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Home My WebLink AboutFinance Committee - November 4, 2021CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D Thursday, November 4, 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 November 4, 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 OCTOBER 14, 2021A. Recommended Action: Approve and file. DRAFT MINUTES 10142021 4A1_CORRESPONDENCE_DRAFT MINUTES 10142021 V.CURRENT BUSINESS OVERVIEW OF HISTORICAL FUNDING PROVIDED TO VISIT NEWPORT BEACH A. Summary: 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. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A 5A1_CORRESPONDENCE_11042021 5A2_STAFF PRESENTATION_11042021 5A3_PRESENTATION_11042021 2 November 4, 2021 Page 3 Finance Committee Meeting CALPERS UPDATEB. Summary: 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. Recommended Action: Receive and file. 5B1_STAFF PRESENTATION_11042021 FIRST QUARTER BUDGET UPDATEC. Staff will provide a presentation regarding the year-to-date and projected FY 2021-22 budget performance. Recommended Action: Receive and file. STAFF REPORT 5C1_STAFF PRESENTATION_11042021 LONG RANGE FINANCIAL FORECAST (LRFF) UPDATED. Summary: Staff will brief the Committee regarding the results of the updated LRFF analysis. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A INTERNAL AUDIT PROGRAM UPDATEE. Summary: Bi-monthly progress update on the internal audit program. Recommended Action: Receive and file. 3 November 4, 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 October 14, 2021 Page 1 of 14 CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 14, 2021 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Chair Will O’Neill, Committee Member Noah Blom, Committee Member John Reed, Committee Member Nancy Scarbrough, and Committee Member Joe Stapleton ABSENT: Mayor Brad Avery and Committee Member William Collopy 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, Fiscal Specialist Bryan Bello, Revenue Manager Evelyn Tseng, Public Works Finance/Administrative Manager Theresa Schweitzer, Senior Budget Analyst Amber Haston, Senior Budget Analyst Shelby Burguan, Revenue Auditor Antonio Velasco, and Harbormaster Paul Blank MEMBERS OF THE PUBLIC: Laura Curran, Charles Klobe, and Jim Mosher III. PUBLIC COMMENTS Laura Curran recommended the City allocate funding and resources for outside counsel to address issues related to group residential facilities. She advised there was a vigorous community meeting on group residential facilities held by the City on October 11 and noted there was a lot of participation. She advised it is clear there is a lot of interest in this issue and will require significant resources including outside counsel experienced in this issue. She reported the City of Costa Mesa’s sober living ordinances were recently upheld in the United States Court of Appeals for the Ninth Circuit and noted they used an attorney who is very assertive and effective in addressing these types of issues. She encouraged the Finance Committee to consider adding this as an extra budget item so City staff will not be over-extended especially with having to deal with the legal ramifications following the recent oil spill. IV. CONSENT CALENDAR MINUTES OF SEPTEMBER 16, 2021 Recommended Action: Approve and file. Chair O’Neill called for public comments. Jim Mosher advised Charles Klobe was in attendance at the last meeting and recommended additional changes to the minutes. MOTION: Committee Member Stapleton moved to approve the minutes, as amended, seconded by Committee Member Scarbrough. The motion carried 5 ayes, 0 noes, 2 absences (Mayor Avery, Committee Member Collopy) 5 Finance Committee Meeting Minutes October 14, 2021 Page 2 of 14 Chair O’Neill requested Item B be heard prior to Item A. V. CURRENT BUSINESS B. FOLLOW-UP HARBOR DEPARTMENT OPERATING BUDGET Summary: Per the Committee's request, staff will provide additional information regarding the Harbor Department's budget. Recommended Action: Receive and file. Finance Director/Treasurer Scott Catlett reported the item was agendized at the request of the Finance Committee. He presented an overview of historical Harbor Department Revenues and noted this presentation just reflects the years where there has been a Harbor Department that has existed separately from the former items that were in Public Works. He advised the report includes three years of actual revenue and the budget for the upcoming year. He presented an overview of historical Harbor Department Staffing and advised a line was added to reflect the Code Enforcement Supervisor who was on loan from the Community Development Department for two years. Finance Director/Treasurer Catlett provided an overview of the historical Harbor Department budget and noted it was the main item changed in the report based on comments from the Finance Committee, which should now tie to the budget document. He advised the report reflects the savings that have occurred in the budget. He noted a line was added to show the cost of the loaned Code Enforcement Officer, which then became part of the budget in subsequent years. In response to Chair O’Neill’s inquiry regarding Maintenance and Repair actuals for previous years, Finance Director/Treasurer Catlett advised funding was appropriated for expenditures that did not occur. Finance Director/Treasurer Catlett explained there were some surprise expenses back in 2019 that the budget responded to but there have not proven to be similar expenditures in the following years. In response to Committee Member Blom’s inquiry regarding allocating that funding to the Harbor Department, Harbormaster Paul Blank advised he prefers to leave the allocation as is due to deferred maintenance. He believes the City is catching up quickly and would like to have a full year under his belt before he commits to a reduction. Finance Director/Treasurer Catlett presented an overview of Other Tidelands Fund Operating Costs that are remaining in the Public Works Department’s area of responsibility, which is primarily Maintenance and Repair. He noted this is the area that was skewing the report that was previously presented. He reported over the last three years there has been a $1.5 million average expended for Tideland Capital Improvement Projects. He noted there are some very large projects in the long-term Harbor Beaches Master Plan that are coming up down the road such as sea wall repair and dredging, so $14 million has been allocated in the FY 2021-22 budget. He advised there is additional fund balance available in the Tidelands Capital Fund that can support those future projects beyond what is currently appropriated. In response to Chair O’Neill’s inquiry regarding the Tidelands Operating Fund and Tidelands Capital Fund, Finance Director/Treasurer Catlett confirmed the Tidelands Operating Fund never has a balance. He clarified the capital component of certain Tidelands revenues plus the General Fund monies being transferred in annually is what is supporting the $14 million of capital projects. In response to Chair O’Neill’s inquiry regarding anticipated additional costs for dredging, Harbormaster Blank reported $20 million is the total for dredging and the City is expecting $12 million coming from other agencies. He confirmed the City has $7 million appropriated for dredging. 6 Finance Committee Meeting Minutes October 14, 2021 Page 3 of 14 Chair O’Neill inquired if the Tidelands Capital Fund can pay for the Balboa Island storm drainage. He noted he is inquiring about flexibility. Finance Director/Treasurer Catlett advised much of the funding in the Tidelands CIP has been transferred there from the General Fund. Deputy Director/Finance Steve Montano reported he has researched it and noted that utilizing the portion of funds that derived from the General Fund can be used. He recommended the Finance Committee think about that from a flexibility standpoint. Committee Member Scarbrough inquired if the Build Back Better Act has been explored. She noted some of the proposed funding is for piers and weather-related issues. City Manager Leung advised the bill has not passed yet, but the City has lobbyists in Washington D.C. pushing for that funding and believes it would be in line for these types of projects. Finance Director/Treasurer Catlett advised once the program guidelines are released, they can be investigated. Chair O’Neill opened public comments. Charles Klobe inquired if the $2.9 million allocated in the 2022 Budget for Ocean Piers was for design. Committee Member Blom advised those funds were allocated to replace the pilings at the end of the pier and continued maintenance but not for design. City Manager Leung advised tearing down the building at the end of the pier is a separate demolition expense. Committee Member Blom advised 19 pilings will need to be replaced at the end of the Newport Pier in addition to a few at Balboa Pier. Ms. Curran inquired about the spike in Marina Park Slips revenues in 2021 and the $230,000 increase to salaries and benefits expenditures with only one full-time equivalent added. Harbormaster Blank reported he has been working since May to get the Harbor Department properly staffed. He advised one additional position will be filled and at that time the Harbor Department will be fully staffed. He reported there has been a big uptick in utilization at Marina Park over the last two years and the increase in revenue is a windfall. He advised he is unsure if this will continue as the trend. Chair O’Neill closed public comments. The item was received and filed. A. YEAR-END BUDGET RESULTS Summary: Staff will provide a presentation regarding the year-end budget results for FY 2020-21. Recommended Action: Receive and file. Finance Director/Treasurer Catlett reported economic indicators and employment have continued to improve in recent months. He advised the City expected sales tax to be higher than originally budgeted but it came in at the highest it has ever been for the City. He noted a lot of it has to do with auto sales that are above the pre-pandemic levels and prices are 8% higher. He added that the City’s Sales Tax Consultant advised there is a supply issue that may moderate the increase in sales, but the prices being higher is expected to offset any decline in sales. As a result, they do not foresee there being a downturn in auto sales that would cause the City’s sales tax revenues to decline. Finance Director/Treasurer Catlett reported in-person spending continues to improve in areas that were still soft relative to sales tax, which are mainly restaurants and in-person retail and noted there is room to grow. He advised multiple hotel properties have reported record transient occupancy tax (TOT) Revenues to the City, which is a good sign, although not across the board, but is nonetheless an encouraging trend. 7 Finance Committee Meeting Minutes October 14, 2021 Page 4 of 14 Finance Director/Treasurer Catlett reported General Fund revenues ended up surpassing third quarter estimates and as a result ended up being $36 million higher than the adopted budget and $16.9 million higher than the third quarter forecast. He reported property tax has been very stable and noted a small positive variance was seen due to strengthening of home values and strong sales in the fourth quarter. He advised revenues ended up at $119 million, while $117 million was projected. He reported sales tax has really been the bright spot and ended up $500,000 higher than the record year of FY 2018-19. He noted Sales Tax ended up $4.4 million above the revised budget. He advised there were some concerns that Amazon’s sales tax allocation methods could have some negative impacts on cities, but the impact was smaller than the City’s consultants originally forecasted. He advised it would be approximately $350,000 per year, which is less than half what was originally anticipated. Finance Director/Treasurer Catlett provided an overview of TOT revenues and reported the Fashion Island Hotel remains closed and noted the Marriott is still under renovation. He advised hotel occupancy has been tracking upwards and as of August was back up to 71% and noted the City was expecting 60% of prior year revenues as the starting point for the fiscal year. He noted that even with the COVID-19 delta variant staff is optimistic about TOT and believes there is still room for growth in the future. He advised TOT finished at 11% above the most recent projection but is still 68% of where the City was before the pandemic hit. Finance Director/Treasurer Catlett reported that the budget for other revenues was reduced by 20% in the early response to the pandemic. He reported strong parking revenues due to more people using beaches and frequenting Newport Beach during the day. He advised property transfer tax was $1.8 million above budget, which is 75% higher than the prior year and noted this growth reflects the growth in the housing market. He reported fees from building permits was 27% above budget. Finance Director/Treasurer Catlett reported overall expenditures were $7 million below what was budgeted and that includes making the extra $5 million pension payment. He reminded the Finance Committee that all of the FY 2020-21 tiered budget cuts that needed to be restored were restored as part of the budget adoption, including Facilities Financial Plan transfer, Harbor CIP transfer, and funding for certain deferred Neighborhood Enhancement projects. Finance Director/Treasurer Catlett reported a strong surplus was projected in the third quarter and at that point the City Council appropriated the funds to restore the tiered budget cuts and it was then forecasted that the reserves would drop due to those appropriations. He advised as a result of strong year end results, the reserve is back up to $30 million. He noted the net effect is a $20 million variance from the third quarter projection. He advised the $7 million change in unrestricted fund balance is really the change in the current year because the City started the year with $24 million of surplus funds on hand. He explained the $31 million has three components that include an $11.5 million carry forward from FY 2018-19, a $12.6 million carry forward from FY 2019-20, and $7 million from the current year. He advised the bottom line is that only $7 million of is the surplus was generated from current year operating revenues. Chair O’Neill discussed the origins of the surplus. He advised there is also a City Council Policy F-5 that states half the surplus goes towards Neighborhood Enhancement programs and half goes towards long-term liabilities. He noted the reason the City had $24 million to deal with the pandemic is because it had not yet spent the surplus which is why there was two-years of surplus available. He advised it could be thought of as a super reserve. Chair O’Neill explained the City ended up using $2.3 million of its Contingency Reserve to balance the budget last year. He advised when the $2.3 million was rolled back to the Contingency Reserve in the first quarter it was again fully funded. He explained that when Finance Director/Treasurer Catlett referenced rolling back he was referencing the Tiered Budget Balancing Framework. He further explained the expenditures were increased which is why there was a reduction. He noted he wanted to ensure everyone is on the same page because the last year was an abnormal year and abnormal budget and very difficult to explain. 