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RRA - 02-07-95 Joint0 0 APPROVED MINUTES OF THE SPECIAL MEETING ROSEMEAD REDEVELOPMENT AGENCY AND ROSEMEAD CITY COUNCIL FEBRUARY 7, 1995 VA P.Y The special Meeting of the Rosemead Redevelopment Agency and City Council was called to order by Chairman Bruesch at 7:05 p.m. in the conference Room of City Hall, 8838 E. Valley Boulevard, Rosemead, California: The Pledge to the Flag was led by Agencymember Clark The Invocation was led by Pastor Dennis Alexander of the Church of the Nazarene ROLL CALL OF OFFICERS: Present: Agencymembers/Councilmembers Clark, Imperial, Vasquez, Vice- Chairman/Mayor Pro Tern Taylor, and Chairman/Mayor Bruesch Absent: None INVESTMENT OF ROSEMEAD REDEVELOPMENT AGENCY FUNDS A. CONSIDERATION OF PROPOSAL FROM STRUCTURED FINANCE TO INVEST AGENCY FUNDS IN A GUARANTEED INVESTMENT CONTRACT VERBATIM DIALOGUE FOLLOWS: CHAIRMAN BRUESCH: What I would like to do, this is an issue in front of us with a lot of ins and outs and what I would like to do is have staff give us a full report, Agencymembers can ask questions during this report and will then open up discussion with Councilmembers. FRANK TRIPEPI, CITY MANAGER: Mr. Chairman and members of the Agency, you have included in your packet this evening a staff report that was dated February 3rd. If we might, I would like to digress just a little bit from the staff report. I don't think it is necessary for me to read the report; however, I think it is important for everyone this evening to understand... Hugh, come up here where you normally sit,... what I would like to do by way of background explanation is to perhaps try to explain to the best of my ability as to why, why we are considering action this evening. At a time when we did the original bond issue, 1993, 1 came across a firm that was recommended to me that basically introduced me to an idea that I wasn't aware of, and that was basically an investing of the escrow reserve fund which is left with the trustee, that would be Mr. John Bolan of Structured Finance. At that time Mr. Bolan gave us a drawdown schedule and showed us how we could invest and maximize the escrow reserve fund which normally sits with the trustee and doesn't really earn anything. At the same time, he gave us a drawdown schedule with a list that showed how he could invest the proceeds at that time, which would meet the covenants of the bond indentures, also would meet the drawdown schedule that was necessary. That schedule was given to me and passed along to the City Treasurer. Probably through my own fault, because of moving quickly because of the bond sale, Mr. Foutz said he normally invests the proceeds and he is correct. We should make it clear this evening that he has been your Treasurer for 30 years. He has done an outstanding job. The City or Agency has never lost a penny in the investments that he has made. Internally, it has always worked very well. We have no operational problems, he talks to us, we talk to him. There is no need to do anything tonight to create a cash flow. We don't need a cash flow. We are not in an Orange County situation. That is another thing I want to clear up right up front. This is not the same kind of a situation. We, the staff, were asked by Council and Agencymembers in December when they received the audit report and looked at the letter from the auditor which at that time indicated that some investments that were made, round figures, at about $18 million were worth maybe $16 million. So, they were worth less on paper than the purchase price. As I think all of your understand, that is called a paper loss. You don't take the loss unless you actually go out and sell, then you do take the loss up front. I believe there were Agencymembers and CIT1 9J, R SLH11-AD TE RRA 2-7-95 Page #1 Councilmembers, both being the same, who were very concerned about the volatility of the investments, the risk factor involved with those investments. We were directed to find an alternative method to that investment mode. That is basically all we have done. We are providing you, this evening, with one alternative that you may look at. The real issue, I think, is a policy decision by the Council and Agency as to what investment vehicles you are presently in and, if, in fact, you want to redirect those investments to something that is less volatile, not as risky, does not have an arbitrage problem, which the current investments would have. I really think that is the crux of the issue that you have before you this evening. We are very fortunate, time wise, to happen to hit the market at an excellent time. As you can see from the proposal that was priced today, your portfolio, you basically can dispose of it and the net bottom line, because that is really what I think we want to talk about, you have no losses. You actually increase the value of your portfolio and you do free up some cash up front to go to the Agency to the tune of about $729,000. Again, we should make a couple of things very clear. There is no need to panic, no need to do something right now to create cash flow because we don't have a cash flow problem. The Treasurer, I think, has accurately reflected your policy for some 30 years, if he didn't he probably would not be your Treasurer for that long, anymore than I would have been your Manager if I had not reflected your policy for 22. years. All we are looking for is policy guidance from the Council as to what the Council/Agency feels comfortable with as an investment mode. With that, as I have stated, we have provided you with one alternative method as to how to minimize the losses, if any, out of the bond portfolio fund that currently exists. As you can see from the proposal price today, there would be no losses. With that, that pretty much concludes what I have to say. We have with us this evening, Mr. John Bolan, who represents Structured Finance and his associate, Doug Dunlap, also with Structured Finance, Victor Hsu, Bond Counsel from Orrick, Herrington and Sutcliffe, who has reviewed and signed off on the package. Rod LeMond, who is your independent auditor from McGladrey. I will say, you have never to my knowledge had the occasion to meet one of the internal auditors at a Council meeting because for the past 22 years, as long as I have been here, and 30 years of Mr. Foutz doing the investments, there has really been no need to have anyone here. I don't think, again, there is any reason to panic tonight. This is not a let's push the red button and bail. It is merely a discussion of an option you have before you which would allow you to minimize your losses, if any, and would allow you to direct us as staff, including the Treasurer, that you want to be in a different investment mode than we currently have and that is the crux of it. Mr. Tunney from Merrill Lynch, who is the broker on the account of the Redevelopment Agency is here this evening. With that Mr. Chairman, that is all I have... and again, we are prepared to answer questions. PETER WALLIN, AGENCY ATTORNEY: Let me add...the principle legal concerns in so far as the Agency is concerned is that the money be available at certain times. On the non-taxable issue at times is designed to make sure that we spend the money fast enough to avoid certain hedge bond rules which would result in the bonds being taxable. That would violate all of our covenants on the bonds. That is secured by the schedule that has been bid. On the Redevelopment Agency set-a-side fund, our principle concern is that we get the money out fast enough to avoid an excess surplus situation. That is also met by the schedule that has been bid. TRIPEPI: I would just like to add a couple of more things. What Peter has said has prompted a couple of thoughts. Number one, if anyone would ask why is somebody willing to pay you today's value on those bonds, if, in fact, the bond market is going to continue to drop. The reason is, as we all know the bonds were purchased for the face value and as long as someone has the ability to hold those to maturity or hold them until the market does turn around, they will make money, we are no exception. If this Agency could hold those bonds for an indeterminate period of time and wait for the market to return, I can assure you, as can Mr. Foutz, there will be no loss. I would also tell you though, the other side to that is that interest rate quoted in some of those bonds exceeds the 5.46 interest rate that we sold the bonds at and, therefore, would be an arbitrage violation. So in effect, what you doing is taking a risk to make 5.46. If you make more than that, which you would do if you could hold the bonds, that money would have to be refunded to the federal government by way of arbitrage payments. So, you have risk plus anything you make over 5.46 goes to the federal government. I will say that if you make less than 5.46 or you take a loss, the fed's are not standing there money in their hand to pay us back our losses. However, they are standing in line to collect our gains, should we make that kind of money. The second thing that I should add is, obviously, we can't wait for a time line on this because we are under, basically, RRA 2-7-95 Page #2 • 0 an expenditure time frame where these funds have to be expended, as