Loading...
HomeMy WebLinkAboutFinance Committee - October 14, 2021CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D Thursday, October 14, 2021 - 3:00 PM Finance Committee Members: Will O'Neill, Chair Brad Avery, Mayor Noah Blom, Council Member William Collopy, Committee Member John Reed, Committee Member Nancy Scarbrough, Committee Member Joe Stapleton, Committee Member Staff Members: Grace K. Leung, City Manager Scott Catlett, Finance Director/Treasurer Steve Montano, Deputy Director, Finance Marlene Burns, Administrative Specialist to the Finance Director NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance Director/Treasurer 24 hours prior to the scheduled Finance Committee meeting. NOTICE REGARDING PUBLIC PARTICIPATION Questions and comments may also be submitted in writing for the Finance Committee’s consideration by sending them to Scott Catlett Finance Director/Treasurer, at scatlett@newportbeachca.gov. To give the Finance Committee adequate time to review your questions and comments, please submit your written comments by no later than 5 p.m. the day prior to the Finance Committee meeting. All correspondence will be made part of the record. NOTICE TO THE PUBLIC 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. It is the intention of the City of Newport Beach to comply with the Americans with Disabilities Act (“ADA”) in all respects. If, as an attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, the City of Newport Beach will attempt to accommodate you in every reasonable manner. If requested, this agenda will be made available in appropriate alternative formats to persons with a disability, as required by Section 202 of the Americans with Disabilities Act of 1990 (42 U.S.C. Sec. 12132), and the federal rules and regulations adopted in implementation thereof. Please contact the City Clerk’s Office at least forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is feasible at (949) 644-3127 or scatlett@newportbeachca.gov. 1 October 14, 2021 Page 2 Finance Committee Meeting I.CALL MEETING TO ORDER II.ROLL CALL III.PUBLIC COMMENTS Public comments are invited on agenda and non-agenda items generally considered to be within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for the record. The Finance Committee has the discretion to extend or shorten the speakers’ time limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all speakers. As a courtesy, please turn cell phones off or set them in the silent mode. IV.CONSENT CALENDAR MINUTES OF SEPTEMBER 16, 2021A. Recommended Action: Approve and file. DRAFT MINUTES 09162021 V.CURRENT BUSINESS YEAR-END BUDGET RESULTSA. Summary: Staff will provide a presentation regarding the year-end budget results for FY 2020-21. Recommended Action: Receive and file. STAFF REPORT 5C1_STAFF PRESENTATION_10142021 FOLLOW-UP HARBOR DEPARTMENT OPERATING BUDGETB. Summary: Per the Committee's request, staff will provide additional information regarding the Harbor Department's budget. Recommended Action: Receive and file. 5B1_STAFF PRESENTATION_10142021 2 October 14, 2021 Page 3 Finance Committee Meeting CREDIT CARD FEES DISCUSSIONC. Summary: Staff will provide the Committee with an overview of the costs associated with processing credit card transactions, as well as the various types of payments for which the City currently accepts credit cards. The purpose of this item is to receive the Committee's feedback on whether it would make sense to recommend to the City Council that the City collect a service fee for any or all credit card transactions. Recommended Action: Receive and file. 5C1_STAFF PRESENTATION_10142021 REVENUE AUDIT PROGRAM UPDATED. Summary: Staff will provide an update on audits conducted by the Revenue Division to verify transient occupancy tax (hotels, agents and residential owners), charter boat company, waste hauler, etc. revenue collections. Recommended Action: Receive and file. STAFF REPORT 5D1_STAFF PRESENTATION_10142021 BUDGET AMENDMENTS FOR QUARTER ENDING SEPTEMBER 30, 2021E. Summary: Staff will report on the budget amendments from the prior quarter. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A 3 October 14, 2021 Page 4 Finance Committee Meeting WORK PLAN REVIEWF. Summary: Staff and Finance Committee to review the proposed work plan and identify matters that members would like placed on a future Agenda for discussion, action, or report. Recommended Action: Receive and file. ATTACHMENT A VI.ADJOURNMENT 4 Finance Committee Meeting Minutes September 16, 2021 Page 1 of 10 CITY OF NEWPORT BEACH FINANCE COMMITTEE SEPTEMBER 16, 2021 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:02 p.m. in the Newport Beach Central Library, Friends Meeting Room, 1000 Avocado Avenue, Newport Beach, California 92660. II. ROLL CALL PRESENT: Chair Will O’Neill, Committee Member Noah Blom, Committee Member William Collopy, Committee Member John Reed, Committee Member Nancy Scarbrough, and Committee Member Joe Stapleton ABSENT: Mayor Brad Avery (Excused Absence) 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, Budget Manager Shannon Espinoza, and Harbormaster Paul Blank OTHER ENTITY: Jayson Schmitt (Chandler Asset Management) Participated via teleconference. MEMBERS OF THE PUBLIC: Jim Mosher III. PUBLIC COMMENTS None IV. CONSENT CALENDAR MINUTES OF MAY 27, 2021 Recommended Action: Approve and file. Chair O’Neill called for public comments and hearing none, closed the public comments. MOTION: Committee Member Reed moved to approve the minutes, as amended, seconded by Committee Member Collopy. The motion carried 5 ayes, 0 noes, 1 abstention (Committee Member Scarbrough), 1 excused absence (Mayor Avery) V. CURRENT BUSINESS A. ANNUAL REVIEW OF INVESTMENT PERFORMANCE Summary: The City's investment advisor, Chandler Asset Management, will report on the performance of the City's investment portfolio for the fiscal year ending June 30, 2021. Recommended Action: Receive and file. Jayson Schmitt, Chandler Asset Management, reported that while recovery continues there are headwinds from the Delta COVID-19 variant that have lowered optimism about the 5 Finance Committee Meeting Minutes September 16, 2021 Page 2 of 10 economy. He advised a potential infrastructure bill may be coming from the Federal level that could provide more stimulus but expects to see a 6% growth in the economy for all of 2021. Mr. Schmitt reported the Federal Reserve purchased $80 billion of U.S. Treasuries and $40 million of Agency Mortgage-Backed Securities (MBS) for a total of $120 million on their balance sheets. He anticipates the Federal Reserve will announce a tapering which is a reduction in the amount of the purchases starting in October or November with the actual taper starting at the beginning of 2022. He reported the Treasury yield curve has steepened, meaning that short-term rates have remained relatively the same and longer-term rates have increased over that period. Mr. Schmitt provided a brief overview of the employment situation. He reported jobs continue to increase although the numbers are underwhelming at 235,000 compared to the consensus estimate of 733,000. He anticipates the job market to continue to heal and get healthier. He advised the unemployment rate continues to trend down but is still above the pandemic levels and has a way to go before getting back to a pre-pandemic basis. Mr. Schmitt provided a brief overview of inflation. He reported the core Consumer Price Index (CPI) headline number was slightly below 5.5%. He advised the most recent survey brought the number down to about 5.3% but noted there are still supply chain disruptions. He advised they continue to see pressure in commodity prices and wages. He reported the Federal Reserve believes the impact on Personal Consumption Expenditures (PCE) will be transitory and will continue to be watched. Mr. Schmitt reported the housing market has recovered but noted there is a slowdown of housing starts. He referenced the S&P 20 City Composite Home Price Index and advised home prices have increased by 19.1% on a year-over-year basis. He believes there is an undersupply of housing as a result of the Great Recession. He noted some of the increase is likely to abate but the home prices will be here to stay. Mr. Schmitt provided a brief overview of bond yields. He reported the two-year and the five-year Treasury yields have remained relatively the same but noted longer-term rates such as the 10-year Treasury yield have started to decline. He advised some of that is due to the reduced expectations for Gross Domestic Product (GDP). Mr. Schmitt reported the objectives of the City are to provide safety, liquidity, and earn commensurate returns. He advised the objective is to meet or exceed the return on an index of 1-3 Year Treasury notes which is met through investing in high-quality fixed-income securities that comply with the City's investment policy. Mr. Schmitt provided a brief overview of the portfolio characteristics. He reported the average maturity of the portfolio is 2.00 years, the average modified duration is 1.81 years which is in line with the benchmark which is 1.80 years. He reported the Average Purchase Yield is 1.35% which has come down from 1.52% three months ago due to rates coming down. He advised the Average Market Yield is 0.27% and is an AA+ rated portfolio valued at $247.8 million. Mr. Schmitt provided a brief overview of the portfolio’s allocation, which includes Mortgage-Backed Securities, US Treasury Notes, Corporate Notes, and Asset-Backed Securities. He advised the yields on the Asset-Backed Securities have increased and noted the yields on the Agency Securities have declined and they have not provided as much value as in the past. He advised other opportunities are being investigated in the marketplace to better achieve the goals of the City. He advised the portfolio allocation also includes Supranationals, Collateralized Mortgage Obligations, Municipal Bonds, and a small amount in a Money Market Fund. He reported the City’s portfolio duration is at 100% of the benchmark meaning that the duration is right in line with the benchmark. He advised it did go a little bit higher on May 31, 2020, when there were opportunities, but has gone down since then. 6 Finance Committee Meeting Minutes September 16, 2021 Page 3 of 10 In response to Committee Member Collopy’s inquiry regarding the benchmark of the AAA rating, Mr. Schmitt explained the benchmark is 100% US Treasuries and the City’s portfolio owns some corporate securities which have lower ratings. He confirmed the portfolio has dropped down, but most portfolios typically have a little bit lesser quality than 100% US Treasuries, allowing the portfolio to gain some additional yield. He advised the portfolio’s rating increased a notch on May 31, 2020, and noted it used to be an AA rated overall portfolio and is now an AA+ rated portfolio. Mr. Schmitt provided a brief overview of the investment performance, which is measured through the total return on the portfolio. He reported the City's portfolio has earned three basis points versus the benchmark, which was flat over the last three months. He advised the 12-month rate of return for the portfolio was 0.28%, the two-year rate of return was 1.97%, the three-year rate of return was 2.84%, the five-year rate of return was 1.95%, and the ten-year rate of returnwas1.44% on an annualized basis. The portfolio has earned an average return of 4.1% since its inception, which is 28 basis points above the benchmark. In response to Committee Member Collopy’s inquiry regarding how the City benchmarks against the portfolios of other cities managed by Chandler Asset Management, Mr. Schmitt explained Chandler Asset Management generally has the same strategy mandate from other cities as Newport Beach. He reported many other public agencies use the one-to-three-year benchmark. He explained they are managing portfolios in a group-type setting meaning that all the portfolios have similar characteristics, and their performance is going to be very similar. In response to Committee Member Stapleton’s inquiry regarding when opportunities are taken to sell securities , Mr. Schmitt confirmed it is considered when advantageous and explained that as securities mature in the current portfolio, they are reinvesting into a lower-interest-rate environment from securities that were purchasing probably three to four years ago. He confirmed the annualized rate of return is gross of fees and would be five or six basis points less net of fees. Chair O’Neill’s inquired as to the amounts listed for the Civic Center COP and the Fire Station COP. Deputy Director/Finance Steve Montano advised the amount shown for the Civic Center reflects the City’s Build America Bond subsidy payment that comes in and is used to pay a portion of the debt service payment later in the fiscal year. He clarified the $10 million shown for the Fire Station COP is the full amount the City borrowed for construction, which is still sitting in the portfolio earning interest pending drawdown to reimburse the City for project costs. He advised payments to the contractor are slow at the outset and will start ramping up over the next few months. Chair O’Neill opened public comments. Jim Mosher inquired whether all of the City funds such as a Tideland Fund are in a separate account somewhere or is mingled into this one investment account or not and how that works. Chair O’Neill closed public comments. Finance Director/Treasurer Catlett confirmed the funds are comingled within a pooled investment portfolio. He advised that in addition to the portfolio managed by Chandler Asset Management, the City also has cash invested in the Local Agency Investment Fund and in the City’s bank accounts. He noted that the funds are pooled because it is easier to manage cashflows that way. From a risk management standpoint, the kinds of securities allowable under the California Government Code are very conservative investments and essentially risk- free. He advised it would be very rare to see a default by one of the securities’ issuers. Mr. Schmitt explained that the corporate bonds held within the City’s portfolio are rated at a high level by a nationally recognized rating agency and are issued by large and stable corporate issuers. 