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Audit 02-24-2014 City of Cupertino Audit Committee Special Meeting Minutes February ',14, 2014 1. CALL TO ORDER At 4:06 PM, Interim Finance Director Sheila Mohan called the meeting to order at Cupertino City Hall, 10300 Torre Avenue, and Conference Room A. 2. ROLL CALL Community Members Present: Angela. Chen, Raymond Yin Council Members Present: Mark Santoro, Rod Sinks City Staff Present: David Brandt, Kristiina Alfaro, Sheila Mohan Absent: Eno Schmidt 3. APPROVAL OF MINUTES Community Member Yin motioned to approve the minutes of the special meeting of February 24, 2014. Councilmember Sinks seconded and the motion passed 4-0 with Community member Eno Schmidt absent. 4. ORAL COMMUNICATIONS - NONE 5. WRITTEN COMMUNICATIONS —NONE 6. NEW BUSINESS A. Performance Measures presentation— Stanford Students Acting Administrative Services :Director, Kristina Alfaro gave an update on the Performance Measures project that is being developed by a group of Stanford University students. Alfaro stated that the objective of the project is to ensure that the performance measures and standards will be meaningful to both City leadership as well as City residents. The group will also be reviewing performance standards of private sector companies such as Google to ensure that the City is employing the best practices currently available. The initial effort will be to develop performance measures in 2014-1.5 for two test departments: Parks and Recreation, and Public Works Department. During the next year, focus groups will be set up and the intent is to implement performance standards for all other departments in the following year. B. U.S. Bank presentation City of Cupertino Audit Committee Special Meeting Minutes February '414, 2014 Before the U.S. Bank presentation, a brief discussion was held on the selection of the investment advisor for the OPEB Trust fund. Councilmember Sinks, on behalf of the Audit sub-committee, provided an overview of the selection process and the rationale for selecting US Bank. Sinks emphasized the fact that the City was looking at a 20 year horizon, and the risk versus return issues had been extensively discussed with both Chandler and US Bank. He stated that the current investment advisor, High Mark, had in fact made investment riskier by allocating a larger portion of the portfolio to bonds rather than equities at a time when the bond market was volatile and therefore riskier. Chandler and US Bank had a higher allocation of equities in their proposed portfolio. Sinks was particularly impressed with US Bank's clear appreciation for a risk-return target consistent with the fund's 15-20 year time horizon, as well as thE' flexibility it provided to chose from many vehicles, including passive and active funds. Councilmember Santoro stated that the sub-committee had made a good choice and agreed with the selection of US Bank as the investment advisor. Community members Chen and Yin agreed as well, and Yin pointed out that being conservative doesn't necessarily mean the investment is less risky. The PARS Executive Vice President, Mitch Barker and US Bank Senior Vice President Rick Rosenthal were invited to come in and make a brief presentation. Rick Rosenthal presented a proposal for revised investment policy guidelines which reflected a 'balanced' approach rather than the previous 'conservative' approach. The key components were a decrease in the range (20 to 40%) for fixed income allocation, and an increase (50-70%) in equities. Rosenthal stated that all bonds will be purchased through mutual funds, and that at no time will a single fixed income issuer exceed 2 percent of the total market value to the Portfolio, and the direct high- yield portion will constitute no :more than 10% of the total market value of the portfolio. Santoro asked questions about what the least risky option would be. Rosenthal stated that for a 15-20 year horizon, the target rate of return City of Cupertino Audit Committee Special Meeting Minutes February '41.4, 2014 would be in the 7.5% range at the high end and 5 % at the' low end. Santoro wanted staff to make sure the OPEB actuary knew we would be generating a 7.5 percent rate of return, which would result in the decrease of unfunded liabilities in the trust fund. The committee members discussed investment strategies briefly. Chen felt that international equity was too risky, the commodities market was too volatile, and that we should not focus exclusively on high rates of return. Rosenthal stated that generally commodities are considered a hedge against inflation, but currently since there the inflation rate was insignificant, he suggested that investment would be limited to 6% in commodities. Rosenthal pointed out that thE' City was in a unique situation, but US Bank's proposed portfolio incorporating the changes directed by the committee members would be consistent with the City's objectives and its current financial situation. Councilmember Sinks motioned to accept the revised investment portfolio. Yin seconded, and the motion passed 4-0, with Schmidt being absent. C. Mid-Year Budget policy Kristina Alfaro made a presentation on the mid-year budget policy. This was for informational purposes only. The City Council's agenda at their March 4, 2014 meeting included. a report on the mid-year budget at which a full and comprehensive discussion was expected. The committee suggested that assigned fund balance accounts, such as the funds for Economic Certainty I and I1 be consolidated into one account. There was no motion made. D. Reserve Policy Kristina Alfaro presented the Reserve Policy for the committee's information. The committee suggested that economic uncertainty categories be modified to remove the contingency fund for infrastructure City of Cupertino Audit Committee Special Meeting Minutes February '14, 2014 and, in addition, increase the level of funding in the capital improvement fund to $ 5 million. Santoro motioned to accept the report. Sinks seconded, and the motion passed 4-0. E. Treasurer's Investment report In the interests of time, this item was not discussed. 7. OLD BUSINESS -None 8. OTHER COMMITTEE UPDATES/REPORTS: None 9. ADJOURNMENT The meeting was adjourned at 7:15 p.m. ` )- ' eila Mohan Interim Finance Director _ r