Mr. Wallin explained. So, that is the reason there is somebody out there willing to buy these bonds and I am not going to sit here and pretend to have a crystal ball and tell you the market is going to go up, it's going to get better, it's going to get worse, because I honestly don't know. All that I have done is try to prepare at least an alternative method that you could look at and consider. That concludes my comments. WALLIN: The liquidation value of both funds combined as of today, I am told, is $18,448,606. VICE-CHAIRMAN TAYLOR: That includes the $1 million you made reference to. TRIPEPI: Yes...that does include the $1 million transferred in. WALLIN: And the cost of making the investments is $17,719,000, leaving $730,000. . TRIPEPI: $730,000 which would come back to the Agency by way of cash up front as soon as the deal was closed. It doesn't come back to you at the end of four years or over four years, it comes back to you up front. TAYLOR: What happens to the $1 million that was put into the account? TRIPEPI: That is used to buy the contract, that is what part of what used... TAYLOR: But where did that money come from and how did we recover that. TRIPEPI: It came from the proceeds of the 1993 issue, not the 1991. The way that you recover it, Mr. Taylor, is with the $21 million payout that takes place over four years. If I might, this is nothing more ...to make it real simple, it's an annuity. We are going to put up $17,700,000 now. Basically, $18,448,000 now, to be paid $21 million over a four year period. TAYLOR: I'm still puzzled about the extra $1 million. That has to come back out and go back into an account somewhere. TRIPEPI: It is currently in a money market fund with Merrill Lynch. HUGH FOUTZ, CITY TREASURER: Held out and did not invest $3 1 /2 million. And fund the first several years of activity. That was not invested until recently. $2 million I invested at 8% in Tennessee Valley Authority federal paper. That does not need to be sold and re-buy into this. And, one more million here in anticipation of the completion of the senior center. So, that $1 million is what I transferred recently, $1.7 million, as a matter of fact. I used part of the 7 to redeem a bunch of bonds, a lot of bonds, so we no longer owe that. We don't have to pay interest. The bonds have an earning capacity of 8 1/2% approximately. And... TAYLOR: Which bonds are you talking about, Hugh? FOUTZ: 1993 bonds. TAYLOR: And, Frank is telling us...how long can we go with that without arbitrage kicking in. FOUTZ: It's not the same thing, Gary. The bonds have been redeemed. We don't owe that money anymore. The people who bought those bonds sold them back to us at a discount that we've saved $85,000. TAYLOR: What was the total amount of that? FOUTZ: 8 1/2% over 30 years is a whole lot of money. TAYLOR: What was the total amount that was bought back? RRA 2-7-95 Page #3 E FOUTZ: About $650,000. J TAYLOR: $650,000. Ok, what are we getting on the balance of the fee, $17 million, or whatever it might be. FOUTZ: The schedule ...I think you have a schedule there of the investments. Between 7 and 71/2%. TAYLOR: Stop right there a minute. If you are getting 7% or so, at what point does arbitrage kick in to it? Frank says we can only make 5.46% When do we lose that extra money? FOUTZ: I can't tell you when we lose it except when we report it. The last two years when we have reported it, we didn't pay it. But, I don't know when it is to be paid. TAYLOR: I would think it would be after the five years. FOUTZ: Yes, it would be. The value that I see is, personally, is that the arbitrage would cover any potential loss. Indeed, in this proposal, the loss up front of $2 million that is suggested, takes care of any arbitrage because last year I made $250,000 in addition to the interest. That would reflect a need to pay arbitrage. When they made the arbitrage report there was none paid for it was spread out...that is the way I understand it. TRIPEPI: Mr. Foutz is correct. By taking the loss up front, we would be free from arbitrage over a four year period. TAYLOR: Right, but after the five year period, it doesn't matter if a 7%..., it's all taken away. Part of my next question is that I don't understand the logic of knowing that there is a five year limitation and take 80% of the Agency's funds and put them in long-term. FOUTZ: Long-term is the availability of the money at 7 1/2%. It was not available in short- term. But you can sell those at any time and that is why today the market looks like a loss. It's not a loss until you sell it. TAYLOR: And, if we need to sell it? FOUTZ: Well, so I've got five years. Don't forget I'm liquid for the first five years. I've got the money and I see no point in selling back part of the portfolio since it's essentially cash now. Why sell it, pay for a sale; buy it, pay for a buy; and hold it and spread it out. We already have it and control it and keep it separate inside the account if you wish. So, it's a matter of all or part. In my opinion, the TVA fund is...well, they're long-term and that is the problem if you think in terms of long-term. From my point of view, I made a little chart here and a list of my recommendations. This little chart here illustrates what happens to the market. It happens that way on a regular basis. TAYLOR: Can I have a copy of that chart? FOUTZ: Yes, you can have a copy but I didn't intend to send it to you before we discussed it because everybody wants to sit and read it. AGENCYMEMBER CLARK: Mr. Chairman, can I break in with a question before I lose it? BRUESCH: Yes. I have a question too. CLARK: You said that you have the money to cover what we have to spend. My understanding is that the rules say we have to spend $16 million is it, in the next five years or is it eight. TRIPEPI: The drawdown schedule. We have to spend the bond proceeds, which I think the originally take was $18,000,000. CLARK: I don't understand what you mean that you have the money to cover that. RRA 2-7-95 Page #4 FOUTZ: Well, you are currently involved in spending some specific money. I have all that covered this year. The schedule shows something like $3 million or $2 1/2 million. CLARK: Right. But, you don't have $18 million tucked away somewhere else, that we don't have to touch these funds. That's what I don't understand. FOUTZ: The funds are always available at the price of the market. The market fluctuation is always something since that happens since the beginning of the investment system. And that fluctuation over a four year period of time, in my estimation, will make us whole again without taking a loss. And, that was what you would call a gamble that I took. I don't see it as a gamble, I think it only as an investment strategy. My feeling is that to sell and take a loss provides a profit opportunity for someone besides ourselves. The reason we are not losing any money is because it is earning interest inside the fund. It is interest we are earning anyway. The long-term is to risk. There isn't any doubt about that. CLARK: If we TRIPEPI: If I might. Let me just clarify (Mr. Tripepi draws a chart on the board). What you are looking at again, are two proposal. The proposals that we have from Structured Finance will basically pay out $21 million at a fixed rate, which would be the straight line that goes along here. You will know exactly what you are going to get every year to spend and what the interest earnings are going to be. Mr. Foutz is correct. You don't lose unless the market is such that the bond is worth less money. If you leave the portfolio as it sits, what you are basically doing is...the market, this being the starting point and this being the finish point, which is to say four years out. You are going to have a bond market going like this, just like it has been for the last few days. But, if you happen to need the money and have to sell and the bond market is down here, you are going to lose money on that particular bond. If it is up here, I will tell, as will Mr. Foutz, you will make money and you will make a lot of money. But anything you make over 5.46 you will have to refund to the federal government because it is arbitrage. So you are going to take this risk for four years to make 5.46% on your money, because that is all you can make. The proposal from Structured Finance, because you do take the one time loss up front, is going to pay out approximately 7.4... JOHN BOLAN, STRUCTURED FINANCE: I don't really know exactly. We price them on a dollar amount, not really on yield. It is around 7.30. TRIPEPI: You are getting a 7.30 return, but no risk BOLAN: For a 2.2 years and 8 month average life contract with a total time of 4 years. AGENCYMEMBER VASQUEZ: Excuse me, Frank, could the gentleman identify himself. TRIPEPI: John Bolan. BOLAN: My name is John Bolan, I'm from Structured Finance Corporation. BRUESCH: I have a couple of specific questions on the memos. On the Orrick memo TAYLOR: Bob, I hate to interrupt you but can we let Hugh finish with what he has. BRUESCH: But this is directly what he is talking about. TAYLOR: OK. He was starting a presentation, unless... BRUESCH: This has something to do with it. Page two in the Orrick memo says we cannot invest in power and telephone utilities, right. Our portfolio