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2001 01 10 IAB Minutes INVESTMENT ADVISORY BOARD Meeting January 10, 2001 I CALL TO ORDER Regular meeting of the La Quinta Investment Advisory Board was cai ed to order at the hour of 5:30 P.M. by Chairman Osborne followed by the Pledge Allegiance. / PRESENT: Board Members Irwin, Mahfoud, Moulin Olander, and Chairman Osborne ABSENT: Board Members Filice and Lewis OTHERS PRESENT: John Falconer, Finance Director and Secreta and Mr. Ken Al-Imam CPA Partner Conrad & Associates II PUBLIC COMMENT - None III CONFIRMATION OF AGENDA- Confirmed with the Addition of 5;everal Interest Rate Graphs prepared by Board Member Irwin and by moving C()rrespondence and Written Material Item A as the Board's first item for consideration, unanimously approved IV CONSENT CALENDAR 1. Approval of Minutes of Meeting on December 13, 2000 for the Investment Advisory Board. MOTION - It was moved by Board Members Moulin/Osborne :o approve the Minutes of December 13, 2000. Motion carried unanimously, with Board members Irwin/Olander abstaining. Investment Advisory Board Janu~ry 10, 2001 Minutes V BUSINESS SESSION A. Transmittal of Treasury Report for November 2001 Mr. Falconer advised that on Page 3 the overall annual earnings are a little higher than the 6-month treasury bill. This is t~e first time in several months the City has met this benchmark b~sed upon the changing interest rate environment. Board Member Moulin mentioned that the Cash line on Page 1 of the Treasurer's Report was off, however, in total the amount.~ were correct. Mr. Falconer advised that the earnings rate listed on pa e 2 exceeded the six month bench mark and was higher than the 5% ~udgeted. Board Member Irwin commented that the portfolio was at the 180 day benchmark and asked if staff tried to keep the portfolio at this level. Mr. Falconer responded that the average maturity for the City is based upon the business cycle of the City. In response to Chairman Osborne about the use of Commercial Paper, Mr. Falconer responded that staff will roll over the $2 million in Commercial Paper and based upon the County Property tax distribution in January will add to our position in Commercial Paper. In response to Board Member Irwin, Mr. Falconer resp¢~nded that the spread between 30 day Commercial Paper and T-Bills hl s averaged 60 basis points as outlined in the Other Financial Data Sec1 on. In response to Chairman Osborne, Mr. Falconer resp nded that he expected to shortly invest $5 million in Commercial Pape with a 30-60 day maturity. MOTION - It was moved by Board Members Moulin/Ola der to review, receive and file the Treasurers Reports for November ~.000. Motion carried unanimously. Investment Advisory Board Janu~ry 10, 2001 Minutes VI CORRESPONDENCE AND WRITTEN MATERIAL A. City of La Quinta Fiscal Year 1999/00 Audited Financial State~nent Mr. Ken Al-Imam CPA Partner with Conrad & Associates presented the FY 1 999/00 City of La Quinta Comprehensive Audited Financial Re 3ort (CAFR) to the Board and the results of the audit. The General Fund financial results were presented with the General Fund reserves increasing from $23 to $28 million. This was-a resul of controlling expenditures which were $1 million less than budgeted nd increased revenues. Interest income was $500,000 more than budgeted, property sales and transient taxes were $2 million more than budgeted, buildin permits were $2.8 million more than budgeted. This surplus was a result c the improved economic climate in California and the nation particularly in th construction area. Mr. Al-Imam cautioned that the nation's economy is slo~ing down and that this surplus was prudently added to the City reserves. Mr. Al-Imam next addressed the City's cash and investments 'eported in the CAFR. The accounting standards define three (3) levels of risk n categorizing cash and investment custodial risk. The City of La Quinta i., in the lowest (best) category of risk - Category 1. The City has an indepencJent custodian who holds the City investments, separate from the broker/d(~alers who the · City does business with. The independent custodian is onl,/ able to take delivery of securities with the City Treasurer's approval. The Audited Financial Statements have been prepared in the fo'mat approved by the Accounting Standards Board. In addition, the City has taken steps to enhance their financial statements and have previously receive,J two awards- California State Municipal Finance Officers (CSMFO) a vard and the Government Finance Officers Association (GFOA) Award an Mr. Al-Imam expects the City to receive these awards for the FY 1999/0 :) CAFR. The additional steps include the preparation of a transmittal letter. Mr. Al-Imam reported their audit did not report any material i~ternal control weaknesses. The City has an excellent internal control system. Mr. Al-Imam