HomeMy WebLinkAboutFinance Committee Agenda - March 24, 20141 This Finance Committee is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that the Finance
Committee’s agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that the public be
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CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA Newport Coast Conference Room, Bay 2E 100 Civic Center Drive, Newport Beach Monday, March 24, 2014 – 4:00 PM
Finance Committee Members: Staff Members:
Mike Henn, Council Member, Chair Keith Curry, Council Member
Tony Petros, Council Member
Dave Kiff, City Manager Dan Matusiewicz, Finance Director
Steve Montano, Deputy Finance Director
____________________________________________________ 1) CALL MEETING TO ORDER 2) ROLL CALL 3) 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 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. 4) APPROVAL OF MINUTES Approval of the November 18, 2013 Finance Committee meeting minutes. 5) CURRENT BUSINESS
A. Review of June 30, 2013 Audit Results: Review results of the June 30, 2013 financial audit
and audit of Federal Funds (Single Audit).
B. 2014 Finance Committee Workplan Overview: Staff will seek approval of tentative Finance Committee agenda topics scheduled for the year.
C. Enterprise Resource Planning (ERP) Update: Review status of ERP selection process and
tentative implementation plan if contract is approved by Council. This item will give
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opportunity for Committee Members to ask questions or request more information in
advance of formal Council action.
D. Discretionary Reserve Level Discussion: City reserves are critical financial tool used for
strategic planning and managing risk. Council Reserve Policy, F-2, establishes the
framework and parameters of the City’s discretionary reserves. It is important to periodically reevaluate this policy to make sure it remains current with strategic objectives and financial
risks faced by the City. Staff will review this policy at a summary level, recommend certain
adjustments and seek Committee comment and direction.
6) FINANCE COMMITTEE ANNOUNCEMENTS OR MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) 7) ADJOURNMENT
All documents distributed for this meeting are available in the
administration office of the Finance Department
1
CITY OF NEWPORT BEACH CITY COUNCIL FINANCE COMMITTEE
NOVEMBER 18, 2013 MEETING MINUTES 1. CALL TO ORDER
The meeting was called to order at 4:00 p.m. in the Newport Coast Conference
Room, Bay 2E, 100 Civic Center Drive, Newport Beach, California 92660.
2. ROLL CALL
Present: Council Member Mike Henn (Chair), Mayor Keith Curry and Council
Member Tony Petros
Staff present: City Manager Dave Kiff, Deputy City Manager Terri Cassidy,
Finance Director Dan Matusiewicz, Deputy Finance Director Steve Montano,
Budget Manager Susan Giangrande and Administrative Coordinator Tammie
Frederickson
Members of the public: Jim Mosher, Carl Cassidy
3. PUBLIC COMMENTS
Mr. Jim Mosher inquired on the status of the Finance Committee work plan for the coming year; commented on possible public interest in the two reports
posted by Finance staff about development fees showing what fees have been collected and how the fees were used during the last fiscal year; and he
expressed that he has no intention of pursuing an appeal to the courts on the alleged Brown Act violations which was the subject of the last Finance
Committee meeting. He reminded the Committee that the City Attorney stated
discussions with the majority of elected officials of a legislative body must take
place only at noticed meetings and there are no exceptions.
Mr. Mosher commented on the trash contract and noted the financial decision
whether or not to outsource was based on savings. He believed it was unfair to
have placed the burden on the trash collectors of demonstrating that insourcing
was economical and feasible. He questioned the accuracy of recycling figures
provided by CR&R and noted some members of the public may feel misled by
information from CR&R regarding sending green waste to the landfill. This is
because that may not be possible in the future and would then require
implementation of a more expensive program.
4. APPROVAL OF MINUTES
Mayor Curry instructed a correction to his statement on page 2 from “…a waste
of taxpayer time and effort” to “…a waste of taxpayer money.” Mayor Curry
moved, Council Member Petros seconded to approve the minutes of the October 15, 2013, Finance Committee meeting with the above correction. The
Committee voted all ayes to approve the minutes.
All documents distributed for this meeting are available in the
administration office of the Finance Department
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5. CURRENT BUSINESS
A. Review of Public Employees Retirement System (PERS) Valuations
Finance Director Dan Matusiewicz reviewed a presentation on the June 30, 2012,
CalPERS Actuarial Valuations used to determine the 2014-15 contribution rates for
safety and miscellaneous employees. The slideshow illustrated pension
fundamentals; pension risks; retirement contributions; historical components of
pension funding; the relationship between investment return and pension cost;
CalPERS historic investment returns; plan cost variables such as mortality,
investment returns, industrial disability retirements and workforce size; and a
CalPERS timeline of historical decisions that affected actuarial assumptions.
Mr. Matusiewicz reviewed the new CalPERS asset smoothing methodology which
will impact contribution rates starting in fiscal year 2016 and will result in a better
funded plan with more stability. The previous actuarial value approach for the
determination of rates is being eliminated. The difference between the actuarial value basis and market value basis is $88.9 million which will be added to the
unfunded liability and phased into rates over 5 years. Council Member Henn questioned whether the smoothing of the $88.9 million is readjusted every year
during the 5-year period if the asset value changes. Mr. Matusiewicz responded that a successive trapezoid-shaped amortization base is added to the schedule
each year. The amortization base can be positive or negative depending on whether there is a net actuarial gain or loss for the year.
Mr. Matusiewicz went on to discuss projected PERS rates and pension costs. He noted that under the old methodology the unfunded liability continued to creep
upwards each year and he illustrated an analogy of a homeowner refinancing a 30-year mortgage every year. He stated that under the new methodology the
unfunded liability over a period of time will look very different than the old
methodology. Referring to the mortgage analogy, this smoothing methodology
will result in truly paying down the mortgage instead of refinancing every year.
Mayor Curry added that under the new methodology the unfunded liability gets
recalculated every year and is affected by factors such as mortality rates and
investment assumptions. Council Member Henn commented there will be new
deficits created over time but it will be paid off at the end of the 30-year
amortization period. Council Member Petros agreed that the City has taken a
responsible approach with steps already made to reduce our costs but he
believed the unfunded liability will never go away. He suggested that the
Council should express support for the efforts San Jose Mayor Reed is
undertaking on a potential pension reform ballot measure.
Mr. Matusiewicz spoke on the projected pension cost increases and noted in six
years the employer contribution will increase $10 million. Council Member Henn
remarked we should find a way to message the good things the City is doing
such as the advance payments that were made, the shift to a fully amortizing
methodology the City elected ahead of CalPERS, the reductions in employment
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administration office of the Finance Department
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levels, and the fact that employees are paying a portion of the employer costs. Mayor Curry commented that by the end of the next fiscal year, employees will
have gone from paying $0 to $7 million a year in costs; that is substantial progress and there is the possibility of employees picking up a portion of the increased
cost, particularly safety employees. Council Member Henn advised against using percentages in discussions and to stick with using dollar amounts.
Mr. Matusiewicz noted in terms of the unfunded liability, the City was fully funded in 2007 on a market value basis. He commented that 60% of the pension benefit
obligation is associated with separated employees and 40% is associated with active members. Mayor Curry remarked the footnote on that slide should be
corrected because it was not in sync with the percentages shown in the pie chart.
More actuarial changes on the horizon will likely impact 2015-16 rates, including
a possible 0.25% reduction to the discount rate, a new experience study looking
at mortality and disability retirement assumptions, a review of the investments
strategy and GASB Statement No. 68 requirement to report unfunded pension
liability on the balance sheet. This reporting requirement this will not change our
means of funding the pension liability.
As previously noted by members of the Finance Committee, the latest actuarial
valuation does not reflect steps taken by the City Council toward pension
reform. Council Member Henn insisted that it is important to find a way to express
the fact in dollars. It is important to reflect the fiscal impact of decisions that
have a substantive benefit in reducing the liability beyond what it otherwise
would have been. Mr. Matusiewicz concluded the presentation with his
recommendations to continue with maintaining reasonable employee
contributions, seeking opportunities for staffing efficiencies to keep payroll in
check, and consider the use of reserves to accelerate payments on the
unfunded liability so as to avoid the interest that accrues to the City from the
liability. Mayor Curry further recommended an increase to employee
contributions, especially safety employees. He added another key element is to
constrain compensation growth. Council Member Henn commented that as
contract negotiations begin it is important in terms of policy direction to understand compensation distinctions and how to control payroll cost growth.
