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2004 05 12 IAB MinutesINVESTMENT ADVISORY BOARD Meeting May 12, 2004 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 (5:40) ABSENT: None OTHERS PRESENT: John Falconer, Finance Director; Vianka Orrantia, Secretary II PUBLIC COMMENTS - None III CONFIRMATION OF AGENDA - Confirmed Mr. Falconer advised the Board of two handouts received from Board Member Moulin and Chairman Lewis in reference to the investment advisors and managers. Staff requested that these be added to Business Session V Item B. Chairman Lewis requested that the Board move Business Session V, Item B to the last item of agenda for discussion. Board concurred. IV CONSENT CALENDAR Approval of Minutes of Meeting on April 14, 2004, 2004 for the Investment Advisory Board. Board Member Moulin advised the Board that page 11, last paragraph, 12' sentence should read: only city in the desert that currently uses a prefessi is the City of Palm Desert. Board Member Olander asked the Board if the word "procrastinating" on page 3, 4th paragraph, 17' sentence, was actually used. Board Member Mahfoud replied to the Board that that was the word/term was correct. MOTION - It was moved by Board Members Mahfoud/Moulin to approve the Minutes of April 14, 2004, as corrected. Motion carried unanimously. Investment Advisory Board May 12, 2004 Minutes V BUSINESS SESSION A. Transmittal of Treasury Report for March 2004 Mr. Falconer informed the Board that on page 9, a note was made indicating the payment of semi-annual bond debt service causing a decrease in some of the balances in the money market funds. Page 2 indicates a decrease in the money market by $4.7 million as a result of the debt service payments. In response to Board Member Moulin, Mr. Falconer clarified for the Board that on page 4, the U.S. Treasuries original date of maturity was a two year term the "leap" year had an affect on this date. One of the Treasuries was purchased on May 31, 2002, and will mature on May 31, 2004. Currently, Staff has not purchased an investment with a term over two years. MOTION — It was moved by Board Members Olander/Mahfoud to review, receive and file the Treasurer's Report of March 2004. Motion carried unanimously. B. Consideration of Fiscal Year 2004/05 Investment Policies Board Member Moulin suggested to the Board that all housekeeping items be discussed prior to discussing the issue of a money manager, and if there was any information from the conference regarding a money manager, that would also be included in the discussions. Chairman Lewis reviewed for the Board a redlined copy of the suggested changes to the investment policy. ► Page 4; item III -Scope, added additional bullet point which reads: enterprise fund. ► Page 6; item V-Maximum Maturities, second paragraph second sentence should read: For FY 200 /0 (In response to Chairman Lewis, Mr. Falconer informed the Board that the maximum maturities will remain at $5 million until review of the budget with Staff. Mr. Falconer will report back to the Board at the next scheduled meeting.) ► Page 10; under U.S. Government and Related Issues, third bullet point, last sentence should read: of $7.6 million face amount for each issuer. ► Page 1 1; under Corporate Notes, last three paragraphs, should read: does not I= investment in corporate hairman Lewis 2 Investment Advisory Board Minutes May 12, 2004 informed the Board that Corporate Notes are being added to the policy, in the past they were not an allowable investment. Board Member Deniel asked the Board to clarify the sentence "not to exceed 30%of the agency's portfolio," asking if it was a restriction of the Government Code, and what the City's restriction was. Chairman Lewis replied that the City's restriction is 15% of the portfolio, which is 50% more restrictive than the state limitation. Mr. Falconer advised the Board that based on a discussion with Board Member Moulin regarding corporate notes, the State Government Code is single "A" or above, this will be more restricted in credit quality as well. Discussion ensued among the Board regarding corporate notes. ► Page 13; Board Member Moulin informed the Board that he needed clarification in reference to the "Safekeeping and Custody" paragraph and contacted Mr. Falconer for clarification and to update the paragraph. Mr. Falconer updated the Board on LAIF and Delivery vs. Payment (DVP). In the past a former Board Member wanted to make sure that LAIF used delivery vs. payment (DVP), this was not an issue with the City, the issue was with LAIF and their investments. The Government Code requires that LAIF operate on a DVP basis. The former Board Member also felt that there would be a day when the City would invest in mutual funds, and felt if the City invested directly in money market mutual funds, that these funds would be operated on a DVP basis. Mr. Falconer advised the Board that the Trustees for the City of La Quinta were contacted to see if they