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HomeMy WebLinkAboutFinance Committee - November 19, 20201 . CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA COMMITTEE MEMBERS WILL PARTICIPATE VIA ZOOM. PLEASE SEE SPECIAL NOTICE REGARDING COVID-19 FOR PUBLIC PARTICIPATION INFORMATION. PLEASE SEE UPDATED ZOOM LINK FOR PUBLIC PARTICIPATION, PLEASE RE-REGISTER. NOVEMBER 19, 2020 3:00 P.M. FINANCE COMMITTEE MEMBERS: STAFF MEMBERS: Will O’Neill, Chair / Mayor Brad Avery, Mayor Pro Tem Joy Brenner, Council Member William Collopy, Committee Member John Reed, Committee Member Joe Stapleton, Committee Member Larry Tucker, Committee Member Grace K. Leung, City Manager Carol Jacobs, Assistant City Manager / Interim Finance Director/Treasurer Steve Montano, Deputy Director, Finance Marlene Burns, Administrative Specialist to the Finance Director On March 4, 2020, Governor Newsom proclaimed a State of Emergency in California as a result of the threat of COVID-19. On March 12, 2020, Governor Newsom issued Executive Order N-25-20, which allows Finance Committee Members to attend Finance Committee meetings by electronic means. Please be advised that to minimize the spread of COVID-19, Finance Committee Members may attend this meeting either electronically or telephonically. Also, please be advised that on March 17, 2020, Governor Newsom issued Executive Order N-29-20, which allows for the public to participate in any meeting of the Finance Committee telephonically or by other electronic means. Given the health risks associated with COVID-19, the City of Newport Beach will conduct this meeting via Zoom. As a member of the public, if you would like to participate in this meeting, you can participate via the following options: 1.You can submit your questions and comments in writing for the Finance Committee’s consideration by sending them to Carol Jacobs, Assistant City Manager / Interim Finance Director/Treasurer, atcjacobs@newportbeachca.gov. To give the Finance Committee adequate time to review your questionsand comments, please submit your written comments by Wednesday, November 18, 2020, at 5 p.m. All emails will be made part of the record.2.You can connect with a computer by joining through Zoom. Use the link below to register for the meetingusing a valid email address. You will receive a confirmation email allowing you to join themeeting: https://zoom.us/webinar/register/WN_QQj0JuJ6TFG9tNHtCdhxuQ.3.Or you may connect by Phone/Audio Only by calling: 669-900-9128. The meeting ID is 992 8650 1154#4.Attendees must raise their hand in the Zoom module if they would like to speak. If attending by phone,press *9 to raise hand. Please know that it is important for the City to allow public participation at this meeting. While the City does not expect there to be any changes to the above process for participating in this meeting, if there is a change, the City will post the information as soon as possible to the City’s website. The City of Newport Beach thanks you in advance for continuing to take precautions to prevent the spread of the COVID-19 virus. 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. Finance Committee Meeting Agenda November 19, 2020 Page 2 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 A. MINUTES OF SEPTEMBER 24, 2020 Recommended Action: Approve and file. V. CURRENT BUSINESS A. CALPERS UPDATE Summary: Staff will present the latest actuarial valuation changes to actuarial assumptions, a review of investment returns, the potential impact of future rates, and the results of employee cost sharing. Recommended Action: Receive and file. B. FISCAL YEAR 2019-20 AND FISCAL YEAR 2020-21 FINANCIAL UPDATES Summary: Staff will provide a fiscal year ending June 30, 2020, and first quarter FY 2020-21 budget performance update. Recommended Action: Receive and file. C. BUDGET AMENDMENTS FOR THE PREVIOUS QUARTER Summary: Staff will report on the budget amendments for the prior quarter. Recommended Action: Receive and file. D. WORK PLAN REVIEW Summary: Finance Committee Meeting Agenda November 19, 2020 Page 2 Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Receive and file. 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 September 24, 2020 1 CITY OF NEWPORT BEACH FINANCE COMMITTEE SEPTEMBER 24, 2020 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:05 p.m. via teleconference. II. ROLL CALL PRESENT: Mayor/Chair Will O’Neill, Mayor Pro Tem Brad Avery (via telephone), Council Member Joy Brenner, Committee Member William Collopy, Committee Member John Reed, Committee Member Joe Stapleton, and Committee Member Larry Tucker ABSENT: None. STAFF PRESENT: City Manager Grace K. Leung, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director/Finance Steve Montano, Administrative Specialist to the Finance Director Marlene Burns, Fire Chief Jeff Boyles, Revenue Manager Evelyn Tseng, Revenue Auditor Antonio Velasco, Purchasing Agent Anthony Nguyen, Administrative Manager Mary Locey, Budget Manager Shannon Espinoza, IT Manager Jackeline Luengas, IT Supervisor Avery Maglinti OTHER ENTITIES: Mark Steranka - Moss Adams Colleen Rozillis – Moss Adams Halie Garcia – Moss Adams Jason Schmidt - Chandler Asset Management Mark Young - KNN Public Finance MEMBERS OF THE PUBLIC: Jim Mosher, Charles Klobe, and Nancy Scarbrough III. PUBLIC COMMENTS Jim Mosher stated he understood the Council adopted a “placeholder” budget given the COVID-19 pandemic and inquired whether the Finance Committee would be reconvening to further discuss any financial impacts. He mentioned public comments were not opened related to the COVID-19 report at the recent City Council meeting. Charles Klobe inquired whether there will be public comment on this agenda during the item related to Fire Station No. 2. Mayor/Chair O’Neill affirmed public comment would be opened during the agenda item. Mayor Chair O’Neill noted he would be more cognizant of public participation at meetings. He stated there has not been a significant impact on the City’s budget due to COVID-19 and is anticipating the Finance Committee will review the City’s budget once the first quarter of the fiscal year is complete. He anticipates the Finance Committee will review the budget at their November meeting with the intent of proposing recommendations to the City Council. IV. CONSENT CALENDAR MINUTES OF JUNE 4, 2020 Recommended Action: Approve and file. Finance Committee Meeting Agenda September 24, 2020 Page 2 Mayor/Chair O’Neill opened public comments and seeing no speakers, closed public comments. MOTION: Committee Member Tucker moved to approve the minutes, as amended, seconded by Committee Member Stapleton. The motion carried 5 ayes – 0 noes, 2 abstentions (Mayor Pro Tem Avery, Council Member Brenner). I. CURRENT BUSINESS A. INVESTMENT PERFORMANCE REVIEW Summary: Staff and/or one or more investment advisors will describe the performance of the City's investment portfolio. Recommended Action: Receive and file Finance Director/Treasurer Dan Matusiewicz provided a brief update on the performance of the City’s investment portfolio. He outlined general performance patterns of “equity” investments versus “fixed-income” investments. The City currently has a good price return, however, new money invested will be done at a lower rate. Jason Schmidt, Chandler Asset Management, provided a status update, noting the economy is currently in a recovery mode. He mentioned the upcoming election and COVID-19 pandemic may impact the financial markets. Currently, the economy has been in a recession since February, however, the trend is moving toward “recovery.” He mentioned there may be additional “stimulus” activities that may take place before the election. He provided brief updates on various financial indices, including unemployment rates, gross domestic product, bond yields. He reviewed the investment objectives of the City and those required by the State of California. The City’s portfolio conforms and complies with those regulations. He reviewed the City’s portfolio characteristics including average maturity and yields as of August 31, 2020. In response to Committee Member Collopy’s inquiry, Finance Director/Treasurer Matusiewicz clarified “short-term” means the two-year range to the City, and a two-year treasury bond would be 14 basis points therefore the income yield of 2.14% and price return is closer to 4%. Mr. Schmidt noted the City is earning approximately 2% from an income basis on the portfolio which is closer to 4% due to price depreciation. He advised future maturing securities will need to be reinvested. Mr. Schmidt continued with his presentation reviewing sector distribution and issuers of securities being held in the portfolio. He stated he has no concerns although issues would be raised with staff should they arise. He advised the City’s rate of return exceeded the goals over many intervals since the inception of the portfolio in 1991. He concluded his presentation by showing how the City’s smaller short-term holdings earned 16 basis points over the past three months. Mayor/Chair O’Neill opened public comments and seeing no speakers, closed public comments. In response to Committee Member Tucker’s inquiry, Finance Director/Treasurer Matusiewicz clarified the general fund’s portion of the investment portfolio is about $90 million. B. ANNUAL INVESTMENT POLICY REVIEW AND UPDATE Summary: 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. 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. Recommended Action: Receive and file Finance Committee Meeting Agenda September 24, 2020 Page 2 Finance Director/Treasurer Dan Matusiewicz provided a brief update as a review of the City’s Investment Policy is required by City policy each year. There are no changes recommended at this time. Mayor/Chair O’Neill commented this is the first time since in his tenure on the Finance Committee no modifications were required. He noted discussions have been historically robust and centered on percentages of money invested in a single area. Mayor/Chair O’Neill opened public comment. Charles Klobe commented that Mr. Schmidt’s slideshow was not on the agenda and inquired if it would be made available. Finance Director/Treasurer Matusiewicz advised he would send it directly to Mr. Klobe. Mayor/Chair O’Neill advised it would be part of the minutes when posted. Mayor/Chair O’Neill closed public comment. C. FIRE STATION 2 - BOND AUTHORIZATION RECOMMENDATION Summary: Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Recommended Action: Receive and file. Finance Director/Treasurer Matusiewicz provided a brief update recommending financing Fire Station 2 to take advantage of low-interest rates and preserving cash during the COVID-19 pandemic. He explained current market conditions provide for a very advantageous borrowing condition and would be a Certificates of Participation (COP) structured with a 10-year lockout with a par call at 10 years. Lastly, he reported the City is looking to issue premium bonds. Mark Young of KNN Public Finance, the City’s Independent Registered Municipal Advisor (IRMA) joined. He reported he prepared an independent analysis of several structuring alternatives in May 2020. He prepared alternative financing scenarios for 10, 15, 20, and 30-years with a total cost of issuance of approximately $167,000 for the $9.5 million project. He noted the options also consider the City’s interest to minimize interest costs during the construction period and recommend using an asset transfer structure utilizing two (2) existing fire stations which allows for lease payments. Lastly, he recommends selecting Standard & Poor’s as the sole rating agency for the financing since lease payments are due no sooner than three months into the fiscal year and do not require a debt service reserve fund due to the City’s AAA credit rating. Finance Director/Treasurer Matusiewicz requested KNN to update their analysis to 10, 15, and 20-year scenarios, identify the process of selecting an underwriter, and develop the method of sale. Mr. Young recommended the City pursue a negotiated public sale and a Request for Purchase (RFP) was prepared and sent to 23 firms which received five (5) responses. Mr. Young stated that Stifel Nicolaus was selected as the underwriter. Lastly, he feels 10 years is a responsible approach to financing the fire station and supports Finance Director/Treasurer Matusiewicz recommendations. Finance Director/Treasurer Matusiewicz advised if the Finance Committee should move forward, City Council would authorize the issuance of bonds on November 10th. He advised City Council may want to consider either setting the project not to exceed $10 million or setting a higher amount to account for unforeseen future construction and materials costs. In response to Finance Director/Treasurer Matusiewicz’s inquiry, Mayor/Chair O’Neill provided the background of how the City’s ability to pay for the project was directly impacted by COVID-19’s budgetary alterations which have necessitated a debt instrument. He advised City Council voted in favor of the safer option of incurring the cost of the project over 10 years. Mayor/Chair O’Neill believes in fiscal conservatism moving forward as the economy recovers and the 10-year interest Finance Committee Meeting Agenda September 24, 2020 Page 2 value is worth buying the security if needed in the future. Mayor/Chair O’Neill expressed his interest in not exceeding 10 years with the belief the City Council would agree and noted the City’s ability to pay off the debt for the 10 years. Mayor/Chair O’Neill commented construction costs are expensive right now. He advised the City opened its RFP process on September 23 and expects to have bids in hand by the end of October to bring it to the City Council at its first November meeting looking for both approvals of the bid and the financing documents. He expects the bid to come in higher than the RFP requested. Mayor/Chair O’Neill advised the Finance Committee needs to formulate a formal recommendation to the City Council on financing the project versus paying from cash reserves and the length of the financing should they go that route. Finance Director/Treasurer Matusiewicz added the need for a recommendation on a maximum interest rate, the need for a maximum term, and a need for the maximum amount of bonds issued and any deviation from a 10-year no call or call at par. Committee Member Collopy expressed concerns about expending the City’s revenues due to the pandemic’s