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2001 04 11 IAB Minutes INVESTMENT ADVISORY BOARD Meeting April 11, 2001 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 Chairman Osborne followed by the Pledge of Allegiance. PRESENT: Board Members Osborne, Mahfoud (5:35), Lewis, Irwin, Olander, Moulin, Felice(5:45) ABSENT: None OTHERS PRESENT: John Falconer, Finance Director and Secretary II PUBLIC COMMENT- None III CONFIRMATION OF AGENDA -In response to Chairman Osborne, Mr. Falconer requested that the following items be considered in confirming the agenda: 1) T-Bill/Commercial Worksheet be added to the Month End Cash Report for March 2001; 2)Board Member Irwin had several interest rate charts that were distributed and will be discussed under Board Member comments and 3) move Page 011 which is the Wells Fargo Money Market Treasury Account Report from the Month End Cash Report to Consideration of the Investment Policies. IV CONSENT CALENDAR 1. Approval of Minutes of Meeting on March 21, 2001 of the InVestment Advisory Board. Board Member Moulin noted that on Page 8 that the reference "Mr Moulin and Mr. Mahfoud addressed Mr. Mahfoud" be changed to "Mr. Moulin and Mr. Irwin addressed Mr. Mahfoud". MOTION - It was moved by Board Members Moulin/Olander to approve the Minutes, as amended, of March 21, 2001. Motion carried unanimously. V BUSINESS SESSION A. Transmittal of Treasury Report for February 2001 Board Member Moulin commented that he was not aware that the University of California issued taxable Commercial Paper. Board Member Irwin and Lewis stated that they had seen these institutions issue this type of paper from time to time. Board Member Lewis stated that he had invested in this type of investment when he was at the bank. In response to Chairman Osborne, Mr. Falconer reported that the LAIF RDA Account was established when the City invested most of its funds at LAIF. The City has two LAIF accounts - City and RDA. At that time the maximum allowable amount per LAIF was $10 million. The current maximum allowable amount is $30 million. The City pools its cash so the cash in the LAIF account is not designated for the RDA. The RDA cash is maintained through the accounting records. In response to Board Member Lewis, Mr. Falconer stated that with the 1 5% limitation placed on LAIF, only' one LAIF account is needed and that, if the Board believed that the RDA account should be closed, then the matter could be taken to the City Council. Board Member Lewis did not believe the account should be closed and there was no further discussion from the Board on closing the RDA LAIF account. In response to Chairman Osborne, Mr. Falconer stated that on Page 5 of the Treasurers Report, the projected cash balances are adequate to fund Capital Projects. The anticipated revenues are exceeding budget projections and expenditures are within the budget. In response to Board Member Lewis, Mr. Falconer stated that the increase of $10 million from last year consisted of $2.6 million in bond proceeds with the balance from increased revenue. In response to Board Member Mahfoud, Mr. Falconer responded that the purchase of Commercial Paper is reported at face value and the difference between this amount and the cash paid is reported as a discount. The discount is then Investment Advisory Board April 11, 2001 Minutes amortized over the life of the investment and the interest income is recognized. MOTION - It was moved by Board Members Lewis/Irwin to review, receive and file the Treasurers Reports for February 2001. Motion carried unanimously. B. Consideration of Fiscal Year 2001/02 Investment Policies In response to Chairman Osborne, Mr. Falconer responded that the highlighted changes on Pages 001 through 003 represented the Legislative changes discussed at the prior meeting and that the City's money market account Page (01 3) has a next day sweep option. Staff is recommending a money market same day sweep option from the Money Market funds listed on Page (009). Mr. Falconer stated that, based upon the review of the fund performances on Page (009), Staff recommends the City select the Treasury Money Market Fund. In response to Board Member Moulin's question about the Wells Fargo Treasury Money Market Funds use of Re-Purchase agreements backed by Treasury Bonds, Mr. Falconer stated that most Treasury Money Market Funds, which are professional managed, use Re-Purchase Agreements. Board Member Moulin stated that the other available Treasury Fund - Dreyfus Treasury Prime Cash Management Account did not appear to have Re-Purchase Agreements. Board Member Irwin and Moulin discussed the earnings rates between