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2001 12 12 IAB Minutes INVESTMENT ADVISORY BOARD Meeting December 12, 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 Mahfoud followed by the Pledge of Allegiance. PRESENT: Board Members Lewis, Olander, Moulin, Osborne and Chairman Mahfoud ABSENT: Board Member Felice OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary and Ken Al-lman, Conrad and Associates II PUBLIC COMMENTS - none III CONFIRMATION OF AGENDA Mr. Falconer advised the Board that the City Council deemed the current position on the Board vacant. In response to Chairman Mahfoud, Mr. Falconer advised that the Council would decide whether or not applications would be taken to fill the vacancy later in the year. IV CONSENT CALENDAR 1. Approval of Minutes of Meeting on November 14, 2001 for the Investment Advisory Board. MOTION - It was moved by Board Member Moulin/Olander to approve the Minutes of November 14, 2001. Motion carried unanimously. Investment Advisory Board December 12, 2001 Minutes V BUSINESS SESSION A. Transmittal of Treasury Report for October, 2001 Mr. Falconer advised the Board that the rates continue to decrease, and due to the decrease, at mid-year Staff will re-analyze the revenue forecast for interest income and possibly lower it. Mr. Falconer also advised that Staff is reviewing the forecast with Council at the second meeting in January. In response to Board Member Moulin, Mr. Falconer advised the Board that the current LAIF percentage is around 16 to 17% due to a purchase of some commercial paper. Mr. Falconer also advised that November was a very busy month for both investing and maturing investments, $5 million was invested in commercial paper, with approximately $2 to $2.5 million taken out of LAIF. Board Member Osborne advised that based on page 8 of the Treasurers Report, he feels that in the upcoming year the City will have to invest more in commercial paper. Mr. Falconer advised that upon the release of property taxes in January and May, approximately $4 million will be placed in commercial paper for thirty days. In response to Board Member Moulin, Mr. Falconer advised the Board that most of the commercial paper is placed into GE Capital and paper carried by brokerage firms. In response to Board Member Osborne, Mr. Falconer advised the Board that the current options are commercial paper or T-Notes. Mr. Falconer advised the Board that the State LAIF limit is $30 million per account, and as of January 1 st it will be increased to $40 million per account. General discussion continued as to why this increase is taking place. MOTION - It was moved by Board Member Lewis/Osborne to approve, receive and file the Treasurer's Report for October 2001. Motion carried unanimously. Investment Advisory Board December 12, 2001 Minutes VI CORRESPONDENCE AND WRITTEN MATERIAL A. City of La Quinta FY 00/01 Audited Financial Statements In response to Chairman Mahfoud, Ken Al-lman of Conrad and Associates advised the Board that the City of La Quinta has implemented Government Accounting Standards Board (GASB) Statement 34, two years ahead of schedule. Mr. Al-lman advised the Board that the GASB 34 dramatically revises and revamps what local government financial statements look like. Mr. Al-lman stated that one of the most beneficial aspects of the new financial format reporting for local government is the MD&A (Management Discussion and Analysis). The Finance Department of the City of La Quinta prepared the entire report. Mr. Al-lman advised the Board that Conrad & Associates did word process some of the material, but all the schedules were prepared by the City's Finance Department and the MD&A was entirely completed by the City, with no involvement from Conrad and Associates. Mr. Al-lman advised the Board that the MD&A is a required part of the new Financial Statement Format. The purpose of this is to explain to the reader the relationship of the different parts of the Financial Statements to each other and to analyze the financial data to the reader, and to interpret the data, tell what the numbers mean and what kind of conclusions can be extracted from the financial data. Mr. Al-lman informed the Board that Conrad and Associates currently audits forty cities and that only four out of the forty cities, (City of La Quinta one of them) has implemented GASB 34 to date. Mr. Al-lman advised the Board that Mr. Falconer, (in the MD&A) has clearly stated in understandable terms, what the new Financial Statements are trying to communicate to the reader. Mr. Al-lman advised the Board that in the schedule on page 16, is the first Financial Statement "per say." GASB's objective was to have on one page a simple Balance Sheet, following as much as they could a business model of financial reporting, such as all assets, liabilities and the equity of the City all on one page. Cash and investments have not changed. Just above the total assets line, there are three lines for capital assets, land 913 million, construction progress of 920 million and other capital assets of 9276 million, which includes the City's furniture, equipment, vehicles and buildings. A significant part of this is the City's Investment Advisory Board December 12, 2001 Minutes infrastructure, street systems, all the public infrastructure assets the City owns and is responsible for, which have not been previously reported on the balance sheet. GASB 34 is trying to bring up the level of reporting by requiring that all assets of the City be placed on the Balance Sheet, which also includes the street systems. All liabilities, not just the accounts payable, but all liabilities including the City's long term bonded indebtedness are reported. Debt assets have been broken down into various