uncertainty. However, he believes 10-year financing is the right decision given the historically low rates and it would still be a good idea even if the City’s revenues had not dropped so dramatically. Mayor/Chair O’Neill clarified the City has done better than the initial adjustments revisions and expect to be doing better at the end of the current quarter than what had been budgeted. Finance Director/Treasurer Matusiewicz added it will be good to see if this is continuing when the first-quarter results are available. Committee Member Tucker commented it is hard to call it financing with the interest rate is so low. In response to Committee Member Tucker’s inquiry, Mr. Young explained the difference between coupon rate and yield when offering a 10-year non-callable bond. He explained that with a 2% coupon and a stated yield of 0.2%, the City would be paying the same amount back as a borrower. He commented that in the event of a rising interest rate environment the bond may need to be sold at a discount before it matures. In that event, he clarified that if the bond is purchased at a premium rate (4%) some interest will be lost but investors still get 100% of the principal invested. In response to Committee Member Tucker’s inquiry, Mr. Young disagreed that the true interest cost has no inflation assumption and explained each of the maturities will have a fixed interest rate. Committee Member Tucker relayed some of his past experiences with construction projects and expressed the quality of the assets built has been very high so he would not focus too much on value engineering because it leaves people to wonder where the money was spent. Mayor/Chair O’Neill responded there was discussion of bringing it back to the City Council to do some value engineering but the view was they have reached the minimum of what is expected and the expectations of the community on public safety are not worth cutting corners. Committee Member Tucker again expressed the payments are effectively the principal and his assumption is the City will follow its previous guidelines for a pre-payment penalty. Committee Member Stapleton echoed the previous sentiments about the historically low rates and potential pandemic-related complications and supports the recommendations. Committee Member Tucker commented if interest rates rise in the marketplace, hypothetically this could get to the point where there is no cost to the City with a make-whole call. Mr. Young confirmed calls shorter than 10 years can be included in a tax-exempt transaction but at a slight cost. Finance Committee Meeting Agenda September 24, 2020 Page 2 In response to Chair O’Neill’s inquiry, Mr. Young responded that for a highly-rated transaction of relatively modest size, the City’s current timeline is good but they would not want the process to extend to Thanksgiving week and if there are delays to the City’s projected timeline, he would recommend waiting until January to price the bonds. In response to Council Member Brenner’s inquiry, Mr. Young responded the retail marketing plan was part of the underwriter RFP. He advised the top two (2) candidates have offices either in Newport Beach or close by and highlighted the billions of dollars in municipal securities held by Orange County residents. Newport Beach bonds are scarce and rated AAA so he expects them to go quickly both within Newport Beach and within surrounding communities. Additionally, he advised since the meetings are public the underwriter can begin premarketing to investors. Mr. Young confirms this was a criteria and one of the reasons for selecting Stifel Nicolaus. In response to Finance Director/Treasurer Matusiewicz’s inquiry, Mr. Young confirmed it would be in the best interest of Newport Beach residents looking to partake in these bonds to open a brokerage account with Stifel Nicolaus adding that Stifel Nicolaus does not have a brokerage agreement with other investment firms like Fidelity. Lastly, Mr. Young added there is a fair amount of Newport Beach residents who already have Stifel Nicolaus as their broker. Mayor/Chair O’Neill opened public comments. Mr. Mosher expressed his belief fire stations should be named geographically and the agenda mentions this as a new Lido Fire Station. He hopes this decision has not been made officially because the station is not on Lido Isle or in Lido Village so the name would be a mistake. Mr. Mosher also expressed his view of Newport Beach always priding itself on having a Facilities Financing Plan (FFP) which demonstrates an ability to pay for anticipated costs without borrowing. He expressed his aversion to government borrowing since the City has an extra cost involved in repaying the bondholder. He inquired if the urgency is necessary if interest rates are expected to remain low for the next five years. Mr. Klobe expressed his belief the recommendation seems like a “no-brainer” given the interest rates and how the City is earning more on its cash reserves than it is paying in interest and referenced Robert Citron as an example of not over-borrowing. Mayor/Chair O’Neill agreed the City will not “go Robert Citron” on borrowing. Committee Member Tucker commented the City will not be earning more on its cash reserves if this interest rate environment persists because of its short-term investments but the proposal is hard to resist because the borrowing costs are so low. Chair O’Neil closed public comments. Mayor/Chair O’Neill expressed his belief Mr. Mosher’s point about the name of the station is a good and fair one and asked that it no longer be referred to as Lido Station. Finance Director/Treasurer Matusiewicz agreed to follow the City Council’s lead on an eventual name. Committee Member Tucker stated that the name is proposed as Lido because Lido is the largest service area for that station. Mayor/Chair O’Neill stated it is time to call it something else per Mr. Mosher’s argument. Mayor/Chair O’Neill expressed belief the cost will exceed $10 million. He suggested the committee not include a highest amount in its recommendation until receiving construction bids. He endorses recommending a maximum length of 10 years and a maximum interest of 2%. Finance Director/Treasurer Matusiewicz clarified the resolution will include those parameters and City Council can give direction to the maximum expenditure. City Manager Leung added the bids are timed so this information will be known before the resolution advancing to City Council. MOTION: Mayor/Chair O’Neill moved the Finance Committee recommend the City Council pursue financing options for Fire Station 2 at a length not to exceed 10 years with a maximum interest rate of 2% and a total amount to be based upon the construction bids to be received, seconded by Committee Member Reed. The motion carried unanimously by acclamation. Finance Committee Meeting Agenda September 24, 2020 Page 2 D. INTERNAL AUDIT PLAN UPDATE Summary: This update summarizes all internal audit activities to date including the findings of the Enterprise Risk Assessment and the Internal Controls Review report. Working in collaboration with City management, Moss Adams prepared a recommended internal audit program for Fiscal Year 2020-21 that focuses on addressing priorities from the risk assessment and internal controls review. Recommended Action: Receive and discuss the reports and provide recommendations for City Manager consideration. Deputy Director/Finance Steve Montano reported Moss Adams LLP is the City’s outsourced Internal Auditor and has been conducting an Enterprise Risk Assessment and an Internal Control Review for several months. Mark Steranka, Moss Adams, provided a brief overview and explained the process is designed for a multi-year evaluation due to the number of departments under the City’s oversight. Colleen Rizollis, Moss Adams, explained the purpose of the project is to reduce risk, strengthen controls, and improve effectiveness to be better stewards of public funds and assessed over 18 categories. She advised the process involved an exhaustive series of interviews with city employees, a large collection of data, and using their experience with other cities to help determine a set of best practices for Newport Beach. Ms. Rozillis praised the City for having just one (1) high-risk category (Procurement and Contracting) and only five (five) moderate to high-risk categories. She noted Purchasing is frequently reported as a pain point in these studies and such was the case in Newport Beach. She attributed it to recent workflow changes that require greater scrutiny through added levels of review. She also found limited capacity despite the work of dedicated employees who wear multiple hats. She noted this is an area of concern because it can have a ripple effect across the entire city. The recommended action is to see if the process can be streamlined to better balance the workload. Ms. Rozillis provided a brief overview of the five (5) moderate to high-risk categories. She explained External risk is often high in California due to potential hazards of geography and natural disasters along with state government compliance matters. She reported Organizational Structure and Staffing is an area where they found staffing gaps. She reported Information Technology was cited as another common issue in the study but has come to light more frequently during the pandemic with more people relying on remote technologies and home Wi-Fi. Additionally, there has been an increased awareness of cybersecurity-related issues, but Ms. Rozillis commended the City on its work in this subsection the past few years. She endorsed increased automation to improve efficiency. Ms. Rozillis noted the City does not have a strategic plan outside of Financial Health Planning and encouraged ongoing discussions about a Strategic Goal Measurement Plan. She noted there are risk programs that relate to Emergency Management and expects this area will receive more funding and attention from municipalities nationwide through lessons learned from the COVID-19 pandemic. Lastly, Ms. Rozillis stated there were also some concerns about employee safety which arose during the interview process. In response to Committee Member Collopy’s inquiry, Ms. Rozillis cited Fort Collins, Colorado as a City with a robust Performance Measurement System and offered to provide many others she considers strong in this area if requested. Halie Garcia, Moss Adams, summarized an Internal Controls Review which she explained is a high-level city-wide analysis to see if established internal controls exist and if they are effective. She explained Moss Adams assessed the existing controls, tested employees attempting to find errors, and tested results. She advised Moss Adams found opportunities for improvement in all of the 10 areas they looked at which include Purchasing and Contract Management, Accounts Receivable, Accounts Payable, Fixed Asset Management, Inventory Management, Financial Reporting, Budgeting, Payroll, Information Technology, and the overall control environment. Ms. Finance Committee Meeting Agenda September 24, 2020 Page 2 Garcia stated this is not abnormal and noted some of the most frequent high-risk control issues arose from Inventory Management, Cash Handling, and Purchasing. She expressed an accepting attitude, an eagerness around the City staff to make changes, and an honest environment about the issues. Lastly, she stated her findings often found the issues stem from lack of resources and lack of policies and noted several quick fixes are obvious such as segregation of duties or implementation of simple reviews. In response to Committee Member Reed inquiry, Ms. Garcia clarified the labeling of the high impact column are things which could result in a material misstatement of financial information, misappropriation of City assets, or possibly public perception among other risks. She noted it applies to a wide variety of things where if something went wrong the impact could be largely negative for the City. She advised these areas were vetted through management to ensure they were rated correctly categorically. In response to Council Member Brenner’s inquiry, City Manager Leung explained this is being done specifically because they have limited resources and so that managers have a better sense of what to prioritize as they strategically tighten up their departments. She added that this process is not unusual for an organization as complex as Newport Beach and it is good to have an outside perspective and assessment of areas of risk. Mr. Steranka explained Moss Adams’ next step is to compile a list to present to management to assess where to focus first based upon priority. He presented 11 areas which include six (6) internal control related and five (5) performance and risk focused. As an example, off of the list, Mr. Steranka highlighted the policy inventory and implementation plan area from the performance and risk-focused section. He explained a lack of policies or updating outdated policies is a relatively easy fix but can be time-consuming. He advised policies are always good not only for work-place control but also for the protection of institutional knowledge as staff turns over or are unavailable at a point in time. Mr. Steranka recommended performing an inventory of fiscal policies to update outdated sections and find gaps, a Procurement Operational Review with a test of the internal controls, assessing inventory control methodology, and finally preparing a FY 2021-22 Internal Audit Plan after managing this program. Committee Member Tucker expressed his pleasure with this extensive project likening it to the type of approach a Fiduciary would take. In response to Committee Member Tucker’s inquiry, City Manager Leung reported the end of this process would likely be regular implementation reports. Committee Member Collopy praised the report for exceeding his expectations. He commented in response to Committee Member Tucker’s point that implementation should not be Moss Adams’ responsibility but the City’s to make it a living document. He retracted his initial outrage at outsourcing an internal audit and praised Finance Director/Treasurer Matusiewicz and Deputy Director/Finance Montano for the decision based on their report. In response to Committee Member Collopy’s inquiry, City Manager Leung stated the City has to take ownership of the report’s recommendations, but further adjustments could come in further consultation with Moss Adams or others. She expressed that it should live between the City Manager’s Office and the Finance Department, but the goal should be to make it a living document. She added the assessment was occurring right as the pandemic hit which may have presented challenges in obtaining responses from staff members so there could be additional areas to target with another round of assessment. Mayor Pro Tem Avery expressed his support of the project and relayed how frequently these audit types discover flaws which need to be balanced by trust in employees while also creating an environment where the policies do not go over the top. Finance Committee Meeting Agenda September 24, 2020 Page 2 In response to Council Member Brenner’s inquiries, City Manager Leung was unable to immediately determine where fines collected exceed the City’s costs and offered to work offline on that with Council Member Brenner. She also explained it is not simple to state how well the City staff enforces laws particularly due to the discretionary measures built into certain laws. She advised is an operational issue and not part of an audit like this. Mayor/Chair O’Neill opened public comments. Mr. Mosher was pleased to see what he believes to be the unvarnished opinion of the outside auditor. He was pleased to report the Library staff was doing an inventory of all items valued at over $500 with pleasure. He doubts they were using all of the suggestions from the Moss Adams report but hopes they will in the future. Nancy Scarborough recalled the Director of Utilities for Newport Beach was arrested for stealing $1.2 million in 1982 so she is particularly thankful for this report because bad things can even happen in typically well-run Newport Beach. Mayor/Chair O’Neill closed public comments. 