Finance Committee

MINUTES FINANCE COMMITTEE July 27, 2020 The meeting of the Finance Committee was called to order by Gabe Allen on July 27, 2020 at 4:01 p.m. by telephone or video conference in order to advance the public health goal of limiting face-to-face meetings (also called “social distancing”) to slow the spread of the Coronavirus (COVID-19). Present at the meeting were Nick Long, John VanDever, Jr., Paul Maaz, Tracy Jacobs, Zak Kone, Gabe Allen, Kristine Polian, Michelle Villarreal, and Ann Williams. Also present at the meeting were Jason Headings and Scott Gruber from Meeder Investment Management. Approval of minutes from the June 15, 2020 Meeting John VanDever made a motion to waive the reading of the minutes and approve the minutes as presented. Zak Kone seconded the motion. The motion passed, all-in-favor. Citizen Comments Peggy Zahler commented that she appreciated the budget amendment items that were on the agenda and made comment on her experiences while she served on the Finance Committee Presentation from Meeder Investment Management Kristine introduced Scott Gruber from Meeder Investment Management. Mr. Gruber gave a presentation to the committee that will be presented to the City Council at the July 28, 2020 Council Meeting Annual Review of the Investment Policy, Investment Strategies and List of Broker/Dealers and Investment Providers – Meeder Scott Gruber reviewed the Investment Policy, Investment Strategies and List of Broker/Dealers and Investment Providers. Discussion of removing the 3-year maximum maturity restriction: John VanDever asked: Are we removing the maturity restriction all together or replacing it with a 5 year. Scott answered: We are just removing it. The code does not have one. He followed that with a more detailed explanation Paul Maas commented: This is contrary to how we have operated in the past, just striving for liquidity and quality. It’s not hard for the new guy to come in and extend maturities to get a better yield that’s a given. We could have done that with or without you. Doesn’t this seem like it is contrary to the way we have operated in the past or should we just not worry about what we have done in the past and look going forward? Scott answered: It’s a valid point. You could easily come and say, come in and extend the portfolio and look better. But in today’s environment, that’s not exactly the case. Even going out longer today, your really not picking up a ton of extra yield. In hindsight, nobody has that crystal ball. In hindsight this time last year, we would have went out and extended and locked in rates and it would have looked much better that keeping all the case in the overnight funds today, and that’s all hindsight and it’s really hard to see that, so for us this has been our strategy for the last couple years of leveraging investments out in that 3 to 5 year area. We’ve tweaked how much we are putting out there. At one point, we were putting 25% out 4 to 5 years. At on time we were keeping 75% inside of a year, so when rates were rising, and inevitably, hopefully they will, when we come out of this, we would have been short. I firmly believe that leveraging a long-term portfolio and laddering it down 3 to 5 years is the more proper way to go. We have even done some research to show that if you just kept in in a one to two-year investment. If you leveraged longer core portfolio, you are going to return more in the long run. The question about liquidity is a valid point. That’s why the cash flow evaluation is so important because we want to make sure that you aren’t coming up short and not having enough cash on hand and liquidity is extremely important. So making sure that the cash on hand is available for all of you upcoming expenses and as well as what’s coming due in the future gives a little more protection in the event that expenses are more or thing are flowing out a little quicker than expected. That’s where we are making sure that we are working, closely with Kristine and her staff to ensure that we are not coming up short in terms of liquidity. Zak Kone asked: Going back to removing the 3-year maximum statement. So, since this is a document that is being built on as time goes along, why not rephrase the statement to max it at five years. Why not write that in? So, you have that in continuum? Scott answered: We certainly could. It’s not something I would fight very hard for right now. If you or everyone said we should put a five-year restriction in, it’s not something that I feel would be restrictive to the portfolio. I don’t think that’s going to be a detriment to your strategy or anything like that. I think the biggest thing with it is why you do a four or five year hard stop? Maybe there’s a five and a quarter year bond out there or a five-year three-month bond that has just three months past it. These are the types of reasons we tried not stick to a firm end restriction. The strategy itself can be written in place. If Kristine and all of us her agree that we are not going beyond five years, that’s a strategy that we can adhere to and stick to. On the policy is really just mandating and giving us a guideline to follow to make sure that we are not out of compliance or breaking any laws or anything like that. So, Zak, I completely agree with it. But if, like I said, that is not one that I would sit here and fight for. If we feel five years is one, we want on there the I would agree with you. Zak Kone asked: Gabe, how do we move forward on that? Do we vote? Or is it something we don’t see as significant? Gabe Allen answered: I don’t think so. Actually, this is a review of the investment policy. I don’t know if it actually requires any action. I tend to lean to