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2004 12 08 IAB Minutes ,t INVESTMENT ADVISORY BOARD Meeting December 8, 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 Vice Chairman Mahfoud, followed by the Pledge of Allegiance. PRESENT: Board Mahfoud, Olander, Moulin, Deniel and Lewis (5:40) ABSENT: None OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary, Louise West, Accounting Manager and Mike Harrison of Conrad & Associates II PUBLIC COMMENTS III CONFIRMATION OF AGENDA Mr. Falconer introduced to the Board the new Accounting Manager, Louise West and Mr. Mike Harrison of Conrad and Associates, LLP. Board Member Moulin suggested to the Board that the first item up for discussion would be Item A under Correspondence and Written Material. Board approved. IV CONSENT CALENDAR A. Approval of Minutes of Meeting on November 10, 2004 for the Investment Advisory Board. MOTION - It was moved by Board Members/Olander to approve the Minutes of November 10, 2004. Motion carried unanimously. V. BUSINESS SESSION ~' A. Transmittal of Treasury Report for October 2004 MOTION - It was moved by Board Members Olander/Moulin to approve, receive and file the Treasury Report for October 2004. Motion carried unanimously. Investment Advisory Board Minutes December 8, 2004 B. Timeline for Work Plan Mr. Falconer informed the Board that the booklet distributed was information obtained from the GFOA. In response to Board Member Moulin, Mr. Falconer informed the Board that the City Council approved the lAB's work plan. Chairman Lewis stated that the Board will need to come up with a timeline for the approved work plan. Chairman Lewis also stated to the Board that bullet point four could be incorporated with the investment policy and bullet point one was completed during the annual meeting with the City Council. Board Member Deniel stated to the Board that her understanding was that the City Council was not opposed to the Board building the infrastructure with the understanding the Board would not go out and hire an Investment Advisor. The building of the infrastructure would n:-'ean working on changing the City Ordinance and placing it into the investment policy as appropriate. Board Member Moulin commented that his understanding from the statement made by the City Attorney that if the Board adhered to the general attorney's opinion that a change to the City Ordinance would not be needed, the Treasurer would remain responsible. Board Member Moulin stated that he suggested an ordinance change so the responsibility does not remain fully on the Treasurer. Chairman Lewis and Mr. Falconer both stated that their understanding was that the ordinance did need to be modified. In response to Board Member Deniel, Mr. Falconer stated that the Board would need to decide exactly what they wanted the portfolio manager to do, than draft an RFP and change the investment policy and the City Ordinance. Chairman Lewis commented to the Board that the drafting of a hypothetical RFP would be a good starting point, prior to changing the investment policy and ordinance. Chairman Lewis suggested to the Board that this item be placed on the next" month's agenda. Mr. Falconer will request sample RFP's from other cities and will bring them to the next scheduled meeting. 2 Investment Advisory Board Minutes December 8, 2004 It was suggested by Board Member Deniel that Mr. Falconer provide a draft RFP for the next scheduled meeting. It was suggested by Chairman Lewis that the consideration of the investment policy be moved up to the month of February. The Board agreed. The Board agreed to the timeline of the work plan. VI CORRESPONDENCE AND WRITTEN MATERIAL A. City of La Quinta FY 04/05 Audited Financial Statements Mr. Mike Harrison of Conrad & Associates, LLP introduced himself to the Board and informed the Board of his position and his reporting of the City's annual audit, specifically the Investment Advisory function of the City and the investment portfolio. As a part of the investment policy, there is a provision within the policy referring to the independent auditors and the functions of internal controls and investment compliance. Mr. Harrison informed the Board that the auditors have reviewed the internal controls over investments and believe they are adequate and can be relied upon to ensure safeguarding of the City's investments. Mr. Harrison also informed the Board that the City has a third party custodian agreement with Bank of New York. All investments have been confirmed including those held with the third party custodian, there was 100% confirmation of approximately $187 million worth of investments. Investment compliance was thoroughly evaluated with the investment policy within the City and the provisions of the Government Code. The City investment policy is more restrictive than the Government Code. The calculations are computed monthly by the City Finance Department and the computations are tested and evaluated as part of the audit process and as a result the City is in compliance with the investment policy. Mr. Harrison also informed the Board that even though there was a turn over in the Finance Department, the functions of the Accounting Manager were segregated and adequate. Some of the functions of the Accounting Manager were performed by Diane Martin. 3 ....