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2003 05 14 IAB Minutes INVESTMENT ADVISORY BOARD Meeting May 14, 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: Chairman Mahfoud, Board Members Moulin, Olander and Lewis Absent:~ Board Member Mortenson OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary and Cristina Deniel II PUBLIC COMMENT - None III CONFIRMATION OF AGENDA Mr. Falconer advised the Board of several handouts which were a result of the. CMTA Conference and some actions to be taken by the Council. The first handout is a letter from the State Treasurer, Phil Angelides regarding LAIF and the current budget discussions in Sacramento. The second handout is an update regarding the Investment Advisory Board which the Council will be discussing on May 20th a reduction in the Investment Advisory Board size from seven to five members. Mr. FalConer also advised the Board of the fax received from Board Member Moulin regarding the investment policies which would be discussed under the Business Session section, item B. In response to Chairman Mahfoud, Mr. Falconer will give a brief overview of the Treasure's Conference. Mr. Falconer suggested that this item be added to Correspondence and Written Material as item D. IV CONSENT CALENDAR A. Approval of Minutes of Meeting on April 9, 2003 for the Investment Advisory Board. Board Member Moulin advised the Board that on page 2 of the Minutes, the fourth paragraph should read: Investment Advisory Board May 14, 2003 Minutes Board Member Moulin also replied to the Board that the bond money is currently being 4= ....... ~ ~,o,u, o~ disbursed. MOTION - It was moved by Board Members Moulin/Olander to approve the Minutes of April 9, 2003 as corrected. Motion carried unanimously. V. BUSINESS SESSION A. Transmittal of Treasury Report for March 2003 Mr. Falconer informed the Board that the portfolio is currently at $100 million with a decrease of $6 million, which is a result of final debt service payments for the year. The portfolio yield is currently around 2% and is being dragged down by the fiscal agent investments, which puts us at 1.78% overall which is 60 basis points higher than the six month Treasury Bill rate. Mr. Falconer also informed the Board that on page 5, it indicates that the Commercial Paper has matured and the City is no longer invested in Commercial Paper. Rates continue to drop and Staff has reinvested $6 million in six month paper, T-Bills, currently at 1.08% and Federal Home Loan Bank for the same period of time at 1.13%, only 5% basis points difference. Discussion ensued by the Board about the current economy. Mr. Falconer informed the Board that on page 4 of the Treasurer's Report, under LAIF, the administrative charges are .47% of 1%. LAIF is legally mandated to not go over .5% of 1% and is currently bumping up against that limit, due to the yields being Iow. Mr. Falconer also informed the Board that at the annual LAIF Conference, it was announced that the annual budget for LAIF is about $2 million, which is a small amount compared to their $50 billion portfolio. Due to the legal limitation, the limitation cannot be exceeded and cannot be charged to the participants in the pool. MOTION - It was moved by Board Members Lewis/Olander to review, receive and file the Treasurer's Report for March 2003. Motion carried unanimously. Investment Advisory Board May 14, 2003 Minutes B. Consideration of Fiscal Year 2003/04 Investment Policy In response to Board Member Lewis, Mr. Falconer informed the Board that GASB 40 would not be incorporated into the Investment Policy; it would be incorporated with the financial statements. Fair market values will have to be included in the footnotes and GASB 40 changes will be incorporated with the Treasurer's report. Chairman Mahfoud advised the Board of the items of discussion for changes and/or deletions to the Investment Advisory Policy: adding a paragraph to the policy in reference to internal loans; making changes to page 10 and 11; and an increase from $5 million to 97.5 million in GSE's, including Fannie Maes and Federal Farm Credit. Chairman Mahfoud reviewed with the Board the changes to the policy. The first item was on page 1 of the Investment Policy and a change was made on page 5. Board Member Moulin advised the Board that on page 17, item number ×VII titled "Investments not subject to the policy," that all investments and cash are subject to the policy." Board Member Moulin suggested to the Board that the word "investment" be changed to activities or some other term. Mr. Falconer advised the ' Board that the distinction that was trying to be made is that cash investments are held within the City in the City's accounts, whereas there are other' items beyond the City's control which they are not held by the City, but in the City's name. Board Member Moulin felt that the word "investment" should be changed. Other suggestions by the Board were activities, transactions or City funds not subject to the policy. Board Member Lewis stated to the Board that some of the funds are investments and the conduit financing for bonds is an investment in the City's