has power utilities. FOUTZ: And that is the part of the portfolio that I suggest that we do sell and now is a good time to sell it. TAYLOR: Excuse me... RRA 2-7-95 Page #5 FOUTZ: But, it will become a better... TAYLOR: Tennessee Valley is in there though at $12 million., FOUTZ: Yes, that's right. You don't have to sell it all. VICTOR HSU, ORRICK, HERRINGTON & SUTCLIFFE: The TVA investments are fine. BRUESCH: TVA is ok. There's Edison, Ohio Bell and Penn Power. FOUTZ: He's talking about selling at the top or the bottom. The strategy would be to sell at the top, most of them, and find a new vehicle, like he is doing. Right now, he is doing something that I am prepared to do. But, I resist the effort to take the loss. BRUESCH: Let me get this straight. You are saying that about 40% of the portfolio should be sold at this time. FOUTZ: 7/12th. There is 12,000,000 TVA and there is 7,000,000 in AAA utility bonds. BRUESCH: That is almost 60% of the money. AGENCYMEMBER IMPERIAL: That is your recommendation to sell 60%? BRUESCH: Using this methodology. FOUTZ: That methodology would work and we hold those TVA's a little longer because they are at market. There is very, very little loss involved in those except the sale and the buy. BRUESCH: So, the basic disagreement and philosophy between you and staff would be over that 40%. TRIPEPI: There is no difference in philosophy between Mr. Foutz and myself. Mr. Chairman, as I stated early in the meeting, all I'm doing is what some Agencymembers asked me to do, to provide you with an alternative method. BRUESCH: Let me restate that. We're not discussing the whole portfolio. We are discussing 40% of that portfolio because you agree at this time that 60% has to... BE DIVESTED. FOUTZ: Yes, I have become aware, in time, that now under the new issue, the utilities do not qualify as proper investments to take even though I've got time, they were bought first because they were the best return on our money. That protects us from the loss of potentials along the way. When they decide what they decide what they are going to use that money for, because we haven't yet. BRUESCH: The Council must understand then, we're not really talking about the full portfolio then. We're only talking about 40% that we have discretion over. FOUTZ: The proposal that they made, they have proposed they combine the '91 and '93 money into one vehicle and they manage it for the four year period. TRIPEPI: They don't manage it. They sell it out. Somebody else buys it. For them it is a legal investment if it's utility and they can sit on it for as long as they want. They are not restricted by Redevelopment law. FOUTZ: But, they do send us the money. TRIPEPI: Absolutely. FOUTZ: This organization here sells us General RE... TRIPEPI: No, no. The money comes from the purchase of AAA rated. No, it doesn't come from Structured. RRA 2-7-95 Page #6 .1 FOUTZ: So, if we sell that to the TVA... i TRIPEPI: Wait a minute, does Merrill Lynch send us a check if you do a sale to Merrill Lynch. Or does Merrill Lynch sell on our behalf and send us the check that comes from someone else. FOLTZ: The check comes to Merrill Lynch and Merrill Lynch gives us the money. TRIPEPI: It doesn't even go to Structured. He doesn't even touch it. It comes to us directly. So, it works the same way except he doesn't even touch the check. BRUESCH: The reason why I brought up the Orrick memo is because to me it really makes the problem, I don't even like to call it a problem, philosophic look-in a different light because we are not dealing with the whole portfolio. TAYLOR: The proposal is though. TRIPEPI: Bob, the proposal is the entire portfolio. BRUESCH: Let me...what we are saying is that we are going to have to get rid of 60% of the portfolio anyhow by law. We are going to have to turn it over by law anyhow. TAYLOR: Why? BRUESCH: Because it's in utilities. You can't do it. FOUTZ: We are vested in utilities and they don't quite qualify, even though they are AAA, I don't know why they structured the bond issue that way. I was not aware of it. I should have been aware of it. The other bond issues were not that way and I just continued doing what I had done. I don't think public utilities are going out of style. They are good American investments. BRUESCH: Another question I have of staff is Structured Finance the only bidder on this plan? TRIPEPI: They are the only persons that I asked to come up with a proposal. BRUESCH: What is a provider? . BOLAN: The provider would be the winning bidder of General RE. BRUESCH: So, the winner and provider are one in the same? BOLAN: Yes. It's called efficacy financial guarantee and we function as the broker so we go out and solicit probably 15 to 20 interested parties. After they come back to us then we send them a bid package and actually get a bid from the ones that want to put it on the TAYLOR: Then we only got two back, technically. BOLAN: You got two back this time. THIS WEEK FOUTZ: I have tZr-received telephone calls, as I always do, from other people who are interested in helping us with our money. In my mail today, I have two more. TAYLOR: In what respect? FOUTZ: From companies that want to help us to manage our portfolio. TAYLOR: Is it a total package list John is talking about? FOLTZ: No. They are not making bids. They don't know that this is being discussed. It is just that they are in the market to help us with our finances just like Mr. Bolan. RRA 2-7-95 Page #7 • • TAYLOR: But, I don't want to get it all piecemeal where we have to keep working on it every three, or four, or six months, "well let's do something else". FOUTZ: Exactly. TAYLOR: What are they offering you to do? FOUTZ: Well, they would offer to make ugta proposal similar to the ones that we have and stretch it out as much as we need. I am rnterested in dealing with everybody who calls me. I can't deal with people that I don't know something about and whose background I don't know. TAYLOR: Well, we would have to determine that. As far as the background of this company, it seems to be right at the top. FOUTZ: I would appear so. But, I here is their first bid and that gave me my first negative impression of Structured Finance. This one is the proceeds of 3.75 and it has improved because the market improved. That is when we sold the bonds. The bonds were at the market. TAYLOR: 3.75 what? FOUTZ: That was the proceeds. That is a negative from my point of view and I didn't think we.needed the help of another expert since we are dealing with one of the international companies that have more guarantee capacity than anybody else. to be BRUESCH: But, at this time you do agree that 60% has even sold and Structured Finance would probably have the best methodology. FOUTZ: They have made the most clear proposal. Mr. Tunney has not been party to all of the details that are contained in here. He saw this for the first time tonight. He has a schedule like this which I have provided to him and he knows what is in the account. I suggested to him that we might, instead, tomorrow or sometime soon, decide not to pull $17,000,000, but to split that up and in the next four years be,prepared, on that graph there, be prepared to sell that TVA or whatever else and put it into a short investment. TAYLOR: That has to be done immediately though, as far as $12 million. FOUTZ: It doesn't have to be done immediately. You may need the money between now and 4 years from now. TAYLOR: But, it's a public utility. BRUESCH: I have a real basic question, Mr. Foutz. When we bought this portfolio who actually said we need two of those and one of those, and one of those those? and two of FOUTZ: I do that. Only me. for us. BRUESCH: And the bond provider, Mr. Tunney, just took the money and invested 44D-.. FOUTZ: I say to him, I want the best federal money I can get,. I want the best investment I can get with, to start with. That was the bond issue for the utilities. It went down like everything else did. But, Mr. Uke+sef ler.) on television last week said they were going back up. Best buy in the market right now. \ Rukeyser BRUESCH: You were the one that said get me x number of bonds FOUTZ: That is correct. BRUESCH: Ok. You just called your orders. RRA 2-7-95 Page #8 0 • TAYLOR: He didn't offer any information that you couldn't invest it in, public utilities? FOUTZ: No, he didn't have access to the bond issue. IMPERIAL: Did anybody offer you this information? That you couldn't invest in utilities. FOUTZ: 1 have to say that that my ignorance is my own fault. ;I don't blame anybody for not offering me. I have a copy of that bond issue and you know how hard it is to read that stuff. I do read it and I have read it recently. When people send me new information, I generally read it all. But, recently we have had an awful lot of information, I haven't read all of it. But, nevertheless, it's my own fault that I didn't read that and understand that the bond counsel agreed that was alright to do. However, that report is a monthly report. It has been in the City's hands right from the beginning. Today's revelation is not new information, it is a monthly report that comes to the City. TAYLOR: Which one is that, Hugh? FOUTZ: The Merrill Lynch report comes report comes monthly to the City. TAYLOR: I have to admit I