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HomeMy WebLinkAboutApproved Minutes - September 24, 2020Finance Committee Meeting Minutes September 24, 2020 Page 1 of 9 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 worse than what was expected and he 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 of 9 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, and 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 3 of 9 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 in his tenure on the Finance Committee when 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’s 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 4 of 9 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 when 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 5 of 9 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 6 of 9 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 7 of 9 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’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. 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 8 of 9 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 this 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. 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 will 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 or October to allow for proper assessment of the first quarter. Mayor/Chair O’Neill opened public comments. Mr. Mosher 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. Finance Committee Meeting Agenda September 24, 2020 Attest: ___________________________________ _____________________ Will O’Neill, Chair Date Finance Committee Page 9 of 9