Proposal:
Analysis of AQMD Treasury Management Options
Synopsis:
This report identifies and evaluates various treasury management options available to the AQMD, including the costs and benefits of implementing each option. Over the last several months the Administrative Committee has been reviewing AQMD's investment and cash management programs performed by the County of Los Angeles. Based upon concerns highlighted by the Orange County bankruptcy, the Administrative Committee has directed staff to provide to the Board an objective comparison of the various treasury management options available to the AQMD and the costs, risks, and benefits associated with each recommendation.
Committee:
Administrative, February 16, 1996, recommended for approval.
Recommended Action:
Adopt the Administrative Committee's recommendation directing staff to implement Option II creating an in-house AQMD treasury management function and return to the Board for specific approval authorizing:
- Establishment of an Investment Oversight Committee
- Initiation of the selection of a Financial Advisor
- Development of an AQMD Investment Policy and Guidelines
- Initiation of the selection of new Banking and Custodial services
- Initiation of the selection of an Independent Investment Management Firm
- Appointment of a new AQMD Treasurer
James M. Lents, Ph.D.
Executive Officer
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Background
Since the AQMD was created in 1977, the County of Los Angeles, under a General Services Agreement, has provided the AQMD with treasury management services which include the processing of payroll and accounts payable warrants and the investment of the AQMD's cash balances. AQMD's cash balances are currently held in eight separate funds in trust with the County and are segregated for accounting purposes from other funds maintained by the Treasurer for Los Angeles County, cities, and other special districts. Prior to September 1995, all AQMD funds held by the County Treasurer were invested in the County's $7.0 billion Pooled Surplus Investment Portfolio (PSIP). In September 1995, the AQMD directed the Los Angeles County Treasurer to invest up to $20 million of the AQMD's funds in the Local Agency Investment Fund (LAIF), which is a $8.0 billion pooled investment fund managed by the California State Treasurer. As of December 31, 1995, the AQMD had $51.4 million invested in the PSIP and $19.5 invested in LAIF.
Policy Issues
The Administrative Committee has been evaluating the financial risks to the AQMD because of its participation in the County's PSIP should the County declare insolvency as a result of its budgetary problems. At its December meeting the Administrative Committee directed staff to report back to the full Board regarding the costs and risks associated with the treasury management options available to the AQMD.
The AQMD has received a reasoned analysis from outside legal counsel regarding the bankruptcy risks to the AQMD funds invested in the Los Angeles County PSIP. This analysis made a significant distinction between the commingled funds in the PSIP and separate accounts in a bankruptcy situation, and expressed that the risks to AQMD funds invested in separate noncommingled investments would be greatly reduced.
Based on this legal analysis and the attached report prepared by outside financial advisors, staff has developed two recommended treasury management options, each with different benefits and costs, which are responsive to the varying degree of perceived risk associated with Los Angeles County solvency. Both options reduce the solvency risks associated with the AQMD's participation in the County's PSIP by moving a significant portion of our investments out of the County's commingled pool and taking a more active role in the short-and-intermediate term investment market. Option I is recommended if the Board perceives the solvency risk to be low and Option II is recommended if the Board believes that the risk is high.
Option I: Los Angeles County Treasury Management - preserves the current benefits of low cost banking and investment services with greater diversification, oversight and control. This option proposes placing approximately 85% of our investments into separate accounts outside of the PSIP (into LAIF and the County's Special Purpose Investment Portfolio) to minimize commingling
Option II - AQMD Treasury Management - requires the appointment of a new internal Treasurer, new expanded banking services, higher oversight and control responsibilities, modest increase in investment risk, potential of increased earnings and higher banking and investment service costs. This option proposes maintaining short-term investments in both the PSIP and LAIF, plus actively managing through an outside portfolio manager an intermediate-term investment account.
It is important to note that the Los Angeles County PSIP currently and historically has had a conservative Investment Policy and Guidelines, a conservative investment program strategy and experienced management and investment staff. The PSIP is the second largest pooled investment program in California, exceeded only by the Pooled Money Investment Account of the State of California. Because of its size and conservative investment policy the PSIP provides its participants a solid return from an investment program which emphasizes safety and liquidity at low administrative cost. Both recommended options include a continued modest level of participation in the PSIP because of the safety and daily liquidity provided by the PSIP to meet AQMD payroll and accounts payable demands.
Resource Impacts
The two treasury management options recommended for Board consideration carry additional costs of approximately $20,000 for Option I to approximately $165,000 for Option II annually.
Attachment (Down Load self-extracting compressed attachment package for this letter in M.S. Office 4.2. )
1. Legal opinion on Use of Los Angeles County as District Treasurer; Bankruptcy Concerns
2. Report on Evaluation of Treasury Management Options and Investment Alternatives
(Treasury)