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2007 07 11 IAB Minutes INVESTMENT ADVISORY BOARD Meeting July 11, 2007 CALL TO ORDER Regular meeting of the La Guinta Investment Advisory Board was called to order at the hour of 4:30 P.M. by Board Member Moulin, followed by the Pledge of Allegiance. PRESENT: Board Members Moulin, Rassi, Park and Ross ABSENT: Board Member Deniel OTHERS PRESENT: John Falconer, Finance Director and Louise West, Accounting Manager Board Member Moulin welcomed the new Investment Advisory Board Members to the Board; Mr. Alan Park and Mr. Ted Ross. II Appointment of Officers A. Appointment of Investment Advisory Board Chairperson Board Member Moulin opened nominations for Chairperson. Board Member Ross nominated Chairperson Deniel for Chairperson, along with a nomination from Board Member Rassi nominating Board Member Moulin. Board Member Moulin advised that he would decline the nomination and he also advised that Chairperson Deniel shared with him prior to the meeting that she would be willing to serve another year either as Chair or Vice Chair. With no other nominations a vote was taken. VOTE: All Ayes with Chairperson Deniel absent MOTION - It was moved by Board Members Rassi/Ross to close nominations and appoint Chairperson Deniel as the Chairperson. Motion carried unanimously. B. Appointment of Investment Advisory Board Vice Chairperson Board Member Moulin opened nominations for Chairperson. Board Member Park nominated Board Member Rassi as Vice Chairperson. With no other nominations, Board Member Moulin closed the nominations. Investment Advisory Board Minutes July 11, 2007 VOTE: All Ayes with Chairperson Deniel absent MOTION - It was moved by Board Members Ross/Park to appoint Board Member Rassi as Vice-Chairman. Motion carried unanimously. At this point in the meeting, Vice Chairman Rassi took over from Board Member Moulin in c:hairing the meeting. At the suggestion of Vice Chairman Rassi, each member and staff introduced themselves and gave a brief overview of their backgrounds. III PUBLIC COMMENT - (This is the time set aside for public comment on any matter not scheduled on the agenda.) None. IV CONFIRMATION OF AGENDA Board Member Moulin requested that an item be added to "Board Member Items," velrbal update on the professional portfolio money manager as discussed during the approval of the Investment Advisory Board work plan at the City Council meeting of July 3. V CONSENT CALENDAR A. Approval of Minutes of Meeting on July 11, 2007 for the Investment Advisolry Board. Board Member Moulin advised that page 1 of the minutes, first sentence should read: Regular meeting of the La Guinta Investment Advisory Board was called to order at the hour of 4:30 by ViGe Chairperson Deniel, followed by the Pledge of Allegiance. MOTION - It was moved by Board Members Moulin/Ross to approve the Minutes of July 11, 2007 as amended. Motion carried unanimously. VI BUSINESS SESSION A. Transmittal of Treasury Report for May 2007 The Treasurer presented the Treasurer's report advising that the months of January and May are months in which the City receives property tax reVE~nue from the County. Therefore, the May Treasurer's report reflects 2 Investment Advi~;ory Board Minutes July 11, 2007 an increase of approximately $27 million due to the receipt of the May tax revenue. The Treasurer advised that some of the monies received from the property taxes will be used for the City's pass-through payments to other taxing entities such as the water and school districts, which are due in June. In addition, the City received a triple flip payment and sales and vehicle license fees at the end of May. In re'sponse to Board Member Ross, The Treasurer clarified for the Board a triple flip payment; which is a plan devised from the state to use city monies as collateral for the state deficit, the state in turn gives cities tax money that would normally go to schools, and the state repays the school from their general fund. The City continues to receive sales tax payments every month with a lesser amount and twice a year receives property tax money from the County in lieu of the aforementioned sales tax and vehicle license fee. The Treasurer went through the Treasurer's Narrative Page for Board Member Park and Ross explaining the City Sweep Account with Wells Fargo. The Treasurer then discussed the City benchmark which is the six month Treasury rate and the difficulties staff has had to meet the benc:hmark due to the Federal Reserve Board raising the rate 1 3 times and thus creating an inverted yield curve. The Treasurer continued stating that these Fed raises created concerns about the performance of the portfolio but fortunately the City has kept a small average maturity and the performance has exceeded the benchmark for the last 12 months. The Treasurer explained that one of the investment areas that drags down the yield is purchasing U.S. Treasuries from two bond debt issuances to construct their extended capital projects. The Treasurer does not want to risk these funds in other types of investments which may result in a loss of principal and would result in the capital projects not being built (Vista Dunes Courtyard Apartments, Ave 48th Housing Project and SilverRock Resort). The Treasurer went over the Investment strategies for the months of May and June. The Treasurer invested heavily in 30 - 60 day Commercial Paper, 3-6 month U.S. Treasuries for the bond proceeds, and is at the maximum investment limit in Farm Credit, FHLB and Freddie Mac