--..... Investment Advisory Board Minutes December 8, 2004 Mr. Harrison advised the Board of the new Governmental Accounting Standard Board's statement, GASB Statement #40. Upon reviewing the City's investment policy, the policy already addresses each of the areas covered by GASB 40. Mr. Harrison advised the Board that the handout were sample footnotes of some disclosures under GASB 40. Mr. Harrison also advised the Board that there are different methods that can be used to disclose the methodology. The best suited method for the City of La Quinta would be the weighted average maturity method. Mr. Harrison informed the Board of the principal areas addressed by GASB 40, such as credit risk, interest rate risk, custodial risk and concentrations of credit risk, these areas are adequately covered throughout the City's investment policy. Mr. Harrison advised the Board that the investments carried on the general ledger , a statement is made that they are carried at market value under GASB Statement 31. The investments carried under the general ledger are approximately $287,000 greater than market. Market is computed and if this was material in relationship to the portfolio, the market value technically is $287,000 less than the financial statements. The City's policy states that it is marked to market and carried at market value. Board Member Moulin stated that he was surprised \his was high due to short maturities. Mr. Harrison replied to the Board that this includes everything, including the fiscal agent investments. Mr. Falconer informed the Board that for the first six months, the City will be below the six month bench mark and begin to increase at the end of January. Mr. Harrison advised the Board that there were no investments sold prior to maturity at a loss and there were no management letter comments affecting cash and investments. Mr. Harrison commented that the auditors were satisfied with the internal controls in the cash and . investment areas. Board Member Deniel asked Mr. Harrison what the Board could do to enhance or make better to what is currently being done to support the Treasurer and what is being done for the City by the Board. Mr. Harrison replied to the Board that this is a City by City decision as to how much risk they are willing to take and how far out does the City want to be in the yield curve. Mr. Harrison stated that the City of La Quinta has been conservative, the City has used the six-month treasury as the bench mark and the investment yield has been at this amount excluding the fiscal 4 Investment Advisory Board . Minutes December 8, 2004 agent or rate even a little below this amount. Mr. Harrison also stated that the Government Code allows the Cities to go out five years and asked does the City want to take more of the portfolio than has been allowed and allow the Treasurer to take it out further. This is a City by City decision. Some cities have been too far out in the yield curve and than this gets into GASB 31, marking to market. If this was done and the interest rates rose, this might become an material number and the entry would have to be booked, even though the City's policy is to hold to maturity. Mr. Harrison advised the Board that this would be a tough call to make. How much more risk is the City willing to take with the public's money. Within the fixed income scenario, where does the City want to be on the yield curve, this is the decision the City will need to make. Board Member Deniel reiterated what Mr. Harrison stated to the Board. Mr. Harrison stated to the Board that if the rate is out two to three years and the yield started to look more attractive, it would be prudent to give the Treasurer some authority to go out if he can enhance the yield however, this could change rapidly. Mr. Harrison reviewed for the Board the handout on the weighted average maturity footnote examples in the GASB 40 handout and what will go into the City of La Quinta's CAFR. The disclosures are not extensive this year but next year will be more extensive and will specifically spell out some of the items allowed in the City's policy, i.e. interest rate risk, credit risk and concentration in credit risk. Mr. Harrison referred to pages two and three for examples. The City currently does not disclose to much at the present time. Mr. Falconer asked Mr. Harrison if investments were held by a financial advisor, would the investments have to be disclosed any differently than the example given. Mr. Harrison replied that they would not. Mr. Harrison stated that this would include assets held by fiscal agents as well. Board Member Moulin informed Mr. Harrison that under the City's current Ordinance, the City Council has designated the responsibility of investments to the Treasurer/Director of Finance. The Board is considering using an Investment Advisor for the City; in order for this to be implemented the Ordinance would have to be changed. The Board was informed of the Attorney General's opinion to allow the City to engage an Investment Advisor, but the sole responsibility for their work 5 Investment Advisory Board Minutes December 8, 2004 would lie on the Treasurer/Finance Director. Board Member Moulin asked Mr. Harrison of all the City's audited by his firm with Investment Managers, what is the Treasurer's role? Does he remain solely responsible or does the City accept responsibility for hiring the investment manager? Mr. Harrison replied to the Board of the forty- seven cities they audit, there are probably only two cities that currently obtain investment managers, the City of Brea and Santa Monica. Mr. Harrison stated to the Board that he felt the Treasurer was very cable and is very knowledgeable of the Government Codes about what is allowable and needs only guidance from the Board of the mechanisms the Board would like to see used within the perimeters of the Government Code. Mr. Harrison also stated that the City of La Quinta's Investment Policy and the thoroughness of it is the best one he has seen. Board Member Moulin felt that he needed to clarify his question to Mr. Harrison and once again asked Mr. Harrison with the City's that do have Investment