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1999 01 13 IAB Minutes INVESTMENT ADVISORY.BOARD Meeting January 13, 1999 I CALL. TO ORDER Regular meeting of the La Quinta Investment Advisory Board was called to order at the hour of 5:30 P.M. by Chairperson Irwin, followed by the Pledge of Allegiance. PRESENT: Board Members Bulgrin, Lewis, Mahfoud, Moulin, and Chairperson Irwin ABSENT: Board Member Brown and Osborne OTHERS PRESENT: Ken Al-Imam, Conrad & Associates, John Falconer, Finance Director and Debbie DeRenard, Secretary II PUBLIC COMMENT - None III CONFIRMATION OF AGENDA- Confirmed IV CONSENT CALENDAR A. Approval of Minutes of Meeting of December 9, 1998 for the. Investment Advisory Board. MOTION - It was moved by Board Members Lewis/Bulgrin to approve the minutes. Board Member IVIoulin questioned the comments made by Board Member Osborne in the Board Member Item section. He advised that they might have just been off-handed comments and should not have been included in the minutes. He further advised that he didn't know if Board Member Osborne would agree with the two comments in the minutes. He advised that he doesn't have a problem - it's not his quote. Board Member Lewis advised that they are the minutes and they are comments, that were said by Board Member Osborne. Motion carried unanimously. 1 Investment Advisory Board January 13, 1999 Minutes V BUSINESS SESSION A.' Transmittal of Treasury Report for November 30, 1998 Mr. Falconer presented the Staff Report and advised that the cash balance increased by $500,000. Revenue was very good for the first six months due to the building activities and sales tax. He advised that there were no other major changes in the cash flow. In response to Chairman Irwin, Mr. Falconer advised that the 40 basis points for Management fees came from the pamphlet. Chairman Irwin commented that the fee was high. In response to Board Member Lewis, Mr. Falconer advised that the yield for the treasury note on page 5 should read 4.50% instead of 6.375%. Chairman Irwin commented that Staff has kept the LAIF balance consistent and under 25% for the entire year. In response to BOard Member Lewis, Mr. Falconer advised that the large outflow of cash in January is the pass -through payments. The City will receive property tax funds on January 19th and the City is required to pay the pass through payments. The City forecasts that they will receive $7.7 million in property tax payments. The City has two Redevelopment Project Areas Nos. 1 & 2. At the time that each area was formed they generated a certain amount of dollars - and from that date forward any change or increment comes to the Redevelopment Agency. These funds can be used to further economic development in the City and in addition the City is required by the State to 'set aside a portion of this tax increment money for Iow/mod housing. The City negotiated with other governmental agencies during the formation of the Project Areas as to what their fair share would be and this amount is the pass-through payment. In response to Chairman Irwin, Mr. Falconer advised that the $8.5 million that was recently invested was rolled over into the same type of investment that it was previously invested in prior to maturity. Investment Advisory Board January 13, 1999 Minutes MOTION - It was moved by Board Members Lewis/Moulin to approve, receive and file the Treasurer's Report for November 30, 1998. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. City of La Quinta FY 97/98 Audited Financial Statements Mr. Ken Al-Imam of Conrad and Associates presented the Audited Financial Statement. He advised that the audit approach in regards to investments is to address existence, ownership and legal compliance. Conrad & Associates confirms 100% of the City's investments. In response to Chairman Irwin, Mr. Al-Imam advised that inVestments are confirmed directly with LAIF - for example a letter is sent directly to LAIF and a return letter is received directly from Pat Beal of LAIF to Conrad and Associates. The treasury securities are confirmed directly with the third party custodian who is holding the securities. Conrad & Associates is very diligent in this function because they feel it's a very important part of the audit. Another aspect of the auditing of investments is to audit legal compliance. The firm wants to make sure that the investments conform to the stipulations of the State Government Code and the City Investment Policy. He advised that his Firm has developed a rigorous 43 point investment compliance check list. The internal controls surrounding the investments were reviewed during the audit process and they were found to be functioning properly. The investments that are held by the fiscal agents are reviewed to make sure they conform to the bond documents. Mr. Al-Imam reviewed the financial st. atement pointing out that GASB categorizes investments by risk factors. The City's investments complies with category number 1 which is the lowest risk category. In response to Chairman Irwin, Mr. Al-Imam advised that he is not allowed to place LAIF in a risk category because the purpose of the three risk categories is to address custodial risk, not market or issuer risk. Custodial risk speaks of investments that are held