation as to the percentage
of the portfolio that can be invested in this category.
d) Mortgage-backed Securities, Collateralized Mortgage Obligation
(CMO) and Asset-backed Securities limited to mortgage-backed
pass-through securities issued by a US government agency, or
consumer receivable pass-through certificates or bonds with a final
maturity not exceeding five years from the date of trade
settlement. Securities eligible for investment under this subdivision
shall be issued by an issuer whose debt is rated in at least the “A”
category or the equivalent by a Nationally Recognized Statistical
Rating Organization (NRSRO). The security itself shall be rated at
least “AAA” or the equivalent by an NRSRO. No more than five
percent (5%) of the City’s total portfolio shall be invested in any one
issuer of mortgage-backed and asset-backed securities listed above,
and the aggregate investment in mortgage-backed and asset-backed
securities shall not exceed twenty percent (20%) of the City’s total
portfolio.
e) Medium-Term Notes issued by corporations organized and
operating within the United States or by depository institutions
licensed by the United States or any state and operating within the
United States, with a final maturity not exceeding five years from the
date of trade settlement, and rated in at least the “A” category or the
equivalent by an NRSRO. No more than five percent (5%) of the
City’s total portfolio shall be invested in any one issuer of medium-
term notes, and the aggregate investment in medium-term notes
shall not exceed thirty percent (30%) of the City’s total portfolio.
f) Municipal Bonds: including bonds issued by the City of Newport
Beach, including bonds payable solely out of the revenues from a
revenue-producing property owned, controlled, or operated by the
City or by a department, board, agency, or authority of the City.
State of California registered warrants or treasury notes or bonds,
including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by the state or
by a department, board, agency, or authority of the state.
Registered treasury notes or bonds of any of the other 49 states in
addition to California, including bonds payable solely out of the
revenues from a revenue producing property owned, controlled, or
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operated by a state or by a department, board, agency, or authority
of any of the other 49 states, in addition to California.
Bonds, notes, warrants, or other evidences of indebtedness of a local
agency within California, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or
operated by the local agency, or by a department, board, agency, or
authority of the local agency.
In addition, these securities must be rated in at least the “A” category
or the equivalent by a NRSRO with maturities not exceeding five
years from the date of trade settlement. No more than five percent
(5%) of the City’s total portfolio shall be invested in any one
municipal issuer. In addition, the aggregate investment in municipal
bonds may not exceed thirty percent (30%) of the portfolio.
g) Non-negotiable Certificates of Deposit and savings deposits with a
maturity not exceeding two years from the date of trade settlement,
in FDIC insured state or nationally chartered banks or savings banks
that qualify as a depository of public funds in the State of California
as defined in California Government Code Section 53630.5. Deposits
exceeding the FDIC insured amount shall be secured pursuant to
California Government Code Section 53652. No one issuer shall
exceed more than five percent (5%) of the portfolio, and investment
in negotiable and nonnegotiable certificates of deposit shall be
limited to thirty percent (30%) of the portfolio combined.
h) Negotiable Certificates of Deposit only with a nationally or state-
chartered bank, a savings association or a federal association (as
defined by Section 5102 of the Financial Code), a state or federal
credit union, or by a federally licensed or state-licensed branch
of a foreign bank whose senior long-term debt is rated in at least
the “A” category, or the equivalent, or short-term debt is rated at
least “A-1” or the equivalent by an NRSRO and having assets in
excess of $10 billion, so as to ensure security and a large, well-
established secondary market. Ease of subsequent marketability
should be further ascertained prior to initial investment by
examining currently quoted bids by primary dealers and the
acceptability of the issuer by these dealers. No one issuer shall
exceed more than five percent (5%) of the portfolio, and maturity
shall not exceed two years. Investment in negotiable and non-
negotiable certificates of deposit shall be limited to thirty percent
(30%) of the portfolio combined.
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i) Prime Commercial Paper with a maturity not exceeding 270 days
from the date of trade settlement that is rated “A-1”, or the
equivalent, by an NRSRO. The entity that issues the commercial
paper shall meet all of the following conditions in either sub-
paragraph i. or sub-paragraph ii. below:
i. The entity shall (1) be organized and operating in the United
States as a general corporation, (2) have total assets in excess
of $500,000,000 and (3) have debt other than commercial
paper, if any, that is rated in at least the “A” category or the
equivalent by an NRSRO.
ii. The entity shall (1) be organized within the United States as a
special purpose corporation, trust, or limited liability
company, (2) have program wide credit enhancements,
including, but not limited to, over collateralization, letters of
credit or surety bond and (3) have commercial paper that is
rated at least “A-1” or the equivalent, by an NRSRO.
iii. No more than five percent (5%) of the City’s total portfolio
shall be invested in the commercial paper of any one issuer,
and the aggregate investment in commercial paper shall not
exceed twenty-five percent (25%) of the City’s total portfolio.
j) Eligible Banker’s Acceptances with a maturity not exceeding 180
days from the date of trade settlement, drawn on and accepted by a
commercial bank whose senior long-term debt is rated in at least the
“A” category or the equivalent by an NRSRO at the time of purchase.
Banker’s Acceptances shall be rated at least “A-1”, or the equivalent
at the time of purchase by an NRSRO. If the bank has senior debt
outstanding, it must be rated in at least the “A” category or the
equivalent by an NRSRO. The aggregate investment in banker’s
acceptances shall not exceed forty percent (40%) of the City’s total
portfolio, and no more than five percent (5%) of the City’s total
portfolio shall be invested in banker’s acceptances of any one bank.
k) Repurchase Agreements and Reverse Repurchase Agreements with
a final termination date not exceeding 30 days collateralized by U.S.
Treasury obligations or Federal Instrumentality securities listed in
items 1 and 2 above with the maturity of the collateral not exceeding
ten years. For the purpose of this section, the term collateral shall
mean purchased securities under the terms of the City’s approved
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Master Repurchase Agreement. The purchased securities shall have
a minimum market value including accrued interest of one hundred
and two percent (102%) of the dollar value of the funds borrowed.
Collateral shall be held in the City's custodian bank, as safekeeping
agent, and the market value of the collateral securities shall be
marked-to-the-market daily.
Repurchase Agreements and Reverse Repurchase Agreements shall
be entered into only with broker/dealers and who are recognized as
Primary Dealers with the Federal Reserve Bank of New York, or with
firms that have a Primary Dealer within their holding company
structure. Primary Dealers approved as Repurchase Agreement
counterparties shall have a short-term credit rating of at least “A-1”
or the equivalent and a long-term credit rating of at least “A” or the
equivalent. Repurchase agreement counterparties shall execute a
City approved Master Repurchase Agreement with the City. The
Finance Director shall maintain a copy of the City's approved Master
Repurchase Agreement and a list of the broker/dealers who have
executed same.
In addition, the City must own assets for more than 30 days before
they can be used as collateral for a reverse repurchase
agreement. No more than ten percent (10%) of the portfolio can be
involved in reverse repurchase agreements.
l) State of California’s Local Agency Investment Fund (LAIF),
pursuant to California Government Code Section 16429.1.
m) County Investment Funds: Los Angeles County provides a service
similar to LAIF for municipal and other government entities outside
of Los Angeles County, including the City. Investment in this pool
is intended to be used as a temporary repository for short-term funds
used for liquidity purposes. The Finance Director shall maintain on
file appropriate information concerning the county pool’s current
investment policies, practices, and performance, as well as its
requirements for participation, including, but not limited to,
limitations on deposits or withdrawals and the composition of the
portfolio. At no time shall more than five percent (5%) of the City’s
total investment portfolio be placed in this pool.
n) Mutual Funds and Money Market Mutual Funds registered under
the Investment Company Act of 1940, provided that:
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i. MUTUAL FUNDS that invest in the securities and obligations as
authorized under California Government Code, Section 53601 (a)
to (k) and (m) to (q) inclusive and that meet either of the
following criteria:
1) Attained the highest ranking or the highest letter and
numerical rating provided by not less than two (2) NRSROs;
or
2) Have retained an investment adviser registered or exempt
from registration with the Securities and Exchange
Commission with not less than five years’ experience
investing in the securities and obligations authorized by
California Government Code, Section 53601 and with assets
under management in excess of $500 million.
3) No more than 10% of the total portfolio may be invested in
shares of any one mutual fund.
ii. MONEY MARKET MUTUAL FUNDS registered with the Securities
and Exchange Commission under the Investment Company Act
of 1940 and issued by diversified management companies and
meet either of the following criteria:
1) Have attained the highest ranking or the highest letter and
numerical rating provided by not less than two (2) NRSROs;
or
2) Have retained an investment adviser registered or exempt
from registration with the Securities and Exchange
Commission with not less than five years’ experience
managing money market mutual funds with assets under
management in excess of $500 million.
3) No more than 20% of the total portfolio may be invested in
Money Market Mutual Funds.
iii. No more than 20% of the total portfolio may be invested in these
securities.
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o) Supranationals which are United States dollar denominated senior
unsecured unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and
Development (IBRD), International Finance Corporation (IFC), or
Inter-American Development Bank (IADB), with a maximum
remaining maturity of five years or less, and eligible for purchase
and sale within the United States. Investments under this paragraph
shall be rated in the "AA" category, its equivalent, or better by at least
one NRSRO.
No more than ten percent (10%) of the City’s total portfolio shall be
invested in any one issuer of supranational obligations. Purchases
of supranational obligations shall not exceed twenty percent (20%)
of the investment portfolio of the City.
2. Investments Specifically Not Permitted
Any security type or structure not specifically approved by this policy is
hereby prohibited. Security types, which are thereby prohibited include,
but are not limited to: “exotic” derivative structures such as range notes,
dual index notes, inverse floating rate notes, leveraged or de-leveraged
floating rate notes, interest only strips that are derived from a pool of
mortgages and any security that could result in zero interest accrual if held
to maturity, or any other complex variable or structured note with an
unusually high degree of volatility risk.
The City shall not invest funds with the Orange County Pool.
3. Exceptions to Prohibited and Restricted Investments
The City shall not be required to sell securities prohibited or restricted in
this policy, or any future policies, or prohibited or restricted by new State
regulations, if purchased prior to their prohibition and/or restriction.
Insofar as these securities provided no notable credit risk to the City,
holding of these securities until maturity is approved. At maturity or
liquidation, such monies shall be reinvested as provided by this policy.
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H. INVESTMENT PARAMETERS
1. Diversification
The City shall diversify its investments to avoid incurring unreasonable
risks inherent in over-investing in specific instruments, individual financial
institutions or maturities. As such, no more than five percent (5%) of the
City’s portfolio may be invested in the instruments of any one issuer, except
governmental issuers, supranationals, investment pools, mutual funds and
money market funds. This restriction does not apply to any type of Federal
Instrumentality or Federal Agency Security listed in Sections G1 b and G1
c above. Nevertheless, the asset allocation in the investment portfolio
should be flexible depending upon the outlook for the economy, the
securities markets and the City’s anticipated cash flow needs.
2. Maximum Maturities
To the extent possible, investments shall be matched with anticipated cash
flow requirements and known future liabilities. The City will not invest in
securities maturing more than five years from the date of trade settlement,
unless the City Council has by resolution granted authority to make such
an investment at least three months prior to the date of investment.
3. Credit Quality
The City shall not purchase any security rated “A1” and / or “A+” or below
if that security has been placed on “credit watch” for a possible downgrade
by an NRSRO.
Each investment manager will monitor the credit quality of the securities in
their respective portfolio. In the event a security held by the City is the
subject of a rating downgrade which brings it below accepted minimums
specified herein, or the security is placed on negative credit watch, where
downgrade could result in a rate drop below acceptable levels, the
investment advisor who purchased the security will immediately notify the
Finance Director. The City shall not be required to immediately sell such
securities. The course of action to be followed will then be decided on a
case by case basis, considering such factors as the reason for the rate drop,
prognosis for recovery or further drop, and market price of the security.
The City Council will be advised of the situation and intended course of
action.
4. Competitive Transactions
Investment advisors shall make best effort to price investment transactions
on a competitive basis with broker/dealers selected consistent with their
practices disclosed in form ADV 2A filed with the SEC. Where possible, at
least three broker/dealers shall be contacted for each transaction and their
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bid or offering prices shall be recorded. If there is no other readily available
competitive offering, the investment advisor shall make their best efforts to
document quotations for comparable or alternative securities. If qualitative
characteristics of a transaction, including, but not limited to, complexity of
the transaction, or sector expertise of the broker, prevent a competitive
selection process, investment advisors shall use brokerage selection
practices as described above.
I. PORTFOLIO PERFORMANCE
The investment portfolio shall be designed to attain a market rate of return
throughout budgetary and economic cycles, taking into account prevailing market
conditions, risk constraints for eligible securities, and cash flow requirements. The
performance of the City’s investments shall be compared to the total return of a
benchmark that most closely corresponds to the portfolio’s duration, universe of
allowable securities, risk profile, and other relevant characteristics. When
comparing the performance of the City’s portfolio, its rate of return will be
computed consistent with Global Investment Performance Standards (GIPS).
J. REPORTING
Monthly, the Finance Director shall produce a treasury report of the investment
portfolio balances, transactions, risk characteristics, earnings, and performance
results of the City’s investment portfolio available to City Council and the public
on the City’s Website. The report shall include the following information:
1. Investment type, issuer, date of maturity, par value and dollar amount
invested in all securities, and investments and monies held by the City;
2. A description of the funds, investments and programs;
3. A market value as of the date of the report (or the most recent valuation as
to assets not valued monthly) and the source of the valuation;
4. A statement of compliance with this Policy or an explanation for non-
compliance
K. INVESTMENT POLICY COMPLIANCE AND ADOPTION
1. Compliance
Any deviation from the policy shall be reported to Finance Committee as
soon as practical, but no later than the next scheduled Finance Committee
meeting. Upon recommendation of the Finance Committee, the Finance
Director shall review deviations from policy with the City Council.
2. Adoption
The Finance Director shall review the Investment Policy with the Finance
Committee at least annually to ensure its consistency with the overall
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objectives of preservation of principal, liquidity and return, and its
relevance to current law and financial and economic trends.
The Finance Director shall review the Investment Policy with City Council
at a public meeting if there are changes recommended to the Investment
Policy.
This Policy was endorsed and adopted by the City Council of the City of
Newport Beach on September 8, 2015. It replaces any previous investment
policy or investment procedures of the City.
Adopted – April 6, 1959
Amended – November 9, 1970
Amended – February 11, 1974
Amended – February 9, 1981
Amended – October 27, 1986
Rewritten – October 22, 1990
Amended – January 28, 1991
Amended – January 24, 1994
Amended – January 9, 1995
Amended – April 22, 1996
Corrected – January 27, 1997
Amended – February 24, 1997
Amended – May 26, 1998
Reaffirmed – March 22, 1999
Reaffirmed – March 14, 2000
Amended & Reaffirmed – May 8, 2001
Amended & Reaffirmed – April 23, 2002
Amended & Reaffirmed – April 8, 2003
Amended & Reaffirmed – April 13, 2004
Amended & Reaffirmed – September 13, 2005
Amended – August 11, 2009
Amended & Reaffirmed – August 10, 2010
Amended & Reaffirmed – September 28, 2010
Reaffirmed – June 28, 2011
Amended & Reaffirmed – October 9, 2012
Amended – August 13, 2013
Amended – September 8, 2015
Amended – March 28, 2017
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5B
September 6, 2018
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
949-644-3123 or danm@newportbeachca.gov
SUBJECT: INVESTMENT PERFORMANCE REVIEW
EXECUTIVE SUMMARY
This memorandum provides an overview of the structure and the performance of the City’s investment portfolio. As guided by the City’s investment policy objectives, the City
strives to maintain a portfolio emphasizing safety and liquidity while earning a market rate
of return commensurate with the City’s risk tolerance and investment restrictions imposed
by the California Government Code. The City has complied with all the limiting parameters
of both the California Government Code and the City’s Investment Policy Statement while earning a rate of return comparable to the City has established benchmarks, the Bank of
America Merrill Lynch (BAML) 1-3 year Treasury Agency index and the BAML 1-3
Government / Corporate index.
DISCUSSION
Investment Portfolio Overview
The City’s strategy continues to focus on identifying value from high quality, marketable
securities among the full range of investment options, ensuring the portfolio continues to be well diversified.
As of June 30, 2018, the City’s entire investment portfolio totaled over $272 million. These
investments are pooled assets of the City Newport Beach, which includes the general
fund, special revenue funds, internal service funds, enterprise funds (i.e., water and wastewater), as well as various other funds.
Investment Performance Review September 6, 2018
Page 2 Liquidity Portfolios The City uses a number of accounts and carve-out portfolios to accomplish its investment
objectives. For liquidity, the City uses a combination of demand deposit accounts (DDA),
the Local Agency Investment Fund (LAIF), and a targeted-maturity portfolio to provide
sufficient liquidity to meet its day-to-day cash flows. Municipal deposits in DDAs are 110
percent collateralized by bank assets, and the City received a compensating balance credit that can only be used to offset banking fees but does not produce income beyond
bank fees. The average compensating balance credit for fiscal year ended June 30, 2018,
amounted to .6% while LAIF produced an income return of approximately 1.4%. Because
the current disparity in earning potential between our DDA accounts and LAIF, only the
bare minimum are maintained in the DDA accounts.
Funds that are needed to meet specific cash flows needs but can be invested at a rate
higher than LAIF are accounted for in our target-maturity portfolio. As of June 30, 2018,
this targeted-maturity portfolio held about $29 million in securities provided an income
return of approximately 1.5%.
Short-Term Portfolio
The City’s core investment portfolio of almost $194 million is actively managed in
accordance with the California Government Code and the City’s investment policy. The investments are held by a custody bank and are registered in the City’s name. The City
accounts for and monitors the portfolio independently of the investment advisors, by a
direct feed from the custody bank and the use of third party analytical software. The City’s
core portfolio finished the twelve months ending June 30, 2018, with income return of
1.529%.
Performance Benchmarking
The City’s investment policy statement identifies the City investment objectives. The
objectives are to preserve principal and liquidity while earning a market rate of commensurate with the City’s investment risk tolerance, liquidity needs and significant
constraints imposed by the California Government Code 53601 as to the type and
quantity of securities that may be purchased by local agencies.
“Total return” is the accepted industry standard measure for comparing portfolio performance to established benchmarks. Total return benchmarks provide valuable
information to those charged with governance of the investment portfolio by:
• Communicating a transparent risk profile and related investment strategy;
• Managing expectations of risk and return; and
• Providing relative variances that can be used to identify decisions made regarding
portfolio durations, sector weighting, credit quality and maturity structure.
Investment Performance Review September 6, 2018
Page 3 The City uses total return to measure performance and risk against its benchmarks. Total
return is made up of both income return and unrealized gains and losses due to changing interest rate environments. The market value of bonds move inversely to the direction of
interest rates. As interest rates increase, the market value of bonds held in the portfolio
decrease because they are paying a lower interest rate than comparable bonds in the
market today.
As illustrated in the chart below the City’s income return was 1.529%. However, as
interest rates advanced upward price return quickly turned negative dragging down the
total return measure down to a meager .46% even though the unrealized losses were not
realized.
The core portfolio currently follows an ultra-short-term bond strategy. This portfolio aims to find value and maximize yield within the high quality fixed income market within the
duration range of the City’s strategic benchmarks. The City uses the BAML 1-3 Year US
Treasuries index as one benchmark. The City also uses a second benchmark, the BAML
1-3 Year U.S. Corporate & Government A rated and above index, which is more reflective of the portfolio’s risk and return characteristics. The use of two benchmarks provides a means to evaluate the added value that high quality corporate bonds bring to the portfolio.
Investment Performance Review September 6, 2018
Page 4 As demonstrated in the table below, the City’s investment portfolio was positioned shorter
in duration than its benchmarks and outperformed the BAML 1-3 US Treasury indexed by 38.1 basis points (bps) and outperformed the BAML 1-3 Gov/Corp index by 25.6 bps for
the year.
PORTFOLIO CHARACTERISTICS LOOKING FORWARD
While total return is an excellent benchmarking measure it does not always provide
intuitive information regarding what the portfolio is earning on a cash basis since the measure assumes all unrealized gains are losses that are ultimately realized at a
particular balance sheet date. This distortion is especially magnified in a changing
interest rate environment and when the duration of the portfolio is longer than the
benchmark.
As of June 30, 2018, the City’s unrealized losses on the investment portfolio was nearly
$2.4 million. In one sense, this is actually good news. The City will be earning higher
bond yields as maturing investments and earnings are reinvested. We can see the fixed
income market gradually moving off of historic lows. The portfolio’s yield to maturity
(YTM) at June 30, 2018, ticked up to 2.57% from 1.51% from one year ago. The downside is the City will have to exercise extra diligence it its cash flow forecasting. Liquidating
securities prior to their maturity date may result in realized losses that could otherwise be
avoided by holding a security to maturity. That is not to say that City avoids selling
investments at a loss. The City deploys an active investment strategy and is willing to
sell an investment at a loss if we can recoup the loss and/or realize a net gain by purchasing another investment with a higher yield. This is the primary difference between
and active versus a passive investment strategy that simply follows the attributes of a
given benchmark. As previously discussed with the Finance Committee, the City will
Investment Performance Review September 6, 2018
Page 5 continue to pursue strategies that more closely align asset maturities with its obligations
including a 1-5 year strategy as market conditions stabilize and possibly a 5-10 year strategy with the Finance Committee’s concurrence and Council approval for certain long-
term obligations. Currently, the short-term strategies have served the City well in the
current economic environment.
Prepared by: Submitted by:
/s/Jeremiah Lim
/s/Dan Matusiewicz
Jeremiah Lim Dan Matusiewicz
Accountant Finance Director
Attachments:
A. Financial Markets Overview
B. Treasury Report – Month Ended June 30, 2018
ATTACHMENT A
FINANCIAL MARKETS OVERVIEW
Financial Markets Overview
The Federal Open Market Committee (FOMC) met July 31 – August 1, 2018. Overall,
the FOMC communicated a favorable view of the domestic economy in the meeting’s
press release. Jobs, household spending, and business fixed investment grew strongly, according to the FOMC. Twelve-month inflation, both overall inflation and inflation
excluding food and energy, remained near the FOMC’s two percent target. Considering
this information, the FOMC decided to leave the federal funds rate target range
unchanged at 1.75 – 2.00 percent. However, the FOMC did indicate that future, gradual
increases to the federal funds rate target range would be appropriate, given the overall state of the domestic economy.
Balance sheet normalization by the FOMC will continue according to the meeting’s
decisions regarding monetary policy implementation. New York’s Federal Reserve Bank
has been directed by the FOMC to continue reducing the liquidity of fixed income markets by $40 billion each month. Treasuries will bear $24 billion of this reduced liquidity.
Mortgage-backed securities will bear $16 billion of this reduced liquidity. Liquidity
reduction will be accomplished by not reinvesting these amounts of principal payments
that the Federal Reserve receives from its portfolio of securities.
Treasury yield curves remain flat, when compared to the past. June 2018’s ending
difference between 2-year and 10-year Treasury yields was 0.33 percent. July 2018’s
ending difference was about the same, at 0.29 percent. Going back to July 2017 the
difference was higher, at 0.95 percent. Previous FOMC increases to the federal funds
rate target range may have contributed to the flatness of the yield curve. Usually, the federal funds rate affects short-term interest rates. Between June 30, 2017 and June 30,
2018, the FOMC has increased the federal funds rate three times.
Treasury Yields
(Source: Chandler)
The Bureau of Economic Analysis (BEA) released new estimates of gross domestic product (GDP) at the end of July 2018. BEA’s “advanced” estimate is that in the second
quarter real GDP grew at 4.1 percent annualized. Growth in the second quarter came from consumer, business, and government spending.
BEA also revised its estimate of first quarter real GDP growth. June 2018 ended with
BEA estimating first quarter real GDP growth at 2.0 percent annualized. Upward revisions
to business and federal government spending now lead BEA to estimate real GDP grew in first quarter by 2.2 percent annualized.
Quarterly Percent Change of Real GDP
(Source: U.S. Bureau of Economic Analysis)
(Seasonally adjusted annualized rates)
The Bureau of Labor Statistics (BLS) released July’s employment data in August. The
unemployment rate decreased to 3.9 percent in July. Total non-farm payroll employment
increased by 157,000 in July. Employment increases were noted in services,
manufacturing, health care, and social assistance. Accompanying July’s job gains was a
2.7 percent increase in hourly pay from the previous year. BLS also revised the increases in total non-farm payroll employment for both May and June. May’s increase was
changed from 244,000 to 268,000. June’s increase was updated from 213,000 to
248,000.
Seasonally Adjusted Unemployment Rate
(Source: U.S. Department of Labor)
Seasonally Adjusted Monthly Change of Non-farm Payroll
(Source: U.S. Department of Labor)
ATTACHMENT B
TREASURY REPORT – MONTH ENDED JUNE 30, 2018
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09
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10
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10
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2
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425,220.73 -594.73424,626.00
MS CN
B
-
C
h
a
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d
l
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02
6
6
5
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B
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7
AM
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D
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07
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15
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6
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1,914,311.15 -671.151,913,640.00
MS CN
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7
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1
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1,059,960.51 -5,207.511,054,753.00
MS CN
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1,399,638.51 -17,320.511,382,318.00
MS CN
B
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45
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US
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2
3
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10
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6
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449,831.08 -12,206.08437,625.00
MS CN
B
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06
0
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1
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02
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04
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13
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2,002,521.51 -4,641.511,997,880.00
MS CN
B
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h
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06
4
0
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1,520,112.90 -47,712.901,472,400.00
MS CN
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06
4
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03
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8
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08
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09
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8
1,003,299.95 -8,709.95994,590.00
MS CN
B
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a
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06
4
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LT 12
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12
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9
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08
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09
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3
3
301,398.49 -3,021.49298,377.00
MS CN
B
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h
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06
4
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1,700,000.00 0.001,700,000.00
MS CN
B
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06
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1,250,000.00 0.001,250,000.00
MS CN
B
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865,000.00 0.00865,000.00
MS CN
B
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08
4
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319,943.30 -1,610.50318,332.80
MS CN
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850,842.19 -13,634.69837,207.50
MS CN
B
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08
4
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364,866.91 -5,360.16359,506.75
MS CN
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09
2
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1,043,870.48 -12,340.481,031,530.00
MS CN
B
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1,033,694.21 -764.211,032,930.00
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MS CN
B
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13
6
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1,500,496.33 -1.361,500,494.96
MS CN
B
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14
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09
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09
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644,608.19 -16,500.74628,107.45
MS CN
B
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h
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17
2
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800,346.72 -11,610.72788,736.00
MS CN
B
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17
2
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424,807.71 -5,791.71419,016.00
MS CN
B
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22
1
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1,202,996.72 -29,276.721,173,720.00
MS CN
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4
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MS CN
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MS CN
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MS CN
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MS CN
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MS CN
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MS CN
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MS CN
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MS CN
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2
3
5
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0
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0
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2,
2
3
5
,
0
0
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0
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US
D
AG
C
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B
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D
LT 06
/
2
7
/
2
0
1
7
06
/
2
9
/
2
0
1
7
10
/
2
4
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2
0
1
9
10
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2
4
/
2
0
1
9
4,
1
5
9
.