Deputy City Manager Terri Cassidy noted that some agencies have made a policy decision to only hire new hires as opposed to laterals. City Manager Kiff
remarked that would result in possibly replacing top executives with someone from the private sector who has never been in PERS but it is something for the
Council to consider.
Council Member Henn stated the recommendations are not ready to go
forward and that Council needs to have a thoughtful discussion about the recommendations and establish the policy direction Council wants to take. He
directed staff to bring back an expanded list of aggressive policy options and include a dollar value expressed for the steps already taken toward reducing the
cost through negotiated increases in employee contributions. Mayor Curry
All documents distributed for this meeting are available in the
administration office of the Finance Department
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added it should be explained that the $89 million increase in the liability is the result of CalPERS changing the assumptions and calculations in a way that states
the number in a much different way than it was a year ago.
Mr. Mosher commented it would be useful to the public to understand how the
various formulas work for calculating employee pensions. Mr. Kiff remarked the CalPERS website provides information on pension formulas.
B. Quarterly Financial Review Q4 FY 2012-13 and Q1 FY 2013-14
Deputy Finance Director Steve Montano went over the financial results for the fourth quarter of fiscal year 2012-13, the period between April 1 and June 30.
Newport Beach continues to be a prosperous and financially secure municipality
due to the strong underlying tax base, strong governance and disciplined fiscal
decisions. He reviewed the “Top 3” revenue sources which are property tax, sales
tax and transient occupancy tax (TOT), and he reported increases higher from
the prior fiscal year for each of the three sources. In response to Council Member
Petros’ question regarding why the sales tax year-to-date actual is lower than
the amended budget, Mr. Matusiewicz explained the State Board of Equalization
made a large adjustment for some funds that were misallocated to the City.
Mr. Montano concluded that overall in FY 2013-13, the net increase to the City’s
General Fund reserve was $2.6 million. Council Member Henn asserted there was
a positive $7.4 million revenue variance and a $5 million positive expenditure
variance, which amounts to a$12.4 million positive variance on an operating
basis. He pointed out the policy decision made to transfer $11.6 million out of the
General Fund to reserves. Mayor Curry commented it is important to get the
message out that the $12.4 million operating variance was achieved through
reduced expenditures and higher revenue growth to finish the fiscal year with a
budget surplus over the adopted budget. Putting the number in perspective,
Mayor Curry stated the surplus is 150% higher than the $8 million debt service cost
for City Hall, or from another perspective the surplus would cover six years of the
$2 million yearly pension cost increase. He emphasized the City continues to be
in strong shape and will continue stringent efforts to reduce pension liability costs.
Council Member Henn remarked that achieving the budget surplus is a mark of distinction to those who operate the City and a view of the operating
performance should be isolated and highlighted.
In response to a question raised by Mayor Curry, Mr. Montano replied the
aggregate total reserves, which include discretionary and committed reserves, total $130 million. Mr. Matusiewicz noted the Facilities Reserve currently includes
committed money that has not yet been set aside for a couple of capital projects, namely Marina Park and Sunset Ridge. Council Member Henn asked
staff to find a consistent methodology for expressing the amount of available reserves. Mayor Curry declared the City’s reserves are at their highest level in the
108 year history of the City. He stated it is important for the taxpayers to know
that in terms of how we’re being good stewards of the City finances. Council
Member Petros pointed out that for policy making, it is vitally important to report
All documents distributed for this meeting are available in the
administration office of the Finance Department
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consistently and correctly the reserve amount and how you arrive at that amount.
Mr. Montano went on to report on the first quarter for fiscal year 2014-15, the period between July 1 and September 30. As is typically the case, much of the
revenue lags during the first quarter, such as property tax and sales tax. He noted the TOT which reflects 26% of revenue covers the summer months. Council
Member Petros questioned whether the housing market is keeping pace with the fourth quarter as reported. Mr. Montano responded it is too early to offer any
projected increase over what was conservatively budgeted.
In response to a question raised by Council Member Petros, Mr. Kiff said the
information on CalPERS was included in the draft Quarterly Financial Report
because PERS released the actuarial reports and this is an opportunity to help
educate the public on the issue. Council Member Henn expressed that the
CalPERS discussion is not relevant to the financial report and the conclusion for
the first quarter should be a positive indication that the budget is on track. Mr.
Henn preferred a separate PERS primer document that addresses some of the
pension issues.
Mr. Mosher inquired about the charts and suggested a revision for clarification to
the column heading “Percent of 2012/13 Budget Realized.” He also questioned
whether the Top 3 components are consistent with the Performance Plan that
shows a large amount of funds coming from fees for services yet there is no
mention of these funds or the tidelands fund in the financial report. Mr.
Matusiewicz responded that this is the first year a separate tidelands report was
published to address issues raised by the State Lands Commission. Agreement
was expressed to include some verbiage in the quarterly financial report on the
expanded tidelands financial report.
C. Budget Process Strategy and Roadmap
Budget Manager Susan Giangrande discussed the fiscal year 2014-15 budget
process. The budget will be compiled using new budgeting software technology
that will bring more structure and efficiency to the budgeting process. Ms.
Giangrande spoke about the improved reporting and expanded capability
features of the software, City Vision. She reviewed highlights and a timeline for
the new Enterprise Resource Planning (ERP) program selection and implementation process with modules phased in over time through mid-2017.
Ms. Giangrande gave an overview of the 2014-15 budget calendar. Council Member Petros stated that during the budget review process, he is interested in
addressing staffing and project management oversight which appears to constrain the capacity to execute capital projects.
Council Member Henn commented the revenue assumptions included in the roadmap are conservative and the Committee Members did not express any
concerns with the conservative nature of the assumptions. The discussion moved on to expenditures wherein Mr. Kiff suggested that at the January Council goal
All documents distributed for this meeting are available in the
administration office of the Finance Department
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setting session there could be further discussion on the Council priorities for completing capital projects faster. He commented that operationally the next
year will include changes to trash collection service, a consultant’s study on fire and emergency medical services that may result in a change, the class and
compensation study as well as the new ERP will result in operational changes, and maintenance and operation of higher technology buildings including OASIS
and the Civic Center.
Mr. Kiff spoke on citizen engagement in the budget process and said he is open
to suggestions on how to achieve a dialogue with the public to help them better understand various aspects of putting together the City’s budget.
Mr. Cassidy encouraged promoting the work of this Committee to members of the public. He stated his belief that the public would benefit from the opportunity
to listen to the discussion and interaction with staff. Mr. Cassidy thanked the
Committee Members and staff for the breaking down the information and he
requested there always be monthly meetings of the Finance Committee.
Mr. Mosher asked about how performance based budgeting fits in with the
changes to the new budgeting software and the ERP. Council Member Henn
explained performance based budgeting does not automatically tie in to a new
ERP system. He stated the ERP will help facilitate steps towards performance
based budgeting which he articulated as activities of the City defined and
prioritized through its programs and an assignment of revenues and costs
associated with the programs. The City Vision software is an enhanced reporting
tool that is revenue and expenditure oriented.
Ms. Giangrande commented that one new feature of City Vision will be the
ability to report the full pension obligation and employee contribution in the
fiscal year 2014-15 detail budget.
On the topic of citizen engagement, Mr. Mosher commented it is disappointing
in many areas and we have a long way to go to get the public actively engaged in financial matters.
6. FINANCE COMMITTEE ANNOUNCEMENTS OR MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM)
Council Member directed staff to return with a pension summary and a 2014 work plan.
7. ADJOURNMENT
The Finance Committee adjourned at 5:54 p.m.
Filed with these minutes are copies of all material distributed at the meeting.
All documents distributed for this meeting are available in the
administration office of the Finance Department
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Attest:
Mike Henn, Chair Date Finance Committee Chair
CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA ITEM INFORMATION
Agenda Item No_____
March 24, 2014 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director (949) 644-3123, DanM@newportbeachca.gov
SUBJECT: FISCAL YEAR 2012-13 AUDITOR RECOMMENDATION
SUMMARY:
In connection with the City’s financial statement audit, the auditors have certain obligations to communicate the audit results with both City Council and management.
The attached letters from the City’s auditors, White Nelson Diehl Evans fulfill those
obligations for the required communication.
