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2007 10 09 IAB Minutes INVESTMENT ADVISORY BOARD SPECIAL MEETING October 9.2007 CALL TO ORDER Regular meeting of the La Quinta Investment Advisory Board was called to order at the hour of 4:30 P.M. by Chairperson Deniel, followed by the Pledge of Allegiance. PRESENT: Board Members Ross, Deniel, Rassi and Park ABSENT: Board Member Moulin OTHERS PRESENT: John Falconer, Finance Director, Council Member Osborne and Vianka Orrantia, Secretary II Public Comment - None III CONFIRMATION OF AGENDA Chairperson Deniel advised the Board that she extended an invitation to Councilman Osborne to attend this month's meeting since the Board considers him a liaison to the Council. The invitation was extended due to the outcome of the September 18, 2007 City Council regarding the Council's consideration to change the La Quinta Municipal Code Governing the Investment of Moneys and Funds. Chairperson Deniel advised that she was not in attendance at the Council meeting, and the Board was represented by Board Member Moulin. Board Member Moulin advised her of the Council's decision and how he felt that there were some inaccuracies stated. Chairperson Deniel advised that there are several issues to discuss with the Board and Councilman Osborne, 1) suggested guidance from Councilman Osllorne as to what direction the Board should now take; 2) discussion of her handout of notes and comments derived from the recorded Council meeting along with an educational summary of the different investment risks and; 3) a suggestion she would like to present to the Board. Councilman Osborne advised that the Board has already laid down the ground work for the implementation of a professional portfolio management firrm within the investment policy, along with the RFP. The only factor for the implementation is Council's approval and Council voted not to implement a professional portfolio management firm at this time. Councilman Osborne alsQ advised of some of the reasons that Council voted not to implement the professional portfolio management firm; one being security matters from the City's stand point, another being the Wymer incident in previous years, and Investment Advisory Board Special Meeting Minutes October 9. 2007 should the City risk investments being sold prior to maturity with the City's policy being that the City holds to maturity. Councilman Osborne advised that the Council's concern would be, "would a prGlfessional portfolio management firm sell prior to maturity and if sold prior to maturity, would this create an added risk to the City's principal." Council also discussed whether or not other cities utilize a professional portfolio management firm. Mr. Falconer advised that he conducted a survey as to what valley cities currently utilize a professional portfolio management firm. The cities of Indian W$lIs and Palm Desert both utilize SYMPPO, a management software. The two valley cities that currently utilize a professional portfolio management firm are the City of Indio and the City of Coachella. Councilman Osborne reiterated the concerns of Council, these being; what is the success of using a prbfessional portfolio management firm and what is the added risk, with the major concern of the City Council being "risk." Councilman Osborne again advised that when Council decides to implement a professional portfolio management firm, the ground work is already in place. Chairperson Deniel advised that after listening to the recorded meeting of September 18th, that the City Council is very comfortable with the Treasurer but the City Attorney seems to have some objections in dividing the portfolio and having someone other than the Treasurer control a portion of the City's portfolio. Chairperson Deniel stated that she felt that the City Council was uneasy with having direct responsibility for portfolio oversight, that they have never had this responsibility before. Chairperson Deniel also advised of the conversation between Council member Henderson and the City Treasurer, and Chairperson Deniel suggested that the Treasurer be allowed to decide as to whether or not the City should hire a professional portfolio management firm for a portion of the portfolio and if decided, he would report to City Council, which he already does with LAIF. Chairperson Deniellisted LAIF's various investment types and advised that City alr$ady uses a professional portfolio management firm when they invest in LAIF. Just like a professional portfolio management firm, LAIF uses a larger array of instruments and has a group of professional managers. She did not know whether LAIF held all investments to maturity or not, due to their size a large amount of securities was traded. The difference is that LAIF is managed like a 2 Investment Advisory Board Special Meeting Minutes October 9. 2007 money market fund, with no gain or loss shown in the principal; fluctuations come through an adjustment in interest. On the other hand, the principal in an account managed by a portfolio management firm would have to be marked to market. Chairperson Deniel advised that this would be something that the Tr$asurer could manage and would also need approval from the City Attorney. Currently there is an ordinance that allows the City Council to delegate to the Treasurer, the authority to invest a portion of the portfolio and if the current ordinance is expanded, then the Treasurer can be made responsible. The Treasurer would continue to review the investments made by the professional portfolio management firm on a daily basis with the Investment Advisory Board reviewing the investments on a monthly basis. Councilman Osborne advised that if this suggestion