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2003 12 10 IAB Minutes INVESTMENT ADVISORY BOARD Meeting December 10, 2003 I CALL TO ORDER Regular meeting of the La Ouinta Investment Advisory Board was called to order at the hour of 5:30 P.M. by Chairman Lewis, followed by the Pledge of Allegiance. PRESENT: Chairman Lewis and Board Members Moulin, Olander and Deniel ABSENT: Board Member Mahfoud OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary and Mike Harrison, Conrad & Associates II PUBLIC COMMENTS III CONFIRMATION OF AGENDA Mr. Falconer advised the Board that per conversation with Councilman Osborne, all other Commissions currently have business cards and suggested that the Investment Advisory Board obtain them. Chairman Lewis suggested this item be discussed under Board Member items. Board approved. Chairman Lewis requested that an additional item be discussed under Board Member items, presentations by Financial Management Firms. Board approved. IV CONSENT CALENDAR A. Approval of Minutes of Meeting on December 10, 2003 for the Investment Advisory Board. Board Member Deniel advised the Board that on page 3, paragraph 4, 4th sentence should read: The current HTE Software the City owns should interface with Union Bank customers systems or with Wells Fargo Bank customers, systems, and this is something that Staff could check into. Mr. Falconer advised the Board that Staff contacted other cities currently utilizing HTE and that the HTE Software does interface with Wells Fargo Banks system. Investment Advisory Board December 10, 2003 Minutes MOTION - It was moved by Board Members Olander/Moulin to approve the Minutes of November 1 2, 2003 as corrected. Motion carried unanimously. V. BUSINESS SESSION A. Transmittal of Treasury Report for October, 2003 Chairman Lewis advised the Board that on page 3, under Restrictions, Restrictions to per-issuer limits below: 100%, does not contain actual dollar amounts for Fannie Mae, FHLB, etc...Mr. Falconer suggested to the Board that the next meeting's Treasurers Report, that Staff could add the $7.5 million per each item. Chairman Lewis also advised the Board that on page 3, the same column, under Restrictions, at the bottom it states to see footnote 1, footnote 1 is not indicated at the bottom of the page. Staff will make sure that the footnote is placed on next months report. Board Member Moulin inquired of Staff, referencing the projected sources of funds on page 5 and in view of the article printed in the local paper regarding the City of Palm Desert, is the City expecting a short fall or if the numbers will have to be reviewed? Mr. Falconer advised the Board that in his opinion the article referenced the City of Rancho Mirage and there were some inaccuracies in the article. Due to the current state budget will be some impacts to cities. Mr. Falconer also advised the Board that in May 2004, the ERAF shift will be $1.2 million. Board Member Olander asked if Staff knew how much it would impact the City's budget. Mr. Falconer advised the Board that vehicle license fees would be impacted around $1.2 million, which would be spread out on a monthly basis, and this impacts the General Fund. The budget for the ERAF shift was $4 million; from a cash flow standpoint the City is still within their budget. Mr. Falconer advised the Board that the third issue mentioned in the Desert Sun article, the reduction of sales tax, which said to be cut in half, (which is called a "triple flip"), will not go into affect until July 2004, which is the new fiscal year. He said there seemed to be a misunderstanding in the article. As it currently stands now, sales tax will be reduced in half, with an equal amount of property tax revenue provided to replace lost the half sales tax. This would affect the City's cash flow, as property tax payments are received twice a year and sales tax payments are received each month. The overall effect will not impact the City. 2 Investment Advisory Board December 10, 2003 Minutes Mr. Falconer informed the Board that Staff reviewed the City's numbers through October 2003 and the City is at 150% of their revenue bud£¡et in building permits, for the first three/four months of the fiscal year. It currently looks as if the City is fine through this fiscal year. The vehicle license fees might be an ongoing issue and could eventually impact the City. Board Member Deniel overviewed for the Board the current hike and reduction of the license fees. Mr. Falconer advised the Board that the Governor rolled back the fees and cut them 73%; currently there is a debate between the Governor's administration and the State Assembly over who will make up the short fall. Mr. Falconer also informed the Board that the Governor would like to sell bonds to raise money to pay the cities back, but the Senate and the Assembly do not want to issue bonds. They feel that all cities will have to bite the bullet just as much as the state. Board Member Moulin informed the Board that the Governor is going to the people with a referendum to get this on the March ballot. General comments were made by the Board regarding the graph created by Staff. It was suggested that a simple line graph be used. MOTION - It was moved' by Board Members Moulin/Olander to review, receive and file the Treasurers Report for October 2003. Motion carried unanimously. VI CORIRESPONDENCE AND WRITTEN MATERIAL A. City of La Ouinta FY 03/04 Audited Financial Statements Chairman Lewis introduced Mr. Mike Harrison of Conrad & Associates, presenting the audited financial statement to the Board. Mr. Harrison presented the audited financial statement advising that the purpose of the audit is to ascertain whether the financial statements of the City are in 100 percent compliance. Mr. Harrison advised the Board that he would give them an overview focusing on the area of investments. Mr. Harrison informed the Board that the City Council was addressed in the previous month when the CAFR