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2003 07 09 IAB Minutes INVESTMENT ADVISORY BOARD Meeting July 9, 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 Lewis and Deniel ABSENT: None OTHERS PRESENT: Tom Genovese, City Manager, Amy Swan-Draper Accounting Manager and Vianka Orrantia, Secretary II APPOINTMENT OF OFFICERS A. Appointment of Investment Advisory Board Chairperson Chairman Mahfoud opened nominations for Chairperson. Board Member Moulin nominated Board Member Tom Lewis for Chairperson. MOTION - It was moved by Board Members Moulin to appoint Board Member Lewis as Chairperson. Motion carried unanimously. B. Appointment Of Investment Advisory Board Vice-Chairperson Chairperson Mahfoud opened nominations for Vice Chairperson. Board Member Olander nominated Board Member Mahfoud. MOTION -It was moved by Board Members Olander/Moulin to appoint Board Member Mahfoud as Vice Chairperson. Motion carried unanimously. Investment Advisory Board July 9, 2003 Minutes III Public Comments Tom Genovese, City Manager informed the Board that 2003/04 Investment Policy had been adopted by the City Council. IV CONFIRMATION OF AGENDA Amy Swan-Draper, Accounting Manager informed the Board that there were several handouts; one of the items was the registration form and information regarding the LAIF Conference. Additional handouts for the Board also included a copy of a letter from former Board Member Mortenson and a handout from Board Member Mahfoud in regards to Freddie Mac and Federal Home Loan Mortgage. V. CONSENT CALENDAR A. Approval of Minutes of Meeting on June 11,2003 for the Investment Advisory Board. Board Member Deniel advised the Board that on page 6, item VII, third paragraph, in parenthesis the sentence should read: (which is not good for the equity market) Board Member Deniel commented that in the third paragraph, the last line that reads "and criminal investigations," that there was not a criminal investigation. Chairman Lewis advised the Board that technically if Board Member Mahfoud said criminal investigations, than the minutes are accurate as stated. Board Member Deniel advised the Board that also on page 6, item VII, the 10th paragraph, and the sentence should read: Board Member Lewis advised the Board that he felt this was a positive; ~he Board took a look at the fact that Senior not cooperating with an internal audit, pC/committee Management was and dismissed management; this was very proactive.stance. Board Member Moulin advised the Board that on page 7, 9th paragraph, the spelling of Benzel was incorrect and should be spelled Brensel. 2 Investment Advisory Board July 9, 2003 Minutes MOTION -It was moved by Board Members Mahfoud/Moulin to approve the Minutes of June 11, 2003 as corrected. Motion carried unanimously. VI BUSINESS SESSION A. Transmittal of Treasury Report for May 2003 Ms. Swan-Draper advised the Board that the City had a considerable amount of cash due to the collection of property tax increments collected at the end of May. A transfer was made to LAIF to bring the dollar amount to a maximum. Ms Swan-Draper also informed the Board that there were several maturities in treasuries; Staff rolled them over, along with government paper which was also rolled over. The overall major change for the month of May was the liquid cash. Ms. Swan-Draper informed the Board that Mr. Falconer continues to keep the City's investments short-term due to the declining interest rates. The average maturity is 74 days, which can be seen on the Summay of Holdings page of the Treasurer's Report. Ms. Swan-Draper also informed the Board that interest rates on the City's money market funds which are related to bond issues are at an all time Iow. They have declined over the past few years and these fiscal agent accounts have been drawn down. Ms. Swan-Draper informed the Board that the activities page indicates an increase in liquid cash in checking due to tax collections and that the money for the tax collection was received at the end of the month. Ms. Swan-Draper also informed the Board that the County of Riverside used to wire transfer the money directly into the City's account but due to a transition of new softWare an actual check is cut. Arrangements have been made for an employee to drive into Riverside to pick up the check and deposit the check that same day and the bank was notified in advance, due to the large sum being deposited. Ms. Swan-Draper advised the Board that the City's checking account was overdrawn in anticipation of the check from the County prior to the arrangements currently in place. Ms. Swan-Draper reviewed the Treasurer's report for the Board. Ms. Swan-Draper informed the Board that the City's year end is 3 Investment Advisory Board July 9, 2003 Minutes JUne 30th and that Staff will be preparing for the annual audit to begin' August 4th. Board Member Deniel requested an appointment with the Treasurer to review the Treasurer's report to gain a better understanding of the report. Board Member Moulin asked Staff when the $9 million was deposited. Ms. Swan-Draper replied that she did not know the exact date could not be given and that there was cash along with a warrant run causing a deficit, which