the Wells Fargo Treasury Money Market Fund and the Dreyfus Treasury Cash Fund and noted that up until February 2001 the Wells Fargo Fund had outperformed the Dreyfus Fund. In response to chairman Osborne, Mr. Falconer stated that the Treasury Money Market Sweep Account would be categorized as a money market mutual fund subject to the 20% Investment Policy limitation. Board Member Mahfoud reviewed the interest rates and noted that they were less than the industry and is the City giving up too much yield. Board Member Moulin stated that Staff is proposing a change in the Mutual Fund from a next day to same day sweep and not proposing a Investment Advisory Board April 11, 2001 Minutes change from a Treasury Sweep. In response to Board Member Lewis, Mr. Falconer stated that the earnings rates listed on Page 009 and 010 for balances less than $100,000 and balances from $100,000 to $1 million depending on the cash needs in the account. Mr. Falconer stated on average $100,000 would be on hand. Board Member Lewis stated that the rate over 8100,000 to 81 million was 100 basis points higher and suggested keeping the balance just over $100,000. Board Member Moulin stated that of the funds listed on Page 009, the City currently could only invest in Treasury or GSE Funds and that the Commercial Paper option is limited to four issuers. Mr. Falconer responded that the General Mills and Weyerhaeuser Real Estate Company Commercial Paper would not qualify with a Moody's P-2 rating. Board Member Lewis stated that the difference in yield did not justify a change and noted that the Wells Fargo Treasury Money.Market was rated AAA by S&P and the Dreyfus was not rated. Board Member Irwin stated that regardless of the balance in the money market account the yield is at a retail rate. He suggested keeping the balances as small as possible and investing in other products that pay a wholesale rate. In response to Chairman Osborne, Mr. Falconer stated that LAIF had been used in the past to transfer funds from the Sweep Account to LAIF; however, currently the LAIF balances have been kept at a fixed amount with Staff using Commercial Paper instead. Chairman Osborne stated LAIF is a 100% higher than the Sweep and Commercial Paper. In response to Chairman Osborne, Mr. Falconer asked to return at the next Board Meeting with information on the Wells Fargo and Dreyfus Treasury Money Market Funds and in response to Board Member Irwin inquire as to the reasons for the yield differences for balances under and over $1 00,000. Chairman Osborne opened the discussion on GSE's and Board Member Irwin suggested that each of the Board Members who were not in attendance at the last meeting share their thoughts on GSE's. Board Member Olander stated that he was uncomfortable with them as an investment because of their political economic power. Board Member Felice stated that she foresees an economic downturn and that institutions will be more creative in how they raise capital; furthermore, she also sees the GSE's as .impacting more traditional institutions. Board Member Olander believed that the GSE's were a government sponsored Investment Advisory Board April 11, 2001 Minutes monopoly, with Congress being the only agency that can control them. Board Member Olander and Felice believed that the GSE's were becoming too politically active. Board Member Olander believed that with the technology they possess will control 80 to 90% of the mortgage market. Chairman Osborne stated that the political motivation may be coming from the big banks and how they feel GSE's have an unfair advantage in the capital markets. Chairman Osborne continued that he was interested in how these issues affected the 75% limitation on GSE's in the City of La Quinta Investment Policy. Chairman Osborne asked if the concern raised applied to all of the GSEs or to a particular GSE. Board Member Moulin believed that the publicly held GSE's were a better investment (FNMA, Freddie MAC and Sallie Mae) because they are regulated and under investor scrutiny. Board Member Moulin believed that non-publicly regulated GSE's (Farm Credit 'and FHLB) were not as creditworthy. Board Member Moulin mentioned that the upcoming California Municipal Treasurer's Association meeting at the end of April will have a session on GSE's with representatives present to answer questions. In response to Chairman Osborne, Mr. Falconer stated that the current investment policy does not have a dollar limitation. The investment portfolio may not consist of more than 75% of GSE's and that no more than 25% of the portfolio may be with any one issuer. Since the discussions last fall, Staff has