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2004 04 14 IAB Minutes INVESTMENT ADVISORY BOARD Meeting. April 14, 2004 . 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 Lewis, followed by the Pledge of Allegiance. PRESENT: Chairman Lewis; Board Members Moulin, Olander, Mahfoud and Deniel ABSENT: None OTHERS PRESENT: John Falconer, Finance Director; Vianka Orrantia, Secretary II PUBLIC COMMENTS - None III CONFIRMATION OF AGENDA - Confirmed IV CONSENT CALENDAR Approval of Minutes of Meeting on March 10,2004 for the Investment Advisory Board. Board Member Deniel advised the Board that page 3, second paragraph, thirteenth sentence should read: Board Member Ghairman Mahfoud. Page 6, second paragraph, second sentence should read: time to go through the general parameters perimeters and return to the next Chairman Lewis advised that Board that on page 1, the portion in parentheses next to Confirmation of Agenda, belongs after Public Comments. MOTION - It was moved by Board Members Olander/Moulin to approve the Minutes of March 10, 2004 as corrected. Motion carried unanimously. V . BUSINESS SESSION A. Transmittal of Treasury Report for February 2004 Mr. Falconer informed the Board that page 6 of the Treasurer's report indicates the maturity of aT-Bill which was rolled over 30 days as a' result of receipt of property tax. $6 million was placed into LAIF, Investment Advisory Board April 14,2004 , Minutes for debt service payments which were due as of March. MOTION - It was moved by Board Members Moulin/Olander to review, receive and file the Treasurer's Report February 2004. Motion carried unanimously. B. Consideration of Fiscal Year 2004/05 Investment Policies Board Member Deniel commented to the Board that due to her absence from the prior meeting the previous meeting minutes did not clarify whether the Board decided if it. was advantageous for the City to have a professional outside portfolio manager or if the Board should continue to proceed with its discussions on this matter. Board Member Deniel informed the Board that in reference to the handout the existing Investment Policy was modified to include a professional money manager to manage all or part of the City's portfolio. The following were the suggested changes and/or deletions: ~ Table of contents; an insert was made in Section 7 A titled "Hiring a Professional Portfolio Manager(s)." ~ Page 5, item A. Credit Risk, second bullet point, the word "with" is missing. ~ Page 7, added "delegation of authority," sections underlined including Section 7 A, are new 'additions. Board Member Deniel asked the Board to read this section and come back with comments. ~ Page 8, first bullet point, regarding the restrictions applied to conflicts of interest between the professional money managers where appropriate. Section 9, "Authorized Financial Dealers and Institutions," under Item 1. Broker/Dealers, added "outside professional portfolio manager," since they are all NASD registered. ~ Page 9, under "Authorized Investments and Limitations," added "The Professional Portfolio Manager contracted by the City will be permitted to invest in the manner s.ummarized in Appendix A," . , Appendix A would have to be created. ~ Page 13, under "Investment Pools," since the two presenters at the February meeting spoke of not only managing the City's Investments as an individual account but also within a pool with other cities with similar funds. The following sentence was deleted "The City does not allow investments with any other Investment Pool - County Pools or Third Party Pools." 2 Investment Advisory Board April 14,2004 Minutes ~ At the top of page 14, a restriction was added which read "If an Independent Professional Investment Manager is hired, a third party custodian, separate from the Investment Manager organization shall be used." ~ Page 18 an appendix A 1, was created as a guideline for a Professional Outside Investment Manager. If the account is handled within pooled investments or similar sorts, restrictions were added. / Board Member Deniel stated to the Board that these were her suggested additions and/or changes within the Investment Policy to include a Professional Money Ma~ager. Board Member Mahfoud asked the Board what it would take to implement the suggested changes. Chairman Lewis replied that to implement changes, the Board will discuss any changes and once a consensus is reached on the overall policy, (which will be discussed at today's meeting and the next scheduled meeting), a vote is taken approving the policy, then forwarded to the City Council. The City Council than reviews the Boards suggestions, one or two members from the Board are present during the City Council's approval session of the policy to answer any questions the Council might have. The City Council either approves the Boards recommendations or they suggest changes they deem appropriate. Board Member Deniel stated