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 and file. Mayor/Chair O’Neill stated the next meeting they include a CalPERS discussion. They will also look at how the first quarter ended along with the last fiscal year and make recommendations to the City Council for a midyear review of the budget. In response to Committee Member Collopy’s inquiry, Mayor/Chair O’Neill explained the next meeting is set for November and October to allow for proper assessment of the first quarter. Mayor/Chair O’Neill opened public comments. Mr. Moser asked if the CalPERS discussion needs to be deferred to November. Mayor/Chair O’Neill responded he did not believe a separate meeting had to be set up to discuss it and it also makes sense to discuss in conjunction with a discussion about potential budget adjustments. Mayor/Chair O’Neill closed public comments. II. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) None III. ADJOURNMENT The Finance Committee adjourned at 5:12 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 September 18, 2020, at 4:35 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. November 19, 2020, 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 SEPTEMBER 24, 2020 Changes to the draft minutes passages shown in italics are suggested in strikeout underline format. The page numbers are those of the agenda packet since all the pages of the minutes are labeled “page 2”. Agenda packet page 5, Item III, paragraph 3: “Mayor Chair Mayor/Chair O’Neill noted he would be more cognizant of public participation at meetings. He stated there has not been a significant impact on the City’s budget due to COVID-19 worse than what was expected and he is anticipating the Finance Committee will review the City’s budget once the first quarter of the fiscal year is complete.” [My recollection is the statement was that although the budget had obviously been impacted, the observed impacts were less than anticipated.] Page 5, Item A, paragraph 2, sentence 5: “He provided brief updates on various financial indices, including unemployment rates, gross domestic product, and bond yields.” Page 6, paragraph 2: “Mayor/Chair O’Neill commented this is the first time since in his tenure on the Finance Committee when no modifications were required.” Page 6, Item C, paragraph 3, last sentence: “Lastly, he feels 10 years is a responsible approach to financing the fire station and supports Finance Director/Treasurer Matusiewicz Matusiewicz’s recommendations.” Page 7, paragraph 6, last sentence: “Committee Member Tucker commented it is hard to call it financing with when the interest rate is so low.” Page 10, paragraph 2, sentence 1: “In response to Committee Member Reed Reed’s inquiry, Ms. Garcia clarified the labeling of the high impact column are things which could result in a material misstatement of financial information, misappropriation of City assets, or possibly public perception among other risks.” Page 11, paragraph 1, last sentence: “She advised this is an operational issue and not part of an audit like this.” Page 11, paragraph 3, sentence 2: “He was pleased to report the Library staff was doing an inventory of all items valued at over $500 with pleasure.” Page 11, Item E, paragraph 1: “Mayor/Chair O’Neill stated the next meeting they will include a CalPERS discussion.” Page 11, Item E, paragraph 2: “In response to Committee Member Collopy’s inquiry, Mayor/Chair O’Neill explained the next meeting is set for November and or October to allow for proper assessment of the first quarter.” [or was it “instead of” ?] Page 11, Item E, paragraph 4: “Mr. Moser Mosher asked if the CalPERS discussion needs to be deferred to November.” 11 CalPERS Update 22 Highlights •June 30,2019 Annual Valuation Report shows continued progress in paying downunfundedliability •Funded status went from 66.9%to 68.7% •Demographic factors came in as forecast by PERS •Upcoming factors to impact City’s unfunded liability: •June 30,2020 PERS Return of 4.7% •Experience study changes •Additional Discretionary Payments (ADPs) •The bulk of the City’s unfunded liability is structured in a required paydown schedule •Determining ADPs beyond Council Policy should be evaluated each year based onfiscalpositionandPERSresults 33 CalPERS Valuation •Annual Valuation Report received in July 2020 has data as of June 30,2019 •2019 Valuation Report sets rates for FY 2021-22 •2-year lag in data results getting into the rates •Investment return for June 30,2019 was 6.7% •Just below assumed rate of 7.0% 44 Pension Costs Sensitive to Investment Earnings 55 CalPERS History of Investment Returns 66 3 Year UAL Trend 2017 2018 2019 Dollars Percent Investment Returns 11.2%8.6%6.7% Accrued Liability 939,503,861 1,006,978,316 1,044,080,301 37,101,985 3.7% Less: Market Value of Assets 619,834,899 673,843,069 717,790,440 43,947,371 6.5% Unfunded Accrued Liability (UAL) 319,668,962 333,135,247 326,289,861 (6,845,386) -2.1% Funded Status 66.0%66.9%68.7% ChangeFiscal Year 77 Plan Maturity Measures Ratio of Retiree Accrued Liability to Total Accrued Liability *MISC SAFETY TOTAL 1. Retiree Accrued Liability 253,660,483 430,107,653 683,768,136 2. Total Accrued Liability 442,487,002 601,593,299 1,044,080,301 3. Ratio of Retiree AL to Total AL [(1) / (2)]57%71%65% * A mature plan will have a ratio above 60-65% Support Ratio *MISC SAFETY TOTAL 1. Number of Actives 526 268 794 2. Number of Retirees 688 447 1135 3. Support Ratio [(1) / (2)]0.76 0.60 0.70 * A mature plan will often have a ratio near or below one. The average support ratio for CalPERS public agency plans is 1.25 June 30, 2019 June 30, 2019 88 Pension Tiers Over Time 99 Discount Rate Sensitivity 1% Lower Current 1% Higher Real Return Rate Assumptions Real Return Rate Discount Rate 6.0%7.0%8.0% Inflation 2.5%2.5%2.5% Real Rate of Return 3.5%4.5%5.5% a) Total Normal Cost 23,559,257$ 18,556,856$ 14,767,732$ b) Accrued Liability 1,181,794,962$ 1,044,080,301$ 930,319,015$ c) Market Value of Assets 717,790,440$ 717,790,440$ 717,790,440$ d) Unfunded Liability/(Surplus) [(b) - (c )]464,004,522$ 326,289,861$ 212,528,575$ e) Funded Status 60.7%68.7%77.2% As of 6/30/19 Misc & Safety Combined 1010 2020 Investment Loss Baseline Actual Return Return Assumed Return:7.0%4.7% Accrued Liability 1,081.73$ 1,081.73$ Market Value of Assets 768.88$ 752.36$ Funded Ratio 71.08%69.55% UAL 312.85$ 329.37$ 2020 Expected Investment Loss:(16.52)$ 2020 Investment Loss 1111 UAL Funded Status ∙ Includes current ADP of $10.9M, 4.7% FY 20 return, 6%/7%/8% for next 9 years, & 7% for next 20 years. 1212 UAL Balance ∙ Includes current ADP of $10.9M, with 4.7% 1 year return and 7% assumed return thereafter 1313 Amortization Schedules Yr Val Yr Pmt Yr Balance Min Payment Balance Min Payment Balance Min Payment Balance Min Payment Min Payment 2018 2021 310,684,151 29,190,322 312,850,000 40,000,000 312,850,000 40,000,000 312,850,000 40,000,000 40,000,000 1 2019 2022 302,237,337 29,993,056 295,215,279 35,000,000 329,370,000 29,230,436 329,370,000 35,000,000 40,000,000 2 2020 2023 292,368,893 30,817,865 279,676,067 35,000,000 304,545,511 30,537,257 298,577,427 35,000,000 40,000,000 3 2021 2024 280,956,468 31,665,356 263,049,110 35,000,000 294,275,712 31,866,070 283,273,566 35,000,000 40,000,000 4 2022 2025 267,868,522 32,536,153 245,258,266 35,000,000 281,912,493 33,217,478 266,898,434 35,000,000 40,000,000 5 2023 2026 252,963,659 33,430,898 226,222,064 35,000,000 267,285,941 34,592,104 249,377,043 35,000,000 40,000,000 6 2024 2027 236,089,926 34,350,247 205,853,326 35,000,000 250,213,607 35,896,701 230,629,154 35,000,000 40,000,000 7 2025 2028 217,084,049 35,294,879 184,058,778 35,000,000 230,596,724 36,812,551 210,568,913 35,000,000 40,000,000 8 2026 2029 195,770,625 36,265,488 160,738,611 35,000,000 208,659,296 37,753,586 189,104,456 35,000,000 40,000,000 9 2027 2030 171,961,256 37,262,789 135,786,032 35,000,000 184,212,833 38,720,501 166,137,486 35,000,000 40,000,000 10 2028 2031 145,453,615 38,287,516 109,086,773 35,000,000 157,054,934 39,714,005 141,562,829 35,673,924 40,000,000 11 2029 2032 116,030,454 39,340,423 80,518,565 35,000,000 126,968,293 40,734,831 114,570,833 36,583,647 11,189,385 12 2030 2033 83,458,536 40,422,284 49,950,583 35,000,000 93,719,637 41,783,729 84,748,373 37,518,388 11,425,784 13 2031 2034 47,487,497 41,533,897 17,242,843 17,857,771 57,058,586 42,861,472 51,871,436 38,478,834 11,668,683 14 2032 2035 7,848,625 1,493,823 16,716,435 17,291,615 15,699,621 16,239,814 16,239,814 15 2033 2036 6,852,806 1,534,903 16 2034 2037 5,744,786 1,577,113 17 2035 2038 4,515,542 1,620,484 18 2036 2039 3,155,388 1,665,047 19 2037 2040 1,653,928 1,710,836 20 2038 2041 21 2039 2042 - - Totals 499,993,381$ 477,857,771$ 531,012,335$ 519,494,607$ 490,523,666$ Savings:11,517,728$ 40,488,669$ ^ includes 10.9 ADP in FY 21 $40M - ongoing pymt plan2020-21 Last Year PERS AV Current PERS AV + ADP + 2020 loss (includes updated FY 20 actual of 4.7%) + ADP (amortized using $35M pymts) Current PERS AV + ADP (assumed @ 7% instead of 4.7% actual) 1414 Orange County Comparison –Non Pooled Plans Agency UAL FS UAL FS UAL Total Pmts Interest Interest as a % of Total Pmts Pmt Efficiency (Total Pmt/UAL)AL GF Rev Total Increase % Change City of Anaheim Total 817,206,799 69.9%839,881,082 70.2%839,491,587 1,503,725,155 664,233,568 44%179%5.1%7.0%22,674,283 2.8% City of Brea Total 137,197,808 67.0%138,983,535 67.5%139,822,469 260,692,518 120,870,049 46%186%4.8%5.5%1,785,727 1.3% City of Buena Park Total *43,880,059 69.7%43,141,214 70.8%42,763,241 75,335,177 32,571,936 43%176%3.7%2.0%(738,845) -1.7% City of Costa Mesa Total 230,585,371 61.5%233,351,350 62.1%232,684,288 432,855,820 200,171,532 46%186%4.3%6.0%2,765,979 1.2% City of Cypress Total *21,626,496 74.2%22,702,629 73.8%22,807,873 41,018,465 18,210,592 44%180%5.1%4.5%1,076,133 5.0% City of Fullerton Total 256,281,657 68.1%266,580,939 67.8%269,746,927 505,078,794 235,331,867 47%187%4.3%5.6%10,299,282 4.0% City of Garden Grove Total 299,230,497 65.7%309,333,035 65.8%310,938,597 577,085,643 266,147,046 46%186%5.2%7.8%10,102,538 3.4% City of Huntington Beach Total 436,173,154 67.7%435,994,236 68.6%433,556,466 790,433,427 356,876,961 45%182%4.6%3.0%(178,918) 0.0% City of Irvine Total 167,287,377 76.6%158,377,077 79.0%146,752,118 252,595,026 105,842,908 42%172%8.1%5.9%(8,910,300) -5.3% City of La Habra Total *29,579,036 75.0%31,582,979 74.7%31,867,433 56,848,409 24,980,976 44%178%6.4%5.2%2,003,943 6.8% City of Laguna Beach Total *29,882,593 75.0%30,395,977 75.8%30,360,164 51,589,197 21,229,033 41%170%5.9%1.4%513,384 1.7% City of Mission Viejo Total *22,196,041 75.6%22,081,104 76.9%21,715,815 35,952,749 14,236,934 40%166%7.2%3.7%(114,937) -0.5% City of Newport Beach Total 333,135,247 66.9%326,289,861 68.7%305,657,238 477,580,483 171,923,245 36%156%5.0%5.7%(6,845,386) -2.1% City of Orange Total 280,577,514 69.1%288,404,662 69.3%290,306,567 536,626,163 246,319,596 46%185%4.8%5.7%7,827,148 2.8% City of Santa Ana Total 681,096,340 67.2%706,905,205 67.0%709,855,463 1,298,053,611 588,198,148 45%183%4.1%5.1%25,808,865 3.8% City of Tustin Total *29,818,507 75.5%29,008,653 77.3%27,463,092 47,860,024 20,396,932 43%174%6.3%4.9%(809,854) -2.7% City of Westminster Total *43,384,139 68.1%46,144,970 67.6%46,287,475 83,016,449 36,728,974 44%179%4.4%7.9%2,760,831 6.4% City of Yorba Linda Total *23,227,948 69.3%23,179,394 70.5%22,809,793 41,552,893 18,743,100 45%182%5.5%4.0%(48,554) -0.2% Irvine Ranch Water District Total *71,700,383 74.7%75,343,820 74.7%74,413,348 122,742,407 48,329,059 39%165%6.3%6.6%3,643,437 5.1% Santa Margarita Water District Total *33,689,685 67.6%35,335,129 67.8%35,424,868 63,681,624 28,256,756 44%180%6.8%4.4%1,645,444 4.9% Grand Totals 3,987,756,651 68.7%4,063,016,851 69.2%4,034,724,822 7,254,324,034 3,219,599,212 44%180%5.0%5.4%75,260,200 1.9% * = Miscellaneous Only Annualized growth 2014 -2019 Change in UAL 2018 to 20192018 Valuation 2019 Valuation 2021 ROLL FORWARD 1515 Summary •City’s Required Contribution Schedule and Council policy on ADPs has set up adisciplinedapproachtopayingdownthebulkoftheunfundedpensionliabilityby2034 •PERS hitting their assumed 7%rate of return over the short and long term is aconcern •Future positive impacts to our pension plans:increasing turnover to PEPRAformulaemployees,changes to mortality rates •Consider increasing the ADP,for a total pension contribution of $40M,duringthedevelopmentoftheFY2021-22 Budget •Annual determination provides City financial flexibility CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5B November 19, 2020 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Finance Department Carol Jacobs, Assistant City Manager/Interim Finance Director 949-644-3213, cjacobs@newportbeachca.gov SUBJECT: Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report SUMMARY: This report contains preliminary information on revenues, expenditures and estimated fund balance for the fiscal year ending June 30, 2020 and financial information through the first quarter (September 2020) of FY 2020-21. Because the City’s financial records are undergoing the customary audit review, the financial information presented in this report for the fiscal year ending June 30, 2020 is preliminary in nature and subject to adjustments as the year-end close process continues through December. The actual revenue results ended up much better than anticipated. General Fund revenues ended FY 2019-20 at $229.8 million and were, $10.9 million or 5%, higher than the projected budget in almost all categories. General Fund expenditures ended FY 2019-20 at $211.1 million and were $3.9 million, or 1.8%, lower than the projected budget in almost all categories. Actual expenditures ended the year lower than budgeted due to the careful management of operating expenditures (hiring freeze and the curtailment of other expenditures) and budget adjustments during the last quarter of the fiscal year. The first financial report of FY 2020-21 provides an analysis of the financial activity of the City from the months of July through September 2020. Year to date activity of the General Fund shows that revenues through quarter 1 are coming in higher, and expenditures lower, than projected. As the economy continues to improve, these trends are likely to continue; however, a great deal is unknown as the global pandemic continues. RECOMMENDED ACTION: Review and discuss this report and provide recommendations for City Manager and City Council consideration. Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 2 DISCUSSION: Economic Overview The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the outbreak. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. California’s unemployment rate averaged a record-high 15.9 percent in the second quarter of 2020, up from 4.4 percent in the first quarter and 3.6 percentage-points higher than the previous record of 12.3 percent during the Great Recession. California’s nonfarm jobs decreased by 2.3 million or 13.0 percent in the second quarter. For California and the nation, job losses were largest for low-wage sectors, with leisure and hospitality losing around 40 percent of its total jobs over one quarter. According to Gary Sherwin, President and CEO of Visit Newport Beach, citywide hotel occupancy is currently averaging about 40 percent a week, when at this time of the year, occupancy is typically about 85 percent. There are few, if any, international guests and most business is regional. Two hotels, the Renaissance Newport Beach and Fashion Island Hotel, remain closed and several of the other hotels are not offering all their rooms for occupancy to promote social distancing. Properties like Lido House with its 130 rooms are doing strong business. Overall weekend business is also showing life and the average daily rate, a barometer of hotel health, is at $290 a night, about 15 percent lower than last year. Restaurants with outdoor patios are doing well, although overall volume is down with indoor dining off limits for now. General Fund Revenues The swift reaction by consumers and businesses to the outbreak of coronavirus (COVID-19) in Newport Beach caused a massive decrease in spending on certain goods and services. The national and state response combined with the uncertainty of how long the presence of the virus would disrupt the U.S. economy made forecasting revenues particularly challenging. The City’s revised FY 2019-20 revenue forecast and associated budget amendment was presented to, and approved by, the City Council on April 28, 2020. General Fund revenues were reduced by $13 million and provisions were made to realize at least $13 million in expenditure savings for the remainder of the fiscal year as a “bridge” solution to narrow the revenue shortfall chasm. The actual revenue results ended up being much better than anticipated. General Fund revenues ended FY 2019-20 at $229.8 million and were, $10.9 million or 5%, higher than the projected budget in almost all categories. The total revenue receipts nearly match that of the prior year General Fund revenue receipts. This report also contains information on General Fund revenues for the first quarter of FY 2020-21, which is the period from July 1, 2020, to Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 3 September 30, 2020. Revenue categories are likely to perform at or higher than their projected levels this year due to more favorable economic conditions than anticipated when the budget was developed in April. Higher property tax valuations within the City are also expected. General Fund Revenues FY 2019-20 Year-End Results General Fund Revenues FY 2020-21 through Q1 (September 2020) Property Taxes - Property taxes are the single largest funding source and represent just under 50% of all General Fund revenues. FY 2019-20 property tax revenue was over $113.3 million, which is almost $0.6 million or 0.5% higher than projected and almost $5 million higher than prior year. Property tax revenue estimates decreased for FY 2019-20 in anticipation of economic hardship due to the pandemic and the Governor’s Executive A B C=B-A D=C/A Revenues by Category PY Actual Revised Budget Actual Variance % Variance Property Taxes 108,365,261 112,723,626 113,313,535 589,909 0.5% Sales Tax 38,502,470 34,411,405 36,232,969 1,821,564 5.3% Transient Occupancy Tax 24,697,446 19,062,031 20,847,883 1,785,852 9.4% Other Taxes 11,327,777 10,841,170 11,846,082 1,004,912 9.3% Service Fees & Charges 20,300,379 18,820,002 20,913,897 2,093,895 11.1% Parking Revenue 4,935,024 5,442,379 5,529,753 87,374 1.6% Licenses & Permits 5,071,609 4,567,521 4,752,252 184,731 4.0% Property Income 4,679,578 3,493,784 4,619,106 1,125,322 32.2% Fines & Penalties 3,454,660 3,089,260 3,659,011 569,751 18.4% Intergovernmental Revenues 3,922,453 2,854,873 3,140,547 285,674 10.0% Investment Earnings 1,484,828 1,505,673 1,295,547 -210,126 -14.0% Miscellaneous Revenues 3,071,110 2,252,529 3,759,851 1,507,322 66.9% Total Revenues $229,812,595 $219,064,253 $229,910,433 $10,846,180 4.95% Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 4 Order (N-61-20) suspending penalties and interest of property taxes. Secured property tax revenue, which makes up almost 85% of all property tax revenue, ended up coming in strong despite everything. Property taxes are among the least affected revenue sources by the pandemic (at least in the short term) as home valuations are assessed in January of one fiscal year and payments are made the following fiscal year. For FY 2020-21, property taxes are so far $292,000 less than projected for the quarter. This is largely due to the City’s first of three unsecured property tax payments coming in less than projected. These are value-based taxes not secured by property (ex. business property, boats, airplanes) and make up only about 2.6% of property tax revenue. Supplemental taxes (levied after change in ownership or completion of new construction) were down significantly for the first quarter; however, the first payment received in November is up 43% over the prior year. This bodes well for future secured property taxes. The first secured property tax payment received mid-November came in considerably higher than prior year which is hopefully an indication of people’s ability to make their property tax payments timely. Sales Tax - The second largest funding source for the General Fund is sales tax revenue, making up more than 15% of General Fund revenues. Sales Tax finished the year at $36.2 million, which is $1.8 million or 5.3% higher than projected. The City’s sales tax base is largely generated from three main industry categories including Autos and Transportation, General Consumer Goods, and Restaurants/Hotels. Most of these industries are also heavily impacted by tourism. At the onset of the pandemic, when businesses were shut down, sales tax revenue potential was drastically impacted. The projection for the year held that the same restrictions in place in April 2020 would remain for the remainder of the fiscal year. Sales Tax revenues were higher than anticipated because businesses pivoted in creative ways to reach their customers, they were able to open at some capacity sooner than expected, and consumer spending was relatively strong. For these reasons all three main industry categories performed better than expected. Although FY 2019-20 wasn’t as bad as budgeted, due to the severe impacts on economic activity we saw across all industry categories, sales taxes receipts were almost $2.3 million less than the prior year. FY 2020-21 sales tax revenues are coming in approximately $824,000 higher than expected. The California Department of Tax and Fee Administration (CDTFA) is using a new methodology to calculate sales tax advances. Our 3rd Quarter 2020 sales tax cleanup payment gets posted November 20, 2020. At the time of this meeting we will know how our payments compare to budget for the quarter as a whole. Transient Occupancy Tax - Transient occupancy tax (TOT) revenue was the most severely impacted revenue source as most major hotels within the City were temporarily closed towards the end of March 2020 and many didn’t start reopening until late May or early June. Also, short term rentals were not allowed in the City from early April 2020 until May 20, 2020. Revenue projections for FY 2019-20 were calculated with the expectation that hotels and short-term lodging would remain at severely reduced capacity through the Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 5 end of the fiscal year. Because hotels started opening up sooner than anticipated, FY 2019-20 transient occupancy tax receipts were $20.8 million, which is almost $1.8 million, or 9.4%, higher than projected. Even though TOT ended higher than projected, FY 2019- 20 revenue was $3.8 million less than the prior year. Although most hotels are up and running, with the exception of the Island Hotel and Renaissance Newport Beach, the vast majority remain well under full capacity. Staff budgeted FY 2020-21 TOT revenues extremely conservatively expecting to realize in the first quarter just 10% of prior year revenue. July 2020 hotel TOT came in at 37% of prior year and August 2020 came in at 48% of prior year. This resulted in revenues for the first quarter of FY 2020-21 coming in approximately $1.7 million over the projected budget for the quarter. As of September 30, 2020, the City collected a nominal amount of residential TOT revenue because such revenue for the quarter ended September 30, 2020, is not due to the City until October 31, 2020. Residential TOT receipts due October 31, 2020, which include agent payments for July 1, 2020 through September 30, 2020 and owner payments for October 1, 2019 through September 30, 2020, came in 0.76% higher than the prior year and approximately $2.7 million higher than projected (net of payments to Visit Newport Beach). We suspect this better than expected revenue performance is due to overnight visits in either hotels or short-term rentals from regional travelers looking for a quick “staycation” close to home. All Other Revenue – This category includes all other revenue sources other than the Top 3 (property tax, sales tax, and TOT). All Other Revenue is made up of the following: • Other Taxes – real property transfer taxes, business license taxes, marine charter taxes, and franchise fees. • Service Fees & Charges – plan check fees, recreation classes, emergency medical services fees, and numerous other cost-of-service fees. • Parking Revenue – all General Fund related metered parking fees that are assessed throughout the various parking zones of the City. • Licenses and Permits – fees charged to process building related permits, street closure permits, dog licenses, and police tow franchise fees. • Property Income – City owned and managed income producing properties, long- term ground leases to concessions, restaurants, hotels and other businesses and organizations, and rental of City facilities to the public. • Fines and Penalties – parking citation fines collected by the City, administrative citation fines, fines remitted to the City from the County for vehicle code violations, and false alarm penalties. • Intergovernmental Revenues – federal, state, and local grant revenues, which includes, but is not limited to, the City’s portion of the ½ cent sales tax revenue paid to the County for public safety, state mandate reimbursements, Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 6 reimbursement for strike teams sent to assist with fires, and revenue sharing with the County of Orange under the Waste Disposal Agreement (WDA). •Investment Earnings – revenue generated from the investment of City funds. •Miscellaneous Revenues – restricted revenue, damage to City property, bad debt,donations and contributions, non-operating revenues such as proceeds from thesale of materials and equipment, and other miscellaneous revenues. FY 2019-20 budget within this category was adjusted at the line item account level based on the trends we were seeing at the beginning of the pandemic and taking a conservative approach by estimating those trends would continue throughout the remainder of the fiscal year. While revenue was down at alarming rates starting mid-March through April, many of our revenues saw improvement as early as May and into June. There are multiple factors that contributed to Other Revenues ending higher in FY 2019-20, such as: •Other Taxes ended the year $1 million higher than projected. Sharper declines were budgeted in case businesses either closed down or didn’t renew their business licenses due to long term closures, home sales slowed excessively, andpeople weren’t able to pay their bills on time. •City Departments pivoted quickly modifying their procedures to ensure they could continue meeting customer needs. Some examples include, the Community Development Department and Public Works devised electronic and contactlessdrop off options to continue permit operations during the City Hall closure, buildinginspectors conducted remote video inspection for interiors, and Recreation andSenior Services provided modified outdoor camps and programs as well as created an online recreation center with virtual classes. These actions resulted