paper. The Board has recommended not purchasing FNMA paper (even though it is permissible in the Investment Policy) because of the lack of audited financial statements which the Treasurer believed would be issued in Declsmber 2007. Board Member Ross asked if this has created a problem with not investing in FNMA with the Treasurer responding that this would 3 Investment Advi~;ory Board Minutes July 11, 2007 result in a 5 basis point loss from investing in LAIF. The Treasurer commented that with the new authority limits that will go into affect on July 1st he will be investing funds in the three aforementioned GSE's out 18 months because of his belief that rates are going to fall for investors wanting safer investments due to the sub-prime market problems and that the portfolio has a short average maturity. The Treasurer stated that he has reduced his holdings in Commercial Paper recently and will go back into the Commercial Paper market and reduce the level of funds held in LAIF. The Treasurer then went over the highlights of the Treasurers Report page by page. Page 4 is an Executive Summary setting forth the State limits and the City actual investments. The Treasurer discussed the three che(;king accounts and their purpose - General Checking account, Housing Account, and SilverRock ZBA account. The page also lists 4 percentages the first being the pooled investment rate - 5.20%, the next percentage is the fiscal agent percentage - 5.05% which drags the overall portfolio earnings down. The Treasurer went on to explain that the bond indenture requires that any mutual funds be invested in AAA rated investments. The next percentage is the overall portfolio performance which is 5.16%. The last percentage is the City benchmark of 4.81 %. Pages 5 and 6 are the detailed holding report. Board Member Ross asked about the historical purpose of the benchmark. The Treasurer responded that the City's Investment Policy was modeled after the Municipal Treasurers Association recommended Policy which recommends a benchmark and that there was lively discussion by the lAB about what benchmark to use. The discussion first centered around the City's was growth and that no investment should be longer than two years which would not subject the portfolio to a great deal of market risk. With that as a given, the lAB settled on the six month T-Bill. Boal'd Member Moulin commented that in his opinion it needs to be revisited. Board Member Moulin continued that he has always looked at the benchmark from the City's viewpoint that it is a basis of comparison and not something that we achieve. Boalrd Member Moulin asked the Treasurer if he agreed with that viewpoint and he concurred. 4 Investment Advisory Board Minutes July 11, 2007 Boalrd Member Ross asked Board Member Moulin in what context he would like to revisit the benchmark. Boalrd Member Rassi believed that in the recent past several Council Members wanted to know why we were not earning more and now basod upon his knowledge of the other Cities in the Valley we are outperforming them. The Treasurer responded that it is difficult to do a City by City comparison because each Treasurer has their own philosophy on investing. His method is based upon the fact that we are a growing City and that the maximum maturity has been for the last twelve years a two year maximum - for the Treasurer a long term investment is one year. Boal'd Member Ross stated that he would like to address the benchmark when considering the Investment Policy. Boal'd Member Moulin also mentioned that a fourth item has been added to this section of the Investment Policy - Diversification. He discussed the theoretical debates the Board has had on this topic. The Treasurer continued that on Page 5 the City Pooled cash was $155 million. Page 6 listed the City's bond proceeds which is $60 million and at the bottom of the page lists the average maturity of 54 days. In addition, at the bottom of page 6 the unrealized gains or losses is summarized. Board Member Moulin responded to Board Member Ross that since our Policy requires a buy and hold we will not incur an actual loss unless there is a cash need that requires a sale of an investment. The Treasurer stated that the accounting pronouncements requ'ire that if the unrealized gains or losses are material to the financial statements they are required to be booked. Boal'd Member Moulin stated that since our portfolio is so short we are not subject to these large ups and downs of the market. Boalrd Member Park inquired what type of sampling do the auditors do in the cash area. Boal'd Member Moulin stated that the auditors confirm 100% of cash. 5 Investment Advisory Board Minutes July 11, 2007 The Treasurer stated that at the conclusion of their annual audit they will come and meet with the Board to discuss any findings in the cash area. PagEl 8 is broken into two sections with the top section a fund listing of the cash and the bottom half lists the cash balances by type. Board Member Ross inquired about the negative SilverRock amount. The Treasurer responded that this will require a year end advance from the General Fund. Board Member Moulin inquired whether the City is booking the interest on the advance and whether the advance will be repaid. The Treasurer responded that the interest is being booked and the advance will be repaid. The Treasurer explained that in the bottom section there is often a negative cash number which should not be a cause for concern. Board Member Moulin stated that the City issued warrants