wards no maximum on maturity restriction myself. These types of things. I don’t have near the experience Paul does. I think it’s best to match the code as much as you can, but I am good either way. As far as a vote, I don’t think we need to, because I don’t think this actually call for action. Michelle, am I right about that? Michelle Villarreal indicated that Gabe Allen was correct with a nod of her head. John VanDever asked: Does your firm have an open hand if you want to go further than that, or do you talk to Kristin before you do anything? You have oversight before you do anything? Scott answered: Yes, we are in a non-discretionary relationship. We operate in two capacities. We can do a discretionary or no-discretionary. The discretionary allows us to operate in a strategy that we’ve discussed. A non-discretionary is going to require us to have frequent communications about the activity in the portfolio. John with that in mind, we would not be going out and buying five or six- or seven-years bonds without Kristine’s approval. That’s kind of where I was going with strategy, really does mandate and guideline what we are going to be able to do, I’m sorry, what we are actually doing. The Policy is just allowing and setting those parameters. John VanDever replied: I’m good with that. Paul Maaz asked: So, all the purchases will have to be done, within the guidelines of the investment policy with the three or four-person investment board. Is that what it is? Kristine Polian answered: We have the investment officers, yes. It requires signatures before anything is ever purchased. It is signed by all three officers. John VanDever replied: That’s great. So, you have a policy in place, and you are meeting all the guidelines in place. I guess State or Federal government? Scott answered: State. Scott continued with a final brief explanation. Commercial Paper Discussion: Gabe Allen asked: Companies use Commercial Paper for payroll, is that accurate? Scott answered: Yes. Paul Maaz commented: It would be my observation that in today’s environment, I think this is the worst way we could possibly go. The timing maybe next year this would be great. There are not any companies out there that are immune to what’s going on right now and we have no earthly idea. They many be great right now, six months from now, it may be nonexistent. I just say the timing for this type of paper is very, very poor. I don’t, we don’t have a vote on this, but I will go on record saying that I think this is a very poor move on our part. Scott answered: I understand Paul. I get it. I will say our team is extremely conservative. We work with over 300 accounts across the country with over 26 Billion dollars of liabilities that we work with. Almost every single one of them own commercial paper. We have very vested interest to our clients to make sure any name we are buying for them. Our credit team has done their additional due diligence. All of these names are in addition to what States already say is permissible in their viewpoint. So, they have to be highly rated by at least two of the national rating agencies. Moody and F & P being the most common ones. If there is any uncertainty of them getting downgraded, we cannot hold them, we would sell them, and we wouldn’t’ be buying them. Term limits is 207 days or least for us. That’s the state mandate. The state already put a very strong requirement. They have to be highly rated. Paul Maaz replied: As far as the rating is concerned. You have to have a top rating A or AA or AAA by the big raters but there is a provision that if they only have one rating, they can go and get a letter of credit from a bank to back the credit. I can assure you that there will be some banks that will not be here at the first of the year. You have no provision as to what banks can issue these letters of credit. I can name you ten of them right now that I wouldn’t even put a deposit there, much less, accept their letter of credit backing my credit. Nick Long commented: And to Paul’s point, we don’t rely on the interest to fund this city. We have basically ran at no interest income, no investment income for 8 years now, so I think we are well positioned to take an extremely conservation approach because at this point losing the deposit is the part that is actually scary, losing the initial investment is what is scary. The interest is almost irrelevant in our budget. Scott commented: Yeah, I was going to agree with you Paul, that LOCs, those come under a different reg. type as well. They are permissible as well. We are not those names. We want only the names that are coming directly from those issuers and we are looking at their fundamentals only. I won’t hit on this hard, I want to go through our process and our viewpoint on this. My comment on limiting the number and names that we are buying right, what the intention of that was, just to let you know is that we are not going to be loading up a ton of commercial paper in the portfolio because of that. We only have four names on our approved issuer list right now and three aren’t really only in the market very often. Those three being JP Morgan, Toyota Motor Credit Company, and Exxon. Exxon being risky. We actually have a ninety-day restriction on them. Just their fundamentals because of being in the oil market and their exposure right now. We have a very strong limit on them. Those are just the processes. I completely agree with you Nick, it’s not worth taking a risk. That’s why we do have such strong requirements. Scott continued to explain their processes in his presentation. Paul Maaz commented: I understand what you are saying, I can appreciate your method in doing all of this, but I just want to