Audit Committee - Regular Meeting

The consent item consists of the three items that are listed on our agenda. I don't see a staff report, although there is a staff report for one of the items. Is there something you wanna say? Introduce us to the consent item, Jonathan.

So after, listening, to past discussions and to expedite some of our meetings, some of the more routine, items such as the the previous minutes or quarterly reports, If there's nothing noteworthy, we would keep a consent so that we can move on to other businesses and spend a bit more time there instead of it leading over to a following meeting. As is, we have a short window to to conduct this meeting of two hours, and sometimes it does kinda bleed over. So for that reason, we we introduced the consent calendar.

Any clarifying questions? I think, Mayor, you've mentioned that we can actually discuss the items if we want.

I do have a question. But Yeah. So so you can go to public comment and see if any members of the public have a comment on consent. And then if we have comments, we make them, and then the consent calendar is full. And so rather than pulling it, do that. So Okay.

Yeah. Actually, you could ask clarifying questions now if you'd like in advance of the public comments.

Sounds good. Okay. So I pulled the cash and investment bank balance from 2022 from the May 31 meeting and and then today's balance. And I was curious about the local agency investment fund. It was at 21,000,000, and now it's at 73,000,000.

And I think he I I was just wondering, was that purely did did we contribute to that? I think we might have. And if you do you recall how much we contributed to it? And and then is the rest of the gain from the investments in it? Wanna see it?

Yeah. Yeah. I well, I I can tell you. So as part of our cash management process that we've started refining over the course of last year, we started using Leith as essentially our our go to fund to pull cash as it's needed. So instead of holding up into our cash interest cash bearing checking account, we are using Leith to to to transfer funds back and forth, so any excess funds.

And so as as there is sometimes an unneed for immediate cash, we'll just leave it in lathe, and then we'll draw it draw on it. As you can see, our checking account, at at this point, it's we wanna maintain $5,000,000. We'll eventually kinda keep lowering it down, but you can probably see about $7 this last go around. We transferred funds in from Lathe to cover payroll, which occurred that week. So we have to have a little bit of leeway time. So it's not

so by now, it's not really

It's back down to to We're trying to manage it at 5. And so we're just using Leith as the the the vehicle or the the investment where we can house most of the water the the fuel sorry. Most of the funds that are are yet to be identified as a need or if there is a potential need, say, a large project in the near future or there's discussions with city hall. And so we kept that variable. And so as we and we can kinda chat about it if we the quarterly investment with Chandler's pool. But over time, if we identify, no, these funds are not gonna be needed over the course of the next year, we'll likely just transfer it to Chandler, and Chandler will manage it with bonds and other investments.

Okay. And is there a upper limit for Leif that you can have?

75,000,000. 70. So we're approaching that that that cap. Likely, we'll have to transfer some funds into Chandler in the near future, probably within the by the end of this week. And there's quite a bit of money sitting in late, so I I highly doubt that we'll be needing to tap into that money anytime soon. And so they'll be able to invest it into a investment that's probably in that really that five year term.

Okay. That's it. Thank you.

Very good. Any other questions? Sonia, you have no? No. I'm pretty good too this time. So why don't we move to public comments if there are any?

We have no hands raised on Zoom and no speakers in person sharing.

Great. So we'll move right through that item. Thanks, Lindsay. So let me invite a motion on our consent calendar items.

Moors so moved.

Is there a second? I second. Excellent. We've got our action items and the motion. Any further discussion on any of these items? Again, we can discuss them now if we like. Excellent. Let's take a vote. All in favor, aye. Aye. Unanimous. Motion carries. Exciting first step of our consent calendar, which I look forward to experimenting with you and Lauren in the future. Thanks, everybody. Alright.

So item four, our agenda item is the appointment of chair and vice chair. It's a new year, so it is time to look at that. So Staff report, we don't have one.

Correct. There is no staff report. This conversation is mainly gonna be had by the the chair and committee members to to discuss who'll be the next chair or continue from the existing chair.

Great. So I can throw it out in the public comment. Are there any?

We have no hands raised on Zoom chair.

Okay. Well, we'll pass through that then. And now I'll invite a motion for a discussion depending on how we need to get to the point.

Not ready to go. Second.

Okay. So that went pretty smoothly. We also need a vice chair. So should we cover that at the same time? Does this stay in motion? You can

do it that way, or you can separate it out. But are you accepting the nomination? I

Yes. I'll accept. Yes. Thanks for everyone. No objections from city staff? Certainly not. No one else in the public commenting. So yeah. Okay. Why don't we take a vote on that motion now? All in favor? Aye. Again, thanks everyone for your vote of confidence, which, you know, it's always a mixed emotion. Being chair is a great responsibility. On the other hand, it's a great responsibility. So alright. So now we need a vice chair. Let me nominate Panyan if you're willing to serve. Happy to help. Thank Great.

Is there a second? Second. Alright. We've got a motion. Any more communication on the motion? All in favor, let's take a vote. Aye. Aye. Very unanimously. We're very efficient. Welcome aboard, I look forward to Yeah. Your partnership. Your your help again this year. Okay. So item five, agenda, is the one that we actually deferred from last time because of the slight wording of incorrectness.

So we've got we received the OPEB and pension one fifteen trust investment policy and recommended to forward it to city council. So why don't we start off with the staff report? You could, Jonathan.

Just point of clarification. There was a presentation that was erroneously attached to a different item, which was the quarterly report. We have provided it here as a as part of this item and as a desk item. That goes a bit into the the the the presentation that Dennis will be presenting on shortly here.

Great.

Thank you. To Dennis.

Turn it over to Dennis.

Thank you so much, committee.

Welcome, Jennifer, and I'm Dennis. You. Thank you

for having us. Did you want us to share the presentation, Jonathan, or will you be sharing it on your end?

Can you please share it?

Yes. K. Perfect. And then, Dennis, just let me know what pages and go ahead when you start seeing it.

Okay. Let's go ahead and start with page five. I'm going to go through and hit the highlights here.

Dennis, can we actually, we the quarter report was part of the consent calendar. If you can jump right into the presentation on the, ESG.

Oh, good.

We're discussed.

Okay. Absolutely. Okay. So here, I'll begin on page four, Jennifer. Okay.

The quick recap, there there have been some questions about some fairly broad topics. One is investments in fossil fuels in the portfolios. Another would be the the topic of data centers came up, and then that kinda opened up the conversation a little bit into the topic of customizing the portfolio, managing with environmental, social, and governance objectives, and how we might accomplish that. This presentation is a very quick overview of of how that's done. The differences in performance, the differences in concentration, and the differences in cost.

So the idea here is to just take the conversation maybe to the next level and and address those concerns. I'm gonna start off here by talking a little bit about fossil fuels in particular, and then we sort of broaden the topic as we go through this presentation. On page four, you can see, we looked at your, we looked at US equity exposure, eliminating fossil fuel investments, and whether or not it would be detrimental to investment return. On the bottom right hand numbers on the lower table on page four, you can see that for the last fifteen years, eliminating fossil fuels from a US equity portfolio actually increases your return by about a half a percent. 15 o six versus fourteen fifty two.

And this compares the MSCI USA index, US stocks to, the MSCI USA x fossil fuels. So, again, that just gives you a little bit of idea. It basically says that eliminating fossil fuels from The US equity portfolio is not a big deal when it comes to performance. Let's go to the next page, page five.

Yes. Can we ask you a quick question?

Of course.

Okay. I'm just wondering if this has anything to do with the kind of pro solar, pro offshore wind environment that we had been during that time frame and how it's changed now with the current administration? Like, that's been the history, but then we expect that to you know, can we predict how that's gonna continue? And do we have some inform for for 2025? Yeah.

So I have noticed there's been an increase in in production and turnover in, like, Texas oil. The there there's been a lot of activity, and it seems like they're pumping more. So I'm wondering if it's, yeah, increased.

I have no information to answer your question. I'd have to guess, but I'm I'm hesitant to do that. I can definitely make a note to to dig into that later.

Yeah. And I mean and he's you know, that we'll have this administration for not not so many years in the future, and then and then probably have some change. So we need to weigh that as well for how long it's it'll be this type of environment that's more pro oil than what we've seen in the past. Alright.

Good no. Good point. Keep in mind though in that fifteen year period that we're showing here, there was a previous Trump administration, and I don't know if I don't know if the needle can be moved that quickly.

That's a good

In a four year administration. Yeah.

So it was 2016. Right? And for those yeah. For most of those years, without oil, it it was doing better. Okay. That that's good.