and by whom they are held. The specific requirements for GASB Statement No. 3 are very explicit and are not designed to deal with a pool such as LAIF. He advised that with LAIF he could only verify funds directly with the LAIF Investment Advisory Board January 13, 1999 Minutes Treasurer, Pat Beal. LAIF has its own internal controls to satisfy their auditors that they have adequate segregation of duties and custodian risks. He advised that the audit confirmed that the City's investments conformed to the lowest risk category - Category No. 1. He explained that this means that the City of La Quinta has very good procedures and practices that allows it to be placed in Category No. 1. In response to Chairman Irwin, Mr. Al-Imam commented that the key strengths of the internal controls for the City are the segregation of duties in the Finance Department. As an example, the Finance Director executes the investment transaction, the City Manager. approves the investment transaction and the Financial Services Assistant receives the custodians' statement and reconciles the independent third party custodian statement to the accounting records. The audit confirmed that the City was following this procedure. In response to Board Member Moulin, Mr. Al-Imam advised that the securities are held by the independent third party custodian - Bank of New York. In response to Board Member Moulin, Mr. Al-Imam advised that the City of La Quinta's internal controls exceeds other Cities of comparable size. The policies and procedures of the City of La Quinta are similar to policy and procedures found in larger cities. In response to Board Member Moulin, Mr. Al-Imam advised that Conrad and Associates has prepared a Management Letter. He advised that there are no comments in regards to cash management or investment functions. There were no weaknesses or proposed adjustments found. One of the areas that was audited this year per the GASB Statement No. 31 requirements is that investments are recorded at market values if material. In going through this process it was found that the difference between the book and market value was very minimal and no adjustment was necessary. In response to Board Member Moulin, Mr. Al-Imam advised that the financial statements which are word processed by his firm are based upon accounting records that are maintained by the Finance Department. He advised that it's important that the Board know that the data is 'received from the City and that the City is responsible. It's the responsibility of the Audit Firm to perform a limited test of the data. 4 Investment Advisory Board January 13, 1999 Minutes In response to Board Member Moulin, Mr. Al-Imam advised that on page 19, the "components of authorized Investment policies," it lists authorized bankers acceptances as an investment vehicle. He advised that this is a mistake on the part of Conrad & Associates - during the preparation of the report. Board Member Moulin advised that the important factor is that there are no investments in this category. In response to Chairman Irwin, Mr. Al-Imam advised that in approximately 3 - 4 years it will become a GASB requirement to change to a different form of reporting. One of the changes will be in the front of the financial statement there will be in a simple two or three-colUmn format that will be a highly condensed aggregate method of reporting that will provide a one page snapshot of the financial position of the City. The City cannot do this one page now because of the difficulty of the project. GASB has struggled with this new method for more than 10 years because it's a difficult task to accomplish due to t'he different fund types and different accounting practices and principles. Currently, the financial statements are not permitted to recognize depreciation and under the new consolidated format, depreciation will have to be considered to be an element of a cost of providing government services to the public. He further advised that it will take government agencies the full 3 to 4 years to pull all the information together that is required to comply with the new accounting standard. He further advised that currently if clients ask how the City stands, he directs them to the General Fund on Page 5. Mr. Falconer advised that on Page 32 and 33 of the Financial Statement it lists the designated and undesignated description of the fund balances for the City. In response to Chairman Irwin, Mr. Falconer advised that he foresees changes to the Accounting Software in order to comply with the GASB changes. Mr. Al-Imam advised that there will be a cost to the City to make the change. He advised that he is not aware of any accounting software currently on the market that will meet the GASB requirement. GASB has announced that this reporting will have a different accounting for the summary reporting and a different basis of accounting for the fund report Investment Advisory Board January 13, 1999 Minutes and this is unfortunate. What this means is that the reporting process will be complicated and this is where the cost comes in. The City will need the current accounting system to do the fund accounting because it will be a requirement. However, when figuring the summary reporting, GASB will have agencies change