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2003 09 10 IAB Minutes INVESTMENT ADVISORY BOARD Meeting September 10, 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, Deniel and Mahfoud (5:33) ABSENT: Chairman Lewis OTHERS PRESENT: John Falconer, Finance Director and Vianka Orrantia, Secretary II PUBLIC COMMENTS III CONFIRMATION OF AGENDA Mr. Falconer advised the Board of a handout prepared by Staff, which was a follow-up of two items from the July meeting and requested that it be discussed under Board Member items. IV CONSENT CALENDAR A. Approval of Minutes of Meeting on July 9, 2003 for the Investment Advisory Board. MOTION - It was moved by Board Members Moulin/Olander to approve the Minutes of July 9, 2003. Motion carried unanimously. V. BUSINESS SESSION A. Transmittal of Treasury Report for June and July 2003 In response to Board Member Moulin, Mr. Falconer informed the Board that if they would like the historical information for June that it could be included in the next scheduled meeting. Board Member Moulin stated that the July report did contain the historical information for June. Investment Advisory Board SEPTEMBER 10, 2003 Minutes Board Member Moulin commented to the Board that Ms. Swan-Draper at the July meeting stated that Staff moved up the GSE's and Board Member Moulin felt that these were moved at the right time. Mr. Falconer informed the Board that in July, a T-Bill matured for 913 million and the proceeds were rolled over into GSE's. Mr. Falconer advised the Board that on page 15, of the Treasurer's Reports, under Cash Flow Analysis, a bond sale was priced on September 2, and will settle on September 25. The bond will be approximately 925 ~ million, which has been added to the forecast. Board Member Deniel asked what the face amount was of the bond. Mr. Falconer replied to the Board that the Bond was 926.4 million. In response to Board Member Deniel, Mr. Falconer advised the Board that the bond was not sold at a discount, that the difference included the fees, (i.e.. underwriter discount, cost of issuance, surety fees, credit enhancement fees)with no premium discount. In response to Board Member Moulin's question regarding the taxable bond sale, Mr. Falconer advised the Board that there were four terms and the rates were anywhere from 4.8% to 6.44%, with the net true interest of 6.37%. Board Member Deniel asked the Board why the bond was taxable if the City was issuing the bond. Mr. Falconer replied that the proceeds will be used for private activities relating to the SilverRock Ranch Property which is taxable by the IRS. In response to Board Member Moulin, Mr. Falconer informed the Board that most tax exempt bonds have a 5% to 10% rule, which could be used for private activities but in this particular case, dealing with the ranch and preferred tee times and possible private use for the Bob Hope Classic, the bond counsel refers to these as private activities. Mr. Falconer continued that the impact to the agency is that the City cannot issue as much debt because the interest rates are higher. The City currently pays an interest of 6.37%, which is higher than a tax exempt bond. The security for these bonds is based on property tax increments from RDA Area 1, South of Avenue 50 all the way to PGA West. Board Member Deniel asked if Staff could segregate the increasing value from what it used to be to what it is and what the taxes use to be and to what it is. Mr. Falconer replied to the Board that the County Auditor Controller's Office handles this. In response to Board Member Moulin, Mr. Falconer advised the Board that the Agency opted not to enter into General Obligation Bonds, because it requires a vote of the people. Mr. Falconer continued by stating that the reason the 2 Investment Advisory Board SEPTEMBER 10, 2003 Minutes Redevelopment Agency was formed was so the property taxes would not go to the County. Therefore the money stays within the City and can be used for whatever the Agency approves. The security for the bonds is tax increment and if for some reason the tax increment falls; such as if there are Prop 8 reevaluations, the bond holders are at risk. Board Member Olander asked Staff who was the underwriter for the bond issue. Mr. Falconer replied that the City's bond underwriter is Wedbush Morgan. Board Member Moulin asked if the bond Counsel receives a flat fee. Mr. Falconer replied to the Board that they do receive a flat fee and the sales bond was not negotiated. Board Member Moulin asked Staff who were the primary people within the City that helped arrange this? Mr. Falconer replied to the Board that the City has an Economic Development team which consists of the City Manager, Assistant City Manager, Redevelopment Director and the Finance Director, along with consultants, City Attorney, Bond Counsel, Disclosure Counsel, Financial Analysts and Pricing Consultant. Board Member Mahfoud asked Staff if the bonds are traded in the secondary market. Mr. Falconer replied to the Board that he did not know if they were still in the underwriter's inventory. In response to Board Member Olander, Mr. Falconer replied to the Board that the City is moving along on the Ranch Project; currently the City has scheduled upcoming meetings for a RFP for a clubhouse architect and Council and the RDA will be discussing the selection of a marketing firm and an engineer for the project. MOTION - It was moved by Board Members Moulin/Olander to approve, receive and file the Treasury Report for June and July 2003. Motion carried unanimously. B. FY 03/04 Investment Advisory Board Work Plan Board Member Moulin commented to the Board that he