Yeah. Just yeah. It and and the key to this is that, energy itself is a small portion. Now let me go to the next slide, page five.

Alright. Thank you.

And and that'll kind of expand upon this answer. So a next concern we look at is risk concentration. Would it really would eliminating one industry cause you to be way overweighted in the other industries? And the answer is simply no. Entire market is in the bottom right hand pie chart.

And if you can dig that out, it shows energy is 2.84% of the overall market, The US stock market. If we were to eliminate fossil fuel companies from the energy sector, you get the pie chart on the bottom left hand side, which leaves you with I'm sorry. Energy at 0.65%. It's just not a big enough industry sector to change all of the weights. So, again, to recap on page four, we said performance is not a big difference, almost immeasurable. On page five, we're showing that we don't have any concerns about overweighting another sector because we eliminated a sector.

So, Dennis, while we're looking at these two pages, is there a reason you focused on The US rather than the entire MSCI? I think that's our portfolio. There's an entire worldwide portfolio. Correct?

In my conversations with our ESG team, I think it's just based on data availability. We'd like to slice and dice a lot of the portfolio in a in a more granular level, but a lot of the information isn't readily available right now.

But I just I guess we can make some conclusions or deductions that on an international basis, the fossil fuels would not be significantly different.

Correct. Yeah.

Simplicity. Yes. Yep.

Okay. So let's go to page, let's go let's go forward, Jennifer. I think we go to page seven next. Yeah. We got a divider in there. Alright. So let's look at cost. So we again, to review, it didn't make a big difference on performance, didn't make a big difference in concentration. Let's look at cost. Your current lineup real quick note about expense ratios.

They can be confusing because every mutual fund that we use in your mute in your portfolios, every ETF charges an expense ratio. Those expense ratios are what the fund family charges to operate the fund. They are always taken out of performance. So we never need to adjust the performance returns for these numbers. We're actually adding them back in. So keep that in mind as we look at them. Your current expense ratio on a weighted average basis is 12 basis points, 0.12%. 1% is 100 basis points. So this is twelve one hundredths of a percent. That's what you're currently paying.

So let's go to the next page, Jennifer. If we were to go with the lineup of funds that is shown here, which is our recommended ESG fund lineup, your overall expense ratio goes to 17 basis points or point 17%. Now you have $73,000,000 invested here. And so the the fees on the the expense ratios on the current fund lineup are about 86,000, $87,000 a year. And, again, be careful with these numbers.

Instead of looking at it as $87,000, I think it's more instructive to look at it as 12 basis points because you've got an enormous amount of money invested here, $73,000,000. So it comes to about again, 12 basis points comes to about $86,000. If we were to go with this sample ESG, environmental, social, and governance fund lineup, your expense ratios would go from 12 to 17 basis points. 17 basis points using that same market value is a $123,000 and change, a difference or a delta of about $36,000. A change of five basis points, which comes to about $36,000 on 72,000,000.

And, again, instead of looking at it as $36,000 difference, I look at it as five bips. Very little change. And, again, these expense ratios are always netted out of performance. We looked at performance before, and there's almost no difference. So so to recap, no big difference in performance. No big difference in concentration. In my opinion, not a big difference in fees.

So the reason these costs go up is because you're tracking something special, ESG. So there's some administrative cost somewhere. It causes it to pay five ships.

The mutual fund companies are charging a little bit more for a variety of reasons. These are smaller funds. They're spreading some expenses out over a smaller base. It but it's more active management. Right? The the funds you're in right now are index funds. They're the easiest to run. There's not a there's not an investment committee that meets and talks about what investments they like or don't like. When you get into the active management here to, to achieve the ESG goals, you've got a little more discretion. You've got people doing research on individual companies.

The mutual fund company is buying research from Sustainalytics and other analytical companies who measure effectiveness of companies meeting environmental social goals. They charge more.

Got it. Thanks. I have a question. So to to include in this ESG index, is it is it beyond excluding fossil fuel companies?

Like Oh, yeah.

What is it?

Yes. It goes beyond that. No. I'll talk about that in a second. Yeah.

One thing. This this our risk and high income fund, the expense ratio, even though it's a smaller part of the portfolio, it's only 5%. The expense ratio just jumps out of the page. It's like order back to higher than everything else.

Yeah. That's an actively that's an actively managed fund, and that's actually the fund we're in now. That's a typo. It's artisan. I did not notice the typo before. I apologize for that. Most actively managed funds have an expense ratio between, say, 50 basis points and a 100. Some of them are over a 100 depending on exactly what they're doing. It's they've all been coming down over the last ten or fifteen years. But for an actively managed high income bond fund, that's that's not an unusual expense ratio at all.

So that's a very high fee compared to the others, but it's a very small position. So it really doesn't raise our overall fees that much.

I I guess it does raise the question, Dennis, of of are we getting the higher performance for the higher fees since it is obviously an outlier as as the vice chair points out here. Even though we're on the topic of ESG, it does raise the question, why are we investing in such a high high expense fund? I presume because we're getting a lot better performance. But that's something I haven't necessarily seen in past reports because I may not be paying attention or maybe you can guide us to that at some point.

I've I'll make a note of that, and I'll run a comparison of Artisan net of fees versus the other alternatives net of fees.

Super. That'd be great follow-up. Thank you.

Okay. Okay. Let's go to page nine, please. Okay. So here's another idea.

So what I've talked about so far is using a lineup of mutual funds called ESG funds. There's another alternative, and that's customized separately managed accounts. If you said if you were to look at the mutual funds that I I showed as a sample so far, if you were to look at those and say, well, that's not that's not good enough. I don't, I wanna exclude particular companies, and I want tremendous control over what goes in this portfolio. What we do then is we hire an SMA manager, separately managed account.

Instead of buying shares of a mutual fund to get the exposure to an asset class, I e, large cap US stocks, small cap US stocks, developed foreign, or emerging foreign, what we do is we hire a manager who's going to buy individual stocks, and

they're

gonna buy them in accordance with the instructions we give them. And we partner with a company called Parametric here. So what we did for the sake of simplicity is we just plugged in Parametric for each of the asset classes and equity asset classes. The expenses go up a little bit, but what really goes up, and and I've mentioned this before, is the complexity. Right now, your portfolio holds at most times 10 or 11 securities, individual mutual funds.

If we were to go with this as presented right here, that very first line, parametric custom US equity SMA would probably hold 250 stocks. And then the the small cap manager, which is the second one shown there, we use the exact same verbiage. It should say small cap, would probably hold another 250 stops. So the accounting complexity goes up exponentially. And, again, ways that this manifests your statement, which now I'm guessing your your custody statement from US Bank is a listing of securities is a page and a half.

That's gonna be 75 pages. And each month, you're gonna have dividend payments, you're gonna have purchases and sales, and you're gonna have corporate actions, which are stock splits, mergers, reverse stock splits, spin offs. And, again, the accounting complexity can be mind boggling. The I just wanted to show this that it's there it is there is an option. If you were so inclined to say, it's not good enough for me to just have ESG funds, I want to exclude the following companies.

I don't typically recommend this because

Oh, okay.

They they now you're in you're in effect, you're managing the portfolio. Yeah. So, you know, just something to keep in mind. Is it available? Yes. It's available. But and I don't know how you do your accounting, whether you're using a data feed into your accounting system. I have met with municipalities who account for every security one at a time. And in those instances, they would have to hire additional accounting staff to

cover that.

So just something to keep in mind.

Dennis, wouldn't this kind of a more detailed portfolio apply to also a taxable portfolio, which the city is not in that situation either. So tax harvest

Yes. Yeah. Exactly. It gives you tremendous control. Yeah.

Really need to go for tax purposes since that's not relevant. Yeah. But okay. Gotcha. It's SMA. An option.

Just an option. Yep. Okay. Page 10, please, Jennifer. Okay.

Let's couple of thing. So I've already covered ESG funds. Again, no no real impact on performance, no real impact on concentration, no real impact on cost. Now in my opinion, I don't think that's a real impact. SMA is an option.

I wanna look at I wanna show you something else here, and this is the way, some of this work is done on the ESG funds. There's a company called Sustainalytics that Morningstar purchased in 2020, and they score fossil fuel companies on two metrics. One is called a carbon risk score, and that is an indication of the risk the company faces from the transition to a low carbon economy. The other one, which I'll go through in the next pages, so is called carbon involvement, and that's how involved is a company in, in carbon, based on their revenues. So, on page 11, here's the takeaway.