don't get it monthly. I don't know who does. FOUTZ: Let the staff people look it up. TAYLOR: Ok, then it goes back to your lap again. So, if when you say it's available, we don't necessarily see it. FOUTZ: I don't think you have a reason to see it. TAYLOR: We don't, we don't. FOUTZ: I don't think that's been your need. Not your response...., well, I suppose... TAYLOR: It has become ours now. FOUTZ: It has become yours. IMPERIAL: It always has. FOUTZ: It got brought up into the public's attention. TAYLOR: Ultimately yes., but not the every day'responsive'supervision. FOUTZ: But none of the problems that have reached the public has caused the hysteria that's rampant. None of those are part of our problem. The stuff is all legit. TAYLOR: I don't think that's the question and that being as far as we are concerned, it's the five year arbitrage and what we have to sell. There's a comment in here as far as losses. If we were to sell, what would the cost be and the losses? Does anybody have that figure? FOUTZ: As far as that, it's in the report. TRIPEPI: It's listed twice, $2,590,000. FOUTZ: On today's market. TRIPEPI: Priced as of today. TAYLOR: That would be the loss. FOUTZ: Mr. Tunney has some comments. IMPERIAL: Before we're through here, I want to get everybody's comments. RRA 2-7-95 Page #9 • 0 FOLTZ: In all fairness, Mr. Tunney doesn't have all this information. He doesn't have all that came to all of us. It was never my intention to combine the '91 with the '93. 1 always thought keeping those funds in separate accounts was very good accounting instead of combining them all in great lump, I've kept them in separate places. The money in '91 is in a different numbered Merrill Lynch account than the money in the '93 account. We've received all that '93 money and I put all that was given to me to manage into First American until it was cleared, and the reserve funds which were held by Mr. Tripepi and he then put the reserve funds with Structured Finance I understand. I don't have a report of that. BRUESCH: On Number 17 you say, "If considered imperative, sell utilities only", well, I don't think we have any choice, do we? FOUTZ: I think you have a choice of delay that might be... TAYLOR: That's only in the '93 bonds, right? FOUTZ: Excuse me? TAYLOR: Only in the '93. The 91's... BRUESCH: But, that's such a small amount. TAYLOR: It's 25% of it and if you say we don't need to touch that. We are looking for an alternate proposal. BRUESCH: Taxable bonds you can. HSU: With respect to investments in utilities of private companies, I'm talking about Duke Power, Southern California Edison, etc. It's unclear to me and it's probably that fact that these are not appropriate investments with the Redevelopment Agency regardless of whether tax exempt or taxable bond proceeds are purchased for those investment. So, I just want to make that point. FOUTZ: Well, if it's unclear to him, it's still unclear to me even after explaining, because he's the expert. HSU: There are probably not permitted investments for the Agency. BRUESCH: Either way. So we are still looking at 7/12. IMPERIAL: Thank you Mr. Hsu. HSU: And also, just to make the point for Mr. Taylor, the TVA bonds, even though it is utility, it's a federally, a federal project so that it's a permitted investment under state statue. BRUESCH: It is a quasi project. TAYLOR: Is that the $12 million we were talking about, Hugh, saying that it's permitted. FOUTZ: But, it's long term. TAYLOR: Oh, that's right. So, short term... FOUTZ: But, we have to spend all that money in five years, Gary. Do you know what you're going to spend it on? IMPERIAL: We've got a senior center we can build over there on Garvey Avenue. We can start with that. TAYLOR: We haven't got the first one taken care of yet, Jay. But, that is another issue. FOUTZ: Let me ask at this point, since this came up. You're talking about a senior or adult.. RRA 2-7-95 Page #10 TAYLOR: Excuse me. Mr. Chairman, let's keep on this issue. Let's not get into that. FOUTZ: It's a trade, a trade-off is what I'm talking about, not for location. BRUESCH: Well, the issue keeps on going back. I don't know, when I read that Orrick memo, I sat back and said we're not talking about the whole portfolio, we just talking about 40% of it. L TRIPEPI: Only if you are dealing with the issue of what is legal or illegal investment. I was not asked to put a proposal together based on what is legal and illegal. I was asked to put a proposal together based on getting the Council, getting the investments out of a market, volatile, fluctuating investment. That's all I talked to him about. BRUESCH: I realize that... TAYLOR: But, it's a two edge. We've got arbitrage and we've got illegal. That's what brings it all together. TRIPEPI: I don't know where you are going, Bob, but it is important to keep coming back to this. You have a proposal of the whole package because the concern was the market volatility of the investments, not because of what is legal or illegal. BRUESCH: Exactly the point I was going to make. What started out as a total policy decision on our part, with this statement the... it has made it...we have to decide not only policy, but we also have to decide whether or not we are going to go by the letter of the law. If we do go by the letter of the law, then automatically we are going to have to get rid of 60% of our investments. IMPERIAL: Mr. Mayor. What would our loss be if pulled only what we have to sell. What would our loss be if got rid of only what we had to get rid of to be legal. BOLAN: Are you asking me? IMPERIAL: Anybody. FOUTZ: Inside a $1 million. That is a very small loss. BRUESCH: Take 60%. HSU: It depends on the maturities, how far out they go TRIPEPI: Right, and they are all priced different. I couldn't tell you what it is. BOLAN: You don't see priced each security priced individually. So you have to take out the security and the purchase price and the market value. IMPERIAL: We have no baseball players that can give us a ballpark figure? BOLAN: No, I couldn't do that. I didn't buy this portfolio, I don't know. FOUTZ: This is...pass that around ...the eight numbers there are the numbers from three days ago. Those were the values three days ago. They are a little better now than they were then. It illustrates what all of the values are, including the TVA. On an individual basis, we can sell all or part of that, today, tomorrow, the next day. TRIPEPI: And, market is definitely better today than it was a week ago. FOUTZ: It's following that pattern according to my estimation. BRUESCH: So, we keep $2,767,000 plus change, right, out of the $17 million. FOUTZ: Whatever you say. RRA 2-7-95 Page #11 BRUESCH: It's right here. So, that's almost ...we'd be getting the best guarantee out of $15 million... that's 75%. FOUTZ: Don't forget, you only have to spend 85% of the whole thing, so you have a 15% leeway anyway. You don't have to spend it all in five years, you have to spend 85% of it. 15% is a pretty good chunk of money, about $2 million and that's the $2 million we are talking about. CLARK: I heard somebody say 40% and the other said 60%. 60% we have to sell, is that it? Tell me, 40% or 60°%o? BRUESCH: Ok, the question was asked, why am I hung up with the percent. I am assuming that this Agency desires to make sure that we are doing everything by the letter of the law, that our investments are legal. If my assumption is wrong, speak up now. IMPERIAL: We have to follow the letter of the law. We have in the past, but on this particular item, no. FOUTZ: Now that the matter has been brought to our attention, we must do something about it. BRUESCH: I'm not casting blame on anybody, I'm not casting aspersions. What I am saying though, we are looking at having to divest ourselves of everything but $2,763,000. Out of that whole portfolio we have to get rid of everything but that, $2,763,000. We are going to have to divest ourself of almost three quarters of the portfolio anyhow. FOUTZ: What funds are you referring to? BRUESCH: The one you just handed to us. HSU: Excuse me. That seems a little bit high. The TVA funds and Federal Home Loan Bank bonds are ok. BRUESCH: Both of them are ok. But, somewhere between 60 and 70%, we are going to have to get rid of anyway. TAYLOR: Are we just going to sell them off in the next four years or are we not paying attention to the arbitrage? FOUTZ: I'm not concerned greatly about the arbitrage. If the taxes on it wasn't so great that you couldn't more than earned the amount, that you earned extra is taxed. Now it's not taxed, it got to be given back. It covers our losses. CLARK: I need some clarification. It is my understanding that arbitrage is anything that we make over the 5.46%, including the principal. We happen to buy the bond for $1 million and we sell it for $1.2 million, the .2 is the arbitrage. We make 8% we pay the difference between 5.46%, and it's not a tax on it, it's the whole amount that goes back to the federal government. So, there is no incentive for us to make money on the principal or interest above the 5.46% that we are getting on our bond proceeds that we sold. FOUTZ: That's true. CLARK: So, my feeling is, why are we willing to risk the market going down further, interest rates going higher, therefore, the