was presented to Council the first thing Council would possibly do is ask the Treasurer for his thoughts. The Treasurer advised that he would have to give this suggestion some thought. Councilman Osborne asked if Wells Fargo Bank could possibly help the Treasurer in this area. Mr. Falconer advised that the investments need to be segregated; the segregation needs to be from the custodians, from the bank, and from the bond trustees. Mr. Falconer also advised that this could be an option. Mr. Falconer clarified for the Board that LAIF does hold all investments to maturity. Mr. Falconer advised that he has been opposed to hiring a professional portfolio mar'lagement firm because the current market conditions do not warrant it at this time. Mr. Falconer stated that the yields at this time do not warrant the expenses of a portfolio money management firm. Councilman Osborne asked what the risk would be by selling prior to maturity. Mr. Falconer clarified that the perception is that when one sells at a loss, one is expected to reinvest for high returns in the near future. In r$sponse to Councilman Osborne, Mr. Falconer advised that an investment firm usually sells at a loss in anticipation of a future return. Chairperson Deniel referenced her handout and stated that 2b segregates the different risks that exist. The one risk that the Council seems to focus on is 3 Investment Advisory Board Special Meeting Minutes October 9. 2007 entlbezzlement risk; Councilman Sniff referenced this risk during the September 18th Council meeting. Chairperson Deniel advised that, nowaday, embezzlement risk no longer an issue and what occurred with the City in previous years is someone inadvertently signed a power of attorney over to an advisor, this would not be allowed today. Chairperson Deniel advised the Board of the various risks, one being issuer risk, (for example) where an issuer sells commercial paper and the issuer goes bankrupt. This is currently protected by the investment policy by; paper grade purchased (i.e. AAA paper) and the dollar amount per issuer. In response to Councilman Osborne, Chairperson Deniel advised that a professional portfolio management firm would be able to anticipate a problem with an issuer prior to the Treasurer knowing. She also advised that issuer risk would be nominal due to the fact that the Treasurer limits himself strictly to triple "A" paper. Chairperson Deniel advised of market risk, a risk of interest rate fluctuations. For example: when interest rates decline, the value of the paper in portfolio rises and when interest rates rise, the value of fixed income securities declines. If the investment is held to maturity, the principal is generally collected in full. Chairperson Deniel advised of several statements made by Council and the Mayor in regard to trading.. Chairperson Deniel clarified that selling before maturity is merely adjusting overall portfolio based on a change in the interest rate scenario. Chairperson Deniel advised of other statements and concerns of the City Council and also advised of the concern of the Treasurer; being, given today's market conditions, would a professional portfolio management firm earn twenty basis points net of their fees. Councilman Osborne again reiterated that the ground work is already in place and: when there is a majority vote by Council a professional portfolio management firm could be implemented. Chairperson Deniel asked if the various risks could possibly be an item of discussion at the joint meeting with City Council. 4 Investment Advisory Board Special Meeting Minutes October 9, 2007 Councilman Osborne replied that this information could be informative and educational but would not necessarily change Council's vote. Chairperson Deniel advised that it's not the Board's objective to change or sway Council's vote. Chairperson Deniel stated that she felt that the City Council was very comfortable with the Treasurer and suggested that the Treasurer be the one authorized to hire a professional portfolio management firm. Councilman Osborne stated that Council has always felt that if there is a need by the Treasurer he will ask and Council has the utmost confidence in the de(:isions of the Treasurer and his staff. Both Councilman Osborne and Mr. Falconer advised of various issues of the past that were not agreed upon by the Board and/or Council but eventually were implemented. Board Member Ross asked if hiring a professional portfolio management firm would alleviate some duties from the Treasurer. Mr. Falconer replied that he felt that hiring a professional portfolio management firntl would possibly add additional duties. Board Member Ross referenced the discussion of responsibility, and advised that if there were a violation by a firm, there is no recovery from an individual, and the claim would be filed against the responsible institution. Mr. Falconer advised if a violation occurred and a lawsuit was filed, everyone involved would be sued, not just the firm. Board Member Park advised of other risks not mentioned, the concentrated risk and! excessive trading risks. Chairperson Deniel advised that the Board limits the amount of paper the Treasurer can purchase by issuer, (i.e. the Treasurer cannot just concentrate on GE paper) therefore addressing the concentration issue. General discussion ensued among the Board regarding the concentrated risk and the ,excessive trading risk. 5 Investment Advisory Board Special Meeting Minutes October 9, 2007 Board Member Rassi stated that he felt that the liability issue discussed by the Board was very interesting. He also stated that even if there was any money lost and then recouped by the City, there could be possible damage