limited the investment in any one GSE to $ 5 million. Board Member Irwin stated that he views the GSE's - FNMA and Freddie MAC which are rated AAA and AA and the well known Commercial Paper issuers which are rated Al/P1 as similar credit risks; however, the Investment Policy limits Commercial Paper to $2 million per issuer and GSE's to 25% of the portfolio. Board Member Irwin believed that FNMA and Freddie MAC's should be limited to $2 million. In response to Chairman Osborne, Board Member Irwin stated that he could not tell if the similar credit risks translated into similar rates of return. Chairman Osborne stated that he noticed similar rates of return in reviewing the sweep account yields. Board Member Mahfoud stated Investment Advisory Board April 11, 2001 Minutes that he did not see these investments - Commercial Paper and GSE's as similar credit risks and in terms of the rating agency's ratings because of the line of credit available to the GSE's from the Federal Government. Board Member Irwin stated that the line of credit is small ($9 billion) as compared to the total GSE indebtedness of $1.8 trillion. Board Member Lewis stated that the Government would not let a big bank or GSE fail because of the political and economic repercussions to the nation, its customers and its stockholders; however, the Government would let a small bank fail. Board Member Irwin stated that the Government allowed Continental Illinois to fail and to go into bankruptcy with the shareholders incurring a loss. Board Member Lewis agreed that the shareholders should take the loss, but the depositors didn't take a loss. Board member Olander stated that the Government worked behind the scenes to help Continental Illinois but did not take official action. Board Member Olander stated that the Government allowed sister banks to extend loans to Continental Illinois to shore up its cash position. Board Member Moulin stated that the FDIC may protect the investor's principal; however, it may not pay for lost interest earnings and may delay the disbursement of the principal to the investor for years. Chairman Osborne stated that he believed that ten years ago the Government helped the Farm Credit Agency. Board Member Moulin stated that while he did not follow Farm Credit it illustrated how political the decision was to help the farmers. Board Member Moulin stated that Congressman Baker is asking the question whether or not the GSE's are becoming too large to support and CitiBank and GE Capital have filed a complaint alleging that these institutions are now becoming too large and powerful. Board Member Irwin stated that in the case of a failing bank the government would have more political pressure to step in with a bailout while in the case of GSE's, their customers are institutions that do not vote. Board Members Lewis and Olander stated that the government would help out the institutions because of the social ramifications. Board member Irwin stated that he had difficulties making the investment on political grounds. Chairman Osborne stated that the investment should be made on its fundamentals. Board Member Mahfoud stated that he was not opposed to lowering the percentage of GSE's from 75% as long as it was not based on comparing the ratings of Commercial Paper to GSE's, or on political reasons; the major reason for a change would be if Congress eliminated the letter of credit guarantee and the implicit support of GSE's. Board Member Moulin stated that discussions are taking place to change the Investment Advisory Board April 11, 2001 Minutes regulatory agency responsible for oversight from Housing and Urban Development (HUD) to a more objective Federal Reserve Board. In response to Chairman Osborne, Mr. Falconer stated Staff has placed a two year and $5 million per agency limitation, with Staff investing up to two years and most recently 3 months based upon the yield curve. Mr. Falconer stated that it was more difficult complying with a percentage figure because the size of the portfolio fluctuates and would like the Board to consider a dollar limitation. Chairman Osborne stated that he was in support of a $5 million limitation per issuer based upon Staff's past practices. Board Member Irwin stated that he was in support of a 93 to 95 million limitation per issuer. In response to Board Member Moulin's question whether there were differences in the issuers, Board Member Olander stated that he saw a difference in the GSE's that have to report to shareholders. Board Member Moulin was in support of a larger dollar limitation for publicly traded GSE's. Board Member Irwin was in support of a larger amount for