name. Board Member Moulin asked the Board how this is avoided subject to the policy. Board Member Lewis suggested to the Board that it read "The Investment Policy pertains to all cash and investments held by the City, except for the following:" Board Member Moulin suggested to the Board that the first sentence be taken out, due to the fact that it repeats what is stated on page 5. Chairman Mahfoud suggested to the Board taking out the first sentence. It was suggested by Board Member Lewis to take the word "investment" out and replace it with the word "items." Board Member Moulin suggested that another word be used relating to 3 Investment Advisory Board May 14, 2003 Minutes financial transactions, or use "financial transactions." Board Member Lewis advised the Board that these are physical things that are being discussed, such as cash, it is not an activity or transaction. Board Member Moulin stated to the Board that it is those items that do not count as cash or investments, for the purpose of the policy. Board Member Lewis emphasized to the Board that these are still investments or cash. Chairman Mahfoud advised the Board that under financial activity, it is cash being used for investment, loans being made, short-term/long-term obligations, cash related activity. Board Member Lewis advised the Board that these are investments not subject to the policy, investments upon proceeds, and loans between government agencies and technically they are investments. Board Member Olander suggested to the Board that it read "investments not subject to this policy." Mr. Falconer stated to the Board that "items not subject to this policy," is not descriptive enough, this could mean that anything else could apply. Mr. Falconer informed the Board that cash and/or financial transactions would be fine with Staff and these items were not under the control of the Treasurer. Board Member Olander suggested that the statement "not under control of the Treasurer," be included. Mr. Falconer advised the Board that there are times when the Treasurer would obtain control of these items if certain events happen. Board Member Moulin stated to the Board that the first concern was the advance to the Developer for the Embassy Suites Hotel, which was not considered by the Treasurer's office. Board Member Moulin also stated that at the City Council meeting, Council Member Osborne stated that this is not cash subject to the Investment Policy; there might be those people that might be in disagreement, but if the City Attorney agrees, then this is fine. Due to the fact that there are those people that might consider this an investment, it should be avoided calling this an "investment." Board Member Lewis advised the Board that if a person considered this an investment and were to look at the policy to see how this is handled, then they can look at the investments that are not covered by the policy; it would not be called a financial transaction. The person can see this was not an investment subject to the policy. Mr. Falconer advised the Board that these are also considered assets, so the policy can state "assets not subject to this policy," some which are notes receivable. Chairman Mahfoud advised the Board that item XVII reads "Financial Assets and Investment Activity not subject to Policy," deleting the first sentence. Board Member Moulin asked for a 4 Investment Advisory Board May 14, 2003 Minutes Financing." Mr. Falconer advised the Board that an example can be listed, such as "housing bonds," where the City uses our name to secure private developer bonds for Iow income housing. There are other types of conduit financing, which the City might not have at this point and time, but possibly in the future, such as industrial development bonds. Mr. Falconer also advised the Board that he could be specific or could be broad, but at this point and time decided to be broad to cover items that might arise. Board Member Lewis asked the Board if conduit debt financing was a GASB recognized term. Mr. Falconer replied that it is in the footnotes in the financial statements that these bonds have been issued in the City's name but are not a debt of the City. Board Member Moulin asked the Board if conduit debt financing is a common expression. Mr. Falconer replied to the Board that this again was in the footnotes of the financial statement. Board Member Moulin suggested to the Board that the term "Conduit Debt Financing" be listed in the glossary. The Board concurred. Board Member Moulin advised the Board that page one would also need to be changed. Board Member Lewis suggested to the Board that one additional word be added to page five, under section III Scope, should say "except as further detailed in Section XVII." In response to Chairman Mahfoud, Mr. Falconer advised the Board that on page seven, section V, Maximum Maturities, that the amount was lowered based on a loan that was done to the Agency and also based on some cash forecasting. Mr. Falconer also advised the Board that based on the current investment yields, he is apprehensive to go out any further. Chairman Mahfoud asked the Board if the annual surplus