Your existing portfolio has an overall carbon risk score of 7.4 compared to the MSCI ACWI, the overall market, and now this does include non US companies here, of seven. So the only takeaway here is you've got a little bit higher carbon risk score than the overall market. Now let's compare. Let's go to page 12. Page 12 is carbon involvement.

You've got a little lower overall risk score on carbon involvement than the overall market. Okay? Now let's go forward to the next two pages, fourteen and fifteen. On page 14, if we were to go with the sample ESG fund lineup using the same scores from Sustainalytics, Whereas before, today, you have a carbon risk score of 7.4 compared to the market of seven. Using these ESG funds, you would have a carbon risk score of 5.5 compared to the overall market of seven.

And let's go to the go ahead.

Go ahead. Just to to clarify, go go back to the to your slide. The the the lowering of the risk get hit. Maybe the the the mayor had a good question about current politics. But I guess even though this is a lower risk now, if somehow there's a change in politics, that would mean it would have to mean if if suddenly fossil fuels are more desirable, that would mean a much higher risk than the market in effect.

Yeah. We'd have to definitely watch what's going on with the industry and which way the political winds are blowing because because everything could be in flux.

It may not always be great because of the the historical numbers that you're looking at.

Yes. Correct.

K. Great. Thanks. Yep.

And then page 15, the next one, we looked at carbon involvement before. You have a right now, you have a 7.6 score versus the market's 8.4. If we were to go with these ESG funds, you would have a 4.4 carbon involvement score, and that makes sense. Right? We're we're getting out of fossil fuel related companies, and so our carbon involvement based on revenues goes way down.

We would go from currently 7.6 down to 4.4 where the market is at eight eight point four. Okay. And I'm almost done here. If you go to page, 16, let's look at what happens very quickly if we if we go with the separately managed account. The way you do that is we go to Parametric and we say, this is how we want the portfolio customized.

And go to the next page, please. They can screen based on almost anything. And here's a list of some of the governance and you know, this all started this all started with companies wanting to mainly, either religious organizations or universities wanting to limit exposure to tobacco, alcohol, or gambling. And then it really took hold with apartheid in South Africa years ago, and this is a relatively young industry. And so there are companies out there that can screen portfolios based on whatever I mean, we have very liberal organizations.

We have very conservative organizations. Sometimes they're on opposite sides of an issue, but it's important to both of them that they invest in a manner that's consistent with their values. So and, this this is just a couple of slides that illustrate what is the process with a separately managed portfolio, the screening. And, I I think that wraps it up. So so what's the conclusion?

Making the move to ESG funds will be very easy. Shouldn't have a big difference in performance. Not a big jump in costs. Making the move to a separately managed portfolio would be much more involved.

Okay. Got it. Thank you, Dennis. Why don't we, throw it open to the committee, verify his question? If there are here may have originated this.

Oh, yeah. Well, I was thinking in terms of plastics and if we make a move away from fossil fuels, are would that also mean that we are sending a a message that we are not in support of the manufacture of all the single use plastics. It's it's coming up a huge well, it's been a huge problem.

The the ESG funds I'm sorry. I'm struggling with my own notes here. The ESG funds, let me look. I think I have

sorry. It's sort of a side side question. I want what I'm wanting to know is if we're we can kill two birds with one stone by pulling away from fossil fuel, also saying that we're not in support of all this plastic waste, and we'd like to see a deep

Yes. Absolutely. Yeah. Let's go

Dennis, I think there's

There's my note. Let's go forward to page 20 let's go to the appendix, page 21 21. Question, by the way. So you're gonna kill a lot more than than and this goes to the vice chair's question earlier. You're gonna kill a lot more than than one bird with that stone.

So this is a a more of an example of the Sustainalytics, scoring. They score all of the holdings of these mutual funds based on a pretty broad, list of things. Let me see. Did they go into detail here? No.

Unfortunately, they don't. As another follow-up, I can get you more detail on what goes into the ESG risk scores. And this is a series of charts. Okay. On page 21, your current pension, just using one of the accounts as an example because they're managed identically, has a corporate sustainability score of 19 compared to the market 18.6.

We're actually already a little higher. Okay. So lower scores here are better. I'm sorry. So we're a little higher than the market overall, but very close.

And what they do is they rank sustainability on a zero to 100 scale, lower scores are better. Okay. And if you go to page 23, just like before, we compare the sample ESG fund lineup to the same market benchmark. And instead of being a little higher at 19 versus 18.6, you'd be at 17.4. Now we wouldn't be able to say we have eliminated any investments in anybody who produces single use plastics, but we would be able to say that we've moved in that direction in a cost effective way, you know, and we're monitoring it.

So but I'll have to I'd have to follow-up and get you a detailed listing of everything they're looking at.

Okay. Yeah.

Any questions, Harlan?

Just a real quick comment. I actually follow this guy who runs this Norwegian sovereign wealth fund. You know, he's like Norwegian sovereign wealth fund's the largest government kind of Norwegian government's retirement fund. And I think, like, they the guy who's running the fund, he does a pretty good podcast interviewing CEOs of the companies that he owns part of. I was reading up upon kinda how they deal with, you know, ESG related. They actually have something called an ethical council where they kinda, like, have these active discussions on what companies to divest from their portfolio. They have $2,000,000,000,000 under there

Right.

In their portfolios that weren't the largest money manager in the public sector. So I'm just curious, like, you know, Dennis, on your end, like, what do you consider as, like, best practices? Like, when you look at these, like, ESG fund, like, what is the what does great look like? What does good look like? And what are some of the things that they kinda you know, you mentioned here, like, here, there's a score, but, like, you know, is there any way for us to get some insight into what kind of what makes a 100 a 100 score versus, like, 80%. I don't know. Just just a comment, not not really something that we can board the ocean over today.

No. Very very good comment. So if you wanna go in this direction, what I would suggest next is is that we come to the table with the list of recommended ESG funds, and then we can go into much greater detail as who runs that fund and what do they consider to be what what is it that makes it an ESG fund? What which issues are they investing around, and which ones do they give weight to? Which ones do they not give weight to? Things like that.

Yeah. I think, Dennis, that may be helpful depending on what the committee as a as a whole here is saying. So I I guess some of my thoughts on as we open the door to ESG, I think maybe question is also opening the door to how do you measure these risk profiles? I mean, this is one company's that that was just learning about that's doing this, and and there's probably many other methods of measuring things as well as setting policy and and, you know, other types of individual stocks that various people have opposition to. And so I guess my initial thought is the SMA seems clearly too too extensive, active management for for what I think our appetite is.

But this is another form of active management. It's just not as active as 200, you know, 2,500 shares of of different stocks. So, again, I've got a bit of a prejudice against going too far in the active management side because there's many doors, and and I'm not excluding any door. But on the other hand, you do have a position if you're a if you're if you're tracking market indexes, you've got a a reasonable portfolio position to say, well, what's our risk in that portfolio? Maybe as a policy, the city can separately say it's opposed to whatever it's supposed to at the city council level, that makes a lot of sense because they're the policy center people.

But as we're investing funds for the retirement security of the of the folks in the city, I'm a little hesitant to go active management, in quite the way that, I guess, I'm expressing here. There's so many doors and mirrors that I'm not familiar enough with that I could see lots of analysis being down the road when people raise these issues rather than just say, well, this isn't the the role necessarily for us to take that kind of act of management. Could be another policy forum that that is the place for that to occur, but not necessarily in the the one one five trust in the OPEB. So those are my thoughts coming out. Are you seeing a lot of cities recently move in this direction?

What's your what's your pulse on this that are we so far behind that we haven't been looking at this and now we need to?

No. I have in the last I've been doing this forty years, and in the last ten, this has been limited to religious orders and and and church sponsored universities, colleges. It it has not really become commonplace in the public sector, and you you were getting into the reason right there. As fiduciaries, we've gotta be really careful about how far we alter the portfolio based on our environmental, social, and governance goals. Because the risk is we limit things from being in the portfolio.

The risk becomes that returns start to lag. And, if you look historically, just removing fossil fuels, it it it hasn't really had an impact on the portfolio. As we start to lay more and more restrictions on the portfolio, we start to get a little farther out on that limb of you know, we've gotta be careful. And if I'm not mistaken, I think this affected CalPERS in the last several years. I think it was four or five years ago.

They had some elected positions that were challenged because of their foray into ESG investing practices that didn't turn out really well. Now Right. You know yeah. They went

A plus. But, yeah, that Bayer, why don't you choose?