which means that they are not due until they are honored. The Treasurer stated that he tries to time some of the larger payments to take advantage of interest earnings from the sweep account but that his intent is not to withhold payments that will cause a hardship to vendors. Pagl3 9 is a six month cashflow schedule. The Treasurer stated that one of the State requirements of a Treasurer is to indicate if the City will be able to operate for the next six months and went over the bottom section of the LAIF and debt service cash balances. Pagl3 10 represents surplus and non-surplus funds with the last column representing the numbers that flow into Page 4. Page 11 is historical rate information showing trends with the last page being a graphical presentation. MOTION - It was moved by Board Members Moulin/Ross to approve, receive and file the Treasury Report for May 2007. Motion carried unanimously. B. FY :2007/2008 Meeting Schedule 6 Investment Advisory Board Minutes July 11, 2007 In response to Vice Chairman Rassi, The Treasurer and Board Member Ross clarified the quarterly dates listed on the meeting schedule. Board Member Moulin advised that he and Chairperson Deniel would like to meet in the month of August, which is normally the month the Board goes dark. Board Member Moulin advised that the LAIF conference is scheduled the same day as the October board meeting; he suggested that the Board go dark the month of October. MOTION - It was moved by Board Members Moulin/Ross to approve the monthly meeting schedule. Motion carried unanimously. C. LAIF Conference The Treasurer clarified for the new Board members the upcoming LAIF Conference. Board Member Ross suggested that this item be continued to the next scheduled meeting. MOTION - It was moved by Board Members Moulin/Ross to continue the discussion of the LAIF Conference. Motion carried unanimously. VII CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - June 2007 The Treasurer clarified for the new Board members the Month End Cash Report. Board Member Moulin advised that page 12 reflects an outstanding balance due from the County and if there was a reason for the delinquency. The Treasurer advised that this balance normally runs in the arrears. Noted and Filed B . Pooled Money Investment Board Reports - April 2007 Noted and Filed 7 Investment Advisory Board Minutes July 11, 2007 C. Distribution of Investment Policies for Fiscal Year 2007/2008 Noted and Filed VIII BOARD MEMBER ITEMS Vice Chairman Rassi advised that Chairperson Deniel requested to discuss business cards. The Treasurer suggested that this item be continued to the next scheduled meeting. MOTION -- It was moved by Board Members Moulin/Ross to continue the business card discussion. Motion carried unanimously. Board Member Moulin advised that he was in attendance at the July 3rd Council meeting for the approval of the Investment Advisory Board Work Plan and during the approval process there was substantial discussion regarding the professional portfolio management firm. He believed that there were two Council Members in favor of using a portfolio firm and two had concerns and that they Goncluded that the only way we will know if it works is to try it. He believed that the two people who had concerns were based on the belief how it is possible, for a professional money management firm to do better than the Treasurer because of the additional management and custodial fees that would be incurred and the risks of different types of investments that the firm can invest in that the Treasurer cannot invest in. Board Member Moulin believed that this issue may require the lAB to assist the City Council in some way. Board Member Rassi asked if the City Council had taken action or just discussed it. Board Member Moulin stated that they did not approve issuing a Request for Proposal but they did adopt the Work Plan. Board Member Moulin stated that at the last lAB Board Meeting the decision was made to delete any reference to a Professional Money Management firm from the Work Plan since the Board has done all they can do and the decision is now with the City Council. Board Member Rassi stated that he believed that the City Council had tabled the matter so the Board backed away from any further efforts. 8 Investment Advisory Board Minutes July 11, 2007 Board Member Moulin stated that the decision of the City Council was to direct the City Attorney to change the City Ordinance. Board Member Moulin had discussed this with Chairperson Deniel who believed that the Board could assist in this change as has been the case in the past. Board Member Moulin gave some historical perspective to Board Members Park and Ross that the City Council has delegated all responsibility for the City Investments to the City Treasurer and excluded themselves from all responsibility. Board Member Moulin stated that it would be unfair to require the Treasurer to be responsible for the actions of a professional money management firm and that the City Council should take responsibility. The Treasurer agreed with that assessment and added that the City Attorney was relying on a State of California Attorney Generals Opinion when she prepares the Ordinance change for Council consideration. The Treasurer believes that the next step is for the City Attorney to bring this before the City Council and determine whether or not the City Council wants to take on this responsibility which would require a first and second reading and go into affect thirty days after the second reading. Board