did report that he has communicated to the Finance Director a minor exception in the timely reporting of investments within 30 days after tt~e end of each quarter. FOr two quarters the reports were submitted a few days late and that Investment Advisory Board January 10, 2001 Minutes staff has taken steps to prepare a report that meets the State requirement. Mr. Al-Imam next addressed the Board concerning a future change in the financial reporting requirements of the City. Beginning in FY 2003 the City will' be required to comply with Government Accounting Standards Board (GASB) Pronouncement 34. The rule substantially changes the way municipal governments 'report the financial activities. The City has already taken steps on early implementation of GASB 34 by reformatting the FY 1 999/00 data into the new format and plan on issuing the FY 2001/02 CAFR in accordance with GASB 34 two years ahead of the new reporting requirement. GASB 34 will require a new set of summary statements that will show on one page a balance sheet of all the assets and liabilities of the City on the full accrual basis of accounting and an income statement on the full accrual basis of accounting including the depreciation of assets. The new standard also requires the reporting of financial data under the current fund-by-fund modified accrual basis of accounting, with schedules reconciling the full accrual basis of accounting (new requirement) to the modified accrual basis of accounting (current requirement). GASB 34 also requires that the City not only report on its balance sheet its operational assets such as City Hall and vehicles which it currently does, but also must report the City owned and maintained street systems (curbs, gutters, sidewalks, storm drains, streets). This information must be reported on the estimated cost basis and depreciated. In response to Member Moulin, Mr. Al-Imam stated that the City will not have to maintain two separate sets of books and report monthly two separate sets of data based upon the full accrual and modified accrual basis of accounting. The Accounting Standards Board has come out with an opinion not to change the current monthly fund by fund reporting requirements. Spread sheets would be used at the end of the year to convert the City accounting data to the full accrual basis of accounting. Mr. Falconer reported that this spreadsheet conversion has already been done by staff except for the fixed asset valuations and depreciation. Staff will first attempt to use the City Geographic Information System (GIS) system to produce the data and use the auditors in an advisory role. If that attempt fails, staff will obtain a complete asset valuation. Investment Advisory Board January 10, 2001 Minutes In response to Board Member Irwin, the cost of these roads is based upon the actual or estimated historical costs. GASB 34 places an emphasis on the income statement - the cost of providing government services. The cost of providing these roads to the public is reflected in the depreciation expense. In response to Board Member Osborne, the depreciation method used will be the straight line method of depreciation. The useful life will be based upon the age of the streets and their maintenance program and set by the City. Board Member Osborne asked Mr Al-Imam how will the auditor be able to express an opinion on the financial statements if each City is using a different method to value their streets. Mr. Al-Imam responded that the American Institute of Certified Public Accountants (AICPA) is in the process of issuing a draft audit guide to help auditors in this area. GASB 34 has set forth that estimates may be used to value assets. The AICPA has set forth that the auditor must through inquiry and discussions with management gain an understanding of the methodologies used. The auditors will test these methodologies, which are very subjective, to gain a comfort'level as to how this data was compiled. Mr. Al-Imam stated that the most important audit area for his firm is the investment area, which from an audit standpoint is the easiest. GASB 34 now requires infrastructure assets be audited which is probably the most difficult and time consuming, and from a audit prospective the least important. Therefore, the GASB and AICPA have given the auditing profession leeway in the infrastructure area. Board Member Irwin commented that the new financial statements will greatly improve the financial reporting and make it easier for the citizens to understand. Mr. Al-Imam responded that the new document will be larger but will contain summary information that is easier to understand. In response to Board Member Moulin, Mr. Al-Imam stated that the auditors did not have any recommendation in their management letter over the cash and investment area. In response to Board Member Moulin about Footnote 2 on page 21 of