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2003 03 12 IAB Minutes INVESTMENT ADVISORY BOARD Meeting March 12, 2003 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 Moulin, Olander, Mortenson, Lewis (5:35), 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 IV CONSENT CALENDAR 1. Approval of Minutes of Meeting on February 12, 2003 for the Investment Advisory Board. MOTION - It was moved by Board Members Moulin/Mortenson to approve the Minutes of February 12, 2003. Motion carried unanimously. V. BUSINESS SESSION A. Transmittal of Treasury Report for January 2003. Board Member Moulin advised the Board that on page 4 of the Treasury Report, the report indicates quite of bit of cash on hand, is this described as checking and/or government mutual funds? Mr. Falconer replied that this should be changed to checking only. In response to Board Member Moulin Mr. Falconer also replied to the Board that the large amount of cash on hand was due to a check received from Riverside County on the last day of the month, which was a first installment of property taxes. This large cash balance is reflected on page 7 of the Treasurer's Report. Investment Advisory Board March 12, 2003 Minutes In response to Board Member Moulin, Mr. Falconer replied to the Board that the only Government Agency Security that was difficult to purchase was Sallie Mae. Mr. Falconer stated to the Board that in the subsequent month (February), the property tax payment was invested in commercial paper, which matures on Thursday, March 13, 2003. $3 million was invested in Solmon, Smith, Barney and $3 million in GE Capital, which will be reflected in the March Treasury Report. Of the 96 million maturing, 92 million will be used for cash needs and 94 million will be reinvested in a T-Bill for three months. Mr. Falconer informed the Board of the current status of T-Bills, 3 month T-Bill are currently at 1.07% and 6 month T- Bills are at 1.05 %. MOTION - It was moved by Board Members Lewis/Olander to review, receive and file the Treasurer's Reports for January 2003. Motion carried unanimously. B. Consideration of Fiscal Year 2002/03 Investment Policy Chairman Mahfoud advised the Board that there were three items up for discussion, GSE's, LAIF and Commercial Paper. Chairman Mahfoud asked the Board if they felt that each individual item might be discussed at three different times, or give each item a ten minute interval for discussion. Board Member Moulin suggested that each Board Member comment on the current level of the investmentS policies, and if any them need to be changed. Mr. Falconer suggested to the Board that for the benefit of Board Member Mortenson, he might give an overview as to why the Board reviews and recommends any changes to the Investment Policy. Several Board Members also commented as to why the policy is reviewed and changed annually. Board Member Lewis advised the Board at the current time he does not foresee any need to make any changes to the current policy, with the understanding of the concerns of the three items up for discussion. Board Member Olander advised the Board that he feels comfortable with the GSE's current setup, but would like to see a possible 5% increase in LAIF, which would increase LAIF from 20% to 25%. Board Member Olander also advised the Board that he is much more comfortable with Investment Advisory Board March 12, 2003 Minutes LAIF than, with commercial paper. With this increase, this would give Mr. Falconer more flexibility. Board Member Olander also advised the Board of the City's current benefit from the LAIF yield. In response to Chairman Mahfoud, Mr. Falconer also informed the "new" Board member(s) about the history of LAIF's percentage. Mr. Falconer also informed the Board of how LAIF makes its investments. Board Member Olander advised the Board of last years LAIF Conference and the feeling of "comfort" with the information obtained from that conference. Chairman Mahfoud asked the Board who audits LAIF? Mr. Falconer replied that the Department of Finance conducts their audit. In response to Chairman Mahfoud, Mr. Falconer advised the Board that LAIF leans more towards mortgage backed products and that the current State Treasurer would like to infuse capital in California communities, affording more people an opportunity to participate in home ownership. Board Member Mortenson advised the Board that his only concern with LAIF was the Iow percentage, but that LAIF is one product that meets the City's objective in the Investment Policy. Board Member Olander advised that LAIF's portfolio is carefully audited by the state auditors. Mr. Falconer advised the Board that LAIF has been in existence since the 1970's. Chairman Mahfoud advised the Board of the underlying assets in LAIF, a concern of the Board and the City Council. Board Members Moulin and Olander advised the Board that they had no concerns with LAIF. Mr. Falconer advised the Board that the City cannot tell LAIF what they can and cannot invest in. Mr. Falconer also advised the Board that LAIF does better when interest rates are down. Board