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2006 12 13 IAB Minutes INVESTMENT ADVISORY BOARD Meeting December 13. 2006 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 Chairperson Deniel, followed by the Pledge of Allegiance. PRESENT: Board Members Moulin. Deniel, Olander, Rassi and Egbert ABSENT: None OTHERS PRESENT: John Falconer, Finance Director, Vianka Orrantia, Secretary and Jennifer Christian of Mayer Hoffman McCann P.C. II PUBLIC COMMENTS - None III CONFIRMATION OF AGENDA - (This is the time set aside for public comment on any matter not scheduled on the agenda.) Mr. Falconer requested that the article received from Board Member Moulin from the Wall Street Journal, be added to Board Member items for discussion. Board concurred. IV CONSENT CALENDAR Approval of Minutes of Meeting on November 8. 2006 for the Investment Advisory Board. Board Member Egbert requested that in the future, whenever the term "money manager" is used that it be reflected as a "Professional Money Management Firm" within the meeting minutes. Board concurred. Chairperson Deniel advised that on page 2, last paragraph, second sentence, it should read: This appendix allows an outside money manager, if hired, to do certain things that are not permitted by ~ the Treasurer. In response to Board Member Rassi, Chairman Deniel clarified that the appendix was approved in the event a Professional Money Management Firm was hired. MOTION - It was moved by Board Members Moulin/Egbert to approve the minutes of November 8.2006 as amended. Motion carried unanimously. Investment Advisory Board Minutes December 13, 2006 The Board made a motion to review the Correspondence and Written Material, Item A., City of La Quinta FY 05/06 Audited Financial Statements at this time. Motion carried unanimously. Ms. Jennifer Christian of Mayer Hoffman McCann, P.C. presented the Audited Financial Statement as it pertained to cash and investments. Page 40: Cash and investment footnotes reflect an approximate total of $218 million of funds invested by the City through June 30, 2006. The $218 million are all invested funds, not cash on hand. The portfolio has increased from the previous year from $181 million to $218 million. Page 43: This schedule reflects the liquidity of the investment portfolio, with most investments maturing in less than six months, with nothing invested past the twelve- month mark, making the portfolio short and liquid. Most of the investments at June 30'h were invested in Treasury Notes and Federal Agency Securities, with almost $30 million in LAIF and the majority of unspent bond funds invested in Treasury Bills as of June 30th. The bottom of the schedule reflects the quality of the investments and their ratings, with most investments rated within the "A" category. There are certain federal agencies and securities that do not have ratings, with no rating for LAIF investments. Page 44: A disclosure is required when any investment in one issuer is more than 5% of the total investment in the portfolio. A disclosure was made due to the $17.4 million investment in Federal Home Loan Bank Securities. As a result this was also disclosed in the management letter to the City Manager and City Council (a copy of the letter was distributed amongst the Board). A recommendation was made in the letter to either recalculate ratios prior to the time of purchase or modify the City's Investment Policy to make it less restrictive. Board Member Moulin clarified that previously discussed investment was an inadvertent error. At the placement of purchase of the security, the security was returned in another form of security rather than the original request at the time of purchase. In response to Board Member Moulin, Ms. Christian stated that as the City's portfolio grows, limits that were established in previous years might not be feasible for the City's current portfolio and the Board may possibly consider percentage indicators vs. dollar amounts. In response to Board Member Rassi, Mr. Falconer advised that a response to the error was stated in the last paragraph of the management letter, which read "the non- 2 Investment Advisory Board Minutes December 13, 2006 compliance has been identified by management and was disclosed in the Treasurer's Report and was also provided to City Council." Ms. Christian advised the Board that there are two types of letters issued after an audit, one is for reportable conditions and the other is for housekeeping items. The items reported to the City were considered housekeeping items. In response to Board Member Egbert, Mr. Falconer advised that developer deposits are tracked by the Finance Department and there are approximately fifty deposits at any one given time. These deposits are negotiated by the individual department and the individual department codes the developer's expenses against the deposit. The available balances are provided to each department on a monthly basis. If a developer deposit is overdrawn, the appropriate department is notified. General discussion ensued among the Board in regard to the reporting of securities and marking to market. Ms. Christian advised that cash and investments are considered a high risk audit area and, because of this, all cash and investment accounts are 1 00% confirmed. Both City's funds and bond funds are confirmed directly from the custodian. The market value is also compared to the custodian statements to what is reported in the accounting system to ensure there are no significance differences. Because these are not marked to market, they are added up at market value to make sure there are no material differences than what is being reported in the financial statements. Also reviewed is the reasonableness market values listed on the custodian statements by comparing to the Wall Street Journal or other resources. Their market values are recalculated to make sure these resource amounts are accurate. Ms. Christian also advised that the types of investments (i.e. Fannie Mae) are compared to what is on the investment report to ensure what is being reported is accurate by issuer and type of investment. Another area audited is the allocation of investment income between the funds of the City to ensure restricted funds are receiving their fair share of income and not one fund is benefiting from another that should have received interest income. Ms. Christian advised that to test the compliance area, there are two sets of criteria to test against, the California Government Code and the internal investment policy. Also tested are percentages and maximum investments amounts. These are compared to Bloomberg screens to ensure the rating information