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HomeMy WebLinkAboutApproved Minutes - March 11, 2021Finance Committee Meeting Minutes March 11, 2021 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE MARCH 11, 2021 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. via teleconference. II. ROLL CALL PRESENT: Chair Will O’Neill, Mayor Brad Avery, Council Member Noah Blom, 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, Finance Director/Treasurer Scott Catlett, Deputy Director/Finance Steve Montano, Administrative Specialist to the Finance Director Marlene Burns, Senior Accountant Theresa Schweitzer, Acting Accounting Manager Trevor Power, Budget Manager Shannon Espinoza, and Payroll Specialist Rochelle Myers MEMBERS OF THE PUBLIC: Charles Klobe, Jim Mosher, and Nancy Scarbrough OTHER ENTITY: Bob Callanan, Audit Partner, CliftonLarsonAllen LLP III. PUBLIC COMMENTS None IV. CONSENT CALENDAR MINUTES OF FEBRUARY 18, 2021 Recommended Action: Approve and file. Chair O’Neill called for public comments and hearing none, closed the public comments. MOTION: Committee Member Blom moved to approve the minutes, seconded by Mayor Avery. The motion carried 7 ayes – 0 noes V. CURRENT BUSINESS A. FINANCIAL STATEMENT AUDIT RESULTS AND RELATED COMMUNICATION FROM THE AUDITORS Summary: The City’s external audit firm will meet with the Finance Committee to discuss the audit findings for the fiscal year ending 6/30/2020. The Committee will have an opportunity to discuss any potential areas of concern and the auditors can discuss any changes in accounting standards or disclosures that were relevant for the audit year. Recommended Action: Receive and file Finance Committee Meeting Minutes March 11, 2021 Page 2 of 8 Finance Director/Treasurer Scott Catlett introduced Bob Callanan, Audit Partner, CliftonLarsonAllen LLP, and advised the Finance Committee they have been provided with a copy of their opinion letter inside of the financial statements for the City, and two accompanying letters reporting out the findings from the audit. Mr. Callanan reported that CliftonLarsonAllen LLP issued an unmodified opinion on the City’s Financial Statements, which is the highest form of opinion that can be provided under auditing standards. He reported a few of the Governmental Accounting Standards Board (GASB) statements that were due to be implemented were postponed for one year and will come into play for FY 2020-21. He advised the City made a change in the way it estimates the allowance for uncollectible accounts receivable, which is listed in one of the letters provided. He noted it was a change in estimate and methodology and they believe it to be reasonable considering the change in the circumstances. Mr. Callanan reported that the Financial Statements contain significant estimates of the City’s pension plans and the reporting of the City’s other post employment benefit (OPEB) plans. He advised the claims liability reported is also an estimate based on experience and existing claims in-process. He noted additional details can be found in footnotes 8, 10, and 11. He advised that there were no significant difficulties in performing the audit and there were a few audit corrections that management agreed to make and have been booked. He noted that there are no disagreements with management on any issues related to financial reporting or audit procedures. He noted that management provided a representation letter that provided full access to whatever was needed to complete the audit under auditing standards. Chair O’Neill called for public comments and hearing none, closed the public comments. The item was received and filed. B. INTERNAL AUDIT PROGRAM UPDATE Summary: Staff will provide the Finance Committee with a verbal update on the status of the Internal Audit Program. Recommended Action: Receive and file. Finance Director/Treasurer Catlett provided a brief overview of the Internal Audit Program. He reported that the program was established to assist the City by enhancing operational performance and improving the effectiveness of risk management, internal controls, and governance. He advised an Enterprise Risk Assessment was completed along with an Internal Controls Review, which developed into a work plan of recommended topics to be reviewed in the Internal Audit Program. Finance Director/Treasurer Catlett reported a contract is in-process to initiate the first year of the program and provided a list of topics that will be covered in the year ahead. He reported MGO will be working on the Operational Review and Internal Controls testing for Procurement and Moss Adams will be handling the IT Operational Review and Internal Controls Testing, Cash Handling Internal Controls Testing, and the City’s Fiscal Policy Inventory and Implementation Plan. He advised that staff will