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HomeMy WebLinkAbout2018-09-04 Finance Committee Summary MinutesFINANCE COMMITTEE MINUTES Page 1 of 14 Special Meeting September 4, 2018 Chairperson Scharff called the meeting to order at 6:07 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California. Present: Filseth; Kou arrived 6:08 P.M., Scharff, Tanaka Absent: Oral Communications None Agenda Items 1. Adoption of Fiscal Year 2019 Investment Policy. Kiely Nose, Administrative Services Director introduced Tarun Narayan and Christine Paras who presented to the Finance Committee (Committee) the 2019 Investment Policy. Tarun Narayan, Manager of Treasury and Debt Investment announced that changes to the Investment Policy had been passed in the budget adoption meeting last June. There were four major changes to the Investment Policy which included codify the existing Environmental, Social and Governance (ESG) Practice, increase Negotiable Certificates of Deposit (NCD), add Supranational Organization’ Securities as an authorized investment, and remove Tennessee Valley Authority (TVA) as an authorized investment. Staff recommended to add in the code language that the City would not be investing in the direct manufacturing of tobacco products, firearms, and engage in the direct production of drilling of fossil fuels under the ESG policy. He announced that to date Staff had purchased roughly $10.6 million in green municipal revenue bonds which financed solar energy, installation of solar energy on government buildings and mass transportation. In terms of NCDs, he stated that the City’s existing policy allowed a limit of 10 percent for NCDs and Staff was recommending an increase up to 20 percent. The City-owned NCDs in over 200 banks totaling less than $50 million. In terms of Supranational Organizations, Staff recommended adding International MINUTES Page 2 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Bank for Reconstruction and Development (IBRD), Inter-American Development Bank (IADB), and International Finance Corporation (IFC) to the list of high rated entities in the policy. All the recommend organizations were USA based and all had a AAA rating. Specific Staff recommendations for the newly proposed Supranational Organizations were that securities would not exceed 10-year maturity, a maximum of 20 percent per value of the portfolio, a maximum of 10 percent per value with any one institution, a minimum rating of AA or Aa2 from a nationally recognized rating service and limited to United States dollar denominated senior unsecured unsubordinated obligations guaranteed by IBRD, IFC, and IADB . He stated that the TVA used fossil fuels and the Palo Alto Citizens Sustainability Group suggested that the City devest in TVA to be a greener City. Staff recommended holding on to the TVA investments until their maturity, around 2021 to 2025 so the City would not take a loss of $9.4 million or greater. In terms of additional updates, Staff recommended updating the investment policy to reflect the Staff position changes that were adopted with the new budget. He announced that Staff was also recommending that the Committee and City Council (Council) authorize the new Staffing positions to transfer up to $10 million in funds between the General Fund (GF) and authorized financial institutes. He concluded that the Committee recommend to Council approval of all the above-recommended changes the 2019 Investment Policy. Melanie Liu articulated that she appreciated that Staff was recommending codification of the informal EGS policy. She showed the Committee a quick video about TVA which discussed TVA’s involvement with coal and she suggested that the Committee take bigger steps t han just removing TVA from the EGS. She voiced her concern about the City using Wells Fargo as a banking source. Stephen Rosenblum declared that he was happy that Palo Alto was taking the steps to update the EGS policy and promote change in terms of fossil fuel use and climate change. He sugg ested that the City add into the EGS policy the refining of fossil fuels. He wanted to know why CDs were exempt from the EGS policy and he urged the City to move quickly. Mark Grossman echoed the previous speakers in that the City needed to pick up the pace in separating itself from institutions that invested in fossil fuel infrastructure. He suggested that the City list the banks where money was being held and to use public banks. MINUTES Page 3 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Susan Stansbury commented that she too was happy to see the City moving in the direction of its sustainability goal. She suggested that the City pull all its money out of companies that were involved with indirect fossil fuel. She stated her concern that the World Bank did have conflicting projects at times and she suggested that the City investigate a little bit more. Council Member Kou asked Staff to elaborate on CDs and any other items that were exempted from the proposed recommendations Mr. Narayan articulated that CDs were exempted because it was impossible to