bond market value going down further, if the profit is not going to help us. We can't make anymore than what we started with plus 5.46% interest. FOUTZ: I think from the public's point of view. Safety is the first absolute requirement of an investment. And, I have been very safety conscious about who I do business with and knowing who they are and what they do about it and where they place the money. That's all included in safety. I don't know Mr. Bolan, I haven't discussed any of this directly with Mr. Bolan. All of this has come about because it's a damned good idea whose time has come. RRA 2-7-95 Page #12 TRIPEPI: Hang on now, Hugh, I want to say something to that. As long as you brought it up, then we'll talk about it. You don't do business with people that you don't feel comfortable with, that's what you said. Merrill Lynch didn't tell you that you couldn't invest that money in utility bonds because it is illegal. Merrill Lynch didn't tell you that you can't make 7.66k interest because that's arbitrage. But, I'll tell you what, Mr. Bolan of Structured Finance, knows the ins and outs of public finance. If Merrill Lynch wants to get into public finance, they had better learn the rules. They're going to learn real hard in Orange County. If they want to get into public financing, they better learn the rules, it's a specialty, Mr. Foutz. He can invest my money, your money, his money, Gary's money, it's private money. It's a big difference. Public finance is a special nitch. Mr. Bolan knows the rules. This was priced to comply with the bond indenture and all the rules of the Redevelopment Agency. Now, I'm sorry to have to have said that, but I said it because (,.feel comfortable with Structured Finance. The money they placed on the escrow reserve fund, your auditors never listed an exception on it. It's perfectly fine. It's earning 5.5% just like clockwork. No problem with it. But the investment loan that we've gotten into with Merrill Lynch is a big problem. And all I was asked to do is find a way to fix it. I don't mind fixing it and I don't care if the Council adopts it or not, but please don't criticize who I chose to fix it with. The man has been in business for years, he does a good job, we've not had any problem with the escrow reserve fund that has been invested, ok. FOUTZ: Mr. Tripepi, with the exception of what I've said. What I said was about me, not about you. TRIPEPI: Well, I feel comfortable investing with him. IMPERIAL: Gentlemen, let's get this on an even keel. I don't feel any insults were thrown around. He just said that he didn't know those people. I can accept the fact that he didn't know or how they dealt. Let's go on with the meeting, we don't have to get our feelings involved. TAYLOR: Mr. Chairman. We have to clear up something here. What happens between... in our packet we have Structured Finance Corporation of American, January 24, 1995, it's listed on page 2... FOUTZ: It's obsolete now. TAYLOR: I know it's obsolete. But, I know want to know why it went down another $750,000. BRUESCH: Gary, which memo are you on? TAYLOR: Page 2, but there's more than that in here. It's Exhibit 6. FOLTZ: When this was first proposed to me, Mr. Taylor, I said, don't panic, let's not be in a hurry to do that. The market is changing. TAYLOR: I can understand that, Hugh. FOUTZ: And, that change has been reflected by about $1 million. TAYLOR: Ok. What change are you talking about? What change, explain what that change is. FOLTZ: The market change. TAYLOR: Ok, from January 24 1 have to assume that that was of that date or that week. So, as of January 24 to February 7, roughly two weeks later, it's changed almost $1 million? Is that because of the interest rate hike that... FOLTZ: It's part of the money market... TAYLOR: Oh no, I want to get this cleared up because in that short time it goes up... RRA 2-7-95 Page #13 • FOUTZ: The interest hike is the issue that caught most of the money managers in the United States short, and I'm no expert. TAYLOR: I'm no expert either, but I want to find out if that 1 /2 percentage rate had anything to do with it. FOUTZ: Yes, it did. TAYLOR: Is that right, John? BOLAN: On that bid the schedule was $18 million. TAYLOR: Ok, but why is the schedule at $17.2 million for this one. BOLAN: Because that's how much money actually needed. In other words this schedule was wrong. TAYLOR: Then, in your opinion, what did that 1/2% raise in the short-term interest rate... what effect did that have on this market? BOLAN: It was already built into the market base. TAYLOR: Built in in what sense. BOLAN: The people on New York and Wall Street that control the market realize that there... TAYLOR: Because a month ago they raised it 3/4 of a percent. BOLAN: Right. TAYLOR: Where did that come into effect? BOLAN: I'm not an economist, so... TAYLOR: No, I'm not either, but I want to find out what that 3/4 and that 1/2%, raising it 1 1/4% in roughly a month's time, what effect did that have. Is that where we are losing the money? FOUTZ: Gary, let's go back a year. Since we borrowed the money at the bottom of the market, the trough was at the.very bottom. We borrowed at 5.4% It hasn't been there since. We had the money and had to put it out. I didn't intend to get 5.4% on it in case there was continuing erosion of interest. I could have gone to 3% and I'd lost 2% It could have, there were some people that said it might and there are still some people saying that it might. But, anyway... TAYLOR: I go back to my original question. What has that 1 1/4% increase in short-term rates done to this market. FOUTZ: It has brought it down because the earnings on the money is less than it was. You paid more for a bond than you used to because of the interest rate. TAYLOR: Ok, then it does have an effect on this. FOUTZ: Mr. Greenspan said that he thinks this is the last correction for inflation. We haven't seen any inflation, but he corrected it. -BOLAN: What he also did is raise interest rates in two and three and four years, which is where that you guys need to plug in the money to meet your capital improvements. Actually, you picked up, in other words, you picked up higher interest rates in the two and three and four year terms too. So that is to your advantage. By my proposal, what you lost on the long end, you pick up on the short end. RRA 2-7-95 Page #14 • FOUTZ: That's right. BOLAN: So, in other words, you can buy the contract for $17.9 million, it's going to show you a cash flow of $21,400,000 and I valued the portfolio and that was like $18,500,000 or $18,448,000, which leaves you a surplus of $729,000. The reason you're asking me about my prices, why my prices were so different, so that what you're saying. Because on the schedule that I priced this morning, the rash flows were $17.2 million. On the schedule I priced two weeks ago, it was $18.2 million. So, it was $1 million less, if I'm not mistaken. So, we're talking about different schedules. TAYLOR: What we had...wasn't there something brought in today that is based on $17,719,000. Page 5, cover sheet, there is another $500,000 difference in the same... BOLAN: Because they had different cash flows. Cash flows were not the same. This was the $17.2 million cash flow. You other cash flows was, I think, $18. or so. BRUESCH: I don't know about you, Gary, but... WALLIN: The figure is $17,719,000 is the amount of dollars you have to invest in order to keep those two annuities. TAYLOR: Ok. Then, the figure up there when you drew the straight line business there, where's that extra $3 million come from to get it to $21,400,000. TRIPEPI: It comes from the folks that are buying your bonds and guaranteeing you a return of 7.4% which brings you up to $21 million and they are willing to take the risk on the bonds because they can. They are not under a time schedule to spend the money. They can hold them for as long as they want. They can wait. FOUTZ: They are not only earning 5.4%, they are going to make the difference between what they paid for it and what they sell it for. TRIPEPI: And you know what else, Hugh. They get to keep it too, don't they. BOLAN: They do, and that is what they do for a living, they manage risk. FOUTZ: And that is the financial market all over the world. TAYLOR: What term do you use then, as far as Page 15 for example, the proceed.funds, we get $17,200,000. But, what it states... BOLAN: This is today's proposal, it's hardbound. That's the old one. TAYLOR: That's what I've been reading. It states there will be no interest paid, how do we get that extra $3 million. BOLAN: The interest accrues within the guarantee or the investment and is paid out so there I is no separate interest payout. But, obviously, if you take the deposit amount and you subtract that from the dollar amount, that's how much accrued interest you have over that period. TAYLOR: Ok, that's why I asked the terminology you used when it states that will be no interest payments, this is a net funded contract. BOLAN: Right. So, what I do is I send that schedule and I say how much do we have to deposit with you today so that you'll pay out and meet that schedule in the next four years. That schedule's average life is about 2.8 years, ok. They assume the interest into the net deposit because we are working with a figure up here that I have deposited in to buy that financial guarantee. So, it's a financial from a AAA rating provider that guarantees you those cash flows. TAYLOR: I don't dispute it being in there, but when I see this boldly stated "there will be no RRA 2-7-95 I Page #15 {>Q • 0 interest payments, this is a net fund", I'm trying to figure it out. BOLAN: By no interest payments, usually when you deal with bond monies, you have semi- annual interest on 330 over 360 basis which coincides with your bond payments to help you service debt. In this case because you don't need the interest income, to service your debt, because you have revenues from other projects servicing the debt and you need to match a cash flow, we net funded because that is the best way to do your deal and to get you out of the situation that you are in. So you are going to make up that loss from selling the securities within this investment during this period. TAYLOR: No, it makes sense. I wanted to find the terminology. FOUTZ: They are giving you a guarantee for the ultimate payment, whoever buys that has bought it with their guarantee. BOLAN: And we did break up the funds in this and make two contracts. There are two separate contracts that break it up and I gave you the aggregate. 