Member Olander suggested to the Board that the Board sit down with those Council Members that have concerns with LAIF and try to rectify any of their concerns. Mr. Falconer advised the Board that this was a previous past practice to meet with the City Council. Mr. Falconer advised the Board that he has met with the City Manager regarding the current Investment Policy and specifically about the increase in percentage of LAIF. The City Manager stated that he was comfortable with LAIF between 15% to 25%. Board Member Moulin Investment Advisory Board March 12, 2003 Minutes advised the Board that LAIF's 5 % increase should be listed as one of the items agreed upon by the Board for modification. Chairman Mahfoud suggested to the Board that they discuss the GSE's. Board Member Moulin advised the Board that the maximum issued had been 75% of the portfolio. Mr. Falconer advised the Board that GMNA' s were at 100%, which the City currently does not invest in. Mr. Falconer advised the Board that dollar limitations were set rather than percentage limitations. Looking at the total portfolio and adding up the amounts available with $23 million of a $100 million portfolio, the Board was looking at 20% to 23%. Mr. Falconer advised the Board that this is how they derived the percentage for LAIF. Mr. Falconer also advised the Board that there was an increase in the Federal Home Loan by ~2 million to $5 million. Board Member Moulin commented to the Board that Freddie Mac and Fannie Mae were at $5 million and the others at $3 million, and last year the Board decided to raise them all except Sallie Mae up to $5 million. Board Member Moulin commented to the BOard, that on page 19, item number 5, money market mutual funds, the State has the City at 60%, and 20% of surplus. Board Member Moulin suggested to the Board that the 20% be increased, which are money markets backed by GSE's or Treasuries. Chairman Mahfoud shared his concern with the Board regarding the management fees for the funds, due to short-term interest being Iow. Mr. Falconer clarified for the Board that with bank sweep accounts, the investments usually were just Treasuries. Mr. Falconer advised the Board that for one year the City invested in a money market sweep account but it was discontinued due to the drop in rates and the management fees. Mr. Falconer also advised the Board that there have been no separate money market funds outside of the bank sweep. Board Member Moulin advised the Board that another concern is whether prime commercial paper should this be left at 30% or should it be reduced. Board Member Moulin commented to the Board that Mr. Falconer is currently using his judgment and not investing in commercial paper. Investment Advisory Board March 12, 2003 Minutes Board Member Moulin advised the Board that he would not like to see 30% in commercial paper at this time. Board Member Mortenson asked if this should be changed in the policy or should staff just not purchase commercial paper GSE's. Mr. Falconer advised the Board that the City does not invest in callables. Board Member Moulin suggested to the Board that GSE's be increased to more than $5 million. Board Member Mortenson asked the Board why a number was placed instead of a percentage. Board Member Moulin replied that the number was easier for Mr. Falconer to work with. Mr. Falconer also replied that percentage limitations apply the day investments are made and if the next day there is a change, you do not liquidate your investments to maintain your percentages. Board Member Moulin advised the Board that if GSE's are raised from 95 to 96 million than the City would have approximately 24%. Chairman Mahfoud asked the Board why they wanted to reduce the commercial paper from 30% to 25%. Board Member Moulin replied that this suggestion was due to the numerous bankruptcies of companies. Mr. Falconer asked the Board for clarification on the percentage mentioned. Board Member Moulin stated that this was just an example. Board Member Olander suggested to the Board that they cut back approximately 5 % on commercial paper and make up the percentage on another investment. Chairman Mahfoud suggested to the Board that before a certain number is picked that this should be discussed. Board Member Moulin advised the Board that the dollar amount could be placed elsewhere if commercial paper is eliminated. Chairman Mahfoud asked the Board for clarification as to why the Board would want to eliminate commercial paper. Board Member Moulin stated to the Board his concern, that due to the current economic environment that it is very risky. Board Member Olander advised the Board that Bristol Myers restated its earnings down substantially and had to rewrite several years. Chairman Mahfoud advised the Board that in order to issue commercial paper, there needs to be high financial ratios. Board Member Mortenson advised the Board that if they are only buying A-1 grade paper, how many instances have there been that the paper is graded A-1 and before it is due, that they have financial difficulties. Investment Advisory Board March 