printed by the media. Councilman Osborne advised that the issues discussed at this Board meeting could be discussed at the scheduled joint meeting with the City Council, such as the summary handout and helping the Council understand some of the risks in~olved along with any potential changes to those risks. CoUncilman Osborne thanked the Board and stated that he felt that the number one priority of the City Council and the Board's is protecting the City's principal which has been done and continues through the City's investment policy. Councilman Osborne commented that in respect to cash flow, greater return and diversity there is always a give and take and how much are we willing to give to get more of the other. Board Member Rassi asked how much time was allotted for all Boards and Commissions to meet with the City Council. Staff replied that each Board and Commission was given approximately 30 minutes and that the meetings were going to take place at the Senior Center at 7:15 p.m. on October 23'd. Mr. Falconer suggested that the Board prepare an agenda of items to be discussed for the joint meeting with the City Council. Chairperson Deniel advised that she would prepare an agenda and forward to all Board members via email. Chairperson Deniel stated that she felt that there seemed to be an issue with the City Attorney regarding the separation of responsibilities. She also stated that she felt the City Council was very comfortable with City Treasurer and that they should allow the Treasurer to decide whether or not he would like to do the diversification, therefore eliminating an ordinance change. Mr. Falconer advised that the investment policy is a living document and suggested that the Board review the investment policy for the upcoming year and make any recommendations to the City Council. Cha:irperson Deniel advised that before a suggestion is presented to Council, the Board would need to find out whether or not it is legal or even possible. 6 Investment Advisory Board Special Meeting Minutes October 9, 2007 Mr. Falconer reiterated that there are other cities that currently use professional portfolio management firms, and the issue at hand is "who will be held responsible. " Mr.. Falconer advised that in his opinion if it is part of the investment policy and if permissible by state code, there would be no need to change the ordinance, and it would ultimately be left at the discretion of the Treasurer. IV CONSENT CALENDAR A. Approval of Minutes of Special Meeting on October 9, 2007 for the Investment Advisory Board. Mr. Falconer advised that on page 1 of the meeting minutes it reflects Board Member Park as being present and should read Board Member Ross. Also on page 1 under the correction of page 3, it should also read Board Member Ross and not Board Member Park. In response to Chairperson Deniel, Mr. Falconer clarified that the item listed under the confirmation of the agenda was from the previous meeting. MOTION - It was moved by Board Members Ross/Rassi to approve the Minutes of October 9,2007, as amended. Motion carried unanimously. V BU$INESS SESSION A. Transmittal of Treasury Report for August 2007 Mr. Falconer presented the Treasurer's report advising that the portfolio dropped slightly by $3 million due to the construction of city hall and the Vista Dunes Courtyard project with the overall yield at 5.08%, the pooled cash investments at 5.17% and the six month treasuries rates currently standing at 4.59%. Mr. Falconer advised that the high cash balance was due to the semi- annual debt service payment along with the warrant run from the first part of September. Board Member Ross asked if the Treasurer was encumbered by the policy and if possible could he extend out for a longer period of time by selling early. 7 Investment Advisory Board Special Meeting Minutes October 9, 2007 Mr. Falconer replied that most of the purchases made were after the implementation of the new policy, with the additional authority to invest in GSE's and longer terms. In response to Board Member Ross, Mr. Falconer advised that in the month of July, he took money out of Treasuries and LAIF, and invested in GSE's. In response to Board Member Ross, Mr. Falconer advised that he could sell at a gain but with the current drop in interest rates what would he reinvest in? Mr. Falconer also advised that when he invested in Farm Credit he wanted to extend out the maturity but there was no Farm Credit Paper available to purchase. Chairperson Deniel clarified that the Treasurer was prevented from extending out further because of the policy and the unavailability of paper. MOTION - It was moved by Board Members Park/Ross to approve, receive and file the Treasury Report for August 2007. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - September 2007 Noted and Filed B . Pooled Money Investment Board Report - July 2007 General discussion ensued among the Board regarding LAIF and their procedures. Noted and Filed C. Discussion of City Council Meeting dated September 18,2007 Item was discussed at the beginning of the meeting. 8 Investment Advisory Board Special l\IIeeting Minutes October 9, 2007 VII BOARD MEMBER ITEMS Chairperson Deniel advised of the handouts from Board Member Moulin, with his comments dated October 3, 2007. Board Member Ross asked the Board and Staff what their comments and thoughts were as to Board Member Moulin's comment from the handout; "It may be a blessing in disguise that the ordinance was not approved." Mr. Falconer advised that he had no comment and could not speak on behalf of Board Member Moulin. VIII Adjournment MOTION - It was moved by Board Members Park/Ross to adjourn the meeting at 5:35 p.m. Motion carried unanimously. 9