provide an update in two months since the program is getting underway. In response to Committee Member Collopy, Finance Director/Treasurer Catlett explained the City is paying Moss Adams $120,000 for the three topics included in year one of the program and $25,000 to MGO for the procurement review. In response to Committee Member Tucker’s inquiry, Finance Director/Treasurer Catlett believes the City will be reviewing three program areas per year. Deputy Director/Finance Steve Montano advised a hierarchy has not been established for the subsequent years but Finance Committee Meeting Minutes March 11, 2021 Page 3 of 8 noted the City took the highest priority items as was suggested through the Enterprise Risk Assessment but believes the entire list could be reviewed in the following two years. Committee Member Collopy commented on the development of key performance indicators and noted he thinks of it as a budget tool that each of the individual Directors develops to rationalize their budget to management. In response to Committee Member Collopy’s inquiry, Deputy Director/Finance Montano explained that one component of the audit was to look for operational efficiencies and to make recommendations from an operational standpoint. He advised there have not been strong key performance indicators in the budget and the thinking was the work on the audit side may be suggestive since they are in the weeds with all of the operations listed and believe it would be a good segue into developing those performance measures for the budget. Committee Member Collopy explained that he is not concerned with who develops them or how they are developed he simply wants to see them happen. Finance Director/Treasurer Catlett remarked that the intention would be to work collaboratively with the department and use this as a starting tool needed to have this program in place prospectively as part of the budget process. In response to Committee Member Tucker’s inquiry, Deputy Director/Finance Montano confirmed cybersecurity is included in the IT Operation Review and Internal Controls Testing. He advised cybersecurity is an ongoing effort within the IT Division. He noted another big area for the IT Division is to achieve the highest standard of PCI compliance for credit card processing to do more with merchants. He noted any findings, recommendations, or improvements would be dovetailed into those efforts. City Manager Grace Leung indicated that IT has performed penetration testing for cybersecurity and explained that this review will help establish best practices for determining the type and frequency of future testing that should be completed. She advised that much of the City’s data is in the cloud, so the IT Division remains very mindful of how important cybersecurity is to the City. In response to Committee Member Collopy’s inquiry, City Manager Leung reported she was unaware of any successful penetration attempts but added that she will confirm with the IT Division. In response to Committee Member Collopy’s inquiry, Finance Director/Treasurer Catlett explained the Finance Customer Service Operational Review is a look at customer service practices to ensure the City is delivering the best level of service to the public. Deputy Director/Finance Montano further explained the review would also cover any pay points in the City that perform any type of revenue collection from a customer service operational standpoint. In response to Mayor Avery’s inquiry, Director/Finance Montano advised that the City has never undertaken a study or an analysis of this magnitude in prior years and noted auditors have not found any issues so there are no historical reports to review. Committee Member Tucker suggested that the Accounts Payable Internal Controls be reviewed next. Director/Finance Montano agreed with the suggestion. Chair O’Neill opened public comments. Nancy Scarbrough inquired if the phone system was being included in the IT Audit as well noting that has been an area for false billing. Deputy Director/Finance Montano advised the phone systems are not specifically being reviewed in the scope but are willing to include that in the review. Ms. Scarbrough reported her small business phone system was compromised Finance Committee Meeting Minutes March 11, 2021 Page 4 of 8 and the loss was not covered by insurance. Deputy Director/Finance Montano noted the review will identify and assess strategies to meet the need for increased cybersecurity readiness so phones may flow into that part of the review. Chair O’Neill closed public comments. Committee Member Tucker thanked City Manager Leung for prioritizing the Internal Audit Program. The item was received and filed. C. DISCUSS REVENUE ASSUMPTIONS Summary: Staff will provide an overview of revenue assumptions for the FY 2021-22 Proposed