12, 2003 Minutes Board Member Moulin advised the Board that Mr. Falconer is very selective in his purchases on commercial paper. Chairman Mahfoud commented to the Board that the only concern of purchasing commercial paper is the possibility of the paper being down graded. Chairman Mahfoud asked the Board that if Staff purchased high grade quality 30 day commercial paper, how would that affect us, from a liquidity standpoint? Mr. Falconer replied to the Board that he views it as if he had purchased Edison or PG&E, the entire principal could have been lost. Mr. Falconer advised the Board that when these were invested in by other agencies they met the investment criteria but then they were down graded and were frozen. The principal was ultimately received back, but he was not sure they recovered the interest. Mr. Falconer advised the Board that he had at one time done an analysis with LAIF. As an example if the City had a $2 million piece and lost the $2 million in XYZ Company, and held a security commercial paper solely on our own versus in LAIF, in LAIF we might have lost a couple hundred dollars, due to the fact the City is a small percentage of a $50 billion pool. If this was held solely by the City, the City would have lost $2 million dollars. Mr. Falconer also advised the Board that he feels more comfortable with LAIF investing in commercial paper. Mr. Falconer advised the Board that usually Staff invests in commercial paper twice a year, usually around the time the property tax money is received, commercial paper is used infrequently and Staff uses only those names familiar to the average person. Mr. Falconer advised the Board that the percentage on commercial paper could be reduced and that Staff would feel comfortable with the reduction. Chairman Mahfoud summarized for the Board the areas of discussion; percentage for LAIF to be raised from 20% to 25%; reduce the percentage on commercial paper, percentage not yet defined; GSE's to be raised from $5 million to an undetermined amount at this time. Motion - It was moved by Board Member Moulin/Olander to continue discussion of the Fiscal Year 2003/04 policy to the next scheduled meeting. Investment Advisory Board March 12, 2003 Minutes C. California Municipal Treasurer's Conference - Monterey, CA April 29 - May 3, 2002 Board Member Lewis informed the Board that due to prior obligations he would not be able to attend the conference. In response to Chairman Mahfoud, Mr. Falconer advised the Board that if the full registration fee for the conference is paid, and due to the location this year, whatever topics are of interest, than those items of interest are attended. Chairman Mahfoud asked Mr. Falconer what if a Board Member is planning to attend a half day only and Mr. Falconer replied to the Board that Staff would pay a daily registration fee. Board Members Mortenson and Olander would like to attend the conference. Board Member Moulin informed the Board that he would not be available. Motion -It was moved by Board Member Lewis/Mortenson for those Board Members interested to contact staff within the next few days for early registration. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - February 2003 Board Member Lewis asked if Staff could find out which yield is reflected in the pooled money investment report. The month end report for LAIF reflects the quarter yield, daily yield and the yearly yield. Which of the three are they reporting on the monthly report, page six of the cash report? Mr. Falconer replied to the Board that he felt that this was the effective yield on the LAIF Performance report for just the month of December, 2002 and on page six, the rates do not correspond with the yield. Mr. Falconer also commented to the Board, looking at the cash report, the yield has gone down 10 basis points for the month of January. Board Member Lewis commented to the Board that the daily yield is down to 1.91. Investment Advisory Board March 12, 2003 Minutes General discussion ensued amongst the Board regarding the current economic state. Noted and Filed B. LAIF Pooled Money Investment Annual Report for January, 2003 In response to Board Member Moulin, Mr. Falconer advised the Board that on page two, the Pooled Money Investment Board Report, item B, included were a definition of the AB55 loans versus the general fund loans to make the distinction. Mr. Falconer advised the Board that currently the report does not indicate any general fund loans being made, but are showing AB55 loans. In response to Board Member Lewis, Mr. Falconer commented to the Board that LAIF balances are not borrowable for loans. Mr. Falconer also commented to the Board that at the previous year's LAIF conference, they were informed that government agencies participate in the interest of the loans. Noted and Filed VII BOARD MEMBER ITEMS Mr. Falconer reminded the Board that the Form 700's are due into the City Clerks office. VIII ADJOURNMENT MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 6:40 p.m. Motion carried unanimously. (Board Member Lewis departed at 6:05) Vianka Orrantia Secretary