were not near $9 million. Board Member Moulin also asked Staff if they were rolling cash into an earning interest account to offset expenses and when the $9 million was received if it went into LAIF. Ms. Swan-Draper advised the Board that the Treasurer handles the investments; therefore she could not answer on his behalf. Board Member Moulin advised the Board that in the previous year the City had a $115 million dollar balance and this year has a balance of $113 million, he asked Staff if they knew what this was attributed to. Ms. Swan-Draper replied to the Board that one of the attributing factors from May 31st of 2002 to current is the $30 million bond issue, which continues to be invested, but during this time $30 to $40 million was spent on the purchase of the Ranch Property. Ms. Swan-Draper stated to the Board that there has been a large amount of money that has come in but there has been a large amount also being paid out. Board Member Moulin commented to the Board that a loan was made to a developer of the hOtel. Ms. Swan-Draper informed the Board that the money has not yet been released to the developer. Mr. Genovese advised the Board that there are certain performa, nce requirements the developer must meet prior to releasing the funds. In response to Board Member Moulin, Ms. Swan-Draper advised the Board that the (conduit financing) interfund loans would be reflected in pooled cash, but the interest investment money listed only represents external cash investments. When money is loaned between funds and one fund is paying interest income to another fund, the money goes into unallocated interest earnings, which is not reflected in the Treasurer's Report. 4 Investment Advisory Board July 9, 2003 Minutes Board Member Deniel stated to the Board that if one City funds lends money to another City fund that there is not interest to be earned because the one City fund that earns the interest is offset by the other City fund that pays the interest so therefore the interest is zero; this is similar to an intercompany account. Ms. Swan-Draper replied to the Board that this is structured a little differently. The money is maintained within pooled cash, reflected in the Treasurer' s report and externally it' s earning a lower amount; internally the fund that is borrowing the money from the general fund is paying a higher interest rate. Chairman Lewis reminded the Board that the current discussion amongst the Board should be that of the Treasurer's Report and asked if there were any questions regarding the Treasurer's Report. Chairman Lewis advised the Board that if there were any further discussion on these or any other issues that they could be listed on a future business item later on in the year. MOTION - It was moved by Chairman Lewis/Board Member Olander to approve, receive and file the Treasury Report for May 31, 2003. Motion carried unanimously. B. FY 2003/04 Meeting' Schedule Chairman Lewis advised the Board that the handout is the following meeting schedule for the upcoming year. The Board is required to meet a minimum of quarterly and as often as monthly, with the exception of the month of August due to the audit. MOTION - It was moved by Board Members Moulin/01ander to continue to meet on a monthly schedule with the Board going dark for the month of August. Motion carried unanimously. C. Consideration of Approval of Investment Advisory Board 2003/2004 Work Plan Chairman Lewis informed the Board that this area is where the Board takes an opportunity to discuss any items of concern or items that need 5 Investment Advisory Board July 9, 2003 Minutes to be looked at depth throughout the year. Next spring is when the Board will start to take a look at those areas in the investment policy that need to be discussed and/or changed. Some examples for future discussion are the issue of Freddie Mac, questions regarding internal accounting, funding and loans between the funds. In a previous year there was a study session setup to discuss commercial paper. Initially when the policy was setup commercial paper was not an allowable investment for the City and it was added at a later date after some in depth study. Chairman Lewis asked the Board if there were any comments, suggestions or items that the Board would like to see discussed over the course of the next fiscal year. Board Member Mahfoud asked if this item would be discussed in September. Chairman Lewis replied to the Board that this item could be continued to the next schedule meeting. Board Member Moulin suggested to the Board that they continue to look at GSE's. Board Member Olander suggested to the Board that they look at GSE's, LAIF and commercial paper. Chairman Lewis suggested that the Board hear a presentation from a professional money manager and schedule a presentation for either the month of November or December to see what they could possibly do for the City, possibly enhancing yields, staying within the guidelines the City has set. From this presentation if the Board decides to go with a money market manager, it could possibly be something considered for next year's investment policy, which is currently not allowable in the current policy. A money market manager could