in Service Fees & Charges (adjusted for recreation class refunds) ending the year$1.5 million higher than projected. •Parking revenues dropped dramatically beginning in mid-March 2020 as travel was impacted by COVID-19, statewide shut-downs began, and beach front parking lots were closed to the public. March 2020 parking revenues were just half of what theywere the prior year and April 2020 revenues were down 75% compared to the prioryear. However, by mid- to late-May 2020 people flocked to the beaches and westarted to see positive month over month revenue again. May 2020 parking revenue was almost 10% higher than the prior year and June 2020 was almost 26% higher than prior year. •At the beginning of the pandemic, the City received many inquiries and requestsfor payment waiver or deferral; however, as time progressed most income properties were able to make their scheduled payments. Between parking and property income, this resulted in $1.2 million in additional revenue over budget. •At the onset of the pandemic, parking citations issued by the Police Departmentas well as the City’s parking consultant decreased significantly. The Police Department stopped issuing street sweeping citations since many people were staying at home and the City’s parking consultant issued less citations due to the Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 7 closure of beach front parking lots and reduced activity within the City. As the beach parking lots opened back up in May 2020, and street sweeping enforcement resumed mid-June 2020, citation issuance increased as well. This contributed to Fines and Penalties ending the year over $0.5 million higher than budgeted. • Miscellaneous Revenues ended the year $1.5 million over projected revenue, this is primarily due to almost $770,000 in funding received from the CARES Act, booking fair value of investments, and refunds issued for cancelled recreation classes. When budgeting for FY 2020-21, revenue accounts other than the Top 3 (property tax, sales tax, and TOT) were, for the most part, reduced by 20% across the board. This was based on historical reductions to revenues during prior recessions and with the understanding that some accounts would come in higher than projected and others would come in lower. All other (than the top 3) revenue through September 30, 2020 is almost $889,000 higher than budgeted. Parking revenue in the first quarter came in incredibly strong, $824,000 over budget. This is due to the warm weather we had through, and beyond, summer and people seeking local options for exercise and entertainment. Intergovernmental Revenues are $526,000 higher than budgeted due to CARES Act funding from the California Department of Finance. Miscellaneous Revenues includes a $210,000 donation from the Friends of the Library. Grants and donations are typically not budgeted until awarded and therefore any new awards wouldn’t have been in our original forecast. Property Income within the first quarter is up almost $200,000 over budget and is due to rental property revenue coming in strong as well as some revenue that was deferred from FY 2019-20 to FY 2020-21. Other categories that are also performing over budget are Other Taxes and Licenses and Permits. Service Fees & Charges came in $1.2 million less than budgeted. This is due to a decrease in fees from Police activity (jail booking, emergency response, and alarm permit) and the Libraries being closed, but largely from Recreation summer programs and contract classes being severely limited. This decrease was offset somewhat by Community Development Department, Public Works, and the Fire Junior Lifeguard Services Fees & Charges revenues coming in higher than projected. Commensurate with the decrease in recreation revenue, there is approximately $780,000 in expenditure savings in contract instructor payments when compared to the prior year. General Fund Expenditures General Fund expenditures ended FY 2019-20 at $211.1 million and were $3.9 million, or 1.8%, lower than the projected budget in almost all categories. Actual expenditures ended the year lower than budgeted due to the careful management of operating expenditures (hiring freeze and the curtailment of other expenditures) and budget adjustments during the last quarter of the fiscal year. To align expenditures with reduced revenues, the City Council authorized a budget amendment that resulted in General Fund expenditure reductions of $13.8 million in FY 2019-20. Of this amount, $7.7 million in expenditure reductions derived from most operating expenditure categories and the remainder from transfers out to other funds and the close out of completed capital projects. In most cases, these were reductions that did not impact service levels and Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 8 would have materialized as savings at year end. Actual expenditure reductions totaled $17.7 million. With 25% of the year complete, FY 2020-21 General Fund expenditures are at 21.6% of the budget and are generally on-track. Expenditures through the first quarter of the year are $3.4 million, or 1.5% lower than projected. Some departments incur a greater or lower level of expenditures in the first half of the year than in the second half due to the timing and seasonality of their operations or programs. This variability is generally consistent with prior years. Existing appropriations are on target to fund all current operational expenditures and no further adjustments are needed as of the end of Q1. Other significant budget updates include the following (all currently covered with existing revised budget appropriations): • Department operating budgets were reduced an additional $2.9 million for FY 2020-21. • Expenditures relating to protests, beach closures, longer than normal beach season, increased visitation/crowds, 4th of July event, storms surge/flooding/emergencies, and beach berm reconstruction and clean-up are expected to be covered with existing expenditure appropriations. • The City has received approximately $4.0 million in CARES Act funding between fiscal years 2019-20 and 2020-21. Between March 2020 and September 30, 2020, we received a total of $3.5 million in CARES Act funding, with another $529,569 received in October of 2020. Of the total $4.0 million received to date, $72,314 was from the U.S. Department of Health & Human Services as part of the Provider Relief Fund to be used for healthcare related expenses or lost revenues; $2.1 million was from the County of Orange to provide grants to small business impacted by the pandemic; $769,758 from the County of Orange and $1.0 million from the State of California were both used to offset public safety activities during the pandemic. In addition to the CARES Act Funding, we also filed a $565,000 claim to the Federal Emergency Management Agency (FEMA). However, the disposition of this claim will not be known for some time. • Many departments have seen an increase in operating costs for janitorial and cleaning expenses related to COVID-19, including street sweeping, public facilities and restroom janitorial services, day porter services at the Central Library, and power washing for temporary outdoor dining. The current budget can fund all expenditures as of the end of Q1. • The Fire Department continues to provide staffing for Strike Team deployments. Reimbursement will be requested through Cal OES and expected to be received within the 2nd – 3rd quarters of FY 2020-21. The Fire Department has a new line item for the transparency of Strike Team expenditures, Strike Teams/Mutual Aid - 713010, which had expenditures of $775,000 through Q1. Other increased expenditures relating to COVID-19 for disposable medicine/EMS supplies for personal protective equipment have been absorbed by the Fire Department through Q1. Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 9 General Fund Expenditures FY 2019-20 Year-End Results General Fund Expenditures FY 2020-21 through Q1 (September 2020) Additional Pension Payment The City set aside a $5 million PERS reserve in anticipation of adverse investment results that would increase the City’s unfunded actuarial liability in the FY 2020-21 budget. The $5 million was reserved and not appropriated due to the onset of the COVID pandemic, with the intention to ask Council for appropriation based on the on-going review of the FY 2020-21 budget to actual results. It is recommended, based on quarter one results and FY 2020-21 projected revenues, to transfer the $5 million from the PERS set aside reserve to the operating budget to continue funding the total PERS unfunded liability budget for a total amount of $40 million in FY 2020-21. This action will act as a buffer against adverse investment results and continue the City’s goal of realigning our budget toward further reductions to the assumed discount rate. Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 10 General Fund Reserves We are fortunate that the City was in excellent financial health prior to the global pandemic. Conservative budgeting and sound financial policies have resulted in a trend of General Fund operating surpluses and strong reserve levels for several years. This is still no less the case even amid the significant economic downturn the City is currently experiencing. Conservative budgeting practices coupled with better than expected consumer demand have resulted in higher revenues and lower expenditures than budgeted. This has contributed towards the realization of unrestricted General Fund resources of $23.9 million at the end of Fiscal Year 2019-20 (see the General Fund Sources and Uses table below). Of this amount, $11.5 million derives from the FY 2018-19 surplus. Due to the time it takes to close a fiscal year and the timing of the annual budget schedule, a prior year surplus is not appropriated in the fiscal year that immediately follows, but in the subsequent fiscal year. Every budget adheres to Council policy regarding the use of prior year surplus funds. Roughly half of any surplus balance in any given year is allocated to address long term obligations with the remaining half allocated to various neighborhood enhancement capital projects. Due to the significant impact to the City’s revenue base resulting from the global pandemic, it was necessary to appropriate the FY 2018-19 surplus of $11.5 million to fund General Fund operations in FY 2020-21. The remaining $12.4 million of the $23.9 million unrestricted General Fund resources derives from the FY 2019-20 surplus (higher revenue and lower expenditure than budgeted), net of transfers in/out and restricted revenues. It was also necessary to balance the deficit that was projected for FY 2020-21 by using a short-term or "bridge" solution. This tiered solution relied on a combination of targeted reductions in operating accounts with underutilization trends, deferred capital project spending (see Attachment B for a list of CIP deferrals), reduced transfers to other funds and a $2.3 million draw from the Contingency Reserve. The General Fund Sources and Uses table that follows, depicts the performance of revenues and expenditures, the application and flow of prior year surpluses, and the resultant impact to the Contingency Reserve. Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 11 General Fund Sources and Uses Because of the unknown impacts of the pandemic, the use of surplus and the tier reduction framework utilizes one-time adjustments designed to ensure the continued delivery of City services. Structural adjustments may be necessary, but more needs to be known before implementing such reductions. In the meantime, the tiered framework allows us to make some restorations based on the positive results for FY 21019-20. Proposed Restoration of Funds Through Tier Framework Tier 5 – Contingency Reserve Per City Council Reserve Policy F-2, the Contingency Reserve shall have a target balance of 25 percent of the General Fund operating budget as originally adopted, excluding the amount allocated for additional discretionary pension payments. In order to balance the budget and under the emergency provisions of Policy F-2, this current year budget has a $2.3 million draw from the Contingency Reserve. Pursuant to policy, staff must present a plan to City Council to replenish the reserve within five years after the economy has stabilized. Based on the positive budget to actual variances realized in FY 2019-20 that resulted in a surplus, the better than expected quarter one results, and the positive revenue results projected for FY 2020-21; the City Council may allocate $2.3 million of prior year surplus to replenish the contingency reserve. Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 12 Tier 4 – Internal Service Fund Charges Funds in the amount of $4.5 million were transferred in from other funds to partially backfill the anticipated General Fund revenue shortfall for FY 2020-21 (see Tier 4 column in Attachment A). These funds derived from prior year internal service funds (ISF) charges that originated from the General Fund. These charges are intended to reimburse ISF operations related to equipment replacement charges, or centrally managed insurance reserves and most were returned without significantly impacting the replacement schedule or funding for liabilities. Staff recommends the replenishment of the $500,000 taken from the Equipment Replacement Fund. This would help improve the percent of that Fund’s reserve that is set aside to cover the accumulated depreciation – currently at 66%. Tier 3 – Deferred Capital Funding Staff recommends maintaining the reductions at this time. A review of the CIP program is recommended in the context of developing the FY 2021-22 budget. This will be discussed in more detail at the FY 2021-22 City Council Planning Workshop in early January 2021. Tier 2 – Temporary Hiring Freeze Staff recommends resuming selected hiring with approval by City Manager. We will still target $2 million in personnel savings, which should be obtainable. Tier 1 – Operating Reductions No change recommended – continue with reductions. Other Funds Other funds that are subject to revenue volatility include Tidelands, Gas Tax, Measure M, SB1 RMRA (Road Maintenance and Rehabilitation Account) and the Water and Wastewater funds. An analysis of the budget performance for these funds at Fiscal Year ending 06/30/2020 and through the first quarter of this fiscal year indicate that no budget adjustments are currently necessary. Staff will continue to monitor these and all funds on a monthly basis. Conclusion There are varying speculative timelines of when life will return to some semblance of normalcy. The answer to this question is unknown but staff will consider adjustments to the operating and capital budgets in subsequent quarters should our revenue projections prove to be either too optimistic or conservative. Any proposed adjustments will be presented to the Finance Committee and City Council. Staff recommends that the Finance Committee review and discuss this report and provide recommendations for City Manager and City Council consideration prior to the November 24, 2020 City Council meeting when this report will next be presented. Year-End FY 2019-20 and FY 2020-21 Q1 Financial Report November 19, 2020 Page 13 Prepared and Submitted by: /a/ Steve Montano ____________________________ Steve Montano Deputy Finance Director Attachments: A. FY 2020-21 Budget Tier Framework and Quarter 1 Restorations B. FY 2020-21 CIP Deferrals ATTACHMENT A FY 2020-21 BUDGET TIER FRAMEWORK AND QUARTER 1 RESTORATIONS FY 2020-21 Budget Tier Framework and Quarter One Restorations Quarter 1 Restorations indicated by Financial First Aid - Initial Bridging Options Operating Cuts No Service Level Change Temp Hiring Freeze Deferred Capital Funding & Spend ISF Charge Reductions Contingency Reserve Service Level Cuts TOTAL GAP FUNDING SOLUTIONS Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Tier 6 Salaries And Benefits Salaries, Benefits and Other Pays (2,000,000) (2,000,000) Discretionary Pension Payments Total Salaries And Benefits (2,000,000) (2,000,000) Maintenance And Operations Professional & Contract Services (1,774,131) (1,774,131) Internal Service Premiums Workers' Compensation (1,000,000) (1,000,000) General Liability Uninsured Claims (1,000,000) (1,000,000) OPEB Equipment Replacement/Maintenance (17,511) (500,000) (517,511) Information Technology (2,000,000) (2,000,000) Maintenance & Repair (179,009) (179,009) Supplies & Materials (289,671) (289,671) Utilities (361,201) (361,201) General Expenses (98,300) (98,300) Travel & Training (151,115) (151,115) Grant Operating Expenses (40,000) (40,000) Total Maintenance And Operations (2,910,938) (4,500,000) (7,410,938) Total Transfers Out (18,477,137) (500,000) (18,977,137) Capital (2,500,000) (2,500,000) Contingency Reserve1 (2,304,399) (2,304,399) Total by Tier (2,910,938) (2,000,000) (20,977,137) (5,000,000) (2,304,399) (33,192,474) Cumulative by Tier (2,910,938) (4,910,938) (25,888,075) (30,888,075) (33,192,474) (33,192,474) 1 Contingency Reserve reduction originally $2,316,684 in Proposed Budget, and reduced to $2,304,399 in Adopted Budget. This reduction of $12,285 is due to a reduction in approprations within the Police Department. ATTACHMENT B FY 2020-21 CIP DEFERRALS FY 2020-21 CIP Deferrals 1 City of Newport Beach Finance Committee Meeting November 19, 2020 Fiscal Year 2019-20 Year End and Fiscal Year 2020-21 Quarter 1 Budget Update 22 Economic Overview •Economic activity and employment have picked up somewhat in recent monthsbutremainwellbelowtheirlevelsatthebeginningoftheoutbreak. •For California and the nation,job losses were largest for low-wage sectors,withleisureandhospitalitylosingaround40percentofitstotaljobsoveronequarter. •Citywide hotel occupancy is currently averaging about 40 percent a week,whenatthistimeoftheyear,occupancy is typically about 85 percent. •Newport Beach restaurants with outdoor patios are doing well,although overallvolumeisdownwithindoordiningofflimitsfornow. 33 General Fund Revenues •Uncertainty of how long the presence of the virus would disrupt the U.S.economy made forecasting revenues particularly challenging. •FY 2019-20 General Fund revenues were reduced by $13 million andprovisionsweremadetorealizeatleast$13 million in expenditure savings. •General Fund revenues ended FY 2019-20 at $229.8 million,$10.9 million or5%higher than the projected budget in almost all categories. •General Fund revenues for the first quarter of FY 2020-21 (July-September2020)are likely to perform at or higher than their projected levels this year duetomorefavorableeconomicconditionsthananticipatedwhenthebudgetwasdevelopedinApril. •Higher property tax valuations within the City are also expected. 44 Property Tax •Property taxes are among the least affected revenue sources by the pandemic (at least in the short term) due to the lag resulting from assessing valuations. •FY 2019-20 property tax revenue was over $113.3 million, which is almost $0.6 million or 0.5% higher than projected and almost $5 million higher than prior year. •For FY 2020-21, property taxes are so far $292,000 less than projected for the quarter due to the City’s first of three unsecured property tax payments coming in less than projected. •November supplemental tax payment is up 43% over the prior year. This bodes well for future secured property taxes. •Better information will be known when first large tax receipts are realized in mid-to late-December. 55 Sales Tax •The City’s sales tax base is largely generated from three main industry categories including Autos and Transportation, General Consumer Goods, and Restaurants/Hotels. Most of these industries are also heavily impacted by tourism. •Businesses pivoted in creative ways to reach their customers, able to open at some capacity sooner than expected, and consumer spending was relatively strong. •Sales Tax finished the year at $36.2 million, which is $1.8 million or 5.3% higher than projected. •FY 2020-21 sales tax revenues are coming in approximately $824,000 higher than expected. 66 Transient Occupancy Tax •Transient occupancy tax (TOT) revenue was the most severely impacted revenue source as most major hotels within the City were temporarily closed towards the end of March 2020 and many didn’t start reopening until late May or early June. •FY 2019-20 TOT receipts were $20.8 million, which is almost $1.8 million, or 9.4%, higher than projected. •Although most hotels are up and running, with the exception of the Island Hotel and Renaissance Newport Beach, the vast majority remain well under full capacity. •Revenues for the first quarter of FY 2020-21 coming in approximately $1.7 million over the projected budget for the quarter. 77 All Other General Fund Revenue Includes Other Taxes, Service Fees & Charges, Parking Revenue, Licenses and Permits, Property Income, Fines and Penalties, Intergovernmental Revenues, Investment Earnings and Miscellaneous Revenues •All other General Fund Revenues ended FY 2019-20 at $59.5 million, $6.6 million or 12.6% higher than the projected budget. •This is attributable to businesses continuing to pay for their licenses, City departments pivoting to meet customer needs (permit processing, remote building inspections, modified outdoor camps and virtual classes), income properties paying timely, and parking revenue coming in strong. •All other FY 2020-21 General Fund Revenues through September 30, 2020 are almost $13.5 million and are $889,000 or 7.1% higher than the projected budget. •This is attributable to strong parking revenues throughout the summer, CARES Act funding, Friends of the Library donation, and property income; however, offset by decreases in Police fees and the Library closure, and largely from limited Recreation summer programs and classes. 88 General Fund Revenues FY 2019-20 A B C=B-A D=C/A Revenues by Category PY Actual Revised Budget Actual Variance % Variance Property Taxes 108,365,261 112,723,626 113,313,535 589,909 0.5% Sales Tax 38,502,470 34,411,405 36,232,969 1,821,564 5.3% Transient Occupancy Tax 24,697,446 19,062,031 20,847,883 1,785,852 9.4% Other Taxes 11,327,777 10,841,170 11,846,082 1,004,912 9.3% Service Fees & Charges 20,300,379 18,820,002 20,913,897 2,093,895 11.1% Parking Revenue 4,935,024 5,442,379 5,529,753 87,374 1.6% Licenses & Permits 5,071,609 4,567,521 4,752,252 184,731 4.0% Property Income 4,679,578 3,493,784 4,619,106 1,125,322 32.2% Fines & Penalties 3,454,660 3,089,260 3,659,011 569,751 18.4% Intergovernmental Revenues 3,922,453 2,854,873 3,140,547 285,674 10.0% Investment Earnings 1,484,828 1,505,673 1,295,547 -210,126 -14.0% Miscellaneous Revenues 3,071,110 2,252,529 3,759,851 1,507,322 66.9% Total Revenues $229,812,595 $219,064,253 $229,910,433 $10,846,180 4.95% 99 General Fund Revenues FY 2020-21 A B C D=C-B E=D/B Revenues by Category PY YTD Q1 Actual Revised Budget YTD Q1 Projection YTD Q1 Actual Variance % Variance Property Taxes $1,959,353 $117,508,227 $2,070,771 $1,777,845 -$292,926 -14.1% Sales Tax 3,318,814 28,690,831 2,376,040 3,200,436 824,396 34.7% Transient Occupancy Tax 4,959,179 6,434,115 495,918 2,267,092 1,771,174 357.2% Other Taxes 2,100,682 9,652,973 1,680,546 1,815,674 135,128 8.0% Service Fees & Charges 7,385,417 17,653,465 6,030,902 4,790,281 -1,240,621 -20.6% Parking Revenue 2,211,940 4,621,160 1,769,260 2,593,300 824,040 46.6% Licenses & Permits 1,266,680 4,239,333 1,012,047 1,130,791 118,744 11.7% Property Income 1,234,287 3,892,635 1,014,606 1,213,468 198,862 19.6% Fines & Penalties 1,121,961 3,681,031 897,397 818,067 -79,330 -8.8% Intergovernmental Revenues 310,547 2,797,691 120,235 646,751 526,516 437.9% Investment Earnings 295,212 1,112,200 58,039 390,533 332,494 572.9% Miscellaneous Revenues 372,814 1,022,350 2,170 75,076 72,906 3359.7% Total Revenues $26,536,886 $201,306,011 $17,527,931 $20,719,314 $3,191,383 18.2% 1010 COVID Relief Funds •The City has received approximately $4.0 million in CARES Act fundingbetweenfiscalyears2019-20 and 2020-21. •$72,314 was from the U.S.Department of Health &Human Services as partoftheProviderReliefFundtobeusedforhealthcarerelatedexpensesorlostrevenues. •$2.1 million was from the County of Orange to provide grants to smallbusinessimpactedbythepandemic. •$769,758 from the County of Orange and $1.0 million from the State ofCaliforniawerebothusedtooffsetpublicsafetyactivitiesduringthepandemic. •$1 million from the state to offset public safety activities during thepandemic. •City also filed a $565,000 claim to the Federal Emergency ManagementAgency(FEMA)-the disposition of this claim will not be known for some time. 1111 COVID-19 Impacts to Other Funds •Other funds that are subject to revenue volatility include Tidelands,Gas Tax,Measure M,SB1 RMRA (Road Maintenance andRehabilitationAccount)and the Water and Wastewater funds. •An analysis of the budget performance through the first quarterrevealsnobudgetadjustmentsarecurrentlynecessary. •Staff will continue to monitor these and all funds on a monthly basis. 1212 General Fund Expenditures •General Fund expenditures ended FY 2019-20 at $211 .1 million,$3.9 million or 1.8%lower than the projected budgetinalmostallcategories. •Actual expenditures ended the year lower than budgetedduetohiringfreezeandthe$13.8 million budget reduction. •With 25%of the year complete,FY 2020-21 General Fundexpendituresareat21.6%of the budget and are generallyon-track.Expenditures through the first quarter of the yearare$3.4 million,or 1.5%lower than projected. 1313 General Fund Expenditures FY 2019-20 A B C=B-A D=C/A Expenditures by Category PY Actual Revised Budget Actual Variance % Variance Salary & Benefits $142,315,972 $145,314,954 $144,706,363 -$608,591 -0.4% Contract Services 21,318,540 22,771,477 21,613,242 -1,158,235 -5.1% Maintenance & Repair 9,469,175 8,834,182 8,464,356 -369,826 -4.2% Supplies & Materials 4,427,660 3,895,994 3,715,045 -180,949 -4.6% Utilities 2,971,221 3,328,840 3,107,708 -221,132 -6.6% General Expenses 2,209,597 2,104,868 1,970,506 -134,362 -6.4% Travel & Training 826,174 785,467 650,609 -134,858 -17.2% Grant Operating 663,825 1,120,502 884,466 -236,036 -21.1% Internal Svc Charge 22,393,942 25,160,173 24,911,535 -248,638 -1.0% Risk Management 760,133 848,023 430,207 -417,816 -49.3% Capital Expenditures 808,019 779,516 612,501 -167,015 -21.4% Total $208,164,258 $214,943,996 $211,066,538 -$3,877,458 -1.8% 1414 General Fund Expenditures FY 2020-21 A B C D=C-B E=D/B Expenditures by Category Revised Budget YTD Q1 Projection YTD Q1 Actual Variance % Variance Salary & Benefits $149,635,979 $35,525,191 $34,311,953 -$1,213,238 -3.4% Contract Services 25,398,708 4,435,618 3,908,656 -526,962 -11.9% Maintenance & Repair 8,987,338 1,977,052 1,191,663 -785,389 -39.7% Supplies & Materials 4,338,054 1,160,497 998,716 -161,781 -13.9% Utilities 2,961,757 585,194 594,072 8,878 1.5% General Expenses 2,290,459 512,276 365,704 -146,572 -28.6% Travel & Training 809,309 228,672 58,191 -170,481 -74.6% Grant Operating 1,155,371 359,101 202,300 -156,801 -43.7% Internal Svc Charge 25,977,295 6,494,324 6,494,324 0 0.0% Risk Management 750,915 206,312 39,780 -166,532 -80.7% Capital Expenditures 849,412 143,022 56,011 -87,011 -60.8% Total $223,154,597 $51,627,259 $48,221,370 -$3,405,889 -6.6% 1515 A B B-A 2019-20 2019-20 2019-20 2020-21 REVISED ACTUAL BUDGET TO ACT REVISED BUDGET $ VAR BUDGET SOURCES: FY 2017-18 Surplus 11,591,448 11,591,448 - - FY 2018-19 Surplus 11,528,065 11,528,065 - 11,528,065 FY 2019-20 Surplus - - - 12,401,197 Use of FY 2019-20 Contingency Reserve - - - 2,304,399 Operating Revenues 219,064,254 229,910,433 10,846,179 201,306,011 Less: Restricted Revenues (1,447,784) (2,895,001) (1,447,217) (765,967) Use of Restricted Revenues and Encumbrances 2,549,640 - (2,549,640) 2,095,632 Transfers-In 13,389,413 17,207,099 3,817,686 17,560,543 TOTAL SOURCES 256,675,036$ 267,342,044$ 10,667,008$ 246,429,880$ USES: Operating Expenditures 214,943,995 211,066,539$ (3,877,456)$ 223,154,598$ Transfers Out 32,346,243 32,346,243 -$ 6,000,000 Set aside-PERS Reserve - - - 5,000,000 TOTAL USES 247,290,238$ 243,412,782$ (3,877,456)$ 234,154,598$ UNRESTRICTED RESOURCES 9,384,798$ 23,929,262$ 14,544,464$ 12,275,282$ CONTINGENCY RESERVE 52,618,059$ 52,618,059$ -$ 50,313,660$ Contingency Replenishment 2,304,399 NET CONTINGENCY RESERVE 52,618,059$ CONTINGENCY RESERVE TARGET 52,403,031$ General Fund Sources and Uses 1616 Additional Pension Payment -$5 million •The City set aside a $5 million PERS reserve in anticipation ofadverseinvestmentresultsthatwouldincreasetheCity’s unfundedactuarialliabilityintheFY2020-21 budget. •It is recommended,based on strong revenue performance,totransferthe$5 million from the PERS set aside reserve to theoperatingbudgettocontinuefundingthetotalPERSunfundedliability($40 million total). 