So looking at the plastics question, because I think, you know, for a lot of us, that seems like a noble thing to to get away from supporting that. And but so I just took the your domestic equity iShares ESG optimized MSCI USA ETF and asked AI about it. And, yeah, does does does this ETF invest in companies that generate a lot of plastics was my general question. And it said it can because it doesn't specifically screen for plastic generation or waste. The fund's investment strategy focuses on positive ESG characteristics in aggregate and in aggregate and apply specific screens.

Major holdings, its top holdings are largely technology companies like NVIDIA, Apple, etcetera. However, it does hold companies in the consumer defensive sector sector such as Coca Cola, which is a major global user of plastic in packaging. In short, while the fund avoids the producers of raw materials, it still holds companies and industries like consumer goods and retail. So I think it it gets it would get challenging. Like, you could say, well, this the fossil fuels is one thing.

But if we're going after synthetic clothing, going after bottles and bags and, you know, we're then we get into exactly what Dennis is describing in regards to our fiduciary duty problem. Yep. So where do you what can you do, and where do you stop?

Let's Maybe this is fire from city staff to clarify what city staff may have analyzed and thought about this issue.

Yeah. It it it really falls on finding the balance. Right? If we go into this SMA and heavily restrict then it becomes a in that Marifas thing, you'd wanna move away from Coca Cola or even possible NVIDIA. Right? NVIDIA has that. But then again, you're also taking a a grenade to your investment or your returns. Right? And so it's finding that balance. Maybe by eliminating the fossil fuels, you're getting rid of the, essentially, the the the root. You're not gonna get rid of all of it. Right? There's still gonna be some some companies that that that that use fossil fuels that might even stay. Right? We our vehicles, some of our vehicles are rely on gasoline to power for the city.

We're trying to move away from that with getting some electric vehicles. But even us as a comp as a city, we have where we rely on electricity with with with fuel. So it's just finding that that that balance in our portfolio to be able to meet our fiduciary need for for the pension and our section one fifteen trust, but also kind of starting to move away from some of those sticky investments, like fossil fuels or maybe the the data centers that are the companies are building the data centers rather than utilizing them. Because as you just pointed out, you used AI. So so there is a benefit to all of it.

So it's just kinda finding where is the middle ground. And I think what Dennis had proposed with this ESG is is step in that direction. Maybe if you if you years down the line, there it becomes a little easier where we start kind of leading out some of these other companies like Coca Cola. But at this point, it is kind of they may be built into it, but at least we're moving in that direction. And and kind of bringing us back to the the topic in hand is how would this affect the policy?

Right? Because that's what we're here for. Do we need to put something in our our pension and and section or OPEC policy to to call out? Should we specifically move towards this, or is this just more of a a decision that we've made as a body? Like, this is the council's direction.

Like, we we want to these ESG, or do we wanna call out specifically in the policy? Now if, maybe this is a Dennis question, but do other cities have a language in their policies that says the city shall or may, use ESG portfolio or, investments? And so that's kind of the direction I'm I'm looking at you all, to to make so that we can propose to audit the to the city council, in the coming month or two, with a proposal or a change in the policy, so that we can, kinda move in that direction.

Dennis, do do you have any thoughts on that question?

Yeah. On the one hand, it it would be within the confines of your investment policy to invest with those ESG funds. On the other hand, I think it would be really good to memorialize that in the policy with just a quick paragraph of, you know, the board has decided that this is important to invest in accordance with these values, And the way we're gonna do that is, you know, through these ESG funds. I think it would be good to put it in there, but, you know, it's not not something that you know, we don't need a complete rewrite of the investment policy.

Okay. Let me let me go a slightly different direction here and see if there's any public comments at this point. Lindsey, anyone earning to make a comment?

We have no answer. He's not answering Sharon.

Okay. So we'll cross that one out, and then I'll bring us back to motion. And I think what to talk out loud a bit on the motion. I I I like the idea of balance. Whenever I hear balance, that's good.

How can we, how can we do something? The Greeks knew what they were talking about. But, I also hear policy. And, you know, policy changes depending on in the chair making the policy. And and and I think maybe we what we could do is distinguish our committee a bit from the upper upper level policymakers, and and there's all kinds of policies within the city, I suspect, that are environmentally friendly, sustainable, that we're not necessarily paying attention to as finance folks here.

And so I'm I'm leaning in the direction of of taking a pure financial rate of return fiduciary toward responsibility at this level. Just talking out loud as one individual, but maybe as a way for us to move forward as a motion where we we have diligently looked at the options. There are some ESG options, but we are looking at how do we stay close to what the market is yielding without taking a position because we don't wanna open the door to so many different other concerns that we we can start to become very active managers. So that's how I throw this out. If, any of that makes sense.

Guys have any thoughts?

I like the idea of bringing the concepts to the council for their consideration and with further information about their fiduciary duty and responsibility there, I had enough best about that duty so that, you know, down the road, if we end up with someone that's very active and and wants to get into that highly managed portfolio because their views are so strong that, yeah, providing some initial guidance from the audit committee about what what we think is a wise thing to do and keep in mind. Just to see I I really appreciate this agenda item and and this information and brings up other questions about, you know, where where far enough is makes sense, where we're going down this road if it where it makes sense.

Would would some of that information be, like, if we know a lot of other cities in California are not taking this path? Is that info that would be useful with Yeah. Course.

And and I wonder what I I thought maybe Palo Alto had adopted to see towards this. But at the end of the day, our job is to be a steward of the finances. And

Right. I worry about that. And and we've had some good results, which is very positive that we we don't wanna but the the problem with yeah. Okay. We've talked about that.

Any comments? Yeah. Okay. I I'm wondering if maybe we need a little bit more information or we're at the point where we might maybe take my suggestion that put it forward in a very strict subject to the fiduciary elements that we thought were most, important to continue maintaining. We can continue not specifying a change in the policy, but allow some additional research for a subsequent city council staff report if you wanna go that route, or we can get it at this level.

Lots of options. Yeah.

I think the the example I brought up earlier, the Norwegian I think Norwegian government, they're almost like an activist government. They had tops down mandate.

They were some major producing Exactly.

Horrible. Versus, like, we don't have that mandate. We're kinda Right.

No. Everyone, we would face the same debate. Every every additional door we open down the road. So it just as a practical matter, I think for us, it's easy to to easier to go down. Let's monitor. It's it's difficult enough monitoring the performance of the portfolio and matching the the indexes that we're choosing and having professional PSM come here to give us advice. If we add additional complexity, I really personally think that's a policy decision decision that comes at a different level than I'm comfortable with, but I'm flexible. So

right now, they could invest in Right? Okay.

That ESGs. They could do ESGs.

So Right. Even within the the current policy that we have?

I believe so. Yes.

Okay. So could is there a way to add a paragraph that says something within protecting our fiduciary duty to you know, for our investments that there is consideration of these the the ESGs, and I'll make sure that we spell it out first, the environmental, social, and governance, ETS. And is it specifically ETFs? It's not like you're not looking at mutual funds. It's all ETFs, Dennis.

It's it's either mutual funds or ETFs. Could be either. Yeah.

That that that that would be consider but it wouldn't I wouldn't do it as a mandate. And I don't know if you put it in the policy for why I wouldn't put it in, but I wouldn't because you unintended consequences all over the place. But that yeah. And that it's it's also really difficult because of just seeing that Coca Cola example in there. You

know? Yeah.

Sure. And I don't know that everyone on the council even agrees with targeting fossil fuels for elimination. So I think it's I think it's actually it would be an interesting study session discussion, or it can come up as a, you know, as the policy moves to the council. But to to have that determination, do a sabbastropical, and know where people stand on on on that, might be a curious thing.

So I'm hearing you. They're they're

But they're asking for really soft language Okay. To address this.

Okay. Option.

Then as it gets to the council, then just throw that out there for, know, what do people think about this, and how do we balance

Is it yeah. Okay. It's a way to open the policy discussion. I see that too.

And there is a different there was a slightly different definition on the that risk table. What they call it? That's risk carbon risk score.

What what they do by the

It's just these the the bar charts that we're seeing between showing our how we compare. And the the slightly different definition was something about, like, the costs of a a company needing to, basically, convert to a lower carbon footprint. I'm a

Yeah. That's the carbon that's the carbon risk score.

Yeah. So this other conversion. Was yes. That's right. How much money a company stands to lose as the world moves away from fossil fuels. And that one starts raising red flags because of our Venezuela foray, and and and, you know, this administration is not moving away from fossil fuels. That's I don't see. So it it I think there's there's there are a number of risks associated with Yeah. Yeah. Just as a as a Right.

Policy. Definitely. I agree with that.

Yeah.