5
8
2,221,569.76 -29,124.162,192,445.60
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
5
G
0
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3
9
FE
D
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74
5
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0
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74
5
,
0
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0
0
US
D
AG
C
Y
B
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LT 12
/
1
5
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2
0
1
6
12
/
1
6
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2
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1
6
10
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4
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9
10
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9
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3
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6
.
5
3
738,789.86 -7,974.66730,815.20
MS CN
B
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e
r
31
3
5
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0
R
3
9
FE
D
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A
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A
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I
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N
A
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T
G
A
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7
0
5
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0
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US
D
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C
Y
B
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D
LT 01
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0
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1
7
01
/
1
0
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2
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1
7
10
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4
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1
9
10
/
2
4
/
2
0
1
9
3,
1
7
3
.
1
9
1,695,227.50 -22,690.701,672,536.80
MS CN
B
-
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h
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r
31
3
5
G
0
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3
8
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D
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A
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1,
6
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1,
6
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0
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0
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US
D
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C
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B
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N
D
LT 09
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2
7
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0
1
7
09
/
2
8
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2
0
1
7
01
/
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5
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2
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2
2
01
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5
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2
0
2
2
15
,
6
4
4
.
4
4
1,605,236.63 -45,732.631,559,504.00
GA
A
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Book Value,Net Unrealized Gain/LossMarket Value
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
5
G
0
T
2
9
FE
D
E
R
A
L
N
A
T
I
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A
L
M
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T
G
A
G
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A
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S
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C
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A
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N
16
0
,
0
0
0
.
0
0
16
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 02
/
2
4
/
2
0
1
7
02
/
2
8
/
2
0
1
7
02
/
2
8
/
2
0
2
0
02
/
2
8
/
2
0
2
0
82
0
.
0
0
159,943.62 -2,647.62157,296.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
5
G
0
T
2
9
FE
D
E
R
A
L
N
A
T
I
O
N
A
L
M
O
R
T
G
A
G
E
A
S
S
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I
A
T
I
O
N
2,
0
0
0
,
0
0
0
.
0
0
2,
0
0
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 03
/
0
2
/
2
0
1
7
03
/
0
3
/
2
0
1
7
02
/
2
8
/
2
0
2
0
02
/
2
8
/
2
0
2
0
10
,
2
5
0
.
0
0
1,993,493.85 -27,293.851,966,200.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
5
G
0
T
2
9
FE
D
E
R
A
L
N
A
T
I
O
N
A
L
M
O
R
T
G
A
G
E
A
S
S
O
C
I
A
T
I
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N
1,
9
5
0
,
0
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0
.
0
0
1,
9
5
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 08
/
3
0
/
2
0
1
7
08
/
3
1
/
2
0
1
7
02
/
2
8
/
2
0
2
0
02
/
2
8
/
2
0
2
0
9,
9
9
3
.
7
5
1,951,212.27 -34,167.271,917,045.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
5
G
0
T
6
0
FE
D
E
R
A
L
N
A
T
I
O
N
A
L
M
O
R
T
G
A
G
E
A
S
S
O
C
I
A
T
I
O
N
70
0
,
0
0
0
.
0
0
70
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 08
/
0
2
/
2
0
1
7
08
/
0
3
/
2
0
1
7
07
/
3
0
/
2
0
2
0
07
/
3
0
/
2
0
2
0
4,
4
0
4
.
1
7
698,945.06 -14,849.06684,096.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
5
G
0
T
6
0
FE
D
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R
A
L
N
A
T
I
O
N
A
L
M
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T
G
A
G
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A
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S
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I
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N
2,
0
9
5
,
0
0
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.
0
0
2,
0
9
5
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 08
/
3
0
/
2
0
1
7
08
/
3
1
/
2
0
1
7
07
/
3
0
/
2
0
2
0
07
/
3
0
/
2
0
2
0
13
,
1
8
1
.
0
4
2,094,808.20 -47,406.602,047,401.60
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
D
G
1
FR
E
D
D
I
E
M
A
C
27
5
,
0
0
0
.
0
0
27
5
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
ST 05
/
1
3
/
2
0
1
6
05
/
1
6
/
2
0
1
6
05
/
3
0
/
2
0
1
9
05
/
3
0
/
2
0
1
9
41
4
.
4
1
276,903.38 -3,435.13273,468.25
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
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K
2
FR
E
D
D
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1,
6
0
0
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0
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.
0
0
1,
6
0
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 04
/
2
8
/
2
0
1
5
04
/
2
9
/
2
0
1
5
08
/
0
1
/
2
0
1
9
08
/
0
1
/
2
0
1
9
8,
3
3
3
.
3
3
1,598,355.81 -18,403.811,579,952.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
D
K
2
FR
E
D
D
I
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M
A
C
10
0
,
0
0
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.
0
0
10
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 06
/
1
8
/
2
0
1
5
06
/
1
9
/
2
0
1
5
08
/
0
1
/
2
0
1
9
08
/
0
1
/
2
0
1
9
52
0
.
8
3
99,662.03 -915.0398,747.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
D
M
8
FR
E
D
D
I
E
M
A
C
1,
7
0
0
,
0
0
0
.
0
0
1,
7
0
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 02
/
2
2
/
2
0
1
6
02
/
2
3
/
2
0
1
6
10
/
0
2
/
2
0
1
9
10
/
0
2
/
2
0
1
9
5,
2
5
3
.
4
7
1,701,068.13 -26,891.131,674,177.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
D
Z
9
FE
D
E
R
A
L
H
O
M
E
L
O
A
N
M
O
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T
G
A
G
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P
1,
7
0
0
,
0
0
0
.
0
0
1,
7
0
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
ST 03
/
1
8
/
2
0
1
6
03
/
2
1
/
2
0
1
6
04
/
1
5
/
2
0
1
9
04
/
1
5
/
2
0
1
9
4,
0
3
7
.
5
0
1,699,854.81 -15,528.811,684,326.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
D
Z
9
FE
D
E
R
A
L
H
O
M
E
L
O
A
N
M
O
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T
G
A
G
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P
1,
5
2
5
,
0
0
0
.
0
0
1,
5
2
5
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
ST 06
/
0
1
/
2
0
1
6
06
/
0
2
/
2
0
1
6
04
/
1
5
/
2
0
1
9
04
/
1
5
/
2
0
1
9
3,
6
2
1
.
8
8
1,524,975.58 -14,036.081,510,939.50
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
E
B
1
FE
D
E
R
A
L
H
O
M
E
L
O
A
N
M
O
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T
G
A
G
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P
4,
6
0
0
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0
0
0
.
0
0
4,
6
0
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 10
/
0
3
/
2
0
1
6
10
/
0
5
/
2
0
1
6
07
/
1
9
/
2
0
1
9
07
/
1
9
/
2
0
1
9
18
,
1
1
2
.
5
0
4,594,319.72 -66,999.724,527,320.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
E
B
1
FE
D
E
R
A
L
H
O
M
E
L
O
A
N
M
O
R
T
G
A
G
E
C
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P
95
0
,
0
0
0
.
0
0
95
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 07
/
1
9
/
2
0
1
6
07
/
2
0
/
2
0
1
6
07
/
1
9
/
2
0
1
9
07
/
1
9
/
2
0
1
9
3,
7
4
0
.
6
3
949,188.84 -14,198.84934,990.00
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
E
E
5
FR
E
D
D
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M
A
C
1,
7
4
0
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0
0
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.
0
0
1,
7
4
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 01
/
1
2
/
2
0
1
7
01
/
1
7
/
2
0
1
7
01
/
1
7
/
2
0
2
0
01
/
1
7
/
2
0
2
0
11
,
8
9
0
.
0
0
1,739,022.03 -26,357.431,712,664.60
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
E
E
5
FR
E
D
D
I
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M
A
C
3,
6
5
0
,
0
0
0
.
0
0
3,
6
5
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 04
/
0
3
/
2
0
1
7
04
/
0
5
/
2
0
1
7
01
/
1
7
/
2
0
2
0
01
/
1
7
/
2
0
2
0
24
,
9
4
1
.
6
7
3,648,966.03 -56,307.533,592,658.50
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
E
F
2
FR
E
D
D
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M
A
C
2,
2
1
5
,
0
0
0
.
0
0
2,
2
1
5
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 06
/
2
7
/
2
0
1
7
06
/
2
9
/
2
0
1
7
04
/
2
0
/
2
0
2
0
04
/
2
0
/
2
0
2
0
6,
0
0
6
.
6
5
2,207,513.50 -38,541.202,168,972.30
MS CN
B
-
C
h
a
n
d
l
e
r
31
3
7
E
A
E
F
2
FR
E
D
D
I
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M
A
C
3,
0
0
0
,
0
0
0
.
0
0
3,
0
0
0
,
0
0
0
.
0
0
US
D
AG
C
Y
B
O
N
D
LT 07
/
0
6
/
2
0
1
7
07
/
1
1
/
2
0
1
7
04
/
2
0
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2,987,522.43 -49,862.432,937,660.00
MS CN
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3
7
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8
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1,328,938.58 -14,512.881,314,425.70
MS CN
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1,992,638.32 941.681,993,580.00
MS CN
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1,089,589.63 -19,198.731,070,390.90
MS CN
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409,845.93 -7,221.83402,624.10
MS CN
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874,955.71 -12,823.64862,132.07
MS CN
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484,949.27 -6,529.80478,419.47
MS CN
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55,771.26 -40.8755,730.39
MS CN
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105,678.01 -148.58105,529.43
MS CN
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8
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399,988.78 -4,002.70395,986.08
MS CN
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8
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LT 05
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81
5
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1
749,908.84 1,013.96750,922.80
MS CN
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244,873.28 -2,925.98241,947.30
MS CN
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US
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LT 03
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03
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14
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204,135.40 -1,003.71203,131.69
MS CN
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6
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29
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379,984.19 -4,891.62375,092.57
MS CN
B
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44
9
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2
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734,915.21 -12,601.75722,313.46
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Book Value,Net Unrealized Gain/LossMarket Value
MS CN
B
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h
a
n
d
l
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r
44
9
3
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A
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70
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US
D
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LT 02
/
2
2
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1
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02
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2
6
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1
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02
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5
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2
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2
1
02
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0
5
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2
0
2
1
7,
4
7
1
.
5
3
697,179.71 -3,815.71693,364.00
MS CN
B
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45
8
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LT 10
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1
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10
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11
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9
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2
0
11
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2
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2
0
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2
1
8
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0
6
1,712,143.19 -35,008.191,677,135.00
MS CN
B
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45
8
1
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US
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LT 04
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5
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04
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1
2
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05
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8
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1
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1,452,900.04 -22,547.741,430,352.30
MS CN
B
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45
9
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86
5
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V
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LT 09
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2
7
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2
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1
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09
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2
9
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1
7
10
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7
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9
10
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9
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3
9
867,947.93 -10,265.83857,682.10
MS CN
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9
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ST 09
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10
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7
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1
1
1,969,702.75 -5,455.151,964,247.60
MS CN
B
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9
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LT 09
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1
2
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09
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1
9
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09
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1
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6
0
1,726,929.32 -39,919.821,687,009.50
MS CN
B
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9
2
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2
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US
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LT 02
/
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1
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02
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3
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01
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13
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2
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8
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9
2
1,634,655.22 -21,106.421,613,548.80
MS CN
B
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d
l
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r
45
9
5
0
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C
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0
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US
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V
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LT 01
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1
8
/
2
0
1
8
01
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2
5
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1,246,840.88 -11,665.881,235,175.00
MS CN
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9
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997,599.79 -9,459.79988,140.00
MS CN
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1,639,793.99 -7,377.291,632,416.70
MS CN
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148,287.63 -251.57148,036.06
MS CN
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LT 07
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2
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317,277.35 -1,194.89316,082.47
MS CN
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249,989.77 -3,621.89246,367.88
MS CN
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1,149,965.76 -2,632.151,147,333.61
MS CN
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484,944.17 -1,738.67483,205.50
MS CN
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4
4
999,616.63 -15,306.63984,310.00
MS CN
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4
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US
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LT 03
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173,794.44 -466.14173,328.30
MS CN
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LT 08
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7
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862,459.53 -3,582.08858,877.44
MS CN
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4
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9
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US
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LT 04
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158,072.39 -1,457.87156,614.52
MS CN
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US
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LT 02
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5
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1,698,552.77 -5,422.871,693,129.90
MS CN
B
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3
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9
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251,390.02 -2,697.52248,692.50
MS CN
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1,951,428.66 -3,988.661,947,440.00
MS CN
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1,004,720.15 -29,550.15975,170.00
MS CN
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3
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751,551.53 -20,279.03731,272.50
MS CN
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3
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1,001,837.81 -10,497.81991,340.00
MS CN
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1,944,857.79 822.211,945,680.00
MS CN
B
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h
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80
8
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884,974.26 3,565.74888,540.00
MS CN
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3
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1
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2
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1,510,265.25 -4,265.251,506,000.00
MS CN
B
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0
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LT 08
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08
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12
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1,724,633.13 0.601,724,633.73
MS CN
B
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85
7
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60
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LT 10
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611,586.15 -16,470.15595,116.00
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Book Value,Net Unrealized Gain/LossMarket Value
MS CN
B
-
C
h
a
n
d
l
e
r
85
7
4
7
7
A
S
2
ST
A
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40
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0
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0
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40
0
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0
0
0
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0
0
US
D
CO
R
P
LT 05
/
2
2
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2
0
1
7
05
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2
5
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2
0
1
7
08
/
1
8
/
2
0
2
0
08
/
1
8
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2
0
2
0
3,
7
6
8
.
3
3
405,415.90 -8,671.90396,744.00
MS CN
B
-
C
h
a
n
d
l
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r
85
7
4
7
7
A
S
2
ST
A
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2,973,748.39 -55,318.392,918,430.00
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3,292,293.42 -39,173.423,253,120.00
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1,500,650.36 -8,915.361,491,735.00
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200,136.67 -1,238.67198,898.00
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1,598,557.80 -16,189.801,582,368.00
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979,566.61 -26,796.61952,770.00
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91
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1,719,240.53 -21,995.781,697,244.75
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1,742,296.64 -43,974.141,698,322.50
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1,741,033.33 -26,505.831,714,527.50
MS CN
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550,136.80 -11,026.80539,110.00
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1,199,883.22 -28,383.221,171,500.00
MS CN
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1
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01
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2
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1,785,257.10 -34,199.101,751,058.00
MS CN
B
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91
2
8
2
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5
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997,161.04 -25,051.04972,110.00
MS CN
B
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91
2
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5
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9
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1,984,992.52 -40,772.521,944,220.00
MS CN
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2
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03
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2
14
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3
4
2,964,749.62 -50,879.622,913,870.00
MS CN
B
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d
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91
2
8
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88
1
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9
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1,342,671.59 -24,100.841,318,570.75
MS CN
B
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h
a
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d
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91
2
8
2
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5
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LT 04
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3
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.
3
3
1,442,306.78 3,903.221,446,210.00
MS CN
B
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92
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998,790.45 -15,030.45983,760.00
MS CN
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9
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502,477.48 -5,297.48497,180.00
MS CN
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390.28
--
-
-
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3
4
9
,
4
6
3
.
7
1
U
S
D
-
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4
6
GA
A
P
T
r
a
d
i
n
g
A
c
t
i
v
i
t
y
06
/
0
1
/
2
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1
8
-
0
6
/
3
0
/
2
0
1
8
(S
h
o
r
t
-
T
e
r
m
P
o
r
t
f
o
l
i
o
)
CI
T
Y
O
F
Ne
w
p
o
r
t
B
e
a
c
h
GL
O
S
S
A
R
Y
O
F
T
E
R
M
S
Ac
c
r
u
e
d
In
t
e
r
e
s
t
‐
Th
e
in
t
e
r
e
s
t
th
a
t
ha
s
ac
c
u
m
u
l
a
t
e
d
on
a bo
n
d
si
n
c
e
th
e
la
s
t
in
t
e
r
e
s
t
pa
y
m
e
n
t
up
to
,
bu
t
no
t
in
c
l
u
d
i
n
g
,
th
e
se
t
t
l
e
m
e
n
t
da
t
e
.
Accrued interest occurs as a result of the
di
f
f
e
r
e
n
c
e
in
ti
m
i
n
g
of
ca
s
h
fl
o
w
s
an
d
th
e
me
a
s
u
r
e
m
e
n
t
of
th
e
s
e
ca
s
h
fl
o
w
s
.
Am
o
r
t
i
z
e
d
Co
s
t
‐
Th
e
am
o
u
n
t
at
wh
i
c
h
an
in
v
e
s
t
m
e
n
t
is
ac
q
u
i
r
e
d
,
ad
j
u
s
t
e
d
fo
r
ac
c
r
e
t
i
o
n
,
am
o
r
t
i
z
a
t
i
o
n
,
an
d
co
l
l
e
c
t
i
o
n
of
ca
s
h
.
Av
e
r
a
g
e
Cr
e
d
i
t
Ra
t
i
n
g
‐
Th
e
av
e
r
a
g
e
cr
e
d
i
t
wo
r
t
h
i
n
e
s
s
of
a po
r
t
f
o
l
i
o
,
we
i
g
h
t
e
d
in
pr
o
p
o
r
t
i
o
n
to
th
e
do
l
l
a
r
am
o
u
n
t
th
a
t
is
in
v
e
s
t
e
d
in
th
e
po
r
t
f
o
l
i
o
.
Co
n
v
e
x
i
t
y
‐
Th
e
re
l
a
t
i
o
n
s
h
i
p
be
t
w
e
e
n
bo
n
d
pr
i
c
e
s
an
d
bo
n
d
yi
e
l
d
s
th
a
t
de
m
o
n
s
t
r
a
t
e
s
ho
w
th
e
du
r
a
t
i
o
n
of
a bo
n
d
ch
a
n
g
e
s
as
th
e
in
t
e
r
e
s
t
ra
t
e
changes.
Cr
e
d
i
t
Ra
t
i
n
g
‐
An
as
s
e
s
s
m
e
n
t
of
th
e
cr
e
d
i
t
wo
r
t
h
i
n
e
s
s
of
an
en
t
i
t
y
wi
t
h
re
s
p
e
c
t
to
a pa
r
t
i
c
u
l
a
r
fi
n
a
n
c
i
a
l
ob
l
i
g
a
t
i
o
n
.
Th
e
cr
e
d
i
t
ra
t
i
n
g
is
in
v
e
r
s
e
l
y
related to the possibility of debt
de
f
a
u
l
t
.
Du
r
a
t
i
o
n
‐
A me
a
s
u
r
e
of
th
e
ex
p
o
s
u
r
e
to
in
t
e
r
e
s
t
ra
t
e
ri
s
k
an
d
se
n
s
i
t
i
v
i
t
y
to
pr
i
c
e
fl
u
c
t
u
a
t
i
o
n
of
fi
x
e
d
‐in
c
o
m
e
in
v
e
s
t
m
e
n
t
s
.
Du
r
a
t
i
o
n
is
ex
p
r
e
s
s
e
d
as a number of years.
In
c
o
m
e
Re
t
u
r
n
‐
Th
e
pe
r
c
e
n
t
a
g
e
of
th
e
to
t
a
l
re
t
u
r
n
ge
n
e
r
a
t
e
d
by
th
e
in
c
o
m
e
fr
o
m
in
t
e
r
e
s
t
or
di
v
i
d
e
n
d
s
.
Or
i
g
i
n
a
l
Co
s
t
‐
Th
e
or
i
g
i
n
a
l
co
s
t
of
an
as
s
e
t
ta
k
e
s
in
t
o
co
n
s
i
d
e
r
a
t
i
o
n
al
l
of
th
e
co
s
t
s
th
a
t
ca
n
be
at
t
r
i
b
u
t
e
d
to
it
s
pu
r
c
h
a
s
e
an
d
to
pu
t
t
i
n
g
th
e
as
s
e
t
to use.
Pa
r
Va
l
u
e
‐
Th
e
fa
c
e
va
l
u
e
of
a bo
n
d
.
Pa
r
va
l
u
e
is
im
p
o
r
t
a
n
t
fo
r
a bo
n
d
or
fi
x
e
d
‐in
c
o
m
e
in
s
t
r
u
m
e
n
t
be
c
a
u
s
e
it
de
t
e
r
m
i
n
e
s
it
s
ma
t
u
r
i
t
y
va
l
u
e
as
well as the dollar value of coupon
pa
y
m
e
n
t
s
.
Pr
i
c
e
Re
t
u
r
n
‐
Th
e
pe
r
c
e
n
t
a
g
e
of
th
e
to
t
a
l
re
t
u
r
n
ge
n
e
r
a
t
e
d
by
ca
p
i
t
a
l
ap
p
r
e
c
i
a
t
i
o
n
du
e
to
ch
a
n
g
e
s
in
th
e
ma
r
k
e
t
pr
i
c
e
of
an
as
s
e
t
.
Pu
r
c
h
a
s
e
Yi
e
l
d
‐Th
e
me
a
s
u
r
e
of
a bo
n
d
’
s
re
c
u
r
r
i
n
g
re
a
l
i
z
e
d
in
v
e
s
t
m
e
n
t
in
c
o
m
e
th
a
t
co
m
b
i
n
e
s
bo
t
h
th
e
bo
n
d
’
s
co
u
p
o
n
re
t
u
r
n
pl
u
s
it
am
o
r
t
i
z
a
t
i
o
n
.
Sh
o
r
t
‐Te
r
m
Po
r
t
f
o
l
i
o
‐
Th
e
ci
t
y
’
s
in
v
e
s
t
m
e
n
t
po
r
t
f
o
l
i
o
wh
o
s
e
se
c
u
r
i
t
i
e
s
’
av
e
r
a
g
e
ma
t
u
r
i
t
y
is
be
t
w
e
e
n
1 an
d
5 ye
a
r
s
.
Ta
r
g
e
t
e
d
‐Ma
t
u
r
i
t
i
e
s
Po
r
t
f
o
l
i
o
‐
Th
e
ci
t
y
’
s
in
v
e
s
t
m
e
n
t
po
r
t
f
o
l
i
o
wh
o
s
e
se
c
u
r
i
t
i
e
s
’
av
e
r
a
g
e
ma
t
u
r
i
t
y
is
be
t
w
e
e
n
0 an
d
3 ye
a
r
s
.
To
t
a
l
Re
t
u
r
n
‐
Th
e
ac
t
u
a
l
ra
t
e
of
re
t
u
r
n
of
an
in
v
e
s
t
m
e
n
t
ov
e
r
a gi
v
e
n
ev
a
l
u
a
t
i
o
n
pe
r
i
o
d
.
To
t
a
l
re
t
u
r
n
is
th
e
co
m
b
i
n
a
t
i
o
n
of
in
c
o
m
e
an
d
pr
i
c
e
re
t
u
r
n
.
Un
r
e
a
l
i
z
e
d
Ga
i
n
s
/
(
L
o
s
s
)
‐
A pr
o
f
i
t
a
b
l
e
/
(
l
o
s
i
n
g
)
po
s
i
t
i
o
n
th
a
t
ha
s
ye
t
to
be
ca
s
h
e
d
in
.
Th
e
ac
t
u
a
l
ga
i
n
/
(
l
o
s
s
)
is
no
t
re
a
l
i
z
e
d
un
t
i
l
th
e
po
s
i
t
i
o
n
is
cl
o
s
e
d
.
A position with an unrealized
ga
i
n
ma
y
ev
e
n
t
u
a
l
l
y
tu
r
n
in
t
o
a po
s
i
t
i
o
n
wi
t
h
an
un
r
e
a
l
i
z
e
d
lo
s
s
,
as
th
e
ma
r
k
e
t
fl
u
c
t
u
a
t
e
s
an
d
vi
c
e
ve
r
s
a
.
We
i
g
h
t
e
d
Av
e
r
a
g
e
Ef
f
e
c
t
i
v
e
Ma
t
u
r
i
t
y
– Th
e
av
e
r
a
g
e
ti
m
e
it
ta
k
e
s
fo
r
se
c
u
r
i
t
i
e
s
in
a po
r
t
f
o
l
i
o
to
ma
t
u
r
e
,
ta
k
i
n
g
in
t
o
ac
c
o
u
n
t
th
e
po
s
s
i
b
i
l
i
t
y
th
a
t
any of the bonds might be called
ba
c
k
to
th
e
is
s
u
e
r
.
We
i
g
h
t
e
d
Av
e
r
a
g
e
Li
f
e
‐
Th
e
av
e
r
a
g
e
nu
m
b
e
r
of
ye
a
r
s
fo
r
wh
i
c
h
ea
c
h
do
l
l
a
r
of
un
p
a
i
d
pr
i
n
c
i
p
a
l
on
an
in
v
e
s
t
m
e
n
t
re
m
a
i
n
s
ou
t
s
t
a
n
d
i
n
g
,
we
i
g
h
t
e
d
by the size of each principal
pa
y
o
u
t
.