7 Finance Committee Meeting Minutes September 16, 2021 Page 4 of 10 In response to Committee Member Collopy’s inquiry regarding the $3 million transfer in/out, Deputy Director/Finance Montano advised the City quite regularly transfers money in and out of the portfolio based on liquidity needs. Finance Director/Treasurer Catlett explained there are three layers within the City’s portfolio that include the City’s bank account, the Local Agency Investment Fund, and the Chandler-managed portfolio. He advised funds regularly move around between those accounts as needed. The item was received and filed. B. ANNUAL REVIEW OF INVESTMENT POLICY Summary: Staff will provide a presentation regarding any changes proposed to the City's Investment Policy by staff or the City's investment advisor prior to the Investment Policy being approved by the City Council. Recommended Action: Review and discuss this report and recommend that Council formally approve the proposed changes by adopting a resolution. These changes are in furtherance of the City’s investment objectives. Deputy Director/Finance Montano reported three changes to the Investment Policy, which would align the Policy to recent changes made to the California Government Code. In response to Committee Member Collopy’s inquiry, Deputy Director/Finance Montano confirmed all this is doing is aligning with State legislation and there have been no zero or negative coupon securities purchased by the City. In response to Chair O’Neill’s inquiry regarding the sunset date for several of the changes, Deputy Director/Finance Montano confirmed the sunset date of January 1, 2026, is a provision in the State code. He also confirmed the sunset date also means such securities purchases are allowed only through that date. Finance Director/Treasurer Catlett clarified if such a security was held in the portfolio as of January 1, 2026, it could be held to maturity. Deputy Director/Finance Montano reported on a fourth and final change that will allow Chandler Asset Management to act on a security that is downgraded below policy minimums if the Finance Director cannot be reached in time. He confirmed this has never happened in his tenure with the City, but it is good to include this language just in case. Chair O’Neill called for public comments and hearing none, closed the public comments. MOTION: Committee Member Stapleton moved to recommend the Council formally approve the proposed changes by adopting a resolution, seconded by Committee Member Collopy. The motion carried 6 ayes, 0 noes, 1 excused absence (Mayor Avery). C. OVERVIEW OF HARBOR DEPARTMENT OPERATIONS, REVENUES, AND OPERATING BUDGET Summary: Staff from the Finance Department and the Harbor Department will provide the Committee with an overview of the revenues generated in the Harbor and the operating budget for the Harbor Department. Recommended Action: Receive and file. Harbormaster Paul Blank provided a brief overview of the Harbor Department’s operations and finances. He reported it was formed in July 2017 when the City assumed responsibility for mooring management from the Orange County Sheriff's Department and realized $300,000 in savings by doing so. He reported the Harbor Operations Division was initially assigned to the 8 Finance Committee Meeting Minutes September 16, 2021 Page 5 of 10 Public Works Department and was transferred to the City Manager's Office in January 2018. He explained the portion of Harbor resources that deals with structures over the water remains in Public Works. Harbormaster Blank reported in July 2018 the City Council created a standalone Harbor Department as part of a change to Title 17. He reported the Harbor Department’s mission is to keep Newport Harbor clean, safe, and well-enjoyed by everyone. He noted in keeping with the paradigm of the General Plan, he explained decisions are made in favor of residents first, businesses second, and visitors third. He provided examples of how the staff is maintaining a clean Harbor and referenced a recent graffiti clean-up effort. Harbormaster Blank reported the Harbor Department provides mooring management, code enforcement, Harbor events permitting, safety/rescue operations, Marina Park/Hospitality, pump-out equipment maintenance and upgrades, impounds and auctions, and public relations and concierge services. He described mooring management that includes the new mooring permitting process, which was established on January 1, 2021. He advised the department is conducting a wholesale audit and update of mooring permits many of which had not been updated in several years. He reported they continue to work on ongoing permit requirements that require maintenance such as overhauls, registration and insurance, and transfers. He noted they also monitor the 51 permitted liveaboards in the live-aboard program including one in the commercial marina. He advised they also manage mooring sub-permitting and explained the Harbor Department can sub-permit moorings that have been vacant for more than 30 days on a two-week basis. He advised sub-permitting of onshore moorings is new this season and is very popular. Lastly, he advised they manage incident documentation and resolution and use the same request system as the rest of the City. He confirmed one audit is being conducted this year and feels they can maintain the data moving forward. Harbormaster Blank reported on code enforcement services that include issuing the Marine Activity Permits for all the commercial operators. He advised he met with the Balboa Bay Club Dock Master and Sales Manager to talk about the people who run charter operations out of the Bay Club. He advised there will be some letters sent between the Harbor Department and some of the Balboa Bay Club’s slip tenants who do not have a Marine Activity Permit and are not permitted to be operating commercial charters out of the Bay Club. Harbormaster Blank reported code enforcement services also include sea lion deterrent and abatement. He explained it is the responsibility of the owner to keep sea lions off of their boats, structures, and docks; however, when it is not possible, the City will deploy the deterrents and charge the cost to the owner. He reported that all visitors to anchorages are subject to a dye tab testing to test the sanitation system and are apprised of the fines if there is discharge in the Harbor. He explained the same dye tab testing program exists for every new boat assigned to a morning. He reported that Code Enforcement officers will write administrative citations for speeding in the Harbor and advised over two dozen have been issued this year. Harbormaster Blank reported bridge jumping was a huge issue beginning in the summer and noted the Harbor Department was able to provide bridge jumping deterrence before the Lifeguard Program was ramped up for the season. He advised 15 total bridge jumping administrative citations were issued. He explained if the bridge jumper is an adult it is issued to the adult and if it is a juvenile the citation is written to their parents or guardians. Harbormaster Blank reported there have been inspections conducted at the commercial marinas for multiple berthing. He explained there is a tremendous cooperative arrangement between the Fire Department and the Harbor Department, in that the Fire Department has code that says every vessel moored in Newport Harbor needs to be independently tied so it can be independently disconnected from the dock or mooring it is tied to in the event of a fire. He noted the Fire Code does not permit multiple berths, meaning, one boat blocking in another boat. He advised Code Enforcement Officers have been issuing warnings for multiple berthing to be 9 Finance Committee Meeting Minutes September 16, 2021 Page 6 of 10 cleared up within 30 days. He confirmed inspections were not conducted on residential piers because the main concern was on the commercial marinas. Harbormaster Blank reported Vessel Turn-In Program (VTIP) grants and the Abandoned Watercraft Abatement Fund (AWAF) are administered by Code Enforcement. He explained that this program takes a no longer wanted vessel and uses California Boating and Waterway Funds to have the boat destroyed. He explained the vessel cannot be salvaged under this program because the State does not want to have to pay to remove the same boat twice. In response to Committee Member Nancy Scarbrough's inquiry regarding who completes vessel destruction, Harbormaster Blank reported three authorized contractors complete this work for the Harbor. He explained the Harbor Department takes the title of the boat and then offers the opportunity to those three contractors to 00bid on the destruction and removal. He advised the current grant has $30,000 remaining with a deadline of September 30, 2021, and noted approximately 30 vessels have been destroyed this year. He reported the Harbor Department recently received another $175,000 in grant funds. In response to Committee Member Collopy's inquiry regarding grant funding, Harbormaster Blank explained that to accept the grant funds the City has to pay 10%. He confirmed the Harbor Department could do more if it had more grant funding but noted there are less than five vessels in Newport Harbor that he would consider eligible today. He advised many people are enjoying their boats this year due to the pandemic and the situation may be very different in 18 months. Harbormaster Blank reported Code Enforcement Services also permits all that activity in Newport Harbor including parades, regattas, large vessel stays, raft-ups, temporary moorings, and coordination with Orange County Sheriff’s Department, and U.S. Coast Guard. He advised large vessel owners expressed appreciation for the easy permitting process in Newport Harbor. In response to Committee Member Scarbrough’s inquiries regarding dye testing and inspections, Harbormaster Blank explained they conduct a mooring check-up every day to confirm vacant moorings and to ensure all vessels have an appropriate reservation. He explained the vessel needs to make it to Marina Park before it is assigned a mooring. He presented photos of an unpermitted raft-up where the permits were revoked and both permittees received $2,000 in fines and are unlikely to receive another permit in the future. Harbormaster Blank reported the Harbor Department is involved in Safety and Rescue Operations and regularly receives training on how to perform safety and rescues at sea or in the Harbor. He referenced a New York Times article that noted a 25% increase in boating accidents this summer. He noted the City implemented the first Paddleboard Safety Program for Newport Harbor in 2013. He reported two rescues that occurred on July 2 and September 4 and provided highlights of each rescue. He advised all staff were recently recertified in Cardiopulmonary Resuscitation (CPR). Harbormaster Blank encouraged residents to visit the Marina Park information page on the City’s website and advised there is a “Ship Shape” light maintenance and cleaning program for mooring permittees available. He advised staff is working with Geographic Information Systems and Information Technology to improve Harbor maps available to visitors and noted there will soon be a QR code on the steering wheel of every Duffy Rental with restroom locations. Harbormaster Blank reported the Harbor Department provides public outreach through