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2002 03 13 IAB Minutes INVESTMENT ADVISORY BOARD Meeting March 13, 2002 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 Osborne, Moulin, Olander, Lewis, and Chairman Mahfoud ABSENT: Board Member Felice OTHERS PRESENT: John Falconer, Finance Director and Vianka Orrantia, Secretary II PUBLIC COMMENT - None III CONFIRMATION OF AGENDA In response to Board Member Moulin's request, Mr. Falconer handed out a sheet with historical interest rate information. Mr. Falconer also handed out to the Board a revised Page 1 of the Treasurer's Report. An extra paragraph was added to the report, the City did receive common stock from the City's health carrier, Principal Financial. Mr. Falconer stated that he believed this should be added to this report after the agenda had been mailed. IV CONSENT CALENDAR 1. Approval of Minutes of Meeting on February 13, 2002 for the Investment Advisory Board. In response to Board Member Moulin, Chairman Mahfoud stated that on page 3 of the meeting minutes, third paragraph, that he stated that the future market was showing a 100 basis point increase 6 months from now. Mr. Falconer Investment Advisory Board March 13, 2002 Minutes stated that this would be reflected in the minutes. MOTION - It was moved by Board Members Moulin/Olander to approve the Minutes of February 13, 2002. Motion carried unanimously. V. BUSINESS SESSION A. Transmittal of Treasury Report for January 2002. Board Member Moulin suggested to Mr. Falconer changing the Treasurer's report to reflect the historical comparative information that had been handed out earlier. The information reflects a dramatic change in a two-year comparative, from a 220-day average maturity down to a 27-day. Board Member Moulin asked if Mr. Falconer omitted his cover page due to the Principal Financial Group stock? Mr. Falconer stated that the cover page change was made to report that he was in the process of liquidating and selling the stock to get the proceeds; Mellon Financial Group is their investment company and Mr. Falconer has been in touch with them to sell the stock. Board Member Moulin asked who receives the proxy statements from Principal Financial on the demutualization? Mr. Falconer replied that he was not aware that the City received any type of statement. Mr. Falconer stated that he received a letter from the City Manager's office that the City had received the shares as part of a conversion from a private company to a publicly traded company. The company has been the City's health care provider and the City has been paying monthly health care premiums for health insurance. Board Member Moulin asked if the proceeds were going to be applied towards a reduction in group insurance or will it be considered income. Mr. Falconer advised the Board that is the reason for adding the paragraph to the Treasurer's report and that the stock would be sold by the end of the year. Board Member Osborne suggested adding it to the City's revenue. Mr. Falconer also advised the Board that the City's basis is basically zero, so technically it would be considered a gain on a sale of an investment. Investment Advisory Board March 13, 2002 Minutes MOTION - It was moved by Board Members Lewis/Olander to review, receive and file the Treasurer's Reports for January 2002. Motion carried unanimously. V. BUSINESS SESSION B. Consideration of Fiscal Year 2002/03 Investment Policy Chairman Mahfoud suggested that the Board begin its discussion as to whether or not to extend from a two-year maturity. Mr. Falconer advised the Board that the State allows up to five years, and the City has an option to go beyond five years, with Council approval. Chairman Mahfoud suggested that the five-year term should be the "ceiling" amount and suggested the Board discuss the advantages and disadvantages of extending from a two- year term to five years. Chairman Mahfoud also advised that the Board's goal is to preserve principal, not to manage a portfolio, not to look for total return, and not be too concerned with interest risk. The Board's goal is to hold an investment to maturity. Mr. Falconer concurred with Chairman Mahfoud's goals as outlined. Board Member Moulin advised the Board that he had an earlier conversation with Mr. Falconer, because Board Member Moulin was interested in what the $10 million was made up of. Board Member Moulin suggested a matching of the due date of City liabilities with the maturity of its investments. Board Member Moulin continued that as long as the investment periods of maturing securities did not exceed the due date of matching liability, than the City preserves the ability to hold until maturity and thereby eliminates the risk of selling securities before maturity. Board Member Moulin further stated that the Board needs to come up with a dollar amount they are comfortable with to invest up to five years. Board Member Moulin also advised that last year's policy included some dollar limitations (GSE's) as opposed to percentage limitations. Board Member Moulin stated that at this time the Treasurer's Report reflected $112 million in the portfolio and $5 million becomes small by comparison of the view we were using when the Board established this as a criteria. In response to Board Member Moulin's question if it would be easier to use percentages than fixed dollar 3 Investment Advisory Board March 13, 2002 Minutes amounts, Mr. Falconer stated that the $10 million was discussed with the City Manager, and was based on a five-year cash flow forecast that is updated every month. Mr. Falconer continued that currently the $10 million would represent money that does not have a matching liability, the $10 million represented equity or fund balances with no designations or reserves and could be invested beyond the five year forecast. Mr. Falconer advised the Board that with the current Iow interest rate environment and with the City's buy and