to the Board that any suggested changes and/or additions she has made to the policy, the City Council has the ultimate decision as to whether or not to hire an outside professional portfolio manager. The fact that it is in the policy does not mean that they will agree. Board Member Mahfoud suggested to the Board that instead of procrastinating about the idea of a professional money manager, the Board should apply the changes to the policy, since there is no requirement to implement and this way it at least it is in the policy. Board Member Deniel concurred. Board Member Olander stated to the Board that this item was being pushed too hard, too fast. He also' stated that this is an educational process and if too much pressure is felt by the Council, there might be some problems. Eventually this might be the future direction. Board Member Olander reminded the Board that the Treasurer stated that at this time a professional money manager is not needed. Currently, the policy is at a buy and hold philosophy and the Treasurer is currently making two to three transactions a month. Board Member Olander stated to the Board that this would be an opportunity to educate everyone and bring them up to speed. 3 , Investment Advisory Board April 14, 2004 Minutes Chairman Lewis asked Board Member Olander if he eventually saw the need for an Investment Advisory Service for the City. Board Member Olander replied that he stated this several times. Chairman Lewis stated that Board Member Deniel is not suggesting that the policy will be changed and than go out and hire an investment advisor, only that this will be an option available when the City does decide to use one it will already be in the place within the policy. Board Member Olander stated to the Board that this was his suggestion ât the previous meeting that for the record that the Board is aware of the ultimate need, if too much is done at this time it may set the cause back. Board Member Deniel stated that the Council Members will eventually have the ultimate decision. But, if there is a policy that says this is what you have done in the past and you can continue with current policy; and in addition, there are one or two other options which have not been done in the past, but when it is decided to go ahead and use a professional ,money manager the option is in place and has been approved by the Investment Board. Board Member Olander stated to the Board that on page 7 of the suggested policy, the second paragraph was rather strong. Chairman Lewis reminded the Board that the City Council appointed the Investment Board Members to advise the City on what is best for City's investments not to advise the City as to what the City Councils wants the Investment Board to do with investments. Advice can be given to the Council by the Board as to what is best for the City and they can disagree. The Council did appoint the Board to give good advice in the best interest of the City. Board Member Olander stated that the Board is in agreement of this statement. Board Member Deniel advised the Board that she purposely stayed away from the term "investment advisor" and calls it a "professional portfolio manager," meaning people who make their living one hundred percent of the time, looking at modeling' the portfolio constru<?tion and staying abreast of the market for the purpose of earning a return. This eventually will be what the City needs. Board Member Olander asked Mr. Falconer if he saw a time when the City would need a money manager. Mr. Falconer replied to the Board that as long as the policy continues with a buy and hold strategy, there is not a need to hire a professional portfolio manager since the' City is not trading. Board Member Olander advised the Board that they are currently doing the preparatory work to eventually set this plan in motion. Board Member Olander stated to the Board that with the continued growth of the City, ultimately a money manager might be needed, but 4 Investment Advisory Board April 14, 2004 Minutes when is this to be determined, two, three or five years? Mr. Falconer stated to the Board that it might not be a function of the size of the portfolio, but just the basic philosophy of the Council on actively trading the portfolio. Mr. Falconer stated to the Board that Chairman Lewis has served on the Board for numerous years and can appreciate the historical perspective. . Chairman Lewis stated to the Board that he does not like to use the term "actively trading" the portfolio, due to the connotations it brings. For example, if the term actively trading is used one might think of a day trader flipping in and out of stocks, this is not the way the bond market works and this is not the way a bond manager works. Actively trading could also mean doing two to three trades a week, as opposed to a month. Board Member Deniel stated to the Board that it also means moving the portfolio along