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2000 06 07 IAB Minutes INVESTMENT ADVISORY BOARD Meeting June 7, 2000 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 Vice Chairperson Mahfoud, followed by the Pledge of Allegiance. PRESENT: Board Members Irwin, Lewis, Moulin, Olander and Vice Chairman Mahfoud ABSENT: Board Member Bulgrin and Chairman Osborne OTHERS PRESENT: 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 on May 10, 2000 for the Investment Advisory Board. Board Member Irwin advised that on Page 7, first paragraph amounts referenced should have a dollar amount and on Page 8, third paragraph should read that Board Member Irwin worked with the City. Board Member Irwin commended Staff on the minutes. MOTION - It was moved by Board Members Lewis/Olander to approve the Minutes of May 10, 2000. Motion carried unanimously. Investment Advisory Board June 7, 2000 Minutes V BUSINESS SESSION A. Transmittal of Treasury Report for April 2000 Mr Falconer advised that Board Member Moulin noted two changes to the Treasurers Report. The first Change - move the $755,339 cash from the "Sold/Matured Column" to the "Other Column" and the LAIF amount of $259,690 should be split between the purchases. The Board discussed the length of investments and the available yields. Mr. Falconer advised the Board that Page 4, bottom of the page, lists the unrealized loss. He further advised that if the unrealized loss holds true through June, the City is prepared to mark to market the portfolio. In response to Board Member Lewis, Mr. Falconer advised that he doesn't have the numbers for May. MOTION - It was moved by Board Members Lewis/Irwin to review, receive and file the Treasurers Report for April 2000. Motion carried unanimously. B. Consideration of Fiscal Year 2000/01 Investment Policy Vice Chairman Mahfoud advised that Board Member Moulin submitted an attachment for the Investment Policy. Mr. Falconer advised that the City Attorney is available via the telephone, she has reviewed the Policy and she has indicated to Staff that the changes in the policy are acceptable. He further advised that Thomas Genovese, the City Manager is present to answer any questions. In response to 'Board Member Irwin, Mr. Genovese advised that he has listened to the tapes of the meetings and reviewed the Investment Policy and concurs with the changes. Investment Advisory Board June 7, 2000 Minutes In response to Board Member Olander, Mr. Falconer advised that Staff is comfortable with the LAIF limit set at 20%. He further advised that the Staff will try to maintain at the 15% LAIF limit. He advised that from time to time Staff may exceed the 15% limit, but it is Staff's intention to adhere to the policy and maintain at 15%. Board Member Moulin advised that he spoke with Mr. Falconer before the meeting, because he objects to the parenthetical limit being expressed in the policy. He further advised that the City had a policy of 35% before, with a management understanding of staying within 25%, and this worked well. It was his understanding that this is the way it was going to be in this policy. He noted that when you add the 15% in the policy, this changes the number from 20% to 15%. He advised that at the April meeting he indicated that he didn't want management to be criticized if they exceeded the 15% limit in LAIF. He further advised that Staff stayed within the 25% level with an exception of one month. He further stated that the policy should indicate 20% and the parenthetical expression should not be in the policy. Board Member Irwin advised that having the parenthetical expression was the exact reason he was prepared to support the Policy. Board Member Moulin advised that he did not realize that the parenthetical expression was going to be in the Policy. Board Member Olander advised that it was his understanding that the Board voted on the LAIF limit at 20% and this was the consensus of the Board. Board Member Lewis advised that the Board had a very lengthy discussion last meeting regarding the LAIF limit. It was the consensus of the Board to lower the LAIF limit to 20% with the stipulation that Staff would try to stay at 15%. There is a lot of concern over the direction that LAIF's investment policy is being affected by politics. Board Member Olander advised that in essence, the City has a reduction 3 Investment Advisory Board June 7, 2000 Minutes to 15% in LAIF. Board Member Lewis advised that LAIF is being lowered to 20% with Staff trying to stay at 15%. Board Member Olander stated he realized that the LAIF limit is 20%, but it is 15% with the parenthetical expression. Board Member Lewis agreed, but further advised that there is no violation if Staff exceeds the 15% limit. He further advised that if Staff feels the need to keep LAIF at 17% or 18%, there would be no criticism from the Board. Board Members Olander and Moulin advised that Policy should state 20% limit in LAIF with no parenthetical expression. Board Member