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2002 12 11 IAB Minutes INVESTMENT ADVISORY BOARD Meeting December 11, 2002 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 Moulin, Osborne, Olander, Felice, Mortenson (5:33) and Chairman Mahfoud ABSENT: None OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary and Mike Harrison of Conrad & Associates II PUBLIC COMMENTS - None III CONFIRMATION OF AGENDA - (This is the time set aside for public comment on any matter not scheduled on the agenda.) IV CONSENT CALENDAR Approval of Minutes of Meeting on November 13, 2002 for the Investment Advisory Board. MOTION - It was moved by Board Members Lewis/Olander to approve the Minutes of November 13, 2002. Motion carried unanimously. V BUSINESS SESSION A. Transmittal of Treasury Report for October 2002 In response to Board Member Olander, Mr. Falconer advised the Board that they should consider the changes to SB68 and the Court's decision regarding LAIF and consider modifying the percent of LAIF for next year's policy. Mr. Falconer also advised the Board that this would also be discussed with the City Manager. Investment Advisory Board December 11, 2002 Minutes MOTION - It was moved by Board Members Lewis/Osborne to review, receive and file the Treasurer's Report October 2002. Motion carried unanimously. VI CORRESONDENCE AND WRITTEN MATERIAL A. City of La Quinta FY 02/03 Audited Financial Statements The Board welcomed Mr. Mike Harrison of Conrad & Associates. Mr. Harrison advised the Board of several new standards that the GAO will be implementing. Mr. Harrison advised the Board of the Sarbannes-Act Oxley, which will affect publicly traded companies. Mr. Harrison also advised the Board of some GAO standards that will affect the City of La Quinta in June 30, 2004 audit, which will begin in January 2003 and the CPA firms that conduct audits for government agencies. There are two over arching principals in the new GAO standards; one, you will not be able to audit your own work and number two, you will not be able to perform management functions at an audit client. Mr. Harrison advised the Board that the GAO recently placed a question and answer section on their website, due to the fact that a great deal of CPA firms do audit work for local governments that might also do non-audit services of some type. Some services might take the form of agreed upon procedures or other types of reports that are issued as a by-product. Mr. Harrison advised the Board that for the State of California, Governor Davis recently signed into law several bills, taking effect January 1st of 2003, affecting all CPA's in California. The first being longer retention of audit working papers which will be have to be retained for seven years. Any time there is a restatement of an audited financial statement, that restated financial statement, along with the previous statement, has to be sent to the State Board of Accountancy. Board Member Moulin asked Mr. Harrison to clarify the changes beginning July of 2003 that could affect the City of La Quinta. Mr. Harrison stated with that the new GAO standards in cases of appraisal work, Conrad and Associates has an alternative practice structure. They look at substance over form in these situations to say it's almost the same thing as if you were performing those services within your CPA firm, even though the revenue does not go into the CPA firm. 2 Investment Advisory Board December 11, 2002 Minutes As an example, if appraisal services were done on fixed assets, under the new standards, for local governments that haven't valued their infrastructure and in the year 2004, having the same firm or consulting department of the same firm will be prohibited in 2004. All work that has been started has to be completed by July 2003 and no new work can be started. Board Member Osborne asked Mr. Harrison how this would affect the relationship between Conrad and Associates and the City of La Quinta? Mr. Harrison replied that non-audit services are not provided to the City by Conrad and Associates. One thing that can be construed as non-audit service is the services provided by CBIZ of Orange County, because Conrad and Associates are an alternative practice structure. In the future, the State will not allow this to be done on an audit client. Mr. Falconer advised the Board this service was performed in the GASB 34 update. Mr. Falconer also advised the Board that the City would soon be going through a pavement management study, due to the fact that CBIZ relies heavily on a pavement management study, which was performed approximately five years ago. The City's Engineering Department is updating the pavement management study this year, so the infrastructure report will be updated, which means this is a changing document due to on- going improvements (i.e. new pavement on the roads, adding lanes, etc...). Mr. Harrison advised the Board that appraisal and actuarial services are strictly