public presentations and education, signage, and wayfinding, and noted there is a new layer within GIS for Harbor adjacent public restrooms and conveniences. He advised service requests can also be initiated through the My Newport application. Harbormaster Blank provided an overview of the Harbor Department’s service statistics and noted anchorage dye tabs, public dock enforcement, and speeding enforcement have 10 Finance Committee Meeting Minutes September 16, 2021 Page 7 of 10 increased. He also advised Marina Park mooring rentals and Marine Activity Permits have increased. In response to Chair O’Neill’s inquiry, Harbormaster Blank reported in August, which is a big month of summer for Marina Park slips, sand lines, sub-permits, and sub-permits of onshore moorings, generated $70,000 or roughly $600,000 per year. In response to Committee Member Collopy’s inquiry regarding buoy lights, Harbormaster Blank reported the Harbor Department has an agreement with the U.S. Coast Guard and Orange County Sheriff’s Department. He explained he knows how to file the Private Aide to Navigation (PATON) Application but needs to go through the process. He advised the Harbor Department will be paying for the lights which cost $90 and will be installed on 22 buoys. In response to Committee Member Scarbrough’s inquiry regarding public restrooms, Harbormaster Blank reported there is an opportunity to obtain floating restrooms free of charge and noted he does coordinate with Senior Engineer John Kappeler. He noted the City has obtained the free use of the devices in Lake Arrowhead to test them out for use. He noted there is grant money available that will provide for the ongoing maintenance and cleaning of the floating restrooms. He explained there will be a cost to the City to drive to Lake Arrowhead and pick up the devices. He further explained the floating restroom will be issued permits from the Harbor Department and be noticed in local newspapers. He explained they will be on a structure that will allow a vessel to tie up for 20 minutes maximum and will be added to the GIS mapping system. Harbormaster Blank provided a brief overview of Harbor Department Revenues. He advised there were some subtle increases in line with the Consumer Price Index (CPI). He reported the Harbor Department does not always collect the money it is due for special events or when a special event permit is written and noted they are doing much better at collecting revenue for every service they provide. He reported they are working on creating a secure payment portal to collect online payments. Harbormaster Blank reported Harbor Departments includes three full-time staff including the Harbormaster, Code Enforcement Supervisor, and a Permit Technician. In response to Chair O’Neill’s inquiry, City Manager Leung reported the Community Development Department lost a Code Enforcement Supervisor and the Harbor Department gained one. She advised it is now in the Harbor Department’s budget and noted some of the positions have been reclassified in Community Development as a result. Harbormaster Blank provided a brief overview of Harbor Department Expenditures and noted expenditures are not significantly higher today than they were prior to the formation of the Harbor Department. Chair O’Neill expressed concern that the report was difficult to follow since the Harbor Department was not formed until 2018. Finance Director/Treasurer Catlett explained some services already existed in Public Works that moved over to the Harbor Department. He explained the mooring management drops off expenditures in 2018 since that was part of the Orange County Sheriff’s Department contract. He clarified salaries and benefits increased from 2020 to 2022, but perhaps there were part-time vacancies at the time that staffed up in 2021. He explained the numbers show the 2021 and 2022 budget that assumes 100% staffing. Chair O’Neill noted the 2022 adopted budget for the Harbor Department is $1.9 million but this document shows $2.4 million. Finance Director/Treasurer Catlett clarified there are some harbor-related contracts under the Public Works that are included in that number because they cannot be broken out in the earlier years shown in the table. Chair O’Neill explained he is looking for trends within the Harbor Department. He noted the budget increases FTE by 2.5 but the overall budget increases $843,000 which is a giant leap. Finance Director/Treasurer Catlett noted much of that was in Maintenance and Repair and it could be that there was much 11 Finance Committee Meeting Minutes September 16, 2021 Page 8 of 10 less spending than usual in 2021 or a high vacancy rate. City Manager Leung believes the key is the actual budget that City Council approved and is critical to the discussion. Chair O’Neill, City Manager Leung, and Finance Director/Treasurer Catlett ensued in a discussion of the adopted budget versus the actuals. City Manager Leung advised it may be helpful to show the budgeted actuals for the Harbor Department starting in 2019. Chair O'Neill noted he understands there are three to four years of data for the Harbor Department and staff is simply trying to determine their needs from an overall budget standpoint. He requested it is brought back with budget actuals from 2019. He acknowledged the Public Works Department also does a substantial amount of work in the Harbor Department. He explained the City is also trying to figure out how to set aside sufficient funding for future harbor capital projects. He advised he is trying to understand what more can be transferred around without impacting other departments because every dollar used is from the General Fund. City Manager Leung clarified Public Works harbor-related items include many contracts and maintenance that probably fluctuate from year to year. Chair O'Neill inquired if there are areas of other departments that can better be handled now by the Harbor Department or Public Works. Committee Member Stapleton would rather see what the actual budget is for the Harbor Department and then be informed what is being done after the fact. Chair O’Neill concurred and noted Capital Expenditures for the Harbor Department in 2020 was listed as $129 total although he knows there are more expenditures out there. Finance Director/Treasurer Catlett clarified that number only includes small capital purchases and does not include capital projects and advised staff will bring back a revised presentation focusing on the requested information for the Finance Committee’s review. Chair O’Neil opened public comments. Mr. Mosher advised the Finance Department has a link to the Harbor and Beaches Master Plan on its website that links to the 2018 version and doubts that is the latest version. He reported the links to the Annual Tideland Financial Report were also not working at the time. He noted Harbormaster Blank reported the Harbor Department is doing brisk business with mooring permit transfers. He explained when the mooring permit transfers the City collects a fee that is based on the price of the transfer. He advised the mooring permit allows someone to rent public State Tidelands which many people treat as their personal property so when the permit transfers they pocket the appreciation which can be quite considerable. He inquired if there is an estimate as to how much revenue the City is losing by not taking the appreciation in the value of the property and allowing it to be privatized. He advised the City Council did try to eliminate that possibility and then quickly reverted to the old system that is in place now. Chair O’Neill closed public comments. Harbormaster Blank explained the fee for a transfer is 75% of the annual permit fee which varies by length of the vessel. He advised the form asks what the amount both parties are agreeing to transfer the mooring permit for, which is published on the Harbor Department’s website. He confirmed the log information is public but there is private information on the forms that cannot be released to the public. In response to Committee Member Blom’s inquiry regarding mooring appreciation, Harbor Master Blank reported the general formula is $1,000 per foot so a 40-foot mooring generally transfers for $40,000 between both parties. He advised onshore moorings are transferring at a premium but that growth in the value of moorings is not much greater than CPI. The item was received and filed. 12 Finance Committee Meeting Minutes September 16, 2021 Page 9 of 10 D. INTERNAL AUDIT PROGRAM UPDATE Summary: Staff Bi-monthly progress update on the internal audit program. Recommended Action: Receive and file. Finance Director/Treasurer Catlett reported there are four reports in process. He advised the three reports from Moss Adams will be on the Finance Committee’s agenda in January. He advised the report from MGO may be on the agenda either in October or November. Chair O’Neill called for public comments and hearing none, closed public comments. The item was received and filed. E. BUDGET AMENDMENTS FOR QUARTER ENDING JUNE 30, 2021 Summary: Staff will report on the budget amendments from the prior quarter. Recommended Action: Receive and file. Chair O’Neill advised he has been asking for the budget amendments to be provided for years in the event of any questions. In response to Chair O’Neill’s inquiry regarding a specific item in the list of budget amendments, Finance Director/Treasurer Catlett indicated that the purpose of the transfer was to move where the appropriations were within the City’s account structure but resulted in no net change in spending. Chair O’Neill called for public comments and hearing none, closed public comments. The item was received and filed. F. WORK PLAN REVIEW Summary: Staff and Finance Committee to review the proposed work plan and identify matters that members would like placed on a future Agenda for discussion, action, or report. Recommended Action: Receive and file. Chair O’Neill reported the next meeting of the Finance Committee will be October 14, 2021, and will include Revenue Audit Program updates and Year-end Budget results. He encouraged the committee to read through the year-end budget results report before the next meeting. Chair O’Neill called for public comments and hearing none, closed public comments. The item was received and filed. VI. ADJOURNMENT The Finance Committee adjourned at 4:39 p.m. to the next regular meeting of the Finance Committee. The agenda for the Regular Meeting was posted on September 10, 2021, at 3:50 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. 13 Finance Committee Meeting Minutes September 16, 2021 Page 10 of 10 Attest: ___________________________________ _____________________ Will O’Neill, Chair Date Finance Committee 14 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5A October 14, 2021 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Finance Department Scott Catlett, Finance Director/City Treasurer 949-644-3123, scatlett@newportbeachca.gov SUBJECT: Fiscal Year 2020-21 Fourth Quarter Financial Report SUMMARY: The City of Newport Beach Finance Department prepares quarterly financial reports to review the status of revenues and expenditures for the City’s funds. This report contains preliminary information on revenues, expenditures, and estimated fund balance for the fourth quarter of the fiscal year ending June 30, 2021. Because the City’s financial records are undergoing the customary audit review, the financial information presented in this report is preliminary in nature and subject to adjustments as the year-end close process continues through December. Any such adjustments are not anticipated to have a material impact on the financial information presented in this report. Year-to-date activity of the General Fund shows that revenues through the end of the fourth quarter came in higher, and expenditures lower, than the revised budget. This is a reflection of both the City’s conservative budgeting and projection methodologies, consistent with City Council Policy F-3, and a more rapid improvement in the economy than had been anticipated. RECOMMENDED ACTION: Review and discuss this report and provide any recommendations for consideration by the City Manager and City Council. 