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2004 06 09 IAB Minutes INVESTMENT ADVISORY BOARD Meeting June 9, 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 and Deniel ABSENT: None OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary Tom Genovese, City Manager, Kathy Jenson, City Attorney, Wayne LeBlang and Randy Rassi II PUBLIC COMMENT - None III CONFIRMATION OF AGENDA Mr. Falconer informed the Board that comments were received from Board Member Moulin in regards to the investment policy, with three changes to the policy based on prior discussions, which Staff concurs. Also received, a separate memo in regards to payment and custody, Mr. Falconer suggested that this handout be added for discussion under Business Session Items, item B. IV CONSENT CALENDAR A. Approval of Minutes of Meeting on May 12, 2004 for the Investment Advisory Board. Board Member Moulin advised the Board that the minutes did not correctly reflect the discussion at the previous meeting in regards to the Investment Policy page 13, Item XII - Safekeeping and Custody; the minutes state that this item was discussed with no action taken. The Board did agree to change the paragraph, there was also suggested language by Chairman Lewis pertaining to customary practice, which is described as DVP. Investment Advisory Board June 9,2004 Minutes Mr. Falconer advised the Board that Staff concurred and also discussed was the title change from Safekeeping and Custody to Payment and Custody, along with deleting the money market mutual fund on LAI F operating on DVP, which is a common industry practice. These two items should have been added to the record. Mr. Falconer stated that this could be discussed in further depth for final language. Chairman Lewis asked what the procedure was for amending the minutes. Kathy Jenson, City Attorney advised the Board that the handout could be added as a separate attachment to the minutes of May 12, 2004. Board Member Moulin also advised the Board that he wrote a memo that was distributed at the previous meeting with history of discussions of the use of a portfolio manager, with suggested recommendations of what the Board should do. The minutes did not reflect that this was discussed or distributed. Board Member Moulin requested that this document be attached to the minutes. Mrs. Jenson advised the Board that if the attachment contains and/or reflects a portion of what occurred at the meeting, than this is appropriate to add as an attachment, but in terms of just an individual board members recommendation that were not discussed at the meeting this would not become part of the minutes. The Board will need to specify what part of the attachment occurred at the meeting. Mr. Falconer stated that the entire document was discussed and was referenced on page 5 of the minutes. Board Member Moulin stated that they were not referenced in the minutes; the item reflected in the minutes was the second document, which was not mentioned. Board Member Deniel concurred with Board Member Moulin and summarized what took place at the previous meeting. Mrs. Jenson advised the Board that if the document was distributed, it can be referenced in the minutes, if it was distributed and discussed, a reference can be added to the minutes and indicate what the majority of the Board's view was, even though a formal vote was not taken. The minutes can reflect that the majority of the Board members felt that they wanted to make the change and wanted this change reflected in the May minutes. Mr. Falconer stated to the Board that he recalls one handout on the confirmed agenda and one received during the actual business session discussion. Board Member Moulin advised the Board that there were a total of four handouts. Mr. Falconer advised the Board that Staff will make the necessary changes and amend May 1 2, 2004 minutes accordingly. 2 Investment Advisory Board June 9,2004 Minutes MOTION - It was moved by Board Members Moulin/Olander to approve the Minutes of May 12, 2004 as corrected. Motion carried unanimously. V. BUSINESS SESSION A. Transmittal of Treasury Report for April 2004 Mr. Falconer informed the Board that on page 9 of the Treasurer's report, a reference is made regarding a loan payment made to the State for approximately $1 .5 million, as mandated by legislature. Over the next two years, additional payments of $3 million per year will be paid. Board Member Moulin commented about the current negative cash balance and the warrant method currently used by staff. Board Member Moulin suggested possibly changing the presentation of the way cash is shown, with. the current report reflecting a negative $75,000. Mr. Falconer informed the Board that this was due to the first council meeting in May, which represents warrants issued, held in the vault and haven't been released or approved by Council. Board Member Moulin asked if it would be better to show as payables instead of cash. Mr. Falconer replied to the