So I guess maybe I was gonna make a a question and an analogy. Dennis, is is it permitted for the portfolio to invest in ETFs or the sin related things? I mean, you have the per the permission to invest in them, but you don't. Am I correct? I'm not sure what sin would be defined as anymore, but there used to be tobacco.

Yeah. The sin stock yeah. The sin stocks were originally tobacco, alcohol, and gambling.

Okay. Perfect.

But but that's not a really great example because there's such a small portion

Okay.

Of the overall market. Tobacco's almost gone away. Now it used to be big.

Okay.

Philip Morris used to be a, you know, blue chip stock in every portfolio, but so much of the alcohol and the gambling are just either private equity or foreign owned or they're just not any out there. But when you start talking about, you know, broader issues you know, now we start we start bringing in, like, almost every company.

I was trying to make the analogy that if you already have the right to invest in those, but we don't, that could be similar to the ESG situation.

Yeah. We do. Yeah. We we do. But yeah.

Okay. If we do, maybe they probably work somewhat. So they Yeah.

We do we we do have the ability to invest in permitted prohibit yeah. Under prohibited asset classes and transactions, you know, it has to do with the the structure of the financing or the security, but it says nothing about about, you know, what is now considered ESG. It used to be called SRI, socially responsible investing. But the policies the policies don't go into that at all.

But it's kinda good thing for the soft learning. So to some extent, guess, maybe we don't need soft wording. But on the other hand, how hard is it to craft two sentences that would allow it but not mandate it? I guess that's where we're at, maybe.

I don't think it would difficult at all to to put some soft language in there, propose it to counsel, and let counsel deliberate whether they wanna keep it in the policy or or just provide general direction to to staff that that the investment strategy should follow x, y, and z rather than memorializing it within a policy.

That satisfies me because we're keeping our we're doing we're keeping our nose very close to the fiduciary part, but but we're allowing an opening for the policymakers, which I look to city council being rather than us. K. You like that? Then maybe we can direct staff with a long well, we could have a motion to direct staff to work with Dennis. We could. But we still have to do the work of approving our policy, but maybe if if there are no other changes to the policy, we could go ahead.

Would you want to keep global infrastructure there, or do you want that removed? That was the other that that actually kept this policy open along. Right. So It's just a new asset class that is available. It would essentially be zeroing out commodities. In fact, at this point, we actually do not invest in commodities and just give the ability all out of global infrastructure.

Maybe you could just flash that on the screen. I know we've got that in the policy documents. So we're all on the same page.

And while we're doing that, Dennis,

can you please give a quick summary of what global infrastructure entails?

Yes. So global infrastructure became a separate asset class somewhere in the last five to ten years and kind of grew out of a blend of technology and real estate. I think the best way to explain it is to use a couple of examples. So global infrastructure would would take on those companies would invest in those companies involved in huge construction projects. Think interstate highways, bridges, like bridges, like you see on the East Coast on the inland coastal waterway.

Right? They're two or three miles long. They they're cost billions of dollars, and they take years to construct. Or and then the other example that I always come back to for global infrastructure is one of the companies in one of our funds made a presentation to us. They they purchased cell towers.

They upgrade the cell towers to five g, and then they either lease them or they sell them. You know? So we're hoping that they do that in a very profitable manner and that five g continues to be drawing in a lot of capital. And that seems like a pretty safe bet. If you had to stop that company and liquidate it at any point, what you own is a bunch of very small parcels of real estate, you know, with a bunch of technology, hardware on them.

So it it's kind of leans heavily into real estate, but not for the sake of, you know, real estate in the traditional sense, commercial or residential building. You know? So that's global infrastructure.

It may Cut. Percentage chart. That's probably the more relevant. So what we're really doing is if we agree with all that, we're just giving you the option. Should you decide that that makes sense in the portfolio, you would include it. Otherwise, it'll be a 0%.

Correct. Yeah. Yeah. Yeah. Much as we did with commodities. We we held commodities for a large portion of the last ten years, but in the last three or four years, we have not. Commodities are typically thought of as a play on inflation that you wanna invest in something that's gonna do well in a period of high inflation, and and we just are not in that environment right now.

So answering the question, this seems fine to me, this chart, mayor.

Do we is there a definition of global infrastructure in this policy?

They added a line, which I just took you guys away from. I could go back to it.

It's not defined, the sense of what it

Yeah. Thing. Dennis, I think last time you met you did mention a highway bridges and talk about cell tower. And today, the first example you gave is actually highways and bridges.

When I go to AI, global infrastructure can include some negative things. Their their definition is right. So it could include a coal fired power plant, oil and gas pipeline, waste energy incineration, petrochemical plants, airports, highway and toll road expansion, gas utilities, materials for heavy industry. Uh-huh. So everything. And then probably also the NVIDIA, you know, they've sold it. Install the water. You sit you know? Yeah. Yeah. Yeah. Cell charger. Right? Okay. Got everything.

That's amazing. Okay. Well, this brings us full circle. It should be a lot very good. I'm glad you're doing.

So one would be basically offsetting. Right.

So the main thing you told me just recently here was it was a new asset structure, so or asset class. And I guess my previous comment had been, don't we have a lot of asset classes that we don't all we don't spell out on that chart? We only spell out three or four of the major ones. Am I right? Have you got more asset classes than the four on the chart?

No. That's about it. We we call that the tier one asset classes in our parlance. So stocks, bonds, real estate, global infrastructure, cash.

So global infrastructure is a tier one asset class?

It is. Yeah. In in the way that we work. Not, you know, not everybody in the industry does everything exactly the same. But that's the way when we do our asset allocation work, that's what we start with.

Okay. Well, maybe in our soft policy then, we can work with work on global infrastructure, because the list you just the list was pretty strong on the

You don't need to have this. This is just a proposal to bring all asset classes within the the policy as it's specifically called out. Which is my question. So all tier one? First of all, couple of us have never heard

of tier one asset class. We've heard of asset class. So what what's in tier two asset class?

So tier two would be in equities. You've got you've got large cap US. You've got mid cap. You've got small cap US. You've got developed foreign and emerging foreign.

Yeah. Yeah. So we don't wanna go into that detail. So global infrastructure could be a subset of real estate just like it has been. Or now you're so Used to be.

To be.

Yeah. One, so therefore, can't look at it that way anymore.

I don't

recall. And we set up all of our reporting systems to follow that that formatting. So I I wouldn't be able to stick it in and and tell you it's a real estate fund. It would

Some examples of the global infrastructure funds or There was one that Dennis suggested last time, if I recall. There's an actual fund, and maybe the the composition of that fund isn't quite as controversial is what we may be alluding.

Or maybe it's getting a really great return, and so it would be foolish for us to not look at it, or or you could, you know, find the the best among

Okay. That's a good practical question.

Dennis, what what what investments would you be in pursuing in global infrastructure, and what kind of return are you seeing?

The index we just added it a few years ago. The index fund we're using is the IGF is the symbol. K. And oh, I have to I'd have to get, I'm I'm thinking for the for the year 2025, the return for global infrastructure was lower than the return for the stock market. But it was a banner year for the stock market, and that's you know, that doesn't tell us an awful lot.

Well, we're trying to just get a real quick high level sense of what ITF might actually be investing in at this point, the top 10 holdings.

Got a nice chart. Up 48.72% in the past five years. Mhmm. I got airports, utilities ESG. Oil, gas, pipelines.

Okay.

Does not incorporate ESG. But it's I don't know how it compares to the others, but it's pretty well.

Well, I see two ways that I'm addressing it. Just because tier one, we wanna stick with whatever model we've got. So if this is the exhausted global tier one assets, then maybe we can have it still on this chart. But our wording then may be on soft two sentences. We put global infrastructure, or we could just eliminate it. And then say, we don't want global infrastructure. It's too new for us. We're just, you know, stuck in the mud here. I think also

you could include it and just leave it at the range available range at zero. And so if the asset class is spelled out and the the policy says we don't wanna invest in there.

At this point. Yeah. Right. Okay. That's a way to get us

because we don't have any we don't have council direction?

Well, we'll be making this proposal to council if it's desire of the audit committee to move forward with calling it out as an asset class, but not investing. So the range available range to invest in is zero. Okay. And so as you can see on the other ranges here, that's we have to stay within that per policy in that range. Right? So if global infrastructure is set to zero, we call out that is a tier one asset. However, council has decided not to invest into that that that class.

So that would be information that would need to be brought to the council about how it's performing because we're balancing that with our fiduciary duty. So if we're saying

We can provide this information to council, and council can make the decision whether it wants to pursue something closer to ESG or kind of balance the fiduciary duty with, you know what, do ESG investments absent of this global infrastructure.