was completed and reviewed the City's activities for the year. 3 Investment Advisory Board December 1 0, 2003 Minutes Mr. Harrison advised the Board that part of the audit was to evaluate the internal controls in the investment area. Detailed discussions were held with the individuals involved as to segregation of duties and making sure internal controls; this process is thoroughly documented and determines the strengths and any weaknesses that are in the process. Currently there are no concerns in the area of weakness, as this was evaluated during the audit. Mr. Harrison asked staff whether, due to the City Manager being out on administrative leave, were the same controls currently in place with the Assistant City Manager, Mark Weiss. Mr. Falconer replied that the policy states that when the City Manager is not present than the Assistant City Manager acts in his place. Mr. Harrison advised the Board that when controls are evaluated that the auditors look for controls, functions and positions that are in place. It has been indicated what the City Manager's functions are and in his absence they continue. Mr. Harrison advised the Board that there were no investments sold prior to maturity. The auditors went through and evaluated investment compliance, not only with the investment policy as it was adopted in June of 2002, (which was for 02/03 fiscal year), but also that the policy was in compliance with the government code, and noted that the City policy is more restrictive. The auditors prepare work papers documenting tests completed during the course of the audit. Cash investments were confirmed 100%, all bank accounts, all investments with LAIF, third party custodians and fiscal agents were verified 100%. As for marking to market, the portfolio and the fiscal agent was "under water" about $22,000, with the rest of the portfolio "above water" about $250,000. Every year the balance sheet date is looked at to determine whether or not market and costs are approximately the same or if there is material difference. Materiality levels for the City, under GASB 34 are determined at the major fund level, which would be the General Fund and five other funds that are identified, and all the other 38 funds are identified under aggregate numbers. If the approximat~ by $230,000 were "diced", where market value is above where they ,are being carried at in the financial statements, which is approximately $113 million at June 30, this amount is insignificant to "dice up" based upon the materiality thresholds. Materiality thresholds on the major funds are well above what would have been allocated to 4 Investment Advisory Board December 10, 2003 Minutes them. In response to Board Member Deniel, Mr. Harrison informed the Board that the materiality levels on all the major funds were set as to what could be passed on adjustments, and the total that is being discussed is about $230,000 across the whole $113 million. If this was marked to market the amount would be higher, because at June 30th the market value was higher than what was being carried on the books. Mr. Harrison informed the Board that for purposes of recording in the financial statements, in the Investment Policy it does state they have been marked to market and for all materiality purposes they have. If there had been millions of dollar worth of difference, than the auditors would have asked the City to go back and allocate the unrealized gains or losses, or whatever the situation might have been, to those major funds or the other funds in the aggregate and journal entries would have to take place to the other 45 funds of the City. Board Member Moulin asked the Board referencing page 37 of the Investment Policy, if the first paragraph was changed in the past year to read that the carrying amount difference is significant or material. Mr. Harrison stated to the Board that this was probably changed within the last two years. Board Member Moulin stated to the Board that the second paragraph reads "changes that occur are recognized," which is a little different from the first paragraph which seems inconsistent. Mr. Harrison advised the Board that in paragraph two, what is trying to be said is that you follow the policy within the materiality limits, Mr. Harrison stated that at some point they were asked to change what is written in paragraph one, which typically is not written. Board Moulin advised the Board that at one point this was an issue with a former board member and that Board Member felt very strongly that this should be mark to market. The Board felt this was not relevant because of the policy "hold to maturity," but obviously in a declining market, there will be a plus and in a rising market there will be a negative. Mr. Harrison advised the Board there should be no problem, that the wording was modified due to a request. Board Member Deniel suggested that the wording in the second paragraph might be changed to read "material changes in fair value that occur are recognized," to comply with the first paragraph. Board Member Moulin reminded the Board that the wording could not be changed at this time. Mr. Harrison stated to the Board that "materiality" affects the whole audit, not just the investments, that this could be possibly inserted throughout, but that as we are trying to stay away from inserting it at all, it should be something in the work papers as opposed to what is in the 5 Investment Advisory Board December 10, 2003 Minutes audit report. Board Member Moulin suggested rewording the first paragraph. Chairman Lewis advised the Board that he didn't have a problem with the way the first paragraph is worded, Board Member Deniel concurred. Mr. Harrison stated to the Board that as far as management letter comments, as reported to the City Council last month, there are no reportable conditions of material weaknesses in the City, so there is nothing to report back in terms of investment related comments, and there were no