FNMA and Freddie Mac; but was not as knowledgeable with Sallie Mae. In response to Chairman Osborne, Mr. Falconer stated that the City has investments in Sallie Mae. Board Member Irwin stated that student loans have a high default rate. Board Irwin stated that GNMA's should be classified as U.S. Treasuries. Board Member Mahfoud stated that he has updated information regarding Congressman's Baker bill .regarding GSE's - the GSE's have a line of credit with the US Treasury between 9 2.2 billion and 94 billion per issuer that has not been touched, the markets perception is that the US Government will guarantee this debt and thus result in lower borrowing costs to the GSE's and ultimately to the home buyer. The competition to the GSE's are other mortgage lenders and banks who have formed a coalition called FN Watch who are lobbying Congress and supporting Congressman Baker's bill. Mr. Falconer made copies for the Board of Board Member's Mahfoud information and with the Chairman and Board's approval included the information under the Board Members Information Section of the Agenda. The Board was in recess until all copies were distributed to the Board. In reviewing the information Board Member Lewis stated that it was unusual for Chairman Greenspan to comment on how well run the GSE's were. In response to Chairman Osborne, Mr. Falconer stated that it would be Investment Advisory Board April 11, 2001 Minutes practical for the next year to place dollar limitations on the GSE issuers but that with the portfolio growing the percentage limitations on Treasuries may have to be addressed. Mr. Falconer stated that he was less comfortable with Commercial Paper, more comfortable with GSE's and very comfortable with Treasury Investments. Chairman Osborne stated that with the direction of the GSE discussions we would limit the GSE investments to $20 million with the $50 -$60 million invested in other types of investments. In response to Board Member Moulin, Mr. Falconer stated that he would not be comfortable with more than $5 million or less than $2 million per GSE issuer. Mr. Falconer stated that he understood the rationale for differentiating between public and non-public GSE's with the publicly traded Sallie Mae and its student loans being perceived less favorably than FNMA and Freddie Mac's home mortgages. Mr. Falconer stated that, as he has stated in the past, he liked to invest in Farm Credit Paper based upon the public support for the farmer. Mr. Falconer stated that he would be comfortable with $5 million for FNMA and Freddie Mac, $3 million for Sallie Mae and $3 million for the remaining non-publicly traded GSE issuers. The Board was in general consensus with the dollar limitations per issuer and Chairman Osborne directed Staff to incorporate the changes in the draft FY 2001/02 Investment policy for review at the May meeting. Chairman Osborne stated that the current policy limits the investment portfolio in US Treasuries to 75% and was there a desire from the Board to make changes. Board Member Irwin stated that Staff has asked for this item to be considered and that he personally believes that in times of financial stress this option needs to be available. Board Member Felice concurred with Board Member Irwin. Board Member Lewis stated, as in the past, that he is philosophically opposed to investing 100% in any investment. Board Member Lewis stated that since US Treasury investments are easier to invest in than other investments this may lead to a greater percentage than should be invested. In response to Board Member Olander and Irwin's statements that the Board would inquire about such an increase in the percent of US Treasury investments, Board Member Lewis stated that he was opposed to giving someone the authority to invest up to a certain percentage and then criticizing the person for investing too much even though it was within the allowed Investment Advisory Board April 11, 2001 Minutes percentage. Board Member Irwin stated that the Board monitors the investment percentages monthly and that the City needs a safety net. Chairman Osborne stated that the City does have a safety net with cash, US Treasuries, mutual funds, LAIF, Commercial Paper, and GSE's. Chairman Osborne stated that the City investment policy criteria of safety, liquidity, yield and diversification would not allow investing 100% in any one investment - US Treasuries. Board Member Irwin agreed but stated that in terms of financial stress the Treasurer would need this option. Board Member Lewis stated that even the US Treasury market may be impacted based upon the financial stress Board Member Irwin is describing. Board