operated on a DVP basis. General discussion continued among the Board regarding delivery vs. payment with the Board concluding that this is standard industry practice. ► Page 25; item 4-name change from Salmon Smith Barney to Citicorp; item 6-added a new bond custody, 2003 RDA Project Area 1 — US Bank. Chairman Lewis advised the Board that Mr. Falconer conducted a survey with other entities as to whether or not they use portfolio managers and how bond proceeds are handled. Mr. Falconer informed the Board that from his survey 28% of other agencies use a portfolio manager. Board Member Deniel asked Staff if there was any feedback as to what kind of return was received. Mr. Falconer replied to the Board that the survey was conducted to find out which cities used a portfolio manager. This survey was conducted via email for those participating cities. Chairman Lewis commented to the Board that upon his review of the survey, the City of Indio was the only city K, Investment Advisory Board Minutes May 12, 2004 in the valley to respond. Board Member Moulin stated that during his attendance at a previous conference, he was able to discuss the use of a portfolio manager with various Finance Directors. His findings from these conversations were that the sizes of most agencies' portfolios were anywhere from $120 to $150 million. Board Member Mahfoud stated that at the recent conference most agencies found an added value from the use of a portfolio manager; one agency from the State of Arizona implemented a pilot program with a time frame of six months. During the six months, the agency, with the inclusion of the City Council, reviewed, monitored and evaluated the performance of the portfolio manager on a weekly basis. The portfolio manager would then report to the city council on a weekly basis. Board Member Mahfoud advised the Board that the outcome of his conversations with other agencies was that they were very happy with their experience with a portfolio manager; there are other cities that utilize a money manager for a buy and hold strategy. General discussion ensued among the Board regarding the results of the survey conducted by the Treasurer and the use of a portfolio manager by other agencies. Board Member Deniel stated to the Board that based on the information from the conversation Mr. Falconer had with the Finance Director from the City of Tracy, she felt it might be helpful to possibly do a comparison of the cities current active managers and what type of return they are receiving as compared to what the City of La Quinta is currently doing. Chairman Lewis advised the Board that it .needs to decide whether or not a portfolio manager will be used. Board Member Deniel stated that this information might be helpful towards the Board's decision. Chairman Lewis referred to the handout he requested to be added to the IAB packet. Chairman Lewis informed the Board that while he attended the conference, one of the exhibitors was from MBIA, a bond rating agency. One of their representatives, Gay Eichoff was involved with the national treasurer's organization. This organization has put together various sample policies and investment policies, that other municipalities may utilize in their entirety or derive language to implement into their own policies. Chairman Lewis asked Ms. Eichoff to forward any sample language from the policy, regarding the use of a money manager by the City. The handout given to the Board are two paragraphs forwarded from Ms. Eichoff. Chairman Lewis stated to the Board that he preferred the second sentence because it was a little more inclusive. Both paragraphs contain the same language, "so long N Investment Advisory Board Minutes May 12, 2004 as it can be clearly demonstrate that these services produce a net financial advantage or necessary financial protection of the (entity's) financial resources. In order to consider utilizing a money manager, it would have to be an advantage to the City. Chairman Lewis advised the Board that this is the type of language he would like if a money manager was to be included in the investment policy. Chairman Lewis referred to the second handout from Board Member Moulin. Board Member .Moulin advised the Board that the handout contains summarized suggested language which was derived from previous meetings over the past year. Board Member Moulin stated to the Board that he is not opposed to the use of an investment manager, but suggested that they.work with City Council. If this issue is placed on the work plan, this provides another opportunity to discuss with the City Council reasons and justifications. Board Member Moulin also stated that he felt that the Treasurer is not ready to utilize an investment manager at this time. There would be no advantage to place this item in the investment policy at this time due to the fact it would not be used. Chairman Lewis advised the Board that even if this was placed in the policy this year, the earliest it would