categories; the first line, capital assets, shows which portion of the City's net assets: equity or net worth, is tied up in investments or tied up in fixed assets, $217 million of the City's equity is invested in hard capital assets and the remainder of the City's equity is identified by the various legal restrictions that pertain to them. Examples include, Public Safety at 972 thousand, Planning and Development at 929 million, Public Works at 91 2 million and Debt Service ¢3 million and unrestricted equity at ¢30 million, which reflects the City's "snap shot" position from a Balance Sheet perspective. Mr. Al-laman advised the Board that the next schedule on page 17 is a statement of activities, based on the accrual basis of the accounting, and the most important items are the three lines located on the bottom of the schedule; change in net assets or net income is 924 million, which means that the equity at the beginning of the year increased from ¢269 million to equity at the end of the year 9293 million. The Income Statement is for the entire City, with accrual basis of the accounting, which is formatted to focus on the various functions of the City of La Quinta, such as General Government, Public Safety, Community Services, Planning and Development, Public Works and also shows the expenses of each function, the program revenues of each function and than also shows both functions of local government, do not have sufficient program revenue to cover their program expenses. The government is required to show the deficit of program revenues to cover program expenses to identify the need to have general revenues be sufficient to cover the shortfall of program revenues under program expenses. These two schedules constitute the government wide Financial Statements; there is a government wide Balance Sheet and also Income Statement. The next schedule, on page 18 and 19 is the traditional Balance Sheet report for the City of La Quinta. This sheet is based on the modified accrual basis of accounting, it does not have on it the fixed assets or capital assets of the City, or the long term debt, and it is a Balance Sheet from a working capital 4 Investment Advisory Board December 12, 2001 Minutes standpoint, current assets and current liabilities. The Accounting Standards Board felt that there is some legitimacy to this form of reporting. They wanted the reader to see the first two schedules on the accrual basis of accounting, just like business reporting, but also wanted the reader to get a good feel of what the City's working capital position was, the City's current assets minus the current liabilities. One of the major changes in this reporting, with the columns going across the top, is that the focus was formally on fund types, such as special revenue fund types, capital project fund types, debt service fund types, but the new reporting is focused on five major funds here at the City of La Quinta. The new accounting standard GASB 34 defines what a major fund is: generally, funds that account for more than 10% of assets. The five funds here at the City of La Quinta, constitute the five major funds of the City La Quinta and all other funds of the City have been placed into "Other Governmental Funds." The majority of the City's assets are accounted for in the five major funds. The Accounting Standard Board felt that it was more informational for the reader to see the financial · activity of the major funds of the City rather than see some generic grouping of funds by fund type. This can be seen on the Income Statement located on pages 22 and 23. This is an Income Statement on the modified accrual basis of accounting, formatted in same way as the Balance Sheet on pages 18 and 19. The major activity of the City is concentrated into a general fund and the three funds of the special revenue fund and than a capital project fund. Most of the activity of the City of La Quinta is focused in the five funds, accounting for 85% of the City's total revenue are in the five funds and there are another twenty non-major funds that are represented in the Other Governmental Funds category. Mr. Al-lman commented that allows the reader to be aware of the significant redevelopment activity, general fund activity, capital project activity and to focus in on the funds, and evaluate the City of La Quinta's activity. At the end of the statement, on page 24 is a reconciliation of the net income and it has been reconciled to the Income Statement in the government wide financial statements on page 17. On page 24 the number at the top is $5.3 million and looking at the bottom of page 23, the last column on the right, third line from the bottom is the $5.3 million and it is net income on the accrual basis of accounting and reconciles that to net income on the accrual basis of accounting and 824 million, which can be located on page 17, which is the third line from the Investment Advisory Board December 12, 2001 Minutes bottom. The Governmental Accounting Standards Board requires a reconciliation so that the reader can understand if interested, how the numbers change from the fund financial statements from the modified basis of accounting to the government wide Financial Statements which is on the accrual basis of accounting. The schedule on page 25 is the reporting for the proprietary fund for the City of the La Quinta, 'the equipment replacement fund. On page 26 is the Income Statement for the equipment replacement fund, page 27 is the Statement of Cash Flows for the equipment replacement fund, and on page 28 is the reporting for the fiduciary funds for the City, then the notes to the Financial Statements and some combining statements in the back of the Comprehensive Annual Financial Report. Mr. Al-lman