hold strategy, he would be uncomfortable investing funds up for five years. Board Member Osborne advised the Board that if the Board extends to five years, that it does not mean staff has to invest the full five years, rather they would have the flexibility to do so. Board Member Osborne advised that he is comfortable with the idea at extending the maximum to a five-year term in accordance with the State rules and limiting it to $10 million versus a percentage. Board Member Osborne believes that if a percentage were used staff may have to sell an investment early if the portfolio changed and that a dollar limitation would seem to be safer. Board Member Moulin advised the Board that he reviewed some of the other policies of other cities that were somewhat comparable and has reviewed the approach they use. Board Member Moulin stated that our two-year limitation was not as conservative as other cities. Board Member Moulin continued that the other cities might require that 50% of the portfolio would be due within six months, 75% would be due within a year, 85% would be due in three years, 95% would be due within four years and 100% would due in 5 years. Board Member Moulin stated that our City does not have a policy that states that any dollar amount is due at a particular time, on a short-term basis. Board Member Moulin stated that he felt that for this particular meeting the Board might agree on some concepts to follow and have Mr. Falconer put together something the Board might consider for their review for the next meeting. Chairman Mahfoud suggested that the Board give their input as to what the advantages and disadvantages were for extending to a five-year term. Mr. Falconer advised that in the past, consensus was taken on each item discussed with the final vote taken on the policy as a whole. Chairman Mahfoud reviewed with the Board that based upon the items discussed extending the maturity would (1) provide more flexibility; the Treasurer would have the option of more pricing levels; and (2) possibly provide a higher yield. Board Member Lewis advised the Board that the 4 Investment Advisory Board March 13, 2002 Minutes third benefit would be less work for the City Staff, in that once the funds were invested in longer term investments there would be fewer rollovers and less costs, due to fewer transactions. Board Member Olander advised the Board that consideration is needed as to what type of investments and their quality if the Board is looking at going from two to five years. Board Member Olander also advised that Board he would feel more comfortable with Government backed issues. Chairman Mahfoud asked the Board if they should invest in Medium Term Notes and Agency paper beyond the two-year term. Board Member Lewis advised the Board that the disadvantage of investing longer would be the interest rate risk involved in a rising interest rate environment, which could end up in an under-performing asset. Board Member Moulin advised the Board that it does become more work, but in the long-term if the portfolio is laddered then the work is eliminated. Board Member Lewis reminded the Board that they do not want to be chasing interest rates. Board Member Lewis suggested that if there is a pool of money available with no immediate short needs, why spend the time and effort in reinvesting this money monthly when it could be invested into something yielding more. Board Member Lewis stated that staff has the flexibility to get out of an investment early if it is needed, and he would rather not weaken this particular point in the policy. Mr. Falconer advised the Board that he would prefer not to be placed into a position as the Finance Director/Treasurer that requires constant monitoring of the portfolio to stay within the percentages set forth in portfolio because of the other duties he is required to perform. Board Member Osborne advised the Board that the average earnings have gone down four percentage points in a twelve-month period. Board Member Osborne continued that based upon the current two-year maximum maturity, a large amount of funds had been placed in one/two year investments to take advantage of the 6 ~/2 % rates have now matured. Board Member Osborne stated that an advantage of investing longer would be less susceptibility to interest rate fluctuations with the down-side being that we would be investing in "something" for five years. Board Member Osborne stated that if the decision is made to invest in longer maturing Treasuries or GSE's it would hold the safety factor down. Board Member Osborne also advised that based upon his previous comments he doesn't see any other down side in this matter other than the issue of interest rate risk. Chairman Mahfoud asked Mr. Falconer that if extending maturities an additional three years, would Mr. 5 Investment Advisory Board March 13, 2002 Minutes Falconer only invest excess monies or would he match liabilities to maturities? Mr. Falconer replied that he had not thought about the matching maturities question. Board Member Lewis suggested that if the Board identified $10 million in reserves that could be invested for a longer maturity, the Board should consider what type of formula staff used, or where staff came up with $10 million or some sort of duration of money, so the City can continue to keep the majority of its money two years or shorter, due to the way that cash flow works. Board Member Osborne stated that in dealing with the issue of liquidity, if a five-year cash flow projection is currently being done now, this could possibly be the basis for the formula. Board Member Osborne suggested that the Board could review this once a year, whether it be $10 million or whatever number and see where the City is. Mr. Falconer reviewed with the Board how the five-year cash flow projection is currently done and stated that it is a compilation of various sources of information, such as Economic Development