possibly pick a better yield than the Treasurer could obtain without having to go through a broker or there is a possibility they would not be able to do anything for the City. Chairman Lewis advised the Board that he knew of a firm that he previously worked with, a firm based out of L.A. by the name of R & C Capital. Board Member Deniel advised the Board that she too could recommend a firm that was also based out of L.A. by the name of Capital Group Companies, with a good Fixed Income Department. Chairman Lewis advised the Board that if this was something that Council would consider to explore, the Board would have to put together a Request For Proposal, these firms would have put together proposals and specify what they could do for the City. This suggestion ~to hear one or two presentations would give the Board a general idea of a what a firm might be able to do for the City. Board Member Deniel commented to the Board that placing Investment Advisory Board July 9, 2003 Minutes our money with LAIF is in essence placing the money with a professional money manager. Chairman Lewis advised the Board that at the last City Council meeting, this was one the question areas that was discussed in great detail and concern, was the fact that the professional money manager of LAIF happens to work for the State of California. Board Member Deniel reiterated the Council's concern. Board Member Mahfoud asked the Board if most bond money managers used "hedging" strategies against interest rate risks. The City is not currently allowed to use a money market manager, as much as it is highly needed in our portfolio, most money market managers have to use hedging strategies against interest rate risks in futures, which involves a future contract. Board Member Deniel advised the Board that it would depend on the perimeters given prior to setting up the presentations, informing the firms what the rules are for the City and if they can or can't meet these guidelines. The firms would than in turn advise the City if they would meet these guidelines, and if hedging would be involved and if the rules would need to be changed to meet the requirements set by the firm. Board Member Mahfoud asked the Board what the average fee was for a bond money manager, if currently it was 35 basis point. Chairman Lewis advised the Board that due to the size of the City's portfolio, this would be negotiated rate. Board Member Deniel commented to the Board that the City could be paying 10 to 12 basis points. Board Member Moulin commented to the Board that he felt that the Board was overstepping their rules or grounds, and that the Treasurer should have some input involving this matter, before a decision is made. Chairman Lewis advised the Board that he had spoke with Mr. Falconer and he was the one that suggested the process of a presentation in November/December and if at that time the Board decided to proceed, than the Board would work on adjusting the policy. Chairman Lewis advised the Board that initially the Board would hear one or two presentations as to what can be done, more of a philosophy. Board Member Mahfoud advised the Board that this was going against the Investment policy and that the current strategy is a "buy and hold" strategy and he could not see paying a short-term bond money manager a 35 basis point fee for a buy and hold strategy, if the City cannot choose a hedging strategy. Board Member Deniel advised the Board that it is not 35 basis points, it is maybe 10 to 12 basis points, which is being paid to LAIF on the spread. By pooling a bid, a spread can be avoided, which is not necessarily buy and hold, but they may know when to move from a Investment Advisory Board July 9, 2003 Minutes 90 to 100 day range into the 180 to 270 range by moving up and down the yield curve, thereby enhancing the return. There is nothing lost by listening to one to two presentations. Board Member Olander commented to the Board that somewhere in the future the City might want their own in-house person if the City's revenue reaches a certain stage. Board Member Moulin advised the Board that the Treasurer invites the Board to participate in some of the selections made, such as considering the banking services, audit services and even the brokerage houses, but the final decisions still remain with him. Chairman Lewis advised the Board that the Banking RFP's should be on the agenda no later than October, so that the City can make a decision by December 31. Board Member Olander suggested to the Board that perhaps they can be a sounding board for matters that come before the City Council in respect to financial investments and some other issues, which could broaden the Boards scope, possibly being an assistance. Board Member Deniel concurred. Chairman Lewis advised the Board that this might be outside the scope of the Board as the statute. Board Member Moulin stated to the Board that this was a good idea; the point made last year that items involving financial matters be brought to the Treasurer, there were some matters that were decided by the City Council without the counsel of the Treasurer and had financial implications. If the City Council or the Treasurer would like the Board's