I also noticed the expense ratio for this specific ETF you mentioned is quite high. It's point 4%.

Oh. Right.

That's you saw, Dennis. We're gonna be looking at those expenses on the ask the whatever the the ask the small fund. So that's another theme here we have is we wanna be sensitive to expenses expense ratios. Okay. Well, how do we bring this to it seems like we're real close.

We we could include it in here with a zero since we're not really convinced that this is a super asset class at this point. I mean, we've been doing fine without it, to be honest. And we have a couple of sentences that allow for policymakers to step in. And then, you know, if the policymakers choose not to, we've got the same policy that we've had, basically, but there's some options for down the road.

And, alternatively, that that paragraph can be struck. And if we have something that's saying, basically, to the council, you you know, you have a fiduciary duty for highest returns, you might not like these investments, but don't see an alternative that's going

to get you that yield. And Right. That would be really good, put that wording in. Makes sense?

Okay. It ended up being a lot more

complicated at first glance. Seemed real simple and clean. Right. And that's that's maybe the theme here to be worried about is we don't know what doors we're opening because many people are not opening these doors. But okay. If it's any confidence, six or seven years ago, we went through a similar type of discussion and came to something very similar as her result. So fiduciary did trump again or whatever the right word is. Right.

Wow.

So let's see. What we need is a motion. Summarize what we've all pretty much come to. You wanna maybe say Sabbath stating what we were at, Jonathan? And then we can see if one of those wants to

The committee's directing staff or making the recommendation that staff present a a policy that considers ESG soft language, considering ESG investments respecting the fiduciary duty to their, pension and, OPEC, investments, including a bit language a bit more language what its fiduciary duty should be in this situation.

And, otherwise, we keep the policy as draft form, or do we change this?

Empty. Thank you. We'll update the the recommended ranges to remove global infringe well, to keep the global infringement, but tenant to 0%. And council will have the the opportunity to move that range should it choose to.

Could we bring two options and just not really be like, we're I don't feel a 100% on either. So that and that happens where there's, you know, there's would have this draft of without the extra language in there and no changes to the percentage in there at all, or you have the soft language and and the the changed range. I propose my proposal is to include one staff re one policy, and you can actually pull out what you would like

to keep in there and what you want to keep as original.

Will the staff report have some Each day, you have the option. Okay. So it'll be written out.

Okay. So we're making one recommendation. Right. And staff wording has options. Maybe that's what because I we we should make one recommendation. Correct. Okay. Okay. That sounds right. We don't

pardon me. Don't wanna see it on consent probably because we want some discussion on the council. K.

Yeah. Okay. So you wanna make a So Is there a second to that A second. Motion? Alright. So we've got motion that I think we understand. We can have a motion we vote or discuss it some more. Dennis, got you. I guess we can bring you in. Are you happy with this?

We've had Yes. Here, but a conclusion that that may be modified in future or not. But we are very concerned with the fiduciary elements, so we wanna make sure we bring that forth in the policy and the and the report that goes to city council. And your your diligence in helping draft this with Jonathan will be much appreciated. And thank you for Looking

forward. Thank you.

Okay. So let's take a vote on our motion, which we haven't quite done yet. All in favor? Aye. Aye. So much is ahead of us. Great. Thank you, everyone.

Thank you.

So that brings us to six, which is internal audit received internal audit and fraud, waste, and abuse programs update. We you guys have been patiently waiting. Thanks, Chelsea. We'll turn it over to you if we can.

Sounds great. Yes. Let me pull up the materials and walk you through them. Can everybody see my screen? Yeah. Wonderful. And is it big enough for everybody?

No. I

knew. I had a feeling. It it looked pretty small even on my screen. So, I will I'll kind of enlarge it. So this is, the audit status report from October 22 all the way through last week of January 16.

There still is one outstanding project that we are trying to wrap up from the past fiscal year internal audit program, and that's the grant management internal control review. We have sent over a draft to management, and we're working through currently, right now, I think it's sitting sitting with the city manager to get any last feedback that they might have and really get that report finalized so that I can report this to you all next next time around. So that will close out the internal audit program for fiscal year 2425. Any questions before I move on to 2526 internal audit program?

Questions? Nope. I see that we're all happy campers right now. Go ahead, Chelsea. Thank you.

Great. Great. Well, then moving into the 2526 internal audit program, we have the council wide policy review. This is going really well. We've held our kickoff meeting.

We have sent our document request, and we've also conducted a lot of interviews for this project. We're hoping to finalize our, interviews during the next period and draft that report. So, hopefully, having either a draft or, a final report to share with you all next next quarter. And that moves us into the investment cash flow policy review. So this is really looking at those policies for the, you know, best practices, comparing it to the GFOA, making sure that comparable to other cities of your size that you have well rounded policies in this area.

And we have reviewed those policies and developed some best practice recommendations. We sent over those comments to city city officials last week, and just needing to have them look over a lot of comments, you know, 30 plus comments per policy. And then we're going to meet, and discuss next steps and make sure that we answer any questions that they might have when considering, our recommendations.

Chelsea, while we're on that call, just the, I guess, would that include I may it may be you're just looking at the policy, so apologies for not having tracked that carefully or remember remember it, but there was also a cash flow projection model that got developed late last year as I recall. Is that subject to what you guys are looking at or is that outside the scope?

Yes. So that is something that we are taking into consideration, especially with the cash flow policy.

Super. Thanks. I look forward to hearing and seeing your report.

Absolutely. Great question. Any other questions before I move on?

Jonathan's got something to say.

So we developed the cash flow policy as well as that that that model, and both of those were provided to Baker Tilly. They are we have not taken the cash flow policy to counsel. They provided some input on that. So we'll be incorporating their their comments into the policy, and then we'll be bringing that forward to to counsel. Oh, well, all in conjunction with this report.

Fantastic. Yep. Question.

So with regards to the cash flow policy, I've had kind of an ongoing question about our total cash investments total that is it it has increased. And I've wondered how it is that we make a determination for what's the right amount versus because, you know, we're holding taxpayer dollars and not investing tangible or services. So what's the right amount, and who's who's the person to advise us on that? And, yeah, just that that kind of general topic because we're looking at having some expenditures. How are we gonna cover that?

Is that gonna put us in a situation where we're gonna because we're trying to we're living off of the interest.

I I do believe the investment policy or the cash flow policy will address what best practices. And if I remember correctly, GFOA says they should have a fund balance of three or six months, which we have near three times our our our our budget. And so it's we have quite a bit of reserve. And so I am unaware of a policy. Maybe Chelsea can speak to this that says that you could have a maximum amount, and it's usually counsel or direction from counsel how to spend that fund.

Well, this is available. So instead of spending, like, the six the $74,500,000 that we had that set aside from the CDTFA audit. We spent 10,000,000 of it towards additional discretionary payment towards CalPERS, and it had a strong benefit to the city because it did, that CalPERS did well, and we we decreased our liability. We have another $64,500,000. What are we doing with that?

So there is a plan to possibly use that for a city hall. We're up to. Right? So we we are in active discussions in that, like, we're holding hoarding money just for the sake of hoarding money or using to invest it and just live off interest. But we can see if we can somehow integrate some what what should what's best practice in the the the industry, what should be your cap, or if there is a any kind of rules that say that you should not have x amount of dollars more.

Because to your point, these are funds or money that we have collected from taxpayers. And if we are over collecting, that might be an issue as well. So, we wanna show that we are collecting and spending it and using our resources that the the community needs.

That's exactly it. Because, yeah, we're all gonna age out at some point. And around for some facility to happen, and it never happens because we're holding on to the money to live off the interest to keep other things going. Yeah. It's a balance, and I I I appreciate advice on that on that matter.

And and there used to be a strategic advisory committee of some kind that would talk it seemed like they would speak to these types of issues, whereas we're we're really limited on what we can talk about. But I think that some kind of a a subcommittee of some sort that that discusses this would be helpful, yeah, to to come up with a strategy.

Yeah. And there should definitely be some industry standards out there and rules of thumb and the GFOA. And so that'll be a good starting point. But then you're you're right. Some decision have to be made, if those decisions are made, you're sort of what do you do? That's Yeah. The issue, I think.

So so for what I'm looking at is that we were at 02/2022, and now we're at $3.10. Right. You know, it's good good good for us.

But Right.

What do you do with

it? Right. Yep. No. That'll be a great report. Chelsea, looking forward. So we will see that at our next meeting, or is that two down the road? That's what we're shooting.