get information from a bank as to what projects they funded and if those projects pertained to fossil fuel. He reiterated that the City was looking to put more money into community type banks. Council Member Kou commented that in terms of the Supranational Organizations it would be very hard to track which investment projects conflicted with other projects. Mr. Narayan announced that he was looking at an organization’s overall goals in terms of social good, eliminating poverty, and those types of goodwill gestures. Council Member Tanaka wanted to know how the change would affect the City in terms of loss or gain of money. Mr. Narayan answered that in the short term there would be no gain or loss of finances. Chair Scharff asked what Staff was expecting in a higher interest rate environment. He noted that there was no effect to City finances mentioned in the Staff report. Mr. Narayan stated that there had not been an analysis done for long-term effects on finances. Council Member Tanaka emphasized that the Committee could not approve something that did not have an analyzation of the long -term outcome and asked for that analysis to be done. He articulated the priorities for the community which were safety, equality, and yield. He asked where ESG fit into those priorities. MINUTES Page 4 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Mr. Narayan confirmed that Staff could do a long-term analysis and bring it back to the Committee. Council Member Tanaka asked Staff to be very clear in their report where ESG fit into the priorities. Mr. Narayan reported that he never bought securities that would cause the City to take a big hit financially. He affirmed that he buys all securities from high-security companies. Council Member Tanaka affirmed that ESG was Priority Number 4 in terms of priorities. Ms. Nose reiterated that ESG was in addition to and subordinate to the above investment objectives of safety, equality, and yield. Council Member Tanaka requested what the City’s total debt was. Mr. Narayan announced he would have to get back to the Committee with the answer. Council Member Tanaka inquired about what the total interest rate was on the City’s debt. Mr. Narayan answered it varied from 3 percent to mid-4 percent. Council Member Tanaka asked how much the City received from interest rates from the City’s investments. Mr. Narayan responded it was roughly $220 and rising. Council Member Tanaka wanted to know why the City was not buying its own debt. Mr. Narayan stated that it was not buying debt but more of an inter-fund loan to one another. MINUTES Page 5 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Ms. Nose interjected that the City’s debt was on a longer horizon than a 10- year horizon. In terms of short-term loans, those were on a 10-year amortization schedule but bonds were on a 30-year schedule. Council Member Tanaka wanted a debt service schedule. Mr. Narayan announced that the City was at approximately $135 million in outstanding bonds. Council Member Tanaka asked how the debt was spread among the different durations. Christine Paras, Assistant Director of Administrative Services answered that some debt was maturing as early as 2022 and some going as far out as 2041. Council Member Tanaka advised that the City should consider looking into buying its own debt that was short-term or within 10-years. Ms. Paras explained that spreading the debt over a longer period helped with cash flow and being able to meet a debt service payment every year. Ms. Nose articulated that the payment schedule for a 10-year debt service was aggressive and if the City was willing to commit revenues on an annual basis then that would impact available funds that deal with day to day operations. Mr. Narayan commented that one of the reasons why the City issues debt to finance projects was the City did not have the available cash in the Reserve Fund for that project up front. Council Member Tanaka disclosed that he agreed that investing locally was a good idea but wanted more information about it from Staff. Mr. Narayan reported that local investments may not qualify under the safety criteria, they may not be allowed by the State, they may not have good enough ratings, and many other criteria that Staff looked at before investing. MINUTES Page 6 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Council Member Tanaka questioned if Public Agency Retirement Services (PARS) was covered in the investment policy or not. Mr. Narayan declared that Staff does not control the PARS investments and Staff was adding the recommendation about PARS for clarity reasons. Fitch was added to the policy for clarity in that they were nationally recognized and their rating was valid. Chair Scharff summarized that Staff answered no, that there were no financial implications for moving forward Staff’s recommendations. He stated he heard from the public that Supranational Organizations could or could not be a good investment. Staff announced that it was a good social investment overall. From a financial perspective he stated he heard it could be a good