is correct and there are no illegal types of investments. Ms. Christian advised that from an internal control stand point, the firm reviews with staff the proper segregation of duties and is currently satisfied with the current system setup with Wells Fargo Bank, wherein one person initiates an investment transaction 3 Investment Advisory Board Minutes December 13, 2006 and another verifies it. The Treasurer initiates the transaction and another person prepares the journal entry that is being entered into the accounting system. This person also does the bank reconciliation, which is an additional check ensure unauthorized transactions did not occur. Overall the City has very strong internal controls and there were no significant problems in the auditing of cash and investments, and Mr. Falconer and his staff have been very helpful in the audit. In response to Board Member Moulin, Ms. Christian advised there was only one audit difference, the cash and investments marked to market. This was assessed by the audit firm whether or not this was material based on each major funds or non-major funds and aggregates; a calculation is also made to ensure that this is not material to individual funds. Ms. Christian stated that this was the only passed adjustment. Occasionally there are small immaterial variances on work papers and internally policy states that if it is less than 10% of what is defined as material, it is not reported on the work paper. General discussion ensued among the Board regarding fraud and how it could be detected within an audit. In response to Chairperson Deniel, Mr. Falconer advised that if an audit committee needs to formed, that it would be a separate board from the Investment Advisory Board and it would need approval from City Council along with an ordinance change. In response to Chairperson Deniel, Ms.Christian stated that less than half the cities audited by Mayer Hoffman McCann, P.C. have audit committees. In response to Board Member Moulin, Ms. Christian advised that the majority of cities audited by the firm, do not have professional money management firms. Board Member Moulin asked if most cities investment policies are as conservative as that of the City of La Quinta. Ms. Christian replied that all cities differ in their investment policies and that the City of La Quinta has a very conservative portfolio for its size. In response to Board Member Moulin, Ms. Christian advised that the City of La Quinta is ethically strong and the Finance Department is a very well run department. Noted and Filed. V BUSINESS SESSION A. Transmittal of TreasurY Report for October 2006 4 ---- Investment Advisory Board Minutes December 13, 2006 Mr. Falconer summarized the Treasury Report for the month of October and advised that the report reflects a change in the size of the portfolio. Usually in the month of October there is more cash going out than coming in to the City. An investment in a Corporate Note was made in GE Capital. The City is still in line with its benchmark six-month U.S. Treasury Bill. In October, the City picked up approximately $3,500 from the money market sweep, net of bank fees. Mr. Falconer advised that at this time he will stay short with the portfolio investing in commercial paper from 45 to 60 days. In response to Board Member Olander, Mr. Falconer advised that when the $3 million in Commercial Paper and $4% million in Freddie Mac are due to mature, he will have the Commercial Paper extended out 45 days to 12/20 to 12/22 range and the best deals for Freddie Mac are reported to be in March with a 5.18 yield. In response to Board Member Olander, Mr. Falconer advised that the month of December will be a big month for investment transactions, totaling approximately 12 investment transactions for the month. The time spent for one transaction is approximately an hour and a half per transaction. MOTION - It was moved by Board Members Olander/Moulin to approve, receive and file the Treasury Report for October 2006. Motion carried unanimously. B. Continued Consideration of the Fiscal Year 2006/07 Work Plan - Review of Investment Policy It was suggested by Chairperson Deniel that a redlined draft of the policy be prepared for the next scheduled meeting. She also suggested adding an approved investment vehicle, such as mutual funds. LAIF is considered a mutual fund currently used by the City. She suggested the Board possibly research government funds from different companies to use as alternative investments (i.e. short-term, intermediate-term). Mr. Falconer advised that both he and Board Member Egbert met with CAL TRUST, which offered this type of vehicle but they were not dollar- in, dollar-out investments. 5 Investment Advisory Board Minutes December 13, 2006 The Board discussed ETF's and I-Shares as possible investments, their flexibility and whether they are allowed by the Government Code. The Board also discussed CDARS and whether or not this will be added to the investment policy. Chairperson Deniel suggested the following for the next scheduled meeting: 1. Redlined draft of the investment policy: 2. Determine whether or not the following list of instruments may be potential alternatives to the investment policy and if they are allowed by the State Code: . Mutual funds that are not dollar in, dollar out . Government backed exchanged traded funds . CDARs MOTION - It was moved by Board Members Moulin/Olander to continue the discussion of the Fiscal Year 2006/07 Work Plan Investment Policy to the January. VI CORRESPONDENCE AND WRITTEN MATERIAL A. City of La Quinta FY 05/06 Audited Financial Statements This item was discussed at the beginning of the meeting and was noted and filed. B . Month End Cash Report Noted and Filed C. Pooled Money Investment Board Report Along with Mr. Falconer, Board Member Rassi attended this year's LAIF Conference and shared his comments about the conference and the current investment methods used by the State. Noted and Filed 6 Investment Advisory Board Minutes December 13, 2006 VII BOARD MEMBER ITEMS - None Board Member Moulin commented on the article from the Wall Street Journal regarding Fannie Mae. General discussion ensued among the Board regarding the article. Mr. Falconer advised that Staff will be going before City Council for a Request for Proposal (RFP) for Audit Services on the first meeting in January. In the last RFP for Audit Services, Council requested that two Investment Advisory Board Members be appointed to the selection committee. VIII Adjournment MOTION - It was moved by Board Members Moulin/Olander to adjourn the meeting at 6:50 p.m. Motion carried unanimously. -t ft4~ Vianka Orrantia, Secretary ~- 7