be utilized would be in spring, if utilized at all in the upcoming fiscal year, based upon the current interest rate environment. Chairman Lewis also advised the Board that there are numerous issues to finalize before even implementing; additional research is needed, how much of the portfolio will be used and the request for proposals for a money manager. In addition, Board Member Moulin provided Language that the outside portfolio manager being recommended in the investment policy would require a change to our ordinance as outlined: Ordinance Section 3.08.020 The City may engage professional investment portfolio managers or advisors to assist the City Treasurer this delegated authority. Staff informed the Board that if an ordinance was required, it would require separate noticing and action by the City Council and stated that the next meeting in June with the City Manager and City Attorney would be the time to discuss this issue. Investment Advisory Board Minutes May 12, 2004 General discussion continued among the Board regarding as to whether or not to implement a portfolio manager at this time into the policy. The Board took a poll and the majority agreed to include references in the recommended policy regarding the use of an outside portfolio manager subject to the RFP process which would occur in Fiscal Year 2004/05. The Board agreed to add the following paragraph into the investment policy referencing a money manager to Section VII, last paragraph: Subject to the required approval procedures for professional services the City may engage professional investment portfolio managers or advisors to assist the City Treasurer to administer the delegated authority to manage and invest the City's funds, so long as it can be demonstrated that these services produce a net financial advantage or necessary financial protection of the City's resources. Before engagement by the City, the professional manager or advisor shall commit to adhere to the provisions of the City of La Quinta's Investment Policy and shall document that they are appropriately registered and licensed by governing bodies. MOTION - It was moved by Board Members Olander/Mouin to continue the review of the Fiscal 2004/05 Investment Policies. Motion carried unanimously. VI CORRESONDENCE AND WRITTEN MATERIAL A. Month End Cash Report and other selected Financial Data — March 2004 Noted and Filed B. Pooled Money Investment Board Reports — February 2003 Chairman Lewis advised the Board of Bill Sherwood's retirement from LAIF effective June 31, 2004. There are several in-house candidates that are eligible to replace Mr. Sherwood. Mr. Falconer advised the Board that based on his conversation with Mr. Sherwood, his recommendation for his replacement would be his assistant. C Investment Advisory Board Minutes May 12, 2004 Chairman Lewis commented to the Board that there are limited candidates with experience in LAIF and the position would not be opened up to just anyone. Mr. Falconer stated there are several other candidates within LAIF, the State Controller's Office and the Department of Finance. General comments were made by the Board regarding the expertise of the current LAIF staff, the current tools used in LAIF and if LAIF will update their technology. Mr. Falconer advised the Board that Mr. Sherwood's position is a civil service position, and the position will be limited to those with the same grade and/or ranking. Board Member Mahfoud updated the Board on the California Recovery Bond an issue covered at the recent LAIF Conference, which was recently placed on the market. Chairman Lewis stated to the Board that these bonds were over subscribed and sold immediately. In response to Board Member Deniel, Board Member Mahfoud stated that the bonds are set to mature in 2017. Board Member Olander asked the Board if State Treasurer Angelides was a speaker at the LAIF Conference. Chairman Lewis stated that he did not speak. Noted and Filed VII BOARD MEMBER ITEMS Vill ADJOURNMENT MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 7:35 p.m. Motion carried unanimously. Sub e Vianka Orrantia Secretary 7 I,. The following matter was not properly described in the minutes of the May 12, 2004 meeting and the agreed upon change to the Investment Policy for 2004-5 is not shown. Possible change to Section XII discussed at May 12, 2004 meeting: XII PAYMENT AND CUSTODY The City shall engage qualified third party custodians to act in a fiduciary capacity to maintain appropriate evidence of the City's ownership of securities and other eligible investments. Such custodians shall disburse funds, received from the City for a purchase, to the broker, dealer or seller only after receiving evidence that the City has legal, record ownership of the securities. This procedure simulates the delivery versus payment (DVP) method for the transfer of security certificates. Payments and receipts for investments not handled by a custodian shall be made directly with the