thing to increase diversity within the portfolio, there was no requirement to invest in it and rates and risks were reviewed for the funds. He was concerned with investing the City’s money into banks that were runn out of a foreign country that could potentially go bankrupt and he was concerned about divesting from the TVA. He asked Staff to explain what they meant by divesting in companies that fund fossil fuels. Mr. Narayan declared that the purpose was to divest in companies that partake in extractions, drilling, and pipelines of fossil fuels. Chair Scharff asked if the TVA engaged in the direct production or drilling of fossil fuels. Mr. Narayan answered that he was not aware of them doing anything like that. He explained that the TVA used fossil fuel for things like generating electricity. Chair Scharff declared that the City of Palo Alto used fossil fuels as well. Mr. Narayan explained that TVA provides very little bonds for purchase and it was not deemed a significant component of investment. Ed Shikada, Assistant City Manager interjected that Staff could follow up with the Committee with additional analysis and put a limit on exposure for the ESG. Another strategy would be to put a maximum exposure on the whole portfolio and establish a reporting mechanism that would come to the Committee for periodic review. MINUTES Page 7 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Chair Scharff disclosed that it was too broad to say fossil fuels in the policy. Mr. Grossman (public speaker) stated that he was one of the leaders for 350 Silicon Valley and the goal was to get to zero carbon as soon as possible. He stated he would be happy to help clean up the wording about fossil fuel in the policy. Chair Scharff wanted to know if the issue with TVA was coal. Mr. Rosenblum (public speaker) articulated that TVA does not produce or drill fossil fuel but they burn coal. They also produce toxic waste in coal ash. Chair Scharff proposed that Staff come back once a year to review the ESG. MOTION: Chair Scharff moved, seconded by Vice Mayor Filseth to recommend to the City Council to approve the City’s Investment Policy with the following changes: 1. Add language codifying the existing Environmental, Social and Governance (ESG) practices; and 2. Increase the Negotiable Certificates of Deposit (NCD) not to exceed limit to 20 percent from 10 percent of the par value of the portfolio to allow for greater investment with community banks and increase portfolio diversification; and 3. Add “Supranational Organizations Securities” as authoriz ed investments to increase social investing with not-to-exceed 10 years of maturity, no more than 20 percent of the par value of the portfolio, no more than 10 percent of par value with any one institution, and with a minimum rating of Double A, and limited to United States dollar denominated senior debt obligations of International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC) and Inter-American Development Bank (IADB). Update Appendix A and C to reflect the addition of supranational organizations as authorized investments; and 4. Add Manager of Treasury, Debt & Investments and Senior Management Analyst as authorized investment personnel to align with job duties; and MINUTES Page 8 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 5. Increase the Manager of Treasury, Debt & Investments and Senior Management Analyst’s authority to transfer funds from the City’s general (checking) account to an authorized financial institution to $10 million per day from $8 million per day to better align with increased cash activities; and 6. Remove the Tennessee Valley Authority (TVA) agency securities as an authorized investment and keep their existing $9.4 million investments to maturity to reflect the transition out of fossil fuel-related investments; and 7. Add under SCOPE section that Public Agency Retirement Services (PARS) Section 115 Irrevocable Trust Investments are not covered by the investment Policy; and 8. Add the rating service agency Fitch as an example of a nationally recognized rating service; currently Moody’s and Standard and Poor’s are only mentioned; and 9. Review the Investment Policy once a year. Ms. Nose noted that quarterly there was an informational report presented to the full Council and annually the policy was brought before the Committee or Council. Chair Scharff explained that if Staff were to come back with a new policy its main concept should be coal manufacturing and use, not fossil fuel. He stated he did not want a full-time person looking into investments and what projects those investments partake in. Vice Mayor Filseth stated that direct investments were discouraged in entities that require the manufacture of tobacco products, firearms, and other things. He believed that was the right direction the City would like to go in but that it did not prohibit Staff for making investments in surrounding Cities that use fossil fuels. He announced that he read the policy as permitting but not mandating Supranational Organizations. Council Member Tanaka questioned if