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2001 03 21 IAB Minutes INVESTMENT ADVISORY BOARD Meeting March 21, 2001 I CALL TO ORDER Regular meeting of the La Quinta Investment Advisory Board was called to order at the hour of 5:48 P.M. by Vice Chairman Mahfoud followed by the Pledge of Allegiance. PRESENT: Board Members Irwin, Lewis, Mahfoud, and Moulin ABSENT: Board Members Felice, Olander and Osborne OTHERS PRESENT: John Falconer, Finance Director and Secretary II PUBLIC COMMENT- None III CONFIRMATION OF AGENDA - Staff noted that the Minutes in the Agenda Packet of February 14, 2001 meeting should be amended to reflect the presence of Board Member Irwin. In addition, Board Member Irwin had several interest rate charts that were distributed and will be discussed under Board Member comments IV CONSENT CALENDAR 1. Approval of Minutes of Meeting on February 14, 2001 of the Investment Advisory Board. MOTION - It was moved by Board Members Irwin/Lewis to approve the Minutes, as amended, of February 14, 2001. Motion carried unanimously. Investment Advisory Board March 21, 2001 Minutes V BUSINESS SESSION A. Transmittal of Treasury Report for January 2001 Board Member Moulin commented that the portfolio has grown to over $72 million. Mr. Falconer responded that a major portion of these funds were committed to capital projects. MOTION - It was moved by Board Members Lewis/Irwin to review, receive and file the Treasurers Reports for January 2001. Motion carried unanimously. B. Consideration of Fiscal Year 2001/02 Investment Policies In response to Board Member Mahfoud, Mr. Falconer reported that staff has identified three investment policy issues that have been discussed in prior meetings for consideration in next year's policy, as well as incorporation of State legislation changes. The three investment policy issues are : (1) Percentage of Government Sponsored Enterprises (GSE's), (2) Percentage of Treasury Issues, and (3) Type of Money Market Sweep Account. The new State legislation affecting local government investments, summarized as an attachment, requires local governments to submit their Investment Policies and Quarterly Investment Reports to the State, limited deposits to financial institutions with at least a satisfactory overall Community Redevelopment Agency rating, and changed the maximum maturity period on Bankers Acceptance investments from 270 days to 180 days and Commercial Paper from 180 days to 270 days. In response to Board Member Lewis, Mr. Falconer stated that SB 1493 only applies to the Counties in California. Board Member Lewis commented that it was appropriate that the Government Code restrict investments to a satisfactory or better ratings. Board Member Lewis and Irwin stated that these practices should be followed by LAIF as well. In response to Board Member Moulin, Mr. Falconer stated that the City will be able to meet the 60 day Quarterly reporting requirement as set forth in AB 943. Mr. Falconer responded that the City has difficulty Investment Advisory Board March 21, 2001 Minutes preparing the Treasurer's report within 30 days after the end of .the month. Board Member Irwin stated that this is the seventh Investment Policy this body has considered and he would like to restrict discussions to the four issues listed in the staff report. The Board was in general agreement with Board Member Moulin adding that an additional item be considered based upon the discussions in the September Board meeting dealing with having the same investment percentages for similarly rated paper. Mr. Falconer reported that with the recent maturity of a GSE for $5,000,000 which was reinvested in a U.S. Treasury Note, and if the scheduled maturity of another GSE for $5,000,000 were reinvested in U. S. Treasury Notes, the City would be nearing its 75% limit in U. S. Treasury Paper. Mr. Falconer stated that he could invest in other investments such as Commercial Paper, however, based upon the interest rate environment spreads were narrowing. Board Member Lewis commented that most people believe the Federal Reserve will continue to tighten interest rates. In response to Board Member Irwin, Mr. Falconer stated that the Treasury Note that was purchased matures May 31, 2001 at 4.5%. Board Member Irwin stated that last year the board approved raising the limit of Commercial Paper from 91,000,000 to 92,000,000 per name and increased the length of investment from 30 to 90 days. He was surprised of the increase in Commercial Paper from 180 to 270 days supported by Palm Desert because the Commercial Paper he sees is in the 30 to 90 day range. Similarly, some of the GSE's are being rated today AAA or AA - FNMA and Freddie Mac. Board Member Irwin believed that GSE's should be treated similar to Al/P1 Commercial Paper with a 92,000,000 per issuer limit. Board Member Irwin stated that the previous and current administration in Washington (D.C.) would not support a Government bailout of GSE's and that the 99 billion line of credit available from Congress on a 91.6 trillion debt was inadequate. Board Member Mahfoud asked if the City would be giving up any yield with this change. Board Member Irwin referred to the interest rate chart handed out at the beginning of the meeting to describe the difference in the GSE yields and 2 Year Treasuries. Board