entity rather than with ,an investment manager, advisor, broker or dealer. Change accepted at May 12, 2004 meeting: XII PAYMENT AND CUSTODY The City. shall engage qualified third party custodians to act in a fiduciary capacity to maintain appropriate evidence of the City's ownership -of securities and other eligible investments. Such custodians shall disburse funds, received from the City for a purchase, to the broker, dealer or seller only after receiving evidence that the City has legal, record ownership of the securities. Even though ownership is evidenced in book -entry form rather than by actual certificates, this procedure is commonly accepted as the delivery versus payment (DVP) method for the transfer of security certificates. Use of a Professional Investment Portfolio Manager and Whether or Not to Change Investment Policy for 2004-2005 to Provide for Such Use Recommendations for Consideration at the May 12, 2004 Meetigg • Do not change the Investment Policy for 2004-2005 for the use of a PPM, • Include the use of a PPM in the 2004-2005 work plan, • Review substantively the changes and effects of engaging a PPM, and • Meet with the City Council at the October 2004 joint meeting, review and discuss the engagement and use of a PPM, listen to the comments expressed by Council Members, respond when appropriate, all with the objective of mutually agreeing on a plan of future action or non -action on the subject. Background Summary of Prior LAB Activities At the LAB meeting on July 9, 2003, members commented on the growth of the City's investment portfolio and that, in recognition of the expected continuing growth, whether changes in the administration of the portfolio may be needed internally or externally by use of a professional portfolio manager ("PPM'). At the meeting on September 10, 2003, discussion continued with agreement that the LAB add educational meetings with PPMs to its work plan for 2003-2004. At the meeting on October 8, 2003, the Treasurer reported on his meeting on October 7, 2003 with the City Council at which the Mayor and Council Members questioned the inclusion of educational meetings with PPMs in the IAB's work plan. At the meeting on February 11, 2004, the LAB received educational presentations by two PPMs, and, after which, the members generally agreed that the use of a PPM is an alternative deserving consideration. At the meeting of the IAB on March 10, 2004, discussion continued on the possible use of a PPM and whether or not to recommend changes in the investment policy for 2004-2005 to provide for the use of a PPM. At the meeting on April 14, 2004, a member submitted a draft of possible changes to the investment policy to provide for the engagement and activities of a PPM. Activities To Be Conducted At the May 12, 2004 meeting, the two members of the IAB who attended The Annual Conference of the CMTA, April 21-23, 2004, are expected to report what they learned about PPMs. The IAB has not substantively reviewed the changes to the investment policy suggested by a member on April 14 to accommodate a PPM, or identified and reviewed the advantages and disadvantages of the use of a PPM including a comparison of the benefits and detriments, consideration of what portion of the portfolio would be allocated to a PPM and the changes to the existing policy that may be necessary, including the policies on buy and hold to maturity, maximum maturity limitations, and investment quality. There has been no communication on the possible use of a PPM with the City Council since the joint meeting on October 7, 2003. Time Constraints At the May meeting each year, it is customary for the LAB to agree on any recommended changes to the Investment Policy for the ensuing year so that a proposed final document can be reviewed by the City's Manager and Counsel and formally approved by the IAB at the June joint meeting with them. The City of La Quinta Investment Policy does not allow investment in Repurchase Agreements. The term "reverse repurchase agreement" means the sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase such securities on or before a specific date and for a specific amount. As provided in Government Code Section 53635, reverse repurchase agreements require the prior approval of the City Council. The City of La Quinta Investment Policy does not allow investment in Reverse Repurchase Agreements. Diversified Management Companies - As authorized in Government Code Section 53601(k), local agencies are authorized to invest in shares of beneficial interest issued by diversified management companies (mutual funds) in an amount not to exceed 20% of the agency's portfolio. There are a number of other qualifications and restrictions regarding allowable investments in corporate notes and shares of beneficial interest issued by mutual funds which include (1) attaining the highest ranking or the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services, or (2) having an investment advisor