advised the Board that the schedules reviewed are the primary or basic Financial Statements of the City, structured so that there are two schedules in the front that are communicating a Balance Sheet and Income Statement on the government wide basis and some additional schedules that focus on the major funds of the City. Mr. Al-lman also advised the Board that the Governmental Accounting Standards Board is meaning to provide the reader with accrual basis data just like a business would report and still give the traditional fund reporting on a working capital basis. Mr. Al-lman again stated that Mr. Falconer did a great job on explaining the significant fluctuations and variations on the prior year in the MD&A. In response to Board Member Moulin, Mr. Al-lman advised the Board that there is a developer loans receivable on the balance sheets associated with reimbursements and loans to developers, in a modified accrual basis of accounting, on page 18 and 19, in the item listed "loans receivable" in the asset section in the amount of $10 million. Under the liability section, listed is deferred revenue of $10 million dollars, a portion of the deferred revenue has been excluded. Mr. Al-lman also advised the Board that on page 16, the deferred revenue has been eliminated from the accrual basis financial statements. With the accrual basis, we would want to recognize all revenues earned by the City, so deferred revenue is setup however, it is not certain if in fact it will be collected in future periods, so the receivable is offset with a liability called deferred revenue. In response to Board Member Moulin, Mr. Al-lman also advised the Board that the entire $10 million of developer loans that are on the balance sheet are supported by a detailed list of individual loans, and each loan Investment Advisory Board December 12, 2001 Minutes has been evaluated and identified in the amount of deferred revenue that should or should not be reported for each. Mr. Al-lman also stated that any event in the future could change the collectability of any receivable and the determination of the initial amount is not a problem. Mr. Al-lman advised the Board that there were not audit adjustments in the area of cash and investments. Mr. Al-lman advised the board that cash investments were the single most focal point of their audits. It has been identified as an area of extreme importance to all users of the Financials Statements and is also the heart of financial reporting from an audit prospective as well, due to the legal issues associated with investments. In response to Board Member Moulin, Mr. Al-lman advised the Board that the requirements of the Investment Policy were up to date, with the current status of the government code, which changes every year. Also verified that the policy contained the appropriate controls so that all investments are safe guarded. Mr. Al-lman again advised the Board that the implementation of this government policy, two years ahead of schedule, was a remarkable accomplishment for the Finance Department here at the City of La Quinta. He also stated that with other cities that have also implemented this government policy, Conrad and Associates did all the work, where as the City of La Quinta's Finance Department put the policy in place. In response to Chairman Mahfoud, Mr. Al-lman advised the Board that the some of the "recognized" revenues generated by the City of La Quinta are property tax dollars, sales tax dollars, transient occupancy tax, gas tax and developer fees, all the mentioned revenues are recognized in local governmental reporting. Mr. Falconer advised the Board that another example of recognized revenue was money owed by C.V.W.D., where a Contractor is hired to install water lines and the City manages the job, and then C.V.W.D. is than billed by the City of La Quinta. Under one method of accounting the revenue is recognized and under another method the City could not recognize the revenue because a physical invoice was not billed to C.V.W.D. Mr. Al-lman stated that reimbursement to C.V.W.D. was billed on a dollar for dollar basis, Investment Advisory Board December 12, 2001 Minutes because the City is not a Contractor making a profit. Mr. Al-lman advised the Board that revenue recognition for governmental accounting are much more straight forward for local government agencies vs. that in the private sector. Mr. Falconer advised the Board that the City of La Quinta is a contract City, and the City does not have enterprise funds, such as water or sewer and is not subject to revenue recognition issues such as with the recent Enron events. Mr. Al-lman stated that GASB is trying to answer all questions that someone might have on local government financials. Board Member Osborne asked if the City set up deferred liability for maintenance replacem.ent for capital improvements, such as roads and buildings? Mr. Falconer replied that the City had a pavement study done five years ago and the number recommended for maintaining the streets to the current level was approximately $1 million per year. Noted and Filed. B. Month End Cash Report - November, 2001 Board Member Osborne asked at what point would Mr. Falconer consider extending investments past the current two-year maximum maturity to get a better yield? Mr. Falconer stated that considering the current market, the City would not currently extend maturities past the two-year maximum. Noted and Filed C. Pooled Money Investment Board Report - September, 2001 Noted & Filed.' VII BOARD MEMBER ITEMS None Investment Advisory Board December 12, 2001 Minutes VIII ADJOURNMENT MOTION - It was moved by Board Member Lewis/Olander to adjourn the meeting at 6:36 p.m. Motion carried unanimously. Vianka Orrantia Secretary