was surprised that the Treasurer was discussing having money managers come in and give a pitch, when this subject was brought up at the previous meeting and he felt that this should be discussed when the Treasurer was here to give his comments or input. Mr. Falconer advised the Board that the day before the meeting in July, that this was discussed with Chairman Lewis over a phone conversation. Chairman Lewis discussed his desire to possibly entertain a money manager. Mr. Falconer informed Chairman Lewis of the past situation of Weymer Investment Advisory Board SEPTEMBER 10, 2003 Minutes and the past direction of the Investment Advisory Board, which at that time was not permitted in the Investment Policy. If this was something to be considered, Mr. Falconer suggested to Chairman Lewis that it could possibly be placed in the work plan during this current fiscal year and incorporated in the Investment Policy. Mr. Falconer advised the Board that the City Council will discuss a particular item they may want at the scheduled meeting in October. (The City Clerk will bring this up at the next scheduled Council meeting for a tentative date. On this scheduled date all boards and commissions have a 45 minute window to sit and talk to the Council about any items the Council might consider.) Mr. Falconer advised the Board that this might be a good time to discuss a money manager with the Council members. That in the past, direction from the Council has been to develop an RFP; therefore if someone was to come in and present educational information, there would be no intention of signing a contract. Mr. Falconer commented to the Board that reading through the previous meeting minutes that this gives clarification of how this suggestion arose and where he stood. Board Member Moulin advised the Board that at the previous meeting it was discussed that the Board has a buy and hold policy and the Board is not trying to manage the funds the way a money manager would. The Board currently looks at the best investment that both Staff and the Board could invest in along with matching the maturity with the projection of the cash flow. Board Member Moulin stated to the Board that he is somewhat skeptical of how a money.manager fits in with the City's way of investing. Board Member Deniel advised the Board of a previous employer, Capital Group Companies, which was a group that managed over $800 billion in investment management. They had equities and fixed income, which is a totally separate department. They have invested monies for many cities as well as university endowments, different groups that do different things and they are also well known as distributors and money managers for American funds. Board Member Deniel advised the Board that they would have no objections or expectations in coming in and doing a presentation as what they can or cannot do for the City. Board Member Deniel stated that there is nothing lost as to hearing what someone has to offer and it doesn't mean that the City would place all their funds, they can start out with whatever is not being used at that time. Board Member Moulin asked if the fees were based on the size of the portfolio. Board Member Deniel replied to the Board that they have mutual funds that are 4 Investment Advisory Board SEPTEMBER 10, 2003 Minutes distributed to the public at 37 basis points. The fees would probably be less; if the fund does well enough to recover the 37 basis points, then it would be worth it. It's through their management of just moving up the yield curve, giving the current economic conditions, along with parameters given by the City. Board Member Olancler stated to the Board that with the current yields and the current money market the way they are, the City is at a lull in terms of the investments. They might have techniques that might increase the City's yields without giving up the City's normal standards, if anything we might learn from the experience. Board Member Moulin asked if they can invest in U.S. Government bonds and GSE's better than the way the City can. Board Member Olander replied to the Board that they can move faster or maybe anticipate certain things. Board Member Deniel stated to the Board that they can hedge with futures. Board Member Mahfoud reminded the Board that the Investment Policy does not allow us to use any type of hedging strategies. Board Member Deniel advised the Board that the Investment Policy could be given to the presenter(s) of a money management firm and they would have to abide by the City's policy, or the firm might even come to the City with recommendations. Mr. Falconer advised the Board that is why the City would develop the RFP, to include such matters: as does the City want delivery vs. payment, do we want to use the current three broker/dealers to get bids, do we want GSI=_'s or Treasuries, do we want a certain amount of money, do we want to extend out longer to get a good return, and .that there is a great deal to be worked out for the RFP process. Board Member Mahfoud advised the Board that a money manager will use hedging strategies; for example if $6 million was going to mature in 30 days, in order to hedge interest rate risks, he may go into a future contract and would this be allowed in our Investment Policy? Mr. Falconer replied no. Board Member Deniel stated to the Board that current policy does not allow the Treasurer or internal manager to go into futures or use hedging strategies; however the policy is adopted by the City Council and if the City Council were to approve that a certain portion of the portfolio is to be managed by a professional manager, the