We
i
g
h
t
e
d
Av
e
r
a
g
e
Ma
t
u
r
i
t
y
‐
Th
e
av
e
r
a
g
e
ti
m
e
it
ta
k
e
s
fo
r
se
c
u
r
i
t
i
e
s
in
a po
r
t
f
o
l
i
o
to
ma
t
u
r
e
,
we
i
g
h
t
e
d
in
pr
o
p
o
r
t
i
o
n
to
th
e
do
l
l
a
r
am
o
u
n
t
th
a
t
is invested in the portfolio. Weighted
av
e
r
a
g
e
ma
t
u
r
i
t
y
me
a
s
u
r
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CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5C September 6, 2018
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director and City Treasurer 949-644-3123, danm@newportbeachca.gov
SUBJECT: GENERAL FUND CONTINGENCY RESERVE FUNDING LEVEL
SUMMARY:
The Government Finance Officers Association (GFOA) calculated the probability that the
City would experience risk from earthquakes, floods, fires, and decreased revenues and
increased pension costs due to an economic downturn over a ten-year period as
expressed through a ten-year cumulative probability chart. GFOA has determined that the range at which reserves produce the best value for the City is between the 70%
confidence level ($14.8 million) and 90% confidence level ($25.5 million). The GFOA
analysis is not inclusive of every risk the City could possibly face and credit rating
agencies value fund balance as a measure of financial flexibility. Staff is also concerned
that current pension benefit levels and pension losses subsequent to the 2008 recession has and will continue to absorb a significant level of the City’s financial capacity over the
many years to come. Staff recommends maintaining the current contingency reserve
level of 25% of operating costs until the net pension costs fall below 8% of General Fund
revenues. Further, staff recommends the Committee consider revising the policy target
to 25% of General Fund revenues versus operating costs since a significant portion of master plan funding is currently classified as inter-fund transfers versus operating costs.
There remains a number of uncertainties regarding the applicability of parametric
insurance to the unique circumstances (e.g., interplay of FEMA reimbursement with
parametric insurance and revenue loss lag beyond the standard one-year loss period) faced by municipalities like Newport Beach. Staff does not recommend pursuing
parametric insurance for General Fund risks as this time. It is unclear how measurable
triggers may mitigate the most concerning economic losses to the City’s General Fund.
Staff does, however, recommend exploring potential risks and the means to mitigate risks
to the City’s water and wastewater infrastructure.
General Fund Contingency Reserve Funding Level September 6, 2018
Page 2 RECOMMENDED ACTION:
a) Review and comment on GFOA’s Risk-Based Analysis of General Fund
Contingency Reserve Requirements Report and the applicability and potential use
of parametric insurance;
b) Recommend a General Fund Contingency Reserve level; and
c) If applicable, direct staff to bring amended reserve policy to Council for approval.
DISCUSSION:
The City hired the Government Financial Officers Association (GFOA) to perform a
thorough examination of the City’s risk factors that generally influence the amount of reserves the City should hold. GFOA identified the risks that posed the most clear and
present danger to the City, including earthquakes, floods, and fires, and the potential for
decreased revenues and increased pension costs due to an economic downturn.
GFOA then calculated the probability that the City would experience the aforementioned risks over a ten-year period as expressed through a ten-year cumulative probability chart
(see below). This chart produces a curve that shows the level of confidence the City can
have that a given level of General Fund Contingency Reserves will prove sufficient over
a ten-year period to cover the extraordinary costs incurred by these risks.
“Sufficient” is defined as the reserves not dropping below $10 million. The $10 million
recognizes the fact that the risk analysis cannot account for every possible problem that
could ever befall the City and it represents the City’s stated preference for a cushion
against these unknowable risks. For example, the City can be 80% confident that a
reserve of $19.4 million would cover the City General Fund’s extraordinary expenditures over a ten-year period, without needing to go below $10 million in the City’s remaining
reserve.
General Fund Contingency Reserve Funding Level September 6, 2018
Page 3
There is a point at which the curve begins to rise sharply. According to GFOA, this is the
point at which the City starts to receive less value from reserves. In Exhibit 7.2 above, this is between the 70% confidence level ($14.8 million) and 90% confidence level ($25.5
million). This represents the range at which reserves produce the best value for the City.
It should be noted that the $10 million buffer would need to be added to get the total
desired reserve level. These findings and the detailed report were presented and
discussed at the June 28, 2018, Finance Committee meeting.
Options to Decide
How much should be set aside in the General Fund Contingency Reserve?
The Government Finance Officers Association (GFOA) recommends, at a minimum, that
general-purpose governments, regardless of size, maintain unrestricted fund balance in
their General Fund of no less than two months regular General Fund operating revenues
or expenditures, which is equivalent to a 16% contingency reserve in Newport Beach.
According to the GFOA, the adequacy of the General Fund unreserved fund balance should be assessed based upon a government’s own specific circumstances. Credit
rating agency Standard and Poor’s (S&P) considers an adequate level of “fund balance”
to be a credit strength because the level of fund balance measures the flexibility of an
issuer to meet essential services during transitionary periods.
General Fund Contingency Reserve Funding Level September 6, 2018
Page 4 In 2014, staff conducted a survey of cities in California similar to Newport Beach, and
found contingency reserve requirements mostly in excess of 15% and in the range of 20% to 25% of operating budget. At that time and on this basis, staff proposed, the Finance
Committee recommended, and the City Council approved increasing the General Fund
Contingency Reserve from 15% to 25% to further buttress the City’s financial flexibility.
The basic purpose of the General Fund Contingency Reserve (a.k.a. rainy day reserve) is to protect the budget from unexpected or unforeseen fiscal disruptions such as
catastrophic loss of critical infrastructure, unanticipated revenue shortfalls, and actions by
another government that eliminates or shifts revenues from the City. Currently, the
General Fund Contingency Reserve has a target balance of 25% percent of General Fund
“Operating Budget” as originally adopted. Operating budget includes current expenditure appropriations and excludes capital improvement projects and transfers out.
Appropriations and access to these funds are reserved for emergency situations only, but
may be accessed by Council by simple budget appropriation.
The current projected General Fund Contingency Reserve level for Fiscal Year 2018-2019 is just over $50 million, which is in excess of the reserve level suggested by the
GFOA analysis. However, there are a number of factors that are worth considering when
determining the appropriate reserve level. First, the GFOA analysis is not inclusive of
every risk the City could possibly face. Market volatility can exacerbate pension funding
requirements, naturally occurring events such as sea-level rise, and other unforeseeable events could have a major financial impact. Staff thinks it is prudent to consider reserving
more than the analysis suggests is efficient.
The GFOA analysis found that a lower reserve level would likely prove sufficient to cover
any extraordinary costs incurred by the risks identified but clearly acknowledged that we cannot foresee all future risks. Further, staff is concerned that current pension benefit
levels combined with pension losses incurred subsequent to 2008 have significantly
eroded the City’s financial flexibility for years to come. To put things in perspective, while
the net debt service on General Fund bonded debt represents less than 4% of General
Fund revenue, net pension expenditures approach 19% (due largely to repayment of the unfunded liability) of General Fund revenues. Normal pension costs represent about 8%
of General Fund revenues. Until the City is able to regain its financial capacity, staff
believes it is prudent to retain significant cash reserves (25% of General Fund revenues)
to preserve financial flexibility when recessionary pressures inevitably return and equity
markets cycle back downward.
While some budgetary challenges can be absorbed by temporary cost cutting,
opportunities to cut expenditures are limited. Much of the City’s expenditure budget is
contractually committed and cannot be cut unilaterally. Smaller cuts can be
accomplished through a number of different strategies, such as deferring maintenance of existing City assets, deferring purchases of certain new assets, and cutting back on some
operating transfers out of the General Fund, and other smaller cuts to departmental
operations.
General Fund Contingency Reserve Funding Level September 6, 2018
Page 5
Until significantly more budget flexibility can be regained (perhaps when net pension costs fall below 10% of general revenues), staff recommends maintaining a General Fund
Contingency Reserve level of no less than 25% of operating revenues. Staff believes it
is appropriate to change its target reserve level to 25% of operating revenues because a
growing amount of General Fund resources are committed to capital master plans (e.g.,
Facilities Financial Plan, Facilities Maintenance Plan, Harbor and Beaches Master Plan). All such expenditures are funded by inter-fund transfers which are not classified as
operating expenditures.
Should the City Obtain Parametric Insurance?
Parametric insurance in addition to traditional indemnity insurance as a risk management
mechanism is used to complement reserves. Parametric insurance can provide the
policyholder (the City) with a payment amount that is defined ahead of time, should a
defined event come to pass (an earthquake of a certain magnitude, for example).
Parametric insurance could be more useful for providing an injection of liquidity because the holder of the policy receives the defined payment immediately upon verification by a
third party that the given event occurred, which usually would be within a matter of days.
A robust insurance strategy could make use of both traditional indemnity and parametric
insurance. For example, traditional indemnity insurance could be used to protect against
loss of the City’s assets, while parametric insurance could be used to compensate the City for the losses in tax revenue it would experience from an impaired tax base, for
instance.
Insurance company SwissRe representatives presented their parametric insurance
offering to the Finance Committee on June 14 and again to staff and Committee Member Collopy on July 19. Staff inquired about two potential drawbacks of using parametric
insurance.
1. Since SwissRe requires confirmation of loss within one year and property tax loss
takes at least two years to materialize, would the City be eligible to submit a claim? SwissRe indicated that there would likely be enough other direct and indirect
losses that the City could certify a sufficient amount of losses in a shorter time
period to collect the policy amount.
2. A disaster occurs that requires the City to spend a large amount of money and then uses its parametric proceeds to pay for all of the associated costs. Two years
later, Federal Emergency Management Agency (FEMA) reimbursement comes in
for eligible costs. Would the City then be subject to a “clawback” from the insurer
for the amount FEMA reimbursed to the City because the City did not ultimately
“lose” that amount of money? SwissRe indicated that because parametric policies are newer in the United States, there is not much precedent for how FEMA would
interact with them. However, SwissRe opined that the total damage would probably
be so extensive that the City should be able to find enough direct and indirect
General Fund Contingency Reserve Funding Level September 6, 2018
Page 6 damages to certify the amount of losses necessary to collect the premium amount
while still likely keeping its FEMA reimbursement.
Currently, parametric insurance is mostly used in the reinsurance space around
catastrophe risks, and it has started to be used in the travel, retail and agricultural sectors.
At present, it appears that there have been very few direct parametric policies placed by
insurers, especially in the municipal government sphere. The data demands of parametric insurance are different, and because the coverage tends to be wider, it can
be more expensive. There remains a number of uncertainties regarding the applicability
of parametric insurance to the unique circumstances (e.g., interplay of FEMA
reimbursement with parametric insurance and revenue loss lag beyond the standard one-
year loss period) faced by municipalities like Newport Beach.
Staff does not recommend pursuing parametric insurance for General Fund risks at this
time. It is unclear how measurable triggers may mitigate the most concerning economic
losses to the City’s General Fund. Staff does, however, recommend exploring potential
risks and the means to mitigate risks to the City’s water and wastewater infrastructure.
CONCLUSION:
Staff recommends that the Finance Committee:
a) Review and comment on GFOA’s Risk-Based Analysis of General Fund Contingency Reserve Requirements Report and the applicability and potential use
of parametric insurance;
b) Recommend a General Fund Contingency Reserve level; and
c) If applicable, direct staff to bring amended reserve policy to Council for approval.
Prepared and Submitted by:
/s/ Steve Montano _____________________________
Steve Montano
Deputy Finance Director
Attachment:
A. Risk-Based Analysis of General Fund Reserve Requirements for the
City of Newport Beach, California Draft – May 2018
ATTACHMENT A
A RISK-BASED ANALYSIS OF GENERAL FUND RESERVE REQUIREMENTS FOR THE CITY OF NEWPORT BEACH, CALIFORNIA
DRAFT – MAY 2018
A Risk-Based Analysis of General Fund Reserve
Requirements for the City of Newport Beach,
California
Draft – May 2018
Produced by:
The Government Finance Officers Association
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
Produced by the Government Finance Officers Association Page 2 of 57
Table of Contents
Section 1 - Executive Summary ..................................................................................................................... 3
Section 2 - Introduction ................................................................................................................................ 6
Section 3 - The Approach to Uncertainty ...................................................................................................... 8
Section 4 - Extreme Events ......................................................................................................................... 12
Section 5 - Revenue Volatility ..................................................................................................................... 33
Section 6 - Secondary Risks ......................................................................................................................... 43
Section 7 - Putting it All Together ............................................................................................................... 50
Section 8 - Next Steps ................................................................................................................................. 55
Section 9 - Appendix 1: Reserves in Comparable Cities .............................................................................. 56
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
Produced by the Government Finance Officers Association Page 3 of 57
Section 1 - Executive Summary
A local government’s “reserves” are the portion of fund balance serves as a hedge against risk. The City of
Newport Beach (City) has asked the question: “what is the right amount of general fund reserves for us?”
The Government Finance Officers Association (GFOA) has helped the City answer this question by
examining the risks that the City is subject to.
First, we identified the risks that posed the most clear and present danger to the City. According to the
City’s disaster management plan, these include earthquakes, floods, and fires. Landslides and high winds
could also be potentially damaging, but less so than earthquakes, floods, and fires. We also accounted for
the other risks, such as the potential for decreased revenues and increased pension costs due to an
economic downturn.
Next, for each risk we calculated the probability that the City would experience one of the aforementioned
risks over a ten-year period and, if an event did occur, what the magnitude of the loss would be for the
City’s general fund. To calculate the probability and magnitude of events, we primarily used the following
sources of data:
• Newport Beach’s own experience. For example, the City’s revenue losses during 2001
“Dot.Bomb” recession and 2007 “Great Recession” provide insight into the potential losses the
City could incur during a future recession.
• The experience of other California cities. Fortunately, Newport Beach hasn’t had a lot of direct
experience with many of the extreme events it is at risk for. The experiences of other California
cities can serve as analogues.
• Research produced by other agencies. For example, the United States Geological Survey makes
available information on the likelihood of earthquakes in the Los Angeles area.
• Expertise of City staff. City staff work every day on preparing the City for the risks it faces. Staff
helped us fill in gaps in the source of data above. For example, the City’s fire chief helped
estimate the cost to respond to a wildfire.
We modeled each risk individually and then combined each individual risk into a ten-year model of the
City’s reserves. Our analysis produced the graph below. The vertical axis represents a given amount of
reserves that the City might choose to hold. The horizontal axis represents the level of confidence the City
could have that a given amount of reserves would be sufficient to cover the losses the City might incur
over a ten-year period. For example, the City can be 80% confident that a reserve of $10.4 million would
cover the City’s extraordinary general fund expenditures for the risks covered in this report over a ten-
year period.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
Produced by the Government Finance Officers Association Page 4 of 57
Exhibit 1.1: Confidence that a Given Level of General Fund Reserves will be Sufficient over 10 Years
Reserves
(Millions
of
Dollars)
Percent Confidence
GFOA cannot prescribe a precise level of reserves because the exact amount the City might wish to
maintain is a product of the City’s appetite for risk. However, we can make a number of suggestions to
help the City identify a risk management strategy that makes sense for Newport Beach.
• There is a point at which the curve begins to rise sharply. This is the point at which the City starts
to receive less value from reserves. In the graph above, this is between the 80% confidence level
($10.4 million) and 90% confidence level ($13.0 million). This represents the range at which
reserves produce the best value for the City.
• The City should supplement reserves with other risk management strategies. Understandably,
City officials might not be satisfied with an 80% or 90% chance of being able to cover damages
from the risks we described in this report. Other financial risk management tools like debt or
insurance could be used to provide additional confidence.
• The City may wish to have some reserves beyond our efficient range to account for the fact that
our analysis cannot account for every risk the City could possibly experience. Our analysis does
cover the most clear and present dangers to the City, but some additional amount of reserves
could be prudent.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
Produced by the Government Finance Officers Association Page 5 of 57
• The City can examine the reserves held by comparable cities. Our examination of comparable
cities suggests that the efficient range of reserves we found is in line with the emergency reserves
maintained by other cities.
• The City could elect to hold more reserves than our recommended efficient range based on global
climate change. Our analysis is based on historical records. Global climate change could increase
the City’s vulnerability to naturally occurring extreme events.1 Hence, historical data could
underestimate the likelihood and/or severity of extreme events in the future. Unfortunately, no
one can say precisely what the impact of climate change will be. Hence, GFOA could not make an
objective adjustment to the results of our analysis. This means that there could be a case for
reserving a higher amount than the efficient range described above (or pursuing other risk
management strategies). GFOA’s Microsoft Excel risk model2 provides the City with the ability to
adjust the likelihood and/or magnitude of future extreme events, if it would like to test different
scenarios. For example, if we were to double the likelihood of a flood then the 80% and 90%
confidence levels increase to $10.8 million and $13.5 million, respectively.
• Select a range of preferred reserves, instead of a single target number. GFOA’s research into how
local governments can best maintain financial sustainability has found that decision-making
“boundaries” are essential. For example, if the City were to adopt a policy to maintain reserves
between X% and Y% of revenues, then that would constitute a clear boundary that defines when
reserves are too high and too low. Compare this to if the City just adopted a policy of that reserves
should be at X% of revenues. It is then impossible to say how far reserves can go above or below
this number and still be at acceptable levels. A range also can accommodate the risk appetites of
more City officials. Thus, a range might be more reflective of the preferences of a greater number
of people.
1 According to “The Impact of Climate Change on Natural Disaster”, an article from NASA’s “Earth Observatory”:
“outcomes of an increase in global temperatures include increased risk of drought and increased intensity of storms,
including tropical cyclones with higher wind speeds, a wetter Asian monsoon, and, possibly, more intense mid-
latitude storms.” https://earthobservatory.nasa.gov/Features/RisingCost/rising_cost5.php?src=share
2 GFOA provides the model to the City so that the City can update the model on its own.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Section 2 - Introduction
“Reserves” are the portion of a local government’s fund balance that are available to respond to the
unexpected. Reserves are the cornerstone of financial flexibility. Reserves provide a government with
options to respond to emergencies and afford a buffer against shocks and other forms of risk. Managing
reserves, though, can be a challenge. Foremost, is the question of how much money to maintain in a
general fund reserve? How much is enough and when does a reserve become too much? This can be a
sensitive question because money held in reserve is money taken from constituents, and the argument
could be made that excessive reserves should be returned to residents in the form of lower taxes/fees or
enhanced services.
The City of Newport Beach has been considering this question recently, especially given its vulnerability
to extreme events like earthquakes and floods and because of the potential for revenue instability owing
to an economic downturn. The City engaged the GFOA to help produce a recommendation to help the
City decide how much reserves is appropriate for the general fund. GFOA is a non-profit association of
over 19,000 state and local government finance professionals and elected officials from across North
America. A key part of GFOA’s mission is to promote best practices in public finance, including reserve
policies.
GFOA’s approach to reserves does not suppose “one-size-fits-all.” But, GFOA’s “Best Practice” on general
fund reserves recommends, at a minimum, that general-purpose governments, regardless of size,
maintain reserves of no less than two months of regular operating revenues or regular operating
expenditures (i.e., reserves equal to about 16.7 percent of revenues).3 However, this 16.7 percent is only
intended as a rule-of-thumb, and it needs to be adjusted according to local conditions. To make the
adjustment, GFOA worked with the City to conduct an analysis of the risks influencing the need for
reserves as a hedge against uncertainty and loss.
A “risk” is defined as the probability and magnitude of a loss, disaster, or other undesirable event.4 The
GFOA’s framework of risk assessment is based on the risk management cycle: identify risk; assess risk;
identify risk mitigation approaches; assess expected risk reduction; and select and implement mitigation
methods. The framework focuses primarily on risk retention, or using reserves, to manage risk. However,
the framework also encourages the City to think about how other risk management methods might
alleviate the need to hold larger reserves. In other words, can the City manage its risks in some other way
besides holding reserves? For example, could insurance or debt instruments complement the City’s
reserve strategy? A thorough examination of the risk factors should lead to a range of desired reserves
and improve the City’s understanding of its overall risk profile.
3 GFOA Best Practice. “Appropriate Level of Unrestricted Fund Balance in the General Fund.” GFOA. 2009.
4 Definition of risk taken from: Douglas W. Hubbard. The Failure of Risk Management: Why It’s Broken and How to
Fix It. John Wiley and Sons, Inc. Hoboken, New Jersey. 2009.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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As a first step to this project, GFOA conducted a review of the risk factors influencing the amount of
reserves a municipal government should hold.5 This review enabled the City and GFOA to classify factors
as either primary or secondary risks. Exhibit 1.1 lists how the risk factors were classified.
Exhibit 2.1 – Categorization of Risk Factors that Influence Reserve Levels for Newport Beach
Primary Risk Factors
Vulnerability to extreme events and public safety concerns, with emphasis on:
• Earthquakes
• Floods (includes landslides and tsunamis)
• Fires
• High Winds
Revenue source stability, particularly as it relates to the potential for revenue decline from an economic downturn
Secondary Risk Factors
Pension costs increase owing to underperformance of plan assets during an economic downturn
Leverage from indebtedness (other than pensions)
Liquidity concerns
Expenditure spikes (e.g., from impending lawsuits)
Growth
The next section gives an overview of how we analyze these risks and what you can expect to see in the
rest of this report.
5 The risk factors and basic review method were developed and published in the GFOA publication: Shayne C.
Kavanagh. Financial Policies. (Government Finance Officers Association: Chicago, IL) 2012.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Section 3 - The Approach to Uncertainty
The accomplished forecasting scientist, Spyros Makridakis, suggests a “Triple-A” approach for dealing with
highly uncertain phenomena.6
1. Accept. First we must accept that we are subject to uncertainty. For example, earthquakes could
experience a great deal of variability, from a barely noticeable tremor to “the big one”.
2. Assess. Next, we must assess the potential impact of the uncertainty, with history providing a
useful reference point. The experiences of other local governments is also a good reference point.
For example, we used the historical experiences of Newport Beach and other California cities to
estimate the potential impact of future extreme events.
3. Augment. The range of uncertainty we actually face will almost always be greater than what we
initially assess it to be. Therefore, we must augment our understanding of risk beyond what our
historical experiences show us. For example, the City has not experienced a major wildfire
recently. This does not mean there is no risk of a future wildfire. Also, the City has not experienced
a major earthquake, but it could in the future. We can augment our understanding of risk using
a technique called “Probability Management”.7 Probability Management is an application of
modern information processing technology that allows us to simulate thousands of potential
events (e.g., wildfires, earthquakes) so that we can observe the probability of events of various
magnitudes coming to pass.
In order to use Probability Management, we express any given type of extreme event as a range of
possibilities that the City might experience. This range is called a “distribution”. A distribution is a shape
that signifies how frequently the City might expect to experience a certain type of event and/or how
severe the event might be. The most common type of distribution is called the “normal distribution”,
more popularly known as the “bell curve”. Many phenomena fit a bell curve. To help us understand how
to read a distribution, we can start with an example that is related to everyday life: Exhibit 3.1 shows a
bell curve for the height of American men. The horizontal axis of Exhibit 3.1 represents height. The vertical
axis represents frequency. 5’9” is the most common height, so it is shown at the top of the curve. Much
taller men, like NBA centers, would be found on the right-hand side of the curve. Very short men would
be found on the left.
6 See: Spyros Makridakis, Robin Hogarth, and Anil Gaba. Dance with Chance: Making Luck Work for You. (Oneworld
Publications: Oxford, England). 2009.
7 The discipline of “Probability Management” was developed by Dr. Sam Savage, author of The Flaw of Averages.
You can learn more about Probability Management at probabilitymanagement.org.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Exhibit 3.1 – The Normal Distribution for American Men
Frequency
Height
The normal distribution can help analyze the City’s risk. To illustrate, the severity of an economic
downturn is roughly normally distributed. A few economic downturns are slight, few are severe, but most
are closer to average.
Another common type of distribution we use in our analysis is called a “lognormal” distribution. A
lognormal distribution is shown in Exhibit 3.2. Earthquakes, for example, fit a lognormal distribution.
Exhibit 3.2 shows that tremors of a small magnitude are the most common type of earthquake, by far.
Large magnitude earthquakes are very rare.
Exhibit 3.2 – Lognormal Distribution for Earthquakes
Frequency
Magnitude
Very Short Very Tall
Average
5’9”
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Expressing Newport Beach’s vulnerability as distributions allows us to calculate the probability that an
event of a given magnitude will come to pass. When we associate a dollar amount with that event, we can
estimate the probability or chance that Newport Beach will need to have a given amount of money on-
hand to respond. Exhibit 3.3 is not a distribution, but is a type of graphic we will use often in this report.
It is called a “cumulative probability chart”. It shows that increasing amounts of reserves are needed to
gain more confidence that the City will have enough money to cover the extraordinary cost to the general
fund arising from an earthquake. We can see that reserving $2.0 million will give the City a 90% chance of
being able to cover the costs that the general fund would incur as a result of an earthquake. The curve is
relatively flat for most of the chart and then begins to move sharply upward. This is because increasingly
large amounts of money are needed to cover the costs from the most extreme earthquakes.
Exhibit 3.3 - Percent of Earthquake’s Covered by Varying General Fund Reserve Levels
As we move to the right of the graph, the amount Newport Beach needs to reserve to cover the cost
of an earthquake increases. At the top right, as the line color changes to orange, it indicates an
increasing level of reserves to address greater than 95% confidence level.
For most risks the City faces, GFOA recommends a range of possible reserve amounts for the City to
consider. This is because there is never one single, objectively best amount of reserves to hold. The
amount of reserves the City will want hold will partially be a function of the City’s willingness to take on
risk. If City officials are willing to take on risk, they might opt for lower reserves and spending more money
on current services. If officials are more risk averse, they might opt for higher reserves. GFOA’s
recommended ranges of reserves are based on where reserves produce the best value or “bang for the
buck”. For example, on Exhibit 3.3 we see that to go from 95% confidence to 99% confidence would
require an extraordinary amount of money. Conversely, to go from 75% to 80% does not cost nearly as
much. Hence, we recommend that the City pick reserve targets that offer the best value. On Exhibit 3.3,
we see that range lies between $1.1 million and $2.0 million for earthquakes. Other strategies for covering
risk beyond these amounts may be more financially savvy (e.g., debt or insurance).
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99%
Mi
l
l
i
o
n
s
At 85% confidence level, the City would require $1.1 million in reserves.
At 90% confidence level,
the City would require $2.0 million in reserves.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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In Section 4 of this report, we will review all of the City’s primary risks posed by extreme events. In Section
5, we cover revenue instability owing to economic downturns. We will analyze them in the manner
described above and suggest where reserves offer the greatest value. Section 6 reviews secondary risk
factors that have less weighty implications for the City’s reserve strategy. These risks will be analyzed in a
similar way to the primary risks.
After we analyze the individual risks, in Section 7, we will consider the risks holistically. This section will
address the following concerns:
• It is highly unlikely that the City will experience many of the extreme events discussed in this
report in a short time period. This means that simply adding the reserve amounts for each event
on top of one another would cause the City to reserve more than its appetite for risk suggests is
needed.