prohibited under the new GAO standards. So if a firm decides to do heavy non-audit services the firm will not be able to do auditing. Board Member Moulin asked Mr. Harrison if the Treasurer had questions or needed advice, would this be considered management consulting? Mr. Harrison replied that this would not be, that a firm can provide training or advice and this would be considered non-audit services. Mr. Falconer advised the Board that there are allotted forty hours per year, for meetings such as this one or meetings for the Council, or over and above the typical audit, but related to the audit. Mr. Harrison advised the Board that cash and investments are confirmed 100%, confirming with the third party custodian, all of the banks and all the investments. The $106 million has been verified through third parties. As far as categorization by risk, which is in the investment footnote, taking the information that is received from 3 Investment Advisory Board December 11, 2002 Minutes third parties is used to determine how deposits and investments should be categorized. All investments that are held with third party custodians are listed in category one, which is the best level of risk of holding investments. Money market mutual funds and pools are not categorized as to the level of risk, and that is how they are listed in the footnotes. Mr. Harrison advised the Board that Conrad & Associates receives the City of La Quinta's Investment Policy during the audit; the firm goes through and marks up the policy, testing for compliance with the Investment Policy. There was only one item found was the item that was over the limit on money market mutual funds, when the purchase of "The Ranch" was done. The limit is 20% of the total portfolio and the City was at 37%. This was the only compliance issue relating to investment compliance. Mr. Harrison advised the Board that every January, Conrad & Associates updates this particular audit area, with any changes in the government code, the 53601 and the 53645 sections of the government code, as it relates to investments. IVir. Harrison also advised the Board that Conrad & Associates are looking at documenting internal controls in for the whole investment cycle, to determine there are adequate checks and balances and safeguards. Mr. Harrison stated to the Board that he feels that the internal and cash controls are very good here in the City. In response to Chairman Mahfoud, Mr. Harrison advised the Board that the accounting pronouncement that the City has to follow is not a FASB Statement, it's a GASB 31 Statement. Mr. Harrison also clarified that GASB 3 has to do with the categorization as to investment risk and GASB 31 has to do with marking to market. Due to the Orange County bankruptcy all of the pools have to be marked to market. Cities used to disclose this information, but now it's their intention to hold investments till maturity and they did not mark up and down the change in the market value. In the report presented, the City has marked to market in accordance with GASB 31. Mr. Harrison advised the Board that this is really the dictating accounting pronouncement as far as how this is presented and for determining unrealized gains and losses. Board Member IVIoulin asked for clarification, theoretically the City is marked to market, but the difference between historical costs and market were insignificant and immaterial, so adjustments were not made. Mr. Harrison advised the Board that there is an immaterial difference between cost and market. This means they're allowing the Treasurer to leave his books at cost; if there were a material difference he would be made to mark them to market. Board Member Osborne asked Mr. Harrison what the Investment Advisory Board December 11, 2002 IVlinutes materialit¥ number was? Mr. Harrison stated that they look at the materiality by fund type, and if they were spread across different funds, the amount would be below the materiality threshold, such as General funds or Capital fund types. Mr. Falconer advised the Board that with a portfolio with $100 million, that 1% would be immaterial and in the past the City used $100,000. Chairman Mahfoud asked Mr. Harrison if the'City's cash flow for 2002 was in the negative? Mr. Harrison stated that the page in the audit report was only proprietary funds, not city wide, just the internal service funds of the City. Board Member Osborne asked Mr. Harrison if there were any changes recommended, relative to the cash? Mr. Harrison replied that there was only one compliance area that came up, this was put in writing and was shared with the City Manager and the City Council and the City was only out of compliance for one week. Mr. Harrison advised the Board that on commercial paper there is one limit that has been decreased as of January 2002, it's now 25% of the portfolio of commercial paper, which the Treasurer has picked for the new policy. Mr. Harrison also advised the Board