Yeah. You know, I think it really is dependent on the back and forth that we have with the city. Obviously, like I mentioned, there's a lot of comments for us to discuss with them. And so given their cadence, that's kind of gonna be that that will be the deciding factor.

Excellent.

But moving on, so the citywide internal control review, we have kicked that off. And, you know, mind you, this rep this internal audit status report was as as of, January 16. And last week, we were really busy with client or with city staff on interviews in this area. I think we had over a dozen interviews in this area. So we have really gotten in deep and hoping to finish off those interviews, provide preliminary observations, and then areas that we want to dig a little deeper in, we will test some high risk controls in those areas.

So excited to send you all that report. You know, this is a big this is a big one. So I'm thinking probably maybe not next this next meeting, but the following meeting, that would be really probably an appropriate time of when we would have that draft to you

all. Great.

And then, of course, we have our ongoing internal audit services, which includes the fraud, waste, and abuse hotline as well as our validation continuation. So last time that I spoke with you all, you had asked for some other, statistics. So I wanted to walk through, you know, it was kind of a it was a quiet quarter, which is a good good thing. We only received one complaint, and it was in the compliance and ethics realm. We have referred it to the appropriate city officials, and it is currently open.

So that brings us to 39 reports in total. We have eight reports that remain open. And what you asked me last time to provide you all with not only the days outstanding, but the last time that I followed up. So, I followed up with the majority majority of these, complaints in December, and we have because of that follow-up, we were able to close, I think, one or two complaints. And then there you will see that there was that last report that was added, and that was on, the December 13.

So, you know, like, I will continue to follow-up with these and, you know, report these statistics to you. Do you have any questions on the fraud, waste, and abuse before I go to validation reporting?

My comment is thank you very much for putting the date in there. That's the first thing I looked at. Good. Puzzled over it, but a recent date is probably the best we as an audit committee can hope for. There's not much more we can do. Right? We've we've explored this, and so thank you for putting it on there. It means you've done some follow-up that is ongoing.

Absolutely. And I'm committed to it. We'll continue to have those dates of when we've reached out to city officials.

Last column added, I do have some continuing concerns about some of the the open reports here. And then because an investigation costs money, and if some of these reports are have to deal with top management, you would then I would guess. I like, I don't know what the policy is underlying on this the fraud, waste, and abuse hotline for who gets who who gets to see that information and who who gets to make the decision about whether an investigation is gonna happen or not. I believe that's the would go to the city attorney, but there's a a a kind of, like, a hidden cost, which is investigation cost to hire another attorney, I would assume, to do do an investigation. So there is it clearly written in the the for the Broadway students hotline or somewhere is there a policy written for for what happens when like a decision tree for what happens if the city attorney, the the subject of a complaint.

Or I think the original contract had the director of administrative services had a has a role in in in handling these. So I thought I'd like to know more about the that that kind of information.

Yeah. Absolutely. I can send you over the policy. It is on the city's website as well, but I can we can send over the policies just so you all have, you know, it it easily available. I I do there is I and I, you know, obviously don't have it at the top of my head, but I know that there is a line of you know, if if a complaint was, you know, for the city attorney, who we would go about, you know, if we would have to go we've, you know, had in past in past with other clients as well, you know, spoken to, the mayor, but there is a certain dynamic of who we provide those, complaints to.

Obviously, if it's about the city attorney, we wouldn't send it to the city attorney. But I I, you know, can provide that language to you all. And then if you want more discussion on it next time, I would be happy to discuss it

with you at that time.

Yeah. We could take a policy that there's just days outstanding or so long that we want city manager to contact the mayor or something. I was talking out loud. Don't That works.

One of the issues is that, like, I think an investigation maybe depending on how thorough it is, you know, 30 to $40,000 of piece, and then you've got eight of them there that starts getting into you know, it's a total full work program item. One question came to mind also is that are we making sure that we have the some kind of scheduled retraining on the front of the Spotlight refresher? Because there when when it we originally started, there was a training, and it was it was I believe it was live on Zoom. But now it's available as a recording. And is there any kind of requirement for us to have those refreshers?

I can check with HR. I know there's a packet or a list of recordings that new staff needs to watch when they come when they're onboarded. I'm not sure if this is one of those requirements. We can have that conversation with Baker Tilly and see what the the frequency in which they we should be requiring staff to to see this very similar to what IT is doing every month. We have a refresher.

Don't click on that website or that email what to look out for. So maybe it's something that we can kind of incorporate into that that that that practice or that frequency. So requiring all staff to, every two years, revisit this, and you'll have a checkmark or some sort of a certificate that you've you've you're familiar with the process.

But by instinct, rather than making a motion and then sending it to city council saying, like, x y z is is maybe this could be done informally, Chelsea. On your next follow-up, you could be saying that we really like what the internal auditors are doing, but we're just stuck here as a committee and seeing these these six hundred and thirty four days outstanding. We don't have any way of adding to the conversation. So our next thought was that we would bring this manager involved, but this could be done maybe through you in your update inquiry next time you do that.

Absolutely. You know, this is something that Baker Tilly does ask. And, you know, the reason when I preface that I'm asking is because the audit committee is very curious and concerned about these days outstanding. So I do believe that, you know, city officials are aware, and I will continue to relay that message. But, you know, I think it would also, you know, mean something if committee members, went to city manager or, you know, the city attorney's office and, you know, can also relay these concerns as well, that this is something that the city, you know, that the audit committee is looking at and is very concerned, you know, and wanting to do their due diligence in this area.

Fair enough. And we've got informal methods of communication. They that's settled. That that is perfect advice. I I do think maybe next time we see this is three months from now, and if we still have a lot of fees outstanding, we probably should consider another step.

There should be some way for an item to be removed from the list. Right. But I don't know if that means goes to counsel. You're gonna talk about the whole situation and determine if there's a will to Right. Move on or not. And but, yeah, that's it's

That could be the discussion that the city manager and the city council have with, you know, formally members of this committee.

Right. Because it it doesn't look good to have this Right.

And we keep saying it. So you've done what we asked, Chelsea, and that's very don't don't get us wrong. We appreciate what you've done. But maybe now we can think about what more we can do. So it's very good.

Absolutely.

Okay. Fraud. Everything's good on that report. Okay.

Yes. And, Jonathan, if you wanna talk about you know, this is something that we do offer. We can help with training. You know, I would say even because of, you know, the possible ramifications of fraud, waste, and abuse, looking at this at a at least annual basis, an hour training is something, you know, we have other clients that do. So let me know if you're if you wanna discuss more.

But I will talk. So there was two two different, or, I guess, two validation recommendations that we were able to close, which is great news this quarter. One was around the enterprise leadership assessments, and the other was around the library expansion construction audit. So if you look at page two of that report, it will tell you those exact findings and what how we were able to determine that those two those two recommendations had been closed. Great. Any questions on the audit validation piece?

I think we're good.

Alright. Well, that is all I have then.

Fantastic. I I know in our work plan, we've got, as always, every quarter to talk with you, so we we may have more to say next time, but thank you very much. Appreciate your professionalism and, the great progress occurring. Thanks for hanging

Thank you Bye.

So I hereby as chair accept the report, which is what our our action item is. So now we're at well, you know what? I forgot to ask about public comment, so I can still ask. Lindsey, do we have one on this previous con on the internal audit one?

I have no public comments.

So so I did ask eventually. Well and I've also accepted it, so that's good. Now we're jumping in order from six to eight when I I just that was seven or something Gotcha. That we're not gonna do. No problem. But number eight is our proposed audit work plan, which back in the day when we didn't have this, it was a lot worse. So but now that we have consent calendars and we've got all kinds of other things going on, approval, any comments on this from a staff perspective?

Yeah. So we as you can see, there's a few red items on here that that weren't discussed at our last meeting in December, one being the investment policy that we had today. We have included the audit committee roles and responsibilities onto the April 27 meeting to discuss that per council direction. Two things that may be included in here should if they are ready, are the the two audits internal audit reports, one for the grant management and the other one's for the cash flow policy. But apart from that, we do have our routine items, so which would include minutes and the two quarterly reports and our internal audit update.

In addition to those, we'll have we'll be proposing an internal audit work program. So this is to discuss what what types of projects for the in Baker Tilly will be pursuing next fiscal year, and that'll kinda set the tone as far as what the price will be. And then based off that, we'll bake bake it into the the budget.

I would say based on all media items that we could discuss, we should continue with consent items, probably the same ones we had even though the treasurer's report is a significant report. I think we can pull it if there's something major on it or whatever, but let's put that as consent so we've got some time to address these other meeting issues, if that's okay with everybody.