registered with the Securities and Exchange Commission with not less than five years' experience investing in the securities and obligations and with assets under management in excess of five hundred million dollars ($500,000,000). The City of La Quinta Investment Policy only allows investments in mutual funds that are money market funds maintaining a par value of $1 per share that invests in direct issues of the U.S. Treasury and/or US Agency Securities with an average maturity of their portfolio not exceeding 90 days and the City limits such investments to 20% of the portfolio. Mortgage -Backed Securities - As authorized in Government code Section 53601(n), local agencies may invest in mortgage -backed securities such as mortgage pass -through securities and collateralized mortgage obligations for a 11 the City Treasurer, who shall establish written procedures for the operation of the investment program consistent with the Investment Policy. Procedures should include reference to safekeeping, wire transfer agreements, banking service contracts, and collateral/depository agreements. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this Investment Policy and the procedures established by the City Treasurer. The City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. The City Manager or Assistant City Manager shall approve in writing all purchases and sales of investments prior to their execution by the City Treasurer. VIII CONFLICT OF INTEREST Investment responsibilities carry added duties of insuring that investments are made without improper influence or the appearance of improper influence. Therefore, the City Manager, Assistant City Manager, and the City Treasurer shall adhere to the State of California Code of Economic Interest and to the following: ► The City Manager, Assistant City Manager, and the City Treasurer shall not personally or through a close relative maintain any accounts, interest, or private dealings with any firm with which the City places investments, with the exception of regular savings, checking and money market accounts, or other similar transactions that are offered on a non-negotiable basis to the general public. Such accounts shall be disclosed annually to the City Clerk in conjunction with annual disclosure statements of economic interest. ► All persons authorized to place or approve investments shall report to the City Clerk kinship relations with principal employees of firms with which the City places investments. IX AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS The City of La Quinta Investment Policy maintains a listing of financial institutions which are approved for direct investment purposes. In addition a list will also be maintained of approved broker/dealers selected by credit worthiness, who maintain an office in the State of California. 7 account the investment risk constraints and liquidity needs. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed 4. Diversified Portfolio Within the constraints of safety, liquidity and yield, the City will endeavor to maintain a diversified portfolio by allocating assets between different types of investments within policy limitations. V MAXIMUM MATURITIES It is the policy of the City of La Quinta to hold securities and other investments of cash in financial instruments until maturity, thus avoiding the risk that the market value on investments fluctuates with overall market interest rates. The hold until maturity policy shall not prevent the sale of a security to minimize loss of principal when the issuer or backer suffers declining credit worthiness. The hold until maturity policy requires that the City of La Quinta's investment portfolio is structured so that sufficient funds are available from maturing investments and other sources to meet anticipated cash needs. To meet anticipated cash needs, it is essential that the Treasurer have reasonably accurate, diligently prepared cash flow projections. Annually, the Treasurer. shall project the amount of funds not expected to be disbursed within five years. For FY 2004/05, the amount of such funds was $5 million. Funds up to that amount may be invested in U.S. Treasury bills, notes and bonds maturing between 2 and 5 years. For all other funds, investments are limited to two years maximum maturity. VI PRUDENCE The City shall follow the Uniform Prudent Investor Act as adopted by the State of California in Probate Code Sections 16045 through 16054. Section 16053 sets forth the terms of a prudent person which are as follows: Investments shall be made with judgment and care - under circumstances then prevailing - which persons of prudence, discretion, and intelligence exercise in the professional management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. VII DELEGATION OF AUTHORITY Authority to manage the City of La Quinta's investment portfolio is derived from the City Ordinance. Management responsibility for the investment program is delegated to 0