1717 Proposed Partial Restoration of Funds Through Tier Framework 1818 Tiered Short-term Budget Reduction Strategy –FY 2020-21 Proposed restorations indicated by 1919 Tier 5 –Contingency Reserve •In order to balance the budget and under the emergency provisions of Policy F-2, this current year budget has a $2.3 million draw from the Contingency Reserve. •Pursuant to policy, staff must present a plan to City Council to replenish the reserve within five years after the economy has stabilized. •Based on the positive budget to actual variances realized in FY 2019-20 that resulted in a surplus, the better than expected quarter one results, and the positive revenue results to date for FY 2020-21; staff recommends restoring $2.3 million to the contingency reserve and fully funding the contingency reserve at 25% of GF operations. Financial First Aid - Initial Bridging Options Contingency Reserve Tier 5 Salaries And Benefits Salaries, Benefits and Other Pays Discretionary Pension Payments Total Salaries And Benefits Maintenance And Operations Professional & Contract Services Internal Service Premiums Workers' Compensation General Liability Uninsured Claims OPEB Equipment Replacement/Maintenance Information Technology Maintenance & Repair Supplies & Materials Utilities General Expenses Travel & Training Grant Operating Expenses Total Maintenance And Operations Transfers Out Transfer Out FFP Transfer Out Tideland Harbor Cap Transfer Out Nbr Enhancement Transfer Out Facilities Maint Transfer Out 800 Mhz Radio Transfer Out Intrafund Transfer IN Intrafund Transfer IN Tidelands Total Transfers Out Capital Contingency Reserve1 (2,304,399) Total by Tier (2,304,399) Cumulative by Tier (33,192,474) 2020 Tier 4 –Internal Service Fund Charges •Funds in the amount of $4.5 million were transferred in from other funds to partially backfill General Fund revenue shortfall for FY 2020-21. •These charges are intended to reimburse ISF operations related to equipment replacement charges, or centrally managed insurance reserves and most were returned without significantly impacting the replacement schedule or funding for liabilities. •Staff recommends the replenishment of the $500,000 taken from the Equipment Replacement Fund. This would help improve the percent of that Fund’s reserve that is set aside to cover the accumulated depreciation –currently at 66%. Financial First Aid - Initial Bridging Options ISF Charge Reductions Tier 4 Salaries And Benefits Salaries, Benefits and Other Pays Discretionary Pension Payments Total Salaries And Benefits Maintenance And Operations Professional & Contract Services Internal Service Premiums Workers' Compensation (1,000,000) General Liability Uninsured Claims (1,000,000) OPEB Equipment Replacement/Maintena (500,000) Information Technology (2,000,000) Maintenance & Repair Supplies & Materials Utilities General Expenses Travel & Training Grant Operating Expenses Total Maintenance And Operations (4,500,000) Transfers Out Transfer Out FFP Transfer Out Tideland Harbor Cap Transfer Out Nbr Enhancement Transfer Out Facilities Maint Transfer Out 800 Mhz Radio (500,000) Transfer Out Intrafund Transfer IN Intrafund Transfer IN Tidelands Total Transfers Out (500,000) Capital Contingency Reserve1 Total by Tier (5,000,000) Cumulative by Tier (30,888,075) 2121 Tiers 1-3 Tier 3 –Deferred Capital Funding Recommend maintaining the reductions at this time. Propose consideration as part of planning the FY 2021-22 CIP during the City Council Planning Workshop in early 2021. Tier 2 –Temporary Hiring Freeze Recommend selective hiring with approval by City Manager. We will still target $2 million in personnel savings, which should be obtainable. Tier 1 –Operating Reductions No change recommended –continue with reductions. Financial First Aid - Initial Bridging Options Operating Cuts No Service Level Change Temp Hiring Freeze Deferred Capital Funding & Spend Tier 1 Tier 2 Tier 3 Salaries And Benefits Salaries, Benefits and Other Pays (2,000,000) Discretionary Pension Payments Total Salaries And Benefits (2,000,000) Maintenance And Operations Professional & Contract Services (1,774,131) Internal Service Premiums Workers' Compensation General Liability Uninsured Claims OPEB Equipment Replacement/Maintena (17,511) Information Technology Maintenance & Repair (179,009) Supplies & Materials (289,671) Utilities (361,201) General Expenses (98,300) Travel & Training (151,115) Grant Operating Expenses (40,000) Total Maintenance And Operations (2,910,938) Transfers Out Transfer Out FFP (8,500,000) Transfer Out Tideland Harbor Cap (4,500,000) Transfer Out Nbr Enhancement (4,977,137) Transfer Out Facilities Maint (500,000) Transfer Out 800 Mhz Radio Transfer Out Intrafund Transfer IN Intrafund Transfer IN Tidelands Total Transfers Out (18,477,137) Capital (2,500,000) Contingency Reserve1 Total by Tier (2,910,938) (2,000,000) (20,977,137) Cumulative by Tier (2,910,938) (4,910,938) (25,888,075) 2222 Conclusion •Staff will consider adjustments to the operating and capital budgets in subsequent quarters should revenue projections prove to be either too optimistic or conservative. •Any proposed adjustments will be presented to the Finance Committee and City Council. •Staff recommends that the Finance Committee review and discuss this report and provide recommendations for City Manager and City Council consideration prior to the November 24, 2020 City Council meeting when this report will next be presented. 23 1 City of Newport Beach Finance Committee Meeting November 19, 2020 Fiscal Year 2019-20 Year End and Fiscal Year 2020-21 Quarter 1 Budget Update 22 Economic Overview •Economic activity and employment have picked up somewhat in recent monthsbutremainwellbelowtheirlevelsatthebeginningoftheoutbreak. •For California and the nation,job losses were largest for low-wage sectors,withleisureandhospitalitylosingaround40percentofitstotaljobsoveronequarter. •Citywide hotel occupancy is currently averaging about 40 percent a week,whenatthistimeoftheyear,occupancy is typically about 85 percent. •Newport Beach restaurants with outdoor patios are doing well,although overallvolumeisdownwithindoordiningofflimitsfornow. 33 General Fund Revenues •Uncertainty of how long the presence of the virus would disrupt the U.S.economy made forecasting revenues particularly challenging. •FY 2019-20 General Fund revenues were reduced by $13 million andprovisionsweremadetorealizeatleast$13 million in expenditure savings. •General Fund revenues ended FY 2019-20 at $229.8 million,$10.9 million or5%higher than the projected budget in almost all categories. •General Fund revenues for the first quarter of FY 2020-21 (July-September2020)are likely to perform at or higher than their projected levels this year duetomorefavorableeconomicconditionsthananticipatedwhenthebudgetwasdevelopedinApril. •Higher property tax valuations within the City are also expected. 44 Property Tax •Property taxes are among the least affected revenue sources by the pandemic (at least in the short term) due to the lag resulting from assessing valuations. •FY 2019-20 property tax revenue was over $113.3 million, which is almost $0.6 million or 0.5% higher than projected and almost $5 million higher than prior year. •For FY 2020-21, property taxes are so far $292,000 less than projected for the quarter due to the City’s first of three unsecured property tax payments coming in less than projected. •November supplemental tax payment is up 43% over the prior year. This bodes well for future secured property taxes. •Better information will be known when first large tax receipts are realized in mid-to late-December. 55 Sales Tax •The City’s sales tax base is largely generated from three main industry categories including Autos and Transportation, General Consumer Goods, and Restaurants/Hotels. Most of these industries are also heavily impacted by tourism. •Businesses pivoted in creative ways to reach their customers, able to open at some capacity sooner than expected, and consumer spending was relatively strong. •Sales Tax finished the year at $36.2 million, which is $1.8 million or 5.3% higher than projected. •FY 2020-21 sales tax revenues are coming in approximately $824,000 higher than expected. 66 Transient Occupancy Tax •Transient occupancy tax (TOT) revenue was the most severely impacted revenue source as most major hotels within the City were temporarily closed towards the end of March 2020 and many didn’t start reopening until late May or early June. •FY 2019-20 TOT receipts were $20.8 million, which is almost $1.8 million, or 9.4%, higher than projected. •Although most hotels are up and running, with the exception of the Island Hotel and Renaissance Newport Beach, the vast majority remain well under full capacity. •Revenues for the first quarter of FY 2020-21 coming in approximately $1.7 million over the projected budget for the quarter. 77 All Other General Fund Revenue Includes Other Taxes, Service Fees & Charges, Parking Revenue, Licenses and Permits, Property Income, Fines and Penalties, Intergovernmental Revenues, Investment Earnings and Miscellaneous Revenues •All other General Fund Revenues ended FY 2019-20 at $59.5 million, $6.6 million or 12.6% higher than the projected budget. •This is attributable to businesses continuing to pay for their licenses, City departments pivoting to meet customer needs (permit processing, remote building inspections, modified outdoor camps and virtual classes), income properties paying timely, and parking revenue coming in strong. •All other FY 2020-21 General Fund Revenues through September 30, 2020 are almost $13.5 million and are $889,000 or 7.1% higher than the projected budget. •This is attributable to strong parking revenues throughout the summer, CARES Act funding, Friends of the Library donation, and property income; however, offset by decreases in Police fees and the Library closure, and largely from limited Recreation summer programs and classes. 88 General Fund Revenues FY 2019-20 A B C=B-A D=C/A Revenues by Category PY Actual Revised Budget Actual Variance % Variance Property Taxes 108,365,261 112,723,626 113,313,535 589,909 0.5% Sales Tax 38,502,470 34,411,405 36,232,969 1,821,564 5.3% Transient Occupancy Tax 24,697,446 19,062,031 20,847,883 1,785,852 9.4% Other Taxes 11,327,777 10,841,170 11,846,082 1,004,912 9.3% Service Fees & Charges 20,300,379 18,820,002 20,913,897 2,093,895 11.1% Parking Revenue 4,935,024 5,442,379 5,529,753 87,374 1.6% Licenses & Permits 5,071,609 4,567,521 4,752,252 184,731 4.0% Property Income 4,679,578 3,493,784 4,619,106 1,125,322 32.2% Fines & Penalties 3,454,660 3,089,260 3,659,011 569,751 18.4% Intergovernmental Revenues 3,922,453 2,854,873 3,140,547 285,674 10.0% Investment Earnings 1,484,828 1,505,673 1,295,547 -210,126 -14.0% Miscellaneous Revenues 3,071,110 2,252,529 3,759,851 1,507,322 66.9% Total Revenues $229,812,595 $219,064,253 $229,910,433 $10,846,180 4.95% 99 General Fund Revenues FY 2020-21 A B C D=C-B E=D/B Revenues by Category PY YTD Q1 Actual Revised Budget YTD Q1 Projection YTD Q1 Actual Variance % Variance Property Taxes $1,959,353 $117,508,227 $2,070,771 $1,777,845 -$292,926 -14.1% Sales Tax 3,318,814 28,690,831 2,376,040 3,200,436 824,396 34.7% Transient Occupancy Tax 4,959,179 6,434,115 495,918 2,267,092 1,771,174 357.2% Other Taxes 2,100,682 9,652,973 1,680,546 1,815,674 135,128 8.0% Service Fees & Charges 7,385,417 17,653,465 6,030,902 4,790,281 -1,240,621 -20.6% Parking Revenue 2,211,940 4,621,160 1,769,260 2,593,300 824,040 46.6% Licenses & Permits 1,266,680 4,239,333 1,012,047 1,130,791 118,744 11.7% Property Income 1,234,287 3,892,635 1,014,606 1,213,468 198,862 19.6% Fines & Penalties 1,121,961 3,681,031 897,397 818,067 -79,330 -8.8% Intergovernmental Revenues 310,547 2,797,691 120,235 646,751 526,516 437.9% Investment Earnings 295,212 1,112,200 58,039 390,533 332,494 572.9% Miscellaneous Revenues 372,814 1,022,350 2,170 75,076 72,906 3359.7% Total Revenues $26,536,886 $201,306,011 $17,527,931 $20,719,314 $3,191,383 18.2% 1010 COVID Relief Funds •The City has received approximately $4.0 million in CARES Act fundingbetweenfiscalyears2019-20 and 2020-21. •$72,314 was from the U.S.Department of Health &Human Services as partoftheProviderReliefFundtobeusedforhealthcarerelatedexpensesorlostrevenues. •$2.1 million was from the County of Orange to provide grants to smallbusinessimpactedbythepandemic. •$769,758 from the County of Orange and $1.0 million from the State ofCaliforniawerebothusedtooffsetpublicsafetyactivitiesduringthepandemic. •$1 million from the state to offset public safety activities during thepandemic. •City also filed a $565,000 claim to the Federal Emergency ManagementAgency(FEMA)-the disposition of this claim will not be known for some time. 1111 COVID-19 Impacts to Other Funds •Other funds that are subject to revenue volatility include Tidelands,Gas Tax,Measure M,SB1 RMRA (Road Maintenance andRehabilitationAccount)and the Water and Wastewater funds. •An analysis of the budget performance through the first quarterrevealsnobudgetadjustmentsarecurrentlynecessary. •Staff will continue to monitor these and all funds on a monthly basis. 1212 General Fund Expenditures •General Fund expenditures ended FY 2019-20 at $211 .1 million,$3.9 million or 1.8%lower than the projected budgetinalmostallcategories. •Actual expenditures ended the year lower than budgetedduetohiringfreezeandthe$13.8 million budget reduction. •With 25%of the year complete,FY 2020-21 General Fundexpendituresareat21.6%of the budget and are generallyon-track.Expenditures through the first quarter of the yearare$3.4 million,or 1.5%lower than projected. 