1 The guarantee does not come from us, we don't manage the money, we never manage money. The guarantee comes from General RE Financial, it's AAA rated. I put some financial in there and they guarantee it. They also have a downgrading provision in there that states, "if to the life of that investment, if their rating drops below the rating on their bonds, ;they will give back your money or collateralize", and all that is spelled out within the contract. In addition to that you get a legal opinion which states that this a binding legal obligation of General RE, and General RE's parent company also guarantees General RE. So these are the type of guarantees that when you go out and sell bonds you buy to give them the AAA rating. FOUTZ: General RE makes their investments and makes the money on the long-term. They are well funded, it says in here, and they investment their money in high risk, high return places, that includes Asia and Europe. BRUESCH: Let's trade places for a while. Now, you have a decision to make. You know you have to get rid of 60% to 70% of the portfolio somehow. Do we'go over to Hugh's types of things, like Treasury Notes, or do we go with Structured Finance. FOUTZ: Structured Finance has done us a great service, there's no question about that. I am at an advantage if you go with them because I don't to have to worry about the "baby" anymore. The "baby" is out of my hands and... BRUESCH: You're not answering my question. FOUTZ: Yes, I'm answering it in a round about way. The whole answer is whether you want me to do what he is suggesting, or you want him to do what he is suggesting, because I know how to do that. I'm perfectly aware of it. He has crystallized it for us in a very nice way, and he makes his living doing that. If you ask me to buy that, 7.5 interest rate loan today, Merrill Lynch will guarantee it and in four or five years, whatever, will produce that kind of money because that's what they are buying it to do. And, I could do that, but I would have to tend the "baby" and it's easier if I don't have to tend the ' baby". IMPERIAL: Ok, so we don't have to throw the baby out with the bath water. But, my question is what is the advantage over you doing it versus this gentlemen who has already put it together. FOUTZ: I can go fishing. IMPERIAL: No, no, no, that's not what I'm saying. What I'm we have if you put this same thing together that he has put to something for his trouble is what I am saying. FOUTZ: Yes. IMPERIAL: But what advantage would it be if you did it and we about him getting something for his work. is, what advantage do I was expecting to get worry at this point RRA 2-7-95 Page #16 • FOUTZ: Well, I don't see... BRUESCH: How much would we save. That's the bottom line, right. IMPERIAL: Yes, I'm getting to that point. BRUESCFJ: Let's put it in dollars and cents. FOUTZ: Arbitrage takes it anyway. That's Maggie's sacred subject. CLARK: Right. What Jay's getting at is can you save this commission. However, Merrill Lynch isn't going to do it for free either ...are you? FOUTZ: Well, anytime we have to sell this and give it to him, there is a sales commission and anytime he takes hold of it and sells, there is a sales commission. So, if you are going to start moving it around, you have to do the best you can. IMPERIAL: But, if you sell it to him and he sells it to somebody else, isn't there a commission. FOUTZ: But, I'm the only one that's not getting paid to do all this work. IMPERIAL: Are you going to get a catholic paycheck, "Thank you and God bless you, ok, let's go on it". FOUTZ: It's all right. Mr. Bolan knows what he's doing, I'm sure he does. If you want him to take this over and run the whole thing, you can be prepared to do it. If you want the City Treasurer to keep them separate, '91 to "93's, 1 would recommend that Mr. Bolan keep them separate in '91's and "93's and not lump them all into a $17 million issue. BOLAN: We've already split it up. We've already talked to Counsel and it is split up. I just gave you the aggregate numbers which are actually going to have two separate investments. FOUTZ: I have recommended that the other day and I am glad that you find it so. BOLAN: So, that is incorporated within the bid package. BRUESCH: Again, we'll go back to Mr. Imperial's original question. You would do all the investing yourself, you would not use a secondary party. FOUTZ: That is right. As l always have. IMPERIAL: Then what is our advantage. TRIPEPI: Merrill Lynch has to dispose of it. FOUTZ: Well, but he is in between the other people you see. He has to put it out to somebody else to... TRIPEPI: No, no, no. But understand... wait a minute, Hugh. What we are talking about is that this is commission up front for the four years. He gets no more commission. As you move money in and out of the funds that's over at Merrill Lynch, there is a commission every time there is a transaction. FOUTZ: That's true. TRIPEPI: Is there not? FOUTZ: Yes sir, that's true. TRIPEPI: Are you telling the Agency tonight that you can dispose of this and handle it yourself instead of Mr. Bolan. Does that include selling all these now, even at a loss. i r I i RRA 2-7-95 Page #17 • • FOUTZ: You would have to. TRIPEPI: Ok. So, that is what you... FOUTZ: You would have to if we going to pick into a market that we bought into when it was 5.4 and now it's 7.7, 7.4 let's say... .44 TRIPEPI: And each time you call Mr. Tunney and say sell this or buy this, there is a transaction fee and commission. FOUTZ: That is right. IMPERIAL: Well, I want to make a point here. The point is that if this hadn't happened, we wouldn't be sitting here tonight and this only rings a bell for me and that bell is there is something wrong we need to fix, ok. And I think that's something to address too, and not just fix this problem. That's like cutting out the cancer and you don't know where it started. So, either way this goes, it's going to be my suggestion, and hope this Council will go with it, that we put together a finance committee within this City Hall that will have two Council people involved, the City Manager, City Treasurer, and, the City Attorney for the legality. Anytime that we make any investments from this point on, this group needs to get together and talk. So, that's going to stop that problem we've got now. So, we need to even think about that before we go on further and say who is going to sell this. That's my opinion and if we don't go for it, I'll fight like hell to get it. FOUTZ: I have to say that a finance committee without the formal structure that you have referred to, does actually function. Frank and I do bump heads in the hall and will talk about what we are doing and he keeps track of it because he gets the same reports that I do and he knows where we are and he gets them monthly and I make a quarterly summary. IMPERIAL: Something happened along the way. If we put a structure like this together and make sure that every time a decision is made, the Council gets information, that somebody is not going to catch me out in the street with "38" pistols. I'm the guy they put in office and I'm the guy they are going to come looking for, ok. And that is what I am saying. I don't want to sit through no more of these meetings. FOUTZ: Well, let me tell you that I don't know that if for instance we've gotten some Redevelopment Agency money in from the county and we have $1 million today or maybe it's $600,000, whatever is available for investment, and it's been earmarked to be spent today, and that we have to put it out. My feeling is put it out as quickly as possible. IMPERIAL: My opinion is get together and have this meeting and put it out as fast as ever. FOUTZ: All right. IMPERIAL: But the thing is, we need to build something into this system that is not going to give us a problem. There is no way in hell that we can get out there with the public that we serve right now and say "I didn't know", they are going to eat us alive. They are doing it in Orange County. What I am doing is I'm trying to look at the wall and read the writing. FOUTZ: You want into the process of not only what's going on, but where it's going. IMPERIAL: Two Council people can give us that information. But, I think somebody from this Council ought to be involved in it and I think that we ought to have one person more knowledgeable than we are. On a day-to-day basis, I don't know what we're doing. FOUTZ: 'I don't disagree with any of that, Jay. What we have, I represent the Council and the Manager represents the Council and the City Attorney represents the Council. We need better surveillance apparently. IMPERIAL: I know it. It's all communication and five or six heads... you know, for instance if the City Attorney was involved and he was aware of this thing, this problem, we would never have had this investment. RRA 2-7-95 Page #18 0 • FOUTZ: Let me add one more expense to the issue, when the City Attorney sits, he gets $200 IMPERIAL: That's better than $2 million. CLARK: I agree with what Mr. Imperial is getting at and I think that we need an investment policy, myself. 