advice, Board is more than willing to furnish it. Chairman Lewis reviewed for the Board of the suggested items for review for the 2003/2004 work plan: review of GSE's, review of LAIF, commercial paper, the RFP for banking services for the next four year contract and listen to a one to three presentations for money managers to see what they could possibly do for the City, or it they could do anything for City, such as increasing the City's return by 20 basis without increasing the risk. Also included for review is to consider more ways to be assistance to the Treasurer and City Council if requested by Treasurer or Council, on financial items. It was clarified by the Board to the City Manager that the Investment Advisory Board is available for assistance if needed by either the Treasurer or the City Council. MOTION -It was moved by Board Members Maufoud/Olander to 8 Investment Advisory Board July 9, 2003 Minutes continue the 2003/2004 Work Plan to the next scheduled meeting. Motion carried unanimously. C. LAIF Conference In response to Chairman Lewis, Ms. Swan-Draper informed the Board that the City has budgeted $2,500 for this years LAIF Conference, for the Treasurer and two Board Members to be able to attend. Chairman Lewis asked the Board who would like to attend the upcoming conference. Board Member Deniel informed the Board that she would be interested in attending. Chairman Lewis informed the Board that he is interested in attending, will reconfirm with Staff at a later date. MOTION -It was moved by Chairman Lewis/Olander authorizing two Board Members, Board Member Deniel and second attendee (to be named at a later date), to attend the conference subject to council approval. Motion carried unanimously. VII CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - June 2003 Ms. Swan-Draper advised the Board that the Treasurer prepared a report reflecting the changes since JulylSt. The following short-term changes have been implemented: LAIF has increased by $5 million; an increase in Fannie Mae by $2.5 million, currently placing Fannie Mae at $7.5 million; an increase Freddie Mac by $2.5 million placing Freddie Mac at $7.5 million; increased Federal Home Loan by $2.5 million placing Federal Home Loan at $7.5 million; Farm Credit still holding at $5 million. In response to Board Member Moulin, Ms. Swan-Draper informed the Board that interest rates are not listed in the summary. Noted and Filed B. Pooled Money Investment Board Reports - April 2003 General conversation ensued amongst the Board regarding the current Investment Advisory Board July 9, 2003 Minutes rates and yields, and the current returns from LAIF. When the rates begin to rise the return from LAIF will decrease. In response to Boar'd Member Deniel, Chairman Lewis advised the Board that LAIF is actually only a subset of the overall portfolio, which includes quite a bit of State money in the pool. Noted and Filed C. Distribution of Investment Policies for Fiscal Year 2003/2004 It was discussed amongst the Board the additional flexibility that the Treasurer now has since the. implementation of the 2003/2004 Investment Policy. It was also discussed amongst the Board the concerns of the City Council members and their concerns regarding LAIF, the current elected officials of the State of California and the current budget crisis of the State of California. Noted and Filed VIII BOARD MEMBER ITEMS Chairman Lewis advised the Board of the letter of resignation from former Board Member Mortenson. Board Member Mahfoud suggested to the Board that they read the copy of the article about Freddie Mac and Federal Home Loans, which was handed out at the beginning of the meeting. Board Member Olander advised the Board that the City Manager awarded a Certificate of Achievement of Financial Reporting from the Government Financial Officers Association of the United States and Canada, appreciation was expressed to the Finance Department and John Falconer and his Staff should be commended. Tom Genovese, City Manager advised the Board that this was- also a reflection of the City Council for providing the resources to the Finance Department, such as an additional Staff Member to the Finance Department, an Information Systems Technology candidate, which will be housed in the Finance Department for support throughout the City. ]0 Investment Advisory Board July 9, 2003 Minutes In response to Board Member Moulin, City Manager, Tom Genovese conveyed to the Board that out of experience and working with the Treasurer, Staff is able to meet timelines, if the City had in-house utilities, than additional Staff would be necessary. Funds have grown, but do not necessitate additional Staff. This issue is also reviewed by the City's auditors; if the auditors see internal weaknesses caused by a lack of staffing position(s) they will make recommendations to either add staff positions or segregate duties and if duties need to be segregated, the auditors may feel this would not be appropriate because there would not be enough staffed positions. IX ADJOURNMENT MOTION -It was moved by Board Members Lewis/Moulin to adjourn the meeting at 6:40 p.m. Motion carried unanimously. ~~Sub~ted by, Vianka Orrantia Secretary