CITY OF FULLERTON
INVESTMENT ADVISORY COMMITTEE
Fullerton City Hall – 303 West Commonwealth Avenue
Third Floor- Room 301
Administrative Services Department Conference Room
Thursday, February 17, 2005 – 4:00 p.m.
CALL TO ORDER
Chair Lauderdale called the meeting to order at 4:03 p.m.
Members present: Phyllis Garrova, City Treasurer
Lynn Lauderdale, Chair, Citizen Member
Stan Lewczyk, Citizen Member
Chris Meyer, City Manager
Glenn L. Steinbrink, Director of Administrative Services
Shawn Nelson, Mayor, arrived after roll call, at 4:18 p.m.
ACTION OR DISCUSSION ITEMS
Item 1. Postponement of Election of New Chair and Vice Chair
City Treasurer Garrova explained that the IAC typically nominates the Chair and Vice Chair at the February meeting, but since the Committee’s vacancy had not yet been filled, the election should be postponed. She further explained that the new Council-appointed Applicant Review Committee (ARC) had not yet held their first meeting, but the City Clerk had advised that the ARC should have the appointments completed before the IAC’s May meeting.
Item 2. Approval of Minutes of August 19, 2004
Citizen Member Lewczyk moved to approve the minutes. Director of Administrative Services Steinbrink seconded the motion. Motion unanimously approved.
Item 3. Status of Investment Portfolio
The 12/31/04 quarterly report distributed by City Treasurer Phyllis Garrova provided the following:
1. Portfolio balances as of 10/31/04, 11/30/04, and 12/31/04.
2. Types of investments, with percentages of portfolio invested in each type, and change from last report.
3. List of maturities between 10/01/04 and 12/31/04.
4. List of purchases between 10/01/04 and 12/31/04.
Ms. Garrova reviewed the Summary by Issuer, noting that the federal agency investments were almost evenly split between Farm Credits and Federal Home Loan, and the City was holding only one Freddie Mac (due to mature in 2006, but with a call in May), three Treasury bills, one commercial paper, and a Treasury note.
City Manager Meyer asked if the City had any Fannie Maes. Ms. Garrova noted that two Fannie Maes had either matured or were called in November and one in December, and that by the end of December, the City had no Fannie Maes, contrary to what Council had been told at a recent Council meeting by an uninformed resident who wrongly alleged that the City had $45 million in Fannie Maes in its portfolio.
Ms. Garrova reminded the Committee that Fannie Mae and Freddie Mac were not in trouble on the fixed-income side, which is the kind of investment the City buys. There were problems with disclosure, leadership, and the asset-backed securities they were buying.
Mr. Lewczyk asked if the returns for Farm Credits, Home Loans, and Fannie Maes were about the same. Ms. Garrova explained that Fannie Maes were slightly higher because of their slight risk.
For the Quarterly Investment Summary, Ms. Garrova noted the prominent item was between October and November, when the $1.6 million payment was made to the Fox Theatre, and the receipt of approximately $2.5 million in property taxes. In December, the portfolio was up about $6 million as a result of: revenues of property tax ($11.2 million), property tax in lieu of vehicle license fees ($2.8 million), expenditures of two debt service payments ($500,000), and payroll of $2.5 million. This left approximately $6 million available for investment.
Citizen Member Lewczyk asked if the $1.6 million Fox Theater payment was considered Redevelopment and how it was accounted for in the books. City Manager Meyer explained that the $1.6 million was a grant (or a gift) from the Redevelopment Agency, and the only way the Agency would get the property back would be if the performance criteria failed to be met in five years, which would allow the property to revert to the City.
Chair Lauderdale asked the City Treasurer what the difference in LAIF’s yield was from 9/30/04 to 12/31/04. City Treasurer Garrova reported that the average monthly yield was 2.003 in November, 2.134 in December, and 2.264 in January, which are excellent short-term rates (noting that LAIF lags about six months behind the market).
Mr. Lewczyk noted that the portfolio still had about $85 million in investments, and did not appear to be affected by the state’s cutbacks. Mr. Steinbrink noted that property tax and in-lieu VLF property tax revenue had been received earlier than expected (in December instead of January).
The City Manager informed the Committee of Council’s approval of selling at a 7% discount the VLF receivable ($2.2 million) owed by the state (due in 2006) as a means of generating needed cash flow, rather than waiting for the state to pay, assuming the state is even able to pay in August 2006. Mr. Steinbrink explained that the City would receive just over $2 million, a loss of about $200,000, but on a present value basis, only about $100,000, which was still a more acceptable option than risking the state’s ability to repay the debt in August 2006.
Mr. Lewczyk asked that the Tax and Revenue Anticipation Note be explained. Mr. Steinbrink explained that it is an annual borrowing that the City does for cash flow purposes, to replace money that would be available if the state and the county disbursed the City’s money on a monthly basis. The City invests the borrowed funds on July 1, when the funds are received, and it is paid back on June 30, the end of the fiscal year. The City earns interest on the money that would have been earned if funds were received from the state and county on a regular basis.
Item 4. Annual Review of Investment Policy
City Treasurer Garrova reviewed with the Committee members her suggested changes to the Investment Policy:
1. Section 5. “Authorized Investments” – refers to Government Code Section 53601 and 53601.6. Section 53601.6 discusses prohibited investments.
Suggested revision to the Investment Policy is to create a separate section (new Section 6) titled “Prohibited Investments.”
Remove Paragraph H (Derivatives) under Section 5. “Authorized Investments,” since derivatives are prohibited investments. Place derivatives under the new Section 6 and expand the description of prohibited investments.
Remove Paragraph G. “Reverse Repurchase Agreements” under Section 5. “Authorized Investments,” since direct investment in reverse repurchase agreements (RRAs) is prohibited, but allowed through an investment pool, such as LAIF, as long as the investment pool does not exceed 10% of its total portfolio in RRAs.
2. Section 14. “Investment Advisory Committee” – last paragraph.
Suggested revision: Paragraph refers to the “daily operations of the Treasury Division.” Because of department reorganization, “Treasury Division” no longer exists. Change wording to “daily operations performed by the City Treasurer.”
3. Attachment 3. “Glossary.” All the terms that are used in the new section, “Prohibited Investments,” will be added to the Glossary.
Mr. Lewczyk asked why the City used a six-month term for the market average rate of return, as opposed to a 12-month or 90-day, or some other term. Ms. Garrova explained that the six-month term seems to be the basis throughout other investment policies, noting that it is possible to use the Fed Funds rate, but the six-month is generally a little higher.
Mr. Lewczyk questioned the maximum percentages used in the Investment Policy, such as 30% bankers’ acceptance, 25% commercial paper. He asked if the City should consider incorporating language into the Investment Policy to limit the percentage invested with one company, pointing out that if 25% of the portfolio is permitted to be invested in commercial paper, the City would not necessarily want to invest that 25% in only one company.
Ms. Garrova indicated she would have to check the Government Code, and could build that into the Investment Policy, but pointed out that the City would probably never reach that maximum because of too many other investment opportunities.
Chair Lauderdale stated that she believed Mr. Lewczyk had a very valid point. Ms. Garrova stated the language could be added to the Investment Policy. Ms. Garrova noted that the Investment Policy does indicate under Bankers Acceptances (Section 5C) that no more than 30% of the combined portfolio may be invested in the Bankers Acceptances of any one commercial bank, and that similar restrictive language could be added for commercial paper.
With no additional suggested changes, Ms. Garrova explained that the Committee members would receive a red-lined final draft of the Investment Policy containing the proposed changes, for their review prior to the May IAC meeting. At the May meeting the Committee would need to approve the final proposed changes for submission to the City Council at its June 21 meeting.
Item 5. Confirmation of Meeting Dates for 2005 (May 19, August 18, November 17)
Chair Lauderdale asked if the meeting dates for 2005 were acceptable to the Committee members. Mayor Nelson indicated he would be unable to attend the August 18 meeting, but the Committee could proceed without him. No other members had scheduling conflicts. Ms. Garrova pointed out that she would check with the Committee members prior to each meeting date to confirm availability, and change the meeting date, if necessary, with their approval.
The Committee members had each received an updated listing of member contact info. Ms. Garrova asked the members to inform the Administrative Services Department secretary if any corrections were needed to the roster.
There being no further business, Chair Lauderdale adjourned the meeting at 4:52 p.m.
Next meeting scheduled for May 19, 2005, at 4:00 p.m. in the Administrative Services Department Conference Room.