the yield curve or part of it as the interest rate outlook changes. An example was given. General discussion ensued amongst the Board reg,arding the issue of chasing yield and the risk~ Board Member Moulin advised the Board of his comments from the' previous meeting and suggested to the Board that ~his issue be placed in a strategic plan. Board Member Moulin stated to the Board that historically the Board has never had a policy rejected by the Council and feels the City might not be ready at this time to move towards a professional money manager and to place it in the policy might be premature. Board Member Olander advised the Board that this item should be mentioned within the policy. If placed in a strategic plan, the idea might get lost. The Board should educate themselves for the benefit of the Council. General discussion ensued amongst the Board regarding several issues, (i.e. loss of the Treasurer, a portfolio money manager and the impact it would have on the City). Chairman Lewis advised the Board that a portfolio money manager could possibly increase yield by a half percent, the City has a hundred million dollar portfolio which annualizes to $500,000, by increasing yield a half percent this could possibly purchase a fire station needed by the City. A portfolio money manager basically invests in the same thing the City already invests in. Board Member Moulin stated to the Board that presenters advised the Board that the current term is too short and the limited investments are not broad enough. There will need to be changes to lengthen the terms. 5 Investment Advisory Board April 14,2004 Minutes General discussion ensued by the Board regarding employing a professional money manager. Board Member Mahfoud suggested to the Board that a case regarding a professional money manager could possibly be made to the City before June. Board Member Deniel stated to the Board to give the policy flexibility so the education process can continue. No action needs to occur if flexibility is in the policy. Board Member Mahfoud , stated to the Board that to add flexibility to the policy, a case needs to be made to City Council. Board Member Moulin advised the Board that the expertise of professional money manager could possibly introduce additional risks, which is not in the current investment portfolio, a current risk the City doesn't have now when interest rates fluctuate due to the current buy and hold to maturity, with this , philosophy it does not return much yield. With the current authority, the Treasurer eliminated the loss of principal, with the exception ,of LAIF. Discussion ensued amongst the Board regarding the fluctuation of the market and buy and "hold to maturity" strategy . Also discussed was the length of terms and why the Board agreed on a two year term. Board Member Deniel asked the Treasurer if investments are marked to market. Mr. Falconer replied that this is done at year-end, with material differences being reported at market. Board Member Moulin advised the Board that the Treasurer records the cost and makes a determination when the financial statements are issued whether or not there is a material difference. Currently there has not been in the past. The policy states they have marked to market, but indeed the books are at cost. , Chairman Lewis asked the Board if there were any other issues that need to be addressed in reference to the investment policy. Board Member Mahfoud replied to the Board that Corporate Notes were an item and commented that he did not see a change in the agency market. Board Member Moulin replied to the Board that GSE's currently have a $ 7.5 million dollar limitation and suggested with the growing portfolio, we might want to increase the limits. Board Member Olander asked the Board what is the current status of commercial paper? Board Member Mahfoud stated to the Board that the supply is greater now than it was a year and half ago. 6 Investment Advisory Board April 14,2004 Minutes Board Member Deniel asked the Board if Federal Home Loans are considered a GSE. Mr. Falconer replied that they are. Mr. Falconer advised the Board that Staff does not have any recommendations fo'r changes to the policy at this time. And last year's Council meeting, the Investment Policy vote was three to two. Mr. Falconer reminded the Board that there have been cases in the past where the Board as a whole has recommended the policy to the Council and also been accompanied with a report from a Board Member who took exceptio'n to the policy, who did not believe that what was being represented reflected their view of the policy. This report accompanied the staff report, the investment policy and staff's recommendations. Mr. Falconer advised the Board that if a Board Member is displeased with what goes before the Council, they have the opportunity, whether as a Board Member or as a citizen to make their feelings known. Board