housekeeping comments in the investment area. This does reflect the great amount of attention in this particular area. Mr. Harrison commented to the Board that he reads through the minutes and can see there is a great amount of attention paid to investment compliance. Mr. Harrison also commented to the Board that this probably stems from the Steven Wymer situation, in which the City did incur an investment loss to a certain degree. The City's investment committee is doing more than most cities that have $113 million in their investment portfolio. Conrad and Associates audit 46 cities and out of the 46 cities, two or three of them have Investment Committees; this places the City of La Ouinta up on top, because this reflects the attention focused in this area. Mr. Harrison informed the Board that there is a statement on the horizon for the 04/05 investment policy, GASB 40. GASB 40 will change what will go on the cash footnote disclosures. Prior to the upcoming adoption of the new investment policy for fiscal year 04/05, the Treasurer should suggest where the investment policy wording will need to be modified. For the fiscal year 04/05 there will be a lot of disclosures in the financial statements required. Mr. Harrison reviewed for the Board GASB 40, deposit and risk disclosures. This is an amendment of a previous GASB Statement, GASB 3. GASB 3 was following custodial risks, how investments were being held. Over a period of time, it was found that category one and category two were not a real meaningful disclosure anymore, with the history that they had had. What is meaningful is to have investments uncollateralized, (referring to category three), and that this still remains as far as custodial risks are concerned. What objectives and that the new statement is establishing comprehensive disclosure requirements for risk in the investment area, going beyond what GASB 3 did. It will include disclosures requirements for credit risks, including custodial credit risk and 6 Investment Advisory Board December 10, 2003 Minutes concentrations of credit risk. It will also include disclosures on interest rate risk and if there is any, foreign currency risk. This will supersede what is in GASB 3, for pension funds, which does not relate to the City of La Ouinta and also supersedes a couple of other GASB statements. In general, the disclosure principles are that the City has to organize their investment types, such as treasuries, bonds, commercial paper, etc... The City will not be able to aggregate dissimilar investments in the notes to the statements. As an example, in the City of Anaheim, the investment risk is greater for the stadium which is a major fund, than it was for other funds, and the risk would have to be disclosed in that particular area. So for the City of La Ouinta the deposit risks and investment policies relating to this will have to be disclosed, of which a great deal is currently being done now, such as limitations, but there will still need to be modifications made the more that this is reviewed, from the investment policy stand point. Mr. Harrison advised the Board that before entering into the new fiscal year (04/05), any training offered regarding GASB 40 should be taken prior to June. Conrad & Associates will conduct training on GASB 40 in April of 2004. Mr. Harrison advised the Board that the State of California is pretty specific but other states might not be as specific in the government code. GASB 40 states that disclosure is required if the investment policy does not address specific risks. The City's policy currently does address specific risks. As an example, if the government code had a particular bond rating that was required, and the City was more stringent then the Government Code, than the City would have to be very specific about this. The credit quality rating of investments and debt securities is going to be required as a disclosure. In response to Mr. Falconer, Mr. Harrison advised the Board that this can be done by aggregating the amount of investments by rating categories. No credit quality disclosures are required for U.S. Government Securities, such as Treasuries and Agencies. Chairman Lewis asked if they differentiate between Agencies and GSE's. Mr. Harrison replied that they did not in the disclosure. Mr. Harrison also advised the Board that the pools will also have to ante up with all the disclosures, such as LAIF. LAIF will have to produce the information so all the local governments that have money in LAIF can put the appropriate disclosure in their own statements. In response to Chairman Lewis, Mr. Harrison advised that Board the for those cities under the $40 million threshold, most put their money in LAIF, so the auditors will have work with putting the disclosures in the statements. Mr. Harrison informed the Board that there is a disclosure 7 Investment Advisory Board December 10, 2003 Minutes required if the investment is unrated and should have had a credit quality rating. Board Member Moulin stated that that Investment committee does not really review the custodians, currently most of it is with the Bank of New York. Should the Investment Board be reviewing this more carefully or should this be split between custodians, what is the intent? Mr. Harrison advised the Board that the intent of having a third party custodian is to have the delivery vs. payment setup so you do not have the same person or department that is handling a book of security form. This is meant to be an independent party and the transaction has to go through that independent party. Board Member Moulin asked if the City would be disclosing custodial activities. Mr. Harrison replied not for the third party custodian, only if the City was exposed to custodial credit risk, which it wasn't since it was being handled by a third party custodian. Chairman Lewis reminded the Board that was reason why the Investment Board was created, because at the time there was a custodial risk