Irwin and Lewis advised that they would not be able to support the policy. In response to Board Member Olander, Board Member Irwin advised that he feels 15% limit in LAIF is "a bunch" and he would not be prepared to support the policy at 20% without the parenthetical expression. Vice Chairman Mahfoud questioned if the Board is prepared to support 17% in LAIF. In response to Board Member Irwin, Board Member Moulin advised that the Board does have an agreement with the LAIF limit, but he does not feel the parenthetical expression should be included in the Policy. He further advised that this stipulation has not been added to the Policy in previous years, and why would it have to be added to this Policy. Board Member Irwin advised that the expression should be added this year because he is not comfortable with the LAIF limit at 20%. Board Member Moulin advised that the majority of the Board agreed with the 20%. 4 Investment Advisory Board June 7, 2000 Minutes Vice Chairman Mahfoud advised that this was stated in the previous minutes. Board Member Lewis advised that the policy has not been changed by adding the parenthetical expression, so what is the objection to having it in the policy. Board Member Moulin advised that because it's a efacto requirement of 15%. Board Member Lewis advised that it's not a defacto requirement to have LAIF at 15% because there is no way that Staff can be criticized if they go over the 15% limit. Board Member Moulin advised that when Staff was consulted about the LAIF limit and what it should be, Staff suggested 25%. He further advised that he is aware that Board Member Irwin is concerned about the LAIF limit, but when you review the overall investments in LAIF the biggest percentage is approved by the City Policy. He further advised that, "if you leave the parenthetical expression in the Policy you might as well change the Policy to 15% limit in LAIF." Board Member Lewis advised that you can have both limits in the Policy. Board Member Irwin advised that the Board has taken a lot of time to arrive at the LAIF limit and the Board felt that by reducing the LAIF limit to 15%, reducing the LAIF amount by five million dollars, this will give Staff plenty of room. He further advised that he will not criticize Staff again if they exceed the LAIF 15% limit. He also advised that this is a good faith effort on the part of Staff to recognize the views of some Members of the Board. Discussion continued with the following motion made: It was moved by Board Members Irwin/Lewis to reduce the LAIF investment limit to 15% and remove the parenthetical expression from the Policy. Motion carried with Board Members Irwin, Lewis and Vice Chairman Mahfoud voting AYE and Board Members Moulin and Olander voting NO. 5 Investment Advisory Board June 7, 2000 Minutes Board Member Moulin questioned if Board Member Lewis was happy with page 1'0, Commercial Paper. Board Member Lewis advised that he doeS not see a problem with the Commercial Paper paragraph. Board Member Moulin advised that the third paragraph should be changed as the State Code does not allow over 31 days. He further advised that it was his understanding that the sentence would be eliminated along with the 5~ Sentence. He further advised that the verbiage from Board Member Lewis was going to be added to the end of the paragraph. Discussion continued with the following changes being made to the Commercial Paper paragraph: Commercial Paper- As authorized in Government Code Section 53601(g), 15% of the portfolio may be invested in commercial paper of the highest rating (A-1 or P-l) as rated by Moody's or Standard and Poor's, with maturities not to exceed 180 days. This percentage may be increased to 30% if the dollar weighted average maturity does not exceed 31 days. Th~ Ci~¢ of La QuinL~ ll~v~st,~'~-~,t Policy o,~ly allows invcsb,-~-m[o in ¢oi~n~-~rcial paper '[o 30% of thC portfolio witl, a n~axiraurn ra~turity of ~:~i;i~ days per issue. There are a number of other qualifications regarding investments in commercial paper based on the financial strength of the corporation and the size of the investment. Th~ CiLy of La Quii,La InvcsLi,~ ~t Policy also Ii,Hits Cm~,~ercial Paper Lo i~o i~orc '[h~n i~i~i!ili~ million dollars in any c~,~ c~[ity a~ any 'Lime for no more Investment Advisory Board June 7, 2000 Minutes Board Member Moulin requested that the following be added to the minutes: Board Member Moulin requests that the minutes covering the approval of the Investment Policy for 2000/2001 explain his continuing concern with the U.S. Government and Related Issues section on pages 9 and 10. Last year Board member Moulin recommended that this section of the Policy be revised to clearly distinguish between direct obligations of the U.S. Government backed as to principal and interest by its full faith and credit and obligations of U.S. Government agencies, instrumentalities and sponsored enterprises not backed by the full faith and credit of the