Member Moulin stated that the issue was LAIF and currently the Board does not have an issue with LAIF. Board Member Deniel stated to the Board that the only concern with LAIF at this time is staff turnover, most of LAI F' s current staff is close to retirement. Board Member Olander suggested to the Board that Staff address this issue at the upcoming LAIF Conference. Chairman Lewis suggested to the Board that they go through the policy page by page. The Board proceeded through the policy. Mr. Falconer advised the Board as a technical note on page 4 item 3 "Scope," "enterprise fund" needs to be added, Staff will set up an enterprise fund for the golf course. Chairman Lewis stated to the Board that the Board's primary goals are safety ,liquidity and yield. Chairman Lewis stated to the Board that page 5 Item 2 referencing liquidity, there are exceptions that allow the sales of securities within the portfolio. Chairman Lewis advised the Board that on Page 6 Item 5, "Maximum Securities," Staff will need to come up with a number. Mr. Falconer advised the Board that a number is hard to come up with due to some upcoming major projects, such as the expansion to the' Civic Center, some economic opportunities and funding of the new library. The City is currently going through the budget process, at this time $ 5 to $10 million might be the number. Mr. Falconer advised the Board that he would like to reserve this amount until the next scheduled meeting. Chairman Lewis advised the Board ,that an amount could be larger, due to the fact that the overall amount of the portfolio rarely drifts below $75 million. 7 Investment Advisory Board April 14,2004 Minutes In response to Board Member Deniel,Mr. Falconer advised the Board that a memorandum is sent over to the City Manager (or Assistant City Manager when acting on behalf of the City Manager), this memo is to authorize the purchase and inform- the City Manager that an investment needs to be rolled over on a particular date and that the Treasurer will be purchasing aT-Bill for $5 million, with a 3 to 6 month maturity. With this process the City Manager is approving the authorization to purchase this investment. In response to Board Member Deniel, Mr. Falconer advised the Board that the way the policy is developed, the Treasurer is restricted as to what he/she can do, with the limitations currently in place, the type of investments, and the buy and hold strategy and the fact that an approval is needed before a trade is made. Board Member Deniel asked Staff if the City Manager or the Assistant City Manager know enough about Finance to be approving investments. Mr. Falconer replied to the Board that they are looking at the overall type of investment and the length of the investment. They have a general awareness that Staff does not invest in 1 0 year bonds or 30 year bonds and does not invest in corporate notes. General discussion ensued amongst the Board regarding this matter and the current checks and balances within the City. The review of policy by the Board continued. Chairman Lewis, . suggested to the Board that the current percentage for LAIF remain the same. Board Member Deniel suggested to the Board that due to the growing portfolio, an absolute value might be implemented. Mr. Falconer advised the Board that currèntly there is a $40 million dollar limit on LAIF. Board Member Moulin suggested to the Board that the limit for GSE's be raised to $10 million. Mr. Falconer advised the Board that from information gathered from broker/dealers and ~redit reports, Staff is comfortable with the current limit, but is willing to discuss. Chairman Lewis also suggested that the limit be raised to $10 million. Board Members Deniel and Mahfoud concurred. Board Member Olander suggested possibly reducing the percentage of commercial paper. Board Member Deniel stated to the Board that 15 % is appropriate. Board Member Deniel advised the Board that on page 10, under Repurchase and Reverse Repurchase Agreements, under the sixth sentence, a space needs to be deleted to continue the sentence. Board Member Moulin suggested to the Board to relook at Corporate Notes. Chairman Lewis stated to the Board that if the Board were to use Corporate Notes to limit them to Triple AAA. Board Member Moulin and Deniel concurred. Board Member Mahfoud stated to the Board that they could move to Double ~A. Board Member 8 Investment Advisory Board April 14,2004 Minutes Deniel asked what the current credit limit is regarding Corporate Notes. Mr. Falconer replied to the Board that it currently is A 1 P1. Mr. Falconer advised the Board that a recent change has been made in regards to commercial paper, counties are allowed to purchase P2 paper and will check to see if this applies to cities. Board Member Lewis asked Staff to check on the state rating guidelines. General discussion ensued amongst the Board regarding Corporate Notes. Chairman Lewis reminded the Board of the prior history of the City's investments which almost resulted in a loss. Board Member Daniel advised the Board that on page 12, third paragraph fourth sentence the space between the sentences needs to be deleted. Chairman Lewis stated to the Board that he hopes the City is meeting under the six month T -Bill when investments are , allowed up to two years. Mr. Falconer advised the Board that it is ' included in the Treasurers Report and have exceeded. In response to Chairman Lewis, Mr. 