DISCUSSION:
The first audit letter is intended to communicate matters of particular significance that
City Council should be aware of including:
• Qualitative Aspects of Accounting Practices
• Difficulties Encountered in Performing the Audit
• Corrected and Uncorrected Adjustments
• Disagreements with Management
• Management Representations
• Management Consultations with Other Independent Accountants
• Other Audit Findings or Issues
We are pleased to report that the auditors reported no instances of significant audit
findings; difficulties encountered in connection with the performance of the audit; corrected or uncorrected adjustments; disagreements with management or other audit
findings or issues.
The second letter entitled “Independent Auditors’ report on Internal Control over
Financial Reporting and on Compliance and Other Matters” is intended to communicate deficiencies, significant deficiencies or material weaknesses in internal control and
instances of noncompliance or other matters. We are pleased to report that the auditors
did not identify any deficiencies in internal control considered to be a material weakness
that would result in more than a remote likelihood of a material misstatement of the
financial statements or would not otherwise be prevented by the City’s internal controls.
FY 2012-13 Auditor Recommendation March 24, 2014
Page 2 They also did not identify any instances of noncompliance or other matters that require specific communication to the governing body as promulgated by Government Auditing Standards.
We are pleased to report that there were no management comments this year.
Prepared by: Submitted by:
Rukshana Virany Dan Matusiewicz
Accounting Manager Finance Director
Attachments:
A. Auditor’s “Audit Committee Letter” B. Auditor’s “Report on Internal Control over Financial Reporting and on Compliance & Other Matters”
2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
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To the Honorable Mayor and
Members of the City Council
of the City of Newport Beach
Newport Beach, California
We have audited the financial statements of the governmental activities, the business-type activities,
each major fund, and the aggregate remaining fund information of the City of Newport Beach (the City)
for the year ended June 30, 2013. Professional standards require that we provide you with information
about our responsibilities under generally accepted auditing standards and Government Auditing
Standards, as well as certain information related to the planned scope and timing of our audit. We have
communicated such information in our engagement letter dated May 3, 2013 and our meeting on
planning matters with the finance committee on June 12, 2013. Professional standards also require that
we communicate to you the following information related to our audit.
Significant Audit Findings
Qualitative Aspects of Accounting Practices
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note 1 to the financial statements. As discussed
in Note 1d to the financial statements, the City incorporated deferred outflows of resources and
deferred inflows of resources into the definitions of the required components of the residual measure of
net position due to the adoption of Governmental Accounting Standards Board’s Statement No. 63,
“Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net
Position”. The adoption of this standard also provides a new statement of net position format to report
all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position.
Also discussed in Note 1d to the financial statements, the City has changed its method for accounting
and reporting certain items previously reported as assets or liabilities during fiscal year 2012-2013 due
to the early adoption of Governmental Accounting Standards Board’s Statement No. 65, “Items
Previously Reported as Assets and Liabilities”. The adoption of this standard required retrospective
application resulting in a $1,132,169 reduction of previously reported net position as of the beginning
of the year for the governmental activities. No other accounting procedures were adopted and the
application of other accounting policies was not changed during the year ended June 30, 2013. We
noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in
the proper period.
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management’s knowledge and experience about past and current events and assumptions
about future events. Certain accounting estimates are particularly sensitive because of their
significance to the financial statements and because of the possibility that future events affecting them
may differ significantly from those expected.
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Significant Audit Findings (Continued)
Qualitative Aspects of Accounting Practices (Continued)
The most sensitive estimates affecting the City’s financial statements are as follows:
a. Management’s estimate of the fair market value of investments, which is based on
market values provided by outside sources.
b. Management’s estimate of the value of capital assets (infrastructure assets) is based
on industry standards.
c. The estimated useful lives of capital assets for depreciation purposes are based on
industry standards.
d. The funded status and funding progress of the public defined benefit plans with
CalPERS are based on actuarial valuations.
e. The annual required contribution and actuarial accrued liability for the City’s Other
Post-Employment Benefit Plan is based on certain actuarial assumptions and
methods prepared by an outside consultant.
f. The total estimated cost to fund the Early Retirement Incentive Program is based on
amounts provided by the third-party administrator.
g. Management’s estimate of the claims payable liabilities related to general liability
and worker’s compensation claims are based on actuarial valuations.
We evaluated the key factors and assumptions used to develop these estimates in determining that they
were reasonable in relation to the financial statements taken as a whole.
Certain financial statement disclosures are particularly sensitive because of their significance to
financial statement users. The most sensitive disclosures affecting the financial statements were
reported in Note 8 regarding claims payable, Note 10 regarding the CalPERS defined benefit plans,
Note 11 regarding the City’s Early Retirement Incentive Program (ERIP), and Note 13 regarding the
City’s Other Post-Employment Benefit Plan.
The financial statement disclosures are neutral, consistent, and clear.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing
our audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during
the audit, other than those that are trivial, and communicate them to the appropriate level of
management. Management has corrected all such misstatements. In addition, none of the
misstatements detected as a result of audit procedures and corrected by management were material,
either individually or in the aggregate, to each opinion unit’s financial statements taken as a whole.
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Significant Audit Findings (Continued)
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a
financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that
could be significant to the financial statements or the auditor’s report. We are pleased to report that no
such disagreements arose during the course of our audit.
Management Representations
We have requested certain representations from management that are included in the management
representation letter dated December 24, 2013.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and
accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation
involves application of an accounting principle to the City’s financial statements or a determination of
the type of auditor’s opinion that may be expressed on those statements, our professional standards
require the consulting accountant to check with us to determine that the consultant has all the relevant
facts. To our knowledge, there were no such consultations with other accountants.
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and
auditing standards, with management each year prior to retention as the City’s auditors. However,
these discussions occurred in the normal course of our professional relationship and our responses
were not a condition to our retention.
Other Matters
With respect to the supplementary information accompanying the financial statements, we made
certain inquiries of management and evaluated the form, content, and methods of preparing the
information to determine that the information complies with accounting principles generally accepted
in the United States of America, the method of preparing it has not changed from the prior period, and
the information is appropriate and complete in relation to our audit of the financial statements. We
compared and reconciled the supplementary information to the underlying accounting records used to
prepare the financial statements or to the financial statements themselves.
This information is intended solely for the use of management, the City Council and others within the
City and is not intended to be and should not be used by anyone other than these specified parties.
Irvine, California
December 24, 2013
2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
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INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS
BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED
IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
The Honorable Mayor and
Members of City Council
City of Newport Beach
Newport Beach, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, the financial statements of the governmental
activities, the business-type activities, each major fund, and the aggregate remaining fund information
of the City of Newport Beach, California (the City), as of and for the year ended June 30, 2013, and the
related notes to the financial statements, which collectively comprise the City’s basic financial
statements and have issued our report thereon dated December 24, 2013.
Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City’s internal
control over financial reporting (internal control) to determine the audit procedures that are appropriate
in the circumstances for the purpose of expressing our opinion on the financial statements, but not for
the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly,
we do not express an opinion on the effectiveness of the City’s internal control.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control such that there is a reasonable possibility that a material
misstatement of the City’s financial statements will not be prevented, or detected and corrected on a
timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal
control that is less severe than a material weakness, yet important enough to merit attention by those
charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify
any deficiencies in internal control that we consider to be material weaknesses. However, material
weaknesses may exist that have not been identified.
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Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City’s financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and
material effect on the determination of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit, and accordingly, we do not express
such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that
are required to be reported under Government Auditing Standards.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and
compliance and the results of that testing, and not to provide an opinion on the effectiveness of the
entity’s internal control or on compliance. This report is an integral part of an audit performed in
accordance with Government Auditing Standards in considering the entity’s internal control and
compliance. Accordingly, this communication is not suitable for any other purpose.
Irvine, California
December 24, 2013
CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA ITEM INFORMATION
Agenda Item No.
March 24, 2014
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Steve Montano, Deputy Finance Director
(949) 644-3240 or Smontano@NewportBeachCA.gov
SUBJECT: Finance Committee 2014 Work Plan
SUMMARY
Staff will present and seek approval of tentative Finance Committee agenda topics
scheduled for the year.