1313 General Fund Expenditures FY 2019-20 A B C=B-A D=C/A Expenditures by Category PY Actual Revised Budget Actual Variance % Variance Salary & Benefits $142,315,972 $145,314,954 $144,706,363 -$608,591 -0.4% Contract Services 21,318,540 22,771,477 21,613,242 -1,158,235 -5.1% Maintenance & Repair 9,469,175 8,834,182 8,464,356 -369,826 -4.2% Supplies & Materials 4,427,660 3,895,994 3,715,045 -180,949 -4.6% Utilities 2,971,221 3,328,840 3,107,708 -221,132 -6.6% General Expenses 2,209,597 2,104,868 1,970,506 -134,362 -6.4% Travel & Training 826,174 785,467 650,609 -134,858 -17.2% Grant Operating 663,825 1,120,502 884,466 -236,036 -21.1% Internal Svc Charge 22,393,942 25,160,173 24,911,535 -248,638 -1.0% Risk Management 760,133 848,023 430,207 -417,816 -49.3% Capital Expenditures 808,019 779,516 612,501 -167,015 -21.4% Total $208,164,258 $214,943,996 $211,066,538 -$3,877,458 -1.8% 1414 General Fund Expenditures FY 2020-21 A B C D=C-B E=D/B Expenditures by Category Revised Budget YTD Q1 Projection YTD Q1 Actual Variance % Variance Salary & Benefits $149,635,979 $35,525,191 $34,311,953 -$1,213,238 -3.4% Contract Services 25,398,708 4,435,618 3,908,656 -526,962 -11.9% Maintenance & Repair 8,987,338 1,977,052 1,191,663 -785,389 -39.7% Supplies & Materials 4,338,054 1,160,497 998,716 -161,781 -13.9% Utilities 2,961,757 585,194 594,072 8,878 1.5% General Expenses 2,290,459 512,276 365,704 -146,572 -28.6% Travel & Training 809,309 228,672 58,191 -170,481 -74.6% Grant Operating 1,155,371 359,101 202,300 -156,801 -43.7% Internal Svc Charge 25,977,295 6,494,324 6,494,324 0 0.0% Risk Management 750,915 206,312 39,780 -166,532 -80.7% Capital Expenditures 849,412 143,022 56,011 -87,011 -60.8% Total $223,154,597 $51,627,259 $48,221,370 -$3,405,889 -6.6% 1515 A B B-A 2019-20 2019-20 2019-20 2020-21 REVISED ACTUAL BUDGET TO ACT REVISED BUDGET $ VAR BUDGET SOURCES: FY 2017-18 Surplus 11,591,448 11,591,448 - - FY 2018-19 Surplus 11,528,065 11,528,065 - 11,528,065 FY 2019-20 Surplus - - - 12,401,197 Use of FY 2019-20 Contingency Reserve - - - 2,304,399 Operating Revenues 219,064,254 229,910,433 10,846,179 201,306,011 Less: Restricted Revenues (1,447,784) (2,895,001) (1,447,217) (765,967) Use of Restricted Revenues and Encumbrances 2,549,640 - (2,549,640) 2,095,632 Transfers-In 13,389,413 17,207,099 3,817,686 17,560,543 TOTAL SOURCES 256,675,036$ 267,342,044$ 10,667,008$ 246,429,880$ USES: Operating Expenditures 214,943,995 211,066,539$ (3,877,456)$ 223,154,598$ Transfers Out 32,346,243 32,346,243 -$ 6,000,000 Set aside-PERS Reserve - - - 5,000,000 TOTAL USES 247,290,238$ 243,412,782$ (3,877,456)$ 234,154,598$ UNRESTRICTED RESOURCES 9,384,798$ 23,929,262$ 14,544,464$ 12,275,282$ CONTINGENCY RESERVE 52,618,059$ 52,618,059$ -$ 50,313,660$ Contingency Replenishment 2,304,399 NET CONTINGENCY RESERVE 52,618,059$ CONTINGENCY RESERVE TARGET 52,403,031$ General Fund Sources and Uses 1616 Additional Pension Payment -$5 million •The City set aside a $5 million PERS reserve in anticipation ofadverseinvestmentresultsthatwouldincreasetheCity’s unfundedactuarialliabilityintheFY2020-21 budget. •It is recommended,based on strong revenue performance,totransferthe$5 million from the PERS set aside reserve to theoperatingbudgettocontinuefundingthetotalPERSunfundedliability($40 million total). 1717 Proposed Partial Restoration of Funds Through Tier Framework 1818 Tiered Short-term Budget Reduction Strategy –FY 2020-21 Proposed restorations indicated by 1919 Tier 5 –Contingency Reserve •In order to balance the budget and under the emergency provisions of Policy F-2, this current year budget has a $2.3 million draw from the Contingency Reserve. •Pursuant to policy, staff must present a plan to City Council to replenish the reserve within five years after the economy has stabilized. •Based on the positive budget to actual variances realized in FY 2019-20 that resulted in a surplus, the better than expected quarter one results, and the positive revenue results to date for FY 2020-21; staff recommends restoring $2.3 million to the contingency reserve and fully funding the contingency reserve at 25% of GF operations. Financial First Aid - Initial Bridging Options Contingency Reserve Tier 5 Salaries And Benefits Salaries, Benefits and Other Pays Discretionary Pension Payments Total Salaries And Benefits Maintenance And Operations Professional & Contract Services Internal Service Premiums Workers' Compensation General Liability Uninsured Claims OPEB Equipment Replacement/Maintenance Information Technology Maintenance & Repair Supplies & Materials Utilities General Expenses Travel & Training Grant Operating Expenses Total Maintenance And Operations Transfers Out Transfer Out FFP Transfer Out Tideland Harbor Cap Transfer Out Nbr Enhancement Transfer Out Facilities Maint Transfer Out 800 Mhz Radio Transfer Out Intrafund Transfer IN Intrafund Transfer IN Tidelands Total Transfers Out Capital Contingency Reserve1 (2,304,399) Total by Tier (2,304,399) Cumulative by Tier (33,192,474) 2020 Tier 4 –Internal Service Fund Charges •Funds in the amount of $4.5 million were transferred in from other funds to partially backfill General Fund revenue shortfall for FY 2020-21. •These charges are intended to reimburse ISF operations related to equipment replacement charges, or centrally managed insurance reserves and most were returned without significantly impacting the replacement schedule or funding for liabilities. •Staff recommends the replenishment of the $500,000 taken from the Equipment Replacement Fund. This would help improve the percent of that Fund’s reserve that is set aside to cover the accumulated depreciation –currently at 66%. Financial First Aid - Initial Bridging Options ISF Charge Reductions Tier 4 Salaries And Benefits Salaries, Benefits and Other Pays Discretionary Pension Payments Total Salaries And Benefits Maintenance And Operations Professional & Contract Services Internal Service Premiums Workers' Compensation (1,000,000) General Liability Uninsured Claims (1,000,000) OPEB Equipment Replacement/Maintena (500,000) Information Technology (2,000,000) Maintenance & Repair Supplies & Materials Utilities General Expenses Travel & Training Grant Operating Expenses Total Maintenance And Operations (4,500,000) Transfers Out Transfer Out FFP Transfer Out Tideland Harbor Cap Transfer Out Nbr Enhancement Transfer Out Facilities Maint Transfer Out 800 Mhz Radio (500,000) Transfer Out Intrafund Transfer IN Intrafund Transfer IN Tidelands Total Transfers Out (500,000) Capital Contingency Reserve1 Total by Tier (5,000,000) Cumulative by Tier (30,888,075) 2121 Tiers 1-3 Tier 3 –Deferred Capital Funding Recommend maintaining the reductions at this time. Propose consideration as part of planning the FY 2021-22 CIP during the City Council Planning Workshop in early 2021. Tier 2 –Temporary Hiring Freeze Recommend selective hiring with approval by City Manager. We will still target $2 million in personnel savings, which should be obtainable. Tier 1 –Operating Reductions No change recommended –continue with reductions. Financial First Aid - Initial Bridging Options Operating Cuts No Service Level Change Temp Hiring Freeze Deferred Capital Funding & Spend Tier 1 Tier 2 Tier 3 Salaries And Benefits Salaries, Benefits and Other Pays (2,000,000) Discretionary Pension Payments Total Salaries And Benefits (2,000,000) Maintenance And Operations Professional & Contract Services (1,774,131) Internal Service Premiums Workers' Compensation General Liability Uninsured Claims OPEB Equipment Replacement/Maintena (17,511) Information Technology Maintenance & Repair (179,009) Supplies & Materials (289,671) Utilities (361,201) General Expenses (98,300) Travel & Training (151,115) Grant Operating Expenses (40,000) Total Maintenance And Operations (2,910,938) Transfers Out Transfer Out FFP (8,500,000) Transfer Out Tideland Harbor Cap (4,500,000) Transfer Out Nbr Enhancement (4,977,137) Transfer Out Facilities Maint (500,000) Transfer Out 800 Mhz Radio Transfer Out Intrafund Transfer IN Intrafund Transfer IN Tidelands Total Transfers Out (18,477,137) Capital (2,500,000) Contingency Reserve1 Total by Tier (2,910,938) (2,000,000) (20,977,137) Cumulative by Tier (2,910,938) (4,910,938) (25,888,075) 2222 Conclusion •Staff will consider adjustments to the operating and capital budgets in subsequent quarters should revenue projections prove to be either too optimistic or conservative. •Any proposed adjustments will be presented to the Finance Committee and City Council. •Staff recommends that the Finance Committee review and discuss this report and provide recommendations for City Manager and City Council consideration prior to the November 24, 2020 City Council meeting when this report will next be presented. 23 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5C November 19, 2020 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Carol Jacobs, Assistant City Manager / Interim Finance Director / Treasurer 949-644-3313 or cjacobs@newportbeachca.gov SUBJECT: BUDGET AMENDMENTS FOR QUARTER ENDING SEPTEMBER 30, 2020 EXECUTIVE SUMMARY The purpose of this memorandum is to report on the budget amendments for the first quarter of FY 2020-21. 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 included as Attachment A. Prepared by: Submitted by: /s/ Walid Harding /s/ Carol Jacobs Walid Harding Carol Jacobs Budget Analyst Assistant City Manager / Interim Finance Director / Treasurer Attachment: A.Budget Amendments Fiscal Year 2020-21 Quarter Ending September 30, 2020 ATTACHMENT A BUDGET AMENDMENTS FISCAL YEAR 2020-21 QUARTER ENDING SEPTEMBER 30, 2020 BA #Date Amendment Type Fund Revenues Expenditures Net Effect on Fund Balance Increase/(Decrease)Department Explanation 001 9/8/2020 City Council OTS Grant Fund 237,000.00 237,000.00 - Police To increase revenue estimates and expenditure appropriations to accept the 2021 State of California, Office of Traffic Safety (OTS) Selective Traffic Enforcement Program (STEP) Grant (#PT21193) for increasing DUI Enforcement and Awareness and funding additional traffic safety enforcement, as well as DUI Sobriety Checkpoints. Funds will be used to pay for overtime costs specifically used for this program and related costs for travel and training.002 8/12/2020 City Manager General Fund - 10,000.00 (10,000.00) Human Resources To appropriate funds from General Fund unappropriated fund balance that were not spent in FY 20 for employee recognition and service awards. 003 9/8/2020 City Council General Fund 200,000.00 200,000.00 - Library To increase revenue estimates and expenditures appropriations to enhance Library collections and programs. 004 9/8/2020 City Council Contributions Fund 79,705.57 79,705.57 - Public Works To increase revenue estimates and expenditure appropriations for the Vessel Sewage Pump Outs Replacement project from increased contributions from the State of California, Department of Parks and Recreation, Division of Boating and Waterways. General Fund 22,500.00 - 22,500.00 Contributions Fund 450,000.00 450,000.00 - 006 8/13/2020 City Manager Environmental Contributions - 509,448.45 (509,448.45) Public Works To appropriate from Contributions Fund unappropriated fund balance funds that were unintentionally excluded from 2021 CIP Reappropriations. These funds were unencumbered at the time of year end, and returned to fund balance. Council had approved the contract with GCI Construction and the allocation of these funds in FY20. Contributions Fund 5,195,419.59 5,195,419.59 - Neighborhood Enhancement - 204,512.35 (204,512.35) 008 9/22/2020 City Council General Fund 25,000.00 25,000.00 - Library To increase revenue estimates and expenditure appropriations to record a donation from the Newport Beach Library Foundation. 009 9/10/2020 City Manager General Fund 10,000.00 10,000.00 - Library To accept a $10,000 donation from Friends of the Newport Beach Library and increase expenditure appropriations to be used toward the passport office and gift shop.010 9/22/2020 City Council General Fund 1,015,975.00 549,858.00 466,117.00 Fire To increase revenue estimates and expenditure appropriations related to the Medi-Cal IGT program. General Fund - 109,040.00 (109,040.00) Water Enterprise Fund - 63,800.00 (63,800.00) 014 9/25/2020 City Manager General Fund 10,000.00 10,000.00 - Library To increase revenue estimates and expenditure appropriations for the Newport Beach Cultural Arts Exhibition. City of Newport BeachFiscal Year 2020-21 Budget AmendmentsQuarter Ending September 30, 2020 005 To appropriate from Neighborhood Enhancement unappropriated fund balance funds to use towards SCE Rule 20A Credit Purchase. This budget amendment also recognizes increased revenue contributions from multiple utility companies and appropriation of these funds towards construction. Public WorksCity Council8/25/2020007 To increase revenue estimates and expenditure appropriations for the Bay/Channel Crossings Water Main Replacement project from contributions from Bayside Village Marina LLC. Public WorksCity Council8/25/2020 011 To increase expenditure appropriations from fund balance to award a contract agreement with BrightView Landscape Services, Inc. for landscape medians and roadside areas maintenance. The maintenance costs were not included in the recently adopted Fiscal Year 2020-21 budget and the amendment will be ongoing and included in future budgets to maintain the contract. Public WorksCity Council9/22/2020 11/10/20 Scheduled Date Agenda Title Agenda Description Dark Dark Thursday, September 24, 2020 Investment Performance Review Staff and/or one or more investment advisors will describe the performance of the City's investment portfolio. Annual Investment Policy Review and Update 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. 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. Fire Station 2 - Bond Authorization Recommendation On May 12, 2020, the City Council reviewed the Adopted Fiscal Year 2019-20 Capital Improvement Program Budget. There was a unanimous straw vote to support evaluating financing for the Lido Fire Station 2 Project. This report describes the contours of a financing plan and its conformance to the City’s Debt Policy. Internal Audit Plan Update This update summarizes all internal audit activities to date including the findings of the Enterprise Risk Assessment and the Internal Controls Review report. Working in collaboration with City management, Moss Adams prepared a recommended internal audit program for Fiscal Year 2020-21 that focuses on addressing priorities from the risk assessment and internal controls review. Work Plan Review Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. Thursday, November 19, 2020 CalPERS Update Staff will present the latest actuarial valuation changes to actuarial assumptions, a review of investment returns, the potential impact of future rates, and the results of employee cost sharing. Fiscal Year 2019-20 and Fiscal Year 2020-21 Financial Updates Staff will provide a fiscal year ending June 30, 2020, and first quarter FY 2020- 21 budget performance update. Budget Amendments for the Previous Quarter Staff will report on the budget amendments for the prior quarter. Work Plan Review Staff will review with the Committee the agenda topics scheduled for the remainder of the calendar year. City of Newport Beach Finance Committee Work Plan 2021 November September July August I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2021\2021 FC Workplan 1