Member Moulin stated that Investment Advisory Board March 21, 2001 Minutes he was more comfortable with FNMA and Freddie Mac because they are under public scrutiny. In response to Board Member Lewis, Board Member Moulin stated that the Federal Home Loan Bank Board (FHLB) is owned by the savings and loan members and is not a public entity. Board Member Irwin stated that he was not aware of a rating for FHLB paper. Board Member Moulin supported Board Member Irwin on the 92 million limit per issuer, stating that this was the point he was making earlier in the meeting about the September meeting last year and changing the investment percentages. Board Member Moulin stated that the $2 million Commercial Paper limitation may or might not be enough. Similarly, the Board may find that the investment per GSE of 92 million may or may not be enough but that he believed the investment plan should be consistent. Board Member Moulin reiterated his past position that he would be in favor of no limitation on the amount of U.S. Treasuries as long as they were not in the same issue. Board Member Irwin stated that he a difficult time distinguishing between Al/P1 and AAA and AA rating. Mr. Falconer stated that he would not recommend raising the limit of Commercial Paper over 92 million per issuer and 90 days because it is basically an IOU of the Company. Board Member Irwin stated that Riverside County invested 940 million in PGE and they are still waiting for their funds. Board Member Lewis was in support of a 92 million 90 day limit on Commercial Paper. Board Member Irwin stated that this issue began in September when FNMA and Freddie Mac were going to issue a large portion of funds in subordinated indebtedness which to his knowledge has not occurred. Board Member Moulin stated that he was aware that there were proposed regulations of a Federally mandated regulatory net worth test. If adopted he understood that Freddie Mac would currently pass, but that FNMA would not; and that FNMA is trying to get proposed regulation changed. Board Member Lewis stated that both Administrations have stated that GSE's are not backed by the full faith and credit of the federal government and they would not bail them out but he would find it hard to believe that the Government would not do at least a partial bail out because of the impact it would have on the credit market if either a Government Sponsored or Government Agency were allowed to default on an issue. Board Member Irwin stated that a Republican Congress and Administration believe that no institution is too big to fail. Board Member Lewis is not aware of any financial issues that would cause any of the GSE's to fail. Board Member Irwin Investment Advisory Board March 21, 2001 Minutes read from an article (which was then distributed to the Board Members and included in Board Member Items) about a Congressman Baker who Chairs the House Capital Markets Sub - Committee and quotes that the Government Accounting Office has reported that GSE regulators lack the enforcement powers that bank regulators have. Board Member Moulin stated that he believes the current policy is inconsistent because it limits Commercial Paper to 92 million per issuer or about 3% of the portfolio while GSE's are limited to 25% per issuer. Board Member Irwin believes that GSE's should be lumped into the GE Capital's, GMAC's and Ford Motor Credit's in analyzing investments. Mr. Falconer stated that he does place reliance on the implicit guarantee of the Federal Government versus no guarantee from Commercial Paper issuers such as Southern California Edison (SCE) and Pacific Gas and Electric (PGE). Board Member Irwin stated that the difference would be the political pressure placed upon Congress in the event of a default. Board Member Lewis stated that from a philosophical standpoint he did not disagree with a Republican Congress and Administration policy not bailing out a GSE but from a practical stand point they would have to come to the aid of the GSE. Board Member Irwin believed that there was a small or remote chance of a GSE default but why take the chance. Board Member Lewis believed that the chance is so small that it is not worth worrying about. Board Member Mahfoud asked what the difference in yield was in investing in a GSE and a Two Year Treasury and Board Member Irwin responded that the City would be giving up 30-40 basis points. Board Member Mahfoud wanted the Board to realize that it would be giving up 30-40 basis points to U.S. Treasuries and that this risk/reward analysis should be considered in any change. Board Member Mahfoud wanted to know if the Board was concerned with the financial leverage risk or the business risk of the GSE's. Board Member Irwin believed that we are dealing with public funds and that an endowment may take the approach that 30-40 basis points is worth the investment but that he did not feel comfortable taking that approach with public funds. Board Member Lewis stated that if the Board takes that approach we would limit our investments to U.S. Treasuries. Board Member Irwin stated that. the City does have Commercial Paper. Board Member Moulin suggested placing a cap on each GSE and based upon the Board and Staff input he believed that the current cap of 25% was too high. Board Member Lewis stated