8 Finance Committee Meeting Minutes October 14, 2021 Page 5 of 14 He noted it is very important to understand that the surplus is all one-time money. He explained while it was good to have the funds available to balance the budget during the pandemic, it also means that the funds were not spent on long-term liabilities or capital projects and so there are some deferred items out there. Finance Director/Treasurer Catlett advised, to echo Chair O’Neill’s point, the budget that was just adopted for FY 2021-22 only has a $32,000 surplus. Chair O’Neill further explained the adopted budget is balanced by $32,000 and does not rely on any of the $31 million anticipated surplus to balance it. He explained it is very complicated and encouraged the Finance Committee to ask questions during the presentation. He explained everything in the budget would need to go as budgeted in order to have the $32,000 surplus. He noted the $31 million can be used on a one-time basis going into this year, which would increase the expenditure assumptions. In response to Committee Member Reed’s inquiry regarding the anticipated $32,000 surplus, Finance Director/Treasurer Catlett explained he expects the anticipated surplus to grow as is the case each year due to expenditure savings and/or positive revenue variances. Finance Director/Treasurer Catlett advised to be consistent with Council Policy F-5, the City Council previously directed a 50/50 split with half going towards the long-term obligations such as pensions and the other going towards CIP projects and neighborhood enhancement projects. He reported staff is recommending that $5 million be allocated towards the CalPERS Unfunded Liability to bring the annual contribution to $40 million consistent with the Finance Committee’s previous direction to evaluate making an additional contribution every year. He advised staff recommends $10.5 million be allocated towards the FFP and Harbor and Beaches CIP to rehabilitate and reconstruct existing City facilities. Lastly, he advised staff recommends $15.5 million be allocated to the routine CIP and neighborhood enhancements. He advised staff would return to City Council with the FY 2022-23 budget process in six months to bring forward specific recommendations for the programming of those funds. Finance Director/Treasurer Catlett reported in addition to the $31 million surplus the City has American Rescue Plan Act (ARPA) funds in the amount of $10.1 million available for allocation. He advised the City has demonstrated that the ARPA funds can be used to offset revenue loss, which allows the City to have more flexibility in the use of the funds than if it did not have revenue losses equal to or greater than the amount of allocated funds. He noted the funds can be used for infrastructure capital projects. He advised staff’s recommendation would be to also allocate the $10.1 million from ARPA for infrastructure projects which would be in addition to the $31 million. Chair O’Neill explained there is $31 million in General Fund surplus and $10.1 million from ARPA and noted they do not have to be tied to specific projects at this time. He noted the City has allocated $6.5 million towards the Library Lecture Hall and $3.5 million towards the Junior Lifeguard Building, which is almost the exact amount received from ARPA and is worth remembering as this is being assessed. He reported CalPERS did really well in their last cycle and the impact will be good for the City in terms of the funded percentage. He advised the Finance Committee recommendation would deviate from Council Policy F-5 that calls for half of the surplus to go to long-term liabilities. He believes it is a good recommendation but wanted to make that clear. Committee Member Stapleton noted the City is still adding the $5 million to the annual payment. Chair O’Neill noted the for the last two years the City has not missed the $5 million payment to CalPERS. Committee Member Blom inquired if the Policy anticipated having more than $10 million in surplus in a single year. Chair O’Neill explained the $5 million discretionary payment to CalPERS is more of a recent development. He explained in 2014 the City Council did a partial 9 Finance Committee Meeting Minutes October 14, 2021 Page 6 of 14 fresh start which means they took some of the pension amortization bases, combined them together, and increased the amount the City had to pay as a default amount. He likened it to a 30-year mortgage that was dropped down to a 20-year mortgage in that the payment is higher, but less is being paid on interest. He advised the default amount the City pays has increased at least twice since 2014. He explained that instead of locking future City Councils to that higher amount the City is making additional discretionary payments. He noted even in a year the City did not have $31 million in surplus the City would put the $5 million towards additional discretionary payments to CalPERS. He noted the City’s surplus has been able to cover the $5 million previously. Committee Member Blom inquired if the variance from the typical surplus amount is the reason the City would want to deviate from City Council Policy F-5. Chair O’Neill confirmed. Committee Member Scarbrough inquired why the City would not want to hold some of the $31 million back in the event something like the pandemic happens again or allocate more to long-term liabilities and not promise departments or residents infrastructure projects. Chair O’Neill noted he could not provide answer since it is a City Council policy question. He noted Committee Member Collopy has been asking for the last couple of years how much should the City hold in its reserves. He advised the City has $52 million in contingency reserves and noted even in a black swan year the City only ends up dipping into it for approximately $2 million. He explained the Finance Committee’s job is to make those types of recommendations to the City Manager and then eventually making a recommendation to the City Council on the budget. He explained as an example that the City could pay down its pension liability in five years, but many of the projects that residents are expecting from their tax dollars will not be completed. He noted that is the balance the City has to constantly play out. He noted when dealing with CIP projects, the Junior Lifeguard Building and the Library Lecture Hall are “nice to haves” not “need to haves”. He noted “need to haves” coming up are the fire station and the library at the end of the peninsula that needs to be replaced and those are the kind of things that could be funded with one-time monies. He advised the City could hold the money back and then the question becomes does the City want to add it to the reserve as a hold back. Committee Member Scarbrough noted the City has been allocated a Regional Housing Needs Assessment (RHNA) number and new housing will be needed along with infrastructure. She inquired how that gets studied and gets put into this entire discussion. Committee Member Stapleton advised he has been on the Finance Committee long enough to know that when CalPERS misses, they miss big. He feels it is best to spend some of this money on long-term projects and infrastructure the City needs. Committee Member Blom advised it is important to note when funds are allocated to CIP, they are not being spent they are sitting in an allocated fund. He explained CIP projects can always be deferred if there is a crisis. He believes development fees could also be used to develop areas to meet the RHNA numbers. City Manager Leung advised City Council gave direction to staff to conduct a Development Impact Fee Study. Committee Member Scarbrough advised it is harder to rescind the funding once residents are promised projects. Chair O’Neill advised it is not very common for the City Council to promise projects. He advised the City has never dealt with anything like this before. Charles Klobe reported there is an annual ranking of cites statewide that always seems to give the City a black eye financially and inquired if there is anything the City can do to because the City’s financials are actually better then what is being reported. Chair O’Neill reported he has spoken offline with Senator John Moorlach about the issue repeatedly. He advised the City will not receive its annual CalPERS actuarial valuation report for FY 2020-21 for a year and half 10 Finance Committee Meeting Minutes October 14, 2021 Page 7 of 14 and noted the City will look better after that. He noted the City is one of the only cities that is trending towards reducing its pension liability. Ms. Curran reported as a CalPERS retiree they could not tell her potential qualification threshold was until she retired. She inquired about the upside versus the downside of the two year and one-year horizon for the $31 million and how it compares to other cities. Finance Director/Treasurer Catlett explained the main reason is it allows the City to deploy resources in a timelier fashion especially relative to the pensions. He explained that when the City spends its surplus reserves down to zero there is still $52 million in the Contingency Reserve and noted the City also has the ability to pull funds back or not make transfers next year to various other funds. He noted there is a lot of flexibility, but it makes sense to deploy these funds as fast as possible. Ms. Curran inquired if philosophically it leads to being more conservative in some of the projections because there are not excess reserves on hand over time. Chair O’Neill explained philosophically by the time the City hits the fourth quarter it has a good sense of where it is with surplus. He advised by the time the City Manager begins working on the budget which is at the start of the fourth quarter and presents it to the Finance Committee and eventually to the City Council it is close to the end of the budget year. He advised the City Manager is able to estimate what the anticipated surplus will be. He advised if the City is putting $5 million towards additional discretionary pension payments the City Manager will have an idea if it is coming from surplus or from the General Fund or a combination of the two. He explained, for example, if the City has a Contingency Reserve of $52 million plus an $11 million surplus it can spend the $11 million because it is not being relied upon for revenue assumptions. He further explained if there is a situation such as the pandemic, the Contingency Reserve can be used rather than using the surplus as a balancing mechanism. He indicated it is conservative and explained it is like a nine month acceleration of payments. Ms. Curran noted it sounds like the City makes a specific estimate for its Contingency Reserve, so it is requiring the City to be more transparent. Chair O’Neill advised he does not believe it is a transparency issue and noted in previous years the City would be using the money in nine months after the timeframe currently being discussed. He explained if the City was doing it this way two years ago it would have had two years’ worth of Surplus instead of three years’ worth to use during the pandemic. Chair O’Neill opened public comments. Jim Mosher advised the agenda did not mention the Finance Committee was being asked to make a recommendation on how to allocate the surplus and noted he needed to look at the staff report cover page to find out that was the recommended action. He recommended having the recommended action on the agenda match what the actual recommended action is in order to properly inform the public on the agenda. He noted in the presentation under Other General Fund Revenues states a 20% reduction is assumed in the adopted budget and actual revenue is $9.2 million higher than the revised budget. He inquired if the $9.2 million is larger or smaller than the 20% or how do they compare. Finance Director/Treasurer Catlett advised he could not answer Mr. Mosher’s question directly from the information in the presentation or the staff report. He advised a 20% reduction in all of the non-major categories of revenue would have been reflected in the $199.6 million. He explained the $9 million is a variance between the revised budget and the actuals. He noted the variance from the originally adopted budget would have been more, but he does not have that number in front of him. He advised he would follow up with Mr. Mosher. Mr. Klobe inquired if the funds for the Library Lecture Hall and Junior Lifeguard building are already budgeted. Chair O’Neill advised only the design was budgeted for the Library Lecture 11 Finance Committee Meeting Minutes October 14, 2021 Page 8 of 14 Hall, but the CIP included $4 million for the project and noted the next year’s CIP budget will be increased by $2.5 million for a total of $6.5 million. He advised it is a question of how quickly the City could work through the Memorandum of Understand (MOU) and noted there is no construction money currently budgeted. Mr. Klobe noted in last few years and even with the pandemic the City had a budget surplus. He inquired if it is safe to assume the City will have a $7 million surplus at the end of the next fiscal year. Chair O’Neill noted it is possible to have a surplus at the end of fiscal year. Mr. Klobe noted the big revenue generator such as real estate sales and auto sales are still strong. He noted Amazon versus retail has not really impacted the City. Ms. Curran inquired about the nexus of sales tax when the customer, for example, places an order for Bristol Farms on Amazon. Committee Member Blom suggested that the customer is probably paying sales tax on products sold and Amazon charges a service agreement that would be independent. Finance Director/Treasurer Catlett explained if a customer is ordering online from a store and picking up at the store, the nexus is with the store location in Newport Beach, but when the order is placed online, and the product is delivered to the customer the revenue would flow to the county sales tax pool. He noted he does not know the answer for the Bristol Farms and Amazon relationship but will follow up with Ms. Curran. Ms. Curran noted the Amazon model will continue to grow. Chair O’Neill closed public comments. Committee Member Reed inquired what would happen if the recommendation is to remain in alignment with the Council Policy F-5. Chair O’Neill advised in that case $15.5 million be allocated for pension liability and $15.5 million would be allocated to CIP. He explained it is tricky to greatly accelerate the City’s unfunded pension liability payments. He advised the $5 million is going towards the idea that CalPERS will continue to miss on a long-term basis on their 7% investment return assumption. He reiterated the $5 million is a second additional discretionary payment. He noted the City would then be funding $11 million over what it would normally be required to pay in any given year. Chair O’Neill advised the only other long-term liabilities the funds can be allocated to are retiree medical and unemployment insurance reserve but those either cannot be paid down faster or are already in a good position. Committee Member Scarbrough inquired which projects would get funded with the $31 million and who makes that decision. Chair O’Neill advised the Finance Committee explains to the City Council where the money is and how it can be spent but the City Council makes the final decision. He advised this would be providing the flexibility to City Council for the possibility of accelerating some of the projects or changing the timeline of a project. Chair O’Neill explained the reason Finance Director/Treasurer Catlett is talking about $10.5 million and $15.5 million and not just $25 million to CIP is because FFP is a long-range planning document to make sure the funding is available when it is needed. He noted the City needs to anticipate General Fund transfers into the FFP for those long-range planning tools. He advised the $15.5 million for CIP needs to be reviewed in the next or following budget cycle as CIP has not been reviewed for some time. He believes the staff recommendation is right because it splits between long-term liabilities and the CIP. Committee Member Blom moved to approve staff’s recommendations. MOTION: Committee Member Blom moved to approve staff’s recommendations, seconded by Committee Member Reed. The motion carried 5 ayes, 0 noes, 2 absences (Mayor Avery, Committee Member Collopy) 12 Finance Committee Meeting Minutes October 14, 2021 Page 9 of 14 C. OVERVIEW CREDIT CARD FEES DISCUSSION 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. Finance Director/Treasurer Catlett reported the City collects payments at a variety of locations and accepts a variety of types of payments. He advised staff is looking for feedback regarding the City collecting a service fee for any or all credit card transactions. He reported two of the largest types of payments collected are building permits and utility bills. He explained the fees charged work out to approximately 2.5% across all of the City’s transactions. Finance Director/Treasurer Catlett advised parking transactions are the largest portion of payments received from people paying at pay stations and through their cell phone using the parking application and totaled $600,000 in the most recent year. He reported building permits totaled $200,000 and online utility payments totaled $260,000. He advised other programs where credit card payments are collected are recreation fees, parking citation payments, and business licenses. Finance Director/Treasurer Catlett provided a brief overview of what the City pays in credit card fees and noted the percentage varies by category and noted the average fee works out to approximately 2.5%. In response to Chair O’Neill’s inquiry about the 5% fee for utility payments, Revenue Manager Evelyn Tseng explained the City is not getting the discount it would normally get because we are using a third-party vendor for hosting the payment portal. Finance Director/Treasurer Catlett explained the City has a variety of systems on the backend, so depending on the software and the system the fee can vary. He reported the City now recovers the credit card fee on