• Considering the risks over a multi-year time period provides a more complete perspective on
potential vulnerability and how to use reserves.
• The occurrence of one risk could impact the likelihood of another. For example, a severe economic
downturn could lead to lower returns on the City’s pension assets, leading to higher pension costs.
In Section 8, we provide our recommended steps for how the City might move forward using our analysis.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Section 4 - Extreme Events
Although Newport Beach has received reimbursement from insurance and public agencies in the past for
natural disasters and has insurance coverages that would help in recovery from future disasters, having
adequate reserves in place is important to
quickly and decisively respond to extreme
events. For example, FEMA reimbursement
will not over all the costs the City incurs and it
could be months, if not years, to receive
reimbursement. As the City’s hazard
mitigation plan indicates, earthquakes,
floods, wildfires, landslides, and strong winds
are potentially the most costly natural
disasters for Newport Beach.8 In discussions
with City staff, the first three disasters
represent the greatest risk and will be the
focus of this section of the analysis.
Fortunately, Newport Beach has not experienced a substantial earthquake in recent history. Therefore,
we have no historical data to suggest what damage an earthquake might do. Instead, we will rely on
historical data for earthquakes that have occurred in other areas in California. We use these cases to
establish the range of potential damage that Newport Beach might experience.
We cannot assume that all
the points along the range of
potential damages is equally
likely – for example, it is more
likely that Newport Beach will
experience seismic activity of
smaller magnitude than a
large seismic event. Theory
suggests, and our
examination of the data
confirms, that the range of
potential damages takes the
shape of a lognormal curve.
Simply stated, Newport
Beach is much more likely to
incur natural disasters of less severity and lower cost with greater frequency than higher cost, more severe
8 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016.
FEMA, CalOES, and Reserves
The U.S. Federal Emergency Management Agency
(FEMA) reimburses local governments for monies spent
in response to a federally-declared disaster. The
California Governor's Office of Emergency Services
(CalOES) provides assistance to local governments for
State of California-declared disasters.
In both cases, reimbursement is only partial (typically
75 percent for FEMA) and is often not immediate.
Therefore, local governments must have the financial
capacity to respond quickly and decisively,
independent of other governmental financial support.
Frequency
of Quake
Exhibit 4.1 – Sample Lognormal Curve
Severity of Quake
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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natural disasters.9 For illustrative purposes, the image above is a lognormal curve of seismic activity. The
odds of experiencing tremors is much greater than the odds of experiencing earthquakes. It is also
significantly more likely that the City experiences tremors than a catastrophic event (“The Big One”).
The severity of earthquakes, floods, and wildfires are attributable to several factors. Factors impacting
the severity of earthquakes include magnitude, density of an area, depth of the earthquake, distance from
the epicenter, local geological conditions, secondary effects (e.g., floods, landslides, fires), and
architecture.10 Factors impacting the severity of floods include amount of precipitation as well as the size,
shape, and land use of the surface area where rainwater reaches.11 Factors influencing the severity of fires
include topography, temperature and relative humidity, and vegetation.12 In addition, an area’s level of
preparedness to respond13 to a natural disaster affects severity and cost. Controlling for many of these
factors is beyond the scope of our analysis. Therefore, in the following subsections, we select proxy
variables (such as population density) to help estimate the impact an extreme event will have on Newport
Beach. We will also return to specific factors affecting Newport Beach’s potential damages from these
hazards based on the City’s natural hazards mitigation plan later in this report when we recommend an
overall reserve strategy.
Because the City does not have information on cost of past earthquakes and wildfires, we gathered
additional sources of data. This includes reference cases using publically available data from FEMA-
declared disasters.14 Additionally, we use other Southern California FEMA-declared disasters as additional
analogues to the three floods for which the City has cost information. There are two important limitations
with these datasets. One is the reference information may represent instances of greater damage than
what the City may experience. The second limitation is the FEMA information includes all cost
reimbursement, including those to the general and enterprise funds. The following sections on each type
of extreme event will further explain any notable features of the data sets we used.
Subsection A - Earthquakes
Developing a reserve strategy for a severe natural disaster is complicated because a disastrous earthquake
is a very low probability event with potentially extreme consequences. Unlike, for example, a recession
9 GFOA used standard statistical procedures to turn the data from Exhibit 2 into a lognormal distribution.
10 Sarah Zielinski, “Seven Factors that Contribute to the Destructiveness of an Earthquake,” Smithsonian, February
23, 2011, http://www.smithsonianmag.com/science-nature/seven-factors-that-contribute-to-the-destructiveness-
of-an-earthquake-44395116/.
11 Ross Gorte, “The Rising Cost of Wildfire Protection,” (Bozeman, MT: Headwater Economics, 2013),
http://headwaterseconomics.org/wphw/wp-content/uploads/fire-costs-background-report.pdf.
12 Becky L. Estes, Eric E. Knapp, Carl N. Skinner, Jay D. Milner, and Haiganoush K. Preisler, “Factors influencing
fire severity under moderate burning conditions in the Klamath Mountains, northern California, USA,” Ecosphere 8:
5 (2017), 1-20, http://onlinelibrary.wiley.com/doi/10.1002/ecs2.1794/pdf.
13 The State of Queensland, Office of the Queensland Chief Scientist, “What factors contribute to floods?,”
http://www.chiefscientist.qld.gov.au/publications/understanding-floods/what-factors-contribute.
14 FEMA Public Assistance Funded Projects Summary provides information on “Federal disaster grant assistance for
debris removal, emergency protective measures, and the repair, replacement, or restoration of disaster-damaged,
publicly owned facilities and the facilities of certain Private Non-Profit (PNP) organizations.” Federal Emergency
Management Agency, “FEMA Public Assistance Funded Projects Summary,” http://www.fema.gov/media-
library/assets/documents/28344, updated December 8, 2017.
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that will almost certainly happen within the foreseeable future due to routine economic cycles, Newport
Beach may not experience a severe earthquake for many years. For a risk factor like revenue volatility
(due to a recession) it makes sense to reserve an amount that is within the relatively well-defined range
suggested by the City’s historical experiences because we know that: A) a recession will happen in the
foreseeable future, and B) certain tax revenues will decline by a roughly predictable amount at that time.
To deal with the unique problems posed by a severe earthquake, we turn to the emerging field of
municipal “resiliency.”15 Resiliency is defined as a government’s ability to absorb an extreme event and
bounce back from it. Further, resiliency is enhanced when a government has multiple options to respond
to an extreme event. When considering financial preparedness to respond, a municipality has three basic
options.
• Reserves. Reserves are under the complete control of a municipality, thus provide the most
flexibility.
• Debt. A municipality could access the debt market to pay for costs of responding.
• Insurance. A municipality could purchase insurance to provide reimbursement of costs incurred.
For a lower probability event with potentially extreme consequences, there are disadvantages to relying
exclusively on reserves. Chief among them include, the length of time to accumulate sufficient reserves
to cover the costs associated with a catastrophic event and the important opportunity costs of holding
these monies in reserve – for example, a municipality could use the money to lower taxes or provide more
services. The resiliency philosophy suggests that we should think about how all three options could be
used to create financial preparedness to deal with an extreme event or a natural disaster.
In order to think about how the three funding mechanisms above might apply to the City’s financial
preparedness strategy for earthquakes, we first need to better define the range of damages the City could
experience. To do this, we draw from earthquake events listed in FEMA’s database for California cities
and towns. The reference examples reflect a similar seismic hazard risk profile as Newport Beach,
according to the U.S. Geological Survey.16 In fact, Newport Beach experienced some light shaking from
the 2010 Baja California earthquake listed below, but did not incur major unexpected costs to its general
fund.17 Exhibit 4.A.1 lists the events (including magnitude of earthquake, as applicable), estimated
damages18 adjusted for inflation to 2017 dollars, population density at the year of the event, and
estimated damages per capita.
15 See for example, the Rockefeller Foundations “100 Resilient Cities” program, of which GFOA is a partner.
www.100resilientcities.org.
16 U.S. Geological Survey, “Simplified 2014 Hazard Map (PGA, 2% in 50 years),
https://earthquake.usgs.gov/hazards/hazmaps/conterminous/2014/images/HazardMap2014_lg.jpg
17 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016.
18 GFOA estimates the total cost using the typical FEMA reimbursement rate of 75 percent of total cost.
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Exhibit 4.A.1: Estimated Damages from Select California Earthquakes
Estimated
Damages (2017 $)
Population
Density (year of event)
Estimated
Damage per Capita
2003 San Simeon - 6.6 magnitude
Arroyo Grande $30,943 2,849 $11
Atascadero $36,888,800 1,077 $34,248
Morro Bay $380,373 1,960 $194
Pismo Beach $32,552 2,315 $14
San Luis Obispo $9,815 3,464 $3
Guadalupe $948,145 4,975 $191
Santa Maria $52,292 3,855 $14
Subtotal $38,342,920 20,495 $1,871
2010 Baja California - 7.2 magnitude
Brawley $48,205 3,249 $15
Calexico $9,002,756 4,597 $1,958
Calipatria $180,405 2,071 $87
El Centro $2,100,258 3,845 $546
Holtville $3,294,249 5,164 $638
Imperial $695,131 2,518 $276
Subtotal $15,321,004 21,444 $714
2014 South Napa - 6.0 magnitude
American Canyon $71,048 4,229 $17
Calistoga $7,866 2,040 $4
Napa $11,171,809 4,485 $2,491
Yountville $681,714 1,884 $362
Benicia $103,049 2,160 $48
Vallejo $717,781 3,920 $183
Subtotal $12,753,267 18,718 $681
TOTAL $66,417,191 60,657 $1,095
Mean $3,495,642 3,192 $1,095
Median $380,373 3,249 $117
Sources: Federal Emergency Management Agency and U.S. Census Bureau
Compared to the other two earthquakes referenced, the 2010 Baja California earthquake incurred the
lowest damage per capita at $714. However, Calexico’s damages per capita were higher than the other
affected municipalities in the dataset for the event. Atascadero’s damages from the 2003 San Simeon
earthquake are the highest amongst the reference examples and represents an extreme case due to high
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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cost of repairing its historic city hall building.19 Due to this and for the purpose of the analysis, we remove
Atascadero from the sample cost per capita and will return to it at the end of this subsection.
Because the estimated damages reflect total cost to the entire municipal government and this analysis
focuses on the general fund only, we need to adjust these figures to make them relevant to the general
fund. We do this by assuming that the general fund’s share of the assets owned by the municipality will
be roughly analogous to the share of damages experienced by the general fund.20 This ratio is shown in
the exhibit below as general fund’s share of total assets. We apply this ratio to the estimated damages
per capita figures shown in Exhibit 4.A.1. Exhibit 4.A.2 lists the estimated general fund damage per
capita.21
To arrive at a general fund reserve recommendation, we first translate the reference cost per capita in
Exhibit 4.A.2 and apply it to Newport Beach’s current population density of 3,641 residents per square
mile. This results in total estimated cost ranging from $6,000 to $7.3 million, which is far too vast to be of
much help in making decisions about Newport Beach’s financial strategy. Therefore, we assume potential
earthquake damage to take the shape of a lognormal distribution, where the City is much more likely to
experience a minor rather than an extreme earthquake.22
19 Creig P. Sherbune, “Financing City Hall: A look at who’s paying the $34 million,” Atascadero News, September 23,
2011, http://www.atascaderonews.com/v2_news_articles.php?heading=0&story_id=4237&page=72.
20 We exclude land since land is not susceptible to earthquake damage in the same way as the built environment.
21 According to Holtville’s FY 2016 CAFR, it does not maintain a complete accounting of capital assets. Thus, the
relative share of capital assets for governmental activities is unavailable and we exclude it from the reference set as
well.
22 GFOA used standard statistical procedures to turn the data from Exhibit 3.A.2 into a lognormal distribution.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Exhibit 4.A.2: Estimated General Fund Damages Per Capita from Select California Earthquakes
General Fund’s Share of Total Assets Estimated General Fund Damage Per Capita
2003 San Simeon - 6.6 magnitude
Arroyo Grande 54% $6
Atascadero 81% $27,581
Morro Bay 51% $99
Pismo Beach 60% $8
San Luis Obispo 48% $1
Guadalupe 42% $81
Santa Maria 63% $9
2010 Baja California - 7.2 magnitude
Brawley 35% $5
Calexico 64% $1,256
Calipatria 57% $50
El Centro 40% $218
Holtville N/A N/A
Imperial 46% $127
2014 South Napa - 6.0 magnitude
American Canyon 82% $14
Calistoga 31% $1
Napa 77% $1,915
Yountville 71% $258
Benicia 51% $25
Vallejo 61% $112
Sources: Federal Emergency Management Agency, U.S. Census Bureau, each cities’ respective CAFR
Exhibit 4.A.323 provides a cumulative probability chart of the potential general fund cost the City would
incurred for an earthquake. The horizontal axis represents the percent likelihood of earthquakes covered.
The vertical axis represents the amount of reserves that are required to cover the cost. For example, the
85 percent mark vertical axis intersects with the orange line at a general fund reserve of $1.1 million. As
the graph moves closer to the right, a greater amount in reserves is needed to cover the less probable and
more severe earthquakes. At the top right, as the line changes from blue to orange, we see that the
amount of reserves required to approach 99% confidence is so high that it does not even fit on our chart.
23 Exhibit 3.A.3 does not graph the amount required to cover 99.9% of earthquakes in order to focus on more
probable scenarios. To cover 99.9% of earthquakes would require $380.3 million from the general fund.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Exhibit 4.A.3 - Percent of Earthquake’s Covered by Varying General Fund Reserve Levels
As we move to the right of the graph, the amount Newport Beach needs to reserve to cover the cost
of an earthquake increases. At the top right, as the line color changes to orange, it indicates an
increasing level of reserves to address greater than 95% confidence level.
Of course, the City can be more confident by setting aside more reserves. But to be completely confident,
the City would need to reserve a very high amount, and as we discussed earlier, there are significant
opportunity costs in doing so. Instead, Newport Beach might consider how reserves, debt, and insurance
can work together. First, let us consider establishing some basic principles.
• Reserves make the most sense at the left-hand side of the curve. Here the City gets the most
“bang for the buck” because each extra dollar of reserves buys the greatest increases in
confidence.
• Debt is probably the most useful closer to the middle of the curve. The middle of the curve
represents severe but not catastrophic damage. Here, the City would likely need to fund a
significant response to a disaster but the City’s tax base would not be so impaired (e.g., stores
closed and residents dislocated on a long-term basis) that paying back the debt would be
problematic.
• Insurance is probably most useful closer to the right-hand side of the curve. The right-hand side
of the curve represents catastrophic damage. In this case, the City’s tax base might be impaired
for a significant duration making repayment of debt difficult. Further, the premium payments for
insurance coverage for only a catastrophic event would be less than for coverage that includes
both severe and catastrophic events. Insurance can also complement the City’s risk mitigation
strategy should it decide to reserve an amount closer to the left-hand side of the curve.
Exhibit 4.A.3 shows the “value” the City gets from reserves. Where the curve is flatter, the value of
reserves is high because a relatively modest increase in the size of reserves “buys” a substantial increase
in the confidence the City can have that its reserves will be adequate for an earthquake. Where the curve
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99%
Mi
l
l
i
o
n
s
At 85% confidence level, the City would require $1.1 million in reserves.
At 90% confidence level, the City would require $2.0 million in reserves.
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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gets steeper, the City needs to put aside more money to gain less confidence. In Exhibit 4.A.3, we can see
that the “value” provided by reserves starts to decrease significantly after about $1.1 million. For example,
the City can be 80 percent confident of covering the damage from an earthquake at $745,000. It can “buy”
an extra 5 percentage points of confidence to get to 85 percent with a reserve of $850,000 – a difference
of $233,000. By way of comparison, going to 90 percent confidence, requires a reserve of $2.0 million. In
other words, to increase confidence from 85 percent to 90 percent requires nearly doubling the reserve
amount, and to go from 90 to 95 percent requires over two and a half times the reserve. This pattern
suggests the following range for reserves:
• On the low end, $1.1 million. This is the point up to which the curve is flattest. That means it is
where each additional 5 percent of confidence requires an approximately similar increase in
reserves. $1.1 million provides the City with an 85 percent likelihood of being able to cover all
damages from an earthquake with general fund reserves.
• On the high end, $2.0 million. This is the point where the City can be 90 percent confident it could
cover all damages from an earthquake with general fund reserves. It is also the point right before
the curve turns much more sharply upwards, where much greater levels of reserve are necessary
to be more confident.
Choosing a number within the range suggested above will depend on the City’s appetite for risk. In
considering these numbers, we must also remember that the City of Newport Beach itself has not incurred
large costs from an earthquake and that the numbers above are all based on analogues generated from
the experience of other cities. Hence, it is useful to consider how Newport Beach’s vulnerability to
earthquakes might compare to other cities’. First, all of the cities used as analogues in this report have a
similar seismic hazard risk profile to Newport Beach, according to the U.S. Geological Survey. So, the
analogues should be roughly comparable. However, the cities might differ in some of their specific
characteristics that make them more vulnerable or less vulnerable to damages. To gain more insight on
this point, we compared the disaster management plans of different cities in the region to see the
potential earthquake damages that were contemplated for each city.24 We found, for example, that
Newport Beach’s plan contemplated slightly lower damages25 from an earthquake at the San Andreas
fault, compared to the average for the plans we examined.26 However, we also found that Newport
Beach’s “worst case scenario” from activity along the San Joaquin Hills fault was considered to be more
severe than that of the other cities’.27 As we saw in Exhibit 4.A.3, using reserves for the most severe
24 We reviewed only disaster management plans produced by the same consultant as the consultant used by
Newport Beach for its disaster management plan. The intent was to compare plans that were developed using similar
methodologies and assumptions.
25 Because the disaster management plans do not estimate costs that would be incurred by the municipal
governments themselves in the event of an earthquake, we compared the reports using building-related economic
losses. Building losses include structural and non-structural damage buildings as well as their contents. Income losses
relate to the inability to operate during a period because of damages sustained during a disaster as well as money
spent on temporary living expenses due to displacement. Presumably the costs incurred by the municipal
governments would be proportional.
26 Damages were scaled to population to increase comparability.
27 These plans contemplated damages to the entire community, including private property, overlapping
governments, and more. So, the plans did not offer insight into the potential cost of an earthquake to the municipal
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possible earthquake is not economical. Hence, this suggests that the City might wish to give special
consideration to financial risk management strategies for damages in excess of reserves.
For potential damages in excess of the reserve target the City selects, Newport Beach should consider
other financing tools like debt and insurance. The scope of this analysis is limited to general fund reserves,
so GFOA cannot provide more specific guidance on the exact points on the curve in Exhibit 4.A.3 at which
the City should consider debt versus insurance, but we can provide the following recommendations to
help the City develop a more robust strategy:
• Develop a contingent capital arrangement. For damage levels at which the City chooses to use
debt, the City should arrive at pre-arranged terms with a lender to be able to access a loan when
the need arises. This will eliminate the need to negotiate terms during high-stress periods in the
aftermath of an extreme event, and the City will have a much more favorable negotiating position
before an event than immediately after.
• Consider inter-fund borrowing. A loan does not necessarily have to come from an external
creditor. If the City has resources in other funds that are not likely to be compromised by a severe
disaster, the City could use inter-fund borrowing to provide the resources needed by the general
fund. Similar to a contingent capital agreement with an external lender, the City should develop
a robust internal borrowing policy prior to an event to govern the terms of the loan.
• Consider “parametric” insurance in addition to traditional indemnity insurance. Indemnity
insurance is the type of insurance that most governments have traditionally purchased, where
the insurance corresponds to the value of the assets being insured, and reimbursement is paid
out after a certain deductible has been met. The advantage of traditional indemnity insurance is
that there is a known damage threshold past which the City is covered.
Parametric insurance is a newer type of insurance for providing coverage for extreme events,
having increased in popularity in the last 15 years or so. Parametric coverage provides the
policyholder (the City) with a payment amount that is defined ahead of time, should a defined
event come to pass (an earthquake of a certain magnitude). Parametric insurance could be more
useful for providing an injection of liquidity because the holder of the policy receives the defined
payment immediately upon verification by a third party that the given event occurred, which
usually would be within a matter of days. As a simple illustration, a parametric policy might
provide the City of Newport Beach with $5 million upon the occurrence of a 7.0 magnitude
earthquake, after the U.S. Geological Survey verifies the magnitude of the quake. This feature of
parametric insurance also eliminates much of the administrative hassle that would be associated
with a traditional indemnity policy (e.g., working with claims adjusters). A final advantage is that
the proceeds from the policy payout are completely fungible – the City could use them to fund
whatever service it deems necessary whereas indemnity policies might require the policyholder
to use the funds to repair or replace the asset that was insured. But, an important disadvantage
of parametric insurance is that the policy is triggered by the magnitude of the event, not the
damages incurred by the City. So, if the City were to experience a 6.9 magnitude quake, to
continue our previous example, it would receive nothing from a parametric policy regardless of
government. However, it reasonable to assume that the cost to municipal government would be roughly
proportionate to the damage done to the entire community.
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the damages it experienced. Additionally, parametric insurance is still a relatively new insurance
instrument, and fewer insurance companies sell parametric policies compared to indemnity
policies.
A robust insurance strategy could make use of both traditional indemnity and parametric
insurance. For example, traditional indemnity insurance could be used to protect against loss of
the City’s assets, while parametric insurance could be used to compensate the City for the losses
in tax revenue it would experience from an impaired tax base, for instance.
As mentioned earlier in this subsection, the estimated damages recorded by Atascadero from the 2003
San Simeon earthquake represent an extreme case. For these extreme events, alternative financing tools
aside from reserves may be prudent. Additionally, Atascadero’s example highlights additional strategies
for Newport Beach to explore. As seen with Atascadero’s city hall, historic buildings are vulnerable when
seismic activity occurs. To help mitigate risk associated with historic buildings, the City could explore
retrofitting, insurance, and other mitigation strategies for buildings that poise the greatest risk as
identified in the City’s disaster management plan.
Earthquake Checkpoints
A severe earthquake is a very low probability event with potentially extreme consequences. This
means that reserves are not a sufficient risk management tool, on their own. This is because there
would be significant opportunity costs to accumulate enough reserves to cover the cost of a severe
earthquake
The City should complement its reserves with debt and/or insurance instruments to provide
additional financial capacity to respond to an extreme event.
A reserve between $1.1 million and $2.0 million should be sufficient to provide the City with 85%
to 90% confidence that it will be able to cover the cost of an earthquake. This is the range of
reserves that is the most “efficient” use of reserves.
Subsection B – Floods (Includes Landslides & Tsunamis)
As a coastal city, Newport Beach faces the risk of flooding from storms, high waves, tsunamis, and rising
sea levels. The Santa Ana River, San Diego Creek, and San Joaquin Hills’ streams can also cause flooding,
with San Diego Creek flooding having caused significant damage to the City.28 The City has experienced
three severe storm and flooding events that were FEMA-declared disasters in December 2004 to January
2005, February 2005, and December 2010 to January 2011.
The three events serve as references to what the City could experience, but to further explore the
possibility of potential damages, we reviewed FEMA’s database for additional severe storms and flooding
in Orange County. Exhibit 4.B.1 lists the cities, estimated damages29,30 adjusted for inflation to 2017
dollars, population density the year of the event, and estimated damages per capita. Exhibit 4.B.2 adjusts
the estimated damage per capita amounts to focus only the general fund. As with the previous section on
28 City of Newport Beach, “Local Hazard Mitigation Plan,” 2016.
29 GFOA estimates the total cost using the typical FEMA reimbursement rate of 75 percent of total cost.
30 GFOA used figures provided by Newport Beach for two of the events that had differing reimbursement rates from
FEMA to account for reimbursement from California Governor's Office of Emergency Services.
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earthquakes, we identify the general fund’s share of capital assets using information from each respective
cities’ most recent comprehensive annual financial report. Doing this allows us to focus on the general
fund, which is the focus of our report. Finally, it should be noted that FEMA’s data groups floods and
landslides together. Hence, the figures used in this section of the report include potential damages from
both types of events.
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Exhibit 4.B.1: Estimated Flood Damages in Orange County Cities
Event & Cities Estimated Damages (2017 $)
Population Density (year of event)
Estimated Damage per Capita
December 2004 to January 2005 Severe Storms and Flooding
Anaheim $3,598,878 6,650 $541
Brea $139,873 3,205 $44
Costa Mesa $165,976 6,967 $24
Dana Point $300,346 5,315 $57
Fullerton $285,815 5,947 $48
Huntington Beach $195,454 7,199 $27
Irvine $370,533 2,722 $136
La Habra $153,089 8,118 $19
Laguna Beach $202,153 2,655 $76
Laguna Niguel $602,195 4,269 $141
Mission Viejo $2,783,161 5,379 $517
Newport Beach $323,705 3,430 $94
San Clemente $162,317 3,329 $49
San Juan Capistrano $1,823,232 2,443 $746
Seal Beach $59,568 2,149 $28
Villa Park $355,940 2,857 $125
Mean $720,140 4,540 $167
February 2005 Storms and Flooding
Anaheim $140,931 6,650 $21
Brea $18,309 3,205 $6
Huntington Beach $95,525 7,199 $13
Laguna Beach $41,707,677 2,655 $15,709
La Habra $7,409 8,118 $1
Mission Viejo $193,583 5,379 $36
Newport Beach* $39,242 3,430 $11
San Juan Capistrano $5,426,949 2,443 $2,221
Santa Ana $78,899 12,207 $6
Mean $47,708,523 51,287 $18,025
December 2010 to January 2011 Winter Storms and Flooding
Aliso Viejo $53,536 6,433 $8
Anaheim $353,016 6,747 $52
Dana Point $169,772 5,131 $33
Fountain Valley $9,326 6,132 $2
Garden Grove $25,406 9,525 $3
Huntington Beach $158,026 7,103 $22
Irvine $101,227 3,212 $32
Laguna Beach $752,198 2,568 $293
Laguna Hills $15,056 4,549 $3
La Habra $10,415 8,174 $1
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Lake Forest $199,308 4,336 $46
Mission Viejo $272,051 5,260 $52
Newport Beach* $252,499.05 3,578 $71
Rancho Santa Margarita $102,462 3,692 $28
San Clemente $1,641,417 3,395 $483
San Juan Capistrano $264,001 2,450 $108
Santa Ana $13,379 11,901 $1
Seal Beach $19,902 2,141 $9
Tustin $9,943 6,818 $1
Mean $232,786 5,429 $66
January 2017 Severe Winter Storms and Flooding
Dana Point $16,041.69 5,233 $3
Huntington Beach $69,783.05 7,501 $9
Laguna Beach $60,545.96 2,620 $23
Newport Beach $6,292.03 3,641 $2
Placentia $10,366.21 7,949 $1
San Juan Capistrano $53,170.35 2,569 $21
Santa Ana $109,245.72 12,256 $9
Westminster $11,433.36 9,111 $1
Yorba Linda $228,128 3,503 $65
Mean $62,778 6,043 $15
Reference Group Mean $1,211,674 5,310 $417
Reference Group Median $153,089 5,131 $28
Sources: Federal Emergency Management Agency, U.S. Census Bureau, and City of Newport Beach, CA
* Figure provided by the City, which differs from the FEMA database and may contain reimbursement from California Governor's Office
of Emergency Services.