Prepared and Submitted by:
_____________________________
Steve Montano
Deputy Finance Director
Attachment: 2014 Finance Committee Work Plan
03/20/2014
\\cnb\data\Users\FIN\Shared\Admin\Finance Committee\Meeting Files\2014\2014 Finance Committee Workplan Overview 1
Scheduled Date Agenda Title Agenda Description
3/24/2014 Review of June 30, 2013 Audit Results Review results of the June 30, 2013 Financial Audit and audit of Federal Funds (Single
Audit). The auditor may wish to discuss any changes in accounting standards or
disclosures that may be relevant for the forthcoming audit year(s). The committee will have an opportunity to discuss any potential areas of audit concern at this time but committee members are also welcome to contact the auditors directly anytime during the course of the
year.2014 Work Plan Overview Staff will seek approval of tentative Finance Committee agenda topics scheduled for the year.
Enterprise Resource Planning (ERP) Update Review status of ERP selection process and tentative implementation plan if contract is approved by Council.Discretionary Reserve Policy Review City reserves are a critical financial tool used for strategic planning and managing risk.
Council Reserve Policy, F-2, establishes the framework and parameters of the City’s discretionary reserves. It is important to periodically reevaluate this policy to make sure it
remains current with strategic objectives and financial risks faced by the City. Staff will
review this policy at a summary level, recommend certain adjustments and seek Committee
comment and direction.
4/28/2014 Quarterly Financial Review Staff will present Q3 financial results prior to the publication of the Quarterly Business
Report. Facilities Financial Plan Tool (FFPT) Update Staff will present an updated version of the FFPT that incorporates further refinements of
the scope, time and cost of potential projects.
Review of Proposed Budget Staff will provide an overview of the 2014-15 Proposed Budget.Special Event Funding Recommendations Staff will present the results of the Special Event Funding Application process and review
staff funding recommendations.
7/21/2014 Annual Investment Policy Review Staff will present its annual review of the City's investment policy and seek approval and
guidance from the Finance Committee regarding the scope, objectives, and standards that
govern the City's investment portfolio.Annual Investment Performance Review Staff and/or one or more investment advisors will describe the performance of the City's
investment portfolio.CALPERS Unfunded Liability Review and White Paper Staff will introduce a white paper that describes the City’s pension benefit plan and the
City’s efforts to manage its financial exposure to rising pension liabilities while at the same
time maintaining its support for promised benefits. Staff will provide clarifying information on the CalPERS changes regarding employer contribution rates, how the impact of
actuarial studies (e.g. payroll growth, mortality, wage inflation, discount rate, etc.) impact
employer rates, and alternatives for selecting the best funding policy going forward.
11/17/2014 Quarterly Financial Review Q1 FY 14/15 Staff will present Q1 financial results prior to the publication of the Quarterly Business Report. Preliminary Year-End Results and the Q4 FY 13/14 Financial
Report
Staff will present the preliminary year-end closing results for FY 13/14 and the Q4 financial
results.Overview of CalPERS Actuarial Valuations Review latest CalPERS Actuarial Valuations setting FY 2015-16 rates.
Discretionary Reserve Policy Review This will be a second review of the City's discretionary reserve levels.
November 2014
City of Newport Beach Finance Committee 2014 Work plan
March 2014
April 2014
July 2014
CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA ITEM INFORMATION
Agenda Item No.
March 24, 2014
TO: HONORABLE CHAIRMAN AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Steve Montano, Deputy Finance Director
(949) 644-3240 or Smontano@NewportBeachCA.gov
SUBJECT: ERP Update
SUMMARY
Staff will discuss the attached staff report.
Prepared and Submitted by:
_____________________________
Steve Montano
Deputy Finance Director
Attachment:
Consideration of Agreement for Integrated Enterprise Resource Planning Software
System (ERP) and Implementation Services (Tyler Technologies Inc.)
CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA ITEM INFORMATION
Agenda Item No.
March 24, 2014
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov
SUBJECT: DISCRETIONARY RESERVE POLICY REVIEW
ABSTRACT:
Several Council members have inquired about the appropriate level and rational behind
the reserves we maintain. This agenda item will provide the basis for a discussion on how we look at our reserves and are they too much relative to strategic and risk management objectives.
DISCUSSION:
Reserves are the cornerstone of financial flexibility. They provide our City with options to respond to unexpected issues and afford a buffer against shocks and other forms of risk. They also provide us with the means to address community priorities such as improving
community serving facilities, emergency communications infrastructure, information
technology, and other strategic initiatives to enhance the long-term financial well being of
the City. City reserves, therefore, represent the combination of both strategic savings efforts and risk management measures.
A summary of discretionary reserve parameters are included in Attachment A which
outline the parameters in Council Policy F-2 and other reserve policies.
Implemented in 2011, the Governmental Accounting Standards Board (GASB) Statement
54 requires the City to categorize governmental fund balances in a hierarchy according to their level of restrictiveness as illustrated in the following table:
GASB 54 (Fund Balance Classification)
Non-Discretionary 1 Non-Spendable (Not Readily convertible to cash)
2 Restricted (Externally Restricted)
Discretionary 3 Committed (Council Restricted)*
4 Assigned (City Manager earmarked/intent)
5 Unassigned (No other level of restriction)
Discretionary Reserve Policy Review March 24, 2014
Page 2 * It is important to note that there is not universally accepted industry practice that “committed” funds are truly available to the government in the event of a financial
necessity. Examples and a more detailed description of each of the classifications are
included in the Reserve Policy F-2 (Attachment B).
How does the City Define Available Reserves?
At the Finance Committee meeting, staff will illustrate how this City determines what reserves would be available in the event of an emergency. Staff will also attempt to address the question “How much is too much?”
Proposed Changes to Discretionary Reserves
Initial staff recommendations include the following amendments to the policy. I. Increase the Contingency Reserve from 15% of General Fund “Operating
Budget” to 25% of General Fund “Operating Budget.”
The City maintains a reserve for contingencies in the spirit of planning for what you cannot foresee. As a minimum balance for this reserve, the City sets aside 15% its operating expenditures for this purpose. The Government Finance Officers Association
(GFOA) recommends, at a minimum, that general-purpose governments, regardless of
size, maintain unrestricted fund balance in their General Fund of no less than two
months regular General Fund operating revenues or expenditures, which is equivalent to a 17% contingency reserve. Credit rating agency Standard and Poors (S&P) considers an adequate level of “fund balance” to be a credit strength because the level
of fund balance measures the flexibility of an issuer to meet essential services during
transitionary periods. S&P considers 15% of annual operating expenditures to be an
adequate level. After conducting a survey of cities in California similar to Newport Beach, staff found contingency reserve requirements mostly in excess of 15% and in the range of 20% to 25% of operating budget. Last week S&P affirmed this rating again
to the investors noting our, excellent financial management, an outstanding economic
base and healthy reserves, in their rationale. In order to maintain an adequate level of
creditworthiness among credit rating agencies and considering the current planned spend down of unassigned reserves, staff believes that increasing the contingency reserve to 25% of General Fund operating budget is a prudent action at this time.
Discretionary Reserve Policy Review March 24, 2014
Page 3
II. Transfer the City’s Contingency Reserve Designation from the
“Committed” to the “Unassigned” GASB 54 Classification Category
Because of the importance of unreserved or “unassigned” fund balance to the credit rating agencies’ evaluation of a local government’s creditworthiness, it is appropriate to consider their primary concerns. One important consideration is that governments have
an adequate level of financial resources to ensure the timely payment of principal and
interest on their outstanding debt. Of particular importance to the credit rating agencies
is the size of available (not otherwise committed or restricted) “fund balance.” Because a large portion of the City’s fund balance (an excess of $22 million) is contained within the “committed” classification, we have learned that rating agencies, without careful
investigation, may consider this portion of fund balance as unavailable. Staff proposes
the transfer of the City’s Contingency Reserve designation from the “Committed” back
to the “Unassigned” GASB 54 classification. Policy restrictions would remain similar but with less specifics in order to be classified as unassigned.
CONCLUSION:
Staff welcomes the Finance Committee’s input on these recommendations. Finance staff will formally bring any approved recommendations back to the Finance Committee
and to Council for formal approval.