Plan, the five-year Capital Improvement Plan, the five year Resource Allocation Plan, (RAP) which projects out the number of positions and projects inflation factors for services and wages, and a uses a number of assumptions. Mr. Falconer continued that the analysis covers every fund in the City and is about a fifty page document which is updated every month and also contains a great deal of confidential information. In response to Board Member Lewis question as to how accurate his forecasting has been, Mr. Falconer replied that the only forecasting for investments that is done is the six-month forecasting for the Treasurer's Report. Mr. Falconer continued that the Treasurer is required to make a statement that the City has at least six months liquidity on hand and that this information is documented on a spread sheet. Mr. Falconer stated that if a comparison is needed, than he would refer to this report and look at what we were going to have in six months and what we actually did have in that six month occurrence. Mr. Falconer also advised the Board that another other long- term forecasting report that has been produced is the thirty-year forecast for the Redevelopment Agency which is primarily used for the City's property tax increment projections. Board Member Moulin advised that the City has over budgeted in expenditures, on a cash flow basis , for the last six months due tothe lack of billing from the County for police services. Chairman Mahfoud felt that the Board was getting a bit off track. Board Member Lewis felt that the Board was not, due to the extension of the maturity beyond the Investment Advisory Board March 13, 2002 Minutes two years involving the liquidity issue. Mr. Falconer advised the Board of a potential problem of using matching maturity funds and used an example of the Council wanting to accelerate a project in the 5 year CIP which would require an earlier than anticipated appropriation, and require that an investment would be sold prior to maturity. Mr. Falconer stated that based on the current five-year forecast, the City currently has the $10 million in unallocated reserves. Chairman Mahfoud suggested that they should incorporate into the policy that any monies with matching liabilities should not be invested. In response to Board Member Lewis as to how the Board determines what is excess, Mr. Falconer replied that he would consider excess funds to be those fund balances that are undesignated by the Council. Mr. Falconer continued that these fund balances are not restricted, reserved or designated by the Council and there is no intent to spend the funds for any particular reason. Mr. Falconer also stated that anything between two and five years would be undesignated fund balances that he would believe should be invested. Board Member Moulin stated that in his review of the balance sheet there is significant long-term debt, particularly bonds payable of $72 million, which would have to be paid off at some point with revenue from various sources and approximately $11 million due to the County of Riverside. Mr. Falconer advised the Board that the $11 million would be paid over a ten-year period. Board Member Moulin advised that taking into consideration these large amounts owed, he suggested that $10 million could be invested no more than four years, not more than five years, working our way back, $20 million invested two to three years. In response to Board Member Lewis, Mr. Falconer replied that the amount of excess cash is determined monthly when he updates the cash flow report. Mr. Falconer stated that the cash flow report is updated based on the appropriations for new capital projects, the mid-year revenue and expenditures that are revised every six months for the current year. Board Member Lewis asked that at this point $10 million has been identified today, do we want to put in the policy a $10 million range beyond two years, when tomorrow it could be reduced to $5 million? Board Member Osborne stated that he recalled when the Board was considering going out two years, the City had a fund balance of roughly $36 million and there was discussion of taking $2 to $3 million which could be extended two years. Board Member Osborne continued that the Board was still looking at a little less than 10% of the overall all funds, which has been pretty consistent. Board Member Osborne suggested that in the policy, it could read that if the Board has $10 7 Investment Advisory Board March 13, 2002 Minutes million it could go more than two years, not more than five years, which would stay within that realm and gives the Board room. Board Member Osborne compared the $10 million under discussion to the $110 million portfolio and noted that it is still less than 10%. Board Member Moulin asked the Board how they felt about having a limitation on maturities for cash available for six months to a year, instead of two years. Although the two year range is very flexible range, we currently do not put much in the two .year range. Board Member Moulin also asked the Board if they should put a handle on the short-term investments? Board Member Lewis suggested that the Board place a five-year maximum with a maximum average maturity for the overall portfolio. Board Member Lewis suggested that this approach would balance the longer term and short-term investments. Board Member Osborne advised the Board, to get to that point, as an example, 50% cannot be more than 6 months and the remaining would be a certain time duration, the Board would have to decide how much would be decided for what duration. Board Member Lewis asked if the Board needed to be that detailed, or could the Boar~l state that the average maturity portfolio couldn't be over 187 days (as an example) or something along this range. Mr. Falconer reminded the Board that this type of arrangement was setup with LAIF. Board Member Osborne asked if would be possible based on Mr. Falconer's