15 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 2 DISCUSSION: Economic Overview California’s unemployment rate remained at 7.6% in July as the state’s employers added 114,400 non-farm payroll jobs, according to data released August 20th by the California Employment Development Department (EDD). Orange County’s unemployment rate stood at 6.3% at the end of July 2021 compared to 6.4% in March 2021. Nonfarm payrolls in California have increased over the past year in all eleven industry sectors with leisure and hospitality growing the most at 25.1 percent. Newport Beach’s hotel occupancy rate stands at 60.7% as of August 21st and is 37.9% higher than at the same time last year. When California finally reopened its economy in mid-June and dropped several COVID- related restrictions, hotel occupancy shot up. In Anaheim, the home of Disneyland, hotel occupancy was at 70% in June, compared to 45% the previous year, according to the global hospitality data and analytics company STR. However, the spread of the more highly contagious Delta-variant and a surge of new COVID-19 cases and hospitalizations, mainly among the unvaccinated, has some hoteliers concerned about the possible impact on tourism and a return of business travelers. Automobile sales as a major industry group has experienced a classical V-shaped recovery in the aftermath of the COVID-19 recession. New car sales dropped 68% or more at many dealers around the State in the initial weeks after the State’s pandemic shutdown order in March 2020. Sales have since steadily rebounded and are now in 2021 13% higher than the same period in 2019, a year before the crisis began. Limited supply has been overwhelmed by strong demand. Consumers are treating themselves to more expensive models, with new cars reported to be 8% more costly this year. The California New Car Dealers Association reports that Porsche, Mercedes, and Tesla have been the most sought-after brands in 2021. S&P Global and other research firms are forecasting continued growth in the 15% range for the remainder of the year before sales begin to flatten out in 2022. The Conference Board expects consumer spending to continue to improve in the second half of 2021, especially on in-person services, but the overall growth contribution derived from consumer spending will moderate as much of the recovery in this facet of the economy has already been achieved. However, the rapid surge in new COVID-19 cases presents a downside risk to consumer spending. While it is unlikely that a new round of severe government-mandated mobility restrictions will be implemented to contain the new Delta-variant, the resurgence in cases does have the potential to affect consumer confidence and in-person spending. General Fund Revenues Most revenue categories performed at or higher than their budgeted levels this year due to more favorable economic conditions than anticipated when the budget was developed in April 2020. This performance trend led to a $17.7 million budget amendment during the third quarter that aligned the budget with the higher anticipated results projected at that time. This narrowed the budget-to-actual variance when compared to prior quarterly 16 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 3 reports; however, actual revenues were still $16.9 million or 7.7% higher than the current year-to-date revised budget. When compared to the third quarter projected actual revenues of $220.2 million, actual revenues were $15.4 million or 7.0% higher than anticipated. As discussed in more detail below, the primary positive variances were in sales tax and service fees & charges. FY 2020-21 Actual General Fund Revenues Through Q4 * * Based on preliminary year-end close data available as of August 30, 2021 Property Taxes - Property taxes are the single largest funding source and typically represent just under 50% of all General Fund revenues. Property tax revenues for FY 2020-21 were budgeted conservatively anticipating the potential for delayed payments due to economic hardship and the Governor’s Executive Order suspending penalties and interest of property taxes. For FY 2020-21, property taxes came in $1,649,313 or 1.4% higher than budgeted. Despite new record price levels, statewide growth in home sales slowed and pending sales dropped in the second quarter of 2021 for the first time since May 2020. Higher priced markets like Newport Beach continued to do well while sales of lower priced properties remained below last year’s levels. The median home sales price of detached single-family residences in Newport Beach was $3.1 million on June 30, 2021, up 15.9% from the prior quarter and 25% higher than the prior year. Secured property tax payments came in strong, $1.2 million over budget, which is an indication of timely property tax payments and higher valuations. With the recent surge of home prices, this category will likely continue to improve, which bodes well for future secured property tax revenues. Sales Tax - The second largest funding source for the General Fund is sales tax revenue, typically making up more than 15% of General Fund revenues. 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. The latest sales tax information shows 17 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 4 that retail and restaurants have been hit especially hard this past year while autos and transportation is showing quarter over quarter increases. Also, the California Department of Tax and Fee Administration (CDTFA) has extended due dates and offered payment plans to small businesses. This has, and will continue to create, timing issues related to when revenues are received. The City’s sales tax consultant provided an updated sales tax estimate at the end of the third quarter, which resulted in an upwardly revised sales tax budget of $34.5 million. This came as the result of increased consumer spending amid an environment of declining COVID-19 cases. Actual Sales Tax revenues came in $4,415,475 or 12.8% higher than anticipated and surpassed the previous highest annual sales tax revenues in FY 2018-19 of $38.5 million and the prior year receipts of $36.2 million. Businesses pivoted in creative ways to reach their customers as they were able to open at some capacity sooner than expected resulting in relatively strong consumer spending. For these reasons all three main industry categories performed better than expected, with particularly strong growth seen in the fourth quarter. Transient Occupancy Tax – Transient occupancy tax (TOT) was the City’s most severely impacted revenue source as the pandemic unfolded, 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, with some hotels remaining closed in the third quarter. Also, short term rentals were not allowed to operate in the City from early April 2020 until May 20, 2020. All but one hotel are now operational, and the latest tax receipts (July) indicate several hotels are reporting their highest monthly tax receipts ever. Staff had budgeted FY 2020-21 TOT revenues very conservatively, expecting to realize 10%, 20%, and 25% of prior year revenue in the first, second, and third quarters respectively. Staff had anticipated that residential TOT would be similarly impacted economically, but in fact, the negative impact has been limited to hotel TOT, with residential TOT revenues coming in at just under $1 million higher than budgeted. The table below illustrates a comparison of hotel TOT revenues by fiscal year and quarter. It is remarkable to note the precipitous revenue increase during in the last quarter accounted for 38.6% of revenue for FY 2020-21. The fourth quarter receipts are much higher than the previous year and somewhat narrowed the revenue loss gap when compared to prior years. The positive improvement in this category has led to year-end revenue collections for this category reaching 81% of the prior year actuals. Transient Occupancy Tax Receipts by Quarter FY18-FY21 A steady improvement in revenue and occupancy rates combined with daily room rates that have been consistently higher than in recent years have been seen since December, Actual Received % of Actuals Actual Received % of Actuals Actual Received % of Actuals Actual Received % of Actuals 1st Quarter 2,267,092 13.43%4,959,179 23.79%4,820,281 19.52%4,340,572 19.01% 2nd Quarter 5,523,645 32.71%7,730,446 37.08%6,313,511 25.56%5,962,939 26.11% 3rd Quarter 2,579,739 15.28%5,545,740 26.60%5,759,862 23.32%5,217,752 22.85% 4th Quarter 6,515,721 38.59%2,612,517 12.53%7,803,792 31.60%7,312,352 32.02% TOTAL $16,886,197 100%$20,847,883 100%$24,697,446 100%$22,833,614 100% Fiscal Year 2020 - 21 Fiscal Year 2019 - 20 Fiscal Year 2018 - 19 Fiscal Year 2017 - 18 18 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 5 which is anticipated to continue given the current easing of restrictions and the anticipated return of more significant numbers of leisure, and ultimately business, travelers in the months ahead. In spite of the changing restrictions, revenues through the end of the fiscal year were approximately $1.7 million or 11.0% over the revised budget. All Other Revenue – This category includes all other revenue sources other than the top three (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, 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 the sale of materials and equipment, and other miscellaneous revenues. Revenue accounts other than the top three were reduced by 20% across the board in the FY 2020-21 budget. 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 revenue (excluding the top three) came in $9.2 million higher than the revised budget. This was primarily the result of the following key variances. Parking revenue through the fiscal year end came in strong at $1.5 million or 27.9% above the revised budget, reflecting a continued increase in day travelers visiting the City and 19 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 6 beaches. Other Taxes came in $1.8 million or 16.0% over budget, with business license taxes and property transfer taxes coming in strong, while marine charter taxes are below budget. Strong home sales in the City have led the property transfer taxes to increase by 75% from the prior year, an increase of $1.7 million. Lastly, Service Fees & Charges came in $3.9 million or 26.8% over budget, primarily due to plan check fees coming in higher than anticipated due to steady activity in the construction field, including large projects such as the Marriot renovation and other developments. Additionally, the City received $1.6 million higher than budgeted revenues for the paramedic service fee due to a higher number of transports and a reduction in collection times for these fees. It is important to note that the significant variance between adopted and revised budget for intergovernmental revenues is partially attributable to COVID-19-related financial assistance provided to the City from the Federal, State, and County governments. As of June 2021, the City has received a total of $4.4 million of CARES Act funding, and is expecting to receive another $860,000, bringing the total funding from CARES to approximately $5.2 million. In addition to the CARES Act Funding, the City is planning to file a claim to the Federal Emergency Management Agency (FEMA), however the disposition of this claim will not be known for some time. The City also received $290,000 from the County of Orange during the third quarter for economic support initiatives for the community’s small businesses. During the fourth quarter, the City received $5.1 million from the U.S. Department of Treasury as part of the American Rescue Plan Act (ARPA) and will receive another $5.1 million in the fourth quarter of fiscal year 2021-22. Staff have documented General Fund revenue losses that exceed the total $10.1 million amount of ARPA funds allocated to the City, which have been set aside in a Special Revenue Fund pending action by the Council to allocate these funds. These funds are discussed later in this report in conjunction with recommendations for the disposition of the unrestricted General Fund reserves on hand in excess of the City’s 25% contingency reserve requirement. General Fund Expenditures FY 2020-21 General Fund expenditures total $220.7 million and came in 3.1% below the revised budget, a savings of $7.0 million. Existing appropriations were enough to cover all necessary expenditures during the fiscal year, with savings realized for salary and benefits due to vacancies, professional and contract services, and maintenance and repairs. 20 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 7 FY 2020-21 Actual General Fund Expenditures * * Based on preliminary year-end close data available as of August 30, 2021 Significant expenditures for FY 2020-21 included:  The current year budget covered increases in operating costs for janitorial and cleaning expenses related to COVID-19, including street sweeping, beach clean- up and park maintenance, public facilities and restroom janitorial services, day porter services at the Central Library, power washing for public spaces and sidewalks including temporary outdoor dining, and additional weekly cleaning of City vehicles (mainly Public Safety departments).  The Fire Department provided staffing for Strike Team deployments and has incurred $1.2 million in strike team and mutual aid costs through the end of the third quarter. Reimbursement will be received from Cal OES, and these reimbursements over time offset these costs with corresponding revenue.  