U.S. Government. The Board agreed and changed the Policy to recognize this distinction, but did not adopt Board Member Moulin's recommendation that, once this distinction is made, the investment limitations recognize the difference in credit risk of guaranteed and non-guaranteed financial instruments. Board Member Moulin believes that the investment limitations of 75% of the categories and 25% for a single issuer should be lower for non-guaranteed than for guaranteed obligations as a recognition of the differing inherent risks. For example, the existing Policy allows the City to invest simultaneously up to 25% of the portfolio in FNMA obligations, 25% in FHLMC obligations, 25% in FHLB obligations and 2,5% in Federal Farm Credit Bank obligations. The purpose of first three of these agencies is to provide funds for home mortgage loans. The latter agency makes loans to farmers. In such circumstances, the City would be 100% at risk for non-guaranteed obligations of U.S. agencies either highly influenced by the real estate market or farm production and prices. Adverse conditions in the real estate and farm markets periodically occur in our system, sometimes at the same time. Board Member Moulin believes that the City subjects ' itself to unnecessary risk by allowing this concentration of its portfolio, and he favors more restrictive limitations to lower the risk and diversify the portfolio. He voted against approval of the Investment Policy in 1999 Partly for this reason. Investment Advisory Board June 7, 2000 Minutes Board Member Moulin recognizes that the Treasurer exercises good judgment to diversify the portfolio and would not concentrate the portfolio in similar risk U.S. Agency securities. However, Board Member Moulin believes that the Policy should require such prudence. An example of similar prudence was shown by the Board and the Treasurer in their review of the Investment Policy for LAIF. They recognized that the investments of LAIF have become more risky, and the investment limitation in LAIF was lowered from 35% to 15% of the portfolio. At the same time, investment limitations in commercial paper and in diversified management companies in the form of a money market mutual funds were increased to allow the Treasurer greater flexibility in view of the restrictions placed on investments in LAIF. One change allows investments in money market funds that invest in U.S. agency securities, relaxing the former restriction to funds investing only in direct issues of the U.S. Treasury. Board Member Moulin agrees with these changes, but notes that the addition of money market funds investing in U.S. Agency Securities increases the City's aforementioned exposure to these non-guaranteed obligations. He believes that the Investment Policy, as it does in the LAIF situation should recognize the risks and include a more restrictive limitation for investments in non-guaranteed U.S. agency securities. Board Member Lewis advised that the issues that have been brought up by Board Member Moulin requires a lot of review. He suggested that the Board leave this Part of the policy "as is" and add it to the 2000/2001 Work Plan. Board Member Irwin advised that this was what was decided last month. He advised that the term used last month was "watchful waiting." He further advised that the Board does not have the tools or information available to form an opinion on this subject at this meeting. In response to Board Member Olander, Mr. Falconer advised that the percentage change from 25% to 20% would not have an impact on the City. Investment Advisory Board June 7, 2000 Minutes Discussion continued with the Board concurring to add Board Member Moulin's concerns regarding GSE's to the 2000/2001 Work Plan for review. MOTION - It was moved by Board Members Lewis/Irwin to approve the Investment Policy as amended and forward the Policy to the City Council for their consideration. Motion carried unanimously. C. Workplan for Fiscal Year 2000/01 After Board discussion the following items were included in the Workplan: 1. Review of the Investment Policy investments in GSE's 2. Internal Controls In response to Board Member Moulin, Mr. Falconer advised that there is no requirement to evaluate BrOker/Dealers. He further advised that the City has built up a relationship with the broker/dealers. In response to Board Member Lewis, Mr. Falconer advised that the backgrounds of the Broker/Dealers are researched yearly. MOTION - It was moved by Board Members Moulin/Olander to approve the 2000/2001 Workplan. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report- May 2000 Noted and Filed. B. Pooled Money Investment Board Reports - March 2000 Noted and Filed. C. LAIF Answer Book Update Noted and Filed. Investment Advisory Board June 7, 2000 Minutes VII BOARD MEMBER ITEMS - None VIII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Moulin to adjourn the meeting at 6:35 p.m. Motion carried unanimously. Submitted by, Debbie DeRenard Secretary 10