Advisors, where does the responsibility lie or is it shared? Mr. Harrison replied to the Board that the Investment Advisor is given perimeters by the Treasurer and so the responsibility would be on the Treasurer. Mr. Harrison advised the Board that the Investment Advisor maintains records but the official records are maintained with the third party custodian, Le. the reconciliation with the federal bank and the terms of those securities being held. Board Member Deniel stated to the Board that there appears to be a conflict between the City Attorney and the Board as to where the responsibility lies. Mr. Harrison stated to the Board in his opinion the responsibility would lie on the Treasurer, but if there were negligence on the part of the Investment Advisor there is Errors of Omissions insurance. Board Member Moulin advised Mr. Harrison that the Board met with some Investment Advisors earlier in the year and one of the Investment Advisors stated to the Board that the City's policy was dated. Mr. Harrison informed the Board that he felt the City's policy was very thorough, the policy has hit on all the areas it should be hitting upon and the Treasurer knows the perimeters within the Government Code, he has laid them out to the Board in terms of lengths of time for investments. The Treasurer understands what needs to be done and feels comfortable with decisions he has made. Board Member Moulin asked Mr. Harrison if there were any areas for improvement. Mr. Harrison replied that with the new Accounting Manager in place does help. 6 Investment Advisory Board Minutes December 8, 2004 Mr. Harrison clarified for the Board the term collusion page 14 in the handout. The term collusion means segregation of duties, the City's policy states between two employees, not employee and vendor. Board Member Moulin asked Mr. Harrison if there were any questions that needed to be asked or should have been asked by the Board. Mr. Harrison replied Ilno." Mr. Harrison stated to the Board that the decision of hiring an Investment Advisor is up to each individual City. Board Member Deniel stated that the City of Palm Desert currently employees a full-time investment manager within the City. When the City of La Quinta gets to a size that it will require a full-time investment manager, it will be best to have someone that has the resources, support and the infrastructure to manage the portfolio. The Treasurer can continue managing the portfolio with the current policy framework. When the financial activities expand to a level when an investment manager is needed, it is better to outsource the job rather than continue them in-house. Mr. Harrison advised the Board that the current accounting staff is currently lean, with the amount of activity and growth of the City, Le. bond indebtedness, additional funds established within the city and tax increments. Mr. Falconer advised the Board that a change was made recently within the Finance Department the City hired an in-house Informational Technology person, which previously was contracted out. Mr. Falconer commented to the Board that the biggest challenge for him is not the time involved in doing investments, they have become routine. As the City's activities increase the biggest challenge currently is the cash flow projections and forecasting. Board Member Moulin stated that even though there has been an increase in money received by the City, the Treasurer hás had to decrease the funds available for investing over two but not more than five years due to City commitments. Board Member Moulin asked if there were any other commitments that might be of concern. Mr. Harrison replied to the Board IIno.1I Mr. Falconer informed the Board that the City made sure that there were available resources to meet this obligation and there were fund balances reserved for this project. There are fund balances available for the Embassy Suites Hotel if they decide to draw down on these funds. Mr. Harrison informed the Board that there is currently $25 7 Investment Advisory Board Minutes December 8, 2004 million in the unreserved general fund balance of this amount $11,000,000 has been placed in emergency reserve; it's recommended that this amount should not be placed to far out on the yield curve. Board Member Olander asked out of the forty-seven cities audited by Conrad and Associates are there any procedures or recommendations that might be used here in the City of La Quinta. Mr. Harrison replied he had no recommendations at this time. Mr. Harrison commented that the Treasurer has the resources to research and or inquire as to what other cities are doing. Mr. Falconer informed the Board that via email he polled other cities as to how many cities used a portfolio manager. Board Member Moulin commended Conrad and Associates. Board Member Mahfoud asked if GASB 40 was a required disclosure. Mr. Harrison replied Ilyes" and gave several examples of what could be used. Mr. Harrison stated that the Treasurer is directed to measure this in the Investment Policy and what is being presented in the Treasurer's report should be reported in the notes to the financial statements. In response to Board Member Mahfoud, Mr. Harrison stated that if the Investment Advisor was given parameters and these parameters were followed, than the portfolio manager is following the guidelines given. Noted and Filed B. Mo"nth End Cash Report - November 2004 Noted and Filed C. Pooled Money Investment Board Report - September 2004 Noted and Filed 8 Investment Advisory Board Minutes December 8, 2004 VIII BOARD MEMBER ITEMS VIII Adjournment MOTION - It was moved by Board Members Olander/Deniel to adjourn the meeting at 6:40 p.m. Motion carried unanimously. Vianka Orrantia Secretary 9