utility bills via utility rates. He noted that cost was part of the rate study. He advised that credit card fees for other programs are being subsidized by the fund where they are budgeted, primarily the Tidelands Fund and the General Fund. Finance Director/Treasurer Catlett reported the City benchmarked with peer cities such as Irvine and Beverly Hills and advised none of them are charging credit card fees for parking. He advised Irvine and Santa Monica charge a fee for building permit credit card fees and noted most cities are recovering utility bill-related fees through rates. He advised Santa Monica is charges a flat dollar fee per utility bill transaction. Finance Director/Treasurer Catlett reported the City could pass through fees for every type of transaction or look at specific categories of transactions. He noted charging customers for credit card fees on building permits might make sense because the user is obtaining a service from the City and the City’s user fees are generally set at 100% of the City’s costs by policy, other than certain user fees such as recreation fees where the fees are subsidized from the General Fund. He advised the user fee schedule can also be used to recover credit card fees or the City could choose to leave things the way they are today. In response to Committee Member Scarbrough’s inquiries regarding rates, Finance Director/Treasurer Catlett explained the fee for utilities is being recovered through utility rates. In response to Committee Member Scarbrough’s inquiry regarding payments by debit card versus credit card, Revenue Manager Tseng explained the fee is slightly less when a customer 13 Finance Committee Meeting Minutes October 14, 2021 Page 10 of 14 pays with a debit card versus a credit card. Chair O’Neill noted when residents pay property tax payments with a credit card, they are charged a 2.5% fee. Committee Member Blom expressed support for a pass-through fee. Chair O’Neill does not think this can be done with parking because the way most people pay will always be transacted through a credit card. Finance Director/Treasurer Catlett confirmed the fees for utilities are recovered through utility rates. Committee Member Stapleton advised he does not want to create a problem that does not already exist and feels like it may create more headaches by charging fees. Chair O’Neill reiterated this should not be done for parking but maybe is doable for building permits. He expressed concern that a California Coastal Commission permit may be needed because the City would effectively be increasing parking rates. Committee Member Stapleton inquired if it is not an increase in the parking and only an increase in the line item is a California Coastal Commission permit still needed. Committee Member Scarbrough noted it seems reasonable to collect a fee for processing building permits with a credit card. Committee Member Blom advised the City is not making a profit on building permits and is strictly paying for staff hours for those fees so incurring the credit card fees as a City expense is a net loss. Chair O’Neill noted that recreation would have a tough time switching over to checks versus credit cards and he would like to see how it would work for the building permits first. He advised the whole point of charging a fee for processing building permits with a credit card is to offset fees for the City. City Manager Leung clarified for building permits customers would be charged an additional credit card fee for those who chose to use a credit card. Committee Member Scarbrough explained the building and plan check fees are in the Building Code and are based on valuation of construction. City Manager Leung reported there are many other permit fees and confirmed a fee study is conducted. In response to Chair O’Neill’s inquiry regarding valuation-based fees, Public Works Finance/Administrative Manager Theresa Schweitzer confirmed valuation-based fees are set based on the cost documented in the City’s user fee study and are then charged based on project valuation. In response to Committee Member Blom’s inquiry regarding number of credit card transactions, City Manager Leung noted 8,200 credit card transactions were conducted. Committee Member Blom noted the question is why the cost is not being recovered by the City. He noted he does not think the City is going to lose out on building permit fees. Committee Member Scarbrough noted she does not feel that customers obtaining building permit fees would be concerned about the fee. Chair O’Neill opened public comments. Mr. Klobe reported it is worth investigating if the City can charge a credit card fee for one thing and not another and ensure there is no legal challenge because everyone is not being treated fairly. He advised the City would have to go to the California Coastal Commission for increased parking fees but can use the cost of credit card fees as the justification. He advised many utility providers are encouraging customers to pay through ACH payments and inquired if customers are offered an ACH option. 14 Finance Committee Meeting Minutes October 14, 2021 Page 11 of 14 Revenue Manager Tseng advised the ACH program is free to the customer but not free to the City and noted the fee is slightly less than credit card costs. She reported staff contacted the County who chose to pass-through fees for credit card transactions but not for ACH transactions. Ms. Curran noted it is not a zero-sum game and the City can offer both forms of payment and let the customer chose. She inquired why the processing fee for parking pay stations is 5.85% and if it has always been that rate. Revenue Manager Tseng explained the City is not able to negotiate discounts with the credit card companies. She explained the parking processing fees are higher because there is a flat fee for all 1.7 million parking transactions. Ms. Curran suggested the City sell a pay card where visitors could purchase set amounts of prepaid parking fees. Revenue Manager Tseng noted it is a great idea and was discussed years ago when they contracted with Park Mobile but advised that at the time the back end administrative fee was high, and the cost could not be justified. Ms. Curran noted the pay card could be used for more than parking fees. Chair O’Neill closed public comments. Committee Member Reed inquired what the cost savings to the City would be for not having to service the meters. Chair O’Neill advised that contract is very expensive which was recently amended. City Manager Leung advised the City looked at the fiscal impact of not servicing the meters. Committee Member Scarbrough inquired if trash was included in utility payments. City Manager Leung advised recycling is included but not trash. Committee Member Scarbrough inquired if the recycling fee gets added to the utility bill and customers are going to pay by credit or debit card will the increased percentage of the recycling fee be calculated into the cost or will the City be subsidizing more. Finance Director/Treasurer Catlett advised he is not sure if the rate study included recycling. Public Works Finance/Administrative Manager Schweitzer advised the recycling study did not include credit card fees in the analysis, but the fees could be included in the next study. Chair O’Neill advised he likes the idea of giving customers the option of paying the pass through for credit cards or paying by check for building permit fees as a starting point. The item was received and filed. D. REVENUE AUDIT PROGRAM UPDATE 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. Revenue Auditor Antonio Velasco advised one of his main tasks is ensuring hotels, charters, and solid waste franchisees are in compliance with the City’s Municipal Code and paying their TOT and franchise fees. He reported for the period of June 2020 through September 2021, 40 companies were audited and of those 40, six were appealed. He advised the appeals were for hotels and some short-term lodging owners who were challenging the late fee. He reported all six appeals were upheld by the City’s’ Hearing Officer Revenue Auditor Velasco reported underreported taxes and fees totaled $82,000 including penalties and interest. He advised some of the main issues for Charter Tax are that some 15 Finance Committee Meeting Minutes October 14, 2021 Page 12 of 14 Marine Charters are operating without a Marine Activities Permit. He explained when the City receives that information it reviews it for any back taxes owed and applies penalties and interest. He advised due to pandemic there were some operators who shut down last year and failed to file or filed late. Revenue Auditor Velasco reported the City has contracted with a consulting firm to conduct audits on the Solid Waste Haulers and check franchisees to see if they are reporting correctly. He advised they have conducted two thirds of the 30 total audits and noted a new finding is that Solid Waste Haulers are incorrectly reporting gross receipts. Revenue Auditor Velasco reported some hotels are not reporting cancellation fees and some of the Short Term Lodging Agents were not reporting cleaning fees. He advised the City followed up with letters to all hotels and Short Term Lodging Agents to remind them of the Municipal Code and their tax requirements. He noted some follow up audits have been conducted and advised the letters are very effective. He advised when Short Term Lodging Agents call to register with the City, they are being notified of their tax requirements and required forms. Revenue Auditor Velasco reported last year 1,000 Short Term Lodging Owners filed for 2020 and 76 filed late or did not file at all. He advised they were sent letters and incurred penalties and interest. Revenue Auditor Velasco reported some hotels have had recent changes of ownership or management and they are being audited. He advised Marine Charter late filers and new operators will be audited to ensure they are reporting correctly. He noted the Harbor Department is also identifying charters to follow up on. He advised that once the consultant completes the audits they will be reviewed for findings. He noted the due date for Short Term Lodging Agents and owners reporting is at the end of October. Committee Member Scarbrough inquired how the auditor identifies unlicensed short-term rentals. Revenue Auditor Velasco reported there are a few programs that help the City identify properties being listed. Revenue Manager Tseng explained there are 1,500 to 1,600 short-term lodging permits and they all cannot be audited. She advised staff picks permittees who are paying more than average and also randomly pick ones to audit. She advised before Revenue Auditor Velasco came on board the City was not great at auditing short-term lodging owners. She noted with an increase in permits a more robust program was needed. Committee Member Stapleton reported beach picnic companies have become very popular and inquired if they were included in the audit program. Finance Director/Treasurer Catlett advised it is an issue from a business licensing and code enforcement perspective. Revenue Manager Tseng advised staff regularly receive calls about it and they send out code enforcement. City Manager Leung advised those companies can get a license, but they are not supposed to conduct business on the beach. She advised yoga in the City’s parks is okay and can be permitted. Chair O’Neill advised companies can obtain a business license and still be violating the law. Committee Member Reed noted he liked the idea of reaching out to new short-term lodging operators and inquired if it is possible to cross reference who has short term rentals by address and changes of property ownership. Revenue Auditor Velasco advised they do not have that ability at this time. Revenue Manager Tseng reported staff started conducting outreach with short-term rental owners last year and noted many agents/owners were contacted. She confirmed there is no way to track the new owners. Chair O’Neill opened public comment. 16 Finance Committee Meeting Minutes October 14, 2021 Page 13 of 14 Mr. Mosher noted he did not follow the logic of auditing the high paying short-term rental owners and inquired about permit holders who are not paying. Revenue Manager Tseng reported the audit is also randomized so the high payers are not the only ones being audited. She advised the City Council passed an ordinance that if the owner does not pay for two years the permit can be revoked. Mr. Klobe advised he would support a policy that requires everyone to be audit every few years. Chair O’Neill closed public comments. The item was received and filed. E. BUDGET AMENDMENTS FOR QUARTER ENDING SEPTEMBER 30, 2021 Summary: Staff will report on the budget amendments from the prior quarter. Recommended Action: Receive and file. 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 on November 4, 2021, and will include a review of the City’s relationship with Visit Newport Beach, an update on the City’s Long Range Financial Forecast, and an Internal Audit update. He advised the Finance Committee will be off in December. He encouraged the Finance Committee to note the two meetings in May 2022. Chair O’Neill called for public comments and hearing none, closed public comments. The item was received and filed. 17 Finance Committee Meeting Minutes October 14, 2021 Page 14 of 14 VI. ADJOURNMENT The Finance Committee adjourned at 4:51 p.m. to the next regular meeting of the Finance Committee. The agenda for the Regular Meeting was posted on October 7, 2021, at 6:45 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. Attest: ___________________________________ _____________________ Will O’Neill, Chair Date Finance Committee 18 November 4, 2021, Finance Committee Agenda Comments These comments on an item on the Newport Beach Finance Committee agenda are submitted by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229) Item IV.A. MINUTES OF OCTOBER 14, 2021 Changes to the draft minutes passages shown in italics are suggested in strikeout underline format. Page 2 (agenda packet page 6), Item B, paragraph 5, sentence 4: “He noted there are some very large projects in the long-term Harbor and Beaches Master Plan that are coming up down the road such as sea wall seawall repair and dredging, so $14 million has been allocated in the FY 2021-22 budget.” Page 2 (agenda packet page 6), Item B, paragraph 6, sentence 1: “In response to Chair O’Neill’s inquiry regarding the Tidelands Operating Fund and Tidelands Capital Fund, Finance Director/Treasurer Catlett confirmed the Tidelands Operating Fund never has a balance.” [?? I am unable to remember what was said, but this does not make sense as presented. The PowerPoint slides preserved in the October 14 meeting archive show only Tidelands expenses, not fund balances. And the Tidelands Operating Fund, like all funds, obviously does always have a balance, either positive or negative. Indeed, the Tide & Submerged Lands Annual Financial Report indicates it maintains a positive balance. I assume the inquiry and confirmation had something to do with the fund being able to maintain that positive balance only through an injection of General Fund revenues. In other words, the inquiry may have sought confirmation that the tidelands operating expenses exceed the revenues attributed directly to those tidelands operations. Whatever, describing this as the “fund” not having a “balance” is extremely confusing when the City’s own documentation indicates it does have one.] Page 4 (agenda packet page 8), paragraph 2, sentence 3: “He noted that even with the COVID- 19 delta Delta variant staff is optimistic about TOT and believes there is still room for growth in the future.” Page 4 (agenda packet page 8), paragraph 5, last sentence: “He advised the bottom line is that only $7 million of is the surplus was generated from current year operating revenues” Page 6 (agenda packet page 10), last paragraph, sentence 2: “Chair O’Neill reported he has spoken offline with former state Senator John Moorlach about the issue repeatedly.” Page 7 (agenda packet page 11), paragraph 1, sentence 1: “Ms. Curran reported as a CalPERS retiree they could not tell what her potential qualification threshold was until she retired.” Page 7 (agenda packet page 11), paragraphs 4 and 5: I am unable to follow what these two paragraphs are trying to say. For example, “He advised by the time the City Manager begins working on the budget which is at the start of the fourth quarter and presents it to the Finance Committee and eventually to the City Council it is close to the end of the budget year” is confusing since I thought the City Manager has been said to begin work on the budget in October, which is the start of the fourth calendar year quarter and not “close to the end of the budget year.” But in the previous sentence