Budget. Recommended Action: Receive and file. Senior Accountant Theresa Schweitzer presented the FY 2021-22 Revenue Outlook, which will include General Fund Revenues, Tidelands Funds, Water Funds, and Wastewater Funds. She reported almost 75% of General Fund Revenue comes from Property Tax, Sales Tax, and Transient Occupancy Tax (TOT) and noted the City ended FY 2019-20 very close to where it ended FY 2018-19. She advised that staff meets regularly with departments to keep an eye on revenue projections given the uncertainty throughout last year and the constantly changing environment. She reported the total General Revenue estimate for FY 2020-21 is $218.6 million and the projection for FY 2021-22 is $232.9 million. Senior Accountant Schweitzer provided an overview of Historical General Fund Revenues. She advised that Revenues are doing much better than expected but are still under where they would have been had the pandemic not occurred. In response to Chair O’Neill’s inquiry regarding the City’s American Rescue Plan Act funding allocation, Finance Director/Treasurer Catlett clarified that the City will receive approximately $9 million. Senior Accountant Schweitzer confirmed the $9 million was not taken into consideration for this presentation. City Manager Leung explained the $9 million will be received over the next two years. She noted the City needs to think about the $9 million carefully because it is a one-time payment. Chair O’Neill concurred. In response to Chair O’Neill’s inquiry regarding what types of funding are included in the General Fund budget for non-recurring expenditures, City Manager Leung advised one-time expenses include the $5 million transfer to the Capital Improvement Program (CIP), $8.5 million to the Facilities Financial Plan (FFP). In response to Committee Member Tucker’s inquiry, City Manager Leung confirmed the $8.5 million to the FFP is largely for debt service. Chair O’Neill commented the City may end up treating the stimulus money the same way it would a Surplus. Senior Accountant Schweitzer reported the City receives 17.15% of the 1% collected for Property Taxes. She advised that Property Tax makes up almost half of General Fund Revenues and includes a variety of categories including secured, unsecured and supplemental with secured making up about 85% of our total revenues within property tax. Lastly, she advised the Assessed Valuation for FY 2021-22 was $63.7 billion and is the second largest in Orange County. In response to Committee Member Joe Stapleton’s inquiry, Senior Accountant Schweitzer advised that the number one city was Irvine. Senior Accountant Schweitzer reported COVID-19 has had limited impacts on Property Taxes so the FY 2020-21 estimate will remain the same. She advised if payments continue to come in as they have been the year will finish higher than projected. She estimates a 4% growth in FY 2021-22 and noted only a 1% Consumer Price Index (CPI) adjustment is being received for FY 2021-22. She reminded the Finance Committee that staff is directed through Council Policy Finance Committee Meeting Minutes March 11, 2021 Page 5 of 8 F-3 to budget revenues conservatively and although the graph shows the City is below the trend line it actually can and often does come in higher than projected. In response to Committee Member Collopy’s inquiry, Senior Accountant Schweitzer clarified the FY 2020-21 projected property tax is $118 million, the FY 2020-21 Post-COVID Projection is $119.1 million, and the trend line is $119.5 million. In response to Committee Member Reed’s inquiry, Senior Accountant Schweitzer reported she has not received any kind of a calculation regarding Proposition 19 from the City’s Property Tax consultant that would impact these numbers. She will ask for more information from the consultant. Senior Accountant Schweitzer reported the City receives 1% of the 7.75% sales tax paid which equates to over 15% of General Fund revenues. She advised Autos and Transportation, Restaurants and Hotels, and General Consumer Goods make up the majority of the Sales Tax Revenue. She reported the City also receives 0.3% of the 0.5% that the County collects for Public Safety. In response to Committee Member Tucker’s inquiry, Senior Accountant Schweitzer confirmed the payment is received from the California Department of Tax and Fee Administration. She clarified that Property Tax and Public Safety funds are remitted to the City by the County. She reported Autos and Transportation accounts for 36% of the Sales Tax received and has thrived during the pandemic. She advised General Consumer Goods and Restaurants and Hotels are usually over 20% but are lower due to the pandemic. Senior Accountant Schweitzer reported the United States Supreme Court ruled that states can mandate that businesses without a physical