Prepared by:
Submitted by:
/s/Steve Montano
/s/Dan Matusiewicz
Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director
City Target Contingency Reserve
Newport Beach 15% of General Fund Operating Budget excluding CIPs & transfers out
Huntington Beach Two months (17%) of General Fund adopted expenditure budget
Irvine 20% of General Fund Expenditures
Beverly Hills 25% of operating revenues
Santa Monica $9.7M Economic Uncertainty Reserve; 10% Emergency Reserve. 14% total
Santa Barbara 25% of operating budget; 15% for Disaster Reserve + 10% for Contingency Reserve
Carlsbad 40%-50% of General Fund Expenditures with a minimum of 30% (to provide for 3-6 months of operations)
Santa Cruz Minimum of two months of General Fund adopted expenditure budget (17%).
Coronado About 6 months of General Fund expenditures and another $1 Million in Emergency (stabilization reserves)
Mission Viejo 15% of General Fund Revenues
Discretionary Reserve Policy Review March 24, 2014
Page 4
Attachments:
A. Summary of Discretionary Reserve Parameters B. Council Policy F-2 Reserve Policy
Summary of Discretionary Reserve Parameters
Reserve Name Purpose Minimum Revenue Set-Aside Recommendation
Discretionary Reserves
Strategic Savings
Facilities Financial Planning Reserve Facility Replacement Max. Annual Debt Service + Project Needs As determined by Facilities Financial Planning Tool (FFPT)
Facilities Maintenance Plan Major Facility Maint.No Policy As determined by Facilities Maintenance Plan (Vertex)
Equipment Replacement Equipment Replacement 50% of Accumulated Depreciation on RV basis Rates sets annually based on projected replacement needs
IT Strategic Fund System Replacement No Minimum Rates sets annually based on projected replacement needs
Public Arts Reserve Public Arts Facilities No Minimum 2% of Public Benefit Fees - Developer Agreements Cross Reference Policy I-13
Oceanfront Encroachment Reserve Revenue Agreement No Minimum 100% of Oceanfront Encroachment permit fee revenue
Sr. Center and Rec. Facility Rental Reserve Equipment Replacement No Minimum 10% Facility Rental Services
Off Street Parking Neighborhood Parking No Minimum 50% of parking meter revenues in designated areas
Paramedic Program Program Refresh No Minimum Hoag Contribution & Program Income Eliminate when funds are utilized
Recreational Instruction Equipment Replacement No Minimum 10% to 20% of specified recreation classes
Senior Fitness Center Reserve Equipment Replacement No Minimum 10% of fitness center membership fees
In Lieu Parking Neighborhood Parking No Minimum Annual fees to use municipal lot
Neighborhood Enhancement A Neighborhood Vitalization No Minimum Parking meter revenues in designated areas
Neighborhood Enhancement B Neighborhood Vitalization No Minimum 50% of parking meter revenues in designated areas
Cable Franchise Public Access Channel No Minimum Cable Franchise
START Program Paramedic Triage Video Program No Minimum Excess revenues generated by sales of training videos/materials
Oil and Gas Reserve Well Improvements No Minimum $40,000 of oil and gas field production revenues annually
Capital Reappropriations Reserves Reappropriated CIPs None Unspent Capital Projects Reappropriated to the next FY
Risk Management
Contingency Reserve Unexpected or Extraordinary events 15% of Operating Budget Increase to 25% of Operating Budget
Worker's Compensation Prefunding Liability Exceed actuary's "Expected Level"Rates charged to departments to fund expected liability.
General Liability Prefunding Liability Exceed actuary's "Expected Level"Rates charged to departments to fund expected liability.
Retiree Insurance Prefunding Liability None Rates set annually to match expected liability.
Compensated Absences Prefunding Liability 3-year average of annual cash flows 3.5% of Employee salaries
PERS Rate Reserve Extraordinary Rate Changes No Minimum No Policy
Unassigned Residual No Minimum Residual Fund balance Reclass Contingency Reserve to
Unassigned Fund Balance
Enterprise Fund Reserves
Water Fund
Stabilization and Contingency Rate Stabilization and Contingency 50% of Annual Operating Budget
Infrastructure Replacement Infrastructure Replacement None Per recommendations from Water Master Plan
Wastewater Fund
Stabilization and Contingency Rate Stabilization and Contingency 50% of Annual Operating Budget
Infrastructure Replacement Infrastructure Replacement None Per recommendations from Water Master Plan
F-2
1
RESERVE POLICY
PURPOSE
To establish City Council policy for the administration of Reserves defined as fund
balances in governmental funds and net working capital in proprietary funds.
BACKGROUND
Prudent financial management dictates that some portion of the funds available to the
City be reserved for future use.
As a general budget principle concerning the use of reserves, the City Council decides
whether to appropriate funds from Reserve accounts. Even though a project or other
expenditure qualifies as a proper use of Reserves, the Council may decide that it is more
beneficial to use current year operating revenues or bond proceeds instead, thereby
retaining the Reserve funds for future use. Reserve funds will not be spent for any
function other than the specific purpose of the Reserve account from which they are
drawn without specific direction in the annual budget; or by a separate City Council
action. Information regarding Annual Budget Adoption and Administration is
contained in City Council Policy F-3.
GOVERNMENTAL FUNDS AND FUND BALANCE DEFINED
Governmental Funds including the General Fund, Special Revenue Funds, Capital
Projects Funds, Debt Service Funds and Permanent Funds have a short-term or current
flow of financial resources, measurement focus and basis of accounting and therefore,
exclude long-term assets and long-term liabilities. The term Fund Balance, used to
describe the resources that accumulate in these funds, is the difference between the
fund assets and fund liabilities of these funds. Fund Balance is similar to the measure
of net working capital that is used in private sector accounting. By definition, both
Fund Balance and Net Working Capital exclude long-term assets and long-term
liabilities.
PROPRIETARY FUNDS AND NET WORKING CAPITAL DEFINED
Proprietary Funds including Enterprise Funds and Internal Service Funds have a long-
term or economic resources measurement focus and basis of accounting and therefore,
include long-term assets and liabilities. This basis of accounting is very similar to that
used in private sector. However, instead of Retained Earnings, the term Net Assets is
used to describe the difference between fund assets and fund liabilities. Since Net
F-2
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Assets include both long-term assets and liabilities, the most comparable measure of
proprietary fund financial resources to governmental Fund Balance is Net Working
Capital, which is the difference between current assets and current liabilities. Net
Working Capital, like Fund Balance, excludes long-term assets and long-term liabilities.
GOVERNMENTAL FUND RESERVES (FUND BALANCE)
For Governmental Funds, the Governmental Accounting Standards Board (“GASB”)
Statement No. 54 defines five specific classifications of fund balance. The five
classifications are intended to identify whether the specific components of fund balance
are available for appropriation and are therefore “Spendable.” The classifications also
are intended to identify the extent to which fund balance is constrained by special
restrictions, if any. Applicable only to governmental funds, the five classifications of
fund balance are as follows:
CLASSIFICATIONS
Non-spendable
NATURE OF RESTRICTION
Cannot be readily converted to cash
Restricted Externally imposed restrictions
Committed City Council imposed commitment
Assigned City Manager assigned purpose/intent
Unassigned Residual balance not otherwise restricted
A. Non-spendable fund balance:
That portion of fund balance that includes amounts
that are either (a) not in a spendable form, or (b) legally or contractually required to
be maintained intact. Examples of Non-spendable fund balance include:
1. Reserve for Inventories
: The value of inventories purchased by the City but not
yet issued to the operating Departments is reflected in this account.
2. Reserve for Long Term Receivables and Advances
: This Reserve is used to
identify and segregate that portion of the City’s financial assets which are not
due to be received for an extended period, so are not available for appropriation
during the budget year.
3. Reserve for Prepaid Assets: This reserve represents resources that have been
paid to another entity in advance of the accounting period in which the resource
is deducted from fund balance. A common example is an insurance premium,
which is typically payable in advance of the coverage period. Although prepaid
F-2
3
assets have yet to be deducted from fund balance, they are no longer available
for appropriation.
4. Reserve for Permanent Endowment - Bay Dredging
: The endowment specifies
that the principal amount will not be depleted and represents the asset amounts
to be held in the Bay Dredging Fund.
5. Reserve for Permanent Endowment - Ackerman Fund
: The endowment specifies
that the principal amount will not be depleted and represents the asset amount
to be held in the Ackerman Fund.