Board that staff is dealing with investments and accounts payable are not investments and should not be reflected as such. In response to Board Member Deniel, Mr. Falconer advised the Board that before the checks are released money is transferred to cover the checks. Discussion ensued by the Board and Staff of how the line items are reported. Board Member Moulin suggested to Staff that an additional footnote could be,added as footnote #3 and suggested the footnote read: IIcash balance reflects checks drawn or prepared and not issued. II Board Member Deniel suggested adding lIin the amount ofll to the end of the sentence. MOTION - It was moved by Board Members Moulin/Olander review, receive and file the Treasurer's Report for April 2004. Motion carried unanimously. B. Continued Consideration of Fiscal Year 2004/05 Investment Policy Chairman Lewis reviewed the final changes and/or corrections to the Investment Policy: 3 Investment Advisory Board June 9,2004 Minutes Page 6: V. Maximum Maturities; second paragraph, second sentence should read - For FY ~ , the amount of such funds was $5 million. Page 7: VII Delegation of Authority; second paragraph, third sentence should read - Treasurer re administer the delegated authority to manage and invest the City's funds, so long as it can be demonstrated that these services produce a net financial protection of the City's resources. Page 8: First sentence: 1. Broker/Dealers who desire to become bidders for investment transactions must supply the City of La Quinta with the following: Page 10: First bullet point: last sentence: of -$+;-S million face amount for each issuer. Page 11: Board Moulin advised the Board of the grammatical changes made to the items listed under the bullet points, changing the semi- colons to periods. Chairman Lewis advised the Board that Corporate Notes have been added as an allowable investment. Previously, these were not an allowable investment per City policy but were allowable under the government code. Chairman Lewis reviewed the bullets which have been added under the Corporate Notes. Page 13: XI Investment Pools; will be deleting the last sentence. XII Safekeeping and Custody; The Board reviewed the handout received from Board Member Moulin. Chairman Lewis advised the Board that the last sentence in the last paragraph should read; Even though ownership is evidenced in book-entry form rather than by actual certificates, this procedure is commonly accepted as delivery versus payment (DVP) method for the transfer of securities. Board Member Moulin stated to the Board that if this change is made than DVP will have to be changed as well in the definition section of the Investment Policy. The definition section discusses the terms of securities only. Chairman Lewis clarified for the Board that the definition section refers to securities not certificates, per page 33 of the Investment Policy. It was agreed upon by the Board to replace the current paragraph in the investment policy with the third paragraph from Board Member Moulin's handout, with a minor change to the very last sentence; versus payment (DVP) 4 Investment Advisory Board June 9,2004 Minutes method for the transfer of security certificates change from to . Page 17: Minor change to section heading which was numbered incorrectly. Page 23: Item 4; Broker/Dealer Services - name change to broker dealer Salomon SmitlT-Barney Item 6: Bond Trustees - added Board Member Deniel asked Staff to clarify whether the name for the Broker Dealer is Citicorp or Citigroup. (Page 23 was changed to Citigroup.) Mrs. Jenson referred back to page 7 of the investment policy and asked for clarification from the Board in regards to the second paragraph, second sentence which mentions portfolio managers or advisers. Will these managers/advisors advise the Treasurer to make the decisions or will they actually make the decisions themselves? Mrs. Jenson advised the Board that the current City code as it is currently drafted delegates the authority to the Finance Director. Board Member Deniel replied to staff that this will be someone who will actually make the decision themselves. Mrs. Jenson stated to the Board that within the scope of the existing code section, someone could advise the Treasurer. If a portfolio manager is used, the code section would need to be changed. Board Member Deniel reviewed why the Board suggests using a professional portfolio manager. Chairman Lewis clarified that the City will not give the professional money manager all monies to manage but will be given a specific dollar amount. The money will continue to be handled through the City's DVP arrangement with the third party custodian. The monies will continue to be maintained within the custody of the City of La Quinta either in the City's bank accounts or a third party custodian. Board Member Deniel informed staff that in this case, a separate account is set up with the same custodian and the professional money manager