the Chair seems to be speaking of the fourth fiscal year quarter, which is close to the end of the budget year. 19 November 4, 2021, Finance Committee agenda comments - Jim Mosher Page 2 of 3 Page 8 (agenda packet page 12), full paragraph 1, sentences 1 and 3: “Mr. Klobe noted in the last few years and even with the pandemic the City had a budget surplus. … Chair O’Neill noted it is possible to have a surplus at the end of the fiscal year.” Page 8 (agenda packet page 12), paragraph 6, sentence 2: “Chair O’Neill advised in that case $15.5 million would be allocated for pension liability and $15.5 million would be allocated to CIP.” Page 12 (agenda packet page 16), first (partial) paragraph, last sentence: “He advised due to the pandemic there were some operators who shut down last year and failed to file or filed late.” Page 12 (agenda packet page 16), (full) paragraph 1, last sentence: “He advised they have conducted two-thirds of the 30 total audits and noted a new finding is that Solid Waste Haulers are incorrectly reporting gross receipts.” Page 13 (agenda packet page 17), paragraph 2: “Mr. Klobe advised he would support a policy that requires everyone to be audit audited every few years.” Item V.A. OVERVIEW OF HISTORICAL FUNDING PROVIDED TO VISIT NEWPORT BEACH 1. Especially in view of its title, the staff report is misleading in saying (on page 2 = page 20 of agenda packet) that “The City’s agreement with VNB originally dates back to May 2004 and was subsequently amended in March 2009.” VNB is in fact a relatively recent (2009) rebranding, at the behest of its current CEO, of what was formerly known as the Newport Beach Conference and Visitors Bureau, originally a self-funded membership trade organization of Newport Beach businesses in the tourism field – and still (erroneously?) referred to by the old name on the City’s home page for visitors. The City’s involvement with the CVB/VNB dates back to the enactment, at the behest of an earlier CVB CEO, and by a slim 4:3 vote in early 1987, of Ordinance No. 86-5, which created Municipal Code Chapter 3.28, adding a “Visitor’s Service Fee” to the TOT, the proceeds from which were to be used such that “The City, or an entity under contract to the City, shall develop, plan, carry out and supervise a program to serve the needs of visitors to, and promote tourism in, the City of Newport Beach” (see 1/26/1987 staff report and Council discussion from minutes of 3/24/86, 7/28/86, 8/11/86, 1/12/87, 1/26/87 and 2/9/87). In short, it seems the CVB was having trouble collecting enough revenue from its members to sustain its operations in the manner it wished, so it sought assistance from the City. A narrow majority of Council agreed to help, although several thought it was improper role for government to subsidize businesses. Needless to say, membership revenues declined to zero after the City agreed to pay the organization’s bills. 2. The staff report is correct in observing in the summary that “VNB also serves as the owners’ association to the Newport Beach Tourism Business Improvement District (TBID).” It is, however, again a bit misleading in saying “The expenditure of an additional $1.7 million of TBID funds was overseen by VNB during FY 2020-21.” 20 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5A November 4, 2021 TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE FROM: Finance Department Scott Catlett, Finance Director/Treasurer 949-644-3123, scatlett@newportbeachca.gov SUBJECT: OVERVIEW OF HISTORICAL FUNDING PROVIDED TO VISIT NEWPORT BEACH SUMMARY: Visit Newport Beach, Inc. (VNB), a non-profit organization (under IRS code §501 (c)(6)), is the Destination Marketing Organization for Newport Beach. VNB operates under an agreement with the City that directs VNB to provide specific services to the City and community using transient occupancy tax (TOT) revenues. VNB also serves as the owners’ association to the Newport Beach Tourism Business Improvement District (TBID) under a separate agreement with the City and administers the TBID’s sales and marketing programs. The City’s agreement with VNB requires the City to pay 18% of all TOT collected from hotels, motels, and vacation rentals to VNB to support their operations. For fiscal year 2020-21, the latest complete fiscal year recorded, the City realized a gross total of $20.4 million in TOT for both hotel and residential TOT. Of that amount, the City paid VNB a total of $3.7 million, or 18%, resulting in a net total of $16.8 million to the City. The expenditure of an additional $1.7 million of TBID funds was overseen by VNB during FY 2020-21. RECOMMENDED ACTION: Receive and file. DISCUSSION: The transient occupancy tax (TOT) is imposed in most cities in the United States, including 419 California cities. The tax is imposed on travelers when they rent 21 Overview of Historical Funding Provided to Visit Newport Beach November 4, 2021 Page 2 accommodations in a hotel, motel, or other short-term lodging for a period of 30 days or less. The tax rate varies by location and is collected by the property operator and remitted to the city or county. The highest rate in California is 15 percent and the lowest is four percent. Under Newport Beach Municipal Code (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 resulting in an overall TOT rate of 10%. History of the City’s Relationship with VNB The City’s agreement with VNB originally dates back to May 2004 and was subsequently amended in March 2009. The City and VNB entered in a new agreement for tourism promotion, branding and marketing services on September 24, 2011. The current tourism promotion agreement generally directs VNB to carry out marketing activities and inform prospective tourists and visitors of the city’s recreational, cultural, shopping and dining opportunities and hotels. It also calls for the development and implementation of specific marketing programs designed to increase business and visitor trade in Newport Beach. In turn, the agreement directs the City to pay to VNB 18% of all TOT collected of the amount collected from hotels, motels, and vacation rentals to support their operations each fiscal year. During fiscal year 2020-21, the City realized a gross total of $20.4 million in TOT for both hotel and residential operators. Of that amount, the City paid VNB a total of $3.7 million, or 18%, resulting in a net total of $16.8 million to the City (see table below). The amount paid to VNB has ranged between $2.9 million in FY 2010-11 to a high of $5.4 million in FY 2018-19, the last full year prior to the COVID-19 pandemic. 22 Overview of Historical Funding Provided to Visit Newport Beach November 4, 2021 Page 3 A summary of actual TOT receipts and VNB allocations between FY 2010-11 and FY 2019-21 can be found in Attachment A. 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 2020. 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 recent tax receipts indicate several hotels are reporting their highest monthly tax receipts ever. The compound annual growth rate for commercial hotel and residential TOT between FY 2010-11 and FY 2018-19 is 7.3% and 15.5%, respectively. As is shown in the chart below, residential TOT receipts have been growing at a much higher rate than commercial TOT receipts. We believe this higher revenue trend for residential TOT is due to overnight visits in short-term rentals from regional travelers looking for a quick trip close to home, as well as general growth in the short-term rental market across the country. VNB serves as the owners’ association to the TBID under a July 1, 2009, management agreement with the City and administers and implements the TBID’s sales and marketing programs. The TBID was formed pursuant to the Property and Business Improvement District Law of 1994, Streets and Highways Code Sections 36600 et seq. at the request of the original member lodging businesses. The annual assessment rate for the member hotels is 3.0% of gross short-term (i.e., stays of 30 calendars days or less) room rental revenue. The TBID was renewed by the City Council on January 28, 2014, for a 10-year term through January 31, 2024. In June 2018, the Management District Plan was amended and now includes the following major hotels as voluntary members of the TBID: 23 Overview of Historical Funding Provided to Visit Newport Beach November 4, 2021 Page 4 Balboa Bay Club and Resort Fashion Island Hotel (currently closed) Hyatt Regency John Wayne Airport Newport Beach Hyatt Regency Newport Beach Lido House Hotel Newport Beach Marriott Bayview Newport Beach Marriott Hotel & Spa Newport Dunes Waterfront Resort & Marina Renaissance Newport Beach Hotel The City of Newport Beach collects the member assessments on behalf of the TBID and retains 0.25% of 1% of the total assessments collected to reimburse the City for administrative costs associated with the TBID. In FY 2019-20, VNB oversaw the expenditure of approximately $4.3 million of TBID funds. In FY 2020-21, only $1.7 million was received due to the impacts of the COVID-19 pandemic. Presentation by the VNB Board Chair and President & CEO In addition to the historical background information provided in this report Debbie Snavely, Board Chair and General Manager of the Newport Beach Marriot Hotel & Spa, and Gary Sherwin, President & CEO of Visit Newport Beach will be present at the Finance Committee meeting to deliver a presentation covering the programs undertaken by VNB using the revenues received from the 18% share of the City’s TOT revenues and the TBID assessments. Conclusion Staff recommends that the Finance Committee receive and file this report. Prepared and Submitted by: /s/ Steve Montano ____________________________ Steve Montano Deputy Finance Director Attachment: A. TOT Receipts/VNB Allocations FY11-FY21 24 ATTACHMENT A TOT RECEIPTS/VNB ALLOCATIONS FY11-FY21 25 FY10-11 FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 FY17-18 FY18-19 FY19-20 FY20-21 FY21-22 Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Actual Revenue Adopted Budget Total Commercial UTOT UTOT Commercial Tax 14,537,128$ 16,498,013$ 18,401,522$ 20,215,954$ 22,620,556$ 23,073,834$ 24,029,634$ 23,837,646$ 25,624,398$ 20,056,172$ 14,159,265$ 18,055,908$ 241,110,029$ UTOT Commercial CVB Payments (2,616,683) (2,969,642) (3,312,068) (3,638,854) (4,071,700) (4,153,290) (4,332,505) (4,283,597) (4,612,390) (3,610,111) (2,539,557) (3,250,063) (43,390,461) Net UTOT-Commercial Taxes 11,920,445$ 13,528,371$ 15,089,454$ 16,577,100$ 18,548,856$ 18,920,544$ 19,697,129$ 19,554,049$ 21,012,008$ 16,446,061$ 11,619,708$ 14,805,845$ 171,294,016$ Residential UTOT UTOT Residential Tax 1,419,986$ 1,478,098$ 1,710,373$ 1,954,588$ 2,216,158$ 2,628,311$ 3,179,038$ 3,998,119$ 4,492,893$ 5,134,368$ 6,255,621$ 5,310,655$ 39,778,208$ UTOT Residential CVB Payments (255,597) (271,929) (299,642) (355,319) (400,508) (465,656) (572,863) (718,554) (807,455) (919,497) (1,114,479) (955,918) (7,137,417) Net UTOT-Residential Taxes 1,164,389$ 1,206,169$ 1,410,731$ 1,599,269$ 1,815,650$ 2,162,655$ 2,606,175$ 3,279,565$ 3,685,438$ 4,214,871$ 5,141,142$ 4,354,737$ 23,144,912$ NET UTOT Tax 13,084,834$ 14,734,540$ 16,500,185$ 18,176,369$ 20,364,506$ 21,083,199$ 22,303,304$ 22,833,614$ 24,697,446$ 20,660,932$ 16,760,850$ 19,160,582$ 194,438,928$ UTOT - Commercial & Residential Tax 26 November 4, 2021, Finance Committee agenda comments - Jim Mosher Page 2 of 3 Page 8 (agenda packet page 12), full paragraph 1, sentences 1 and 3: “Mr. Klobe noted in the last few years and even with the pandemic the City had a budget surplus. … Chair O’Neill noted it is possible to have a surplus at the end of the fiscal year.” Page 8 (agenda packet page 12), paragraph 6, sentence 2: “Chair O’Neill advised in that case $15.5 million would be allocated for pension liability and $15.5 million would be allocated to CIP.” Page 12 (agenda packet page 16), first (partial) paragraph, last sentence: “He advised due to the pandemic there were some operators who shut down last year and failed to file or filed late.” Page 12 (agenda packet page 16), (full) paragraph 1, last sentence: “He advised they have conducted two-thirds of the 30 total audits and noted a new finding is that Solid Waste Haulers are incorrectly reporting gross receipts.” Page 13 (agenda packet page 17), paragraph 2: “Mr. Klobe advised he would support a policy that requires everyone to be audit audited every few years.” Item V.A. OVERVIEW OF HISTORICAL FUNDING PROVIDED TO VISIT NEWPORT BEACH 1.Especially in view of its title, the staff report is misleading in saying (on page 2 = page 20 of agenda packet) that “The City’s agreement with VNB originally dates back to May 2004 and was subsequently amended in March 2009.” VNB is in fact a relatively recent (2009) rebranding, at the behest of its current CEO, of what was formerly known as the Newport Beach Conference and Visitors Bureau, originally a self-funded membership trade organization of Newport Beach businesses in the tourism field – and still (erroneously?) referred to by the old name on the City’s home page for visitors. The City’s involvement with the CVB/VNB dates back to the enactment, at the behest of an earlier CVB CEO, and by a slim 4:3 vote in early 1987, of Ordinance No. 86-5, which created Municipal Code Chapter 3.28, adding a “Visitor’s Service Fee” to the TOT, the proceeds from which were to be used such that “The City, or an entity under contract to the City, shall develop, plan, carry out and supervise a program to serve the needs of visitors to, and promote tourism in, the City of Newport Beach” (see 1/26/1987 staff report and Council discussion from minutes of 3/24/86, 7/28/86, 8/11/86, 1/12/87, 1/26/87 and 2/9/87). In short, it seems the CVB was having trouble collecting enough revenue from its members to sustain its operations in the manner it wished, so it sought assistance from the City. A narrow majority of Council agreed to help, although several thought it was improper role for government to subsidize businesses. Needless to say, membership revenues declined to zero after the City agreed to pay the organization’s bills. 2.The staff report is correct in observing in the summary that “VNB also serves as the owners’ association to the Newport Beach Tourism Business Improvement District (TBID).” It is, however, again a bit misleading in saying “The expenditure of an additional $1.7 million of TBID funds was overseen by VNB during FY 2020-21.” 27 November 4, 2021, Finance Committee agenda comments - Jim Mosher Page 3 of 3 Under Section 36612 of the California Streets and Highways Code, which allowed the City Council to create the TBID, the board of the designated owner’s association is required to comply with the Brown Act (that is, provide public notice and allow public participation) whenever it meets to discuss BID matters. To avoid this requirement exposing the organization’s activities to public scrutiny, the TBID expenditures are overseen not by the VNB board, but rather by a committee consisting, it appears, of the general managers of the TBID “member” hotels. 