go back and say that you are chasing rates, for the sake of quality and liquidity, and I think it is contrary to the way we have done it in the past and I don’t know if we should change the way we do it going forward sake of a few basis points. I think we could put it for another year. I think when we come back and look at it in a year it’s going to look entirely different. Those four may not even be in the play anymore. But then again, everything may have turned around. I think that this is a market that is very risky right now. If you are going to put limitations on the quality of the companies that have been participating in this, then specify exactly what it is they have to be doing, what their numbers need to look like before we get in bed with them. Because I can assure you it’s going to turn on you in a heartbeat and it’s going to be miserable after the first of the year. John VanDever asked: Does League City have any commercial paper now? Kristine Polian answered: No. I certainly hear everyone’s concerns that are talking about commercial paper, we will be talking about this to Council tomorrow, and obviously, Councilmember Long will be in attendance, and he would be discussing those issues with commercial paper, as well as, I will indicate that the Finance Committee, that there were definitely a few opponents to adding commercial paper to the policy. So, just rest assured that Council will be aware of your concerns. John VanDever commented: I would like to go on the record like Paul, that I never recommended commercial paper while I was on the school board or superintendent. I always stayed with safer. Gabe Allen commented: Another thing about that, I know we may never use it, but history has proven in municipalities, anyway, if it’s an option, there is a decent chance that it will be used. So as a personal investor right now I would not use commercial paper. I would like to see it maybe removed, even as an option. Because like I said, if it is down there, sometimes, you never know what is going to happen. There is a chance we might use it. Paul Maaz commented: Gabe, I think that that is a very good point that you made. We are assuming that when you change this investment policy, you are doing it counting on Meeder being around for a while. They are only there for a year, and Kristine, hopefully will be here for quite some time, but things change. And you are right if it is there then there is the opportunity that some day, we will jump off over there and do it. Scott commented: I appreciate everyone’s feedback. This is good. One thing I want to say is that I don’t want to look like I am coming in here and saying this is our way and the only way. These were evaluations of looking at the state code, trying to get the policy in line with the state code. Ultimately, our job is to come in and provide recommendations and advice and if it is your decision not to, we respect that decision and we will operate around it. I just wanted to say that, because I don’t want it to look like we are coming in here and trying to make a ton of big moves and risky decisions. We want this to be collaborative, and I do appreciate everyone’s feed back here. Scott continued with his presentation saying that he will work with Kristine and Council to remove the commercial paper from the policy. Kristine answered: We will look at it, but we can’t change it at this point. We will see what Council says about it. Presentation of the 2nd Quarter Financial Report Angie Steelman presented the 2nd Quarter Financial Report for the Quarter Ended March 31, 2020. There was no discussion. Presentation of the 2nd Quarter Budget Amendment Angie Steelman presented the 2nd Quarter Budget Amendment for the Quarter Ended March 31, 2020. There was no discussion. Presentation of the FY2021 -2025 Long Range Financial Forecast (LRFF) Angie Steelman presented the FY2021-2025 Long Range Financial Forecast (LRFF). Angie also mentioned to the committee that she had provided an information packet about Senate Bill #2. If anyone had any questions, she invited them to call her or email her. Overview of the FY2021 Proposed Budget Angie Steelman gave an overview of the FY2021 Proposed Budget to the committee. There was no discussion. Presentation of the FY2021 Proposed Budget for Accounting, Budget and the Internal Auditor Angie Steelman provided the Presentation of the FY2021 Proposed Budget for Accounting, Budget, and the Internal Auditor in this meeting’s agenda packet. She asked the committee if they had reviewed the information. Paul Maaz asked if the Internal Auditor position had been filled or if anyone had considered outsourcing the position. There was a brief discussion. Gabe Allen asked about the revenues and how we might compare to other municipalities around our area. Angie Steelman explained several ways that she updates the City Manager on revenues and sales tax, including to use of a new software in order to analyze and compare. Consider and Take Action to Excuse Absences No action taken. Overview of 2020 General Obligation Bond Issuance (Item #6) Kristine Polian gave an overview of the 2020 General Obligation Bond Issuance. There was no discussion. Staff Comments Kristine Polian asked if anyone wanted to discuss the Investment Policy any further. She mentioned that there was concern about the removal of the 3-year investment maturity restriction and the use of commercial paper. There were no further comments. Committee Member Comments No committee member comments. Paul Maaz made a motion to adjourn. John VanDever seconded the motion. The motion passed all-in-favor. The meeting was adjourned at approximately 5:25 p.m. ________________________________________ Chairperson