the quarterly informational reports that Council received included analysis of adopting the ESG policy or not and what effects it would have on the City if adopted. MINUTES Page 9 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Mr. Narayan responded that Staff could make it crystal clear what kinds of purchases Staff has made in terms of investments. He added that in terms of issuing debt versus internally financing that was not something that was included in the quarterly reports. Mr. Shikada clarified that he was thinking of an analysis on ESG versus market based but Staff could put together more information for the quarterly report on what the yields were. Vice Mayor Filseth declared that if the City pursues the prioritization of safety, equality, and yield first, and pick investments that are greener was a good direction and then monitor where the City was in terms of the priorities. MOTION PASSED: 4-0 2. Prioritization Criteria and Planning for Palo Alto's Natural Gas Utility's Capital Improvement Plan. Dean Batchelor, Utilities Chief Operating Officer introduced Aaron Perkins who oversees the City’s gas projects. The Finance Committee (Committee) had asked Staff to come back with more information on Capital Improvement Projects (CIP) and more information on the gas main replacement program. Aaron Perkins, Senior Engineer articulated that he would be discussing the City’s natural gas CIP planning projects. He noted that there were four City gate stations for the natural gas system that received gas from Pacific Gas and Electric (PG&E). Three of those gates distributed gas to the City and one was dedicated to the VA hospital. There were roughly 386 total miles of natural gas pipeline in the system, 210 miles of it were larger diameter distribution mains, and the remaining 176 were smaller service pipeline that fed gas to buildings. There were roughly 17,500 natural gas service pipelines in the systems and 24,000 natural gas meters. The Federal Department of Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA), the west coast division, has regulatory oversight over the City of Palo Alto (City). PHMSA’s job was to regulate and make sure there were safe and secure movements of hazardous materials. In August 2011 PHMSA mandated that all gas distribution operators develop and implement a Gas Distribution Integrity Management Plan (DIMP). Key elements of DIMP included knowledge of the system, identify threats, MINUTES Page 10 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 evaluate, and rank risks, implement measures to reduce risk, and measure performance. The City’s DIMP’s ranking system was: 1) Material, weld, and joint failure to PVC pipes; 2) Excavation damage by a third party; 3) Excavation damages by crew or contractors 4) Material, weld, and joint failure on Acrylonitrile Butadiene Styrene (ABS) and tenite pipe; 5) Corrosion on steel; 6) Legacy cross-bores; and 7) Natural forces. Chair Scharff wanted to know why some pipes were steel and some were PVC. Mr. Perkins explained it was determined by which era the installation took place in. Chair Scharff asked why the City was not using steel pipelines instead of the PVC pipes and fittings since the Number One item on the DIMP plan was PVC failures. Mr. Perkins explained that PVC overtime gets brittle, but steel has many more factors that make it not a suitable material to work with; it rusts, its more expensive to maintain, and work on etc. Polyethene (PE) or plastic pipelines are now used and there was no corrosion associated with them, it can be easily squeezed without breaking, it was cheaper and lighter. Vice Mayor Filseth questioned that as the PE pipes age would they move up the list as Number 1 on the DIMP plan. Mr. Perkins stated that manufacturers have said that PE would last over 100- years. Vice Mayor Filseth wanted to know how long steel lasts. Mr. Perkins explained that if everything was installed correctly then steel could last longer than PE pipes. Council Member Kou articulated that steel can only be used with steel pipes whereas PE pipes could be used with various other forms of plastic. Mr. Perkins confirmed that was correct. MINUTES Page 11 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Mr. Perkins continued with his presentation stating that after 20-years or more PVC fittings begin to substantially fail. He noted that the last major ABS replacement project that was performed in 2013 and that drove down City of Palo Alto Utilities (CPAU) report on leaks. A study was conducted by CPAU on PVC risks and they concluded that PVC pipe had three times greater risk of failing on services and four times greater risk failing on distribution mains compared to PE pipes. The FY2019-FY2023 Master Plan CIP budget proposed to replace 18,000 linear feet of PVC pipe per year and that would be roughly $6.5 million to do that per year . In terms of the ABS/tenite replacement project Staff proposed to replace 160 and the average amount per service was $5,000. Council Member Kou asked if these replacement projects were discovered through the cross-bore