Council might consider allowing the manager to use hedging strategies. Board Member Mahfoud asked if the City Auditors would allow hedging. Mr. Falconer advised the Board that the City needs to abide by the State Codes. There are two issues, does the Board feel comfortable reporting losses and giving the City's money Investment Advisory Board SEPTEMBER 10, 2003 Minutes to a professional with our guidance. Board Member Mahfoud asked the Board what criteria does the City use for the Selection process or does the Board have enough knowledge as to what to look for. Mr. Falconer advised the Board that an RFP process be set up. Mr. Falconer also advised that this be discussed with Council and that the meeting scheduled with the Council Members in October would be the ideal time to discuss this matter with them. Board Member Deniel asked the Board if the RFP process would be done prior to hearing what a money manager could do for the City. Mr. Falconer replied that he didn't want to be presumptuous, but the Board would probably need to find out from Council if they wanted the Board to go forward with this idea; in terms of the RFP process, from an educational standpoint there shouldn't be any issue. Board Member Deniel stated that an invitation for just a presentation might be educational and/or help the Board to decide whether they need a money manager. Mr. Falconer advised the Board that if they wanted to place the work plan for educational purposes only and upon the decision of the Council from the meeting in October, the Board can proceed from there. Board Member Mahfoud asked if the Board was ready to make a case before Council regarding the money manager. Board Member Deniel stated that she was not ready to make a case before Council until the Board has had a chance to hear what a money manager can or cannot do for the City. Board Member Deniel also stated to the Board that if one or two firms were invited to make a presentation, at that time the Board would let the money managers describe what they do and we would explain how we invest. "These are policies and if hired by the City what can you do for us?" Board Member Mahfoud asked the Board if they wanted to meet with the money manager before the scheduled meeting with the Council or have the money manager at the meeting with the Council. Board Member Deniel again stated that she would like more education as to what they can or cannot do for the City. Board Member Olander agreed. Board Member Moulin agreed and also stated that this should be considered a long term idea. Board Member Moulin suggested to the Board that this idea be listed on the work plan as something to be considered for this fiscal year and towards the end of the year maybe come up with a recommendation. Board Member Olander suggested that this idea be listed as a high priority. Board Member Deniel stated to the Board that the Board go through the presentations, get some education and it could be possible the Board will decide at that time Investment Advisory Board SEPTEMBER 10, 2003 Minutes that they would not be able to use a money manager. Board Member Deniel advised the Board that both she and Chairman Lewis had several firms in mind to give a presentation. Mr. Falconer suggested that the Board place this particular item on the work plan for consideration by Council and based on their decision, at the next scheduled Board meeting come back with suggested criteria for choosing a money manager. Board Member Mahfoud advised the Board of the other items to be listed on the next fiscal year work plan: GSE's, LAIF, commercial paper and RFP for banking services. Board Member Deniel stated to the Board that in addition to the list mentioned, that the work plan would also read with the exploration idea of an open mind to investigate the possibility of having a money manager exist in the. management of the current portion of funds of the City. Board Member Olander suggested to the Board to state "exploratory discovery discussions." Board Member Moulin suggested to the Board "preliminary discovery." MOTION -It was moved by Board Members Moulin/Olander tO approve the 2003/2004 Work Plan. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - August 2003 Board Member Deniel asked the Board what is the Wells Fargo Housing account? Mr. Falconer replied to the Board that a separate bank account is setup to track a housing program within the City. Back in the early 90's, construction was depressed and a builder in the cove had 50 homes that were fairly new and he was not able to sell them, so the City used Iow/moderate income funds to purchase these homes. Mr. Falconer stated to the Board that for the people that rent these homes, their monthly rent is subsidized by the County. In order to track the money, this account was setup; also over the years there has been an excess of money, which is invested in LAIF, as part of the investment pool. The homes are owned by the Redevelopment Agency and Council has directed staff to sell the homes, which are sold to the renters, if they qualify and will give those renters an opportunity to own their own home. There is also a program within the City of La Quinta to help with the ? Investment Advisory Board SEPTEMBER 10, 2003 Minutes second trust deed, a silent second. Board Member Moulin asked Staff if the City had a program for employees, policeman, fireman, and teachers. Mr. Falconer advised the Board that the City is required by the State to maintain a certain amount of homes for Iow/moderate housing. An employee within the City who qualified for the silent second program has purchased a home. Board Member Deniel