was defined. Mr. Falconer replied to the Board that due to the many variables involved, it would be hard to define in an exact calculation. Chairman Mahfoud continued to reconfirm the changes made in the policy, page 7, page 10. Mr. Falconer asked the Board if the letter handed out at the beginning of the meeting could be discussed at this current time. The Board agreed. Mr. Falconer advised the Board that at the Treasurer's Conference, there was a breakout session and a woman speaker who represented the state wide water districts, which hold a great deal of power. He stated that several members of this Board were very concerned about the State deficit and if push came to shove, they believed that there is a possibility that the LAIF Funds could be tapped. The woman suggested to the State Treasurer that he Investment Advisory Board May 14, 2003 Minutes write a letter reassuring the I_AIF participants that the LAIF funds cannot be tapped by the State Legislature. Mr. Falconer advised the Board that this letter was the Treasurer's response to that request from the breakout session. Mr. Falconer also advised the Board that it was important the Treasurer did go on record, formally in writing, of the legislation that was passed. Board Member Lewis shared with the Board only one concern, the last paragraph in the letter, which states '1 would oppose any statutory change in regard to the program," which could imply that the Legislature could step in and make a statutory change and would nullify the previous section, depending on votes or steps needed to be taken. Mr. Falconer advised the Board that the League of Cities follows all the legislative actions that go through the State Assembly and the Senate. If this item was to come up, there are 3,000 members of the State pool and if there was a chance this might happen, they would possibly pull all their money out at once. There is a guarantee withdraw up to $10 million, so in a short amount of time the fund would drop. Board Member Olander reaffirmed to the Board that LAIF has leaned over backwards so that legislature cannot touch these monies. In addition to the handout from Mr. Falconer, Board Member Olander presented a flyer asking if the State could borrow LAIF dollars to resolve the budget deficit, and the answer stated is no. Also asked was if the State cannot adopt a budget bythe June 30th deadline, could they borrow monies from LAIF and again the answer was no. Board Member Olander requested the flyer be copied and distributed to the Board members. The flyer also included another breakdown of LAIF funds which could be of interest to the Board. In response to Board Member Moulin, Mr. Falconer advised the Board that Council receives a copy of the Investment Advisory Board Meeting Minutes in their agenda packets and can obtain a copy of the recorded minutes from the City Clerk's office. Cristina Deniel, potential Investment Advisory Board Candidate asked the Board if the State Treasurer actively manages the LAIF Funds in order to get the same type of. return that Orange County received, (i.e. so much in interest rate and taking interest rate risk, there wasn't a credit risk because of Federal Home Loan Bank mortgage backed securities, which were leveraged in order to increase yield.) Can the State do the same thing? Chairman Mahfoud replied to Ms. Deniel Investment Advisory Board May 14, 2003 Minutes that it is his understanding they have a policy with guidelines regarding interest rate risks. Board Member Lewis also stated that LAIF has an investment policy, stating what they can and cannot do. In response to Ms. Deniel, Board Member Lewis stated that LAIF cannot leverage themselves the way Orange County did. Mr. Falconer informed the Board that LAIF has two overriding documents, one being the State Code, which the City abides by as well. The City of La Quinta is further restricted from the State Code, this was adopted by the Investment Advisory Board and the City Council. LAIF has a state code, the LAIF Answer Book, policies they abide by in investments. Mr. Falconer stated that for example, the City can invest in commercial paper, which can only be A1 P1 or a higher rating, while LAIF can go A2P2, meaning they can go with a little more risk with their commercial paper program. Mr. Falconer informed Ms. Deniel that if she would like to obtain a copy of the LAIF Answer Book that Staff could forward to her. (Subsequently mailed.) Chairman Mahfoud asked the Board to clarify on page 10, last bullet point, "non-publicly owned" if this was correct. Mr. Falconer replied that in order to be consistent with page 11, public-owned, that non- publicly owned be used. Board Member Moulin reiterated that a distinction was being made due to the different level of scrutiny with a publicly-held entity listed on the New York Stock Exchange. The GSE's are pretty much the same and decided to combine them into one and distinguish the "publicly held" by definition. Chairman Mahfoud asked the Board if there were any comments that derived from Board Member Mortenson's comments at a previous meeting. Board Member Moulin replied that he felt