the basis of accounting. In response to Board Member Moulin, Mr. Al-Imam advised that the basis of the changes is that GASB does not want agencies to recognize as an example; infrastructure and depreciation or long term debt reporting in the funds until the summary reporting. The City will have an aggregate level - all the liabilities and all assets of the City listed in one place. This is going to be required even on revenue recognition. Currently we are only allowed to recognize revenue that is going to be receipted shortly after the fiscal year ends, but under the new basis of accounting we will be required to extend revenue recognition for amounts received well into the next fiscal year. This will be the same for expenditures. On the new basis of accounting we will have to recognize any liability for claims and judgements. Vacation and sick leave accruals will have to be recognized in full effect in the fiscal year that they have occurred - currently they are recognized when they become liabilities. Mr. Al-Imam advised that he wished that GASB would have extended this to the fund levels so that there would be a consistent basis of accounting. In response to Chairman Irwin, Mr. Falconer advised that the City was an unincorporated area before it was a City. The City will need to estimate the infrastructure. He further advised that the key figures will be the unpaid vacation and sick leave. Currently these figures are not shown as a liability on the financial statement. They will not be an issue for the City of La Quinta because the City has a maximum amount of carry-over for sick leave. This will be a problem for the cities that do not have a maximum carryover amount. Chairman Irwin explained that a financial statement would have more credibility if you could look at one page and understand it. Mr. Al-Imam advised that this one page financial statement will be a benefit of the new accounting methodology. One of the downfalls would be explaining where an individual figure was generated. Investment Advisory Board January 13, 1999 Minutes Mr. Falconer advised that currently the financial software that is used by the City allows the Finance Department to download information onto spreadsheets. Chairman Irwin advised that with the strength of the Finance Department and the accounting software there should be no problem. Mr. Al-Imam advised that he appreciates the community of La Quinta because they have well-informed citizens. He further explained that some of his local government clients have citizens that don't appreciate the audit function and the extensive testing that is involved in the process. They have an inherent distrust for government. In response to Board Member Moulin, Mr. Al-Imam advised that in regards to Y2K, the auditing firm's responsibility is limited to making sure that the financial statements disclose the plans of the City for the Y2K process. The firm is prohibited by their profession from giving an opinion on the Y2K compliance. Mr. Falconer advised that a monthly Y2K Compliance report is submitted to the City Council. Board Member Moulin advised that he would like to compliment the City for the complete comprehensive Financial Statement. He further thanked Mr. Al-Imam for the positive comments. Mr. Al-Imam advised that his audit approach is unique in that its extremely thorough and exhaustive. In response to Board Member Mahfoud, Mr. Al-Imam advised that in auditing the City, his firm performs approximately 1000 hours of audit work. B. Month End Cash Report - December 1998 Noted and Filed. C. Pooled Money Investment Reports - October 1998 Noted and Filed. Investment Advisory Board January 13, 1999 Minutes D. Maturing Investments Mr. Falconer advised that at the last Investment Advisory Board meeting, the Board discussed investment strategies and one of the goals that Board Member Brown mentioned was a investment strategies report. He further advised that this report on maturing investments was a good approach to get the Board's thoughts and recommendations. He advised that he has some interest rate information. There is a $5 million treasury note maturing on the 15th of February. If it was to be rolled-over into another treasury note there might be some loss of yield. He advised that he forecasts that the funds can be invested for a longer period of time. In response to Chairman Irwin, Mr. Falconer advised that the spread in commercial paper has dropped significantly. In response to Chairman Irwin, Mr. Falconer advised that he recommends Federal Farm Credit Paper for one year due to the supply issue. He advised that during the last investment he tried to invest in Federal Farm Credit Paper and it was difficult to find. The Board concurred on the investment. Mr. Falconer did advise the Board that tax funds are expected to be received and are usually invested in Commercial Paper for a 30 day period. In response to Board Member Mahfoud, Mr. Falconer advised that the staff report was prepared and presented as a way of getting feedback regarding the current investments from the Board. VII BOARD MEMBER ITEMS - None VIII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Moulin to adjourn the meeting at 6:30 P.M.. Motion carried unanimously. NEXT MEETING FEBRUARY 10. 1999