1 think that if we are talking public funds, it's taxpayer money, I think it should be invested only in local banks, CD's, safe government insured accounts. Because of the arbitrage, we can't make money on it. It doesn't do a bit of good and I'm not willing to risk . the public's money to make money for the federal government if that's the only place it is going. We have to take care of the public money. I would like to make a motion that we accept the package presented by Structured Finance and then we go from there on the future. Correct this problem right now. I'm not willing to risk the market, the interest rates going up and, therefore, the value of the bonds going down any further when we know we have to spend the money anyway. The risk is too great. We've already discussed the fact that there is no blame to be put on anyone. But, I am not willing to say that I think interest rates are going to go down, therefore, leave as it is. I want to get out of this. We don't lose any money, we actually come out ahead with this package and I am much more comfortable with this than taking the risk of what the market is going to do. BRUESCH: It's been moved that we accept Structured Finance Corporation's package. Is there a second? VASQUEZ: Second it. Very well put, Maggie. BRUESCH: Is there any further discussion. FOUTZ: You want to put all the money at once? You want all of it there. CLARK: It's the package because it makes us whole. We end up with $21 million. It's no more than what we would have gotten if we made the straight interest rate on and not lost any principle. BRUESCH: I also think that we should put the full amount in because, again, going back to our memo, we have to put at least 60 to 70% in. As long as we're going to do that we may as well put it all in. FOUTZ: May I suggest that the $3 or $4 million that is at your beck and call without paying anybody a second commission, be put in like LAIF, which is now paying 5.4% CLARK: Now which 3 or 4 million? FOUTZ: The money that was at First American that recently I put in Federal Home Loan bond, Federal Bank bond, at nearly 8%. 1 can sell those at a small profit. BRUESCH: Is this money in your package? BOLAN: Is this the money in the '93 bond issue? Then why would you put it with LAIF and earn 5.30% when you get 7.40% here and then you still have some money market and you're managing the money. It could go up, it could go down. FOUTZ: That is what I am concerned about. They were about ready to spend it because they are about ready to finish that ...and I don't know how much money they still have to spend. TRIPEPI: We'll get $730,000 on back, the cash flow is not involved in either way. BOLAN: One other thing I should point out. General RE pays my commission. I'm not going to come to you and ask you for any money. I mean, I get paid by General RE because I bring those guys hundreds of millions of dollars. The reason why you got such a good price and good deal is not because of Rosemead, not because of this one deal. Look at my list of deals, I do billions of dollars worth of investments. We're the financial advisor to the City of Pomona, we do all their bonds. So you getting economy of scale here. This is a small deal RRA 2-7-95 Page #19 • • for these guys. BRUESCH: Gentlemen and ladies, we've just been told that we're "small potatoes". There is a motion and a second on the floor. Any further discussions? TAYLOR: Mr. Chairman. What does this have to do with the long-term financing in the future. BRUESCH: That is what Mrs. Clark was going to discuss. FOUTZ: You have before you some statements that I want on the record. BRUESCH: We don't need to read that in the record, we can put that as'pait of the written record in the minutes. FOLTZ: That is suitable to me.. TAYLOR: There is only one paper? What about the two, want to pass those out. What bearing do they have? FOUTZ: Just my opinions and my philosophy. The aforementioned materials are attached herewith and become a part of the Minutes. BRUESCH: It's been moved and seconded. TAYLOR: Wait a minute, I still want this cleared up on the long-term investment, over five years. What authority are we giving? TRIPEPI: Mr. Taylor, if the Agency has no restriction as to longer than five year investment, the only play where that comes in is basically you have to spend `the proceeds within five years. With the five year provision we are discussing comes in under the City Council agenda where there is Government Code sections that prohibit anyone from investing City funds longer than five years without a resolution. TAYLOR: Explain the difference to me then, as far as, if we have to spend the funds through the Redevelopment Agency within five years, why would we consider long-term financing for the long-term bonds. TRIPEPI: You mean why did we do a long-term bond issue? TAYLOR: Why would we in the future... no, I'm not talking about our bond sale, I'm talking about the investments here, "There will be no more..." TRIPEPI: This diminishes your proceeds. FOUTZ: This locks up 1993. TRIPEPI: This locks up '93. The proceeds are there, the draw-down schedule. TAYLOR: But, any future sales and such, what is the policy? IMPERIAL: As far as I'm concerned, the policy should be that we are elected for four year terms, I don't think we ought to obligate somebody 15-20 years out. As far as I'm concerned, five years is a maximum. TAYLOR: That's my point. I want to make sure. IMPERIAL: We have no right to set policy for some other guy that might be sitting here trying over a great big problem. TAYLOR: It states in here the reason why that State has a five year limit. RRA 2-7-95 Page #20 BRUESCH: You're talking about two different things. WALLIN: The five years is dictated by the tax laws. If you have had other money, say tax increment that was not the proceeds of bond sales, you might be in a position where you would want to invest it pursuant to an investment policy, which might include investment beyond five years. But, we don't have that kind of money right now. FOUTZ: If you do a tax free issue next time, if there is a next time, you might want to do that. You might even want to authorize them into some blue chip American stuff. TRIPEPI: But that's up to the Agency. FOUTZ: That's right. WALLIN: But, we don't have that money to invest. FOUTZ: But in answer to your question, that would be a time and place. The flexibility of your investment committee would be to pick and choose, what all investments committees have to do, wherever they are. They pick and choose the best place to put it. BRUESCH: Let's cross that bridge when we close this. It has been moved and seconded to accept the bid of Structured Finance. TAYLOR: Has anybody read these... issues from 'Mr. Foutz. FOUTZ: They're just nice to know information, on the record. TAYLOR: But, your thirty years is worth something. I might disagree with you on some of it, but there is going to be some... FOUTZ: I don't expect anybody to agree with all that. IMPERIAL: Well, we're not saying you can't be the Treasurer. We're saying that more of five heads is better than one. TAYLOR: And, I'm not disputing that. That's not in the motion. That's not in this item tonight. BRUESCH: Hearing no more comments, we have a motion and second to accept Structured Finance. All in favor say Aye. All opposed... Vote taken from voting slip: Aye: Vasquez, Clark, Bruesch No: Imperial Abstain: Taylor Absent: None TAYLOR: Mr. Chairman. I abstain on this motion. IMPERIAL: I am opposed and want the record to show that if we broke this up I could probably go for that, but not the whole thing. I would like the minutes of this to be verbatim. BRUESCH: We have a three-one-one vote. VERBATIM MINUTES END B. RESOLUTION NO. 95-04 - AUTHORIZING THE EXECUTION AND DELIVERY OF FIRST SUPPLEMENTAL INDENTURES RELATING TO THE REDEVELOPMENT AGENCY SUBORDINATE LIEN TAX ALLOCATION BONDS, SERIES 1991 AND TAX ALLOCATION BONDS, SERIES 1993A AND SERIES 19936, AUTHORIZING THE EXECUTION AND THE DELIVERY OF INVESTMENT RRA 2-7-95 Page #21 • AGREEMENTS FOR AMOUNTS IN THE APPLICABLE REDEVELOPMENT FUNDS, AND AUTHORIZING CERTAIN OTHER OFFICIAL ACTION IN CONNECTION THEREWITH. The following