that if this approach was taken that we would reach the 75% limit in U.S. Treasuries. Board Member Irwin believed that the limit should be increased from 75% to 100%. Board Member Investment Advisory Board March 21, 2001 Minutes Lewis stated that the issue was not whether U.S. Treasuries were unsafe, but that diversity and yield purposes are also important. Board Member Moulin believed that diversification is very important as it allows Staff to select investments and increase the percentage to 100%. Board Member Irwin believed that while diversification is a factor the only factor, is safety. Board Member Moulin stated that there are four criteria and it is one of them. Board Member Mahfoud believed that we did not have the information to do a risk/reward analysis and asset allocation plan at this time. Board Member Moulin believed that the Board should take a subjective approach based upon the Board Members' previous experience and that the Treasurer would do the detail work; if the Treasurer believed the Board was limiting him then he should let the Board know. Board Member Moulin and Board Member Irwin concurred that safety was the most important criteria. Board Member Irwin stated that while he felt confident that Riverside County would receive their funds from their investment in PGE they were still waiting. Board Member Lewis stated that $40 million was a significant amount to invest in regardless of the percentage of the portfolio. Mr. Falconer stated that from Staff's perspective any dollar amount lost would come under public scrutiny. Board Member Lewis stated that the public looks at the investments not as the City's but as public funds. Board Member Irwin stated that a discussion of GSE's cannot take place without discussing U.S. Treasuries and he recommended an increase in the percentage to 1 00%; to take into consideration times of financial stress and that if the Board reduces the percentage in GSE's the percentage in U.S. Treasuries should be increased. Board Member Lewis stated that as a practical standpoint the Treasurer will never be 100% invested in U.S. Treasuries. Board member Irwin stated that the policy is for one year and that was comfortable in recommending that U.S. Treasuries be increased to 1 00% and that GSE's be cut back to the limitations placed on Commercial Paper. Board Member Moulin concurred. Board Member Irwin stated that if a change were to be made that it be orderly. Mr. Falconer stated that the Investment Policy was in place through June 30 th and that he would not recommend selling a GSE at a loss if the Board did recommend a change. Board Member Mahfoud asked if their were liquidity concerns with GSE's and Board Member Irwin stated that normally this would not be a concern but that it could happen down the road. Board Member Mahfoud was concerned that the Investment Policy was becoming too conservative in that the City would be giving up yield. Board Member Lewis stated that he agreed that diversification Investment Advisory Board March 21, 2001 Minutes was 4th in the order of investment objectives; however, it still was an objective and helped with liquidity and rate of return and that 1 00% in any asset class is a bad thing. Board Member Irwin stated that he was not recommending that 100% be invested in U.S. Treasuries, only that the Treasurer have the ability to do so. Board Member Moulin stated that the current Investment Policy allows 20% of the portfolio be invested in Money Market Funds, which could include a GSE option, and if we impose limitations on GSE's we could invest in Money Market GSE funds which are sponsored by large investment organizations; and in certain situations these investment organizations stepped in to protect the investment in mutual funds. Board Member Irwin and Lewis concurred. In response to Board Member Mahfoud, Mr. Falconer stated that updating the Investment Policies takes several months and that staff is not looking for a final decision this evening. Mr. Falconer continued that Staff could contact Wells Fargo about GSE Sweep options. Staff is currently limiting GSE's to 5 million per issuer and no new purchases have been made since the September discussion. The $5 million in FNMA investments in early March was rolled over to a U.S. Treasury Note which were 30 basis points lower then GSE's at the time of the investment. Mr. Falconer stated that he felt comfortable with 100% investments in U.S. Treasuries but that the City would sacrifice on the yield. Board Member Mahfoud asked if a independent evaluation of each GSE would be performed or would an across the board reduction in each GSE be proposed. Board Member Moulin stated that for each non- government insurer paper a specific dollar limitation be in place similar be the dollar limitation placed upon Commercial Paper. Board Member Moulin stated that from the other City Policies he has reviewed none limited investments in U.S. Treasuries nor did the State impose such limits. Board Member Lewis stated that the State does not place a limitation on LAIF and Mr. Falconer responded that no limitation was placed on GSE's by the State. Board Member Irwin stated that as an asset class he looked at GSE and Commercial Paper similarly, however, after listening to Board Member Mahfoud he did look at FNMA and Freddie