project or if they were two different things. Ed Shikada, Assistant City Manager explained that they were two different projects. Council Member Kou wanted to know if any of the pipes that were mentioned in the above presentation were being replaced in the cross-bore project Mr. Shikada stated no. The cross-bore replaces laterals that serve homes. Council Member Tanaka questioned if Staff was coordinating with road repairs when they need to replace a section of piping. Mr. Perkins confirmed yes. Staff had monthly meetings with Public Works to coordinate and determine which section of road was being worked on. If possible then Staff planned to repair that piping when the road was torn up. Council Member Tanaka noted that the public has complained about resurfacing being done to a road and then it was immediately ripped up for a pipe replacement project. He asked for confirmation that it's $100 per foot to local piped by GPS. Mr. Perkins stated that was not correct. The $100 per foot included GSP, labor, testing, street cut fees, and other various fees. Council Member Tanaka asked about the Upgrade Downtown Project and if that project was replacing the gas pipes. MINUTES Page 12 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 Mr. Perkins responded that the project Upgrade Downtown was replacing gas and water and the surrounding streets were replacing gas pipelines. Mr. Batchelor articulated that there was a Request for Proposal (RFP) sent out but Staff got no response to it. So, Staff went through the rules and regulations and decided to do a direct reward and get it all done at once. Council Member Tanaka asked if these projects were always going to be done in rush circumstances or if Staff was planning to plan them out better in the future. Mr. Batchelor responded that it was a rare occurrence to have no bidders and that it normally does not happen that way. Council Member Tanaka inquired as to why the Upgrade Downtown project was separate from the rest of the City’s gas CIPs. Mr. Perkins articulated that Upgrade Downtown was different because it replaced gas, water, traffic signals, and street lights. Whereas the gas pipe CIP was just pipe replacement. Council Member Tanaka added why not do that all the time, replace everything at one time. Mr. Perkins concurred that it was a good idea only if all the systems in that area were all deemed replaceable. Mr. Batchelor added that most streets have different ages for pipes, water mains, and gas pipes. Vice Mayor Filseth requested information on what the plan would be after the proposed CIP was met in 2023. Mr. Perkins declared that the proposed $6 million would be carried past 2023 with the continuation of replacing pipes of a different material. NO ACTION TAKEN MINUTES Page 13 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 3. Review and Discussion of the Colleagues’ Memo From Council Members DuBois, Filseth, Scharff, and Tanaka on Fiscal Transparency in Labor Negotiations. Kiely Nose, Administrative Services Director announced that there was no Staff presentation. Sunny Johnson-Gutter voiced that the Executive Board of 319 Fire Department appreciated the new collaborative nature of negotiations and the City’s goal to be as transparent about the negotiations as possible. Herb Borock added his support about the transparency of the negotiation process. He wanted to see transparency for unfunded pensions and other post-employment benefits for management and professional employees. Also, transparency for Elected Officials compensation and any raises they may receive. He voiced that management and confidential employee salary should be done in an open session with Council. Vice Mayor Filseth acknowledged the need for transparency and that it was essential for the upcoming negotiations. In terms of San Jose’s policy, he stated that the Palo Alto’s (City) policy was modeled after it but there were clauses in it that did not pertain to Palo Alto and those were taken out. The intent of the Colleague’s memo was not to change the bargaining process but to increase transparency at certain checkpoints. Chair Scharff suggested that Staff come up with an implementation plan on getting feedback from all the bargaining groups that would be prior to the meet and confer. Then the Finance Committee (Committee) would come up with a plan based on Staff’s recommendation. MOTION: Chair Scharff moved, seconded by Vice Mayor Filseth to recommend to the City Council to: 1. Direct Staff to develop a Draft Implementation Plan for review by all of the bargaining groups; 2. Refer this Plan to the Finance Committee; 3. Direct Staff to use the Finance Committee’s recommendation to “meet and confer” with the bargaining groups; and MINUTES Page 14 of 14 Sp. Finance Committee Meeting Minutes: 9/4/2018 4. Refer this Item to the City Council for approval. MOTION PASSED: 3-0 Tanaka absent Future Meetings and Agendas Michelle Flaherty, Deputy City Manager announced the next meeting for the Finance Committee was scheduled for September 18th, 2018. ADJOURNMENT: Meeting was adjourned at 8:03 P.M.