Go ahead, Mayor. Separate kind of you. One of the things that I've noticed in the budget that that one, we work on budget format, but I don't see anybody doing a spot check on the budget units themselves, and I'll give the of the library. Oh, gosh. There was there was money put aside for library. How the county was providing that funding. So we still had a, like

Budget items.

Yeah. A budget item for it, but it was, like, $600,000 being allocated for expanded hours just a couple years ago. And it was something that somebody told me that, no. You don't have to pay for that. It shouldn't be in your budget.

It's covered outside. And so it then got removed, reduced down, stuff like that. So I would like that there would be a mechanism where someone other than myself would be essentially auditing those parts and to see if they're do some spot checking and to see if some of the budget items are are a little off. And or if there's a that the the number of hours isn't correct or something. Just some auditing it.

And, also, with issue with there's a separation of our our our facilities. You've got, like, facilities maintenance, and and then you've got another section up for the facilities. It I I think there might be a clearer way that those can be done. So if you look in in the the budget, you'll you'll maybe see, like, Blackberry Farms show up in a couple different places. One is an an enterprise fund.

One is a, like, a maintenance thing, then it shows up as maybe other facilities. And I and it's it's unclear, if that's, like, the best way it should be shown. I'll offline, I'll come up with some better examples. But the bottom line is who who could be that person that would be doing the audit of of, the the actual budget numbers?

Perfect. That's a great I'm so glad we're bringing that up at this point because, again, there's there's layers of people that can be involved to do that. Staff is one. But internal audit is really where I wanted to hopefully could save some time and have a meeting discussion on on that's an item. If we could put enough guidance around it, it's a good topic in my mind for internal audits.

But we have to be able to think about over the next three months or so possibly in the budgeting process going on. You guys don't be able to put some of the thoughts into, like, guideposts. Like, with one example for the 600,000 of the library would be we could put some materiality item, say anything over 500,000 or something, they do something with, they look at in some way or or whatever. We can find it. But I think this is a great one for internal audit.

We always need to do is put our minds to together. How do we structure so they can do a project? And and internal audit maybe can think about it before we have our meeting next quarter. Unfortunately, we released Lindsay probably, but I'm sure she's got lots of comments because Baker Tilly didn't just did that, a massive format discussion. So they they've got all kinds of experts we know in house that that could do something. Like, benchmarking against other cities might be an example of how they do it. How do they anyway, I throw this out because this is exactly where I see us setting the stage for what internal audit does. Now that requires budget, but I think we've got a budget or or a demand for it.

I think it saves us in the long run, especially finding things. Exactly. Now this is too bloated here. And I I I I had thought that the the budget had gotten kind of bloated because of our prior financial condition and that it has needed to be ratcheted back because there's no incentive to remove like, with a lot of gray hours, there's no incentive to remove that because you've got this huge budget, and then you can park that money away in reserves. Right.

Contracts is another component that's fairly easy to verify. Are they saying in the budget for each section that they have 1 and a half million in contracts? But if you actually go look at the number of contracts that they're paying on, they're only paying, you know, 400,000, and that number is is excessively bloated. This happened with Safe Routes to School, actually, and with regards to not with not so much with the contracts, but with the revenue that they were reporting. And I could look in OpenGov and say, no. You only got 200,000. You're telling me you got 400,000. Why do you believe in the

I remember you were looking that up.

And they they did find it. Well, they went out and asked for it and got it after the fact Okay. To get it to close to 400.

1 way to approach this sometimes and, Hanyan, you said

variance analysis. Right?

Yeah. We we could do some some we could suggest three or four things, and then based on what they find in those areas, it can be expanded or contracted. So instead of trying to solve the whole problem of the world, we don't know what the problems of the world are, but maybe you can put your thought to thinking about this because you've got a lot

of I think we

can describe this like a variance analysis of here's what we budgeted. Here's how we actually how much we actually spend. And you can kinda, like, set a threshold of, like, percentage to spend, like, percentage spent to the budget in terms of the and also in dollar terms. And then we can kinda, like, come up with this with with a guideline of, like, maybe we should go back and revisit this item. More explanation

Yeah. Or whatever.

And and then also a look on is was do we agree with where this was attributed to in the budget? It was something that really belonged over in, I don't know, Parks and Rec. Did it end up over in this other part, perhaps?

Right. The internal audit's really good at that. For our city staff, we don't wanna leave you does this make sense in terms of

It does.

Possible. And and some of this actually gets back to what I understand what you're getting at as far as there's it being bloated. But how some of these budget units are separated kinda gets back to wanting to drill down into the detail. Right? I wanna see what's BlackBerry Farm, what's their summer summer programs versus, what is their golf course versus what is just ongoing cost. Right? And so and part of what Baker Tilly had proposed in their review is you're breaking it down too fine. And then and so you need to start consolidating some of this stuff, some of these rebudget units, and then that's how you report out. I 100% understand. Well, then you're starting to hide some of the detail.

Well, then it gets back to the the the departments. It's like, well, you know what? You've consistently only came up to about 70% of your budget. What are you doing with the other 30%?

At which point, we need to start telling them, no.

You're bloating the budget. You need to start we're we're about to take something to counsel where there's this possible tax ballot measure on on this. Is there really a need for it? Right? And so now it's it becomes the the conversation. Right. Is it loaded, or is it we're just carrying over some of these expenses year over year because that is the that there's a project on the that the on the line. So then it becomes an analysis. Is there a reason why we're not spending that 70%, or is it being carried over? Or so it it it's not just a well, you know what?

You have $300,000 left in your bank, your budget. Why was it there, or was it carried over? So it it becomes a a a more of a, a an exercise with all the departments making sure that they're they're budgeting correctly. And if it's they're they're leaking in some sort of a contingency or, like, a a bearing contingency into their budget. Well, no. You know what? You're gonna have to go to council if something comes up in emergency. And sometimes there's a a benefit. Right? If it's nominal, well, okay.

It it you can make a little bit of variance into your budget. Or if it really is something that oh, you know what? We we're we have a vacancy to to fill that vacancy. We need to get a contractor to come out and perform that that job, and the vacancy savings won't cover it. Go back to council, ask for that that budget, and we can manage it that way. So it becomes as, alright. Well, how much do we want to let the the departments have a little bit of leeway, and how much do we want them to go back to counsel frequently to to ask for more money when needed?

So maybe you, Jonathan, could have a behind the scenes convo with Lindsay and and Chelsea or or not Lindsay. Lindsay's sitting next to me there. The internal audit group, and then we can have a robust discussion. I think that's really a function of the audit committee is to have that kind of guidance and and, you know, variance analysis could easily be a project they could come up with, but we need some parameters around it to make it sense sensible for them.

Can we who would be if if I would like to see the, like, the budget as it's going through discussed with, like, a subcommittee, how can that happen? Because in the past or or maybe that maybe that is within our purview that we can discuss the budget process because it gets it gets really rushed, and we are not really talking about some of the spending in at the at the at line item level. And we are seeing, you know, page after page of these special projects that have come through in the past. Is there is it within this body's purview to make a recommendation about how to have the budget more thoroughly reviewed by perhaps interested audit committee members, members of the public who are following it.

I can have that conversation with our city manager and see how we'd be able to bring that, but my my initial thought is to contract with a bigger utility to have that them perform that that function.

That allows us to get involved with a utility because they're on it. Or they're they're under the audit committee for review and the city council. So you could have a subcommittee that works with them closely, for example. There's many variations. That that that would be the way to not have to address whether it's in our municipal code or not.

It's just the for all that's doing it, it's an approved project, then we're definitely supervising it. Right? So that's, I think, the easiest easy way to we we could put something in there, but, again, it's the same problem of how do we get volunteers and qualified people and everything. So this is this maybe sets up a process where you start to see you could I could you could easily see three or four years of different sets of questions that get addressed under the rubric of internal audit looking at budgeting process.

And we saw it was very informative with that group that came in to discuss the budget format, the level the different levels of understanding, and then also the attitude about should a number of the public members of the public have the same understanding of the budget or no. No. We we we elected you. It's your your job. We don't wanna know about that.

Right.

And yeah. And I'm more of the I want as many people educated about this to be able to weigh in and and and understand it. So it's a different approach towards governance and your belief towards Right. Yeah.

Yeah. Very informative. Well, I know we're we're up against the gun here. I think we got a lot accomplished. Thanks again, everyone. I accept this work plan is much subject to our discussion, and I hear by calls German.

So

what time is it actually? 05:56. Okay. Longer than I anticipated.