3. It is good to see in the Discussion at the top of page 2 that the staff report reports TOT to be a tax “imposed on travelers when they rent accommodations in a hotel, motel, or other short- term lodging for a period of 30 days or less” – consistent with California Revenue and Taxation Code Section 7280. That seems straightforward enough, but in its planning documents and short term lodging ordinances, from which TOT is also collected, the City insists (see, for example, NMBC Sec. 5.95.010) on defining “short term” as “a period of less than thirty (30) consecutive calendar days,” which does not seem quite the same. 4. Questions: a. How common is it for cities to subsidize visitors bureaus as compared to them being privately-funded trade organizations as the Newport Beach CVB once was? b. What, if any, measure exists to confirm or deny that visitation to Newport Beach is greater as a result of the VNB subsidy (or as a result of VNB’s operations in general) than it would be without it? c. Since 2011, the City has, for oversight purposes, required a Council-designated City representative, currently Sharon Wood, to sit on the VNB Executive Board. i. Has Ms. Wood reported back to the City or expressed any concerns about VNB? ii. Was Ms. Wood invited to provide her insights to the Finance Committee, instead of relying entirely on VNB’s own, possibly self-serving spokespeople? d. Is the VNB subsidy being used to promote the short-term lodging industry that many residents feel is detrimental to their quality of life? e. Is the VNB subsidy being used to promote air travel to John Wayne Airport, again something many residents feel is detrimental to their quality of life? f. Is the compensation of the VNB CEO too high? According to page 17 of the NB&Co 2018 Form 990 and VNB 2018 Form 990, Mr. Sherwin's compensation for what I believe is 7/1/2018-6/30/2019 was $311,782 + $55,201 = $366,983, not counting the perks that may be available to him as a travel executive. That seems similar too, if not more than, the cost of the Newport Beach City Manager, who oversees a much larger organization and budget. Is anything wrong with that? g. If subsidizing VNB makes sense because it increases TOT to the City, why would it not make sense for the City to create and subsidize organizations promoting other business sectors? For example, diverting a portion of sales tax to promote auto sales, since auto sales tax is a greater revenue source to the City than TOT? 28 Overview of Historical Funding Provided to Visit Newport Beach Finance Committee Meeting November 4, 2021 29 City of Newport Beach –Finance Department 2 •The current tourism promotion agreement: •Charges VNB with carrying out marketing activities and informing prospective tourists and visitors of the city’s recreational,cultural,shopping and dining opportunities and hotels •Calls for the development and implementation of specific marketing programs designed to increase business and visitor trade in Newport Beach •Directs the City to pay 18%of all TOT collected from hotels and vacation rentals to VNB to fund their operations •Current TOT rate is 10%of the amount paid City Agreement with Visit Newport Beach 30 City of Newport Beach –Finance Department 3 Historical TOT Receipts/Allocations to VNB 31 City of Newport Beach –Finance Department 4 Hotel and Residential TOT Reveue ~30% residential ~10% residential 32 City of Newport Beach –Finance Department 5 •Formed pursuant to the Property and Business Improvement District Law of 1994 at the request of the original members •VNB serves as the TBID owners’association under a management agreement with the City •Administers and implements TBID sales and marketing programs •The annual assessment rate for the member hotels is 3.0%of room rental revenue Tourism Business Improvement District TBID membership: •Balboa Bay Club and Resort •Fashion Island Hotel (currently closed) •Hyatt Regency John Wayne Airport •Hyatt Regency Newport Beach •Lido House Hotel •Newport Beach Marriott Bayview •Newport Beach Marriott Hotel & Spa •Newport Dunes Waterfront Resort & Marina •Renaissance Newport Beach Hotel 33 City of Newport Beach –Finance Department 6 Questions? Transient Occupancy Tax in Newport Beach 34 VISIT NEWPORT BEACH, INC. AND NEWPORT BEACH & COMPANY PRESENTATION TO THE CITY OF NEWPORT BEACH NOVEMBER 4, 2021 FINANCE COMMITTEE 35 VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION VISIT NEWPORT BEACH, INC. BOARD GOVERNANCE JOE ADAMS DISCOVERY CUBE DAVID BEEK ISLAND MARINE FUEL LINDA M. BEIMFOHR HORNBLOWER CRUISES & EVENTS CANDACE BISCONTE EVENTIS DESTINATION SERVICES HOMER BLUDAU FORMER CITY MANAGER, NEWPORT BEACH ANDRÉ BROSE LIDO HOUSE SCOTT CATLETT CITY OF NEWPORT BEACH CHARLES CHO NEWPORT BEACH MARRIOTT BAYVIEW MARINA DUTTON BALBOA BAY RESORT BOARD OF DIRECTORS MICHAEL GELFAND NEWPORT DUNES WATERFRONT RESORT ERIN HENRY HYATT REGENCY NEWPORT BEACH GREGG HERNING RENAISSANCE NEWPORT BEACH RUSH HILL NRM REAL ESTATE ADVISORS WASIM KAZI HYATT REGENCY JOHN WAYNE AIRPORT, NEWPORT BEACH DENNIS KUHL LOS ANGELES ANGELS OF ANAHEIM CHIEF JON LEWIS NEWPORT BEACH POLICE DEPARTMENT MARIO MAROVIC LOUNGE GROUP TONY PETROS LSA STEVE ROSANSKY THE CHAMBER NEWPORT BEACH GREGG SCHWENK NEWPORT BEACH FILM FESTIVAL DEBBIE SNAVELY NEWPORT BEACH MARRIOTT HOTEL & SPA JOE STAPLETON SPINNAKER INVESTMENT GROUP TANYA THOMAS FASHION ISLAND GERARD WIDDER THE RESORT AT PELICAN HILL SHARON WOOD NEWPORT BEACH CITY APPOINTEE OPEN FASHION ISLAND HOTEL 36 VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION CHAIR: BEN STINNETT NEWPORT BEACH MARRIOTT RESORT & SPA AMY DEIFT HORNBLOWER CRUISES & EVENTS ANGELA CORTRIGHT SPA GREGORIE’S VICE CHAIR: LILIANA GARCIA LIDO HOUSE HOTEL AMY DEIFT HORNBLOWER CRUISES & EVENTS ANGELA CORTRIGHT SPA GREGORIE’S SARAH CROWE IRVINE COMPANY RESORT PROPERTIES OPEN FASHION ISLAND HOTEL KAMIA KINCHLOW BALBOA BAY RESORT OPEN ORANGE COUNTY/JOHN WAYNE AIRPORT JAN HOLLIS HYATT REGENCY JWA, NEWPORT BEACH KELLY CARLSON BALBOA VILLAGE MERCHANTS ASSOCIATION NANCY GARDNER NEWPORT BEACH CONSERVANCY DIANA PARSEL FASHION ISLAND (IRVINE CO. RETAIL) JOHN POPE CITY OF NEWPORT BEACH NICOLE HAY 21 OCEANFRONT JAMES KEAVENY THE RESORT AT PELICAN HILL OPEN RENAISSANCE NEWPORT BEACH MAUREEN SLOAN HELMSBRISCOE BEVERLY MORGAN SHERMAN LIBRARY & GARDENS SHELLEY CALLAHAN HYATT REGENCY NEWPORT BEACH MARKETING COMMITTEE 37 VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION $4,504,894 $4,267,684 $1,706,206 $2,776,107 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000 FY2019 ACTUAL FY2020 ACTUAL FY2021 ACTUAL FY2022 BUDGETVNB TBID REVENUEVISIT NEWPORT BEACH TBID REVENUE FROM TOURISM BUSINESS-IMPROVEMENT DISTRICT (TBID) VISIT NEWPORT BEACH TOT ANNUAL REVENUE FROM TOURISM-OCCUPANCY TAX (TOT) $5,418,437 $5,180,432 $3,077,459 $3,925,729 $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 FY2019 ACTUAL FY2020 ACTUAL FY2021 ACTUAL FY2022 BUDGETVNB TOT REVENUEVISIT NEWPORT BEACH, INC. FY19-FY22 TOTAL ANNUAL REVENUE TOT & TBID NOTES: FY19-FY21 ACTUAL REVENUE, FY22 FORECASTED BUDGET NOTES: FY19-FY21 ACTUAL REVENUE, FY22 FORECASTED BUDGET 38 ANNUAL BUSINESS PLAN VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION 174 PAGES 95 PAGES 39 SLOW RECOVERY OF MEETINGS AND CONVENTIONS NEW HOTEL DEVELOPMENT IN THE CITY RESTARTING OF INTERNATIONAL TRAVEL THE “SUGAR HIGH” OF SUMMER 2021 VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION SITUATIONAL ANALYSIS 2021-2022 40 STABILIZE MARKET SEGMENTS MOVE INTO INCREASED LUXURY TIER MARKETING ASSIST HOTELS WITH REPOSITIONING THEIR PRODUCTS INCREASE OUTREACH TO MEETING PLANNERS RESPOND TO IMMEDIATE CRISIS SUCH AS THE RECENT OIL SPILL AND COVID RESTRICTIONS VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION IMMEDIATE GOALS 41 VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION TRADITIONAL MARKETING VNB TOOLS TO TRACK OUR EFFORTS VNB TOOLS TO TRACK OUR MARKETING RESULTS $215 MILLION IN TOTAL 5-YEAR LEISURE ECONOMIC IMPACT VISIT NEWPORT BEACH, INC. LEISURE MARKETING (TOT) VNB MEASUREMENT & TRACKING TOOLS MOST RESEARCH TOOLS DESIGNED TO TRACK RESULTS NOT EFFORTS. VNB ALSO TRACKS IMPRESSIONS, CLICKS, VIEWS, HITS AND MORE FROM TRADITIONAL MARKETING TOOLS MEASURING MARKETING RESULTS & EFFORTS 5-YEAR TOTAL LEISURE MARKETING KPI RESULTS 5-YEAR TOTAL ACTUAL RESULTS TOP KPI MEASUREMENTS FY2015 FY2016 FY2017 FY2018 FY2019 INCREMENTAL TRIPS 37,400 114,600 61,100 87,600 73,300 374,000 INCREMENTAL ROOM NIGHTS 56,300 71,800 98,100 125,800 89,800 441,800 INCREMENTAL ECONOMIC IMPACT $21,500,000 $82,500,000 $36,900,000 $39,500,000 $34,300,000 $214,700,000 INTERNATIONAL &DOMESTIC VISITOR TRACKING TOOLS 42 VISIT NEWPORT BEACH FINANCE COMMITTTEE PRESENTATION VISIT NEWPORT BEACH TOURISM BUSINESS IMPROVEMENT DISTRICT TBID GROUP/MEETINGS HOTEL REVENUE & ECONOMIC IMPACT FY2019 -YTD VISIT NEWPORT BEACH, INC. GROUP SALES & MARKETING (TBID) $140 MILLION IN TOTAL 4-YEAR GROUPMEETINGS ECONOMIC IMPACT 43 VISIT NEWPORT BEACH, INC. AND NEWPORT BEACH & COMPANY NOVEMBER 4, 2021 THANK YOU! 44 2021 CalPERS Update Finance Committee November 4, 2021 45 Recent and Current CalPERS News 2City of Newport Beach –Finance Department 46 City of Newport Beach –Finance Department 3 CalPERS Fiscal Status Source: CalPERS $469 billion in assets (up from $389b in prior year)21.3% net return on investments (4.7% in prior year) Preliminary 47 City of Newport Beach –Finance Department 4 June 30, 2021, CalPERS Portfolio Composition Source: CalPERS 48 City of Newport Beach –Finance Department 5 CalPERS Historical Investment Returns Source: CalPERS 49 City of Newport Beach –Finance Department 6 CalPERS Funding Risk Mitigation Policy Source: CalPERS If investment returns outperform discount rate by: then resulting discount rate will be: +2 pp 9%6.95% +7 pp 14%6.90% +10 pp 17%6.85% +13 pp 20%6.80% +17 pp 24%6.75% 6.8% Discount Rate Triggered at 6/30/2021 •Uses a portion of unexpected gains to de-risk the portfolio 50 •Results in higher long- term rates than would otherwise be the case •Rate increase phased in with five- year ramp •Theoretically decreases the size of deviations from the expected investment return City of Newport Beach –Finance Department 7 CalPERS Funding Risk Mitigation Policy Source: CalPERS Total Employer Rate as % of Pay51 City of Newport Beach –Finance Department 8 Ongoing Discussion of Discount Rate Change •Asset Liability Management (ALM) process underway with implementation in July 2022 •Reviewed every four years by the CalPERS staff and Board •Current asset mix has a projected return of only 6.2% over the next 20 years •Asset mix change required to avoid a discount rate decrease to match expected return •Candidate portfolios recently reviewed by the CalPERS Board with a narrowed focus now on returns (and discount rates) of 6.5%, 6.8%, and 7.0% •Additional CalPERS staff recommendations on the table •Use of leverage to increase the returns •Increased allocation to private equity 52 City of Newport Beach –Finance Department 9 Latest Experience Study •Updates demographic assumptions used in the actuarial valuations •Impact of changes amortized over 20 years •Effective in FY 2023-24 rates Source: CalPERS Plan Type Accrued Liability *Normal Cost * Miscellaneous -0.25%+ 2.93% Safety + 0.32%+ 3.86% * As a percentage of the total accrued liability or normal cost, not a percentage of payroll. 53 City of Newport Beach –Finance Department 10 Split Fund Employer Option •Preliminary discussions regarding options to de-risk well-funded pension plans within the larger CalPERS investment portfolio •CalPERS exploring whether and how to provide options •Could be similar to (but with less risk than) their current tiered investment options for the CEPPT and CERBT programs CERBT Investment Options Strategy 1 Strategy 2 Strategy 3 Expected Return 7.6%7.0%6.2% Standard Deviation of Expected Return 11.8%9.2%7.3% CERBT Asset Classes Strategy 1 Strategy 2 Strategy 3 Global Equity 59%40%22% Fixed Income 25%43%49% Treasury Inflation-Protected Securities 5%5%16% Real Estate 8%8%8% Commodities 3%4%5% 54 Normal Cost Update 11City of Newport Beach –Finance Department 55 City of Newport Beach –Finance Department 12 Expected Changes to the Normal Cost •The normal cost is the annual cost of providing the incremental pension benefit earned during that year •The normal cost will likely increase in the next several years due to: •Discount rate reduction •Experience study results •Increases expected to be small and manageable •PEPRA employees share equally in any increase that exceeds a 1% of pay threshold versus the baseline year 56 City of Newport Beach –Finance Department 13 Average Normal Cost Trending Down due to PEPRA •Classic members pay a fixed 8% or 7% of pay for the Miscellaneous Plan and 9% of pay for the Safety Plan toward the normal cost with the City paying the balance •PEPRA members share equally in the payment of the normal cost at 6.5% for the Miscellaneous Plan and 11.5% for the Safety Plan •The blended normal cost is trending downward over time as the number of PEPRA employees increases FY 2021-22 FY 2022-23 Total Normal Cost 17.4%17.1% Employee Share 7.5%7.5% Employer Share 9.8%9.6% Tier 1 (2.5% @ 55)18.6%18.4% Tier 2 (2.0% & 60)18.7%18.7% Tier 3 (2.0% & 62)13.3%13.7% Miscellaneous FY 2021-22 FY 2022-23 Total Normal Cost 29.1%28.9% Employee Share 9.3%9.5% Employer Share 19.7%19.4% Tier 1 (3.0% @ 50)27.5% -32.6%27.5% -33.6% Tier 2 (2.0% @ 50)22.8% -31.1%23.1% -31.2% Tier 3 (2.7% @ 57)22.9%23.1% Safety 4.7% differenceUp to 10.5% difference57 City of Newport Beach –Finance Department 14 Turnover of Employees into Tiers 2 and 3 58 Unfunded Liability Update 15City of Newport Beach –Finance Department 59 City of Newport Beach –Finance Department 16 June 30, 2020, Valuation Reports •The City receives separate valuation reports for the miscellaneous and safety plans •2020 valuation reports are dated August 2021 and set the contribution rates for FY 2022-23 •Good or bad news has a two-year lag before being reflected in contribution rates 60 City of Newport Beach –Finance Department 17 June 30, 2020, Valuation Reports •FY 2019-20 investment return was 4.7%, underperforming the 7.0% target •Funded ratios still increased for both plans •Total unfunded liability increased from $326.3 million to $333.0 million, while the total funded percentage increased from 68.7% to 69.2% June 30, 2019 June 30, 2020 Accrued Liability $ 442,487,002 $ 460,751,764 Market Value of Assets $ 322,688,377 $ 336,126,374 Unfunded Liability $ 119,798,625 $ 124,625,390 Funded Ratio 72.9 %73.0 % Miscellaneous June 30, 2019 June 30, 2020 Accrued Liability $ 601,593,299 $ 620,832,794 Market Value of Assets $ 395,102,063 $ 412,411,927 Unfunded Liability $ 206,491,236 $ 208,420,867 Funded Ratio 65.7 %66.4 % Safety 61 City of Newport Beach –Finance Department 18 June 30, 2020, Valuation Reports •The City implemented fresh starts in 2013 and 2018 with 20-year amortizations •Recent changes to CalPERS actuarial methods shortened the amortization period for new bases to 20 years and eliminated much of the ramping •Staff target discretionary payments to the most advantageous amortization base each year Date Amount Fresh Start 6/30/2013 $ 111,210,773 Fresh Start 6/30/2018 2,125,310 Actuarial (Gain) / Loss 6/30/2019 62,834 Investment (Gain) / Loss 6/30/2019 1,759,102 Actuarial (Gain) / Loss 6/30/2020 1,505,554 Investment (Gain) / Loss 6/30/2020 7,961,817 Miscellaneous Date Amount Fresh Start 6/30/2013 $ 185,660,978 Fresh Start 6/30/2018 10,174,621 Actuarial (Gain) / Loss 6/30/2019 524,536 Investment (Gain) / Loss 6/30/2019 2,254,003 Actuarial (Gain) / Loss 6/30/2020 (1,809) Investment (Gain) / Loss 6/30/2020 9,808,538 Safety 62 City of Newport Beach –Finance Department 19 Comparison to Other Orange County Employers •The funded percentage for every non-pooled plan in the County other than Newport Beach and Irvine decreased •Irvine suspended their discretionary payments due to the COVID-19 pandemic Agency UAL Funded %UAL Funded %UAL $UAL %Funded % City of Anaheim 839,881,082 70.2%884,308,082 69.6%44,427,000 5.3%-0.6% City of Brea *41,152,907 73.0%44,240,756 72.0%3,087,849 7.5%-1.0% City of Buena Park *43,141,214 70.8%45,947,839 69.8%2,806,625 6.5%-1.0% City of Costa Mesa 233,351,350 62.1%242,275,493 61.7%8,924,143 3.8%-0.3% City of Cypress *22,702,629 73.8%24,660,070 72.3%1,957,441 8.6%-1.5% City of Fullerton 266,580,939 67.8%282,857,335 66.6%16,276,396 6.1%-1.2% City of Garden Grove 309,333,035 65.8%329,315,311 64.7%19,982,276 6.5%-1.1% City of Huntington Beach 435,994,236 68.6%454,929,864 68.2%18,935,628 4.3%-0.4% City of Irvine 158,377,077 79.0%162,599,460 79.4%4,222,383 2.7%0.4% City of La Habra *31,582,979 74.7%33,462,226 74.1%1,879,247 6.0%-0.6% City of Laguna Beach *30,395,977 75.8%31,849,617 75.5%1,453,640 4.8%-0.3% City of Mission Viejo *22,081,104 76.9%23,921,524 76.3%1,840,420 8.3%-0.6% City of Newport Beach 326,289,861 68.7%333,046,257 69.2%6,756,396 2.1%0.5% City of Orange 288,404,662 69.3%311,646,198 68.1%23,241,536 8.1%-1.2% City of Santa Ana 706,905,205 67.0%764,634,849 65.5%57,729,644 8.2%-1.4% City of Tustin *29,008,653 77.3%31,572,384 76.7%2,563,731 8.8%-0.6% City of Westminster *46,144,970 67.6%48,114,638 67.1%1,969,668 4.3%-0.5% City of Yorba Linda *23,179,394 70.5%24,520,033 70.2%1,340,639 5.8%-0.3% Irvine Ranch Water District *75,343,820 74.7%83,052,928 73.6%7,709,108 10.2%-1.1% Santa Margarita Water District *35,335,129 67.8%37,650,157 67.3%2,315,028 6.6%-0.5% * Miscellaneous Only ChangeJune 30, 2019, Valuation June 30, 2020, Valuation 63 City of Newport Beach –Finance Department 20 Subsequent Events •21.3% return and risk mitigation policy discount rate change will be reflected in the June 30, 2021, valuation reports to be received in August 2022 •But investment earnings can be volatile •Employer rates must fill the gap •ALM process with impact to investment portfolio in FY 2022-23 •Experience Study with impact to FY 2023-24 contribution rates 64 City of Newport Beach –Finance Department 21 Orange County CalPERS Plans Funded Status Source: CalPERS 65 City of Newport Beach –Finance Department 22 Current Unfunded Liability Paydown Strategy •In November 2019, the Finance Committee endorsed staff’s recommendation to anticipate a future drop in the discount rate •$35 million base contribution to the unfunded liability to remain in place as part of the baseline budget •Additional $5 million per year contribution to be added for five years with a $2 million per year contribution thereafter •The Council endorsed this strategy for the FY 2020-21 budget, with a plan to revisit the plan’s adequacy and the approach each year 66 City of Newport Beach –Finance Department 