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HomeMy WebLinkAboutApproved Minutes - March 12, 2020Finance Committee Meeting Minutes March 12, 2020 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE MARCH 12, 2020 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:01 p.m. in the Newport Beach Central Library, Friends Meeting Room, 1000 Avocado Avenue, Newport Beach, California 92660. II. ROLL CALL PRESENT: Mayor/Chair Will O’Neill (arrived 3:06 p.m.), Council Member Diane Dixon, Committee Member John Reed, Committee Member Joe Stapleton, Committee Member Larry Tucker ABSENT: Council Member Joy Brenner STAFF PRESENT: City Manager Grace K. Leung, Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve Montano, Administrative Manager Angela Crespi, Senior Accountant Theresa Schweitzer, Public Works Manager Chris Miller, Fire Chief Jeff Boyles, Fire Battalion Chief Brian McDonough, Accounting Manager Rukshana Virany, Revenue Manager Evelyn Tseng, Budget Analyst Amy Lewis, Budget and Payroll Supervisor Shannon Espinoza, Public Works Director Dave Webb, and Administrative Specialist to the Finance Director, Marlene Burns OTHER ENTITIES: Robert Callanan, White Nelson Diehl Evans LLP Joe Ludin, White Nelson Diehl Evans LLP MEMBERS OF THE PUBLIC: Jim Mosher, Don Yahn, and Committee Member William Collopy (Attending the meeting as a member of the public) III. PUBLIC COMMENTS Mr. Mosher addressed the committee regarding the City's Lobbyist Registration Ordinance and noted any speaker addressing the committee who is being paid to do so needs to register with the Office of the City Clerk which can be submitted online. He referenced the minutes of the previous meeting and reported multiple contracts for the same service are not unusual within the City and noted City Council approved three (3) on-call contracts with electrical service vendors in September 2019. He recommended the Finance Committee review the Fee Schedule Update, specifically the Appeal Fee, noticing disparate fee schedules for different departments. IV. CONSENT CALENDAR MINUTES OF FEBRUARY 13, 2020 Recommended Action: Approve and file. MOTION: Committee Member Tucker moved to approve the minutes as presented and Committee Member Stapleton seconded. The motion carried 4 ayes – 0 noes, 2 absent (O’Neill and Brenner). V. CURRENT BUSINESS Finance Committee Meeting Minutes March 12, 2020 Page 2 of 8 A. FINANCIAL STATEMENT AUDIT RESULTS AND RELATED COMMUNICATION Summary: The City’s external audit firm, White Nelson Diehl Evans LLP will meet with the Finance Committee to discuss the audit findings for the fiscal year ending 6/30/2019. The Committee will have an opportunity to discuss any potential areas of concern and the auditors can discuss any changes in accounting standards or disclosures that were relevant for the audit year. Recommended Action: Receive and file. Robert Callanan, White Nelson Diehl Evans LLP, presented the results of the City’s external audit for the fiscal year ending June 30, 2019 and noted there were no significant changes in accounting policies from year-to-year. He noted there were some additional disclosure requirements related to Debt Obligations but did not lead to a substantial change. Mr. Callanan reported the City’s financial statements contain estimates of Infrastructure Assets (which is listed in GASB Summary of Statement No. 34), Depreciation Expenses on the use of Capital Assets, Pension Obligations, Other Post-Employment Benefits (OPEB) Liabilities, and claims for General Liability and Worker's Compensation and are subject to change. Mr. Callanan reported no significant difficulties performing the audit. He noted one (1) correction of an audit-related inquiry which had to do with the General Liability and Internal Service Fund which was adjusted by $350,000 based on updated information from the City Attorney. He reported there were no disagreements with management regarding any issues or matters and reported White Nelson Diehl Evans LLP was provided with a Representation Letter which provided unfettered access to information in order to provide an opinion on the Financial Statements. He reported their opinion is an Unmodified Opinion on the City’s financial statements which is the highest form that can be provided under auditing standards. Mr. Callanan reported GASB Statement No. 84, relating to Fiduciary Activities, will be implemented in Fiscal Year 2019-20 and noted potential adjustments. He reported the California Governmental Accounting and Auditing Committee is developing a white paper to clarify reporting Pensions and OPEB Fiduciary activities for consistent reporting. Mr. Callanan reported an audit of the City's Federal Grant Programs was given an Unmodified Opinion. He noted a major program tested this year was Asset Forfeiture which is the share of proceeds from Police raids which must be used for specific Public Safety equipment purposes and reported there were no findings or issues with the program. He also reported the City’s Schedule of Expenditure of Federal Awards was fairly reported. In response to Council Member Dixon’s inquiry, Mr. Callanan clarified the GASB Statement No. 84 change impacts smaller pensions that are not CalPERS related and noted the City does not have any of those plans. Chair O’Neil opened public comments. Jim Mosher expressed concern the Finance Committee was not discussing specific items within the City’s Comprehensive Annual Financial Reports (CAFR). Chair O’Neil closed public comments. There was no further action taken on this item. B. HARBOR AND BEACHES MASTER PLAN Summary: Finance Committee Meeting Minutes March 12, 2020 Page 3 of 8 Staff will present a draft of Harbors and Beaches financial plans reviewing the timing, means of financing, and fiscal impacts associated with funding Council prioritized capital projects. Recommended Action: Review the Harbor and Beaches financial plans and recommend the information go to the City Council in the future for their consideration. Deputy Director/Finance Steve Montano provided a brief overview of the Harbor and Beaches Master Plan and noted it is similar to the Facilities Financial Plan (FFP). He reported the Fund Balance from 2020 through 2045 is healthy and projected to grow due to the estimated $49 million in grant funding expected in 2032. He provided an overview of the external contributions and projected expenditures covered by grants. Deputy Director/Finance Montano provided an overview of estimated revenue sources which include grant funding but is mainly funded through General Fund contributions and Incremental Revenue Projections received through leases, mooring rents, commercial and residential pier rents. Deputy Director/Finance Montano reported on Debt Service which consists of two (2) loans advanced from the General Fund to cover a dredging project and the other was to cover the construction of the Marina Park marina. Deputy Director/Finance Montano reported on expenditure by type noting a majority of projects are to support the bulkheads around the harbor. He noted the majority of projects are evenly funded through General Fund contributions and Incremental Revenue received through rents and leases. In response to Council Member Dixon’s inquiry, Public Works Manager Chris Miller clarified grant funding can come from federal, state or local grant and grant funding is projected. Deputy Director/Finance Montano advised projected revenues are listed but are not in the budget. He further clarified this helps explain how much the Harbor Fund or the General Fund would need to contribute should the grants not materialize. Council Member Dixon requested a footnote indicating a grant is projected. In response to Committee Member Tucker’s inquiry, Public Works Manager Miller clarified the dredging project is technically a federal project but the City is choosing to prefund the project but explained Harbor waters are federally maintained. He explained the California State Lands Commission grants the Tidelands to the City and County with the City’s portion being approximately 86% and the County’s portion 14%. In response to Committee Member Tucker’s inquiry, Public Works Manager Miller advised the U.S. Army Corps of Engineers ranks all the ports and harbors in California based primarily on economic cargo ports and recreational ports tend to get lower funding. He advised the City has lobbied for more funding but it is highly unlikely to be 100% federally funded. He also noted the City would need to decide to fund all or a portion of the project but the likelihood of being reimbursed is improbable. Council Member Dixon reported Council Member Duffield and Mayor Pro Tem Avery travel to Washington annually to lobby the U.S. Army Corps of Engineers and the Appropriations Committee for dredging funding and while the City makes the list, funding is never appropriated. In response to Committee Member Tucker’s inquiry, Public Works Manager Miller clarified the City has contributed funds to preload the project and is paying for all the design, engineering, permitting, and California Environmental Quality Act (CEQA) Environmental Impact Reports. He further stated the City has committed to 20% of the entire project which is $4.5 million of the City’s budget allocated towards construction costs and is hoping to receive $18 million in federal funding. He also noted the City is looked upon favorably by the Appropriations Committee by contributing to the project. Finance Committee Meeting Minutes March 12, 2020 Page 4 of 8 In response to Committee Member Tucker’s inquiry, Public Works Manager Miller reported the Harbor is not at its design depth that was deemed by the Federal Government in 1917. He did report some groundings have been reported and although uncommon, there is more potential if dredging is not completed. He also noted if the dredging project is completed it will be a one-and-done type of project and will only require maintenance after certain minor storm events. In response to Council Member Dixon’s inquiry, Deputy Director/Finance Montano clarified the City is still repaying the last dredging project through the end of 2030. Director/Treasurer Matusiewicz clarified the City had a unique opportunity dispose dredging material in the past and provided a no-interest loan to the Harbor Fund so it could continue its efforts without being hindered by a lack of cash. He clarified that revenues coming into the Tidelands fund are being used to repay the General Fund over time. Deputy Director/Finance Montano advised a breakdown of revenues was listed within the Master Plan and explained it comes from the sum of leases, mooring rents, and commercial and residential pier rents. Public Works Manager Miller clarified in 2010-2012 there were base rates for moorings and rents which was increased by the City Council and those incremental rents were earmarked specifically for Harbor Projects. He further clarified the incremental rents gradually increase by Consumer Price Index (CPI) but is essentially a fixed amount. Chair O’Neill noted the Finance Committee is reviewing this to determine if funding is at an appropriate level and assumed it will require General Fund contributions. He noted it should fall back to the Harbor Commission to decide how to trim some of the projects back in case the priorities were too large from a financial commitment. Chair O’Neill expressed concern regarding the City’s revenue assumptions for the next budget cycle. In response to Chair O’Neill’s inquiry, Harbor Commissioner Don Yahn advised there was not a prioritized list of projects broken down. He advised the Harbor Commission would review per City Council’s direction. He also noted the Harbor Commission identified many strategic projects such as secondary launch ramps and seawalls but feels prioritizing projects would be useful. Chair O’Neill requested an action item to review the Harbor and Beaches Master Plan with City Manager Leung along with some members of the City Council to determine if they agree with the Harbor Commission on the finance side. Harbor and Beaches projects substantially impact the budget and it must be determined if the City Council needs to notify the Harbor Commission of the City Council’s request to review their project priorities. Chair O’Neill opened public comments. Jim Mosher stated it is his understanding that navigable waters belong to the public and the State is a trustee on behalf of the people. He noted the Harbor Commission was trying to understand the dashboard and how it relates to the attached spreadsheets. He expressed concern regarding expenditures noting it was vague and asked for clarification. He requested clarification regarding the General Fund contributions net amount when corrected for Debt Service and asked for clarification for time-periods throughout the Master Plan. Lastly, he inquired if bulkhead maintenance was also the responsibility of the Federal Government. Chair O’Neill closed public comments. Chair O’Neill noted Mr. Mosher made good points about referencing potential projects and General Fund contributions. In response to Chair O’Neill’s inquiry, Finance Director/Treasurer Matusiewicz reported the City contributes $4.5 million annually to the Harbor Capital Fund and the repayment of the loan was related to the previous projects discussed earlier. Deputy Director/Finance Montano clarified Finance Committee Meeting Minutes March 12, 2020 Page 5 of 8 the first red line for $3.5 million is gross and Debt Service 2020 is $1.25 million and the sum of the two is the net addition to the Harbor capital fund. Council Member Dixon expressed her support for a long-term Dredging Master Plan. In response to Council Member Dixon’s inquiry, Public Works Director Dave Webb clarified Newport Island would not qualify for federal funding and would need $3 million from the General Fund to dredge the canal. Public Works Manager Miller advised the Harbor Department would be investigating how much would need to be dredged from that canal and noted the other projects are estimates. Council Member Dixon recommended dredging be a separate chart within the Harbor and Beaches Master Plan to help better understand future needs, obligations and external sources. Committee Member Tucker stated the Harbor and Beaches Master Plan is simply a plan and does not find its way to the budget until the City Council decides to fund the projects. Director/Treasurer Matusiewicz noted the Finance Committee looks to the City Council and Public Works to identify the necessary projects, then staff can look at incremental rents and grant revenue to complement General Fund contributions. Committee Member Tucker expressed his support for prioritizing projects with input from the Harbor Commission and a decision from City Council. There was no further action taken on this item. C. DISCUSS REVENUE ASSUMPTIONS Summary: Staff will provide an overview of revenue assumptions for the FY 2020-21 Proposed Budget. Recommended Action: Receive and file. Finance Director/Treasurer Matusiewicz reported COVID-19 has changed the budget strategy. In response to Chair O’Neill’s inquiry, Finance Director/Treasurer Matusiewicz reported he has not received any information from CalPERS but believes the return on the portfolio is down significantly from the peak. He also noted CalPERS CIO Ben Meng was anticipating a downturn and was trying to position the portfolio to take advantage of those circumstances but did not have any specific intelligence at the moment. Finance Director/Treasurer Matusiewicz advised Newport Beach is better off than cities such as Anaheim whose main source of revenue is Transient Occupancy Tax (TOT). He reported the City receives $0.17 on the dollar of the 1% Ad Valorem Tax assessed on property values which make up 47% of General Fund revenues. He reported the City receives 1% of the 7.75% charged in Sales Tax and makes up 16.8% of the General Fund. In response to Council Member Dixon’s inquiry, Finance Director/Treasurer Matusiewicz explained that due to the Wayfair decision (South Dakota v. Wayfair, Inc.) any Internet Sales goes into the County pool and the City receives approximately 5.8% of the total pool. All Orange County cities will benefit from the Wayfair decision, but it is too early to tell how much the overall collections will offset the losses generated by online sales. Finance Director/Treasurer Matusiewicz reported TOT Tax is 10% of gross sales and represents 10.8% of the General Fund and includes hotels and residential rentals. He advised residential rentals had been increasing at double-digit rates but is anticipating the commercial side will drop significantly. He noted the COVID-19 fear factor has led to a significant drop in the corporate sector travel and attendance at sporting events. Finance Committee Meeting Minutes March 12, 2020 Page 6 of 8 Deputy Director/Finance Montano presented on the fiscal impacts of COVID-19. He reported visitor spending comes primarily from food, lodging, and retail sales. In response to Council Member Dixon’s inquiry, he explained the $337 million noted in the Visit Newport Beach reports is the economic impact and not provable numbers. Deputy Director/Finance Montano reported most visitors are domestic travelers who come for leisure and day trips and noted international visitors account for just under 5% of the total volume. Council Member Dixon reported Balboa Village Merchants bookings were holding steady but felt it was mainly due to visitors who could drive to Newport Beach. Deputy Director/Finance Montano advised there is indication certain hotels are experiencing event cancellations based on reports from Visit Newport Beach and expressed concern regarding the worldwide impact of COVID-19. He noted Newport Beach accounts for 2.7% of the County population but accounts for 5.6% of the hotel room inventory. Deputy Director/Finance Montano provided a brief overview of Property Tax revenue over time and how it is impacted by major events. He noted Sales Tax growth is more sensitive to an economic downturn. Director/Treasurer Matusiewicz noted Property Taxes will help with revenue stability since the assessed property valuations for the next fiscal year were based on a January 1 valuation date. Senior Accountant Theresa Schweitzer reported staff is meeting daily to discuss the potential outcomes from COVID-19 which is evolving every week. She reported she met with City Manager Leung to finalize the projections. She reported Property Tax growth was 5.43% for Fiscal Year 2019-20 which was down from 7.22% the previous year and projects 5% is realistic for Fiscal Year 2020-21 and should know actual numbers by the end of June. She also reported there is less revenue coming in from Supplemental Taxes due to home prices slowing. Senior Accountant Schweitzer reported the City’s Sales Tax Consultant initially predicted a short term 30-day impact to the City’s tourism sensitive Sales Tax revenue including retail and restaurants of $279,000 but they recently increased it to a 60-day impact, which would end up being $588,000. She reported the Sales Tax Consultant is projecting at 20% reduction on General Retail and Food Products within 60 days and will result in a loss of $500,000. Chair O’Neill recommended reaching out to local restaurants to better understand the fiscal impacts. Senior Accountant Schweitzer advised staff is continuing to evaluate and make changes to the calculations as necessary. Senior Accountant Schweitzer reported the City projects Sales Tax will reduce 1.5% in Fiscal Year 2020-21 due to the economic uncertainty surrounding COVID-19. She noted there may be some additional revenue due to the Wayfair decision and will make adjustments to estimates at that time. She also noted the Fiscal Year 2019-20 estimate was updated down 6% for Commercial TOT and flat for Residential TOT for the remaining months of this fiscal year. She reported the City is expecting a 12% drop in Commercial TOT and a 5% increase in Residential TOT. Senior Accountant Schweitzer reported Fiscal Year 2020-21 Other Revenues appear to be going down but noted that grants and donations are not budgeted until they are known so no adjustments have been made but may be required at a later date. In response to Council Member Dixon’s inquiry, Senior Accountant Schweitzer clarified the City is projecting a drop of $1 million this year and the following fiscal year for Other Taxes and Revenues. She presented an overview of the General Fund and noted the Fiscal Year 2019-20 updated estimate is still showing slight growth over Fiscal Year 2018-19 at 1.42%. She noted the revised Fiscal Year 2020-21 projection is down $6.5 mission from the original projection. Finance Committee Meeting Minutes March 12, 2020 Page 7 of 8 Chair O’Neill expressed concern as to how other cities will survive COVID-19. Council Member Dixon noted the payments to CalPERS will increase because the discount rate will decrease. Chair O’Neill noted when the item is presented to the City Council there is no need to include the Fiscal Year 2020-21 projection. City Manager Leung agreed and noted she was making decisions on the operating side. Chair O’Neill noted if COVID-19 sustains, the worst-case scenario is $10 - $11 million in lost revenue. City Manager Leung advised there are a lot of Capital Improvement Program (CIP) projects and it may be necessary to pull back on some of the accelerated infrastructure projects. In response to Council Member Dixon’s inquiry, City Manager Leung advised there is $2.3 million unallocated from Fiscal Year 2018-19 Surplus Funds and noted next year’s Surplus Funds may be impacted. In response to Committee Member Stapleton’s inquiry, Director/Treasurer Matusiewicz advised that CalPERS payments are made monthly. City Manager Leung noted the City is receiving more revenue from online sales tax which is a positive trend and will complete more analysis to determine consumer spending. In response to Committee Member Reed’s inquiry, Finance Director/Treasurer Matusiewicz advised the City cannot refinance the Civic Center bonds because they have a make-whole call premium associated with the bonds. He advised the City would continue to focus on paying down CalPERS and OPEB liabilities since they carry at much higher interest rates. Senior Accountant Schweitzer advised the City will have February hotel TOT information by the end of the month and will be able to determine if there is a decrease but thinks March may show the largest decrease. She advised TOT information should be available in April since the agents pay quarterly and information regarding 1st Quarter Sales Tax will be available in late May. Senior Accountant Schweitzer reported 99% of the Tidelands Revenue Fund comes from Use of Money and Property which includes Parking Meter Revenue, Lease Property, Onshore and Offshore Moorings and Slip Revenues. She noted some accounts within the Tidelands Revenue Fund are capped and anything over the established baseline goes into the Harbor Capital fund. She noted none of the accounts have been adjusted for COVID-19. Senior Accountant Schweitzer reported 98% of the Water Revenue Fund comes from the sale of water, fixed and usage charges, meter turn on and connection charges. Committee Member Tucker expressed concern with the revenue impacts and suggested a contingency plan in the event the revenue decrease is not $6.5 million. Council Member Dixon noted the City will need to plan for the worst-case scenario. She encouraged residents to spend online and order take-out from local restaurants. Chair O’Neill advised the City will be working on a messaging campaign to encourage residents to buy local over the next few weeks. Chair O’Neill opened public comments. In response to Mr. Mosher’s inquiry regarding revenue amounts, Chair O’Neill responded the City has always been good about projecting a revenue amount that turns out to be lower than the actual amount. He noted the City historically has tended to see more money coming in than in the projections and rather than being overly optimistic, he feels it is better to be less