can make investment decisions with limited power of attorney. Tom Genovese, City Manager advised the Board that the terms for portfolio money manager and/or advisor would need to be added to the investment policy glossary and this will be a determining factor as to whether or not the City code would have to be amended. If a professional money manager is used than this is delegation of investment authority and the code would have to be amended. If an advisor is used, 5 Investment Advisory Board June 9,2004 Minutes they would be able to advise the Treasurer and the benefit of using an advisor would eliminate the potential for fraud. Board Member Deniel summarized for the Board and staff how the professional money manager would operate. Mrs. Jenson shared with the Board Government Code section 53607 which states; lithe legislative body may delegate to the Treasurer the obligation to invest and reinvest funds." She also shared the Attorney General opinion which states; lithe Treasurer could hire a contracted vestment manager, who is not officially part of the Treasurer, who has some discretionary authority provided that the Treasurer exercises prudence in the selection of the manager and imposes suitable safeguards to prevent abuse in the exercise of discretion by the manager and the Treasurer would remain responsible for any investment decisions by the manager." Mrs. Jenson advised the Board that all safeguards will need to be met in order to stay consistent with state law. Mr. Falconer stated that there are separate sections dealing with counties and will need to make sure that this doesn't just apply just to counties. Board Member Deniel advised Staff that what is described by the attorney general's opinion is exactly what the Board has in mind and by adding an investment advisor into the policy is only a potential for future use. Mr. Genovese advised the Board that the Treasurer will bear all risks and responsibility for any action taken by the third party manager. The Board and staff continued to discuss the role of a professional money manager and also included in the discussions were the guidelines of choosing a professional money manager and the Request for Proposal (RFP) process used by the city if the Board decided to utilize a professional money manager and implement this into the policy. Mr. Genovese asked the Board how the professional money manager would be paid. Board Member Moulin replied that they are generally paid with a percentage of the portfolio. Chairman Lewis advised that typically on a fixed income portfolio they are paid a quarter to a half of a percent pay for performance usually is against the rules unless in a hedge fund. If a professional money manager is paid per transaction, this can create a conflict of interest. 6 Investment Advisory Board June 9,2004 Minutes In response to Chairman Lewis, Mrs. Jenson stated to the Board that a recommendation could be made to the City Council to allow for a professional money manager. Chairman Lewis asked staff if this could remain in the policy if it didn't meet code. Mrs. Jenson replied to the Board that the policy would have to be consistent with code, if the intent is to go beyond an advisory role. Discussion ensued amongst the Board and Staff in regards to adding a professional money manager to the policy, the selection process and the language. Chairman Lewis recommended to the Board that they remove the paragraph from page 7, regarding a professional money manager and place this item on next year's work plan so the Board can work on the language, the definition for the glossary and recommendations to the City Council to adjust the code. In response to Board Member Deniel, Chairman Lewis advised the Board that a recommendation is made to City Council to revise the code, to which the City Council will either agree or disagree. Mrs. Jenson informed the Board that an ordinance is adopted, which sets up the new language presented to City Council, at the next scheduled council meeting they have a second reading and goes into affect 30 days after. Mr. Genovese commended the Board for their work on the 2004/05 Investment Policy. In response to Chairman Lewis, Mr. Falconer informed the Board that the policy will be presented to Council on Tuesday, June 15th. Motion - It was moved by Board Members Deniel/Olander to approve the Investment Policy for 2004/05 as amended and forward the Policy to the City Council for their consideration. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - May 2004 Noted and Filed 7 . Investment Advisory Board June 9,2004 Minutes B. Pooled Investment Board Report - March 2004 Noted and Filed VII BOARD MEMBER ITEMS Board Member Moulin asked the visitors in attendance if they had any comments in regards to the Investment Board Meeting. There were no comments. VIII ADJOURNMENT MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 6:40 p.m. Motion carried unanimously. ..... Vianka Orrantia Secretary 8