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Exhibit 4.B.2: Estimated General Fund Damages Per Capita from Select California Floods
Event & Cities General Fund Share
of Capital Assets
Estimated GF
Damage Per Capita
Anaheim 32% $173
Brea 64% $28
Costa Mesa 100% $24
Dana Point 100% $57
Fullerton 78% $38
Huntington Beach 72% $20
Irvine 100% $136
La Habra 66% $12
Laguna Beach 66% $50
Laguna Niguel 100% $141
Mission Viejo 99% $510
Newport Beach 78% $74
San Clemente 51% $25
San Juan Capistrano 42% $311
Seal Beach 59% $16
Villa Park 100% $125
February 2005 Storms and Flooding
Anaheim 32% $7
Brea 64% $4
Huntington Beach 72% $10
Laguna Beach 66% $10,326
La Habra 66% $1
Mission Viejo 99% $35
Newport Beach* 78% $9
San Juan Capistrano 42% $927
Santa Ana 80% $5
December 2010 to January 2011 Winter Storms and Flooding
Aliso Viejo 100% $8
Anaheim 32% $17
Dana Point 100% $33
Fountain Valley 50% $1
Garden Grove 61% $2
Huntington Beach 72% $16
Irvine 100% $32
Laguna Beach 66% $193
Laguna Hills 88% $3
La Habra 66% $1
Lake Forest 100% $46
Mission Viejo 99% $51
Newport Beach 78% $55
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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Rancho Santa Margarita 100% $28
San Clemente 51% $246
San Juan Capistrano 42% $45
Santa Ana 80% $1
Seal Beach 59% $5
Tustin 87% $1
January 2017 Severe Winter Storms and Flooding
Dana Point 100% $3
Huntington Beach 72% $7
Laguna Beach 66% $15
Newport Beach 78% $1
Placentia 78% $1
San Juan Capistrano 42% $9
Santa Ana 80% $7
Westminster 86% $1
Yorba Linda 90% $58
Sources: Federal Emergency Management Agency, U.S. Census Bureau, each cities’ respective CAFR
The estimated general fund damages range greatly for the over 50 reference examples, but there are
more instances of lower cost damages than higher cost damages. At the lower end, there were several
cities that recorded under $1 per capita in general fund damages, including La Habra for the February
2005 storms and flooding, La Habra, Santa Ana, and Tustin for the December to January 2011 winter
storms and flooding, and Placentia and Westminster for the January 2017 severe winter storms and
flooding. Consecutive days of rain resulted in large damages recorded for the February 2005 storms and
flooding disaster. At the higher end, Laguna Beach recorded $10,300 in general fund damages per capita,
followed by San Juan Capistrano at $927. The volume of rain left Laguna Beach’s soil saturated, which
resulted in a landslide the following May.31 Significant rain in San Juan Capistrano almost compromised
the levee at San Juan Creek and improvements have been underway since to mitigate the creek’s flooding
risk.32 This pattern of many smaller floods and few very large ones suggests a lognormal distribution, like
we used for earthquakes.
As with the earthquake analysis, to make the reference cases more applicable to Newport Beach, we apply
each reference’s general fund cost per capita to the City’s current population density of 3,641 residents
per square mile. The lognormal distribution of the referenced floods is shown in Exhibit 4.B.3.33 The
horizontal axis represents the percent of floods that should be covered by the amount of general fund
reserves shown on the vertical axis.
31 U.S. Department of Commerce, National Oceanic and Atmospheric Administration, “A History of Significant
Weather Events in Southern California,” updated May 2017,
https://www.weather.gov/media/sgx/documents/weatherhistory.pdf.
32 Orange County, CA Public Works, “Background Information,”
http://www.ocflood.com/nfc/projects_a/sjc/background.
33 Exhibit 4.B.3 does not graph the amount required to cover 99.9% of floods in order to focus on more probable
scenarios. To cover 99.9% of floods would require $41.5 million.
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As the line changes from blue to orange, it
represents the increasing amount of reserves
that are required beyond the 95 percent
confidence level. Note, as stated earlier, these
figures represent total estimated cost of floods
in 2017 dollars, exclusive of any FEMA
reimbursement. For example, if the City wants
to cover 75 percent of possible flood events, it
would reserve an amount of $217,000. As we
move to the right, we see that it requires
greater reserves to cover each additional 5
percent of floods. To cover 90 percent of floods
would require $652,000, over twice as much
that is required to cover 75 percent of floods.
This is because the right hand side of the graph
represents increasingly extreme and, therefore,
increasingly unlikely possible future floods. In order to cover the most extreme floods (those above our
95th percentile), the City might consider other strategies besides general fund reserves because of the
high cost of covering additional flood possibilities. Examples of such strategies might be loans and
insurance.
Exhibit 4.B.3 - Percent of Floods Covered by Varying Reserve Levels5
To cover 75% of floods, the City would reserve $217,000.
34 State of California Governor’s Office of Emergency Management, “2013 California Multi-Hazard Mitigation Plan,”
Chapter 6 - Other Hazards: Risks And Mitigation, http://www.caloes.ca.gov/for-individuals-families/hazard-
mitigation-planning/state-hazard-mitigation-plan.
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99%
Mi
l
l
i
o
n
s
At 75% confidence level, the City would need a reserve of $217,000.
At 90% confidence level, the City would need a reserve of $652,000.
The Risk of Tsunamis
A tsunami is a tidal wave caused by the displacement
of a large body of water. Multiple kinds of geological
events could cause a tsunami, such as an earthquake
or volcano. FEMA has recorded only one tsunami
causing damage to California cities. Due to a 2011
tsunami, three cities incurred damages, ranging from
about $7,000 to $104,000 (for the entire city
government, not just general fund). Of course, many
other tsunamis have landed on California: over 80 in
the last 150 years.34 Although this data set is limited,
it does appear that most tsunamis would cause
damage that is roughly comparable to other types of
flooding Newport Beach might experience.
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So, to summarize a recommended reserve range:
• On the low end, $217,000. This is the 75 percent confidence level and is the point at which the
City will get the most value from reserves. After this point, each additional 5 percentage points of
confidence requires over 1.3 times the amount of reserve. We can consider this a less risk averse
reserve strategy.
• On the high end, $652,000. This is the 90 percent confidence level. At this point, over two times
as much reserves are required as at the 75% confidence level. This might be considered a more
risk averse approach.
When selecting a reserve target, the City might also take into account its current flood mitigation efforts,
including infrastructure improvements to flood walls, etc.35 Such mitigation efforts might prevent some
floods from occurring at all and/or lessen the impact.
Flood Checkpoints
Floods are similar to earthquakes in that they are rare events with potentially extreme
consequences.
Newport Beach has experienced three floods in its recent history, giving us some useful past
experience to draw upon to estimate future risk. We supplemented this with the experience of
other cities in the region.
A reserve between $217,000 and $652,000 should be sufficient to provide the City with 75% to 90%
confidence that it will be able to cover the cost of a flood. This is the range of reserves that is the
most “efficient” use of reserves.
Subsection C – Fires
The City of Newport Beach is vulnerable to fires because of the area’s weather, topography, and
vegetation. In the past, the City and surrounding areas have experienced fires, with the most severe in
recent years affecting nearby Laguna Beach in 1993.36 The City’s primary risk from wildfires arises from its
proximity to Crystal Cove State Park. In recent years, fortunately, the City has not experienced fires for
which it incurred damages. Also, nearby cities with comparable risk of wildfire have not experienced many
fires either. So, rather than draw from analogues as with other extreme events, we worked with the City’s
Fire Chief to estimate the potential cost the City could incur for a fire. According to the Fire Chief, most
fires last about four to six hours, with the maximum duration being approximately 12 hours. This is simply
because there is not enough vegetation in Newport Beach to cause a large-scale fire.
If the City were to experience a fire, it can contract with the County as well as the State of California Office
of Emergency Services through an assistance-by-hire agreement to help address the fire. The table below
provides a summary of items needed and estimates from City’s Fire Chief on the number of units needed
for each item to fight a 4-hour and 12-hour fire. Each unit would be required for the full duration of the
fire. The table also includes the hourly rate per the assistance-by hire-agreement. This allows us to
calculate the total estimated cost for a 4-hour and 12-hour fire.
35 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” 2016.
36 City of Newport Beach, CA, “Local Hazard Mitigation Plan,” updated 2016.
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Exhibit 3.C.1: Estimated Cost of 4-Hour and 12-Hour Fire to City of Newport Beach
# of Units Needed Total Cost
Item 4-hour fire 12-hour fire Hourly Rate 4-hour fire 12-hour fire
Hand Crew (Firefighter) 18.00 36.00 $36.84 $2,652 $15,915
Hand Crew Supervisor (Fire Captain) 1.00 2.00 $71.56 $286 $1,717
Hand Crew Supervisor (Fire App. Engineer) 1.00 2.00 $62.77 $251 $1,506
Hand Crew Supervisor (Firefighter) 1.00 1.00 $55.97 $224 $672
Heavy Fire Equipment Operator 1.00 1.00 $96.11 $384 $1,153
Fire Pilot 1.00 2.00 $73.49 $294 $1,764
Lead Fire Pilot 1.00 1.00 $84.50 $338 $1,014
Type 3 Engine 2.00 2.00 $80.00 $640 $1,920
Crew Carrying Vehicle 1.00 2.00 $21.75 $87 $522
Dozer Transport 1.00 1.00 $73.25 $293 $879
Dozer 1.00 1.00 $72.50 $290 $870
Dozer Trailer 1.00 1.00 $14.00 $56 $168
Dozer Tender 1.00 1.00 $26.00 $104 $312
Fuel Tender 1.00 1.00 $36.75 $147 $441
Patrol Unit (Type 6) 1.00 3.00 $80.00 $320 $2,880
Water Tender 1.00 1.00 $36.75 $147 $441
Helicopter - Bell Super Huey 1.00 1.00 $1,329.74 $5,319 $15,957
Helicopter - Bell 412 1.00 1.00 $4,191.13 $16,765 $50,294
Total $28,598 $98,425
The potential cost that the City could incur is not as simple as a range between $28,600 and $98,400. This
is because there is uncertainty that a fire might cost less or more than these estimated figures. In fact,
research shows that when people estimate a range of possibilities for an uncertain event, they usually
make the range too narrow. In other words, they underestimate the amount of risk.37 This is not a failure
in judgment – it is just the way in which the human mind works. After all, if people were able to accurately
judge risk, we would not need projects like the one GFOA is performing for Newport Beach. In fact, GFOA
had the opportunity to validate this proposition at another local government. We asked the fire chief in
that jurisdiction to estimate variability in fire size and then compared the cost to data from actual fires we
collected from the region. We found that the chief underestimated the variability in fire size in a manner
very similar to how research suggests people routinely underestimate uncertainty.
This does not mean that the figures in Exhibit 3.C.1 are not helpful – to the contrary, they provide an
excellent starting point which we can transform into a probabilistic distribution. We created a distribution
that extends the tails of the distribution beyond the range suggested by Exhibit 3.C.1. We set the size of
the tails by doubling the size of the range from Exhibit 3.C.1. Research suggests that human judges
37 Jack Soll and Joshua Klayman (2004). “Over-confidence in Interval Estimates”. Journal of Experimental Psychology:
Learning Memory and Cognition. 30, pages 299-314.
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typically underestimate uncertainty by about 50%. Doubling the range compensates for this. Exhibit 3.C.2
shows the resulting probabilistic cumulative probability chart of fire cost.
Exhibit 3.C.2 – Confidence that Wild Fire Cost will be Covered by Reserves
The incremental cost to cover fires increases at the 85th percentile or when reserve reach $118,500.
The horizontal axis shows the confidence a given reserve will cover the cost of a fire. The vertical axis
shows the amount of reserves. As the line moves from left to right, we see cost increasing and the color
change from blue to orange to reflect greater uncertainty to cover closer to 100% of fires. Up until the
85th percentile, each additional 5 percent incremental coverage of fires will require about 10% more
reserves. The cost then increases to about 20% more reserves by the 95th percentile and to 35% more by
the 99th percentile. Here is the range in between which reserves are most “efficient”:
• Reserve $118,500 to cover 85% of fires as a less risk-averse approach. This represents the point
on the graph where the City maintains maximum incremental coverage through reserves.
• Reserve $159,000 to cover 95% of fires as a more risk-averse approach. This is where the City
would get greater coverage through reserves before the incremental cost noticeably increases.
Newport Beach also benefits from a strong mutual aid system among the local governments in the region.
Newport Beach also undertakes fire prevention programs, training, vegetation management, and other
related activities to lessen the impact of wildfires in the area. This helps manage the fire risk that the City
is subject to from fires and complements the City’s reserve strategy.
Fire Checkpoints
The City has not experienced a wildfire in many years. This means there is no useful historical data
to draw upon. Therefore, we worked with the City’s Fire Chief to estimate a range of potential costs.
We used statistical techniques to widen the range we developed with the Fire Chief. This was
intended to compensate for the natural human tendency to underestimate future uncertainty.
A reserve between $118,500 and $159,000 should be sufficient to give the City 85% to 95%
confidence that it could cover the cost of a wildfire. This is the most “efficient” use of reserves.
$0
$25,000
$50,000
$75,000
$100,000
$125,000
$150,000
$175,000
$200,000
$225,000
$250,000
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%99%
At 95% confidence level, the City would need a
reserve of $159,000.
At 85% confidence level, the City would need a reserve of $118,500.
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Subsection D – High Winds
Newport Beach is subject to high winds on a regular basis, but the damages are not as potentially severe
as for the other risks we have examined. Hence, high winds is a higher frequency, lower consequence
event compared to the others we have examined so far. For our analysis, we assumed that the City would
be exposed to some costs to respond to high winds every year. We found damages have ranged between
$60,000 and $140,000 per year. However, we only had a few years’ worth of data to consult. Hence, we
doubled the range of potential damages. Doubling a range that is based on little data is a rule of thumb
for approximating the range in which 95% of future events should fall.38
We assumed that the City’s regular budget was capable of absorbing the damage from an “average” year,
or about $100,000. Therefore, reserves would only be necessary for wind damages that were beyond
what happens in an average year. Exhibit 3.D.1 shows the reserves the City would need for a given level
of confidence. The City wouldn’t need any reserves for about 50% confidence and below, because wind
damages up to that point would be covered by the regular City budget. The required reserves increases
rapidly after that. 95% confidence would require about $86,000.
Exhibit 3.D.1 – Reserves Required for High Winds Damage (in thousands of dollars)
Reserves
(thousands
of dollars)
Level of Confidence
High Wind Checkpoints
High winds are a high frequency, lower consequence event.
The City’s budget can absorb lower wind damages. Reserves can help with higher damages.
$86,000 would give the City 95% confidence of being able to cover the costs of a high wind event.
38 See: Spyros Makridakis, Robin Hogarth, and Anil Gaba. Dance with Chance: Making Luck Work for You. (Oneworld
Publications: Oxford, England). 2009.
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Section 5 - Revenue Volatility
An important risk for any local government is revenue volatility, primarily owing to downturns in the
economy. For example, Newport Beach’s revenue declined about 9% from fiscal year (FY) 2008 to FY 2010
due to the Great Recession. Reserves can be used
to help a local government make a “soft landing”
in the event of a revenue downturn.
In this section of the report, we will analyze the
City’s vulnerability to revenue downturns. In
Newport Beach, property taxes are, by far, the
single most important revenue source at about
half of general fund revenues. Sales taxes are the
second most important at about 15%. Transient
occupancy taxes are the third largest at about 12%.
The remaining revenues comprise about a quarter
of general fund revenues and include sources such
as building permits and business licenses. Exhibit
5.1 summarizes the City’s general fund revenue
portfolio between FY 2013 and FY 2017.
In the subsections below, we will examine each of the major revenues. The objective is to determine if
the composition of the revenue base has changed such that the City of Newport Beach is more vulnerable
or less vulnerable to revenue downturns than in the past. This is important because in the last section we
will use the City’s historical revenue data to analyze risk to the revenue portfolio as a whole.
Subsection A - Property Taxes
In addition to being the largest revenue source, property taxes are also the most stable. While general
fund revenues declined 9% from FY 2008 to FY 2010, property tax
revenues increased by 1.5%. Exhibit 5.A.1 compares the change in
property tax to the changes to the City’s other revenue sources
during this period.
The most obvious reason for the property tax’s strength is that
Newport Beach is a very desirable locale, next to the Pacific
Ocean. For example, when it comes to home values, Newport
Beach is in the top five to six percent of California cities.40 Also,
Newport Beach is in the top third of California cities where the average home value has now met or
exceeded 2007-08 highs.41
39 Percentages are based on an average of fiscal years 2013 through 2017.
40 According to Zillow’s average home valuation database, Newport Beach has 40th highest average home value out
of the 719 California cities included in their database.
41 According to Zillow’s average home valuation database.
Exhibit 5.1 – Composition of Newport Beach’s
General Fund Revenue Portfolio39
Property taxes, are by far, the most important
revenue source
Exhibit 5.A.1 – Change in Revenues,
FY 2008 to FY 2010
Property Taxes 1.5%
Sales Taxes -20.2%
Transient Occupancy Tax -11.7%
Other -19.2%
Total -9.2%
0.0%20.0%40.0%60.0%
Property Taxes
Sales Taxes
Transient Occupancy
Tax
Other
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Another strength of the City of Newport Beach’s property tax base is the composition of its largest
taxpayers. For example, some cities have a few taxpayers that constitute a very large proportion of the
total tax base. This presents a risk if those taxpayers cease to do business in the locale. The prototypical
example would be a large manufacturing plant in an industry that is undergoing significant structural
changes. In Newport Beach, the largest property taxpayer is The Irvine Company, which accounts for
about 2.87% of the total taxable assessed value in the City. The Irvine Company buys and holds real estate.
Hence, even if the Irvine Company ran into financial difficulties, it seems unlikely that its real estate assets
would lose much, if any, value. Past The Irvine Company, the next largest property taxpayer, PH Finance
LLC, constitutes only 0.53% of the City’s total taxable assessed value and the share of the tax base
attributable the largest taxpayers declines from there: the 10th largest, John Hancock Life Insurance,
comprises 0.21% of the total taxable value. So, as demonstrated above, the largest property taxpayers in
Newport Beach do not comprise an overwhelming portion of the tax base. Further, the nature of their
holdings do not seem to pose a risk of precipitous declines in value due to changing business conditions
because they are not concentrated in a potentially vulnerable sector of the economy.
According to City staff, most of the property development activity that is taking place in Newport Beach
is infill development, turnover of property, and significant remodeling of existing properties. There could
also be occasional appeals of assessed values, if the property market gets overheated. However, none of
these factors seem capable of introducing enough volatility into property tax revenues to change the tax’s
traditional role of imparting stability to the City’s revenues.
Property Tax Checkpoints
Property tax is the City’s largest revenue source.
Property tax revenues did not decline at all during the Great Recession. Hence, it has a stabilizing
influence on City revenues.
The City’s tax base is diverse. This is a source of stability.
Subsection B - Sales Taxes
As we saw in Exhibit 5.A.1, sales taxes experienced the greatest decline during the Great Recession. For
many cities, sales taxes are a volatile revenue that are vulnerable to economic downturns. To gain better
insight into sales tax volatility, we can break down Newport Beach’s tax base by type of tax producer. The
data available to GFOA from the City’s contracted sales tax analyst, HdL, breaks sales taxes down into
eight categories of sales tax producers. Three of those categories produce just over 70% of the City’s
revenues: autos and transportation (30%), restaurants and hotels (22%), and general consumer goods
(20%). Exhibit 5.B.1 shows the three major categories of sales taxes.42 It also includes all other locally
produced sales taxes as the “other” line. Finally, county and state pools are shown as a separate line.
42 This data is expressed in calendar years, rather than fiscal years.
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Exhibit 5.B.1 – City Sales Taxes by Category of Tax Producer (in millions)
Restaurants and hotels have overtaken general consumer goods as a portion of the tax base. The
former is a more stable producer.
In Exhibit 5.B.1, we can see that all categories declined during 2008 through 2010, though some more
than others. General consumer goods experienced the sharpest decline at 24%. Autos and transportation
was second at 19%. A 19% decline was not too much more than the declines experienced by the “county
and state pools” or “other” categories. However, the size of autos and transportation category makes a
19% decline more impactful. The restaurants and hotels category was barely effected by the Great
Recession as evidenced by its 5% decline.
Turning our attention to the recovery from the Great Recession, we can see that autos and transportation
recovered well. In fact, it now produces a slightly higher share of all sales taxes than it did before the Great
Recession. Since restaurants and hotels did not fall far, the segment recovered quickly and continued to
grow. General consumer goods, however, has not recovered to pre-recession levels and has even declined
in recent years. In fact, it fell behind restaurants and hotels in importance as a sales tax producer. This is
probably not too surprising given the pressure that traditional retailer have faced from on-line retail. The
“other” and county and state pool categories recovered well. The “other” category includes business and
industry taxes, which were very volatile during the Great Recession. These taxes dropped sharply and
recovered sharply. The “other” category also includes consumer essentials, like food and fuel that didn’t
change much during the Great Recession. Hence, these sub-categories balanced each other out to some
extent, thereby preventing the “other” category from exhibiting dramatic behavior.
The implication is that the sales tax base does not appear to be any more vulnerable to recessions than it
has been in the past. In fact, the sales tax base might now be somewhat less vulnerable because general
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consumer goods has been overtaken by restaurants and hotels as a major sales tax producer. The latter
category proved more resistant to economic downturns during the Great Recession. Further, Newport
Beach now participates in a County sales tax pool for on-line sales, which does offset at least some
potential future loss of brink-and-mortar stores to on-line sales.
Sales Tax Checkpoints
Sales tax is a volatile revenue. During the Great Recession, it had the sharpest decline of any of
the City’s major revenue sources.
Since the Great Recession, restaurants and hotels have superseded general consumer goods in
importance as a source of sales tax revenue. The former appears to be a much more reliable
producer during economic downturns. This means that the City’s sales tax revenues may be more
stable than in the past.
Subsection C - Transient Occupancy Taxes
The transient occupancy tax (TOT) is essentially the City’s hotel bed tax. Exhibit 5.A.1 shows that TOT can
be vulnerable to economic downturns, but perhaps not as volatile as other revenue sources. In Newport
Beach, the top five TOT-producing hotels make up over 60% of the City’s total TOT revenue. The Resort at
Pelican Hill is particularly important at over a quarter of TOT revenue. Hence, this means the City is
theoretically vulnerable to a business interruption at one of the key hotels.
Of course, it is in the financial interest of the hotels to be at peak capacity as much as possible and, since
2008, the TOT revenue produced has been up across all properties. This appears to be due to steadily
rising room rates, while maintaining a consistent level of occupancy. Between calendar year 2010 and
2017, the average daily hotel room rate is up 54%, while occupancy rates are up only 13%.43 This has
contributed to a doubling of TOT revenues between 2009 and 2017.44 The City’s long-term forecasting
consultant, Beacon Economics, expects this upward trend to continue. In fact, for the period of FY 2017
through FY 2022, Beacon predicts that TOT will grow 25% more than property tax and 50% more than
sales tax.45 Hence, it would appear that the hotel sector in the City is fundamentally healthy.
The foregoing suggests that a general economic downturn is probably the most significant risk to TOT
revenues. Given the continuing, if not increasing, strength of Newport Beach’s hotel sector, TOT does not
appear to be any more vulnerable to a downturn than it has been in the past.
Earlier, we mentioned that a business interruption to a large hotel might be a theoretical risk given that
larger hotels produce the lion’s share of TOT revenue. For example, a fire at one of the major hotels that
makes the hotel unoccupiable could cause a drop in revenues at that hotel. However, given that the hotel
operator would have a clear incentive to put the rooms back in service as soon as possible and given that
other hotels in Newport Beach would likely be able to pick up excess demand,46 this risk does not appear
43 “2016 – 2017 Newport Beach and Company Annual Report: Go Beyond”. New Beach & Company.
44 The City also added some rooms during this time period.
45 “City of Newport Beach Revenue Forecast” Beacon Economics. January 2017.
46 The occupancy rate in Newport Beach hotels is around 75%. The City’s occupancy reports suggests that Newport
Beach hotels typically experience and occupancy rate that is close to the Orange County average, so are not
especially overcrowded compared to other hotels in the region.
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to be large and would certainly be absorbable within a reserve that is sufficient to cover an economic
downturn.
Transient Occupancy Tax Checkpoints
TOT is Newport Beach’s fastest growing major revenue source.
TOT is vulnerable to economic downturns, but not as vulnerable as sales taxes or many other
minor City revenue sources.
The hotel industry appears strong in Newport Beach, given steady rising room rates and stable
occupancy. Hence, it does not appear that the TOT is much more vulnerable to an economic
downturn than before.
Subsection D - Other Revenues
When considered together, the City’s other revenue sources are larger than both TOT and sales taxes.
They also can be vulnerable to economic downturns, as we saw in Exhibit 5.A.1. In fact, the decline in
other revenues was only slightly less than the decline in sales taxes. As of FY 2017, the top five most
important individual revenue sources within the other category are business license taxes, paramedic
service fees, building permits, plan checking fees, and cable franchise fees. However, these sources only
produced about 30% of other revenue. Newport Beach, in FY 2017, had almost 100 individual revenue
sources that produced over $100,000 and 15 sources that produced over $1 million. This shows the
diversity of these revenues.