that Board Member Mortenson was under the impression there were some backed by the full faith of credit by the United States Government, which is not the case. Board Member Moulin advised the Board that that the fax he forwarded to Mr. Falconer as a handout was his suggestion as a replacement paragraph for page 10 third bullet point, which also included the definition of GSE's, which Board Member Moulin felt that needed to be included in the paragraph. Mr. Falconer advised the Board that the paragraph does not explicitly state that we do not invest in the others. Board Member Lewis advised it says we only invest in the following. Board Member Lewis also advised that in the future it makes it easier 7 Investment Advisory Board May 14, 2003 Minutes to add them back in rather than add here and take out from there. Board Member Moulin stated to Staff that it was easier to list those investments the City invests in. Mr. Falconer advised the Board that Board Member Mortenson is now employed by Smith Barney and a result this could be a possible conflict of interest, due to the fact that Smith Barney is listed in the Investment Policy as one of the City's Broker/dealers. Board Member Mortenson was instructed by his firm not to attend an Investment Advisory Board Meeting until the firm consulted with the City's legal council. In response to Chairman Mahfoud, Mr. Falconer informed the Board that the firm is looking for a letter from the City saying that it is not a conflict, and if a letter is forthcoming then the issue is resolved. Chairman Mahfoud informed the Board that most and/or all changes to page 19 were made. Board Member Moulin advised the Board that on page 35 under "Federal Credit Agencies, item number two (FHLB's), last paragraph is missing a sentence. Board Member Lewis suggested to the Board that on page 19, Summary of Authorized Investments and Limitations, the items listed with a zero should be deleted and list the ones that have been approved. Board Member Moulin agreed. Chairman Mahfoud advised the Board that LAIF was changed to 25%, 7.5% on GSE's. Mr. Falconer reminded the Board that there was a change from $10 million to $5 million and invested over two years. Chairman Mahfoud asked the Board if there was a decision made to decrease commercial paper. Mr. Falconer replied to the Board, that at a previous meeting, commercial paper would not be eliminated, but based on the current market, commercial paper was not going to be utilized. Motion - It was moved by Board Member Lewis/Chairman Mahfoud to continue discussion of the Fiscal Year 2003/04 policy to the next scheduled meeting. Investment Advisory Board May 14, 2003 Minutes VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - April 2003 Mr. Falconer advised the Board that a check was cut for $1.7 million for the Sheriff's cost for the last five months, which will reflect a decrease in cash. Chairman Mahfoud asked the Board if there was a repo on the PMIA account. Mr. Falconer replied to the Board that this currently was being utilized. Noted and Filed B. Pooled Investment Board Report - February 2003 Chairman Mahfoud thanked Staff for the information provided regarding the LAIF investments. Mr. Falconer commented to the Board that based on the information that Staff provided, LAIF does not invest in Phillip Morris or Ingersol, due to some of their policies. Noted and Filed C. GASB No. 40 - New Rules Regarding Investment Disclosures in the notes to the Financial Statements Item was discussed briefly under section V. Business Session, item B. VII BOARD MEMBER ITEMS Mr. Falconer shared with the Board an overview of the LAIF Conference. Among the key speakers in attendance was a woman who shared her concerns and discussed the administrative fees and the limitations. Another keynote speaker was the U.S. Treasurer who spoke on counterfeiting and autographed dollar bills. On Thursday the keynote speaker was an Economist from the Anderson School at UCLA and he spoke on the economy, interest rates and his predictions of the future economy. Board Member Moulin commented to the Board that the gentleman from the UCLA has done some forecasting on the Investment Advisory Board May 14, 2003 Minutes economy and has been very accurate. Mr. Falconer advised the Board that he and Board Member Olander sat in on presentation from a City and a School District from San Bernardino and the collaborative efforts they go to try and receive federal and state grants and how they try to eliminate duplicate services and avoid overlapping. Mr. Falconer informed the Board that City Council is considering reducing the Investment Board Member size from seven members to five members. Board Member Moulin asked the Board how many seats would be open in June. Mr. Falconer replied that there would be one seat open if the Council reduced the Board to five members. Board Member Lewis advised that Board that his term will be up in June, but he will be reapplying to the Board. VIII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Olander to adjourn the meeting at 6:40 p.m. Motion carried unanimously. Sub~~:~ by, Vianka Orrantia Secretary lO