Member Rassi asked if the City Council had directed the lAB to work with the City Attorney on the language and the Treasurer responded that they were not directed to do so. Board Member Moulin reflected on the bad experience in the past with a money manager who was a dishonest person that the City lost money with. The City Treasurer does not have access to the securities and the money manager would not have access but would have the ability to buy and sell securities. The securities would be with a third party custodian and would not have access to any cash. Board Member Moulin advised that the Board has in the past been strongly opposed to hiring a City Investment employee because of their lack of exposure to the financial market. Board Member Ross stated that an analysis would have to be performed on the incremental value of doing this and that there appears to be some undercurrents. Board Member Park stated that based upon his limited involvement with the Board, that based upon the parameters of going out six months that he did not see how someone could do more and than take into consideration the fee structure the return would be less. 9 Investment Advisory Board Minutes July 11, 2007 The Treasurer stated that he should explain to the new Board Members the past dealings with Steven Wymer, a money manager since this issue seems to come up every six months for the twelve years he has been with the City. He understood that in 1991 or 1992 the City had a custodian, Refco Securities, Kim Goodman who through forgeries and defalcations resulted in the loss of funds. He understood that the City did not lose any principal but did lose interest and attorney fees. The Treasurer stated that this resulted in the creation of a full time Finance Director, and with him and his two predecessors developed policies which reflect some of the undercurrents that Board Member Ross had referred to. The Treasurer went on that for him and others at the City, they have had to deal with the burden of this. The Treasurer stated that some Cities have great relations with Investment Advisors and that he tends to personalize these issues. He stated that he referred to individuals during the discussion at the City Council meeting because he believes that a firm is only as good as the individuals you deal with and stated that you may have a great firm and have a person on the account that is not any good. The Treasurer told the Board that he did not respond during the July 3'd Council Meeting to the Mayors request on how he felt on the City engaging a portfolio management firm. He stated that he has consistently stated and still believEls that a portfolio management firm is not warranted due to the types of investments the State Code permits and the short term maturities. In addition, the yield curve does not support the idea of going out the 3-5 years that the Treasurer believes will be required to cover the added firm fees. The Treasurer recalled a presentation to the lAB by a professional that recommended not going into long term investments because of the yield curve and believes that condition still exists. The Treasurer continued by consistentlly stating that the reason he did not answer the question was because he had given the Mayor the same response in the previous two years. Board Member Moulin stated to the Board that he believes that the interest earnings that a Council Member believes could be earned by using a Portfolio ManagemE~nt firm would equate to $1,000,000 is not possible. Board Member Moulin referred to the Investment Policy which would limit the managed funds to 10% of the $150 million net of bond proceeds or $15 million. Board Member Ross stated that the incremental benefit would be how many basis points after management fees could be earned under managemE!nt. 10 Investment Advisory Board Minutes July 11, 2007 Board Member Rassi stated that City investments should be looked at as safety, liquidity and yield in that order, what we are discussing here is yield which is the third priority but how is the Investment Manager going to do better than the Treasurer. Board Member Rassi did not support the use of an Investment Manager because one of the reasons previously given was that the Investment firm would have more flexibility and could go out further on the yield curve which he sees as liquidity risk. Board Member Rassi referred back to a previous meeting with the City Council where the question was asked what if the market changes and the investment goes down in value and was told that they will hold on to the investment until maturity. Board Member Ross asked how long the Board has been working on this issue to inGlude a Request for Proposal (RFP) for Portfolio Manager into the Investment Policy and was told five years. The Treasurer stated that the RFP was seen as an investment tool. Board Member Ross asked the Treasurer by including this RFP in the policy is this investment a de facto affirmation that it should be issued. The Treasurer stated that he believed that it would be a de facto affirmation if the City Council took the final step in authorizing the release of the RFP and outlined the steps that the City Council would take after reviewing the Ordinance change. MOTION -- It was moved by Board Members Moulin/Ross to continue the Investment Advisory Work Plan. Motion carried unanimously. MOTION - It was moved by Board Members Moulin/Park to adjourn the meeting at 6:05 p.m. Motion carried unanimously. Submitted by, f11--J~~-<~ John M. Falconer Treasurer 11