B. Restricted fund balance
: The portion of fund balance that reflects constraints placed
on the use of resources (other than non-spendable items) that are either (a)
externally imposed by creditors, grantors, contributors, or laws or regulations of
other governments; or (b) imposed by law through constitutional provisions or
enabling legislation. Examples of restricted fund balance are:
1. Reserve for Debt Service
: Funds are placed in this Reserve at the time debt is
issued. The provisions governing the Reserve, if established, are in the Bond
Indenture and the Reserve itself is typically controlled by the Trustee.
2. Affordable Housing
: A principal provision of the Newport Beach Housing
Element requires developers to provide housing units for lower income
households, the number of which is to be negotiated for each development
project. In lieu of constructing affordable housing, developers have paid into this
reserve which is used at the City Council’s discretion to provide alternate
methods for the delivery of affordable housing for lower income households.
3. Park In Lieu
: Per NBMC 19.52 and California Government Code Section 664777
(The 1975 “Quimby Act”), a dedication of land or payment of fees for park or
recreational purposes in conjunction with residential development is required.
The fees collected can only be used for specific park or recreation purposes as
outlined in NBMC 19.52.030 and 19.52.070.
4. Upper Newport Bay Restoration Reserve
: This reserve is the repository for funds
mandated by SB573, as well as special fees charged to permit holders as an
alternative to meeting certain specified mitigation criteria. In addition to the
mitigation fees, ten percent (10%) of Beacon Bay lease revenue is placed in this
Reserve. Funds in the Reserve are restricted for Upper Newport Bay restoration
projects.
F-2
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5. Permanent Endowment for Bay Dredging
: The endowment also specifies that
the interest earnings on the principal amount can only be used for dredging
projects in the Newport Bay.
6. Permanent Endowment for Ackerman Fund
: The endowment also specifies that
the interest earnings on the principal amount can only be used for scholarships
provided by the City.
C. Committed fund balance
: That portion of a fund balance that includes amounts that
can only be used for specific purposes pursuant to constraints imposed by formal
action by the government’s highest level of decision making authority, and remain
binding unless removed in the same manner. The City considers a resolution to
constitute a formal action for the purposes of establishing committed fund balance.
The action to constrain resources must occur within the fiscal reporting period;
however the amount can be determined subsequently. City Council imposed
Commitments are as follows:
1. Contingency Reserve
: The Contingency Reserve shall have a target balance of
fifteen percent (15%) of General Fund “Operating Budget” as originally adopted.
Operating Budget for this purpose shall include current expenditure
appropriations and shall exclude Capital Improvement Projects and Transfers
Out. Appropriation and/or access to these funds are reserved for emergency
situations only. The parameters by which the Contingency Reserve could be
accessed would include the following circumstances:
a. A catastrophic loss of critical infrastructure requiring an expenditure of
greater than or equal to five percent (5%) of the General Fund, Operating
Budget, as defined above.
b. A State or Federally declared state of emergency where the City response or
related City loss is greater than or equal to five percent (5%) of the General
Fund, Operating Budget.
c. Any settlement arising from a claim or judgment where the loss exceeds the
City’s insured policy coverage by an amount greater than or equal to five
percent (5%) of the General Fund, Operating Budget.
d. Deviation from budgeted revenue projections in the top three General Fund
revenue categories, namely, Property Taxes, Sales Taxes and Transient
Occupancy Taxes in a cumulative amount greater than or equal to five
percent (5%) of the General Fund, Operating Budget.
F-2
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e. Any action by another government that eliminates or shifts revenues from the
City amounting to greater than or equal to five percent (5%) of the General
Fund, Operating Budget.
f. Inability of the City to meet its debt service obligations in any given year.
g. Any combination of factors 1) a.-f. amounting to greater than or equal to five
percent (5%) of the General Fund, Operating Budget in any one fiscal year.
Use of the Contingency Reserve must be approved by the City Council. Should
the Contingency Reserve commitment be used, the City Manager shall present a
plan to City Council to replenish the reserve within five years.
2. Facilities Financial Planning Reserve
: In conjunction with the City’s Facilities
Financial Plan, a sinking fund has been established to amortize the cost of critical
City facilities such as, but not limited to, the Civic Center, Police Department
buildings, Fire Stations, Library Branches and other Facility Improvement
Projects.
The Facilities Financial Planning Program establishes a level charge to the
General Fund that will perpetually replenish the cash flows necessary to finance
the construction of critical City facilities. This plan will be updated annually as
part of the budget process, or as conditions change. The City shall strive to
maintain fund balance in the Facilities Financial Planning Reserve at a level equal
to or greater than the maximum annual debts of existing obligations.
The eligible uses of this reserve include the cash funding of public facility
improvements or the servicing of related debt.
3. Oceanfront Encroachment Reserve
: In the early 1990’s, it was discovered by
survey that improvements to several ocean front parcels were encroaching onto
the public beach. The encroachment was relatively minor. The negotiated
solution was for the property owners to pay a permit fee each year to the City.
Revenue thus generated may only be used for ocean front restoration projects
and incidental costs of improvements and maintenance to enhance public access
and use of ocean beaches as approved by the City Council. This Reserve is the
repository for those funds. City Council Policy L-12 contains additional
background and details about the encroachment issue.
4. Senior Center and Recreation Facility Rental Reserve: City Council Policy B-2
requires ten percent (10%) of gross revenues derived from OASIS Senior Center
F-2
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and Recreation facilities rental fees to be set aside annually for equipment
replacement and/or facility refurbishment.
5. Off Street Parking
: Per NBMC 12.44.025 fifty percent (50%) of parking meter
revenue collected in designated areas is set aside for acquisition, development
and improvement of off street parking facilities within those areas.
6. Paramedic Program (Hoag)
: In addition to the debt issuance agreements with
Hoag Hospital which required an original deposit, effective July 1, 2000, any
excess revenues generated by this program, after accounting for General City
Overhead of fifteen percent (15%), were to be accumulated for future paramedic
related purposes. Funds accumulated may be used only for paramedic related
purposes as directed by the City Council.
7. Recreational Instruction
: City Council Policy B-2 requires ten percent (10%) to
twenty percent (20%) of gross annual revenues derived from specified
recreational classes to be set aside for the refurbishment of certain recreational
facilities, fee-based activity programs and equipment used in connection with
fee-based recreation classes.
8. Senior Fitness Center Reserve
: City Council Policy B-2 requires ten percent (10%)
of the gross annual revenues derived from fitness center membership fees to be
set aside and used for new or replacement fitness equipment.
9. In Lieu Parking
: Per NBMC 12.44.125 the City requires commercial businesses to
provide adequate off-street parking or where this is not possible, businesses are
afforded the opportunity to pay an annual fee and use parking spaces in a
municipal lot, providing such a lot is located within specified proximity to the
business. These funds can only be used to provide additional parking.
10. Neighborhood Enhancement - A
: NBMC 12.44.027 directs revenues from
parking meters in Zone 9 shall be apportioned to this Neighborhood
Enhancement A. Funds accumulated will only be used for the purpose of
enhancing and supplementing services to the West Newport area. Both the
nature of the supplemental services and the definition of the area served are set
forth in the Code Section above.
11. Neighborhood Enhancement - B: NBMC 12.44.027 directs that fifty percent (50%)
of revenues from parking meters in the Balboa Peninsula be apportioned to this
Neighborhood Enhancement B. Funds accumulated will only be used for the
purpose of enhancing and supplementing services in the Balboa Peninsula.
Specific details are contained in the Code Section.
F-2
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12. Cable Franchise
: Pursuant to the provisions of the Newport Beach Municipal
Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in return for the use
of the City’s streets and public ways for the purpose of installing, operating,
maintaining, or reconstructing a cable system to provide cable service, fees are
collected by the City from cable providers. Those fees are to be used by the City
for support of Public, Education, and Government access programming only.
13. START Program
: The Fire Department's START Program developed by the Fire
Department and Hoag Hospital helps prepare emergency personnel to quickly
organize their resources to handle multi-casualty emergencies. Training video
and training materials are sold to other agencies. Any excess revenues generated
by this program shall only be used for production expenses related to future
START training materials and to enhance paramedic, EMT, and MICN pre-
hospital education as directed by the City Council.
14. Oil and Gas Reserve
: The annual $40,000 which is being set aside from the oil
and gas field production revenues is to be used to fund abandoned wells and
facilities as they go out of service.
D. Assigned fund balance
: That portion of a fund balance that includes amounts that
are constrained by the City’s intent to be used for specific purposes but that are not
restricted or committed. This policy hereby delegates the authority to the City
Manager or designee to modify or create new assignments of fund balance.