Member Olander stated that this would be for an emergency stop gap. Board Member Moulin stated that the Treasurer had asked for this item to be considered because of Staff's limitation on the use of GSE's to $5 million per issuer. In response to Chairman Osborne, Mr. Falconer stated that the 'reason he had limited the investment to GSE's was based upon a combination of the future Council discussions (in September) and the investment environment. Board Member Olander requested that the Board consider a 90% limitation. Chairman Osborne stated that last year when the LAIF percentage was discussed one of the possible LAIF investment alternatives was that the stated percentage would be 25%,; however, it would be understood that the actual percentage should not exceed 1 5%. Chairman Osborne did not believe that was a proper investment policy option and should not be applied to US Treasuries. Board Members Lewis and Irwin agreed. Board Member Mahfoud stated that he may .consider a higher number 90-95% but that from his business and educational training he could not support 100% in US Treasuries unless the markets were in financial stress. Mr. Mahfoud stated that by increasing the percentage in US Treasuries and by reducing the exposure to GSE's, the City will be giving up yield in an environment where it is not warranted. Board Member Lewis stated that if we have two percentages - one for instances of financial stress and another when it is not warranted then we have to define financial stress and who would determine it. Chairman Osborne stated that he would determine it as an event in which the Board has time to take action and make a recommendation to the City Council, Board Member Moulin stated for the last two years he has supported 100% in US Treasuries and is not opposed to it on philosophical terms or from a management standpoint. Investment Advisory Board April 11, 2001 Minutes Board Member Moulin did not believe the diversification or liquidity aspects of investing apply to US Treasuries. Board Member Lewis agreed with Board Member Moulin on the liquidity issue but disagreed on the diversification issue. Board Member Moulin stated that he supported 100% but would consider discussions between 75% and 100%. Board member Irwin stated that anything between 85% and 1 00% was symbolic and that 85% is in the lowest yielding asset class - checking and savings. Board Member Lewis stated that he recalled this percentage was arrived at when there was a sudden influx of funds before the weekend which could not be invested. Board Member Felice stated that the policy is similar to the use of a credit card, which is available if you need to use it, but is best if not used; and, if you have to use it, you pay the amount borrowed off quickly. Board Member Felice stated that effective cash management does not warrant 100% investment in US Treasuries; however, in these volatile investment times, US Treasuries are good investments to have in the portfolio. Board Member Lewis stated that he does not agree that you give the Treasurer a tool and then criticize the Treasurer for using it. Board Member Olander stated that he believes that it is a tool available if certain circumstances should arise. Board Member Felice asked Board member Lewis what other investment vehicles would be available besides US Treasuries in times of financial stress and Board Member Lewis' responded that the Treasurer could invest in checking and savings, LAIF, GSE's and Commercial Paper. In response to Board Member Lewis, Board Member Irwin stated that their may be a time when US Treasuries are the only investment to make - International Incident. At this time Chairman Osborne announced that four (4) Board Members FeliCe, Irwin, Moulin and Olander were in favor of recommending an increase in the maximum investment in US Treasuries and GNMA's to 100% and three (3) Board Members Lewis, Mahfoud and Chairman Osborne not in favor. Mr. Falconer reported that a minority report may be submitted to the Council when the Investment Policy is considered in June. MOTION - It was moved by Board Members Lewis/Irwin to continue this item to next Board Meeting. Motion carried unanimously. ]0 Investment AdvisOry Board April 11, 2001 Minutes VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report and Other Selected Financial Data - March 2001 Noted and Filed B. Pooled Money Investment Board Reports - January 2001 Noted and Filed VII BOARD MEMBER ITEMS VIII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Moulin to adjourn the meeting at 7:20 p.m. Motion carried unanimously. /~._~itted by, .~ z ~__~ i ~nhann cMe ' DFi; 'eCc~ ~ rer ]!