resolution was presented to the Agency for adoption: RESOLUTION NO. 95-04 RESOLUTION AUTHORIZING THE EXECUTION AND DELIVERY OF FIRST SUPPLEMENTAL INDENTURES RELATING TO THE AGENCY'S SUBORDINATE LIEN TAX ALLOCATION BONDS, SERIES 1991 AND TAX ALLOCATION BONDS, SERIES 1993A AND SERIES 19938, AUTHORIZING THE EXECUTION AND DELIVERY OF INVESTMENT AGREEMENTS FOR AMOUNTS IN THE APPLICABLE REDEVELOPMENT FUNDS, AND AUTHORIZING CERTAIN OTHER OFFICIAL ACTION IN CONNECTION THEREWITH MOTION BY AGENCYMEMBER VASQUEZ, SECOND BYAGENCYMEMBER CLARKthat the Agency adopt Resolution No. 95-04. Vote resulted: Aye: Vasquez, Clark, Bruesch No: Taylor, Imperial Absent: None Abstain: None The Chairman declared said motion duly carried and so ordered. A 5-minute recess was called at this time and the meeting was reconvened accordingly. C. RESOLUTION NO. 95-04 -AUTHORIZING CERTAIN INVESTMENTS PURSUANT TO GOVERNMENT CODE SECTION 53601 The following resolution was presented to the Council for adoption: RESOLUTION NO. 95-04 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ROSEMEAD AUTHORIZING CERTAIN INVESTMENTS PURSUANT TO GOVERNMENT CODE SECTION 53601 Mr. Tripepi, presented the staff report and explained that this resolution will legalize investments which violated Government Code Section 53601 as it relates to investments longer that five years. Mr. Foutz explained that these investments have to five years unless authorized by the governing body. Mr. Foutz stated that this resolution authorizes certain investments with a maturity of longer than five years and, therefore, limits his flexibility in the future. MOTION BY COUNCILMEMBER VASQUEZ, SECOND BY COUNCILMEMBER CLARK that the Council adopt Resolution No. 95-04. Vote resulted: Yes: Clark, Bruesch, Vasquez, Imperial No: Taylor Absent: None Abstain: None Mayor Pro Tern Taylor stated that his NO vote was due to the provision in the Government Code that addresses two problem areas, namely, that an intermediate investment is not as sensitive as a long-term investment, thereby exposing public funds to less risk; and, should a government be permitted to lock up funds in long term investments for extended periods beyond those for which governments forecast needs. Mr. Taylor stated further that the Government Code should stay the way it is. RRA 2-7-95 Page #22 • • The Mayor declared said motion duly carried and so ordered. Discussion ensued regarding the establishment of a finance committee and an investment policy. Mr. Tripepi stated that these items will be on the next agenda. ;a Mayor Bruesch requested quarterly investment reports from Mr. Foutz. Councilman Imperial request that Mr. Tunney, from Merrill Lynch, be given an opportunity to speak. II. ORAL COMMUNICATIONS FROM THE AUDIENCE Tim Tunney, Merrill Lynch, stated that he has been in the financial services business for over 20 years. Mr. Tunney explained that the 1991 bonds were refinanced at the bottom of the market at a 5.71 % interest rate and that interest rates have climbed since until the Orange County crisis and have declined sharply since. He stated further that Mr. Foutz has served the City well for the past 30 years in all phases. Mr. Tunney explained that the 1991 bond proceeds of approximately $2 1 /2 million are the ones that the auditor may look at for arbitrage since they resulted from a tax free bond issue. Furthermore, over the years, the City has alternating taxable bond issues and in the future, any taxable bond issue is going to be questionable in the market. Mr. Tunney stated further that Mr. Foutz was able to repurchase $600,000 this past week on favorable terms. And, all investments made over the past 10 years were appropriate and in good faith and that Mr. Foutz could achieve the same results as Structured Finance. Mr. Tunney asked that the Council consider Merrill Lynch favorable in future investments. Mr. Tunney stated that. he looked into the issue of the 1993 bond proceeds and that 2/3 of them do not mature for 30 or 40 years, and that Mr. Foutz matched those maturities at a big spread, locked it in, and kept a large reserve. Further, when you go to a guaranteed investment contract with any carrier, you are locking the hands of the Treasurer for at least four or five years and reducing his flexibility. Mr. Tunney stated that Merrill Lynch could also provide the same service as Structured Finance. Councilmember Imperial thanked Mr. Tunney for all his help in the past. III. ADJOURNMENT There being no further business, the meeting was adjourned at 9:00 p.m. Respectfully Submitted, Agency cretary City Clerk RRA 2-7-95 Page #23 APPROVED WE SEE ALL AROUND US EVIDENCE OF "SLOW DOWN" OF RATE OF GROWTH. HIGH INCOME GROUPS HIGH UNEMPLOYMENT RATES LEAD SLOW DOWN. (CA 8.7%) "SEASONABLY ADJUSTED" FACTORS ARE FOCUSED ON DISAPPOINTING CHRISTMAS SALES, AND OTHER CONTINUING "BELLWEATHERS". ELECTRIC UTILITIES SLOW DOWN RATE OF GROWTH IS AN INDICATOR. 1996 SHOULD SHOW AN INCREASE IN VALUES OF ELECTRIC UTILITIES.(RUCKIZER + 1) OUR HORIZONTAL BOOM IS DUE FOR A CORRECTION. MR. GREENSMPAN AT FEDS SAYS AND ARTIFICIAL INTEREST MANIPULATION AT AN END. COMBINING NOW, THIS CONFLICT OF DATA AND RECOMMENDATION SUGGESTS A SYNTHESIS. I CAN WORK IT OUT SO THAT SAFETY IS MAINTAINED WITH MINIMUM LOSS OR PROFIT, TOO. "85% INVESTED" AND COMPLETION DELAYS, = 15% HOLDING AND COMPLETION DELAYS ANYWAY. A LOOK AT SKILLFUL UNIT MANAGEMENT OF OUR SENIOR HOUSING UNITS AND THEIR SOLIDARITY FINANCES WILL DIRECT FUTURE PROJECTS BALANCE IN TIMING OUR PORTFOLIO. LETS REPLACE THIS WAVE OF PESSIMISSM WITH AN OBJECT TO COMPLETION & FAITH IN THE SYSTEM. FLEXIBILITY IN THE MARKET REMAINS AN OPTION NEEDED. TREASURERS DUTIES REMAIN SEPERATED FROM MANAGERS ASSIGNMENT AS A CHECK AND BALANCE SYSTEM. EMPLOYEES REPORT ONLY TO THE MANAGER. MANAGER APPEARS TO BE PERSONALLY MOTIVATED IN THIS PARTICULAR CONTRACT. A CHECK & BALANCE SYSTEM IS WHAT TREASURER DOES, IF NEW DIRECTION IS DIRECTED, TREASURER CAN DO IT WITH TREASURY CERTIFICATES OR OTHER GOVERNMENT SOLID FUNDS AND MINIMIZE THE INITIAL SELL DOWN AND STILL MEET THE FIVE YEAR SCHEDULE AT THE SAME PROFIT LEVEL. THESE ARE BID BONDS AT MARKET. Hubert E. Foutz Treasurer, City of Rosemead r l W _ \ ~F $ t 1 nH j Hugh Fouts • - 'City Treasurer City of Rosemead I BELIEVE THE INTEREST RATE DECLINE THIS YEAR WILL BE DRIVEN BY A CYCLE SWING BACK FROM INFLATION. THE PENDULUM SWING DOWNWARD SHOULD BE AIDED BY THE EUROPEAN FLOOD, JAPANESE EARTHQUAKE AND AMERICAN HEMOSPHERE NEEDS TO EXPAND. WHEN WE BUY FRUIT OR GOODS FROM PERU OR CHILI OR OIL FROM MEXICO, THEY THEN HAVE DOLLARS TO BUY THE COMPUTERS AND TECHNOLOGY NECESSARY TO ADVANCE THEIR EDUCATIONAL STANDARDS OF THEIR PEOPLE AND INCREASE THEIR STABILITY. OUR HEMOSPHERE LEADERSHIP IS OUR OWN MARKET. IT SHOULD NOT BECOME THE MARKET OF THE ASIANS OR OTHERS, UNLESS WE FAIL TO SEEK THAT FOR OURSELVES. WITH OUR DOLLARS, THEY CAN BUY OUR TECHNOLOGY! THOSE WHO HAVE KNOWLEDGE HAVE THE PECULIAR RESPONSIBILITY TO BE SENSITIVE TO THE ILLS OF THE WORLD, FOR IF THEY ARE NOT, IT WILL BE THE IGNORANT WHO ARE MOVERS OF EVENTS, AND THE VALUE OF KNOWLEDGE WILL BE LOST. - -Kenneth Boling, Economist r HUGH FOUTZ POSiIIO92-4-95 REGARDING RDA 1993 RECOYIMENDATIONS BY CITY %!A-%AGER S :Bt. JOHN BOLEN' I. ALL INVESTMENTS HAVE ALWAYS BEEN CLEARLY REPORTED. NO SUDDEN DISCOVERY. 2. THE ESTABLISHED >'.ETHODOLOGY OF INVESTMENTS HAS BEEN WELL DEMONSTRATED. 3. ALI. INVESTMENTS ARE SOLID C.S.A. 5. WE ARE NOT IN A PINCH. 5. PLENTY OF MONEY KEPT ASIDE AND AVAILABLE TO MEET DEMANDS AHEAD. 6. ARBITRAGE DOES SPREAD OUT. :;ONE HAS BEEN PAID WHEN REPORTS SUBMITTED. 7. S250,000 LAST YEAR WAS NOT TAXED. (OUR EXTRA PROFITS) 8. THIS HASN'T BEEN ILLEGAL. 9. ANY CHANGES RECOMMENDED WILL REQUIRE A MODIFICATION AMENDMENT TO ISSUE. 10. FIVE YEAR SPENDING LIMIT COULD BE MODIFIED TOO IF IT WERE NECESSART . 11. CONTINUATION OF PRESENT DIRECTION CAN BE ACCOMODATED WITHOUT CHANGE/LOSS. 12. GENERAL RE FINANCIAL PRODUCTS CORP, LOWIBIDDER, IS INVESTED IN ASIA & EUROPE. 13. OUR LOSS WOULD BE OTHERS PROFITS. 14. FEDERAL RESERVE BOARD CHAIRMAN SAYS THE MARKET IS IN CORRECTION, DOWN. 15. .OTHER MORE DESIREABLE PLACES TO MAKE SUCH DRASTIC CORRECTION AS) WAS RECOMMENDE 16. ALTERNATIVE: KEEP THE GOVT TVA's WHICH ARE NOW AT MARKET. WITH NO LOSS. 17. IF CONSIDERED IMPERATIVE, SELL UTILITIES ONLY. INVEST IN TREASURY CERTIFICATES. 18. GUARANTEES OF THESE CERTIFICATES ARE AWAYS AVAILABLE, AND ARE AT MARKET. 19. THERE IS ENOUGH "CASH ON HAND" TO MEET OUR OBLIGATIONS. 20. TREASURY CERTIFICATES ARE BETTER THAN THIRD PARTY BIDDERS. I CAN DO IT, TOO. 21. NO FORMAT, BOND MODIFICATIONS NEED TO FIT MY DESIGN. 22. PLEASE DON'T PANIC. 23. I CONTINUE TO SERVE THE COUNCIL AND ROSEMEAD. HUBERT E. FOL'TZ Treasurer Citv of Rosemead Fig. 3. Cyclical expansions fol. low contractions, with turning points in between. The Na. tional Bureau of Economic Re- search has dated these phases for America's history and for many other countries. Not every peak reaches "prosper- ity" in the sense of low unemployment. The pendulum of inflation has been curbed for now, and swings back down the earnings curve this year. It is my desire to give this challenge its best construction in the interest of Rosemead. J it ':Er.. e x' % r o lne r+c ~ x,7€ r. The business cycle, like the year, has its seasons: