September 15, 1998

7:30 p.m.

 

            The Board of Directors of the San Benito County Water District convened in special session. All members of the Board were present together with Manager/Engineer, John S. Gregg, District Counsel, David E. Pipal, Administrative Services Officer, Janet L. Torres and Nancy Jones from Public Financial Management, Inc.

a.         PLEDGE OF ALLEGIANCE TO THE FLAG:

            President Swanson requested everyone present to stand and recite the Pledge of Allegiance to the Flag.

b.         PUBLIC INPUT:

            President Swanson opened and closed the public input portion, hearing no comment from the public.

1.         INVESTMENT REVIEW -

a)         Presentation of Report (PFM):

President Swanson stated his intention was to have John S. Gregg give a brief presentation, introduce Nancy Jones of Public Financial Management, Inc., (PFM), then turn the presentation of the report over to her and follow up with a discussion. District Manager Gregg gave a brief introduction of the Investment Management Review by Public Financial Management, Inc. along with the backup material provided by staff. District Manager Gregg stated PFM was supplied with a significant amount of material and with that material they produced a report. He stated PFM submitted a draft, which was reviewed by the investment committee, and a final report was printed. District Manager Gregg stated questions with respect to compliance issues, fees and investments were discussed within the investment committee. He stated the investment advisory group chosen has been advising dozens of public agencies and is one of few agencies who don’t participate in the sales and purchase of bonds. District Manager Gregg introduced and turned the presentation over to Nancy Jones of PFM.

b)         Presentation of Recommendations and Discussion:

Nancy Jones stated PFM has only worked with public agencies since 1975. She stated she will briefly go through report. President Swanson requested she go through the entire report and the board can then ask questions. Nancy Jones stated they checked for compliance with law, how money is managed, composition and performance of the District’s portfolio. She stated one of PFMs recommendation was to review the District’s investment policy, incorporating the Government Code. She stated another recommendation was that the District have a clear delegation of day to day investment. Nancy Jones stated the District is permitted to own both mutual and money market funds, but what is in the mutual fund has to be what is allowed by law. One of the mutual funds the district owns is not allowed (max. security of greater than 5 years). Ms. Jones questioned as to whether the code allows the District to own Unit Investment Trusts (UITs). Ms. Jones stated PFMs recommendations are in Section VI and they mainly state the District needs to take time to work on investment policy and look at cash flow analysis. Nancy Jones stated PFM recommends to continue to use LAIF. She stated this investment was the least expensive, was highly liquid and had an excellent rate of return. She stated PFM recommends selling the UITs, keep the Treasury and Federal Agency obligations, hold the mortgage-backed securities to maturity, and suggested buying securities in pieces of $1 million. She stated $1 million is an appropriate size investment for a $15 million portfolio.

1)         Investment Policy Revision -

            • Rewrite policy - Director Jerry Buzzetta stated he believes it is not appropriate to rewrite policy at tonight’s meeting. He stated the goal of investment committee was to bring questions of compliance and policies to the Board. President Swanson stated the intention of tonight’s meeting is to get direction from the board. Director Buzzetta stated the investment committee looked for internal control of investments. President Swanson stated it is recommended by PFM to review the District’s policy. He asked how the board wants to handle it? District Manager Gregg stated it was extremely important that the board as a whole attend a workshop and review the policy. He stated through inquiry and discussion the workshop could lead to better guidelines for the committee. Director Perry asked if the District needed someone to help get them on track? District Manager Gregg stated PFM could be retained to help the board re-write the investment policy. Director Gonzales stated he didn’t know what LAIFs investments are. Nancy Jones stated LAIF is allowed to buy investments that the public can’t. Counsel Pipal stated LAIF is allowed to invest in certain funds? Nancy Jones stated LAIF has an answer book that is available to anyone. President Swanson asked if PFM thinks 45% of invested funds was not safe in LAIF? Nancy Jones stated the board should discuss it, and it should be in the District’s policy. She stated the question is how much do you feel comfortable having in LAIF. District Manager Gregg stated the Board might structure policy to show how much is allowed. He stated these are some of the things a workshop could help with, also who has the investment authority. Directors Rupert, Gonzales, Perry and Buzzetta stated they were in favor of holding a workshop.
            • Prepare cash flow projections - Director Gonzales stated sometimes the District cannot project cash flow. He stated determining how much money should be tied up is difficult to estimate. District Manager Gregg stated a prudent emergency decision can determine when things are likely to occur. He stated part of the workshop could be how to prepare a cash flow. Counsel Pipal stated a safe rule is to keep three to six months of operating expense liquid. Nancy Jones stated the question is what is liquidity. She added the real questions are what is the likelihood you would need liquidity. President Swanson stated cash flow projections would be handled in the workshop. Director Perry stated he had been on the budget committee and he has seen long term projections through the budget. He stated the thing to keep in mind is if a pipeline is going down there should be a certain amount of money set aside for emergencies. District Manager Gregg stated he agreed and the District could be looking to spend a couple of million dollars within a 90 day period. He stated the District could be rolling urgency money 90 days at a time. Director Perry stated a workshop is the time to put down all the questions and discuss it.
            • Develop investment strategy - Director Perry stated it all starts with the investment policy. Director Gonzales stated the District’s strategy has been pretty good in the past, but can be discussed at the workshop. Counsel Pipal stated investments for longer than 5 years need to be corrected right now. Nancy Jones stated PFM recommends to stay away from certain investments. Director Buzzetta stated what was real important is the rate of return, which all goes back to the investment policy. President Swanson stated all discussion items could be incorporated in the workshop.
            • Develop specific Plan for implementing strategy - President Swanson stated all strategy goes back to the workshop.

2)         Establish Single Custody Account - Director Rupert asked if the District could remedy the fact that the holdings are not in the District’s name right now? District Manager Gregg stated staff could contact banks and the board can order to proceed. Nancy Jones stated PRM recommended the District try to find a bank to hold holdings in the District’s name. She stated she recommends if the Board takes any action on anything tonight, this is the area. She added the brokerage firms are being hardest hit right now. She recommended having the District’s holdings through a trust department of a bank. She stated that way the District’s holdings would be separate from the actions of the bank.

3)         Establish Comprehensive Reporting Requirements and Performance Benchmarks - Director Gonzales stated the investment committee has been reporting quarterly. President Swanson stated he was under the impression that the board as a whole should become involved in the reporting. Nancy Jones stated the absolute standard is to look at total return of your portfolio compare to the index. She stated the District should pick an index with same holdings as in the District’s portfolio. She stated she could show an example to the board at the workshop. District Manager Gregg stated the staff can look at generating the type of investments, and create a graph to see how the District’s investments are going. He stated the goal is to generate improvements and make the terms of investments more comprehensible. Director Buzzetta stated he didn’t see a fee structure in the investment report. Nancy Jones stated all that is required is to show rate of return but it can be shown with a fee structure. She recommended looking at both portfolios and then look at the fee structure. Counsel Pipal asked if it was required to have an MOU with brokers. Nancy Jones stated that if you have an investment advisor, you should have a contract. Director Buzzetta stated he would like to see the schedule of fees as a look backwards. Director Rupert stated the District has asked Dean Witter for information and the District hasn’t received it, so he questioned how the District would get the fee information. President Swanson stated he thought the Board was going forward? Director Buzzetta stated the District has purchased Class B shares and he wanted to know what the fees were? President Swanson stated that item was not an agendized item. He stated the Board was going forward and not backwards. District Manager Gregg stated Counsel Pipal may have some guidance, if an issue arises due to the past. Counsel Pipal stated when the District sells the mutual funds then the fees can be negotiated at that time. President Swanson stated the Board refers the issue back to the investment committee. Director Perry stated this issue should be incorporated in the workshop.

4)         Unit Investment Trusts and U.S. Government Securities Trust - Director Buzzetta stated these holdings are not in compliance with the Government Code and should be liquidated. President Swanson stated he doesn’t dispute Nancy Jones’ recommendation and would like Dean Witter to discuss this issue with the Board. District Manager Gregg stated he has written a letter to Dean Witter requesting explanation of representation. Counsel Pipal stated Dean Witter will support their investments. Director Perry stated if District Manger Gregg doesn’t get an answer in a reasonable amount of time another letter should be sent. President Swanson asked if the investment committee requested information from Dean Witter? Director Buzzetta stated staff has been requested to write a letter. District Manager Gregg stated Dean Witter’s response has been general and not to the point. President Swanson stated he was concerned with the response or lack of response from Dean Witter. He added they are our agents yet they won’t respond. Director Rupert asked if the Board needed a letter from Counsel Pipal? Counsel Pipal stated he would be happy to write a letter to Dean Witter. President Swanson questioned if this company was the only one the District was having trouble with? Nancy Jones stated it was. District Manager Gregg stated a copy of the letter should be sent to the regional office also. Counsel Pipal stated there is some play in the appropriateness of the investments conducted by Dean Witter. President Swanson asked if the response from Dean Witter defends their position, where does the Board go from there? Director Buzzetta stated the District needed to get the fees back. President Swanson asked if that was a compliance issue or another issue? Counsel Pipal stated he recommends selling the questionable investments. He stated the urgency is that these investment are out of compliance, and the individual board members can be held responsible. Counsel Pipal stated if the investments are not in compliance they need to get into compliance. Director Perry stated the District should sell now. Nancy Jones stated one advantage is that when the rates go down, the securities go up. Nancy Jones stated the Government Code states you can not have securities that are in excess of five years. Counsel Pipal stated you can if you have a resolution, which the District does. Nancy Jones stated if the District authorized Dean Witter to invest in securities over five years, they will state they have authority.

C.        Action Items

1)         Investment Policy Revision - Upon a motion duly made, seconded and carried a workshop will be held tentatively on October 21st at 5:00 p.m. This workshop will develop training and assist the Board in reviewing and revising the District’s investment policy. Director Rupert asked if RFM’s contract include training. District Manager Gregg stated it did not and training would have to be negotiated. He stated he would put a request for authority on the agenda for next week.

2)         Custody Account - Upon motion duly made, seconded and unanimously passed authorization was given to the District Manager to pursue RFPs in the District’s name.

3)         Reporting and Performance Requirements - Upon motion duly made, seconded and unanimously passed, this item was to be included in the workshop.

4)         Unit Investment Trust and U. S. Government Security Trusts - Upon motion duly made, seconded and unanimously passed authorization was given to the District Manager to sell the Unit Investment Trusts and wait for a response from Dean Witter on the U. S. Government Security Funds. Counsel Pipal stated the Board can wait for a report from PFM, but it would be negligent to hold onto securities that are not in compliance with the Government Code.

President Swanson thanked Nancy Jones from Public Financial Management, Inc. Director Perry asked if the Board wanted to set a time frame for Dean Witter to respond? President Swanson stated the Board should give Dean Witter a week to respond. He stated upon hearing no response by Monday, September 21, 1998, District Manager Gregg will call Dean Witter and Counsel Pipal will send a letter, forwarding a copy of District Manager Gregg’s letter to Dean Witter’s main office.

            The vote of each member of the Board on the preceding matters was as follows, unless otherwise stated:

            AYES:             DIRECTORS:  Swanson, Perry, Rupert, Gonzales, Buzzetta

            NOES:             DIRECTORS:  None

            ABSENT:        DIRECTORS:  None

            The Board adjourned to a Regular Meeting to be held on September 23, 1998 at 7:30 p.m., 30 Mansfield Road, Hollister, California.

 

                                                                        ____________________________________

                                                                        Robert M. Swanson

                                                                        President

 

 

ATTEST:         ______________________________

                        Janet L. Torres

                        Administrative Services Officer

Adjourned.