Comparing the individual sources that make up other revenues between the Great Recession and FY 2017,
we can see that there have been some changes that would decrease potential volatility. For example,
investment income was an important revenue at the start of the Great Recession and declined
precipitously. Investment income does not break into the top ten other revenues in FY 2017. The top two
other revenues in FY 2017 are business license taxes and paramedic service fees, both of which proved
much more resistant to the economic downturn than most other revenues. Cable franchise fees and
parking fines are also both important revenues in FY 2017 (as they were before) and proved more resistant
to the downturn than most other revenues.
There have also been a few changes that might increase vulnerability. Building permits and plan checking
fees are now more important than they had been at the start of the Great Recession and both
demonstrated higher-than-average vulnerability to the downturn. However, the changes that could
increase vulnerability should be at least balanced out by the changes that decrease vulnerability.
Other Revenue Checkpoints
During the Great Recession, “other revenues” declined only slightly less than sales taxes, the
City’s most volatile revenue.
Since the Great Recession, the composition of “other revenues” has changed somewhat. Some
less volatile revenues have gained more prominence. However, some volatile revenues are still
important. Overall, “other revenues” should be at least as stable, if not more stable, than in the
past.
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Subsection E - Risk Analysis of All City Revenues
To analyze the risk that an economic downturn poses to the City’s revenues we will start with the City’s
historical experience with past downturns. Earlier, we discussed some of the year-to-year changes in the
City’ revenues during the Great Recession. However, in order to make the best use of the City’s data for
risk analysis we need to use monthly and/or quarterly data. Monthly or quarterly data will give us a more
precise estimate of how long the revenue downturn lasted. Annual revenue figures are essentially an
average of all 12 months. However, if, for example, three of those months are part of an economic
downturn and nine are part of the subsequent recovery, then the year as a whole will show revenue
growth. This could cause us to underestimate the length of time City revenues are negatively impacted by
an economic downturn.
In order to make the best use of monthly/quarterly data for risk analysis, we need to remove the effects
of what is known as “seasonal” variation. This means that there is some regularly occurring variance in
the revenue that is independent from economic cycles. For instance, in Newport Beach, the final months
of the calendar year always provides the most sales tax revenue, presumably due to holiday spending. So,
if those months produce more revenue than the City was generating during the preceding fall months,
that does not necessarily mean that an economic downturn has ended – it could just indicate seasonal
variation. A simple way to remove season variation is to create a 12-month moving average. This means
that for every single month in our data set we take an average consisting of that month plus the six months
prior and the five months after (for a total of 12 months). This essentially averages out annual seasonal
variation and gives us a purer sense of the impact of economic cycles on Newport Beach’s revenue.
In Exhibit 5.E.1 monthly revenues are plotted out from December 1998 to December 2016. The blue line
represents the 12-month moving average, while the red line is actual monthly revenues. We can see that
the red lines exhibit large swings during the year such that it is hard to pick out when there is an economic
downturn. The blue line removes seasonal effects, which results in a much smoother line. We can see the
economic downturns much more easily – which are highlighted by the green circles. The Great Recession
is the right-hand circle and revenues declined by about 13% from the high just before the downturn
started to the point at which revenues turned back upwards.
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Exhibit 5.E.1 – Monthly Revenues for the City of Newport Beach
The Great Recession had a much more noticiable impact on City revenues.
The length of the downward trending blue line associate with the 2001 Dot.Bomb recession is 16 months.
The length of the downward trending blue line associated with the Great Recession is 21 months.
According to the Bureau of Economic Analysis, the duration of the 2001 Dot.Bomb recession was eight
months while the length of the Great Recession was 18 months. Hence, it appears that the City’s revenue
portfolio will be depressed by an economic downturn for longer than economists’ measurements of the
length of that downturn might suggest. We will take this into consideration when analyzing the risk that
the City is subject to.
We can also see from Exhibit 5.E.1 that the Great Recession resulted in a steeper decline in revenues.
From March 2008 to January 2010, the moving average of City revenues declined 14.7%. In contrast, from
February 2001 to May 2002, the moving average only declined 4.4%. Because the Great Recession was
both deeper and lengthier, we will use that as our primary reference case for determining possible future
risk. A reserve calibrated against the Great Recession will prove sufficient for a lesser recession, like the
2001 Dot.Bomb recession.
To analyze the variability of the City’s revenue and risk, we used quarterly data. We first measured all of
the quarterly changes in revenue during the Great Recession period circled on Exhibit 5.E.1, where a
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“quarter” was any consecutive three-month period (we did not limit ourselves to calendar year quarters).
This gave us a sample of plausible changes in revenue during a hypothetical future recession. We found
that the average quarterly change in revenue was a decline of 0.9%. We also found that changes were
roughly normally distributed around this average, meaning they took the approximate shape of the “bell
curve” that we introduced at the beginning of this report. We then were able to simulate potential
revenue declines over multiple subsequent quarters. For example, we found that for a hypothetical 4-
quarter recession there was only a 1% chance of a decline in revenue of 14.95% or more and a 10% chance
of a decline of 10.53% or more. This gave us the probable depth of a recession for every quarter in a
hypothetical future recession.
The next step was to define the likelihood of different potential lengths of future recession. To do so, we
gathered data on the lengths of all recessions that occurred in the U.S. since 1950. However, we also
found that Newport Beach’s revenue downturns had lasted longer than both the 2001 Recession and
Great Recession, by about three to four months. Hence, we assumed that Newport Beach’s revenues
would also experience a one-quarter longer downturn in future recessions. With this in mind, we found
the average length of a recession was four and 1/3 quarters. However, the lengths of the recessions were
not normally distributed around this average. The shape was closer to the “lognormal” distribution we
saw earlier in this report, where shorter recessions were more likely and very long recessions unlikely.
This gave use the probable length of a hypothetical future recession.
By combining length and depth, we can get the amount of reserves that Newport Beach would need to
be prepared for a hypothetical future recession. The results are shown in Exhibit 5.E.2. The vertical axis
shows various possible reserve levels, expressed as a percent of revenues. The horizontal axis shows how
confident the City would be that a given level of reserves could replace 100% of the City’s revenue decline
during a hypothetical future recession. First, let’s review a few points of interest about Exhibit 5.E.2:
• The exhibit does not call out specific recession lengths or depths because they are all combined
on the blue line. For example, a recession that would require a 10% fund balance to replace all
revenue could be a product of shorter but a deeper recession or a longer but shallower recession.
The point on the line that intersects with the 10% reserve reflects all such possibilities.
• It is unlikely that the City would replace every last dollar of lost revenue with reserves during an
actual recession. Rather, it would cut some spending. Hence, GFOA’s recommendations can be
adjusted downward according to how much the City feels it could cut from its budget. We will
reflect the possibility for downward adjustment in Section 7 of this report.
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Exhibit 5.E.2 – Reserves Required to Replace Revenues Lost During a Recession
Reserves
as a % of
Revenue
Confidence that reserves will remain above $0 during a future Recession
Around 70% confidence provides the best “value” reserve level. Above 90% confidence, the value of
additional reserves declines rapidly.
In Exhibit 5.E.2, the point at which the City gets the most “value” for its reserve is about 70% confidence
or a reserve of 8.0% of revenues. Past this point, it costs proportionately more money to “buy” an extra 5
percentage points of confidence. To illustrate, to go from 65% confidence to 70% confidence the reserve
must go from 7.4% to 8.0%. But, to go from 70% confidence to 75% confidence the reserve must go from
8.0% to 8.8%. To go from 75% to 80% confidence requires 9.6% reserves. Past 90% confidence, the curve
becomes even steeper, making additional confidence even more “expensive.”
Hence, the City of Newport Beach might consider a range of possible reserves to guard against revenues
declined from an economic downturn. Recall that earlier in this report we saw that the City’s revenue
sources do not appear to be any more vulnerable to an economic downturn than they have been in the
past. This means the numbers below, which are based on historical data, should provide a reasonable
representation of current risk. If anything, they may be somewhat conservative given that some of
Newport Beach’s revenues may now be less vulnerable to downturns than in the past. As a point of
reference, at their lowest point, the City’s quarterly revenues declined about 10% from their highs right
before the Great Recession.
• Low end: A reserve equal to 8.0% of revenue, giving the City 70% confidence of being able to
replace 100% of all revenue lost from a recession. Assuming annual revenues of about $205
million, this translates to a reserve of about $16.4 million.
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• High end: A reserve equal to 12.0% of revenue, giving the City a 90% chance of being able to
replace 100% of all revenue lost from a recession. Assuming annual revenues of about $205
million, this translates to a reserve of about $24.6 million.
Again, it should be noted that the City would probably not want to replace every last dollar of lost revenue
with reserves during an actual recession. Rather, it would cut some spending. Hence, GFOA’s
recommendations can be adjusted downward according to how much the City feels it could cut from its
budget. We will reflect the possibility for downward adjustment in Section 7 of this report.
Revenue Risk Analysis Checkpoints
GFOA used Newport Beach’s historical experiences with the Great Recession, 2001 Dot.Bomb
recession, and recession records since World War II to simulate the impact of a hypothetical
future recession.
The simulation found that a reserve equal to 8.0% of revenue (or about $16.4 million) would
give the City 70% confidence of being able to replace 100% of all revenue lost from a
recession. This represents a potential lower bound for the City’s reserve target because it is
the point at which reserves provide the best “value” for the money.
The simulation found that a reserve equal to 12.0% of revenue (or about $24.6 million) would
give the City a 90% chance of being able to replace 100% of all revenue lost from a recession.
Beyond this point, it gets much more “expensive” for the City to gain more confidence with
larger reserves.
The City may not wish to replace 100% of all lost revenue during a recession. It might also
wish to cut back expenditures. The City can adjust GFOA’s recommended reserve levels
downward in accordance with its willingness to cut spending during a recession.
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Section 6 - Secondary Risks
This section of the report addresses other risk factors that have less weighty implications for the City’s
reserve strategy than those described in the previous sections. These include pensions; non-pension debt;
expenditure spikes; liquidity; future growth; and existing claims on the City’s fund balance.
Subsection A - Pensions
Like many cities in California, Newport Beach faces a substantial pension liability. The City has been
forward-thinking in developing and following a plan to fund its pension liabilities. For the purposes of this
report, we will examine one specific pension scenario: the impact of a recession.47 This is because the
purpose of reserves is to buffer the City against shocks. A recession is a shock. The City’s normal, on-going
pension liability is a known and predictable financial stressor that should be dealt with through the City’s
normal budgeting and long-term financial planning process.
The pension plan that the City is a part of CalPERS assumes a 7% annual return.48 A recession would cause
CalPERS’s investments to perform below expectations. If the investments perform below expectations,
the City eventually has to make up the difference with increased contributions. This unplanned additional
expenditure would add more financial pressure in the aftermath of an economic downturn. It should be
noted that CalPERS is administered in such a way that member municipalities would not feel the
consequences of investment underperformance immediately – there is about a two-year lag. This means
that the City would have forewarning of an increase in its contribution after investments underperform.
However, since that increase would come on the heels of a recession it would certainly be an inopportune
time for the City to make additional pension payments. Therefore, there may be some role for reserves
to help cushion the blow.
To calculate the potential increase in contribution costs from a recession, we first obtained a distribution
of CalPERS expected returns. The average expected return is 7%. That means returns are expected to be
below 7% half of the time and above 7% the other half of the time.
Based on information from CalPERS, we learned that returns are expected to take the shape of a normal
distribution or bell curve. This means that most the time returns will stay close to 7% but a wider variation
is possible. Using estimates from CalPERS and records of what has happened during past recessions, we
found that returns during a recession might range from 6.2% to -11%. -11% would be an extreme result,
while something close to 6% would be much more likely during a recession.
Next, we estimated potential recession lengths. Using past recessions as reference cases, we found the
likelihood of a recession lasting one, two, or three years.49 Of course, a three-year recession is very
unlikely, and a two-year recession is unlikely.50 Most recessions would last about a year or so.
47 A recession is a significant decline in economic activity that lasts longer than a few months.
48 CalPERS, “CalPERS to Lower Discount Rate to Seven Percent Over the Next Three Years,” December 21, 2016,
https://www.calpers.ca.gov/page/newsroom/calpers-news/2016/calpers-lower-discount-rate.
49 We gathered recession lengths for every recession since 1950 and used that to simulate future recession lengths.
50 The Great Recession lasted 18 months. The Great Depression lasted just over 3.5 years.
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We then simulated thousands of possible recessions, where each recession lasted somewhere between
one and three years and the rate of return for each year of the recession was somewhere between 6.2%
and -11%. We then connected these variable rates of return to a pension contribution model developed
by Newport Beach City staff. This gave us a range of potential contribution increases due to a recession.
Exhibit 6.A.1 shows the results for a five-year period. Years 1, 2, and 3 are the potential recession years.
The additional pension cost to the City will always be zero in years 1 and 2 because the CalPERS system is
designed to defer the initial impact from investment underperformance. Year 3 is when the additional
costs are felt. In the vast majority of cases, a recession will be over by the third year. However, in extreme
cases a recession could go into a third year. Years 4 and 5 are recovery years, when the economy will very
likely have emerged from a recession. The rows in the exhibit show the percent confidence the City can
have that a given amount of money would be sufficient to cover the additional contribution costs in a
given year.
Exhibit 6.A.1 – Additional Pension Contributions in the Wake of a Recession
Confidence Year 1 Year 2 Year 3 Year 4 Year 5 Total*
50% $0 $0 $1,600,000 $2,700,000 $3,400,000 $7,800,000
60% $0 $0 $1,800,000 $3,100,000 $4,100,000 $9,100,000
70% $0 $0 $2,000,000 $3,800,000 $5,100,000 $11,000,000
80% $0 $0 $2,500,000 $4,800,000 $6,400,000 $13,500,000
90% $0 $0 $3,500,000 $6,300,000 $8,300,000 $17,700,000
*Total is a simulation for the entire three years at once, not counting each year individually. Hence, the
results are slightly different than if all three years were just summed arithmetically.
For the purposes of reserve planning, the numbers of greatest interest in Exhibit 6.A.1 are probably the
bolded and italicized ones in Year 3: the 70%, 80%, and 90% confidence levels. These represent particularly
harsh recessions. During a harsher recession, the City is presumably facing greater pressure on its
revenues and the recession would be longer, so the increased costs for pensions would be that much
more of a burden. By contrast, a recession at the 50% or 60% confidence level would likely be over after
one year, giving the City an entire year of recovery before having to shoulder increased pension costs.
For building a reserve for this risk, the City probably would not want to reserve the entire bolded/italicized
amounts shown in Exhibit 6.A.1. This is because the City will have forewarning of the impending costs and
could structure its budget accordingly. However, it might want some reserves in place so that budget cuts
do not have to be as dramatic as they would in the absence of reserves. For instance, a $2 million reserve
might assume that the City will cut $1.5 million in costs. $1.5 million is about equal to the amount needed
to cover the pension cost increase that would be associated with an average recession. $1.5 million in cuts
plus $2 million in reserves is $3.5 million or 90% confidence. A $1 million reserve might assume that the
City will cut deeper. For example, this means the City would be willing to cut $2.5 million in the case of a
very severe recession.
As we get into years 4 and 5 on Exhibit 6.A.1, the use of reserves becomes much more of a City policy
issue than an issue of technical risk analysis. The City will have at least one and, probably, two years of
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forewarning before experiencing these costs. The City could choose to handle these increased pension
costs through its regular planning and budgeting process, but could have some reserves set aside if the
City did not want to handle the costs only through increased revenue and/or spending cuts.
Finally, it should be noted that the historical records suggests that CalPERS returns rise above average
expectations immediately following a downturn (i.e., go above 7%). This would eventually reduce some
of the financial pressure on the City. It would not help for the period of time we are interested in for a
reserve strategy, but it does at least suggest that the City’s long-term prospects in the aftermath of a
recession may be less dire than suggested by Exhibit 6.A.1.
Subsection B - Debt (Not Including Pensions)
Any form of leverage could reduce the City’s financial flexibility, thus increasing the need for reserves to
provide some offsetting flexibility. For example, if the City had a great deal of outstanding debt, it might
find it more difficult to borrow funds in the case of an emergency.
The City’s existing debt policy provides a set of guidelines to encourage positive use of debt for
investments like capital infrastructure. The policy requires that debt only be used if it meets the City’s
payment distribution goals, is the most cost-effective funding means available, and is fiscally prudent.
These guidelines provide stability to the City’s debt portfolio. According to its comprehensive annual
financial report, the City’s debt policy is recognized by the California Debt and Investment Advisory
Commission as one of only 14 equivalent city/county policies in California with 20 or more debt
management best practice elements.
At the end of FY 2016, the City had total long-term debt outstanding of $116.5 million. The City has an
Issue Credit Rating of AAA as assigned by Standard & Poor’s Rating Services. A rating of AAA by Standard
& Poor’s Rating Services is roughly equivalent to an Aaa rating by Moody’s Investors Services.
The following table, Exhibit 6.B.1, uses figures from the City’s FY 2016 CAFR to compare Newport Beach’s
debt to similar sized cities. The table shows median indebtedness, by credit rating as reported in Moody’s
Investors Services. The City’s level of net direct debt, which includes a non-self-supporting portion of
general obligation bonds, sales and special tax bonds, general fund lease obligations, bond anticipation
notes, and capital leases, compared to its full value, or estimated full market value of taxable property
within its boundaries, is only 0.25 percent. This is a good deal lower than the medians across the six
ratings. While the actual net direct debt for the City is higher than the medians in the same population
bracket, the low percentage indicates the City is in a healthy position with respect to the kind of debt
typically used acquiring capital assets.
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Exhibit 6.B.1 - Comparison of Newport Beach’s Financial Indicators to Cities with Between 50,000 and 100,000
in Population by Credit Rating
Newport Beach Aaa Aa A Baa Ba
Net Direct Debt as % of Full Value 0.25% 0.6% 1.1% 2.0% 3.9% N/A
Net Direct Debt ($000s) $116,544 $59,300 $64,143 $78,275 $170,848 N/A
Source: “2015 US Local Government Medians – Tax Base Growth Reinforces Sector Stability as Pension Troubles Remain,” Moody’s Investors
Service (March 30, 2017).
Exhibit 6.B.2 includes a group of California cities that are comparable to Newport Beach based on a
combination of factors, including geography, population, general fund revenue portfolio, and size. The
exhibit provides summary statistics from each of the cities’ FY 2016 CAFR and includes four commonly
used measures of indebtedness. The measures are categorized as “Measures of Direct Debt” and
“Measures of Overall Debt.”
Direct debt considers only bonded debt issued by the City of Newport Beach. Within this category, the
first measure is debt service (principal and interest payments) as a percent of City expenditures. This figure
gauges the pressure placed on the budget by debt payments. The second measure shows direct debt as a
percent of the City’s full assessed value. This shows debt burden relative to the City’s tax base.
Overall debt captures the full burden placed on the public by debt issued by all local governments that
overlap Newport Beach. Within this category, the first measure shows the burden placed on citizens by
municipal indebtedness inclusive of direct and overlapping debt. The second measure compares direct
debt plus the debt of overlapping jurisdictions as a percent of the full assessed value of properties in the
jurisdiction.
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Exhibit 6.B.2 - Comparison of Newport Beach's Indebtedness with Other Cities
Newport Beach Laguna
Beach
Huntington
Beach
Santa
Monica
Costa
Mesa
Mission
Viejo
Population 84,915 23,505 197,574 93,834 114,044 96,718
Measures of Direct Debt
Debt Service as a % of
Expenditures 5.42% 0.00% 3.22% 2.84% 3.10% 3.86%
Net Direct Debt as % of
Full Value 0.25% 0.00% 0.14% 0.25% 0.15% 0.09%
Measures of Overall Debt
Overall Debt per Capita $8,603 $1,779 $2,823 $7,900 $1,615 $1,071
Overall Debt Burden
(Overall Net Debt as %
Full Value)
1.54% 0.33% 1.58% 2.38% 1.11% 0.68%
Source: FY 2016 CAFR for each represented city.
Exhibit 6.B.2 shows that Newport Beach has the highest overall debt per capita when compared to its peer
cities, but falls in the middle of its peers when looking at overall debt burden as a percent of full assessed
value.
For direct debt, Newport Beach is relatively similar to its peers. While the City has the highest percentage
of debt service as a percent of all expenditures at 5.42 percent, it is mostly comparable to the other cities
when calculating direct debt as a percentage of full value. While the City does appear to have slightly
higher debt measures than its counterparts, it must be considered that several of the comparables have
extremely low amounts of debt to begin with, specifically Laguna Beach with no direct debt reported in
the FY 16 CAFR.
To conclude our discussion on debt, Newport Beach’s has a relatively low overall debt burden, which is
illustrated by its high bond rating and low overall burden relative to other cities of comparable size across
the United States. Newport Beach’s debt levels are not much different than nearby comparable cities, but
these cities also have little debt. Newport Beach’s favorable debt position provides it with financial
flexibility to complement a reserve strategy.
Subsection C - Other Post-Employment Benefits (OPEB) Liabilities
The City has manageable OPEB liabilities. In FY 2016, its annual OPEB cost amounted to $2.8 million.
Newport Beach has also taken measures to mitigate funding risk by setting up a CalPERS OPEB trust to
prefund OPEB obligations. Because of the proactive measures the City has taken to address its OPEB
obligations, no specific general fund reserve is recommended. However, the City should continue its
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practice to make its full actuarially required contribution and to administer the OPEB trust that is has
created.
Subsection D – Expenditure Spikes
The City does not have large impending lawsuits against it. There is an external reserve to cover any
lawsuits the City may face. If that fund were to be depleted, there may be cause for concern, but
historically this has not been an issue. Of course, if the City encounters a situation in the future where a
large impending lawsuit materializes, it will want to adjust its risk management strategy. However, for
now, there does not appear to be compelling evidence that additional reserves are needed.
Subsection E – Liquidity
According to historical revenue data, the City receives about 45 percent of its annual revenue between
July 1 and December 1. Most of that 45 percent comes during the month of December from property
taxes; about 21% of the City’s entire yearly revenues are collected in December. This means that the City’s
revenue receipts are slightly weighted towards the latter part of the fiscal year. However, this appears to
be a relatively minor risk that can be addressed in two ways.
First, the reserves recommended in this report can serve as “de facto working capital”. The relatively
minor liquidity concerns the City might experience could be absorbed within its regular reserves.
Second, the City’s investment policies and practices can provide for sufficient liquidity to ensure that the
City’s idle funds are available when needed during the early part of the year. For example, the City staff
perform cash flow analysis monthly and have a plan in place to liquidate investment maturities as cash is
needed. The City’s investment strategy also anticipates these peaks and valleys in the City revenue
inflows.
Subsection F – Growth
Population growth has remained relatively stable and plateaued. Hence, a potential resource strain due
to population growth is not a risk.
Subsection G - Claims on General Fund Balance
The reserves that the City sets aside for risk mitigation are a subset of the City’s fund balances. Fund
balance is the difference between the general fund’s assets and liabilities. Sometimes, there are claims
on fund balances that make those balance unavailable for risk mitigation.
The City’s FY 16 CAFR details claims on the City’s existing fund balance. As of FY 2016, the General Fund
balance was $81.8 million.
$15.2 million of this is classified as nonspendable. These nonspendable funds are long-term loan
receivables, prepaid items, and inventories. The restricted general fund balance amounts to $3.1 million,
intended for use in a variety of general fund activities including affordable housing and oceanfront
encroachment. This total of about $18.1 million constitutes a solid claim that makes this portion of fund
balance unavailable for risk mitigation.
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The City has $2.7 million classified as committed by City Council. Much of this is an encumbrance reserve.
While the City could, hypothetically, redirect these funds to other purposes, it is not the City’s intent to
redirect these funds. Hence, we might also consider these commitments to be a claim on fund balance.
Assigned fund balance is about $4.2 million. Most of this is a wastewater subsidy. While intended to be
more flexible than a “commitment”, the City still has expressed an intention to use this money for
something other than risk management.
That leaves $56.6 million as unassigned fund balance. Unassigned fund balance doesn’t have claims on it
and could be used for risk mitigation.
In conclusion, the City has a substantial amount of unassigned fund balance. The City also has some
assigned and committed restrictions are self-imposed, so, if needed, the City could draw on these in an
emergency.
Secondary Risk Checkpoints
Of the secondary risks we examined, only the possibility of increased pension payments in the
aftermath of a recession appears to be significant risk.
The way in which CALPERS is administered has the effect of deferring the effects of investment
underperformance on the City for a two-year period. This means the City would not face immediate
increased pension costs during an economic downturn. There is then a five year smoothing beyond
that.
A reserve of between $2.0 million and $3.5 million would give the City 70% to 90% confidence of
being able to cover the increased pension costs in the third year after an economic downturn (i.e.,
after the aforementioned two-year period passes).
The City could also experience increased annual pension costs four and five years after a recession.
However, because this is a number of years after a recession occurs, planning for these costs might
be better handled through the City’s long-term planning and budgeting process, rather than
reserves.
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Section 7 - Putting it All Together
In Sections 4, 5, and 6, we examined individual risks such as earthquakes, floods, fires, and revenue losses
due to economic downturns. We examined each of these risks individually in order to best understand
the nature of each risk, and we found a range of reserves that represents an “efficient” use of reserves
for mitigating each individual risk. However, to arrive at a final reserve strategy for the City we need to
consider these risks as a group. Considering the risks as a group has important advantages.
The first advantage is that considering risks as a group recognizes the diversity in the risks that the City
faces. This diversity actually is an advantage for City finances! Diversity in risks means we should not simply
add together each of the reserve ranges for each individual risk. This may overstate the amount of
reserves that the City really needs. This is because it is very unlikely that the City will experience a severe
earthquake, recession, fire, and flood all within a short time period. Exhibit 7.1 below illustrates using fires
and floods. Let’s imagine that the City wanted to be 95% confident that it could cover the damages from
a flood and a fire. The table shows the amounts needs for each individual risk and then adds them together
in a simple summation, arriving at $1.6 million. The “combined distribution” column creates an entirely
new distribution from the data we have for fires and floods together. The 95% confidence level for this
new distribution is only $1.47 million or about 8 percent less than the simple summation. This is
recognizing that it is highly unlikely that the City will experience a severe fire and a severe flood at once.
Rather, it is more likely that at least one of the events would be much milder. When we consider all of the
City’s risks in this manner, the reserves required to achieve a given level of confidence will be much less
than when each risk is considered in isolation.