23 Roll-Forward of Valuations to June 30, 2021 •The City’s unfunded liability has not changed much in the last three years due to the ongoing actuarial changes and investment losses and in spite of the discretionary payments •Phased discount rate reduction from 7.5% to 7.0% •Two years below the target return •The 21.3% investment return in FY 2020-21 has significantly reduced the City’s liability, even with the discount rate reduction to 6.8% June 30, 2018 June 30, 2019 June 30, 2020 June 30, 2021 * Unfunded Liability $ 333,135,247 $ 326,289,861 $ 333,046,257 $ 234,909,163 Funded Percentage 66.9 %68.7 %69.2 %79.5 % Investment Return 8.6 %6.7 %4.7 %21.3 % * Projected 67 City of Newport Beach –Finance Department 24 Projections for the Future •Using CalPERS’ Pension Outlook modeling capabilities staff modeled the future impact of continuing the current payment strategy •The strong FY 2020-21 investment earnings have given the City a considerable projected head start on paying down the liability •Current projection shows the liability eliminated in FY 2029-30 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Planned Payment $ 40,000,000 $ 35,000,000 $ 35,000,000 $ 35,000,000 $ 35,000,000 $ 35,000,000 $ 35,000,000 $ 35,000,000 $ 23,823,175 Beginning Unfunded Liability $ 234,909,163 $ 209,706,310 $ 188,741,985 $ 165,406,009 $ 140,483,189 $ 113,865,616 $ 85,438,047 $ 55,077,405 $ 22,652,238 Beginning Funded Percentage 79.5 %82.3 %84.6 %86.9 %89.2 %91.6 %93.9 %96.2 %98.5 % Investment Return 7.0 %6.8 %6.8 %6.8 %6.8 %6.8 %6.8 %6.8 %6.8 % 68 City of Newport Beach –Finance Department 25 Projections for the Future •Continuing with the current plan to pay an additional $5.0 / $2.0 million per year, the liability is projected to be eliminated a year sooner in FY 2028-29 •Total baseline payments of $268.8 million from FY 2022-23 until paid •Additional contributions reduce the total payments to $260.8 million 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Planned Payment $ 40,000,000 $ 40,000,000 $ 40,000,000 $ 40,000,000 $ 37,000,000 $ 37,000,000 $ 37,000,000 $ 29,823,538 $ -0- Beginning Unfunded Liability $ 234,909,163 $ 209,706,310 $ 183,574,780 $ 154,720,230 $ 123,903,572 $ 94,091,703 $ 62,252,628 $ 28,248,495 $ -0- Beginning Funded Percentage 79.5 %82.3 %85.0 %87.8 %90.5 %93.0 %95.5 %98.1 %100.0 % Investment Return 7.0 %6.8 %6.8 %6.8 %6.8 %6.8 %6.8 %6.8 %6.8 % 69 60.0% 65.0% 70.0% 75.0% 80.0% 85.0% 90.0% 95.0% 100.0% 105.0% 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2019 Projection 2020 Projection 2021 w/ Additional Discretionary Payments 2021 Projection City of Newport Beach –Finance Department 26 Impact of Investment Return and Additional Payments •As can be seen in the chart, projections change from year to year •In 2019, staff projected that the liability would be eliminated in 2034, the projected date slipped to 2036 in 2020, and now the date has been reduced to 2030 70 City of Newport Beach –Finance Department 27 Caution for the Future •While FY 2020-21 was a very good year for CalPERS, we do not know what the future holds •Possibility of further discount rate reductions •Possibility of another recession or investment earnings shortfall •Still, the City is in a very good position relative to most peer agencies with flexibility for continuing to address the unfunded liability in the future 71 City of Newport Beach –Finance Department 28 Summary •Staff recommend continuing with the ADP strategy recommended in 2019 •This disciplined approach to the accelerated paydown of the City’s unfunded liability is expected to: •Paydown the current liability in FY 2028-29 •Reduce long-term pension costs •Consider a new “fresh start” after the ALM process concludes •Monitor future CalPERS investment returns and respond accordingly 72 City of Newport Beach –Finance Department 29 Questions? 73 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5C November 4, 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 2021-22 First 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 first quarter of the fiscal year ending June 30, 2022. The first financial report of FY 2021-22 provides an analysis of the financial activity of the City from the months of July through September 2021. Based on information available at the end of the first quarter, positive revenue adjustments are expected and will be reflected in the proposed first quarter budget amendment that will accompany this report on the City Council’s agenda. Several expenditure budget adjustments are also recommended, all of which are fully offset by the additional revenues. RECOMMENDED ACTION: Review and discuss this report and provide any recommendations for consideration by the City Manager and City Council. 74 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 2 DISCUSSION: Economic Overview California’s unemployment rate remained steady at 7.5% in September, as the state’s employers added 47,400 non-farm payroll jobs, according to data released on October 22, 2021, by the California Employment Development Department (EDD). Orange County’s unemployment rate was 5.0% at the end of September 2021 compared to 6.3% in July 2021. Nonfarm payrolls in California have increased over the past year in all eleven industry sectors with leisure and hospitality growing the most at 21.7%. Unemployment trends are expected to improve gradually as the economy recovers from the widespread impacts of COVID-19. Newport Beach’s hotel occupancy rate stood at 62.2% as of the last week of September and was 19.6% higher than at the same time last year, while room rates were 15.5% higher than the same time last year. When California finally reopened its economy in June and lifted various COVID-related restrictions, hotel occupancy increased significantly. The City is continuing to see a resulting increase in transient occupancy tax (TOT) revenues, which are quickly trending toward revenue levels seen prior to the COVID-19 pandemic. Federal and State stimulus has inflated consumer ability and willingness to spend on taxable goods. The Consumer Price Index was up 5.4% year-over-year in September of 2021, unchanged on a year-over-year basis from June. Retail sales are exhibiting the fastest growth since 2015, with the outlook for local tax revenues remaining positive despite supply chain, pricing, and labor concerns. 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. New car and boat sales have since steadily rebounded and are now 22% higher than the same period in 2019, a year before the crisis began. The inventory and supply of new vehicles has been overwhelmed by strong demand due to low financing rates and government stimulus payments. It is expected that the inventory shortfall will influence second quarter growth, following a strong sales spike in the month of July. Higher prices will, however, moderate the impact. This sector is expected to increase at 3% annual growth through fiscal year 2026-27. The economy is expected to continue to grow through the remainder of the fiscal year. However, it is likely that the hardest hit industries will continue to see the highest recovery as a return to normal consumer behavior spurs recovery in sales associated with restaurants, hotels, and general consumer goods purchased in brick-and-mortar establishments. 75 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 3 General Fund Revenues Most revenue categories performed at or higher than their budgeted levels last year due to more favorable economic conditions than anticipated when the budget was originally adopted. Compared to the first quarter of last fiscal year, the City is continuing to see positive increases in the categories of sales tax, transient occupancy tax, and service fees and charges. However, it is important to remember that the first quarter of last fiscal year was in the midst of the initial stages of the pandemic. Property Taxes - Property taxes are the City’s single largest General Fund revenue and typically represent just under 50% of all General Fund revenues. With the recent surge of home prices, this category is expected to continue to perform strongly, which bodes well for future secured property tax revenues. The stay-at-home orders, business closures and other economic impacts affected 2021-22 growth by reducing the annual CPI adjustment from the maximum 2% to 1.036%. The City therefore experienced a net taxable value increase of 4.1% for the FY 2021/22 tax roll and the assessed value increase between FY 2020-21 and FY 2021-22 was $2.6 billion. The largest growth in assessed values related to prior year transfer of ownership, which accounted for $1.7 billion, or 64.1% of all growth experienced in the City. The second largest change was attributed to the 1.036% Proposition 13 adjustment, which was $579 million and accounted for 22% of the overall growth. As FY 2021-22 assessed values are established in January of 2021 and based on the prior calendar year, a strengthening of home sales in the summer of 2020 resulted in a positive impact to the tax roll that mitigated to some extent the smaller CPI adjustment. For FY 2020-21, secured property tax payments came in strong, $1.2 million over budget, which is an indication of timely property tax payments and higher valuations. Based on the higher prior year total assessed valuation, staff recommend increasing the property tax revenue estimate for FY 2021-22 in the first quarter budget amendment by $1.6 million. A greater percent change in sales transactions was realized in the first eight months of the calendar year through August of 2021 at 2.67% growth, vs. an average of 2.60% for the entire year in the two previous years. Increased prices regionally were driven by lower inventory and declining interest rates for home loans. The median sale price of a residential home from January to August was $3,020,000, which represents a $432,500 or 16.71% increase in median sale price from calendar year 2020. The assessed value of sold homes also increased by 52%, which was the second highest increase seen in the last five years. Due to these positive changes, the City is on track to see closer to 5% property tax growth in FY 2022-23. 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. Because these revenues are remitted to the City by 76 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 4 the State several months after they are paid by consumers, staff have limited FY 2021- 22 information on which to report in the first quarter. Receipts from April through June of 2021 were 39.4% above the second quarter of FY 2019-20, similar to the statewide average. Limited inventory and higher demands led Autos and Transportation to continue to show quarter over quarter increases, mainly due to a surge of retail sales along with increased prices in March and April of this year. This category is expected to plateau in the upcoming quarters, with anticipated inventory limitations offset by higher prices. The largest categories showing growth through the end of June included the hardest hit areas during the pandemic, specifically restaurants, hotels, and general consumer goods. Fuel and service stations also saw increased growth due to rising consumption and fuel prices. Building and construction revenues increase by 20.9%, with contractor activity expected to increase in the second quarter. Compared to the same quarter in 2019 prior to the pandemic, an overall 9.5% increase in the City’s sales tax revenues has been seen. Autos and Transportation are up 22% from the second quarter of 2019, due to the aforementioned strong car sales as well as increased yacht sales due to additional interest in recreational boating. Allocations from the State and County Pool have increased 44% during that time, which in part is attributable to the Wayfair/AB147 legislation change that allowed for taxation of additional internet sales. This growth in pool revenues is also indicative of the shift that occurred to online shopping habits during the pandemic, which at least in part is expected to remain once the economy has fully returned to normal. The three industry sectors hardest hit during the pandemic have only experienced 7% growth, including business-industrial, fuel and service stations, and restaurant/hotel receipts. The outlook for local tax revenues remains positive despite supply chain, pricing, and labor concerns, and the City expects to see continued growth for the remainder of the fiscal year. As it is early in the year, staff are not recommending a revision to the sales tax revenue estimate at this time. 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. The City has seen a steady rebound and comeback for TOT revenues in the months since. Short term rental revenues have steadily increased and did not decline significantly even at the depths of the pandemic. As leisure travelers have returned, several hotel properties in the City have reported record TOT tax receipts in the summer months. Higher occupancy rates, combined with higher average room rates, have resulted in TOT revenues that have exceeded the revenue estimate included in the adopted budget year-to-date. Data 77 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 5 provided by Visit Newport Beach illustrates this very positive trend in both occupancy and room rates: While the Fashion Island Hotel remains closed and the Marriot remains under renovation, both properties are expected to reopen fully in the months ahead with new branding that should command higher room rates. These reopenings, combined with the expected return of more business travelers, are anticipated to have additional positive impact on the City’s TOT revenues. Staff remain cautious, however, to predict the exact timing of these trends and the reopening date for the Fashion Island Hotel has yet to be announced. When crafting the TOT revenue estimate for FY 2021-22, staff assumed that short term rental-related TOT revenues would continue to grow from their FY 2020-21 levels and that hotel TOT would start the year at 60% of pre-pandemic revenue levels and end the year at 80% of pre-pandemic revenue levels. As can be seen in the charts above provided by Visit Newport Beach, occupancy levels were at 83% of pre-pandemic levels in August and 75% for September. During those same two months, average room rates were higher than in recent years. While the Fashion Island Hotel remains closed, these are very encouraging signs that indicate a trend that will likely result in TOT revenues exceeding the current revenue estimate. The table below illustrates a comparison of hotel 78 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 6 TOT revenues by fiscal year and quarter showing the strong growth in the first quarter of FY 2021-22 and how it compares to the prior three years. Transient Occupancy Tax Receipts by Quarter for FY 2018-19 – FY 2021-22 Fiscal Year 2021 - 22 Fiscal Year 2020 – 21 Fiscal Year 2019 - 20 Fiscal Year 2018 - 19 Actual Received % of Actuals Actual Received % of Actuals Actual Received % of Actuals Actual Received % of Actuals 1st Quarter 5,331,038 100.00% 2,267,092 13.43% 4,959,179 23.79% 4,820,281 19.52% 2nd Quarter - 0.00% 5,523,645 32.71% 7,730,446 37.08% 6,313,511 25.56% 3rd Quarter - 0.00% 2,579,739 15.28% 5,545,740 26.60% 5,759,862 23.32% 4th Quarter - 0.00% 6,515,721 38.59% 2,612,517 12.53% 7,803,792 31.60% TOTAL $5,331,038 100% $16,886,197 100% $20,847,883 100% $24,697,446 100% While staff believes that these positive trends are likely to continue as the fiscal year progresses, conservatism is warranted given the pandemic-related impacts to tourism and business travel that have been seen over the past two years. Staff are therefore not recommending a revision to the TOT revenue estimate at this time. 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 and 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, 79 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 7 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. Service fees and charges revenues are projected to exceed the adopted budget by $1.1 million. This is primarily due to increased revenue received from recreation fee-based classes and the Junior Lifeguard program. As a result of the strong interest that has been seen in returning to in-person activities, the original revenue estimates included in the adopted budget for fee-based recreation classes must be adjusted upward. A related revenue estimate increase in facility rental revenues of $183,000 is also proposed. Intergovernmental revenues are projected to exceed the adopted budget by $714,000. The City participates in the California Fire Service and Rescue Emergency Mutual Aid System, which reimburses agencies for their emergency assistance to the State of California and to Federal Fire Agencies. In the first quarter of Fiscal Year 2021-22 the City received $280,875 from the State of California for staff assigned to strike team deployments. Staff seek to align the FY 2021-22 budget with actual revenues received through the first quarter, which includes increasing revenue estimates & expenditure appropriations by $280,875 and is reflected as an increase in intergovernmental revenues. The City is also expected to receive $433,244 from the State of California Department of Housing and Community Development for the SB 2 Permanent Local Housing Allocation (PLHA) program grant, which will be used to offset the City’s General Fund contribution to the Mind OC Mobile Crisis Response Team. Revenue is expected to be received in the current fiscal year, has been reflected in the revised projection for intergovernmental revenues, and will be appropriated when received. 