presence in the State collect and remit sales tax. She noted Assembly Bill (AB) 147 requires retailers outside of California to register and collect California use tax and was signed into law on April 25, 2019. She advised AB147 has sharply increased the Sales Tax collected. Senior Accountant Schweitzer reported the City is keeping the FY 2020-21 mid-year estimate at a conservative $34.5 million. She advised the FY 2019-20 Q4 payment was less than expected but noted the Governor did allow for a three-month payment date extension, so the reduced Q4 payment may be due to those missing payments. She reported the FY 2021-22 estimate was provided by the City’s Sales Tax consultant who anticipates slowing growth for Autos and Transportation as well as Building and Construction, but expects Restaurants to be back at approximately 93% of their peak along with Consumer Goods continuing to recover. In response to Committee Member Collopy’s inquiry, Senior Accountant Schweitzer explained the $6 million in anticipated growth from FY 2020-21 is not outside of the line where the City would have expected to be had the pandemic not occurred. She advised the Sales Tax consultant estimated approximately $36 million for FY 2020-21 but noted the City wanted to stay with the conservative $34.5 million because the fourth quarter payment came in less than the consultant was expecting and opined that it was better to opt for the more conservative amount. Senior Accountant Schweitzer reported on TOT and advised the City collects 10% of the rent. She reported TOT makes up 9.1% of General Fund Revenues and includes hotel and residential less payments to Visit Newport Beach Inc. She further explained last year TOT made up 11% of General Fund Revenues. She reported that over half of the City’s hotels were closed last spring with Fashion Island Hotel remaining closed and the Renaissance Hotel just recently reopening. She noted Residential TOT is performing better than prior years but Hotel TOT is still down. She projects Hotel TOT will get back to 60% of pre-COVID actuals by the end of FY 2020-21 and get up to 80% of pre-COVID actuals by the end of FY 2021-22 with Residential TOT projecting flat. Lastly, she reported that although TOT has performed better Finance Committee Meeting Minutes March 11, 2021 Page 6 of 8 than projected it is still considerably below the trend line. She noted there is confidence that once the pandemic is over TOT revenues will bounce back as there is much pent-up demand. Senior Accountant Schweitzer reported on Other Taxes and Revenues and estimates it to be 20% less than the prior year based on prior recession trends. She advised the hardest-hit category from the virus was Charges for Services largely due to limited recreation and senior service classes. She noted other areas impacted by the pandemic were Facility Rentals, Marine Charter Tax, and Investment Income. She reported some areas have fared well during the pandemic such as Parking Revenues and Plan Checks. She clarified that there are decreases in Intergovernmental and Other Revenues which are due to grants and donations that are not budgeted until they are known. Senior Accountant Schweitzer reported 99% of revenue within the Tideland Fund comes from the use of money and property such as Parking Meter Revenue, Lease of Properties, Onshore and Offshore Moorings, and Marina Park Revenue. She advised a handful of accounts within the Tideland Fund are capped and anything over an established baseline goes into the Harbor Capital Fund to help fund capital improvements within the Harbor. She reported Parking dropped at the end of FY 2019-20 but bounced back quickly in FY 2020-21. She advised Leases had minor impacts from COVID and are still up year over year. She noted Investment Income is down and Sale of Oil is down in the FY 2020-21 estimate but is showing improvement. Senior Accountant Schweitzer reported 97% of revenue within the Water Fund comes from Charges for Services which include the Sale of Water, both fixed and usage charges, Meter Turn On, and Connection Charges. She advised the Water Rate Adjustment became effective in January 2020 with annual increases until 2024. She reported Sale of Water is based on consumption and can vary every year. She reported Water Capital Fund Revenues are related to Investment Income which is projected to be down for FY 2020-21 and FY 2021-22, which explains the drastic decrease. Senior Accountant Schweitzer reported 98% of the revenue within the Wastewater Fund comes from Charges for Services. She advised the Wastewater Rate was adjusted effective January 1, 2018, with annual increases until January 2022. She explained sewer use is based on water consumption and can vary. Lastly, she reported Wastewater Capital Fund Revenues are related to Investment Income