Public Safety saw increased expenditures relating to COVID-19 for disposable medicine/EMS supplies for personal protective equipment, emergency cleaning services, and related supplies. These costs were fully absorbed in the current year budget, with CARES Act & FEMA reimbursement expected to offset the additional expenditures.  Departments have seen increased overtime costs relating to the pandemic for emergency clean-up services such as beach and street clean-up relating to more people enjoying the beach for outdoor recreational activities due to the shutdown orders, and staffing COVID testing sites and vaccinations PODs that were able to be absorbed due to other salary savings relating to vacancies. \A B C=B-A D=C/A Expenditures by Category Adopted Budget Revised Budget Actuals Variance % Variance Salary & Benefits 149,193,631$ 153,841,452$ 152,365,914$ (1,475,538)$ -1.0% Contract Services 24,088,461 25,635,070 21,894,363 (3,740,706) -14.6% Grant operating 600,000 1,166,409 1,046,476 (119,933) -10.3% Utilities 2,961,757 2,932,409 3,579,524 647,115 22.1% Supplies & Materials 3,740,696 4,363,610 3,868,801 (494,809) -11.3% Maintenance & Repair 8,822,276 8,987,338 8,531,515 (455,823) -5.1% Travel & Training 813,368 807,792 445,276 (362,516) -44.9% General Expenses 2,125,501 2,299,060 2,079,421 (219,640) -9.6% Internal Svc Charge 25,977,295 25,977,295 25,977,295 (0) 0.0% Risk management 750,915 750,915 383,068 (367,847) -49.0% Capital Expenditures 785,138 940,144 533,597 (406,548) -43.2% Total 219,859,038$ 227,701,494$ 220,705,249$ (6,996,245)$ -3.1% 21 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 8 Significant savings for FY 2020-21 included:  Savings were achieved in salary and benefits. The City budgeted for $2.0 million in salary savings and achieved an additional $1.5 million in savings at year end due to vacancies and attrition.  Contract Services realized savings for various professional service contracts, including Recreation contract instructors due to some programs not being able to run due to restrictions relating to the pandemic. A corresponding revenue decrease was realized in Service Fees & Charges for these contract class expenditure savings. Other contract savings were related to a delay in the City’s parking meter upgrade, which will occur in FY 2021-22.  The Utilities spending category came in over budget due to increases in electricity rates due to Southern California Edison raising rates during the year for wildfire insurance premiums. The FY 2021-22 budget has been adjusted accordingly to adequately fund future electricity expenditures, including for street lights. Other increases in Utilities costs include water rate increases from the Irvine Ranch Water District, which will be addressed in the fiscal year 2021-22 quarter one staff report. The Tiered Budget Balancing Framework The strategy employed to balance the budget for FY 2020-21 included a utilization of a tiered budget balancing framework, which is illustrated below. At the onset of budget adoption, $33.0 million of reductions were approved. $2.8 million of reductions were restored in the first quarter which includes the tier 4 and tier 5 reductions, with $4.8 million of tier 1 and tier 2 spending reductions achieved during the year. At the end of the third quarter, $15.4 million of reductions were restored, including 22 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 9 the $8.5 million contribution to the Facilities Financing Plan (FFP), $4.5 million contribution to Harbor CIP, and $2.4 million of Neighborhood Enhancement projects. $10.1 million of the cuts implemented through the tiered budget balancing framework did not need to be restored during the fiscal year, including $5.6 million of CIP projects not ready to move forward, $2.0 million of fund balance returned from insurance funds, $2.0 million of fund balance returned from the information technology fund, and $500,000 relating to the facilities maintenance plan. With these restorations, all appropriate budget reductions were addressed and restored by the end of the fourth quarter. 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. At the end of FY 2019-20, the City had $24.1 million of prior year surplus funds on hand, with approximately half of these funds attributable to FY 2018-19 operational savings and half attributable to FY 2019-20 operational savings. Consistent with City Council Policy F-5, General Fund Surplus Utilization, these funds would have normally been allocated to paying down long-term obligations and funding infrastructure or neighborhood capital improvements. However, given the strong evidence in early 2020 that the pandemic would have significant financial impacts on the City, the FY 2018-19 surplus funds on hand were redeployed to assist in balancing the FY 2020-21 budget along with the reductions outlined in the Tiered Budget Balancing Framework. The FY 2019-20 surplus funds were realized several months after adoption of the FY 2020-21 budget once the books were closed for FY 2019-20, and these funds were also set aside as a resource to respond to any additional negative budget impacts from the pandemic. Conservative budgeting practices coupled with better than expected consumer demand have resulted in higher revenues and lower expenditures than budgeted in FY 2020-21. Projected unrestricted General Fund resources of $30.6 million were forecasted in the third quarter. The $16.9 million of tiered budget reductions restored during the budget process, combined with appropriations made at that time by the Council toward permanent supportive housing ($1.0 million), continued funding for the General Plan Update project ($0.7 million), and the required contribution to the contingency reserve to maintain a 25% reserve level in line with the increased FY 2021-22 budget ($2.7 million), were projected to decrease the $30.6 million balance to $11.0 million. Actual revenues exceeded budget by $16.9 million and exceeded the final projection shared with the Council during the FY 2021-22 budget adoption process by $15.4 million. Actual expenditures were below budget by $7.0 million and were below the final projection by $6.1 million. As a result of the additional revenue received and expenditure budget savings, as well as other adjustments outlined in the table below, unrestricted General Fund resources are projected to be $31.0 million, an increase of $7.0 million versus the start of the fiscal year. 23 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 10 General Fund Sources and Uses * * Based on preliminary year-end close data available as of August 30, 2021 It is important to emphasize that the net change in unrestricted fund balance for the year was only $7.0 million, with the remainder of the $31.0 million budget surplus being composed of the carried forward budget surpluses from FY 2018-19 and FY 2019-20. While originally those funds had been set aside to address the fiscal impact of the pandemic, they ultimately were not needed to balance the FY 2020-21 budget due to the faster than anticipated recovery of the economy. It should also be noted that the FY 2021-22 budget is balanced as adopted, with revenues only $31,975 higher than expenditures. The $31.0 million of surplus funds on hand are therefore entirely one-time in nature and do not reflect an ongoing excess of revenues over expenditures. Recommended Uses for Unrestricted General Fund Resources Historically, year-end surplus funds have been held over until the end of the following fiscal year for allocation. These allocations are made consistent with City Council Policy F-5, which recommends that roughly 50% of surplus funds be allocated to long-term obligations such as pensions, debt, and other long-term needs and 50% be allocated to infrastructure or neighborhood capital improvements. As discussed with the Council during the adoption of the FY 2021-22 budget, staff is recommending that action be taken sooner on a go-forward basis as part of this year-end budget discussion. This approach facilitates the allocation of resources on a timelier basis to liabilities as well as enhances the ability to plan for capital projects during the upcoming budget process. As discussed, $31.0 million of unrestricted General Fund resources are available for use at the Council’s discretion at this time. Consistent with City Council Policy F-5, staff recommend that these funds be allocated as follows: 24 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 11 1. CalPERS Unfunded Liability – $5.0 million to bring the City’s annual unfunded liability contribution to CalPERS up from $35 million to $40 million, consistent with recent years and the recommendation of the Finance Committee. 2. Facilities and Infrastructure Replacement Liabilities – $10.5 million toward additional contributions to long-term infrastructure liabilities within the Facilities Financial Plan and Harbor & Beaches CIP. These funds would be set aside now, with specific allocations recommended as part of the upcoming FY 2022-23 budget process. Staff are in the process of reviewing the City’s facilities and infrastructure replacement needs to ensure that the project list is comprehensive and the funding adequate. It is likely that there will be a need for additional funding once this analysis is complete, and this $10.5 million will be part of the solution to this issue. Staff are also evaluating whether it is appropriate to index the currently flat annual contributions to facilities replacement and maintenance to inflation, which will ensure that adequate funds are set aside on an ongoing basis as costs or particularly needs in any given year increase. 3. CIP and Neighborhood Enhancements – $15.5 million toward the FY 2022-23 capital improvement program, to include neighborhood enhancement projects. These funds would be set aside now, with specific allocations recommended as part of the upcoming FY 2022-23 budget process. As discussed earlier in this report, the City has $10.1 million of ARPA funds on hand as well that have been allocated to the revenue loss expenditure category under the program’s guidelines. This facilitates using these funds for any eligible infrastructure project or projects. It is staff’s recommendation that the full $10.1 million of ARPA funds also be allocated to the FY 2022-23 capital improvement program, with specific allocations recommended as part of the upcoming FY 2022-23 budget process. 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 through the fourth quarter of this fiscal year indicates that no budget adjustments are necessary and variances between budgeted and actual amounts are within reason. 25 Fiscal Year 2020-21 Fourth Quarter Financial Report October 14, 2021 Page 12 Conclusion Staff recommends that the Finance Committee review and discuss this report and provide any recommendations for City Manager and City Council consideration prior to the October 26, 2021, City Council meeting, at which time this report will be presented. Prepared and Submitted by: /s/ Steve Montano ____________________________ Steve Montano Deputy Finance Director 26 10/14/2021 1 2020‐21 Fourth Quarter Financial Report Finance  Committee October 14, 2021 City of Newport Beach –Finance Department 2 Economic Overview •Economic activity and employment have continued to improve in recent months •Record sales tax revenues in FY 2020‐21 •Auto sales 13% above pre‐pandemic level with prices 8% higher •In‐person spending expected to continue to improve in the second half of 2021 •Multiple hotel properties in the City reporting record revenues in the last few months •However, the Delta Variant is a reminder that caution and conservatism are still appropriate in this  uncertain time Unemployment March 2021 July 2021 United States 6.0% 5.4% California 8.3% 7.6% Orange County 6.4% 6.3% 1 2 10/14/2021 2 City of Newport Beach –Finance Department 3 Actual General Fund Revenues Adopted Budget $ 199.6 million Third Quarter Projection $ 220.2 million Actual Revenues $ 235.6 million •The original budget took a very conservative  approach to forecasting COVID revenue impacts •$16.9 million higher than the Q3 projection •$36.0 million higher than the adopted budget  $‐  $50  $100  $150  $200  $250 Adopted Projected ActualMillions Property Tax Sales Tax TOT Other City of Newport Beach –Finance Department 4 Historical General Fund Revenues $235 $241 $219 $200 $204 $217 $230 $230 $236 $170 $180 $190 $200 $210 $220 $230 $240 $250 $260 $270 2016-17 Actual 2017-18 Actual 2018-19 Actual 2019-20 Actual 2020-21 ActualMillions Pre-COVID Projection Initial Post-COVID Projection Actual 3 4 10/14/2021 3 City of Newport Beach –Finance Department 5 Property Tax •Not significantly impacted by the  pandemic •Represents approximately 50% of  General Fund revenues •Positive variance of 1.4%, mostly due to  higher secured property tax revenues •The City’s median home sale price  stood at $3.1 million in June, 25%  higher than the prior year $97  $102  $108  $113  $119   $80  $85  $90  $95  $100  $105  $110  $115  $120  $125  $130 2016‐17 Actual 2017‐18 Actual 2018‐19 Actual 2019‐20 Actual 2020‐21 ActualMillions City of Newport Beach –Finance Department 6 Sales Tax •Consumer spending has continuing to  strengthen and adapt •FY 2020‐21 ended as a record year for sales tax  revenues, $454,000 higher than FY 2018‐19 •$4.4 million (12.8%) above the revised budget •Strong performance across all categories with  continued room for improvement related to in‐ person shopping and dining businesses •Recent shift of Amazon sales tax revenues is  anticipated to have a smaller than originally  projected impact of approximately $350,000  per year $34  $35  $39  $36  $39   $30  $32  $34  $36  $38  $40 2016‐17 Actual 2017‐18 Actual 2018‐19 Actual 2019‐20 Actual 2020‐21 ActualMillions5 6 10/14/2021 4 City of Newport Beach –Finance Department 7 Transient Occupancy Tax •Fashion Island Hotel remains closed •Hotel occupancy at other properties  gradually approaching pre‐pandemic levels •Higher average daily rates have continued •We have seen record TOT revenues for  multiple properties in recent months •Finished 11% above the most recent  projection •Annualized revenue has recovered to 68%  of the FY 2018‐19 amount, but the 4th quarter was very strong $22 $23  $25  $21  $17   $10  $12  $14  $16  $18  $20  $22  $24  $26 2016‐17 Actual 2017‐18 Actual 2018‐19 Actual 2019‐20 Actual 2020‐21 ActualMillions City of Newport Beach –Finance Department 8 Other General Fund Revenues •A 20% reduction to other revenues was assumed in the adopted budget •Actual revenues were $9.2 million above the revised budget •Parking revenues very strong at $1.5 million or 27.9% above budget due  to sustained growth in day visitor activity in the City  •Property transfer tax revenue was $1.8 million or 16.0% above budget  due to continued strong real estate activity and increasing property  values, with actual revenue 75% higher than the prior year •Fees and charges revenues were $3.9 million or 26.8% above budget due  to increased construction activity 7 8 10/14/2021 5 City of Newport Beach –Finance Department 9 Actual General Fund Expenditures Adopted Budget $ 219.9 million Final Budget $ 227.7 million  Third Quarter Projection $ 226.8 million Actual Expenditures $ 220.7 million •$7.0 million of actual expenditure budget savings •$1.5 million of this amount was salary savings in addition to the $2.0 million included in  the adopted budget •All departments performed as expected •Additional $5 million pension payment made, bringing the total to $40 million City of Newport Beach –Finance Department 10 Tiered Budget Balancing Framework •Tier 5 and partial Tier 4 cuts  restored at the first quarter  budget review •Tier 1 and Tier 2 cuts were  achieved •The Council restored the  remainder of the  (recommended) cuts at the  time of FY 2021‐22 budget  adoption 9 10 10/14/2021 6 City of Newport Beach –Finance Department 11 General Fund Reserves •Higher than originally  budgeted revenues and  lower than budgeted costs  have resulted in a strong  year‐end budget surplus of  $31.0 million •Variance from the final  projection of $20.1 million •Net current year change to  fund balance of a positive  $7.0 million City of Newport Beach –Finance Department 12 Context for $31.0 Million On Hand •Of the $31.0 million of available surplus finds, only $7.0 million relates to FY 2020‐21  operating results •$24.1 million attributable to carried forward surplus from the prior two fiscal years that  was intended to offset COVID‐related impacts to the budget •$11.5 million FY 2018‐19 surplus •$12.6 million FY 2019‐20 surplus •The need for these funds has been offset by higher revenues •FY 2021‐22 budget is balanced with revenues exceeding expenditures by only $31,975 •The $31.0 million of funds on hand is therefore entirely one‐time in nature 11 12 10/14/2021 7 City of Newport Beach –Finance Department 13 Recommended Uses for Surplus Funds on Hand •City Council policy F‐5 recommends that: •Roughly 50% of surplus funds be allocated to long‐term obligations •Roughly 50% be allocated to infrastructure and neighborhood capital projects •Staff are recommending allocation of the available $31.0 million as follows: •$5.0 million to bring the City’s CalPERS unfunded liability contribution to $40.0 million •$10.5 million toward long‐term infrastructure liabilities within the Facilities Financial Plan and Harbor  & Beaches CIP •$15.5 million toward the FY 2022‐23 capital improvement program to include neighborhood  enhancement projects •Specific programming of the $15.5 million would be determined during the FY 2022‐23 budget process City of Newport Beach –Finance Department 14 Use of ARPA Funds •Staff have determined that the City’s entire $10.1 million of ARPA funds can be  allocated to offset revenue losses, which facilitates use of these funds for general  governmental purposes •Staff recommend allocation of these funds to eligible infrastructure projects, with  specific programming to be determined as part of the FY 2022‐23 budget process  13 14 10/14/2021 8 City of Newport Beach –Finance Department 15 Recommended Action Staff recommends that the Finance Committee: •Review and discuss this report •Provide any recommendations for consideration by the  City Manager and the City Council City of Newport Beach –Finance Department 16 Questions? 15 16 10/14/2021 1 Overview of Credit Card Usage and Fees Finance Committee Meeting October 14, 2021 Payment Types Accepted •Cash •Cashiers checks •Money orders •Debit cards •Credit cards 2 1 2 27 10/14/2021 2 Credit Cards at the City The City accepts all major credit cards for most services, including: •Licenses and Permits •Utility Bills •Citations •Recreation Programs •Slip Rentals •Parking •Copies 3 Sample Transaction Transaction amount paid with a MasterCard credit card $716.44 Interchange Rate ‐ 1.55% + $0.10 11.20$                                      Incremental Discount Rate @ .04%0.29$                                        Payment Brand Assessment @ .13% for transactions < $1,000.00 0.93$                                        Payment Brand Network Fees @ $0.0195 per transaction 0.02$                                        Authorization Fee @ $0.04 per transaction 0.04$                                        Total Fees 12.48$                                      Building Permit Purchased Over the Counter Building Permit, Plumbing Permit, Plan Check Fee, deposit •The transaction-specific fees are illustrated for a sample building permit below •These fees amount to approximately 1.7% of the transaction, while the City’s costs are closer to 2.5% when including fees that are not transaction-specific 4 3 4 28 10/14/2021 3 Usage Increase Parking (paystations, pay‐by‐cell) $             569,369.47  $       509,391.32 347,176.33$          Building (over the counter) 194,603.53$              $       185,755.83 175,805.05$          Utility Payments (online) 262,730.39$              $       231,421.87 223,250.71$          Everything else 539,220.58$              $       476,301.00 539,879.98$          Total 1,565,923.97$           $   1,402,870.02 1,286,112.07$       FY 2020‐21 FY 2019‐20 FY 2018‐19 •Usage has increased in recent years •Much of this is likely cyclical •Fluctuating building permit revenues •Increased use of City parking facilities during the pandemic •“Everything else” primarily includes recreation ($173k), other finance billings ($105k), junior lifeguards ($95k), parking citations ($55k), and business licenses ($51k) 5 How Much Do We Pay and Recover in Credit Card Fees? Function  CC Fees Total Revenue % of Revenue # of  Transactions Parking (paystations, pay‐by‐cell) $             569,369.47 9,732,854.78$              5.85% 1,765,439 Building (over the counter) 194,603.53$            8,111,931.40$              2.40% 8,266 Utility Payments (online) 262,730.39$            18,690,446.81$           5.04% 85,479 Everything else 539,220.58$            15,756,417.60$           3.42% 97,838 FY 2020‐21 •Fees can differ based on the type of transaction and method of charge •Example: Parking charges have a per-transaction fee •The City currently recovers credit card fees for utility payments via utility rates •No other cost recovery currently in place for these fees 6 5 6 29 10/14/2021 4 Do Other Cities Pass Through Fees? Agency Parking Building Utilities City of Newport Beach N/A N/A Rates City of Anaheim N/A N/A Rates * City of Beverly Hills N/A N/A Rates * City of Costa Mesa N/A N/A Rates * City of Huntington Beach N/A N/A Rates * City of Irvine N/A 2.50% Rates * City of Laguna Beach N/A N/A Rates * City of Santa Monica N/A 2.95% $2.95 * Standard practice assumed but not verified.7 Options 1. Pass through all non-utilities credit card fees 2. Pass through credit card fees for certain transactions: a) Building permits and related b) Parking c) Other (recreation, library, etc.) 3. Use Fee Schedule to recover credit card fee costs 4. Leave as-is 8 7 8 30 10/14/2021 5 Questions? 9 9 31 10/14/2021 1 Additional Harbor Department Operating Budget Information Finance Committee Meeting October 14, 2021 City of Newport Beach – Harbor Department 2 Historical Harbor Department Revenues • Harbor Department revenues have grown steadily in recent years • 2020-21 Revenues reached an all-time high Revenue Type  2019 Actual  2020 Actual  2021 Actual  2022 Budget  Balboa Yacht Basin Slips 1,145,780$    1,189,478$    1,232,185$    1,193,800$     Mooring Permits ‐ Off Shore 1,100,072      1,135,389      1,150,122      1,194,811       Marina Park Slips 223,735          252,576          406,973          265,000           Guest Moorings 242,623          171,650          235,217          250,000           Mooring Permits ‐ On Shore 144,234          159,302          160,759          147,462           Mooring Transfers 52,384            47,130            78,083            55,000             Other Revenues 71,872            56,944            80,948            77,628             Total  $    2,980,700  $    3,012,469  $    3,344,287  $    3,183,701  1 2 32 10/14/2021 2 City of Newport Beach – Harbor Department 3 Historical Harbor Department Staffing Position Classification FY 2018‐19 FY 2019‐20 FY 2020‐21 FY 2021‐22 Full‐Time Harbormaster 1.00                 1.00                 1.00                 1.00                  Part‐Time Harbor Services Workers 8.14                 8.14                 7.39                 7.39                  Part‐Time Department Assistant 0.75                 0.75                 0.50                 0.50                  Full‐Time Code Enforcement Supervisor (CDD) 1.00                 1.00                  ‐                    ‐                    Full‐Time Code Enforcement Supervisor (Harbor)‐                    ‐                   1.00                 1.00                  Part‐Time Code Enforcement Trainees ‐                    ‐                   1.50                 1.50                  Full‐Time Permit Technician ‐                    ‐                    ‐                   1.00                  Total 10.89              10.89              11.39              12.39               City of Newport Beach – Harbor Department 4 Historical Harbor Department Budget • There have been salary savings in each year • Total budget savings in the most recent two fiscal years has been between $259,000 and $272,000 Expenditure Category  2019 Budget  2019 Actual  2020 Budget  2020 Actual  2021 Budget  2021 Actual  2022 Budget  Salaries and Benefits 685,187$        533,414$        696,739$        650,444$        1,052,317$    962,728$        1,194,822$     Contract Services 203,322          275,995          281,272          183,972          271,672          249,916          291,193           Maintenance and Repair 20,000            140,046          130,000          56,453            140,000          31,157            141,547           Other Non‐Personnel Expenses 127,000          96,451            149,250          112,197          148,850          101,206          129,042           Internal Service Charges 90,906            105,697          85,086            85,517            141,478          141,478          170,311           Capital Purchases 5,000               4,625               5,000               129                  5,000               1,086               5,000                Total  $    1,131,415  $    1,156,228  $    1,347,347  $    1,088,712  $    1,759,317  $    1,487,571  $    1,931,915  Cost of Loaned Code Supervisor 154,880          145,380          160,778          149,293           ‐                         ‐                         ‐                         Total  $    1,286,295  $    1,301,608  $    1,508,125  $    1,238,005  $    1,759,317  $    1,487,571  $    1,931,915  3 4 33 10/14/2021 3 City of Newport Beach – Harbor Department 5 Other Tidelands Fund Operating Costs • The Public Works Department retains responsibility for maintenance of piers, beaches, and marinas • FY 2018-19 was a transitional year wherein certain expenses were relocated within the budget Expenditure Category  2019 Budget  2019 Actual  2020 Budget  2020 Actual  2021 Budget  2021 Actual  2022 Budget  Salaries and Benefits 1 387,565$        177,475$         ‐$                 51$                   Contract Services 2 671,200          655,303          263,000          137,356          260,000          243,549          260,000           Maintenance and Repair Pier Maintenance 145,000          114,725          45,000            77,577            45,000            41,789            45,000             Beach Maintenance 35,000            30,730            35,000            25,525            35,000            37,751            35,000             Marina Maintenance 30,000             ‐                        30,000            13,240            30,000            1,058               30,000             Building Maintenance 53,000            51,641            53,000            30,776            59,777            37,940            59,777             Other Non‐Personnel Expenses 32,000            24,417            11,250            11,414            14,250            5,237               14,250             Internal Service Charges 71,561            56,770            9,562                ‐                         ‐                         ‐                         ‐                         Capital Purchases 5,000                ‐                        5,000                ‐                        5,000                ‐                        5,000                Total  $    1,430,326  $    1,111,061  $        451,812  $        295,939  $        449,027  $        367,324  $        449,027  1 FY 2018‐19 amount includes Harbor Resources Manager and Technician positions that were reclassified and relocated in subsequent fiscal years. 2 FY 2018‐19 amount includes contracts for NPDES and TMDL administration that were relocated in subsequent fiscal years to the General Fund. City of Newport Beach – Harbor Department 6 Tidelands CIP • Average expenditures over the past three years amounted to $1.4 million • The FY 2021-22 budget includes $14.1 million of Tidelands CIP funding, much of which is carryover funding from prior fiscal years • The Tidelands Capital Fund has $33.1 million of funds on hand for future capital projects, including the ongoing harbor dredging and other projects listed below Project Description  2019 Actual  2020 Actual  2021 Actual  Three Year  Average  2022 Budget  Dredging 955,455$        645,379$        78,773$          559,869$        7,107,993$     Ocean Piers 674,264          128,381          305,452          369,366          2,932,835       Bulkheads and Seawalls 12,326            326,282          168,235          168,948          2,252,320       Beach and Bay Sand Management ‐                        87,565            179,525          89,030            300,000           Abandoned Watercraft Abatement 135,740          57,632            34,976            76,116            145,998           Eelgrass Surveys 75,000             ‐                        111,176          62,059             ‐                         Harbor Piers ‐                        1,280               2,400               1,227               946,320           Other Minor Improvements 93,647            77,277            124,967          98,630            383,870           Total  $    1,946,432  $    1,323,796  $    1,005,504  $    1,425,244  $  14,069,336  5 6 34 10/14/2021 4 City of Newport Beach – Harbor Department 7 Questions? 7 35 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5D October 14, 2021 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Scott Catlett, Finance Director/Treasurer 949-644-3126, scatlett@newportbeachca.gov SUBJECT: FINANCE DEPARTMENT REVENUE DIVISION AUDIT PROGRAM UPDATE SUMMARY: The City’s Revenue Auditor ensures compliance with City vendor agreements and the Newport Beach Municipal Code (NBMC) by auditing vendor payments, transient occupancy tax, charter tax, waste hauler franchise, and other types of payments. The auditor’s main tasks (among others) are to identify and prioritize taxpayers and contracts for auditing; recommend an audit schedule of taxpayers and vendors and execute such audits in the priority assigned by the Finance Director; ensure payments or refunds are made in a timely manner; and to develop internal controls to support revenue management activities and loss prevention. The table below summarizes the number and type of audits conducted year to date since June 1, 2020. This period generally covers the activity that has occurred since the last report was provided to the Finance Committee. These audits have resulted in preliminary findings of taxes and other payments owed that amount to approximately $82,000. Audit Type Audited to Date Main Issue Appeals Prelim. Findings Marine Charter Passenger Tax 3 Operating without MAP & Late Filing 0 $2,000 TOT-STL Agents & Owners 16 Late Filing & Cleaning Fees 3 $40,000 TOT-Hotels 1 Cancellation Fees 3 $0 Franchise Solid Waste Haulers 20 Incorrect Gross Receipts 0 $40,000 Total 40 6 $82,000 41 Finance Department Revenue Division Audit Program Update October 14, 2021 Page 2 RECOMMENDED ACTION: Receive and file. DISCUSSION: Marine Charter Passenger Tax Audits Boat charter operators are required to obtain an annual Marine Activities Permit (MAP) under NBMC Section 17.10. In addition, under NBMC Sections 3.34 and 5.04, charter operators are required to remit monthly marine charter passenger tax and obtain a business license, respectively. Under NBMC Section 3.34.110, the City of Newport Beach (City) has the right to review charter operator records. The number of charters in the City has grown from nine operators in 2019 to 25 in 2021. The Harbor Department’s Code Enforcement Division has cited charter companies that were operating without a MAP and/or a business license. These discoveries are audited for charter tax owed to the City for previous periods. Three audited charters were discovered in early 2020 owing over $2,000 in charter tax. In March 2020, the Governor of California issued a stay-at-home Executive Order N-33- 20. As a result, many Charter operators ceased operation in the months that followed. Some charters that were operating failed to file their monthly charter tax returns. The City assessed penalties and interest and brought these operators into compliance. Transient Occupancy Tax (TOT) Audits Under NBMC Section 3.16, transients who rent a room or space for 30 days or less shall pay a tax of nine percent of the rent charged by the operator. In addition, under NBMC Section 3.28, transients who rent a room or space for 30 days or less shall pay a fee of one percent of the rent charged by the operator. Under NBMC Section 3.16.110 the City has the right to audit the operator’s records. Hotels In 2019 all hotels were audited by firms Davis Farr and Gruber & Associates. One common audit result was that some hotels failed to report cancellation fees. The City Attorney’s office confirmed that cancellation fees are taxable under the NBMC Section 3.16. To improve future filings, the City provided cancellation fee information to the hotels. One hotel that had previously excluded cancellation fees had a follow up audit in 2021 and was found to be in compliance. There is open communication between hotel management, and the City, to resolve issues such as taxable versus non-taxable fees and confirming exemptions prior to submitting 42 Finance Department Revenue Division Audit Program Update October 14, 2021 Page 3 their monthly returns. This communication with the hotels is vital, as many hotels have recently experienced management and/or ownership changes this past year. Three hotels filed appeals in 2020, all regarding late penalties. All three resulted in upheld decisions by the hearing officers. Short-Term Lodging Agents In 2019, 18 agents were audited by firms Davis Farr and Gruber & Associates. A common audit finding was that many agents who represent short term lodging permittees failed to report cleaning fees as part of taxable gross rent. The City provided cleaning fee information to the all the agents in an effort to improve future TOT filings. NBMC Section 5.95 was revised in 2020. This change required agents to confirm they will collect and remit TOT on behalf of their clients and register with the City’s Finance Director. Forty-three short term lodging agents registered with the Finance Director. Of those, 10 new agents were added this last year. New agents are reaching out to the City to obtain TOT returns and when doing so, are provided information on the City’s tax requirements. Short Term Lodging Owners A total of 1,045 short term lodging owners filed their annual return in 2020. Seventy-six owners filed late returns resulting in late penalties and interest. Three owners filed appeals challenging late penalties, all of which resulted in upheld decisions by the hearing officers. Sixteen owners required an audit of their returns due to incorrect reporting. The majority of owners audited were represented by agents, which resulted in an audit of both the owner and their agents’ returns. New discoveries by the Revenue Division and enforcement of the code as it pertains to the illegal operation of short term lodging units continued throughout the year, resulting in the payment of back taxes and fees. One discovery resulted in taxes owed for three years in the amount of $40,000. Solid Waste Hauler Franchise Fee NBMC Section 12.63 requires any person providing commercial solid waste handling services to obtain a franchise and pay a fixed percent franchise fee based on the quarterly receipts. The franchise fee is 18% and defined under Ordinance 2017-16. Consulting and audit firm Michael Balliet Consulting (Balliet) was engaged to conduct 30 audits on solid waste haulers for franchise fees for an audit period of one year. Balliet has completed 20 of the audits and discovered that a third of the haulers have tonnage and gross receipt reporting errors. In addition, haulers may also be subject to penalties and interest. Early audit findings have resulted in taxes owed of approximately $40,000. 43 Finance Department Revenue Division Audit Program Update October 14, 2021 Page 4 Findings These audits have resulted in preliminary findings of taxes and other payments owed that amount to approximately $82,000. Audits for TOT, Charter and Solid Waste will continue with a continued focus on new operators and franchises. Prepared and Submitted by: /a/ Antonio Velasco _____________________________ Antonio Velasco Revenue Auditor 44 10/14/2021 1 Revenue Audit Program Update Finance Committee Meeting October 14, 2021 City of Newport Beach – Finance Department 2 Finance Department Revenue Division Audit Function The City’s Revenue Auditor ensures compliance with City vendor agreements and the Newport Beach Municipal Code (NBMC) by auditing vendor payments, transient occupancy tax, charter tax, waste hauler franchise, and other types of payments. Auditor’s Main Tasks: • Identify and prioritize taxpayers and contracts for auditing • Recommend an audit schedule of taxpayers and vendors and execute such audits in the priority assigned by the Finance Director • Ensure payments or refunds are made in a timely manner • Develop internal controls to support revenue management activities and loss prevention 1 2 45 10/14/2021 2 City of Newport Beach – Finance Department 3 Summary of Audit Activities to Date Since June 2020 City of Newport Beach – Finance Department 4 Audit Findings •Marine Charter Passenger Tax • Operating without a Marine Activities Permit • Late Filers •Solid Waste Hauler Franchise Fee • Incorrect Gross Receipts 3 4 46 10/14/2021 3 City of Newport Beach – Finance Department 5 Audit Findings •Transient Occupancy Tax •Hotels • Cancellation Fees •Short Term Lodging Agents • Cleaning Fees • Getting New Agents Registered •Short Term Lodging Owners • Late Filers • New Discoveries City of Newport Beach – Finance Department 6 Audit Plan •Transient Occupancy Tax •Hotels • Audit hotels with recent change of ownership (3) •Short Term Lodging Agents/Owners • Select audits based on 2021 TOT filings (15+) •Marine Charter Passenger Tax • Audit late filers (3) and new operators (5) •Solid Waste Hauler Franchise Fee • Finish remaining audits (10) • Follow up audits based on findings 5 6 47 10/14/2021 4 City of Newport Beach – Finance Department 7 Questions? 