'Falconer advised the Board in reference to reporting standards, under "AB 943, submission of Treasurers Report to the California Debt and Advisory Commission," under state budget listed are unfunded state mandates. If the state has a particular request of the City, theoretically the City should be able to calculate the cost and send the State a bill. Currently these bills have been sent to Sacramento and the State has not been able to pay the state mandate. The City recently received a letter from Treasurer Angelides stating that the City is not required to submit the reports to California Debt Advisory Commission. The City's Mayor responded in a letter that the City will continue to send these reports. Board Member Deniel advised the Board that on page 16, item eighteen is missing an X and as well as item seventeen. Mr. Falconer advised the Board that on page 23 of the Investment Policy another bond issue will need to be added, 2003 RDA Taxable Bond. Staff is currently under discussion regarding another $ 65 million bond issue for low and moderate income housing, which might be completed at the end of June, so this might be added as well. Board Member Moulin commented to Staff in regards to the reports to the state. MOTION - It was moved by Board Members Moulin/Olander to continue the review of the Fiscal 2004/05 Investment Policies. Motion carried unanimously. 9 Investment Advisory Board April 14, 2004 Minutes VI CORRESONDENCE AND WRITTEN MATERIAL A. Month End Cash Report and other selected Financial Data - March 2004 Mr. Falconer advised the Board that on page 11, there were some additional details in the cash flow explaining some of the variances and cash flow activity for the month of February. Board Member Deniel asked why the sales tax actual greatly exceeded the budgeted amount, is this because the budget is straight lined across the year or is this a natural increase over year to year for the same month? Board Member Deniel stated that her question was that budgeted for February was $336,000, is $336,000 a result for creating the budget by putting a number for the total year and dividing it equally or is the $336,000 based on February from the previous year? There are recognizable seasonal changes. How was the budget constructed? Mr. Falconer replied to the Board that under note one, the expenditures are budgeted 8% per month, the expenditures are straight lined but for the revenue it does fluctuate with the business cycle. Board Member Deniel asked Staff if the City did indeed have increase in sales tax for the month of February over and above the expected amount for February. Mr. Falconer replied to the Board that actual sales taxes will be about $800,000 more than what was budgeted for the entire year. Noted and Filed B. Pooled Money Investment Board Reports - January 2003 Board Member Olander asked if there was anything scheduled in regards to LAIF at the upcoming conference. Chairman Lewis replied to the Board that there is a session regarding LAIF and the scheduled speakers are Bill Sherwood and Ilene Park, both from the State Treasurer's office. Noted and Filed 10 Investment Advisory Board April 14, 2004 Minutes VII BOARD MEMBER ITEMS Chairman Lewis stated to the Board that the City will eventually have to address the issue at some point in time to hire a professional money manager to at least manage a portion of the City's portfolio. Board Member DeÌ1iel concurred. Chairman Lewis also stated to the Board that at the upcoming CMT A Conference there might be available information regarding this matter. Board Member Deniel suggested to the Board that the Treasurer poll other cities as to whether or not they use a professiona,l money manager. Mr. Falconer advised the Board that he currently has emails for all Finance Directors for the State of California and will send out an email for the poll. Board Member Deniel suggested to Staff that they ask who the money manager is and the level of satisfaction. Mr. Falconer advised the Board that he will ask if they use a money manager and what firm they use. In response to Board Member Moulin, Mr. Falconer advised the Board that the only city in the desert that currently uses an in-house investment manager is the City of Palm Desert. VIII ADJOURNMENT MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 7:05 p.m. Motion carried unanimously. ... Vianka Orrantia Secretary 11