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