7 48 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5E October 14, 2021 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Scott Catlett, Finance Director/Treasurer 949-644-3123 or scatlett@newportbeachca.gov SUBJECT: BUDGET AMENDMENTS FOR QUARTER ENDING SEPTEMBER 30, 2021 EXECUTIVE SUMMARY The purpose of this memorandum is to report on the budget amendments for the first quarter of Fiscal Year 2021-22. 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/ Scott Catlett Walid Harding Scott Catlett Budget Analyst Finance Director/Treasurer Attachment: A. Budget Amendments Fiscal Year 2021-22 Quarter Ending September 30, 2021 49 ATTACHMENT A BUDGET AMENDMENTS FISCAL YEAR 2021-22 QUARTER ENDING SEPTEMBER 30, 2021 50 BA #Date Amendment Type Fund Revenues Expenditures Net Effect on Fund Balance Increase/(Decrease)Department Explanation GENERAL FUND - 792,800.00 (792,800.00) ASSESSMENT DIST #124 792,800.00 792,800.00 - CONTRIBUTIONS FUND 971,480.00 (527,520.00) 1,499,000.00 WATER CAPITAL FUND - 527,520.00 (527,520.00) 003 8/24/2021 City Council GENERAL FUND 24,830.00 24,830.00 - Police To increase revenue estimates and expenditure appropriations from the approval and acceptance of the California Department of Alcoholic Beverage Control (ABC) 2021-22 Alcohol Policing Partnership Program (APP) Grant. 004 9/14/2021 City Council GENERAL FUND 200,000.00 200,000.00 - Library To increase revenue estimates and expenditures appropriations by accepting a check from Friends of the Library to enhance Library collections and programs. 006 9/14/2021 City Council GENERAL FUND 12,000.00 12,000.00 - Library To increase revenue estimates and expenditures appropriations by accepting a check from California State Library to support Library Youth Programming. 007 8/24/2021 City Council FIRE EQUIPMENT FUND 274,900.00 302,390.00 (27,490.00) Fire To increase revenue estimates and expenditure appropriations from the acceptance of the Assistance to Firefighters Grant (AFG) from the Federal Emergency Management Agency (FEMA). The AFG will offset the cost of installing vehicle exhaust extraction systems in six of the department's fire stations. 008 9/14/2021 City Council OTS GRANT FUND 270,000.00 270,000.00 - Police To increase revenue estimates and expenditure appropriations to accept the 2022 State of California, Office of Traffic Safety (OTS) Selective Traffic Enforcement Program (STEP) Grant (#PT22042) 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. 009 8/24/2021 City Manager GENERAL FUND 10,000.00 10,000.00 - Library To increase revenue estimates and expenditure appropriations from the Literacy Services Special Deposit Account. Funds will be allocated to the Literacy Programming part time salaries account. 010 8/25/2021 City Manager GENERAL FUND 10,000.00 10,000.00 - Library To increase revenue estimates and expenditure appropriations to record a check received from Arts Orange County to supplement programming. 011 9/7/2021 City Manager GENERAL FUND 4,500.00 4,500.00 - Library To increase revenue estimates and expenditure appropriations from the Literacy Services Special Deposit Account. Funds will be allocated to various Literacy Maintenance & Operating expense accounts. 012 9/28/2021 City Council GENERAL FUND 20,000.00 20,000.00 - Library To increase revenue estimates and expenditure appropriations by accepting a check from the Newport Beach Arts Foundation to enhance the Cultural Arts Sculpture Garden. 013 9/28/2021 City Council GENERAL FUND - 25,380.00 (25,380.00) Police To increase expenditure appropriations from unappropriated General Fund fund balance to fund crossing guard services at new crossing guard locations. On-going funding will be provided in subsequent years budgets for these services. 7/14/2021002 To transfer expenditure appropriations and revenue estimates related to the Grant Assistance Agreement with the U.S. Bureau of Reclamation for the Advanced Meter Project from the Water Fund to the Contributions Fund. UtilitiesCity Manager City of Newport BeachFiscal Year 2021-22 Budget Amendments Quarter Ending September 30, 2021 To increase expenditure appropriations from Assessment District #124 with an advance from General Fund unappropriated fund balance for the engineering design work. Public WorksCity Council7/27/2021001 51 BA #Date Amendment Type Fund Revenues Expenditures Net Effect on Fund Balance Increase/(Decrease)Department Explanation City of Newport BeachFiscal Year 2021-22 Budget Amendments Quarter Ending September 30, 2021 TIDE & SUBMERGED LANDS FUND - 17,500.00 (17,500.00) CONTRIBUTIONS FUND 175,000.00 175,000.00 - GENERAL FUND - 376,101.00 (376,101.00) COMM DEVL BLK GRANT FUND 717,079.00 717,079.00 - 9/28/2021015 To increase revenue estimates and expenditure appropriations from the approval of a mobile crisis response team to assist residents and homeless individuals experiencing a mental health crisis related to COVID-19. City ManagerCity Council To increase revenue estimates and expenditure appropriations from the approval and acceptance of the State of California's Division of Boating and Waterways SAVE Grant. The SAVE Grant requires a 10% match, which will come from the Tidelands fund balance. HarborCity Council9/28/2021014 52 10/7/21 Scheduled Date Agenda Title Report Type Agenda Description Thursday, October 14, 2021 Year-End Budget Results Presentation Staff will provide a presentation regarding the year-end budget results for FY 2020-21. New Item Follow-Up Harbor Department Operating Budget Receive and File Per the Committee's request, staff will provide additional information regarding the Harbor Department's budget. Exchanged for Visit Newport Beach Item in November Credit Card Fees Discussion Presentation Staff will provide the Committee with an overview of the costs associated with processing credit card transactions, as well as the various types of payments for which the City currently accepts credit cards. The purpose of this item is to receive the Committee's feedback on whether it would make sense to recommend to the City Council that the City collect a service fee for any or all credit card transactions. Revenue Audit Program Update Presentation Staff will provide an update on audits conducted by the Revenue Division to verify transient occupancy tax (hotels, agents and residential owners), charter boat company, waste hauler, etc. revenue collections. Budget Amendments for Quarter Ending September 30, 2021 Receive and File Staff will report on the budget amendments from the prior quarter. Thursday, November 4, 2021 Overview of Historical Funding Provided to Visit Newport Beach Presentation Staff will provide the Committee with historical information on the transient occupancy tax revenues generated in the City, as well as the portion passed through to Visit Newport Beach, to inform a discussion regarding the resources currently allocated to tourism marketing. Representatives from Visit Newport Beach will also be present to discuss the ways in which these resources are allocated in their budget to various categories of expenditures. CalPERS Update Presentation Staff will provide the Committee with an overview of the data from the latest actuarial reports from CalPERS as well as their impact on prior projections of the paydown of the City's unfunded pension liability. First Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected FY 2021-22 budget performance. Long Range Financial Forecast (LRFF) Update Presentation Staff will brief the Committee regarding the results of the updated LRFF analysis. Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program. December 2021 Newport Beach Finance Committee Work Plan October 2021 November 2021 Committee Recess I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2021\WORK PLAN 2021 - 9-20-2021 1 53 10/7/21 Scheduled Date Agenda Title Report Type Agenda Description Newport Beach Finance Committee Work Plan Thursday, January 13, 2022 Financial Statement Audit Results and Related Communication Presentation The City’s external auditors will meet with the Finance Committee to discuss the results of their audit for the fiscal year ending June 30, 2021. Internal Audit Program Reports Presentation Presentation of reports, findings, and recommendations from the FY 2020-21 audit program. Internal Audit Program Work Plan Review Presentation Selection of audit topics for the FY 2021-22 audit program. Tidelands Fund Budget Presentation Options Presentation Staff will provide the Committee with an overview of the current method of reflecting cost allocations to the Tidelands Fund in the City's budget and several recommended options to improve transparency in the budget document relative to these interfund allocations. Budget Amendments for Quarter Ending December 31, 2021 Receive and File Staff will report on the budget amendments from the prior quarter. Thursday, February 10, 2022 Fee Study Update Presentation Staff will present the Master Fee Schedule to the City Council prior to presenting it to the City Council. Facilities Financial Plan (FFP), Harbor & Beaches Master Plan, and Capital Improvement Program (CIP) Update Presentation Staff from Public Works and Finance will provide an update on the current status of FFP and Harbor & Beaches Master Plan funding, as well as what is planned for inclusion in the FY 2022-23 CIP. Internal Service Funds Update Presentation Staff will provide the Committee with an update on the health of the City's insurance, vehicle, equipment, and other internal service funds. Second Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected FY 2021-22 budget performance. Thursday, March 10, 2022 OPEB Actuarial Valuation Report Update Presentation Staff will provide the Committee with an overview of the latest actuarial valuation report prepared by the City's actuary. Overview of Revenue Projections Presentation Staff will provide the Committee with an overview of the assumptions utilized to prepare revenue projections for the City's major funds as part of the FY 2022-23 budget preparation process. Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program. January 2022 February 2022 March 2022 I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2021\WORK PLAN 2021 - 9-20-2021 2 54 10/7/21 Scheduled Date Agenda Title Report Type Agenda Description Newport Beach Finance Committee Work Plan Thursday, April 14, 2022 Proposed FY 2022-23 Budget Overview Presentation Staff will provide the Committee with an overview of the expenditure budget for FY 2022-23 that will be presented to the City Council in May. Budget Amendments for Quarter Ending March 31, 2022 Receive and File Staff will report on the budget amendments from the prior quarter. Thursday, May 12, 2022 Third Quarter Budget Update Presentation Staff will provide a presentation regarding the year-to-date and projected Fiscal Year 2021-22 budget performance. Follow-Up Discussion of Proposed FY 2022-23 Budget Discussion Staff will provide the Committee with a copy of the Fiscal Year 2022-23 proposed budget document. Should the Committee wish to continue April's discussion of the Fiscal Year 2022-23 budget, this is also an opportunity to do so. Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program. Thursday, May 26, 2022 Financial Statement Auditor's Communication with the Finance Committee acting as the City's Audit Committee Presentation The City's external auditors, Davis Farr LLP, will provide an overview presentation regarding the audit process and request feedback from the Committee regarding any information that may assist them in their audit of the City's financial statements. Committee Recommendation to Council for the FY 2022-23 Budget Discussion Discussion of the Study Session earlier in the week and formulation of any recommendations to be presented to the City Council at the budget public hearing in June. Thursday, September 15, 2022 Annual Review of Investment Performance Presentation The City's investment advisor, Chandler Asset Management, will report on the performance of the City's investment portfolio for the fiscal year ending June 30, 2022. Annual Review of Investment Policy Presentation Staff will provide a presentation regarding any changes proposed to the City's Investment Policy by staff or the City's investment advisor prior to the Investment Policy being approved by the City Council. Internal Audit Program Update Verbal Update Bi-monthly progress update on the internal audit program. Budget Amendments for Quarter Ending June 30, 2022 Receive and File Staff will report on the budget amendments from the prior quarter. June 2022 May 2022 April 2022 Committee Recess July 2022 Committee Recess August 2022 September 2022 Committee Recess I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2021\WORK PLAN 2021 - 9-20-2021 3 55