which is projected to be down for FY 2020-21 and FY 2021-22. In response to Committee Member Tucker’s inquiry, Senior Accountant Schweitzer reported that much of the revenue that comes in for the recreation classes is from contract classes so it would be expected that expenditure would be down as well. Chair O’Neill called for public comments and hearing none, closed the public comments. Chair O’Neill reported that he has spoken to several colleagues in other cities who are scrambling and noted that the City of Anaheim has had it rough. He advised that Anaheim just received word they would be receiving approximately $100 million from the American Rescue Plan Act federal stimulus package, which only covers one year of lost revenue for them. He noted Disneyland will be reopening at 35% capacity at best and restricted to California residents which does not help bring back tourism to Anaheim. He appreciates how conservative the City has been with revenue assumptions and hopes the expected summer economic activity comes to fruition. He encouraged residents to continue to shop locally, support local businesses, and encouraged people to take staycations. The item was received and filed. D. WORK PLAN REVIEW Summary: Staff and Finance Committee to review the proposed work plan and adjust as necessary. Finance Committee Meeting Minutes March 11, 2021 Page 7 of 8 Recommended Action: Receive and file. Chair O’Neill reported that the next meeting of the Finance Committee will be April 15 where Audit Services recommendations and the Proposed Budget will be discussed. He indicated that there may be a meeting on April 29 but will discuss the need with City Manager Leung. He clarified there will be a meeting on May 13 where discussions regarding the budget will continue. He reported there will be a Joint City Council/Finance Committee Budget Study Session on May 25 and requested all Finance Committee members attend in-person or virtually and believes it will start at 4:00 p.m. He advised there will be a May 27 Finance Committee meeting at 3:00 p.m. to review the budget and make a recommendation to the City Council. He suggested the Finance Committee retain the June 10 meeting on the calendar but noted it will probably be canceled. Chair O’Neill opened public comments. Jim Mosher requested clarification if the intention is to hold non-joint meetings in a virtual format. He expressed his frustration with technical difficulties that prevent him from joining the virtual meeting before the meeting has started for two months in a row. He suggested he email his non-agenda comments since he was unable to connect to the meeting when comments were expected. Chair O’Neill noted he would extend the three-minute speaking limit for Mr. Mosher given the technical issues he described. In response to Mr. Mosher’s inquiry, Chair O’Neill commented he is unable to provide an answer regarding the intent to continue holding the meetings virtually. Chair O’Neill reopened agenda and non-agenda comments. Mr. Mosher reported approximately one month ago he was unable to locate the contract with Socrata. He commented that the City spends $20,000 in software maintenance for both the Open Expenditure and the Open Budget Software sometimes referred to as Open Checkbook. He noted the contract runs through the end of November and inquired if the City will still be using the Open Expenditure module internally, and if it will be used after November, and lastly, will it ever be made public like other cities to show real-time expenditure activity of the City. Mr. Mosher reported that during the same time he could not locate the larger contract with Tyler Technologies for the City’s Enterprise Resource Planning (ERP) Software System. He noted he was only able to find the contract made in 2014 which expired in 2019. He also noted the City Clerk shows the contract as being expired yet it has been amended after the expiration date. He requested the status of the ERP software contract. Mr. Mosher reported an error on Page 7 of the minutes of February 18 which should be corrected to reflect the Library copy charge is increasing from $0.15 per page to $0.35 per page. Mr. Mosher inquired how the City’s Auditor became CliftonLarsonAllen LLP as it had been White Nelson Diehl Evans. He noted he has never seen the Comprehensive Annual Financial Report agendized at either the Finance Committee or the City Council for discussion and expressed concern that the City spends a lot of money on a very lengthy report that is not discussed. Chair O’Neill closed the agenda and non-agenda comments. Deputy Director/Finance Montano advised staff does access some of the functionality internally that is available in Open Expenditures. He noted there has not been much demand for releasing it for public access other than Mr. Mosher.