Constraints imposed on the use of assigned amounts may be changed by the City
Manager or his designee. Appropriations of balances are subject to Council Policy
F-3 concerning budget adoption and administration. Examples of assigned fund
balance may include but are not limited to:
1. Appropriations Reserves
: This is a temporary repository for funds not yet fully
appropriated in the annual budget. It is normally used during the budget
process to set aside funds for known or strongly anticipated expenses that will
need to be addressed by budget amendment during the budget year. Sometimes
the dollar amount and/or appropriate account breakdown for such expenses
cannot be specifically identified at the time the budget is adopted, even though
the funds will be needed. In such cases, the funds will normally be budgeted to
the Reserve for Appropriations.
2. Change in Fair Market Value of Investments: As dictated by GASB 31, the City is
required to record investments at their fair value (market value). This
accounting practice is necessary to insure that the City’s investment assets are
shown at their true value as of the balance sheet. However, in a fluctuating
F-2
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interest rate environment, this practice records market value gains or losses
which may never be actually realized. The City Manager may elect to reserve a
portion of fund balance associated with an unrealized market value gain.
However, it is impractical to assign a portion of fund balance associated with an
unrealized market value loss.
3. PERS Rate Reserve
: This Reserve may be established for the specific purpose of
helping to smooth out the year-to-year fluctuations in PERS rates.
When the City Manager or his designee authorizes a change in General Fund, Assigned
Fund Balance, City Council shall be notified quarterly.
E. Unassigned fund balance
: The residual portion of available fund balance that is not
otherwise restricted, committed or assigned.
PROPRIETARY FUND RESERVES (NET WORKING CAPITAL)
In the case of Proprietary Funds (Enterprise and Internal Service Funds), Generally
Accepted Accounting Principles (“GAAP”) does not permit the reporting of reserves on
the face of City financial statements. However, this does not preclude the City from
setting policies to accumulate financial resources for prudent financial management of
its proprietary fund operations. Since proprietary funds may include both long-term
capital assets and long-term liabilities, the most comparable measure of liquid financial
resources that is similar to fund balance in proprietary funds is net working capital
which is the difference between current assets and current liabilities. For all further
references to reserves in Proprietary Funds, Net Working Capital is the intended
meaning.
A.
Water Enterprise Fund
1. Stabilization and Contingency Reserve: This Reserve is used to provide
sufficient funds to support seasonal variations in cash flows and in more extreme
conditions, to maintain operations for a reasonable period of time so the City
may reorganize in an orderly manner or effectuate a rate increase to offset
sustained cost increases. The intent of the Reserve is to provide funds to offset
cost increases that are projected to be short-lived, thereby partially eliminating
the volatility in annual rate adjustments. It is not intended to offset ongoing,
long-term pricing structure changes. The target level of this reserve is fifty
percent (50%) of the annual operating budget. This reserve level is intended to
provide a reorganization period of 6 months with zero income or 24 months at a
twenty-five percent (25%) loss rate. The City Council must approve the use of
these funds, based on City Manager recommendation. Funds collected in excess
F-2
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of the Stabilization reserve target would be available to offset future rate
adjustments, while extended reserve shortfalls would be recovered from future
rate increases. Should catastrophic losses to the infrastructure system occur, the
Stabilization and Contingency Reserve may be called upon to avoid disruption to
water distribution.
2. Infrastructure Replacement Funding Policy
: This funding policy is intended to
be a temporary repository for cash flows associated with the funding of
infrastructure replacement projects provided by the Water Master Plan. The
contribution rate is intended to level-amortize the cost of infrastructure
replacement projects over a long period. The annual funding rate of the Water
Master Plan is targeted at an amount that, when combined with prior or future
year contributions, is sufficient to provide for the eventual replacement of assets
as scheduled in the plan. This contribution policy is based on the funding
requirements of the most current Water Master Plan. There are no minimum or
maximum balances contemplated by this funding policy. However, the
contributions level should be reviewed periodically or as major updates to the
Water Master Plan occur. Annual funding is contingent on many factors and
may ultimately involve a combined strategy of cash funding and debt issuance
with the intent to normalize the burden on Water customer rates.
B.
Wastewater Enterprise Fund
1. Stabilization and Contingency Reserve
: This Reserve is used to provide
sufficient funds to support seasonal variations in cash flows and in more extreme
conditions, to maintain operations for a reasonable period of time so the City
may reorganize in an orderly manner or effectuate a rate increase to offset
sustained cost increases. The intent of the Reserve is to provide funds to offset
cost increases that are projected to be short-lived, thereby partially eliminating
the volatility in annual rate adjustments. It is not intended to offset ongoing,
long-term pricing structure changes. The target level of this reserve is fifty
percent (50%) of the annual operating budget. This reserve level is intended to
provide a reorganization period of 6 months with zero income or 24 months at a
twenty-five percent (25%) loss rate. The City Council must approve use of these
funds, based on City Manager recommendation. Funds collected in excess of the
Stabilization reserve target would be available to offset future rate adjustments,
while extended reserve shortfalls would be recovered from future rate increases.
Should catastrophic losses to the infrastructure system occur, the Stabilization
and Contingency Reserve may be called upon to avoid disruption to wastewater
service.
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2. Infrastructure Replacement Funding Policy
: This funding policy is intended to
be a temporary repository for cash flows associated with the funding of
infrastructure replacement projects provided by the Wastewater Master Plan.
The contribution rate is intended to level-amortize the cost of infrastructure
replacement projects over a long period of time. The annual funding rate of the
Wastewater Master Plan is targeted at an amount that, when combined with
prior or future year contributions, is sufficient to provide for the eventual
replacement of assets as scheduled in the plan. This contribution policy should
be updated periodically based on the most current Wastewater Master Plan.
There are no minimum or maximum balances contemplated by this funding
policy. However, the contributions level should be reviewed periodically or as
major updates to the Wastewater Master Plan occur. Annual funding is
contingent on many factors and may ultimately involve a combined strategy of
cash funding and debt issuance with the intent to normalize the burden on
Wastewater customer rates.
C.
Internal Service Funds
Background
.
Internal Service Funds are used to centrally manage and account for specific
program activity in a centralized cost center. Their revenue generally comes from
internal charges to departmental operating budgets rather than direct
appropriations. They have several functions.
--They work well in normalizing departmental budgeting for programs that have
life-cycles greater than one year; thereby facilitating level budgeting for
expenditures that will, by their nature, be erratic from year to year. This also
facilitates easier identification of long term trends.
--They act as a strategic savings plan for long-term assets and liabilities.
--From an analytical standpoint, they enable appropriate distribution of city-wide
costs to individual departments, thereby more readily establishing true costs of
various operations.
Since departmental charges to the internal service fund duplicate the ultimate
expenditure from the internal service fund, they are eliminated when consolidating
entity-wide totals.
The measurement criteria, cash flow patterns, funding horizon and acceptable
funding levels are unique to each program being funded. Policy regarding target
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balance and/or contribution policy, gain/loss amortization assumption, source data,
and governance for each of the City’s Internal Service Funds is set forth as follows:
1. For all Internal Service Funds:
The Finance Director may transfer part or all of
any unencumbered fund balance between the Internal Service Funds provided
that the withdrawal of funds from the transferred fund would not cause
insufficient reserve levels or insufficient resources to carry out its intended
purpose. This action is appropriate when the decline in cash balance in any fund
is precipitated by an off-trend non-recurring event. The Finance Director will
make such recommendations as part of the annual budget adoption or through
separate Council action.
2. Equipment Maintenance Fund and Equipment Replacement Fund
: The
Equipment Maintenance and Replacement Funds receive operating money from
the Departments to provide equipment maintenance and to fund the regular
replacement of major pieces of equipment (mostly vehicles) at their economic
obsolescence.
a. Equipment Maintenance Fund
: The Equipment Maintenance Fund acts solely
as a cost allocation center (vs. a pre-funding center) and is funded on a pay-
as-you-go basis by departmental maintenance charges by vehicle type and
usage requirement. Because of this limited function, the target year-end
balance is zero.
Contribution rates (departmental charges) are set to include the direct costs
associated with maintaining the City vehicle fleet, including fleet
maintenance employee salary and benefits, operating expenses and
maintenance related capital outlay. Administrative overhead and
maintenance facility improvements and replacement costs are to be provided
outside of this cost unit.