Exhibit 7.1 – Reserve Needed to be 95% Confident for Fire and Flood Risk
Fire Flood Simple
Summation
Combined
Distribution
Difference
95%
Confident
$159,000 $1,431,000 $1,590,000 $1,473,589 8%
The second advantage of considering all of the risks together is that not all of the risks have an equal
chance of occurring over a given time period. For example, Newport Beach has experienced three floods
in its recent history, but no earthquakes. This suggests that floods are more likely to occur than
earthquakes. The City’s reserve strategy should reflect this fact. In the bullet points below, we show the
relative chance of each of the major risks occurring over a ten-year period. We can use these probabilities
to build a probabilistic model of risks over a long-term time horizon. You will note that some of the
extreme events are expressed as a fraction. Of course, the City can’t experience a portion of an event, but
the fraction does impact our simulation of risk. For instance, the City can expect to experience 1/3 of a
wildfire in a ten-year period. If we created three different ten-year simulations, we might expect one of
them to include a wildfire. We can create hundreds or even thousands of ten-year simulations, so there
will be many that include a wildfire.
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• Revenue loss due to a recession. Historical data suggests that it is highly likely (over 90% chance)
that there will be at least one recessionary year in a ten-year period.51 The historical data also
tells us there is a considerable chance of having more than one recessionary year in a ten-year
period.
• Earthquake. Data obtained through the US Geological Survey (USGS) suggests that the Los
Angeles area has about a 32% chance of experiencing an earthquake of a magnitude of at least
6.0 over a ten-year period.52 Of course, not every part of the Los Angeles region will be relevant
to the risks faced by Newport Beach. However, given that some faults further from Newport Beach
still pose a threat (i.e., San Andreas) much of the LA region is still relevant. Hence, we judged it
prudent to use the probability for the entire Los Angeles region.53
• Flood. The City has experienced three FEMA-declared flood disasters between 2004 and 2017, a
13-year period. Hence, over ten-year period we might expect “2.3” floods.
• Fire. The City has experienced one wildfire every 30 years. This means the City can expect “1/3”
of a wildfire every ten years.
The final advantage of considering all of the risks together is that we can consider “risk
interdependencies”. This simply means that the occurrence of one risk could impact the probability
and/or magnitude of a related risk. Perhaps the strongest and most obvious dependency is between
revenue losses from a recession and spikes in pension costs due to CalPERS investment under-
performance – both are caused by an economic downturn and both are worse for the City the worse the
recession gets. We examined the potential for other interdependencies as well, but concluded that they
weren’t as important. For example, could an earthquake lead to a wildfire? The City’s Fire Chief advised
us that the areas where a wildfire could start are not exposed to infrastructure that could be damaged
and start a fire as a result (e.g., electrical lines). Could an earthquake lead to tsunami? The USGS analyzed
the potential impact of a 7.8 earthquake on the southernmost 200 miles of the San Andreas fault, the area
thought to be at greatest risk to produce a large quake. The USGS found that because of the large distance
from the earthquake to the coast, tsunamis are not a significant risk.54
To realize the advantages described above, we built a model that considers the City’s risks over a ten-year
time horizon. As with our other models, the model runs hundreds or even thousands of simulations of
possible futures for Newport Beach. Here are the key assumptions behind the model:
• Probability of an undesirable event. The probability of any undesirable event occurring (e.g., fire,
flood, earthquake, etc.) is consistent with the assumptions described above.
• Magnitude of an undesirable event. Should a simulation show that an undesirable event occurs
in a given year, the magnitude is generated randomly in a manner identical to the individual risk
models we showed earlier in this report.
51 We took economic data since 1950 and used that to calculate the odds of a recession occurring in a ten year
period, including how many of those years would be recession years.
52 Edward H. Field, et al. “Long-Term Time-Dependent Probabilities for the Third Uniform California Earthquake
Rupture Forecast”. Bulletin of the Seismological Society of America, Vol. 105, No. 2A, pp. 511–543, April 2015.
53 Further, data to calculate a probability specifically for Newport Beach or Orange County was not available. This
means that the probability of an earthquake occurring is probably somewhat overstated. We tried using a somewhat
lower probability to see what the difference was and observed that implications for reserves was not large.
54 Lucile Jones, et al. “The ShakeOut Scenario”. US Geological Survey. 2008.
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• Interdependencies. Should our simulation show that a recession occurs in a given year, then both
a revenue loss and a pension loss of similar magnitude will be triggered.
• FEMA reimbursement. The City could recoup some of its losses from extreme events due to
reimbursements from FEMA. The model assumes the reimbursements are received two years
after the event occurs.55 The model also assumes that a disaster must cost the City at least
$100,000 to receive any reimbursement (anything smaller would not be declared a FEMA-eligible
disaster). We also assume the City will be reimbursed at the customary rate of 75% of incurred
costs.
• The City cuts spending to help offset the impact of an extreme event. The City will not use
reserves to absorb the full impact of an extreme event, like a recession or natural disaster (either
increased costs or revenue losses). At least some of the loss could be absorbed by cutting back on
the City’s regular spending. A discussion with City staff and the Finance Committee suggests that
the City could be able to cut about 2% of its budget in order to absorb unexpected financial
impacts. The cut could be accomplished through a number of different strategies, such has
deferring maintenance of existing city assets, deferring purchases of certain new assets, and
cutting back on some operating transfers out of the general fund. Smaller cuts in the City’s
operating expenditures also help absorb the loss.
• City cuts spending in other areas to in response to spike in pension costs. Similar to the revenue
loss, it is assumed that the City’s reserve would not absorb the entire amount of a pension cost
increase. Again, it is assumed spending cuts will absorb 70% of the first year of pension cost
increases in the aftermath of recession. For subsequent years, it is assumed that 100% of
increased costs would be accommodated within the City’s regular budget.
• A reserve of $10 million is the City’s “red line”. All of the analysis assumes the City will want to
stay above at least $10 million dollars in its reserve. This recognizes the fact that the risk analysis
cannot account for every possible problem that could ever befall the City. $10 million is the City’s
stated preference for a cushion against these unknowable risks.
We combined all of the information described above to create at ten-year probabilistic model. The model
produces a curve, much like what we presented for the City’s individual risk factors. The curve is
presented in Exhibit 7.2. It shows the level of confidence the City can have that a given level of general
fund reserves will prove sufficient over a ten-year period to cover the extraordinary costs incurred by the
general fund as a result of the risks covered in this report. “Sufficient” is defined as the reserves not
dropping below $10 million. For example, the City can be 80% confident that a reserve of $19.4 million
would cover the City general funds extraordinary expenditures over a ten-year period, without needing
to go below $10 million in the City’s remaining reserve.
55 Our research shows that FEMA reimbursements are completed 18 months after the disaster occurs, on average.
So, this is a conservative assumption.
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Exhibit 7.2 – Confidence that a Given Level of General Fund Reserves will be Sufficient over 10 Years
Reserves
(Millions
of Dollars)
Percent Confidence
As with the other curves we have shown in this report, there is a point at which the curve begins to rise
sharply. This is the point at which the City starts to receive less value from reserves. In Exhibit 7.2, this is
between the 70% confidence level ($14.8 million) and 90% confidence level ($25.5 million). This
represents the range at which reserves produce the best value for the City (note the City would need to
add its $10 million dollar “red line” to these amounts to get the total desired reserve). However, there are
a number of other factors that are worth considering as part of settling on a reserve level:
Other risk management mechanisms can complement reserves. Understandably, City officials might not
be satisfied with an 80% or 90% chance of being able to cover damages from the risks we described in this
report. Other financial risk management tools like debt or insurance could be used to provide additional
confidence beyond that provided by reserves.
Our analysis is not inclusive of every risk the City could possibly face. We used the City’s disaster
management plan to identify the risks that posed the most clear and present danger to the City. However,
it is possible that the City could experience a shock that no one was expecting. Hence, there is a case for
reserving more than our analysis suggest is efficient. This could provide additional protection against risks
that no one can foresee. That is why the City set a $10 million minimum reserve “red line” that our reserve
analysis took into account.
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Our analysis is based on historical records. Global climate change could increase the City’s vulnerability
to naturally occurring extreme events.56 This means that historical data could underestimate the
likelihood and/or severity of extreme events in the future. Unfortunately, no one can say precisely what
the impact of climate change will be. Hence, GFOA can’t speculate if an upward adjustment to the reserves
is necessary and, if so, by how much. However, this does mean that there could be a case for reserving a
higher amount than the efficient range described above (or pursuing other risk management strategies).
Also, GFOA’s Microsoft Excel57 risk model provides the City with the ability to adjust the likelihood and/or
magnitude of future extreme events, if it would like to test different scenarios.
The reserves held by comparable cities. The reserves held by comparable cities can provide context to
the City of Newport Beach’s officials for selecting their own reserve levels. Appendix 1 contains a detailed
comparison of Newport Beach’s fund balance with those of Laguna Beach, Huntington Beach, Santa
Monica, Costa Mesa, and Mission Viejo. The comparison shows that Newport Beach has more reserves
set aside specifically for responding to emergencies than the other cities. Newport Beach has an amount
equal to about 23% of annual revenue. Of the three other cities that have reserves set aside specifically
for emergencies, those cities have an average reserve of about 10% of annual revenues. By way of
comparison, the 90% confidence reserve we showed in Exhibit 7.2 is about $13 million, which equates to
around 7% of annual revenue. In the two paragraphs above, we suggested a few rationales for why the
City might wish to have reserves somewhat higher than our suggested “efficient” range. If GFOA’s range
were augmented a bit, the resulting reserve would be pretty similar to the amount maintained by the
other cities.
The City’s desired level of reserves should be memorialized in a formal policy and expressed as a percent
of revenue or expenditures. The City already has such a policy, so the policy can be updated based on
how the City wishes to use GFOA’s analysis to adjust its desired level of reserves. The dollar figures
contained in this report can be converted into a percent of the City’s annual revenues or expenditures.
This way, the dollar amount will automatically adjust with changes in the City’s budget.
The City’s desired level of reserves should be a range, rather than a single number. GFOA’s research into
how local governments can best maintain financial sustainability has found that decision-making
“boundaries” are essential. For example, if the City were to adopt a policy to maintain reserves between
X% and Y% of revenues, then that would constitute a clear boundary that defines when reserves are too
high or too low. Compare this to if the City just adopted a policy that reserves should be at X% of revenues.
It is then impossible to say how far reserves can go above or below this number and still be an acceptable
amount. A range also can accommodate the risk appetites of more City officials. Thus, a range could be
more reflective of the preferences of a greater number of people and, thereby, get more support.
56 According to “The Impact of Climate Change on Natural Disaster”, an article from NASA’s “Earth Observatory”:
“outcomes of an increase in global temperatures include increased risk of drought and increased intensity of storms,
including tropical cyclones with higher wind speeds, a wetter Asian monsoon, and, possibly, more intense mid-
latitude storms.” https://earthobservatory.nasa.gov/Features/RisingCost/rising_cost5.php?src=share
57 GFOA has provided the model to the City so it can run its own scenarios
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Section 8 - Next Steps
Based on the information presented in this report, we suggest that Newport Beach take the following
steps:
#1 - Pick a desired range of reserves.
This can be based on what our analysis suggests is efficient. It will also depend on City officials’ appetite
for risk. Section 7 provided a number of suggested factors that might help City officials decide on their
preferred level of reserves.
#2 - Consider how debt and insurance can complement the reserve strategy.
Debt and/or insurance can provide protection to the City past the point where reserves are efficient.
In the case of debt, the City might be able use a line of credit with a local lending institution (the City
already has a $1 million line of credit with a local bank), certificates of participation, or revenue
anticipation notes. The City might also think about interfund borrowing opportunities. Equipment/facility
replacement funds, worker’s compensation fund, facility maintenance funds might all be able to make
short-term loans to the general fund in the case of an emergency. The City could develop policies to
provide the flexibility to use these borrowing tools while also providing the necessary guidelines and
limitations to ensure that borrowing occurs in a fiscally prudent manner.
The City could also investigate newer types of insurance instruments, like parametric policies. Parametric
policies were described earlier in this report.
#3 - Memorialize the City’s desired range of a reserve in a formal policy.
We strongly recommend expressing this as a range, rather than a single number. A range provides a
“boundary” within which decisions must be made.
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Section 9 - Appendix 1: Reserves in Comparable Cities
To help the City consider the exact amount of reserves to maintain, Exhibit 9.1 provides a table of General
Fund balances as a percent of General Fund revenues for California cities that are comparable to the City
of Newport Beach. Several notes should be made about Exhibit 9.1 in order for the reader to fully
understand its meaning. First, “fund balance” is an accounting term describing the difference between
assets and liabilities in the General Fund. “Reserves” (which are the main topic of GFOA’s analysis for
Newport Beach) are the portion of fund balance set aside, by City Council policy, as a hedge against risk.
Hence, not all “fund balance” is necessarily available as a reserve. The three right-most columns of Exhibit
8.1 shows how much each city holds in fund balance as a percent of general revenue. Each of the three
columns in this exhibit examines fund balances from a different perspective on the relationship between
fund balance and risk mitigation.
The column #1 shows “unrestricted” fund balance as a percentage of General Fund operating revenue.
This is an accounting term describing fund balances that do not have constraints placed on their use by
an outside entity (e.g., a bond covenant might restrict the use of some portion of fund balance to debt
service) and are spendable (e.g., do not represent inventory or other non-liquid assets). This the broadest
definition of fund balance we show in Exhibit 9.1. An “unrestricted” fund balance may still have constraints
placed upon its use, but these constraints would be created by the city government itself. One common
constraint is to dedicate some portion of fund balance to hedging against the types of risks described in
this report. However, other constraints have nothing to do with risk mitigation - to illustrate: a common
self-imposed constraint is setting aside fund balance to pay for a special capital project. Newport Beach
has imposed several such constraints; for example, the city has about $790,000 in funding committed for
NPTV programming. While such a constraint could be removed and, thus, the entirety of monies in the
“unrestricted” category made available for risk mitigation, it is not the intent of the city to do so.
Column #2 shows the amount of fund balance available for risk mitigation after fund balances having self-
imposed restrictions (not germane to risk mitigation) are removed from consideration. Because have
removed funds that are the subject of self-imposed restrictions, this category is narrower than the first
category. This leaves self-imposed restrictions that are specifically germane to risk mitigation as well as
unrestricted fund balance (i.e., fund balance for which no restrictions at all have been identified).
Unrestricted fund balance could easily be used for responding to emergency events, if needed.
Column #3 includes only those fund balances that have been specifically identified by the city government
as intended for creating a risk mitigating reserve. It should be noted that since the analysis in Exhibit 9.1
is based only upon the information included in each city’s FY 2016 CAFR, it is possible the amount
dedicated to risk mitigation could be somewhat higher for some of the cities as a legislative policy
document might call for maintaining a given amount in fund balance as a reserve without creating an
accounting restriction that would show up in the financial report. For example, Newport Beach’s CAFR
dos not call out risk mitigating reserve in the financial statements, but one is described in the management
discussion and analysis.
It is also important to note that some cities, like Laguna Beach, account for emergency reserves in a fund
outside of the general fund. These other funds appear to be substantively similar in purpose to the
A Risk-Based Analysis of General Fund Reserve Requirements for the City of Newport Beach
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general fund reserve Newport Beach is considering, but just are located in a separate fund. This does not
include reserves that are found in utility funds or other funds with operational responsibilities apart
from the general fund. We have included these amounts in column three to provide for greater
comparability between the cities.
Exhibit 9.1- Fund Balances as Percent of General Fund Revenue
City Population (#1) Unrestricted
(#2)
Available for Risk Mitigation
(#3)
Dedicated to Risk Mitigation
Newport Beach 84,915 32% 28% 23%
Laguna Beach 23,505 83% 33% 8%
Huntington Beach 197,574 27% 11% 11%
Santa Monica 93,834 96% 19% 0%
Costa Mesa 114,044 51% 38% 12%
Mission Viejo 96,718 55% 24% 0%
Average 101,765 57% 25% 9%
Median 95,276 53% 26% 10%
Sources: FY 2016 CAFR for each city.
Given that column #3 is the most relevant to our analysis, it bears a closer look. Starting, with the City of
Newport Beach’s, we see a reserve equal to 23% of revenues. This is the City’s Contingency Reserve. The
reserve can be found as part of “Unassigned” fund balance in the City’s CAFR and amounts to $45.8
million. The City’s policy states that this amount exists to provide assistance in emergency situations.
Many of Newport Beach’s peer cities have similar emergency funds set up. Laguna Beach’s Disaster
Contingency Fund exists outside the General Fund, and has a total fund balance of $6.2 million to be used
exclusively for repairing public facilities and protecting lives/property. During FY 16, Huntington Beach’s
City Council established the Economic Uncertainties Reserve in the General Fund, which creates a reserve
to be used for catastrophic events and natural disasters. The Council’s goal was to commit the value of
two months of the General Fund expenditure adopted budget amount to this fund. The City of Santa
Monica’s Disaster Relief Fund typically assists with covering expenses of a natural disaster. As of FY 16,
the City’s fund had a net zero balance; the City received and promptly used a Federal and State Earthquake
grant in FY 16 of $2.7 million. Additionally, $15,123 was transferred from the Disaster Relief Fund to the
General Fund to “close out” the fund. It is unclear whether or not the fund will remain in use. While the
City had a fund of that amount at some point during the year, the year-end balance is a net zero. The City
of Costa Mesa has significant committed funds for declared disasters in the general fund. The fund
currently has $14.1 million dollars, and per City ordinance, any fund balance utilized must be replenished.
The City of Mission Viejo had no existing emergency or disaster fund.
Exhibit 9.1 shows that Newport Beach has the most available for contingency.
PENSION ASSET SENSITIVITY
Expected Average Investment Return 7%Investment Earnings
Expected Volatility +/- ~12%6.00%
Actuarial Loss
-1.00%
UAL
Market Value of Assets 619,834,903$319,668,958$939,503,861$
Funded Status 65.97% 100.00%
20 20
Year Balance Payment Balance Payment
6,198,349$-$9,395,039$-$
6,632,233$-$10,052,691$-$
1 7,096,490$155,157$10,756,380$235,177$
2 7,432,748$310,315$11,266,057$470,355$
3 7,632,048$465,472$11,568,143$705,532$
4 7,684,803$620,630$11,648,105$940,709$
5 7,580,754$775,787$2,327,362$11,490,395$1,175,886$3,527,659$
6 7,308,926$775,787$11,078,377$1,175,886$
7 7,018,070$775,787$10,637,517$1,175,886$
8 6,706,854$775,787$10,165,797$1,175,886$
9 6,373,853$775,787$9,661,056$1,175,886$
10 6,017,542$775,787$9,120,984$1,175,886$
11 5,636,290$775,787$8,543,107$1,175,886$
12 5,228,349$775,787$7,924,778$1,175,886$
13 4,791,853$775,787$7,263,166$1,175,886$
14 4,324,801$775,787$6,555,242$1,175,886$
15 3,825,057$775,787$5,797,762$1,175,886$
16 3,290,330$775,787$4,987,260$1,175,886$
17 2,718,172$775,787$4,120,022$1,175,886$
18 2,105,963$775,787$3,192,077$1,175,886$
19 1,450,900$775,787$2,199,176$1,175,886$
20 749,982$775,787$1,136,772$1,175,886$
13,964,175$21,165,953$
New Amort Policy
Asset (Gain)/Loss
Level $ 5Yr Ramp Up
Fully Funded as of 6/30/17 ValCurrent Funded Status as of 6/30/17 Val
Pmts.
Asset (Gain)/Loss
New Amort Policy
Level $ 5Yr Ramp Up
Item No. 5C1
Reserve Policy
Additional Materials Received
September 6, 2018
PENSION ASSET SENSITIVITY
Expected Average Investment Return 7%Investment Earnings
Expected Volatility +/- ~12%-5.00%
Actuarial Loss
-12.00%
UAL
Market Value of Assets 619,834,903$319,668,958$939,503,861$
Funded Status 65.97%100.00%
20 20
Year Balance Payment Balance Payment
74,380,188$-$112,740,463$-$
79,586,802$-$120,632,296$-$
1 85,157,878$1,861,890$129,076,556$2,822,127$
2 89,192,975$3,723,780$135,192,685$5,644,254$
3 91,584,575$5,585,670$138,817,711$8,466,381$
4 92,217,634$7,447,560$139,777,258$11,288,508$
5 90,969,052$9,309,450$27,928,350$137,884,742$14,110,635$42,331,905$
6 87,707,116$9,309,450$132,940,520$14,110,635$
7 84,216,844$9,309,450$127,650,202$14,110,635$
8 80,482,253$9,309,450$121,989,561$14,110,635$
9 76,486,241$9,309,450$115,932,676$14,110,635$
10 72,210,508$9,309,450$109,451,809$14,110,635$
11 67,635,474$9,309,450$102,517,281$14,110,635$
12 62,740,187$9,309,450$95,097,336$14,110,635$
13 57,502,231$9,309,450$87,157,995$14,110,635$
14 51,897,617$9,309,450$78,662,901$14,110,635$
15 45,900,680$9,309,450$69,573,149$14,110,635$
16 39,483,958$9,309,450$59,847,115$14,110,635$
17 32,618,065$9,309,450$49,440,259$14,110,635$
18 25,271,560$9,309,450$38,304,922$14,110,635$
19 17,410,799$9,309,450$26,390,112$14,110,635$
20 8,999,785$9,309,450$13,641,266$14,110,635$
167,570,099$253,991,432$
New Amort Policy
Asset (Gain)/Loss
Level $ 5Yr Ramp Up
Fully Funded as of 6/30/17 ValCurrent Funded Status as of 6/30/17 Val
Pmts.
Asset (Gain)/Loss
New Amort Policy
Level $ 5Yr Ramp Up
PENSION ASSET SENSITIVITY
Expected Average Investment Return 7%Investment Earnings
Expected Volatility +/- ~12%-17.00%
Actuarial Loss
-24.00%
UAL
Market Value of Assets 619,834,903$319,668,958$939,503,861$
Funded Status 65.97%100.00%
20 20
Year Balance Payment Balance Payment
148,760,377$-$225,480,927$-$
159,173,603$-$241,264,592$-$
1 170,315,755$3,723,780$258,153,113$5,644,254$
2 178,385,950$7,447,560$270,385,369$11,288,508$
3 183,169,151$11,171,340$277,635,421$16,932,762$
4 184,435,268$14,895,120$279,554,515$22,577,016$
5 181,938,104$18,618,900$55,856,700$275,769,484$28,221,270$84,663,811$
6 175,414,232$18,618,900$265,881,039$28,221,270$
7 168,433,688$18,618,900$255,300,403$28,221,270$
8 160,964,507$18,618,900$243,979,122$28,221,270$
9 152,972,483$18,618,900$231,865,352$28,221,270$
10 144,421,017$18,618,900$218,903,618$28,221,270$
11 135,270,948$18,618,900$205,034,562$28,221,270$
12 125,480,375$18,618,900$190,194,673$28,221,270$
13 115,004,461$18,618,900$174,315,991$28,221,270$
14 103,795,234$18,618,900$157,325,801$28,221,270$
15 91,801,360$18,618,900$139,146,298$28,221,270$
16 78,967,916$18,618,900$119,694,230$28,221,270$
17 65,236,130$18,618,900$98,880,517$28,221,270$
18 50,543,119$18,618,900$76,609,845$28,221,270$
19 34,821,598$18,618,900$52,780,225$28,221,270$
20 17,999,570$18,618,900$27,282,532$28,221,270$
335,140,197$507,982,864$
New Amort Policy
Asset (Gain)/Loss
Level $ 5Yr Ramp Up
Fully Funded as of 6/30/17 ValCurrent Funded Status as of 6/30/17 Val
Pmts.
Asset (Gain)/Loss
New Amort Policy
Level $ 5Yr Ramp Up
1
Burns, Marlene
From:Montano, Steve
Sent:Thursday, September 06, 2018 1:48 PM
To:Burns, Marlene
Subject:Fwd: Public Comment – Reserve Policy - Agenda Item C
Attachments:Public Comment – Reserve Policy - Agenda Item C.docx; ATT00001.htm
Sent from my iPhone
Begin forwarded message:
From: carl cassidy <carlrcassidy@att.net>
Date: September 6, 2018 at 1:24:29 PM PDT
To: Dan Matusiewicz <dmatusiewicz@newportbeachca.gov>
Cc: Steve Montano <smontano@newportbeachca.gov>
Subject: Public Comment – Reserve Policy - Agenda Item C
Reply-To: carl cassidy <carlrcassidy@att.net>
To: City of Newport Beach Finance Committee
Re: Public Comment – Reserve Policy - Agenda Item C
From: Public Carl R. Cassidy Date: TH 9/6/18
Outline without substantive discussions from one humble member of the Public
where additional future discussion and public transparency might be welcome:
1)Confirmation of amounts used by City and the GFOA study with
disparity for the proposed general fund contingency reserve funding
levels;
2)Additional specific delineation of what additional reserves are and are
not included in the general contingency reserve (e.g. capital infrastructure
and city utilized equipment depreciation, unresolved settlement of legal
actions);
3)More specific line item delineation of FEMA reimbursements, sea
level rise, harbor maintenance costs, sewer infrastructure cost
replacement, unplanned additional pension costs over PERS underfunded
liability;
4)Additional discussion of the comparative reserves analysis used for
contiguous cities that quite possibly do not compare to the uniquely
unique City of Newport Beach (harbor, coastal tidelands, amount
(valuation) of city owned real property, talent pool of local residence,
history, contiguous cities use of NB public resources, and overall
goodwill);
Item No. 5C2
Reserve Policy
Correspondence
September 6, 2018
2
5)Separate reserves for lost revenues and increased revenue from
reserves for additional replacement cost of catastrophic events;
6)Additional reporting of proposed revenues against future actual
revenues for on-going re-evaluating the annual additions to the
Contingency reserve;
7)Availability of other revenue measures such as Hazard Mitigation
Districts, transient occupancy taxes, increased sharing of development
costs;
8)Comparison of use of additional debt to use of contingency reserves
The Public does not seek to diminish with any view towards additional progress on
scheduling the City Reserves the amazing alacrity with which City Staff and this
highly capable Finance Committee has established with valuable outside GFOA
review a reserve for transparent, be it so humble, reporting to an overwhelmed
Public.