asked Staff what the difference was between City LAIF and RDA LAIF. Mr. Falconer replied to the Board that there was no distinction they are just two different accounts. Mr. Falconer advised the Board that at one time the City had a $10 million maximum to invest in LAIF therefore a second account was opened. In response to Board Member MoUlin, Mr. Falconer advised the Board that the current cap on LAIF is $40 million per account, 25% of the City's portfolio. Mr. Falconer also advised the Board that LAIF will also open funds for bond proceeds, which are separate. Noted and Filed B. Pooled Money Investment Board Reports - May and June 2003 Board Member Olander made general comments on the current shifts that have been made in the LAIF portfolio between treasuries, agencies and commercial paper, which is at the expense of loans. Board Member Olander also commented on the small decline of CD's. Mr. Falconer commented on the current LAIF portfolio size. Board Member Olander commented that commercial paper went from 21% to 25%. Board Member Deniel asked the Board who besides herself and Mr. Falconer will be in attendance to the LAIF Conference. Mr. Falconer advised the Board that an open slot still remains and if there was any interest to notify Staff no later than Friday, September 19th. Noted and Filed C. Increase in Board Compensation Noted and Filed Investment Advisory Board SEPTEMBER 10, 2003 Minutes D. Request for Proposal for Banking Services Update Mr. Falconer advised the Board that this is one of the most important items done this fiscal year. RFP's are submitted to local banks listed on the City's registry, banks within the City and banks that offer services to Governments. A copy of the RFP was included for the Board's review. Mr. Falconer advised the Board that Staff would like to schedule interviews in November for those banks that reply to the RFP. In the past there were three banks that responded: Bank of America, Wells Fargo and Union Bank. Mr. Falconer advised the Board that Washington Mutual also has inquired. Board Member Moulin commented to the Board that he felt the City should stick to larger banks. In response to Board Member Deniel, Mr. Falconer commented to the Board that the current bank (Wells Fargo) offers the same benefits to City employees as they would any other customer. Board Member Deniel advised the Board that one of the key services that larger banks provide are sweep accounts and interest payments on deposits, such as Wells Fargo. Mr. Falconer advised the Board that the City had at one time a treasury sweep account, but the interest was more than the fees that were being earned, so the sweep account was discontinued and the City went to compensating balances. With the interest rates so Iow, the City would be losing money every month on a sweep account. Noted and Filed VIII BOARD MEMBER ITEMS Mr. Falconer advised the Board that due to his absence at the July Board meeting and upon reviewing the July meeting minutes, the handout was a result of a question from Board Member Moulin that Staff was unable to answer. Mr. Falconer clarified to the Board that the $14 million was from the County Housing Investment. Mr. Falconer also clarified that the second page was a result of the changes from the previous year's cash balances which were $115 million in 2002 to $113 million 2003; he referred back to May 31, 2003 Treasurer's Report and put down what funds they were in and the changes. Board Member Moulin asked Staff if the audit field work was done. Mr. Falconer replied that Staff has received draft financial statements. There were a Investment Advisory Board SEPTEMBER 10, 2003 Minutes few housekeeping items, none which related to cash investments. There was one area in the Auditors cash work which dealt with confirming the rating status of the First American Fund. The bond indenture requires the money market funds have a certain rating, A rating. Mr. Falconer contacted Standard and Poors and had them speak with the Auditors regarding the rating. Board Member Moulin advised those new Board Members that the Board meets with the Auditors once a year to discuss audit areas of cash investments. Board Member Deniel asked the Board when they will receive a copy of the audit report. Mr. Falconer clarified to the Board that the audit partner meets with the City Manager to review the audit and ask any questions, then the audit partner will meet with the City Council around November/December, which at this time presents the audited statement to the City Council. Around December/January the audit partner meets with the Board and reviews cash footnotes and at that time addresses any questions from the Board. In response to Board Member Deniel, Mr. Falconer clarified that there are two kinds of comments, material weaknesses and housekeeping items. At this time there are no material weaknesses, but there are a few housekeeping items, which could be subject for discussion with the Board if they pertain to cash and investments. Mr. Falconer continued that he was not aware that these housekeeping items pertained to cash and investments. Board Member Moulin advised the Board that their jurisdiction is limited and there is no audit committee to the City. The Board does have the authority over the control of cash and investments and the handling of the internal controls, for this purpose the Board meets with the auditors. The auditors review what has occurred and 100% confirmation of securities. VIII Adjournment MOTION - It was moved by Chairman Mahfoud/ Board Member Moulin to adjourn the meeting at 6:35 p.m. Motion carried unanimously. ia . Secretary