MAC more favorably than FHLB and that in making a decision he may want to weight some more favorably than others. Board Member Moulin stated that the Board could define within the GSE those that are publicly held and therefore under more scrutiny. Board Member Lewis believed that when he was at the bank the Federal Regulators Investment Advisory Board. March 21, 2001 Minutes considered FHLB a less credit risk than FNMA or Freddie MAC. Board Member Moulin stated that GSE's are all basically government sponsored with differing purposes. Board Member Irwin asked Mr. Falconer about the 85 million GSE maturing at the end of March and what he intended to invest in. Mr Falconer responded that he has previously reported to the Board that he has intended to limit the use of Commercial Paper to ~5 million and LAIF to ~7-8 million and that he plans to limit his investment in GSE's to $5 million per issuer. Mr. Falconer stated that he had a decision between a GSE or a U.S. Treasury Note. Board Member Lewis stated that he had no problem limiting the dollar amount per GSE; however, he thought that the $2 million amount was too limiting due to the implicit Government guarantee. Board Member Lewis stated that GSE's were looked at by the market between U.S. Treasuries and Commercial Paper and that limiting the GSE's to between $2-5 million was worthy of discussion with $10 million too much. Board Member Irwin stated that there are seven or eight GSE's that are available for investment. Mr. Falconer stated that one of these GSE's -GNMA is too long a maturity to be eligible for investment. Mr. Falconer stated that there are four GSE's that are readily available. Board Member Moulin stated that FNMA, Freddie MAC, FHLB, Federal Farm Credit GSE's were readily available. Mr. Falconer stated that Federal Farm Credit Paper is more difficult to obtain then the others . Board Member Irwin and Moulin supported the proposal that Board Member Lewis had discussed earlier. Board Member Lewis stated that what needed further discussion was the dollar limitation per limitation and what the overall percentage of the investment category (GSE) should be. Board Member Irwin concurred and added that the Treasurer needed the increased percentages in U.S. Treasuries. Board Member Moulin and Mahfoud concurred with Board Member Mahfoud, stating that U.S. Treasuries are a risk free investment and inquired as to the basis for determining the dollar amount limitation perGSE. Board Member Irwin stated that he would approach the dollar limit similar to how the Board arrived at the Commercial Paper limit - first a $1 million limitation per issuer and then as the Board felt more comfortable it was raised to $2 million. Mr. Falconer stated that another condition that was looked at was the overall market conditions. Board Member Moulin stated that a number of sound companies that issue Commercial Paper are looking a lot less solid today. Board member Lewis stated that initially the Investment Policy did not allow Commercial Paper and it took several years before Commercial Paper was approved. Board Member Lewis Investment Advisory Board March 21, 2001 Minutes stated that he recommended that at the next Board Meeting the Members bring back their dollar limitation and percentage for GSE's and their percentage of Treasuries. MOTION -It was moved by Board Members Lewis/Irwin to continue this item to next Board Meeting. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report and Other Selected Financial Data - March 2001 Mr. Falconer reported that the analysis included an analysis of the budget to actual variances that were discussed at the January Meeting which could be found on page 15. Mr. Falconer reported that a formula error was discovered during the course of this analysis which has been corrected and discussed the salaries and fringe benefit, transient occupancy tax and sales tax figures. In response to Board Member Irwin, Mr. Falconer stated that he could not report the sales tax figures for any particular business. Noted and Filed B. Pooled Money Investment Board Reports - December 2000 Board Member Lewis commented that he has reviewed the Time Deposit information on Page 5, and discussed the criteria LAIF uses for selecting the financial institutions. Mr. Lewis did not feel comfortable with financial institutions LAIF was investing Time Deposits in. Board Member Lewis stated that he was interested to see LAIF raise their yield from December 1999 to December 2000 when yields were falling. Mr. Falconer stated that the use of Commercial Paper has increased. Board Member Lewis also did not understand why LAIF broke out Time Deposits and Certificate of Deposits separately in the LAIF Report. Noted and Filed Investment Advisory Board March 21, 2001 Minutes VII BOARD MEMBER ITEMS Board Member Irwin stated that the interest rate charts were prepared for the GSE discussion. The Board Members expressed their thanks for the report. In response to Board Member Mahfoud, Mr. Falconer described the reporting of the Sweep Money Market funds and would present the Sweep options to the Board at the next Meeting. VIII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Moulin to adjourn the meeting at 7:15 p.m. Motion carried unanimously. Sub 'tted by, // ~John M. Falcoher //Finance Director lO