80 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 8 Overall, the positive adjustment to property tax revenues, revenue from fee-based classes, intergovernmental revenues, and several other categories of revenue will have a positive impact on the expected year-end results for FY 2021-22, as illustrated in the following table, with total General Fund revenues now projected to exceed the adopted budget by $3.7 million. FY 2021-22 Projected General Fund Revenues General Fund Expenditures The FY 2021-22 General Fund revised expenditure budget totals $234.8 million. Year to date expenditures of $46.9 million equate to approximately 20% of the budget. Some departments incur a greater or lower level of expenditures in the first half of the year than in the second half due to the timing and seasonality of their operations or programs, and the trends in the current fiscal year are generally consistent with prior years. Existing appropriations are on target to fund all current operational expenditures and likely generate year-end budget savings. Significant expenditure budget updates include the following:  Recreation and Senior Services: During the previous fiscal year, the department reduced their operational revenues and expenditure budgets in response to cancelled classes relating to the COVID-19 shutdowns. At the end of quarter one, staff is seeking to restore expenditure appropriations back to pre-COVID levels due to the reinstatement of cancelled classes. The department anticipates an additional $1.3 million of class revenues with a corresponding $637,000 needed of expenditure appropriations for contract instructors. 81 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 9  Last fiscal year, as part of the response to the anticipated reduction in revenues due to the coronavirus pandemic, the City employed a tiered budget reduction strategy to balance the budget. Included in the first tier of cuts to the operating budget was a reduction to utility budgets. The water budget for the Public Works Department related to City Parks was previously reduced by $237,000 as part of this budget balancing strategy. This reduction was not restored with the adoption of the FY 2021-22 budget. Staff projects current budget levels will be insufficient for the current fiscal year and recommends the restoration of the $237,000 previously cut from this budget line item to cover expenditures in the current fiscal year.  As discussed earlier in this report, an expenditure appropriation of $280,875 is required to align with additional revenues from the California Fire Service and Rescue Emergency Mutual Aid System. Other than these limited appropriations that are fully offset by the proposed revenue estimate adjustments, no expenditure budget adjustments have been identified that require attention at this time. On October 26, 2021, the City Council approved $31.0 million of recommended appropriations from prior year unrestricted General Fund resources as follows: 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 and Beaches CIP. Funds were set aside, with specific allocations being recommended as part of the upcoming FY 2022-23 budget process. 3. CIP and Neighborhood Enhancements – $15.5 million toward the FY 2022-23 capital improvement program, to include neighborhood enhancement projects. Funds were set aside with specific allocations being recommended as part of the upcoming FY 2022-23 budget process. The following table illustrates the year-end projection at this time, which includes the recommended budget adjustments and appropriations from prior year surplus. As it is early in the year, staff is not yet projecting any budget savings, though as is the case each year, additional savings are anticipated to materialize as the fiscal year progresses. 82 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 10 General Fund Reserves We are fortunate that the City was in excellent financial health prior to the global pandemic. Conservative budgeting and sound financial policies have resulted in a trend of General Fund operating surpluses and strong reserve levels for several years. As the economy emerges from the pandemic, the City is well positioned to continue delivering a high level of service to the community while targeting surplus resources to key priorities each year. Staff currently project that unrestricted General Fund resources will total $1.1 million at the end of Fiscal Year 2021-22, an improvement of $1.1 million versus the adopted budget surplus of $32,000. As is the case each year, staff anticipate that additional budget savings will be realized, and the final year-end budget surplus will exceed this amount. The table below illustrates the prior year sources and uses of funds as compared to the adopted budget, the revised budget, and the projected year-end results. 83 Fiscal Year 2021-22 First Quarter Financial Report November 4, 2021 Page 11 General Fund Sources and Uses As the data presented in this report reflects only 25% of the fiscal year, there remain opportunities for positive or negative variances. The risks associated with variances are further amplified by the lingering effects of the pandemic. While this report reflects the best information currently available to staff, variances will occur. Staff therefore recommends caution when viewing the projected ending unrestricted fund balance (surplus) of $38 million, which is still very much subject to revision as the year progresses. 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 first quarter of this fiscal year indicates that no budget adjustments are necessary and variances between budgeted and actual amounts are within reason. 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 November 9, 2021, City Council meeting, at which time this report will be presented. Prepared and Submitted by: /s/ Scott Catlett ____________________________ Scott Catlett Finance Director / Treasurer 84 2021-22 First Quarter Financial Report Finance Committee November 4, 2021 85 City of Newport Beach –Finance Department 2 Projected General Fund Revenues Adopted Budget $ 234.1 million Revised Budget $ 234.3 million First Quarter Projection $ 237.9 million •$3.7 million of pr0jected positive variance •Continuing positive trends seen in the first quarter $- $50 $100 $150 $200 $250 Adopted Revised ProjectedMillions Property Tax Sales Tax TOT Other 86 City of Newport Beach –Finance Department 3 Property Tax •Represents approximately 50% of General Fund revenues •On track to exceed the adopted budget based on strong assessed value growth reflected in the final tax roll •$1.6 million upward adjustment to the revenue estimate •Staff does not anticipate further revisions to the projection for secured property tax $102 $108 $113 $119 $124 $80 $85 $90 $95 $100 $105 $110 $115 $120 $125 $130 2017-18 Actual 2018-19 Actual 2019-20 Actual 2020-21 Actual 2021-22 ProjectedMillions 87 City of Newport Beach –Finance Department 4 Sales Tax •FY 2020-21 was a record year for sales tax revenues •Growth expected to continue •Consumer spending continuing to strengthening and adapt •Due to the lag in sales tax collections, it is too early in the fiscal year to tell if an adjustment to the revenue budget is appropriate •Based on our consultant’s analysis, an upward adjustment to the revenue estimate in the second quarter is possible $35 $39 $36 $39 $40 $32 $34 $36 $38 $40 $42 2017-18 Actual 2018-19 Actual 2019-20 Actual 2020-21 Actual 2021-22 ProjectedMillions 88 City of Newport Beach –Finance Department 5 Transient Occupancy Tax •Transient occupancy tax was the City’s most severely impacted revenue source as a result of the pandemic •Fashion Island Hotel remains closed, but may be open later in the year •Marriott renovation nearing completion •Record TOT revenues from multiple properties in recent months •An upward adjustment to the revenue estimate in the second quarter is likely, but staff is cautiously evaluating trends prior to making any adjustment $23 $25 $21 $17 $19 $10 $12 $14 $16 $18 $20 $22 $24 $26 2017-18 Actual 2018-19 Actual 2019-20 Actual 2020-21 Actual 2021-22 ProjectedMillions 89 City of Newport Beach –Finance Department 6 Historical General Fund Revenues $235 $241 $251 $219 $200 $204 $217 $230 $230 $236 $238 $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 Actual 2021-22 ProjectedMillions Pre-COVID Projection Initial Post-COVID Projection Actual and Current Projection 90 City of Newport Beach –Finance Department 7 Other General Fund Revenues •Positive revenue adjustments for increased recreation class and facility rental activity •$1.1 million adjustment to service fees & charges •$0.2 million adjustment to property income •Partially offset by increased expenditures for instructors, etc. •$0.7 million adjustment to intergovernmental revenues •$0.3 million strike team reimbursement from the State •$0.4 million of assumed SB 2 grant revenues for homeless services 91 City of Newport Beach –Finance Department 8 Projected General Fund Expenditures Adopted Budget $ 226.0 million Revised Budget $ 234.8 million First Quarter Projection $ 235.9 million •$5.0 million additional payment to CalPERS included in revised budget •$3.1 million of budget carryovers and $0.8 million of year-to-date budget amendments •Budget amendment to be included with the City Council staff report to appropriate: •$0.6 million for recreation class expenses •$0.2 million for additional water costs •$0.3 million for Fire Department mutual aid expenses 92 City of Newport Beach –Finance Department 9 General Fund Sources and Uses •Increase in transfers out reflects the use of prior year surplus for FFP and CIP transfers •Current projection of $1.1 million surplus •Budget savings will likely be identified as the year progresses, as is usually the case 93 City of Newport Beach –Finance Department 10 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 94 City of Newport Beach –Finance Department 11 Questions? 95 CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5D November 4, 2021 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Scott Catlett, Finance Director/Treasurer 949-644-3123, scatlett@newportbeachca.gov SUBJECT: GENERAL FUND LONG-RANGE FISCAL FORECAST FY2023-FY2041 EXECUTIVE SUMMARY The City is projected to be in a financially sound position over the next 20-year period and is in excellent financial position relative to most other local agencies with a revenue base and reserves unparalleled by any similar size City in the County. The forecast projects a surplus balance (revenues net of expenditures) in each year over the next 20 years. Any short term deficits that may arise as a result of an economic downturn or other unforeseen event likely will be absorbed without long-term reliance on the Contingency Reserve – no structural deficit is apparent. RECOMMENDATION: Receive and file. DISCUSSION Strategic planning begins with determining the City’s fiscal capacity based upon long- term financial forecasts of recurring available revenues and future financial obligations. Prior to the adoption of the annual budget, the Finance Department annually prepares a General Fund Long-Range Financial Forecast (LRFF) that evaluates known internal and external issues impacting the City’s financial condition. The LRFF is intended to help the City attain and maintain financial sustainability; sufficient long-term information to guide financial decisions; and sufficient resources to provide programs and services for the community. Methodology The Finance Department utilizes a three-step step process when preparing the LRFF. First, a baseline growth scenario for the various revenue and expenditure categories is established by analyzing historical compound annual growth rates (CAGR), historical 96 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 2 average growth rates and/or other assumptions of future growth based on the latest information from consultants and other sources. Some allowance is made in assuming higher near-term growth rates for our rapidly recovering post-COVID 19 revenue sources such as sales tax and transient occupancy tax. Next, line items that may vary from the typical escalation patterns are segregated and are increased by their unique defined schedule (dollar or percentage growth basis). These items include such items as additional discretionary pension payments which are on a fixed annual contribution schedule, interest income, known and expected ground lease revenue from various properties, transfers out to support the various master financing plans (Facilities Financing Plan, Harbor and Beaches Master Plan, Facilities Master Plan), and any emerging commitments the City has on the horizon. Finally, the model is designed to be flexible enough to model one or more alternate baseline scenarios or fiscal impacts should there be a need. Major Assumptions Major assumptions used in the model include the following: The FY 2021-22 adopted budget, stripped of one-time items, was used as a base budget from which forward growth assumptions were launched. Annual General Fund transfers-out in support of:  FFP – $8.5m up to $12.5m in out years annually  CIP – $5.0m annually  Facilities Maintenance – $1.5m annually  Tidelands Harbor Capital – $4.5m annually  Contingency Reserve funding annually (25% of expenditures, less discretionary pension funding) In spite of having realized year-end surpluses in excess of $10 million over the past several years, we did not program future surpluses in our projections. Surpluses that appear in the forecast represent the net operating result of annual revenues less forecast expenditures (there is no assumed expenditure savings or revenues exceeding budget as is typically realized each year – the forecast assumes all revenues and expenditures are fully realized as presented). Revenue Assumptions The methodology used for calculating revenue changes from FY 2022-23 to FY 2041-42 is initially based on historical revenue trends using CAGR or the annual average growth for each revenue category, depending on which seems most applicable for the particular revenue growth category based on how it may change going forward. This methodology is adjusted based on staff’s knowledge of known one-time past events and other extraneous factors. Then an outlook is developed that factors in the ebb and flow of economic cycles. As the result, this approach provides variable, as opposed to static and 97 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 3 linear, forecast growth patterns. This mitigates the compounding effect that can tend to distort revenue growth over time. The General Fund’s top three revenue sources (Property Tax, Sales Tax, and Transient Occupancy Tax) account for 75% of total General Fund revenues. Consequently, the future growth assumptions for these top revenue sources can sway the forecast considerably. Property Taxes While the COVID-19 pandemic delayed some home and property sales in the 2020 calendar year, it did not significantly impact property tax revenue growth due to transfer of ownership, higher sale prices, and the construction/renovation of properties over the past year. The stay-at-home orders, business closures, and economic impacts did impact the overall growth experienced, as the annual consumer price index adjustment calculated by the State was only 1.036%, or roughly ½ of the 2% maximum allowable growth factor seen in most years. However, we project continued consistent and vigorous demand for Newport Beach’s coastal property over the long run. This demand has allowed the City to enjoy long-term growth trends with its number one revenue source, which remains the least impacted by COVID-19. Value changes in Newport Beach show continued appreciation in property values in FY 2021-22. Over the past 10 years, assessed valuation increased an average of 5.5% per annum and 6.2% over a twenty- year period. Newport Beach’s assessed property values increased 4.5 percent in FY 2021-22, with a local assessed value of $63.3 billion. The average annual 17-year growth for all items in this category including secured property tax, unsecured property tax, supplemental taxes, redevelopment agency residual and prior year penalties and interest is 6.1%. Staff conservatively forecast 5% annual growth for property taxes as a whole. 