the financial statements, Mr. Al-Imam stated that the auditors did not have any Investment Advisory Board January 10, 2001 Minutes audit adjustments between fair and book value for cash and investments. In response to Board Member Moulin about the increase in the portfolio and whether or not the staff should be increased, Mr. Al-Imam stated that it is always better to have more staff but that has to be balanced against being a · good steward of its resources. In response to Board Member Moulin about the need for an Investment Manager due to the size of the portfolio, Mr. Al-Imam stated that it is unusual for a City with the size of La Quinta's portfolio to have an Investment Manager. Mr. Falconer added that the only City in the Coachella Valley with an Investment Manager is Palm Desert which has a portfolio of $300 million. In response to Board Member Olander about how many Cities receive the CSMFO and GFOA award, Mr Al-Imam stated that the percentage in California was 20% which leads the nation in reporting and is quite higher than the national average. In response to Board Member Moulin about his opinion of the Local Agency Investment Fund (LAIF), Mr Al-Imam tells his clients to monitor the LAIF fund for its maturities and its composition but that the firm does not have any particular concerns because of its size and the requirement of State agencies to participate. In response to Board Member Moulin about his opinion of our investment policy, Mr. Al-Imam stated that he was not an investment advisor but that based upon his auditing experience he did not believe it was too restrictive or lacking and that it was in the range it should be. In response to Board Member Osborne previously notifying the lAB about the late submission of the Investment report to the Council within the 30 day time State requirement, Mr. Falconer responded that the City does not receive financial information in time to do the complete Treasurer's Report; however, a summary of investments is prepared to meet the state guideline. Mr. Al- Imam stated that this a problem with all of his clients and believed the State should have used a sixty day requirement. In respond to Board Member Irwin about submitting reconciled statements, Mr. Falconer responded that he believed that these constituted a complete Investment Advisory Board January 10, 2001 Minutes Treasurer's report. The State 30 day requirement necessitated the summary of investments which is not based on reconciled cash but is based upon the best available information. In respond to Board Member Osborne about the $500,000 increase in investment income, Mr. Al-Imam responded that this was based upon conservative budgeting. Mr. Falconer stated that when the budget was prepared; staff used a 5% interest rate with actual rates exceeding 5%. In addition, with the General Fund reserve increase from one time revenue the interest income allocated to the Fund also increased, and from year to year fund balances go up and down in each of the Funds depending on the activity. B. Month End Cash Report and other selected financial Data - December 2000 In response to Board Member Moulin about the favorable budget to actual variance on Page 1 2 of $1.9 million for other expenditure items, Mr. Falconer stated that staff will investigate the variance and report back at the next meeting its findings. Noted and Filed C. Pooled Money Investment Board Reports - October 2000 Board Member Irwin commented that the Pooled Money investment Account average maturity of 199 days and City average maturity of 180 days were close as were the average yields. Board Member Irwin also stated that the City Investment Policy was more conservative than LAIF. Board Member Olander commented that with the current power problems faced by the State of California and the rippling effect this will have on the banking system and Corporations, that the City investment policies and investment choices are correct. Board Member Moulin, Olander and Irwin commented about have recent power problems and the impact it may have on the banking industry. Noted and Filed Investment Advisory Board January 10, 2001 Minutes Noted and Filed VII BOARD MEMBER ITEMS - None Board Member Irwin commented that the new capital rules and subordinating debt for Freddie Mac and Fannie Mae are continuing but may not be finalized before the adoption of next years Investment Policy. Board Member Irwin commented on the graphs of weekly numbers tracking (1) the yields of 2 year Treasuries, FNMA, Freddie Mac and FHLB paper, (2) Treasury yield curves and (3) the spread between the ten year Treasury and 13 week T-Bill. Board Member Moulin commented upon the very good stock performance of Fannie Mae. VIII ADJOURNMENT MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 6:32 p.m. Motion carried unanimously. Submitted by, John M. Falconer Finance Director