Because of the limited purpose of this fund, a gain/loss assumption is not
needed.
Source data is ongoing city fleet inventory and maintenance cost information.
Governance is achieved through annual management adjustment of
contribution rates on the basis of maintenance cost by vehicle and
distribution of costs based on fleet use by department.
b. Equipment Replacement Fund: Operating Departments are charged annual
amounts sufficient to accumulate funds for the replacement of vehicles,
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communications equipment, parking equipment and other equipment
replacement determined appropriate by the Finance Director. The City
Manager recommends annual rate adjustments as part of the budget
preparation process. These adjustments are based on pricing, future
replacement schedules and other variables.
The age and needs of the equipment inventory vary from year to year.
Therefore the year-end fund balance will fluctuate in direct correlation to
accumulated depreciation. In general, it will increase in the years preceding
the scheduled replacement of relatively large percentage of the equipment, on
a dollar value basis. However, rising equipment costs, dissimilar future
needs, replacing equipment faster than their expected life or maintaining
equipment longer than their expected life all contribute to variation from the
projected schedule.
In light of the above, the target funding level is not established in terms of a
flat dollar figure or even a percentage of the overall value of the equipment
inventory. It is established at fifty percent (50%) of the current accumulated
depreciation value of the equipment inventory, calculated on a replacement
value basis. This will be reconciled annually as part of the year-end close out
process by the Finance Department. If departmental replacement charges for
equipment prove to be excessive or insufficient with regard to this target
funding level, new rates established during the next budget cycle will be
adjusted with a view toward bringing the balance back to the target level over
a three-year period.
3. Insurance Reserve Funds
: The Insurance Reserve funds account for the activities
of general liability and workers’ compensation claims.
Background
.
The City employs an actuary to estimate the liabilities associated with the general
liability and workers compensation activities. The costs typically associated with
these programs include: claims administration, legal defense, insurance
premiums, self insured retention and the establishment of appropriate loss
reserves including “incurred-but-not reported” (IBNR) claims. In a prescribed
measurement methodology, the Actuary estimates the liabilities in conformity
with Generally Accepted Accounting Principles (GAAP).
The Actuary refers to this measurement level in his report as the “Expected
Level.” However, because actuarial estimates are subject to significant
uncertainties, actuaries typically recommend that a target funding level be set at
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an amount in excess of expected liability as a margin to cover contingencies. A
typical target funding level would be set to obtain a specified confidence level
(the percent chance that resources set-aside will be sufficient to cover existing
claims).
Full funding of the Actuary’s “Target Funding Level” establishes a seventy-five
percent (75%) confidence there will be sufficient resources (including projected
interest) to pay the full amount of existing claims without future contributions.
Funding at the “Expected Level” produces a confidence level of only fifty percent
to sixty-five percent (50%-65%). Therefore, the target funding of insurance
reserves should exceed the “Expected Level” to account for adverse estimate
deviation.
Policy & Practice.
The City should target funding of its risk management obligations at not less
than the Expected Level, described above; and not more than an amount
sufficient to establish a seventy-five percent (75%) Confidence Level. Actuarial
losses should be recovered over a rolling 3-year basis while actuarial gains
should be amortized over a rolling 5-year basis. As part of the operating budget,
each department will be charged a rate equal to its proportionate share of the
total “revenue” required to fund the Insurance Reserve Fund at this level.
To lessen the impact of short-term annual rate change fluctuation, City
management may implement one-time fund transfers (rather than department
rate increases) when funding shortfalls appear to be due to unusually sharp and
non-recurring factors. Excess reserves in other areas may be transferred to the
internal service fund in these instances but such transfers should not exceed the
funding necessary to reach a seventy-five (75%) confidence level interval.
4. Compensated Absences Fund
:
Background
.
The primary purpose of flex leave, vacation leave and sick leave is to provide
compensated time off as appropriate and approved. However, under certain
circumstances, typically at separation from service, some employees have the
option of receiving cash-out payments for some accumulated leave balances.
The Compensated Absences Fund is utilized primarily as a budget smoothing
technique for any such leave bank liquidations. The primary purpose of the
Compensated Absences Fund is to maintain a balance sufficient to facilitate this
smoothing.
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Policy and Practice
.
The contribution rate will be set to cover estimated annual cash flows based on a
three-year trailing average.
The minimum cash reserve should not fall below that three-year average. The
maximum cash reserve should not exceed fifty percent (50%) of the long term
liability. The target cash reserve shall be the median difference between the
minimum and maximum figures.
Each department will make contributions to the Compensated Absences Fund
through its operating budget as a specified percentage of salary. The Finance
Director will review and recommend adjustments to the percentage of salary
required during the annual budget development process. This percentage will
be set so as to maintain the reserve within the parameters established above.
5.
Post Retirement Funding Policies:
a. Pension Funding
:
(i) California Public Employees Retirement System (CalPERS)
: The City’s
principal Defined Benefit Pension program is provided through contract
with CalPERS. The City’s contributions to the plan include a fixed
employer paid member contribution and an actuarially determined
employer contribution that fluctuates each year based on an annual
actuarial plan valuation. This variable rate employer contribution
includes the normal cost of providing the contracted benefits plus or
minus an amortization of plan changes and net actuarial gains and losses
since the last valuation period.
It is the City’s policy to make contributions to the plan equaling at least
one hundred percent (100%) of the actuarially required contribution
(annual pension cost). Because the City pays the entire actuarially
required contribution each year, by definition, its net pension obligation at
the end of each year is $0. Any unfunded actuarial liability (UAL) is
amortized and paid in accordance with the actuary’s funding
recommendations. The City will strive to maintain its UAL within a range
that is considered acceptable to actuarial standards. The City Council
shall consider increasing the annual CalPERS contribution should the
UAL status fall below acceptable actuarial standards.
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(ii) Laborer’s International Union of North America (LIUNA)
: The City
provides funds to support a supplemental pension plan for some
employee associations through contract with LIUNA. This is funded at a
fixed percentage of total compensation on a pay-as-you-go basis. The City
is not contractually required to guarantee the level of the ultimate LIUNA
benefit to retirees, nor does it do so. Therefore the City’s liability for this
program is full funded each year.
b. Other Post Employment Benefits (OPEB Funding)
:
Background
.
The City’s OPEB funding obligations consists of two retiree medical plans.
New Plan
. Effective January 2006, the City and its employee associations
agreed to major changes to the Post Employment Healthcare Plan. New
employees and all current employees participate in a program that requires
certain defined employee and employer contributions while the employee is
in active service. However, once the contributions have been made to the
employee’s account, the City has transferred a substantial portion of the
funding risk to the employee.
Old Plan
. Eligible employees who retired prior to the “New Plan” and
certain active employees were eligible to continue to receive post-retirement
medical benefits (a defined benefit plan). The cost was divided among the
City, current employees and retirees. In the past, this program was largely
funded on a pay-as-you-go basis, so there was a significant unfunded
liability. Recognizing this problem, the City began contributing to this
obligation in 2001. In 2008, these assets were placed in a pre-funding trust.
The City’s intention is to amortize the remaining unfunded liability within 20
years.
Policy & Practice
.
New Plan
. Consistent with agreements between the City and Employee
Associations, the new defined contribution plan will be one hundred percent
(100%) funded, on an ongoing basis, as part of the annual budget process.
Funds to cover this expenditure will be contained within the salary section of
each department’s annual operating budget.
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Old Plan
. The City’s policy is to pre fund the explicit (cash subsidy) portion
of the Actuarial Accrued Liability (AAL) of the remnants of the old plan over
a 20-year amortization period, or less. This amount will be based on the
Annual Required Contribution (ARC) determined by a biennial actuarial
review; subject to review and analysis by the City. The City will strive to
maintain a funded status that will be within a range that is considered
acceptable to actuarial standards. The City Council shall consider increasing
the annual OPEB contribution should the funded status fall below acceptable
actuarial standards.
Adopted - January 24, 1994
Amended - April 10, 1995
Amended - April 27, 1998
Amended - March 14, 2000
Amended – May 8, 2001
Amended – April 23, 2002
Amended – April 13, 2004
Amended – September 15, 2008
Amended – November 12, 2008
Amended – May 24, 2011
Amended – September 27, 2011
Amended – May 14, 2013