98 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 4 Sales Tax The second largest funding source for the General Fund is sales tax revenue, which is largely generated from three main industry categories including autos and transportation, general consumer goods, and restaurants/hotels. These industries are also heavily impacted by tourism. At the onset of the pandemic when businesses were shut down, sales tax revenue potential appeared drastically diminished. Staff’s initial projections held the ongoing assumption that the restrictions in place in April 2020 would remain for the rest of the fiscal year. However, sales tax revenues were higher than anticipated because businesses pivoted in creative ways to reach their customers – they were able to open at some capacity sooner than expected, and consumer spending was relatively strong. Online car sales increased and sales at local dealerships have picked up significantly. RVs and boat sales became more popular as families could not travel internationally. Online sales increased dramatically, resulting in significant growth in the City’s county pool allocation. An uptick in sales related to home improvement projects was also evident. For these reasons actual sales tax revenues came in at $4.4 million or 12.8% higher than anticipated in FY 2020-21 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. Looking ahead, sustained sales tax growth is still anticipated through the end of the 2021 calendar year and will resume its traditional growth trend in 2022 and beyond. However, inflationary effects are showing up in the cost of many taxable products. Pent up demand for travel and experiences, the return of commuters and more costly fuel, and labor 99 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 5 shortages having upward pressure on prices may begin to consume more disposable income and tighten growth by the start of 2022. The post-Great Recession CAGR through FY 2018-19, excluding the economic aberration of COVID-19 in fiscal years 2019-20 and 2020-21 is 4.3%. The economic outlook for the City’s largest industry segments appears positive for the foreseeable future. We conservatively forecast 4% annual growth for sales tax. Transient Occupancy Tax Transient occupancy tax (TOT) was the City’s most severely impacted revenue source as the pandemic unfolded. However, the City has seen a steady rebound and comeback with the City recording the highest TOT tax rate ever through August 2021. Revenues received during the last quarter of the FY 2020-21 fiscal year accounted for 38.6% of all revenue received for the entire fiscal year. The fourth quarter receipts were much higher than the previous year and somewhat narrowed the revenue loss gap when compared to prior years, which led to year-end revenue collections reaching 81% of the prior year actuals. A steady improvement in occupancy rates combined with an increase in daily room rates is estimated to dramatically improve TOT revenue over the next two years. We project receipts of $23.8 million in FY 2022-23. This amount represents a 25% increase over the FY 2021-22 adopted budget but remains only 96% of the actual revenues received in FY 2018-19. Continued strong growth of 15% is anticipated in FY 2023-24 and staying generally consistent with historical trends, we project growth of 4% every year thereafter. 100 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 6 Other revenues (service fees and charges, fines and penalties, property income, transfers in, and other miscellaneous revenues) which make up 27% of the total are projected to grow modestly at 2.6% on average over the next 20 years. This assumption is based on the average growth from the preceding 15 years. Expenditure Assumptions Regular salaries for both miscellaneous and public safety are on average assumed to grow at 2% annually. This is based on the most recent negotiated MOU agreements. The forecast assumes no growth in personnel headcount. Special and other pays (certification pay, bilingual pay, motor office pay, scholastic achievement, etc.) is projected to grow commensurately with salaries at 2% annually, with the exception of FY 2022-23 which has a 20% increase from the prior year due to the elimination of an assumed $2,000,000 vacancy-related salary savings that was included in the budget during the two fiscal years most impacted by the pandemic. The benefits category which consists of various stipends, life insurance, Medicare fringes, retiree health plan contribution, and the City’s pension contributions to CalPERS among other miscellaneous benefits is projected to grow on average at just over 1% annually based on negotiated MOU increases for the early part of the forecast and then grow at over 4% annually thereafter. The forecast assumes continued funding of the City’s unfunded actuarial liability at the $35 million level through FY 2028-29, after which the liability is eliminated assuming no dramatic changes in either future CalPERS experience studies or the discount rate. This assumes that the City Council authorizes additional contributions through future surplus balances of $5.0 million tapering to $2.0 million after five years. This is consistent with City Council action in recent years with the recommendation of the Finance Committee. This additional allocation to CalPERS is not reflected in the forecast 101 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 7 as it is considered discretionary for City Council action on an annual basis and would be funded from prior year surplus. General Fund Expenditure Forecast FY23 – FY27 Non-personnel costs include contract services, utilities, supplies and materials, maintenance and repair, and transfers-out. These expenditures are projected to grow on average at 5.4% annually. Conclusion The City is in excellent financial position relative to most other local agencies with a revenue base and reserves unparalleled by any similar size City in the County. The LRFF projects a surplus balance (revenues net of expenditures) of $2.5 million in FY 2022-23. Surpluses are also projected for the remaining years of the model. This is partly due to the compounding effect of constant positive annual growth factors projected for the City’s top three revenue sources. The compounding was mitigated by introducing variable, as opposed to static and linear, growth patterns that more closely align with the normal “ups and downs” of the economic cycle. FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 Regular Salaries 80,216,297$ 81,820,623$ 83,457,035$ 85,126,176$ 86,828,699$ Growth Rate 2.0%2.0%2.0%2.0%2.0% Special and Other Pays 13,713,472$ 13,987,741$ 14,267,496$ 14,552,846$ 14,843,903$ Growth Rate 19.8%2.0%2.0%2.0%2.0% Benefits 1 61,889,034$ 62,158,256$ 62,432,862$ 63,589,024$ 64,803,353$ Growth Rate 0.4%0.4%0.4%1.9%1.9% Non-Personnel Costs 2 107,580,106$ 112,098,583$ 117,438,663$ 123,341,037$ 129,403,997$ Growth Rate 6.0%4.2%4.8%5.0%4.9% Total General Fund Expenditures 263,398,909$ 270,065,202$ 277,596,056$ 286,609,083$ 295,879,952$ Growth Rate 4.0%2.5%2.8%3.2%3.2% Surplus (Deficit)2,502,519$ 8,798,552$ 12,163,260$ 16,214,406$ 18,849,873$ 1 Assumes CalPERS unfunded liability payment remains at a flat $35 million per year through 2029. 2 Assumes transfers out to FFP, CIP, etc. remain flat and includes funds set aside for growth in contingency reserve. 102 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 8 The City currently has a contingency reserve of $55.3 million, which represents 25% of operating expenditures. This reserve serves as a means to respond to unexpected deviations in operating trends for the 20-year term of the forecast. Historically, the City has not utilized its contingency reserve to balance its annual budgets and only did so recently to cover revenue shortfall during the COVID-19 pandemic. The small proposed draw of less than $3 million from the contingency reserve during FY 2020-21 was quickly reversed with the first quarter budget update that year. However, the City is not without its fiscal challenges. Although revenue receipts have improved considerably since the Great Recession and are again recovering quickly from the depths of the COVID-19 pandemic, future recessions or shifts in consumer habits (such as retail purchases or hotel stays) may alter the course of revenues and new patterns may emerge that differ significantly from our past results. Agencies dependent on traditional brick-and-mortar retail stores for a major portion of their sales tax will be facing new challenges in the coming years as merchants retrench and downsize to cope with a rapidly changing environment. Generational preferences for experiences over merchandise, plus the growing costs of health care, education, and housing, are reducing discretionary spending for taxable goods while time-challenged consumers are opting for the convenience of online shopping. The City routinely faces financially impactful events such as significant increases to CalPERS pension plans, unfunded state mandates, and the need to ramp-up savings to meet substantial near-term facilities maintenance and replacement obligations in accordance with our long-term infrastructure financing plans. Fortunately, the City’s revenue strength provides the Council with the ability to make strategic decisions each year that deploy new revenues toward the most critical needs of our citizens. 103 General Fund Long-Range Financial Forecast FY2023 – FY2042 November 4, 2021 Page 9 In summary, the General Fund is projected to be in a financially sound position over the next 20-year period. Any short term deficits that may arise can be absorbed without long- term reliance on Contingency Reserve – no structural deficit is apparent. Prepared by: Submitted by: /s/ Steve Montano /s/ Scott Catlett Steve Montano Scott Catlett Deputy Finance Director Finance Director Attachment: A. 20-year LRFF Table and Associated Graph 104 ATTACHMENT A 20-YEAR LRFF TABLE AND ASSOCIATED GRAPH 105 FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 FY 2031-32 FY 2032-33 FY 2033-34 FY 2034-35 FY 2035-36 FY 2036-37 FY 2037-38 FY 38-39 FY 2039-40 FY 2040-41 FY 2041-42 Property Tax 128,341,479$ 134,758,553$ 141,496,481$ 148,571,305$ 155,999,870$ 160,679,866$ 167,107,061$ 175,462,414$ 184,235,534$ 193,447,311$ 203,119,677$ 211,244,464$ 217,581,798$ 226,285,069$ 237,599,323$ 249,479,289$ 261,953,254$ 275,050,916$ 288,803,462$ 300,355,600$ Growth Rate 5.0%5.0%5.0%5.0%5.0%3.0%4.0%5.0%5.0%5.0%5.0%4.0%3.0%4.0%5.0%5.0%5.0%5.0%5.0%4.0% Sales Tax 42,047,799$ 43,309,233$ 44,608,510$ 45,946,766$ 47,325,169$ 48,271,672$ 49,237,106$ 50,714,219$ 52,235,645$ 53,802,715$ 55,416,796$ 57,079,300$ 58,220,886$ 59,385,304$ 61,166,863$ 63,001,869$ 64,891,925$ 66,838,683$ 68,843,843$ 70,220,720$ Growth Rate 4.4%3.0%3.0%3.0%3.0%2.0%2.0%3.0%3.0%3.0%3.0%3.0%2.0%2.0%3.0%3.0%3.0%3.0%3.0%2.0% Transient Occupancy Tax 23,784,366$ 27,352,021$ 28,446,102$ 29,583,946$ 30,767,304$ 31,690,323$ 32,324,130$ 32,647,371$ 33,300,318$ 34,299,328$ 35,671,301$ 37,098,153$ 38,211,098$ 38,975,319$ 39,365,073$ 40,152,374$ 41,356,945$ 43,011,223$ 44,731,672$ 46,520,939$ Growth Rate 25.0%15.0%4.0%4.0%4.0%3.0%2.0%1.0%2.0%3.0%4.0%4.0%3.0%2.0%1.0%2.0%3.0%4.0%4.0%4.0% Other Revenues 71,727,783$ 73,443,947$ 75,208,223$ 78,721,473$ 80,637,483$ 85,830,941$ 87,476,532$ 89,668,255$ 91,422,726$ 93,821,749$ 96,210,067$ 98,667,292$ 101,124,192$ 103,650,837$ 106,416,254$ 109,169,781$ 112,003,754$ 114,920,726$ 117,923,337$ 120,888,353$ Growth Rate 0.01%2.4%2.4%4.7%2.4%6.4%1.9%2.5%2.0%2.6%2.5%2.6%2.5%2.5%2.7%2.6%2.6%2.6%2.6%2.5% Total General Fund Revenue 265,901,427$ 278,863,754$ 289,759,316$ 302,823,490$ 314,729,825$ 326,472,802$ 336,144,828$ 348,492,258$ 361,194,224$ 375,371,103$ 390,417,840$ 404,089,209$ 415,137,973$ 428,296,530$ 444,547,513$ 461,803,313$ 480,205,877$ 499,821,548$ 520,302,315$ 537,985,612$ Growth Rate 5.0%4.9%3.9%4.5%3.9%3.7%3.0%3.7%3.6%3.9%4.0%3.5%2.7%3.2%3.8%3.9%4.0%4.1%4.1%3.4% FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 FY 2031-32 FY 2032-33 FY 2033-34 FY 2034-35 FY 2035-36 FY 2036-37 FY 2037-38 FY 38-39 FY 2039-40 FY 2040-41 FY 2041-42 Regular Salaries 80,216,297$ 81,820,623$ 83,457,035$ 85,126,176$ 86,828,699$ 88,565,273$ 90,336,579$ 92,143,310$ 93,986,177$ 95,865,900$ 97,783,218$ 99,738,883$ 101,733,660$ 103,768,333$ 105,843,700$ 107,960,574$ 110,119,786$ 112,322,181$ 114,568,625$ 116,859,997$ Growth Rate 2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0% Special and Other Pays 13,713,472$ 13,987,741$ 14,267,496$ 14,552,846$ 14,843,903$ 15,140,781$ 15,443,597$ 15,752,469$ 16,067,518$ 16,388,868$ 16,716,646$ 17,050,979$ 17,391,998$ 17,739,838$ 18,094,635$ 18,456,527$ 18,825,658$ 19,202,171$ 19,586,215$ 19,977,939$ Growth Rate 19.8%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0%2.0% Benefits 1 61,889,034$ 62,158,256$ 62,432,862$ 63,589,024$ 64,803,353$ 66,079,113$ 67,419,762$ 35,718,387$ 37,200,010$ 38,758,161$ 40,397,182$ 42,121,676$ 43,936,512$ 45,846,848$ 47,858,147$ 49,976,194$ 52,207,113$ 54,557,395$ 57,033,910$ 59,643,938$ Growth Rate 0.4%0.4%0.4%1.9%1.9%2.0%2.0%-47.0%4.1%4.2%4.2%4.3%4.3%4.3%4.4%4.4%4.5%4.5%4.5%4.6% Non-Personnel Costs 2 107,580,106$ 112,098,583$ 117,438,663$ 123,341,037$ 129,403,997$ 136,097,163$ 143,232,957$ 143,721,640$ 158,900,069$ 167,494,890$ 176,594,116$ 186,281,810$ 196,598,100$ 207,585,946$ 219,291,347$ 231,763,560$ 245,055,338$ 259,223,184$ 274,327,626$ 290,433,508$ Growth Rate 6.0%4.2%4.8%5.0%4.9%5.2%5.2%0.3%10.6%5.4%5.4%5.5%5.5%5.6%5.6%5.7%5.7%5.8%5.8%5.9% Total General Fund Expenditures 263,398,909$ 270,065,202$ 277,596,056$ 286,609,083$ 295,879,952$ 305,882,330$ 316,432,895$ 287,335,807$ 306,153,774$ 318,507,819$ 331,491,162$ 345,193,347$ 359,660,270$ 374,940,966$ 391,087,829$ 408,156,855$ 426,207,895$ 445,304,932$ 465,516,376$ 486,915,382$ Growth Rate 4.0%2.5%2.8%3.2%3.2%3.4%3.4%-9.2%6.5%4.0%4.1%4.1%4.2%4.2%4.3%4.4%4.4%4.5%4.5%4.6% Surplus (Deficit)2,502,519$ 8,798,552$ 12,163,260$ 16,214,406$ 18,849,873$ 20,590,472$ 19,711,933$ 61,156,451$ 55,040,450$ 56,863,284$ 58,926,678$ 58,895,862$ 55,477,703$ 53,355,564$ 53,459,683$ 53,646,458$ 53,997,982$ 54,516,616$ 54,785,939$ 51,070,230$ 1 Assumes CalPERS unfunded liability payment remains at a flat $35 million per year through 2029. 2 Assumes transfers out to FFP, CIP, etc. remain flat and includes funds set aside for growth in contingency reserve. CITY OF NEWPORT BEACH GENERAL FUND LONG-RANGE FISCAL FORECAST FY 2023 - FY 2042 FY 23 FY 24 FY 25 FY 26 FY 27 FY 28 FY 29 FY 30 FY 31 FY 32 FY 33 FY 34 FY 35 FY 36 FY 37 FY 38 FY 39 FY 40 FY 41 FY 42 NET OPERATING RESULT $2.5 $8.8 $12.2 $16.2 $18.8 $20.6 $19.7 $61.2 $55.0 $56.9 $58.9 $58.9 $55.5 $53.4 $53.5 $53.6 $54.0 $54.5 $54.8 $51.1 ENDING CONTINGENCY FUND BALANCE $57.4 $59.2 $61.0 $63.1 $65.3 $67.7 $70.1 $65.7 $68.4 $71.3 $74.4 $77.6 $81.1 $84.7 $88.5 $92.6 $96.9 $101.4 $106.3 $111.4 TOTAL REVENUES $265.9 $278.9 $289.8 $302.8 $314.7 $326.5 $336.1 $348.5 $361.2 $375.4 $390.4 $404.1 $415.1 $428.3 $444.5 $461.8 $480.2 $499.8 $520.3 $538.0 TOTAL EXPENDITURES $263.4 $270.1 $277.6 $286.6 $295.9 $305.9 $316.4 $287.3 $306.2 $318.5 $331.5 $345.2 $359.7 $374.9 $391.1 $408.2 $426.2 $445.3 $465.5 $486.9 $- $100.0 $200.0 $300.0 $400.0 $500.0 $600.0 $ MILLIONSGENERAL FUND REVENUES, EXPENDITURES & NET OPERATING RESULT (SURPLUS/DEFICIT) FY 23 -FY 42 106 10/28/21 Scheduled Date Agenda Title Report Type Agenda Description 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. 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. Newport Beach Finance Committee Work Plan November 2021 Committee Recess December 2021 January 2022 I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2021\WORK PLAN 2021 - 10-28-2021 1107 10/28/21 Scheduled Date Agenda Title Report Type Agenda Description Newport Beach Finance Committee Work Plan 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. 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. April 2022 May 2022 February 2022 March 2022 I:\Users\FIN\Shared\Admin\Finance Committee\WORK PLAN\2021\WORK PLAN 2021 - 10-28-2021 2108 10/28/21 Scheduled Date Agenda Title Report Type Agenda Description Newport Beach Finance Committee Work Plan 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. Thursday, October 13, 2022 Year-End Budget Results Presentation Staff will provide a presentation regarding the year-end budget results for FY 2021-22. 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, 2022 Receive and File Staff will report on the budget amendments from the prior quarter. June 2022 October 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 - 10-28-2021 3109