Thank you,
Carl R.Cassidy
To: City of Newport Beach Finance Committee
Re: Public Comment – Reserve Policy - Agenda Item C
From: Public Carl R. Cassidy Date: TH 9/6/18
Outline without substantive discussions from one humble member of the Public where
additional future discussion and public transparency might be welcome:
1)Confirmation of amounts used by City and the GFOA study with disparity for the
proposed general fund contingency reserve funding levels;
2)Additional specific delineation of what additional reserves are and are not included in
the general contingency reserve (e.g. capital infrastructure and city utilized equipment
depreciation, unresolved settlement of legal actions);
3)More specific line item delineation of FEMA reimbursements, sea level rise, harbor
maintenance costs, sewer infrastructure cost replacement, unplanned additional
pension costs over PERS underfunded liability;
4)Additional discussion of the comparative reserves analysis used for contiguous cities
that quite possibly do not compare to the uniquely unique City of Newport Beach
(harbor, coastal tidelands, amount (valuation) of city owned real property, talent pool
of local residence, history, contiguous cities use of NB public resources, and overall
goodwill);
5)Separate reserves for lost revenues and increased revenue from reserves for additional
replacement cost of catastrophic events;
6)Additional reporting of proposed revenues against future actual revenues for on-going
re-evaluating the annual additions to the Contingency reserve;
7)Availability of other revenue measures such as Hazard Mitigation Districts, transient
occupancy taxes, increased sharing of development costs;
8)Comparison of use of additional debt to use of contingency reserves
The Public does not seek to diminish with any view towards additional progress on scheduling
the City Reserves the amazing alacrity with which City Staff and this highly capable Finance
Committee has established with valuable outside GFOA review a reserve for transparent, be it
so humble, reporting to an overwhelmed Public.
ATTACHMENT TO EMAIL
B C [ F 1992 12.s"1993 14.S"1994 2.°"40.°"
199S 16.3" 1996 1S.3" 1997 20.1% 30.°"
1998 19.S"1999 12.S"20.°" 2000 10.S"2001 -7.2"2002 •6,1" 10.()%2003 3.7"
2004 16.6%
200S 12.3" 0.0% 2006 11.8"
2007 19.1%
2008 -S.1" ·10.0%
2009 •24.°"
2010 13.3"
2011 21.7" -20.0%
2012 0.1"
2013 13.2"
2014 18.4" -30.0%
2015 2.4"
. ShN11b r Sheet2
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• ·�
� ! ! ,._ I i i ... N � � � � ... ... ... ... ... ...
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I Ill ! � M � i
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I Great Recession l-+24.0%
.., N 8 8 � N "' § I §� N N
Q R s T
Item No. 5C3
Reserve Policy
Additional Materials Received
September 6, 2018
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5D September 6, 2018
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department Dan Matusiewicz, Finance Director
949-644-3213, danm@newportbeachca.gov
SUBJECT: REVIEW OF FINANCE COMMITTEE AUTHORIZING RESOLUTION
DISCUSSION:
The Finance Committee is charged with a variety of tasks including, but not limited to,
reviewing and monitoring events and issues that may affect the financial status of the City
and making recommendations to the City Council regarding amendments to financial and
budgetary policies.
The Finance Committee periodically reviews the Finance Committee authorizing
resolution to align its ongoing work plan with the Committee’s stated responsibilities and
to consider any changes deemed necessary.
The authorizing resolution was last updated by the City Council on September 12, 2017,
to amend the term of the Finance Committee’s citizen appointees.
RECOMMENDED ACTION:
Review City Council Resolution 2017-58, suggest and recommend changes as needed for submission to the City Council for final approval.
Prepared by: Submitted by:
/s/ Steve Montano
/s/ Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
Finance Internal Control Update September 6, 2018
Page 2
Attachment:
A. City Council Resolution 2017-58 - Finance Committee Purpose and Responsibilities
ATTACHMENT A
CITY COUNCIL RESOLUTION 2017-58 - FINANCE COMMITTEE PURPOSE AND RESPONSIBILITIES
RESOLUTION NO. 2017-58
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH, CALIFORNIA, AMENDING THE TERM
OF THE FINANCE COMMITTEE'S CITIZEN APPOINTEES
WHEREAS, the City Council of the City of Newport Beach ("City") has a long and
established history of being good guardians and stewards of the public's money;
WHEREAS, appropriations, expenditures and other budgetary matters are a
primary concern of the City Council;
WHEREAS, the City Council has adopted various policies regarding financial
matters;
WHEREAS, the City Council has adopted policies regarding income property and
annexations, which may have an impact on the City's finances;
WHEREAS, on December 12, 1994, the City Council adopted Resolution No. 94-
110 establishing the Finance Committee, whose duties and responsibilities have been
amended throughout the years to further protect and safe guard the public's money;
WHEREAS, the Finance Committee is charged with a variety of tasks including,
but not limited to, reviewing and monitoring events and issues that may affect the financial
status of the City and making recommendations to the City Council regarding
amendments to financial and budgetary policies;
WHEREAS, the existing Finance Committee is composed of three City Council
Members, appointed by the Mayor subject to City Council approval, and four citizen
members, appointed by City Council Members not on the Finance Committee subject to
City Council approval ("Citizen Appointees"); and
WHEREAS, the City Council desires to amend the Finance Committee to:
1) modify the term of its Citizen Appointees to align with the fiscal year; and (2) clarify
the duration of a Citizen Appointee's term to be one year or until a Citizen Appointee's
successor is appointed and qualified.
NOW, THEREFORE, the City Council of the City of Newport Beach resolves as
follows:
Section 1: The City Council hereby amends the Finance Committee as described
in the Finance Committee Description, which is attached hereto and incorporated herein
by reference.
Section 2: The City Council hereby repeals all resolutions related to the Finance
Committee that are in conflict with this resolution.
Resolution No. 2017-58
Page 2 of 5
Section 3: If any section, subsection, sentence, clause or phrase of this
resolution is for any reason held to be invalid or unconstitutional, such decision shall not
affect the validity or constitutionality of the remaining portions of this resolution. The City
Council hereby declares that it would have passed this resolution and each section,
subsection, sentence, clause or phrase hereof, irrespective of the fact that any one or
more sections, subsections, sentences, clauses and phrases be declared invalid or
unconstitutional.
Section 4: The recitals provided in this resolution are true and correct and are
incorporated into the substantive portion of this resolution.
Section 5: The City Council find the adoption of this resolution and the
amendment of the Finance Committee is not subject to the California Environmental
Quality Act ("CEQA") pursuant to Sections 15060(c)(2) (the activity will not result in a
direct or reasonably foreseeable indirect physical change in the environment) and
15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
Section 6: This resolution shall take effect immediately upon its adc
City Council, and the City Clerk shall certify the vote adopting this yhsoyttion.
ADOPTED this 12th day of September, 2017.
Kevin
Mayor
ATTEST- I
Leilani I. Brown
City Clerk
APPROVED AS TO FORM:
Aaron C. Hal
City Attorney
Attachment: Finance Committee Description
Resolution No. 2017-58
Page 3 of 5
FINANCE COMMITTEE
AUTHORIZATION: Established by Resolution No. 94-110 adopted on
December 12, 1994. Modified by Resolution No. 96-100
adopted on December 9, 1996. Disbanded by Resolution
No. 98-32 adopted on May 11, 1998. Re-established by
Resolution No. 2000-103 adopted on December 12, 2000.
Duties and membership amended by Resolution No. 2007-21
adopted on April 10, 2007. Purpose and responsibilities
amended by Resolution No. 2013-32 adopted on April 9,
2013. Membership, qualifications and term of members, and
purpose and responsibilities amended by Resolution
No. 2015-5 adopted on January 13, 2015. Administrative
practices amended by Resolution No. 2015-40 adopted on
May 26, 2015. Term of citizen appointees amended by
Resolution No. 2017-58 adopted on September 12, 2017.
MEMBERSHIP: Seven (7) total. Three (3) Council Members appointed by the
Mayor subject to full City Council approval. Four (4) citizen
members appointed by the Council Members not on the
Committee subject to approval of the full City Council ("Citizen
Appointees"). Citizen Appointees have equal voting status.
The Mayor shall appoint the chairperson subject to
confirmation of the full City Council.
Staff support shall be provided primarily by the City Manager
and the Finance Director and by other staff as necessary.
Meetings shall be held as required by the business needs of
the Finance Committee in the City Council Chambers or such
other locations as allowed by the Ralph M. Brown Act, on
weeknights or weekdays (M -Th) at a time that is convenient
for the Finance Committee and the public to encourage public
participation.
TERM OF COUNCIL
MEMBERS: Indefinite pending City Council action.
TERM OF CITIZEN
APPOINTEES: Appointed annually on a fiscal year (July 1 to June 30) basis.
Citizen Appointees shall serve for a one-year term or until their
successor is appointed and qualified.
QUALIFICATIONS OF
CITIZEN APPOINTEES:
Resolution No. 2017-58
Page 4 of 5
1. Must be a resident of the city of Newport Beach.
2. Must be a registered voter in Newport Beach.
3. Must be appointed by a City Council Member.
4. Recommended, but not required, that the appointee be
a CPA, CFA or Business/Finance major or other such
designation as may be appropriate.
PURPOSE &
RESPONSIBILITIES: A. Review and monitor events and issues which may
affect the financial status of the City;
B. Make recommendations to the City Council regarding
amendments to financial and budgetary policies;
C. In accordance with Sections 504 & 1101 of the City
Charter, review the City Manager's proposed budget
and give recommendations to the City Manager in
advance of the budget's presentation to the City
Council. The Committee's recommendations shall be
provided in writing to the City Council along with the
City Manager's presented budget;
D. Recommend for Council approval, and manage an on-
going process for measuring and setting goals
designed to maximize the City's revenues consistent
with existing taxation structures and inter-
governmental funding opportunities, fee generation
consistent with market rate charges for City provided
services and market rate fees for utilization of City
owned assets. Recommend to Council major initiatives
to accomplish identified goals;
E. Recommend for Council approval, and manage an on-
going process for measuring and setting goals
designed to minimize the City's cost to provide core
services and required activities, consistent with the
desired service level for residents and other internal
and external customers. Recommend to Council major
initiatives to accomplish identified goals;
F. Review with staff on an annual basis the timing, means
of financing, and fiscal impacts associated with funding
the high-priority projects designated in the Facilities
Financing Plan. After approval by the City Council,
identify, review and annually recommend to Council
the most advantageous methods to fund the City
Council's approved Facilities Financing Plan;
Resolution No. 2017-58
Page 5 of 5
G. Identify, review and annually recommend to Council
the most advantageous methods to fund the City's long
term compensation and benefit program liabilities;
H. Review and recommend to Council policies related to
the setting of funding goals for reserves, and review
on-going progress related thereto;
Review the structure and documentation of any
proposed debt financing to assess the risk associated
with debt usage;
J. Conduct audit conference meeting(s) with the auditors
to provide independent review and oversight of the City
of Newport Beach's financial reporting processes,
framework of internal control, and to provide a forum in
which auditors can candidly discuss concerns in the
absence of staff; and
K. Recommend for Council approval, monitor, and review
activities related to Investment Guidelines for City
Reserve and investment funds.
STATE OF CALIFORNIA }
COUNTY OF ORANGE } ss.
CITY OF NEWPORT BEACH }
I, Leilani I. Brown, City Clerk of the City of Newport Beach, California, do hereby certify that the
whole number of members of the City Council is seven; that the foregoing resolution, being Resolution
No. 2017-58 was duly introduced before and adopted by the City Council of said City at a regular meeting
of said Council held on the 121h day of September, 2017, and that the same was so passed and adopted
by the following vote, to wit:
AYES: Council Member Jeff Herdman, Council Member Brad Avery, Council Member Diane
Dixon, Council Member Scott Peotter, Council Member Will O'Neill, Mayor Pro Tem
Duffy Duffield, Mayor Kevin Muldoon
NAYS: None
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the official seal of
said City this 131h day of September, 2017.
dd a j- bvp,=
Leilani . Brown
City Clerk
Newport Beach, California
PURPOSE &
1. 2. 3. 4.
RESPONSIBILITIES: A
B.
C.
Resolution No. 2017-58 Page 4 of 5 ----
(/tc,/t//tB Must be a resident of the city of Newport Beach. Must be a registered voter in Newport Beach. Must be appointed by a City Council Member. Recommended, but not required, that the appointee be a CPA, CFA or Business/Finance major or other such designation as may be appropriate.
Review and monitor events and issues which may affect the financial status of the City;
Make recommendations to the City Council regarding �-,,,)'� amendments to finahcial and budgetary policies; �r
In accordance with Sections 504 & 1101 of iicity Charter, review the City Manager's proposed budget and give recommendations to the City Manager.-ift-. .
Recommend for Council approval,-and Fl9onege a,, u. ,·§oin9 proc'iss for fl"leesurin§ and seUin§-goalsdesigned to maximize the City's revenues consistentwith existing taxation structures and intergovernmental funding opportunities, fee generationconsistent with market rate charges for City providedservices and market rate fees for utilization of Cityowned assets. Recommend to Council major initiativesto accomplish identified goals;
Recommend for Council approval,....e1nd l"r'la,,age ar1 0111 !JOirg pr9';QSG -for Fl9eesuri, ,g e, ,d settin� .. goals designed to minimize the City's cost to provide core services and required activities, consistent with the desired service level for residents and other internal and external customers. Recommend to Council major initiatives to accomplish identified goals;
�bti; ,NJl!,w:,i.iii?'
F. a;:ri���==:l����c��! · Fine, ,eing Pla111. Afte a roval by the City Council,
�1A��ldentify, rev ew and an:s:.uall'J' recommend tot€vm ,cil ff, (,---the most advantageous methods to fund he City Council's approved Facilities Financing Plan; � yf\�
Item No. 5D1Review of Finance Committee Purpose and Responsibilities CorrespondenceSeptember 6, 2018
QUALIFICATIONS OF CITIZEN APPOINTEES:
G.
H.
I.
J,
K.
, /.. .
Resolution No. 2017-58Page 5 of 5
Identify, review and annually recommend to Councilthe most advantageous methods to fund the City's long
term compensation and benefit program liabilities;
Review and recommend to Council policies related tothe setting of funding goals for reserves, and review
on-going progress related thereto;
Review the structure and documentation of anyproposed debt financing to assess the risk associatedwith���
Conduct audit conference meeting(s) with the auditorsto provide independent review and oversight of the Cityof Newport Beach's finan� reporting processes,framework of internal contr�d to provide a forum inwhich auditors can candidly discuss concerns in theabsence of staff; ttml-�,fPv -Reeer,in ,end fut euuaeil app,e,ol, ��r, and reviewactivities related to Investment urdelines for City
Reserve and investment funds1 �
1
Burns, Marlene
From:Montano, Steve
Sent:Thursday, September 06, 2018 12:43 PM
To:Burns, Marlene
Subject:FW: Public Comment - Duties and Responsibilities of Finance Committee 9/6/18
meeting agenda item D
Attachments:Public Comment - Duties and Responsibilities of Finance Committee.docx
Here is another…
Steve Montano | Deputy Finance Director | City of Newport Beach
100 Civic Center Drive | Newport Beach, CA | 92660
smontano@newportbeachca.gov | Phone: (949) 644-3240 | Fax: (949) 644-3339
From: carl cassidy <carlrcassidy@att.net>
Sent: Thursday, September 6, 2018 12:31 PM
To: Matusiewicz, Dan <DMatusiewicz@newportbeachca.gov>
Cc: Montano, Steve <SMontano@newportbeachca.gov>
Subject: Public Comment ‐ Duties and Responsibilities of Finance Committee 9/6/18 meeting agenda item D
As we discussed in prior meetings, I would appreciate the attached Public
Comment please be attached and included for purposes of the September
Finance Comm. meeting agenda item D on my respectful concerns for
ambiguities in successive City Council resolutions for composition,
duties, and responsibilities of the Finance Committee.
As always I appreciate your awesome leadership and service to the City and
the enlightenment on this matter and other areas of finance previously
provided.
To: City of Newport Beach Finance Committee
Re: Public Comment - Duties and Responsibilities of Finance Committee
One possible reading of successive City Council Resolutions regarding Audit oversight ambiguity in provisions
From: Public Carl R. Cassidy Date: TH 9/6/18
Recent Council meetings have seen discussion regarding the Finance Committee member composition
and relative saliency of the advice and recommendations generally go straight to the City Council
Consent calendar without additional opportunity for Public Comment. Because the majority of the
Finance Committee are not members of Council, a majority of the Committee could place items on
the Consent calendar without opportunity for all Council members or Public to be heard in
Public meeting.
Item No. 5D2
Review of Finance Committee Purpose and
Responsibilities
Correspondence
September 6, 2018
2
The most recent City Council Resolution 2017-58 provides in Sections 1& 2 – “The City Council
hereby amends the Finance Committee as described in the Finance Committee Description, which is
attached hereto and incorporated herein … and hereby repeals all resolutions related to the Finance
Committee that are in conflict with this resolution.” The Resolution references and attaches City
Council Resolution 94-110 for guidance on continuing purpose and responsibilities:
C. “….The Committee’s recommendations shall be provided in writing to the City Council
along with the City Manager's presented budget;” Generally this responsibility has been a footnote in
the staff report accompanying the city Manager budget statement that the Finance Committee has
reviewed and discussed the without specific recommendations presented and delineated for transparent
Public Comment. In addition, the subsequent provisions of attaches City Council Resolution 94-110
provides for specific recommendations to be made to the City Council in entirety and not thru a
Committee of which the majority are non-elected officials.
A compelling provision of the City Council Resolution 2017-58 is the continued reiteration from City
Council Resolutions 2015-5 & 2015-40 of paragraph J. “Conduct audit conference meeting( s)
with the auditors to provide independent review and oversight of the City of Newport Beach' s
financial reporting processes, framework of internal control, and to provide a forum in which
auditors can candidly discuss concerns in the absence of staff,”
A humble, but respectful reading might allow for the appearance or literal form interpretation, that this continued delegation of responsibilities for auditor discussions and framework of internal to a committee composed of majority non-elected volunteers is not in the best interests of the City, Council, or the volunteers assuming the responsibility. Presumably one possible reading of the Resolutions, the
majority of the Council could conceivably not be advised of these auditor discussions and meetings
(without presence of staff) of internal control exposure and financial statement adjustments from
outside independent review by auditors specifically engaged to provide Public assurance with possible
financial responsibility for the internal control omissions or financial statement misstatements falling
upon 4 civic minded individuals.
My comments are respectfully submitted with the express statement that my personal confidence and
limited experience with the city personnel, finance staff, the Finance Committee, and City Council does
not provide any actual or whim of concern for financial statement reporting and internal control
procedures utilized by outstanding, highly credible, dedicated staff. My concern is merely one of
providing the appearance of transparency and independence to the Public.
Thank you,
Carl R.Cassidy
To: City of Newport Beach Finance Committee
Re: Public Comment - Duties and Responsibilities of Finance Committee
One possible reading of successive City Council Resolutions regarding Audit oversight
ambiguity in provisions
From: Public Carl R. Cassidy Date: TH 9/6/18
Recent Council meetings have seen discussion regarding the Finance Committee member composition
and relative saliency of the advice and recommendations generally go straight to the City Council
Consent calendar without additional opportunity for Public Comment. Because the majority of the
Finance Committee are not members of Council, a majority of the Committee could place items on
the Consent calendar without opportunity for all Council members or Public to be heard in
Public meeting.
The most recent City Council Resolution 2017-58 provides in Sections 1& 2 – “The City Council
hereby amends the Finance Committee as described in the Finance Committee Description, which is
attached hereto and incorporated herein … and hereby repeals all resolutions related to the Finance
Committee that are in conflict with this resolution.” The Resolution references and attaches City
Council Resolution 94-110 for guidance on continuing purpose and responsibilities:
C.“….The Committee’s recommendations shall be provided in writing to the City Council
along with the City Manager's presented budget;” Generally this responsibility has been a footnote in
the staff report accompanying the city Manager budget statement that the Finance Committee has
reviewed and discussed the without specific recommendations presented and delineated for transparent
Public Comment. In addition, the subsequent provisions of attaches City Council Resolution 94-110
provides for specific recommendations to be made to the City Council in entirety and not thru a
Committee of which the majority are non-elected officials.
A compelling provision of the City Council Resolution 2017-58 is the continued reiteration from City
Council Resolutions 2015-5 & 2015-40 of paragraph J. “Conduct audit conference meeting( s)
with the auditors to provide independent review and oversight of the City of Newport Beach' s
financial reporting processes, framework of internal control, and to provide a forum in which
auditors can candidly discuss concerns in the absence of staff,”
A humble, but respectful reading might allow for the appearance or literal form interpretation, that this
continued delegation of responsibilities for auditor discussions and framework of internal to a
committee composed of majority non-elected volunteers is not in the best interests of the City, Council,
or the volunteers assuming the responsibility. Presumably one possible reading of the Resolutions, the
majority of the Council could conceivably not be advised of these auditor discussions and meetings
(without presence of staff) of internal control exposure and financial statement adjustments from
outside independent review by auditors specifically engaged to provide Public assurance with possible
financial responsibility for the internal control omissions or financial statement misstatements falling
upon 4 civic minded individuals.
My comments are respectfully submitted with the express statement that my personal confidence and
limited experience with the city personnel, finance staff, the Finance Committee, and City Council does
not provide any actual or whim of concern for financial statement reporting and internal control
procedures utilized by outstanding, highly credible, dedicated staff. My concern is merely one of
providing the appearance of transparency and independence to the Public.
ATTACHMENT TO EMAIL
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
Agenda Item No. 5E
September 6, 2018
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
949-644-3123 or danm@newportbeachca.gov
SUBJECT: BUDGET AMENDMENTS (QUARTER ENDED JUNE 30, 2018)
EXECUTIVE SUMMARY
The purpose of this memorandum is to report on the budget amendments for the fourth
quarter of Fiscal Year 2017-2018. All budget amendments are in compliance with City
Council Policy F-3, Budget Adoption and Administration.
DISCUSSION
City Council Policy F-3, Budget Adoption and Administration, identifies how
appropriations can be transferred, increased or reduced. The Finance Committee
reviews a quarterly report of City Council and City Manager budget amendments including their effect on fund balance. Please find the list of budget amendments for the quarter
ending June 30, 2018, as Attachment A.
Prepared by: Submitted by:
/s/ Susan Giangrande
/s/ Dan Matusiewicz
Susan Giangrande Dan Matusiewicz
Budget Manager Finance Director
Attachment:
A. Budget Amendments Fiscal Year 2017-2018 Quarter Ending June
30, 2018
ATTACHMENT A
BUDGET AMENDMENTS FISCAL YEAR 2017-2018 QUARTER ENDING JUNE 30, 2018
Date Amount Amendment Type Fund
Net Effect on Fund Balance Increase/(Decrease)Department Explanation
04/11/18 9,700.00 City Manager General Fund - CDD
To increase salary and benefit appropriations for additional
Department Assistant hours in CDD from existing office equipment and furniture appropriations.
04/13/18 12,967.60 City Manager General Fund - Finance & Recreation
To transfer salary and benefit appropriations from Finance to Recreation related to the transfer of .5 Budget Analyst position.
04/13/18 428,520.29 City Manager General Fund CIP 428,520.29 Public Works To reduce CIP expenditure appropriations related to completed
projects.
04/13/18 4,202,592.91 City Manager various 3,419,065.83 Public Works To reduce CIP expenditure appropriations related to completed projects.
04/23/18 3,420.00 City Manager General Fund - Recreation/MOD
To increase revenue estimates and expenditure appropriations
related to the Per Player Field Maintenance agreements
04/24/18 260,000.00 City Council General Fund CIP (260,000.00) Public Works
To appropriate General Fund Capital Projects unappropriated fund balance to the Slurry Seal Program.
Tidelands Capital (22,182.75) Equipment Fund 22,182.75
05/22/18 77,000.00 City Council Tidelands - Public Works
To transfer expenditure appropriations from the Tidegate Retrofit
project to the Bayview Heights Drainage project.
06/19/18 30,000.00 City Manager General Fund - Human Resources
To appropriate funds from council to HR's outside counsel to be used towards negotiations.
City of Newport Beach
Budget AmendmentsFiscal Year 2017-18Quarter Ending June 30, 2018
04/26/18 22,182.75 City Manager Public Works
To reduce appropriations of the Balboa Island Seawall Project,
for the purchase of a trailer, and to transfer appropriations from
Tidelands Capital to Equipment Fund.
ATTACHMENT A
FINANCE COMMITTEE WORKPLAN
8/30/18
Thursday, September 06, 2018 Annual Review of Investment Policy Review Investment Policy and Investment Portfolio
Performance.
Investment Performance Review Staff and/or one or more investment advisors will
describe the performance of the City's investment
portfolio.
Reserve Policy Further discussion and consideration of reserve
policy pursuant to findings in Draft Report: GFOA
Risk Based Analysis of General Fund Reserve
Requirements
Review Finance Committee Purpose and
Responsibilties
Review City Council Resolution 2017-58 (Finance
Committee Purpose and Responsibilities), suggest
and recommend changes as needed for submission
to the City Council for final approval.
Budget Amendments (Quarter Ended
June 30, 2018)
Receive and file a staff report on the budget
amendments for the prior quarter.
Discuss Items for Future Agendas
Thursday, October 18, 2018 Review Workers' Compensation and
General Liability Valuations
Review Workers' Compensation and General Liability
Valuation with Actuary.
Fiscal Sustainability Plan Update Review and discuss City Council Resolution 2015-47,
Fiscal Sustainability Plan
Subcommittee Policy Recommendations Reserve for Subcommittee recommendations on
Council finance policies.
Contracting Policy Limits Review allowable approval thresholds in the Authority
to Contract Policy F-14
Budget Amendments (Quarter Ended
September 30, 2018)
Receive and file a staff report on the budget
amendments for the prior quarter.
Discuss Items for Future Agendas
Thursday, November 29, 2018 Review CalPERS Payment Options Staff will discuss CalPERS Fresh Start, discretionary
and other payment options under consideration.
Review of City Water and Wastewater
Rates
Staff will discuss proposed rate changes for the water
operation and provide an update on current waster
rates and operations.
Subcommittee Policy Recommendations Reserve for Subcommittee recommendations on
Council finance policies.
Discuss Items for Future Agendas
Thursday, December 13, 2018 Reserve Policy (F-2) Discussion Finance Committee recommended revisions to
Council Reserve Policy F-2.
Subcommittee Policy Recommendations Reserve for Subcommittee recommendations on
Council finance policies.
Discuss Items for Future Agendas
City of Newport Beach Finance Committee Work Plan 2018-19
September
October
November
December