cash flow analysis and liquidity needs, so much would have to stay in this realm and so much in that realm, and ladder it from zero days to five years. Mr. Falconer replied that staff would be able to do what ever cash flow analysis is needed. Mr. Falconer stated, as an example, we currently have a $100 million portfolio, and 940 million may be needed in bond proceeds in the next four months, so the portfolio would go down to $60 million. Board Member Moulin asked what Mr. Falconer wanted to do? Mr. Falconer replied that the City resources have changed and that the City is in a better financial footing and there is the flexibility to increase to five years. Mr. Falconer stated that as a practical matter he would not purchase any investment for that length of time for under 5% and used the historical 20 year data provided by LAIF as an example of rates. Board Member Moulin stated that he believed that Mr. Falconer wanted to keep the policy as is and carve out the $10 million. Mr. Falconer stated that this was correct and the maturities would be staggered. Chairman Mahfoud suggested moving on to the next item. Investment Advisory Board March 13, 2002 Minutes Board Member Moulin felt that the Board should focus on the liquidity policy and as to whether or not the policy is adequate. He also suggested that the Board give it some thought and come back with some recommendations. Board Member Moulin stated that he did not want to see the Board come up short and to make sure the policy clearly lays this out. Mr. Falconer shared that he is hesitate to use a percentage rate for long term investment limitations. Mr. Falconer continued that if we used a 10% rate today, 10% of $100 million is $10 million; however, four months from now if the $40 million from the bond proceeds are spent, then technically 10% of $60 million would be $6 million. Mr. Falconer advised the Board that if he had invested $10 million in longer-term investments in a technical sense he would be in violation of the policy and have to sell $4 million before maturity. Board Member Osborne asked for clarification of Medium Term Notes. Board Member Lewis replied it was a matter of maturity and Mr. Falconer stated also that it was a Triple A rating of Corporate Notes. Chairman Mahfoud stated that he felt reluctant in investing in Corporate Bonds. Board Member Lewis also stated that he would be disinclined to add Corporate Notes to the list of permitted investments. Mr. Falconer advised the Board that when investing public funds there is a higher guideline to follow. Mr. Falconer wanted to clarify that, in the previous discussions with the Board on the issue of investing in Medium Term Notes, he would limit investments in this area to GE Capital where he keeps rolling over GE Commercial Paper from month to month. Mr. Falconer stated there may be an opportunity to extend the maturity of GE Capital Medium term Notes to two years and increase the yield. Mr. Falconer advised the Board that in the Medium Term Note discussions he would rather deal with actual numbers versus percentages of the portfolio. The Board decided to continue to discuss Medium Term Notes and Commercial Notes at the next meeting. Board Member Moulin suggested that with the current commercial paper, that the dollar amount could be raised somewhat. Board Member Moulin asked Mr. Falconer to fine-tune the limits and to come back to the Board with his suggestions. Investment Advisory Board March 13, 2002 Minutes Motion - It was moved by Board Member Moulin/Lewis to continue discussion of the policy to the next scheduled meeting. C.California Municipal Treasurer's Conference - Monterey, CA April 29 - May 3, 2002 Chairman Mahfoud volunteered to attend the conference. Mr. Falconer advised that if there was one other member interested, to notify Staff within one week so that travel arrangements could be made. Motion - It was moved by Board Member Lewis/Osborne, to notify Staff, on a first come, first serve basis within one week to finalize travel to conference. Motion carried unanimously. D. Selection of two Board Members to serve on Audit Request Proposal Committee (RFP) Mr. Falconer advised the Board that this particular item was taken to Council on March 5th and that typically two Council Members and Staff serve on the selection committee. The Council suggested, because of the specialized nature of this item, two Investment Advisory Board members should serve in place of two Council members. Mr. Falconer advised that during the Council discussion the fact was made that the Investment Advisory Board has two CPA's serving who may want to serve on the Audit Selection committee. Due to the timeline these two Board Members need to be selected at this meeting so that some interim work can be done prior to the end of the Fiscal year. Motion - Board Member Olander/Lewis suggested that Board Member Osborne and Moulin serve on the selection committee. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - February 2002 Noted and Filed B. LAIF Pooled Money Investment Annual Report, November and December Pooled Money Report l0 Investment Advisory Board March 13, 2002 Minutes In response to Chairman Mahfoud, Mr. Falconer replied that the LAIF answer book, which is passed out from time to time, has the investment criteria for medium term notes, and that the annual report before us refers more to historical information. Noted and Filed VII BOARD MEMBER ITEMS VIII ADJOURNMENT MOTION -It was moved by Board Members Moulin/Lewis to adjourn the meeting at 7:03 p.m. Motion carried unanimously. S ubrmitte'd""b-~y Vianka Orrantia Secretary INVESTMENT ADVISORY BOARD Business Session: A Meeting Date: April 10, 2002 ITEM TITLE: Transmittal of Treasury Report for February 28, 2002 BACKGROUND: Attached please find the Treasury Report February 28, 2002 RECOMMENDATION: Review, Receive and File the Treasury Report for February 28, 2002 on~;r, Finance Director