that LAIFhas increased from $30 to $40 million; these are the only changes in the calendar year 2002. In response to Board Member Moulin, Mr. Harrison advised the Board that a management letter was issued and there were four comments, which were "house keeping" comments and/or immaterial compliance issues. Mr. Harrison stated that the fourth comment was on investment compliance. Board Member Moulin stated that he feels that the Finance Department operates on a lean staff, should they add additional staffing? Mr. Harrison stated that he only comes out to the City of La Quinta three or four times a year, each time is on official business for half a day or a full day and feels that it would be unfair for him to comment. In response to Board Member Moulin, Mr. Falconer advised the Board that the City was looking at new investment software for approximately $15,000, but Mr. Falconer felt that the cost benefit didn't justify the 5 Investment Advisory Board December 11, 2002 Minutes expenditure, so the City decided to stay with the current software, (mark to market and tracking investments). Mr. Falconer also advised the Board that the City is currently looking at purchasing new accounting software. This software would include cash amount modules and bank reconciliation modules. The City is hoping to purchase software to work smarter not harder, due to the fact the current software was purchased ten years ago. Mr. Falconer stated that the City is hoping to have the new software installed by July 1st, 2003. In response to Board Member Moulin, Mr. Falconer advised the Board that Conrad & Associates was not included in the evaluation of potential software, due to the fact that there was a possibility that Conrad & Associates would submit a proposal for the software. The City asked two other Financial Officers here in the valley to sit on the evaluation committee and are hoping a decision will be reached by January 2003. Mr. Harrison stated that this was a good decision because it segregates the audit from the non-audit services. Discussion regarding the new software can be done after the selection, and the discussion would include internal controls. Mr. Harrison advised the Board that Conrad & Associates would be training their staff on the new fraud standards. This new standard will not be effective until 6/30/04 here in the City of La Quinta. The name of this new standard is SAS99. Board Member Moulin asked Mr. Harrison if the City of La Quinta is being too restrictive on the Treasurer on the flexibility he or she might need. Mr. Harrison stated to the Board that he felt the Treasurer, with his professional background and interest, along with the outside committee, that the City and the Board should do what they are comfortable with. Mr. Harrison stated that one concern he has had at other clients is that the maturity level is out too far. In response to Board Member Moulin, Mr. Harrison stated to the Board that referencing LAIF, that SB68 is providing greater assurances that if the state has problems, that it is not a stumbling block for retrieving funds. In response to Board Member Mahfoud, Mr. Harrison advised the Board the City once again received both the GFOA award for excellence in financial reporting, as well as the California Society of Municipal Finance Officers award. They were received with a GASB 34 compliant CAFR. 6 Investment Advisory Board December 11, 2002 Minutes Mr. Harrison also advised the Board that this award is always a year in arrears when it included in the financial statements and that he believed the 2002 statements would receive the two awards again. Noted and Filed B. Month End Cash Report - November 2002 Mr. Falconer advised the Board that staff could prepare an analysis on average maturity for LAIF however, this request was not pursued. Noted and Filed C. Pooled Money Investment Board Report - August, 2002 In response to Chairman Mahfoud, Mr. Falconer advised the Board that he spoke with Lehann Karrs. She stated that you are looking at the PMIA, which includes LAIF and the other state general fund monies, the entire state portfolio of which LAIF is $20 billion and that this $20 billion is not a fund that the state could borrow against. Mr. Falconer also advised the Board that the PMIA is $46 billion and LAIF is only $20 billion. Board Member Osborne asked Mr. Falconer, due to the new rules on the loans, if there were going to be any separate reporting provided by LAIF comparing the PMIA to LAIF? Mr. Falconer stated he felt that there would not be. Noted and Filed VII BOARD MEMBER ITEMS Other Handout A. Fannie Mae and Freddie Mac Article Board Member Olander stated that it would be interesting to see how aggressive it will get in this area. 7 Investment Advisory Board December 11, 2002 Minutes VII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Osborne to adjourn the meeting at 6:29 p.m. Motion carried unanimously. Submitted by Vianka Orrantia Secretary