and there wasn't a third party. Mr. Falconer advised the Board that one of the areas to think about is that some of the bond issues require a certain credit rating for money market funds and staff will have to contact Standard and Poors to make sure the money market funds are at that credit rating. Chairman Lewis advised the Board that some of the funds do not bother to get the rating because there is a cost incurred to obtain a rating. Mr. Falconer advised the Board that this is one item that has to be disclosed. Mr. Harrison asked if some of the money market funds are unrated. Mr. Falconer stated that the bond indenture requires that certain credit quality for money market funds and the investment policy does not. Mr. Harrison advised that the City would have to disclose whatthe credit quality rating that was required as a part of the bond document. Board Member Deniel requested from staff a copy of the GASB 40 summary. Mr. Harrison stated to the Board that interest rate risk would need to be reported; however, the interest rate risk is managed by weighted average maturity or by specific identification. Mr. Falconer advised the Board that staff would be categorizing the investments by weighted average maturity; currently staff reports the weighted average maturity for the entire portfolio. Mr. Harrison stated there will be notes to the financial statements organizing interest rate risk information by investment type using one of several methods and weighted average maturity is one them. 8 Investment Advisory Board December 10, 2003 Minutes GASB states to use the disclosure method most consistent with the way that you manage the interest rate risk. This is what the City will have to disclose, showing the weighted average maturity by investment type, by one of the methods. Mr. Harrison advised the Board that the important thing for the Board is to "fine tune" the investment policy. Board Member Moulin asked if, due to the fact that the policy was changed in fiscal year 03/04 and due to the Embassy Suites Hotel and SilverRock Ranch activities, from an audit standpoint and disclosure standpoint, would this be covered by any of the material. Mr. Harrison replied to the Board that if this was an investment, that the answer would have to be no. Mr. Harrison advised the Board that there are also disclosures to debt instruments that are highly sensitive to interest rate changes, if there are contract terms that include such terms as multipliers, indexes or reset dates. The effective dates for GASB 40 for periods beginning after June 15, 2004, will be the new upcoming fiscal year. Mr. Harrison stated to the Board that even if Mr. Falconer implemented this in the next fiscal year, he felt that LAIF would not early implement, so the City would just have to state that this information was not available. Chairman Lewis suggested that this could be footnoted as preliminary. Mr. Falconer suggested to the Board that the other option is to continue under the current policy and do a duplicate footnoting of how it would look under the new standards. Mr. Harrison advised the Board that early application is encouraged. Board Member Moulin asked if there were any proposed audit adjustments. Mr. Harrison replied that the only item was the mark to market, which was passed due to immateriality. Board Member Deniel asked if there were any recommendations for improvement as far as investment process. Mr. Harrison replied that the auditors were satisfied that the internal controls were adequate to safeguard the assets of the City, which is the objective they look for. Due to the limited number of personnel in the Finance Department, they have sound internal controls over wire transfers, segregation of duties, verifications of amounts coming back on execution of trades, approvals from City Manager and what the Treasurer does. Mr. Harrison stated to the Board that the only concern was that the City Manager is out on administrative leave and there is another person that is suppose to be fulfilling the checks and balance 9 Investment Advisory Board December 10, 2003 Minutes approval process, so it is up to the Treasurer to educate the Acting City Manager of what his responsibilities are with relationship to the checks and balances approval process. Board Member Moulin asked if there were any disagreements with Management for cash and investments. Mr. Harrison stated there were none. Noted and Filed B. Month End Cash Report - November 2003 Noted and Filed C. Pooled Money Investment Board Report - September 2003 VII BOARD MEMBER ITEMS General discussion ensued amongst the Board regarding business cards and it was the consensus of the Board not to purchase them. Board Member Moulin commended the Audit firm, Conrad and Associates; and also wanted to thank Staff on a job well done. Chairman Lewis suggested to the Board that investment information presentations possibly be scheduled in the month of February. Chairman Lewis stated that he had someone in mind as well as Board Member Deniel. Chairman Lewis suggested that the presentations be 10 to 1 5 minutes with a 10 to 1 5 minute question and answer period and that this will be just for informational purposes. Board Member Olander suggested to the Board that the presenters would submit an executive summary prior to their presentations. Chairman Lewis suggested that the Board meet earlier than the normal scheduled time, of 5:30 and suggested 4:30. Board Member Olander suggested that an invitation to the City Council be made. Mr. Falconer advised the Board that the City has a weekly item of interest memorandum that is sent to the City Council Members, this could be added. Chairman Lewis suggested to the Board that the business items be conducted prior to the presentations. 10 Investment Advisory Board December 10, 2003 Minutes VIII Adjournment MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 6:30 p.m. Motion carried unanimously. Vianka Orrantia Secretary 11