Audit Committee - Regular Meeting

This is the audit committee meeting, October '25.

Vice mayor Moore? Here. Council member Mohan? Here. Committee member Wong?

Here.

Vice chair Wu?

Here.

Chair Schmidt?

Here. Great. We've got a a quorum in everybody. This is probably our first time in maybe a year and a half. We have five members. So we're we're in force. I look forward to an exciting session with everybody. So why don't we move on to the, approval of the minutes? Last time, we had a nice we approved both minutes at the same time. Let's try and do that same thing again. If everyone had a chance to, look them over beforehand, then we'll just move in if there's a motion. I don't see any anybody have any comments or changes to them. But let's have a motion first if we can to approve both minutes.

Moore, I move to approve items one and two of minutes for July 28 and August 1.

Is there a second?

I will second it.

K. We've got a second. Any, questions, comments? Excellent. We're moving fast on the minutes. Let's, take a go. All in favor of approving, the motions?

Aye. Aye.

Aye. Aye. No. I see no it passes unanimously, Lindsay. Great. Okay. So we didn't have any postponements, and maybe we have oral communications. I'm not sure if we have virtual attendance.

Oh, we have we have an attendee. We have one member on Zoom, San Rao.

Why don't we move to San Rao? And, I I guess that's the only one we have.

Welcome, San.

Yes. Good afternoon, chair Schmidt. It gives me great pleasure to be able to comment on this meeting. I wanna congratulate the council members that supported the resumption of the hybrid Zoom meetings for not only the few commissions that had it before, but all commissions and committees. And and so I don't know if the audit committee was ever having remote Zoom attendance and remote public comment before, but, I wanna give a shout out to all of the council members that did support this effort.

I think it is a great win for public transparency and engagement and and and, clearly, members of the public like myself that are unable to be there in person but able to attend and follow your proceedings remotely are able to do so. So I wanna thank you all for that. I do wanna briefly comment on the budget format changes that have been proposed and that have had working groups. I would encourage staff, as was done previously, to focus on the on the needs of your stakeholders, which is the council members and their need to make budget decisions.

This is a an agenda item. This is for oral communications.

I believe budget is not on the agenda. Is that right, or is it?

It's on it's on

the agenda. It's on the agenda.

Okay. My apologies. I was just commenting on the community outreach that was occurring, and, I will I will refrain my comments to the community outreach. I would encourage you to continue to do community outreach. However, I would also, at the same time, encourage you to focus on the personas that are budget aware or financially savvy enough to be able to offer you informed input on matters that affect the ability to look at data transparently by department.

I think it is critical to look at budget by department and to be able to do outreach, for solving all of the problems the community may have because, obviously, you have people that don't understand finance, that don't understand budgets, and that want everything to be dumbed down. And then you have people that need to make decisions, and then you have members of the public that wanna study or have a passion to study or are able to study the budget and offer you informed input. And I encourage and urge you to focus on the personas that are either decision makers or are able to offer you informed input so that the goal of this process is to make the study more specific by department to look at ways where cost can be reduced so that members of the public do not have to pay additional fees because of the cost recovery plan. I think the whole process of this budget review has to focus on members of the public and the cost that they bear. We are having double digit revenue.

Fee increases every year, and that is not sustainable.

You guys for time.

Thank you. Thank

you, Sam. Alright. I since we have no other oral communications for items not on the agenda, why don't we move into item three on the agenda? Received the OPEB and pension section 115 trust performance report for the quarter ending 09/30/2025. And I don't see a a staff report here, but I do see Dennis Mullens from PFM US Bank. Dennis, why don't you take the floor and make your presentation? I we are a little limited on time. I appreciate your always your patience with us. But

More than happy to keep you on schedule.

Thank you.

Did you wanna Okay. Can you go ahead and page forward? Who has the Let's go ahead and page forward to page eight, folks. There you go. We're pleased to report that it's been a very good nine month period where we have September 30 results.

This is the asset allocation of of the OPEB. Just as a quick review, you're about 65% equity and 27% in fixed income. You have a little bit of real assets and about 2% in cash. Next page, please. Always like to remind you that the fixed income portion is mostly investment grade.

We do have an allocation to high yield. High yield is a great investment class to invest in using mutual funds because of the diversification. We diversify away all of the individual company risk using the mutual fund. And then the spread right now between high yield bonds and investment grade bonds is three to four percentage points. We began the year with about three. It blew up to about four. Now we're back to about three. So if investment grade bonds are yielding about 4%, we're getting about seven on the on the high yield bonds. And then please go to page 30. Okay.

So on page 13, we get into the performance. You can see the total value of the OPEB. First column is year to date, nine months. Netable, page 13.66. Anytime we see double digits in a year, that's great.

This is double digit returns in a nine month period, and the market was back up to another all time high today. So the trend is continuing. The trend that we've seen this year is unexpectedly good equity markets. If you look at overall expectations entering this year from very smart strategists, there's a lot of caution. There was a lot of concern about the change to the new administration, the unknown about policy changes and tariffs and trade policies, and yet we have seen really strong equity returns Through September 30, you can down the first column, you can see S and P 514.83.

Wanna call your attention to something really unusual going on. If you can continue down that column, you'll see MSCI EAFE. That's Europe, Australia, and Far East. That is the benchmark for the developed foreign markets. And then the one below that, MSCI emerging markets, that is the benchmark for emerging markets.

Those two together represent really all non US equity markets. Notice those numbers 25 to 27%, much higher than the S and P 500. That's a really remarkable reversal. In the last ten years, year after year after year after year, the S and P five hundred has outperformed all of the other markets, and it's also outperformed mid cap and small cap US stocks. Entering this year, there was no real pivot point.

There was no real signal that non US stocks were gonna significantly outperform the S and P five hundred, but they did. And it's a great lesson in strategic asset allocation. Stick to it. And eventually, these valuations will all come back, you know, in into play. So entering this year, The US equity market, the S P 500 was at about 20 times earnings per share.

The non US developed foreign market was at about 12 times earnings per share. So the non US market was at a much better value, and we saw we finally saw that pay off. So diversification has paid off. If you see the dark blue line in the first column, total equity, that's your equities. 18% for the first nine months. Now you can see it's the S and P 500, and that's because of that non US exposure. So that's the big story this year. Fixed income return is 6.25% the first nine months of the year. These are bonds that are yielding four. How did 4% yielding bonds give you 6% in nine months?

Interest rates settled down. They came down. The interest rates we care about are six years roughly. We're we're investing in in intermediate term investment grade bonds. You'll hear that the Fed on September 1617 in the last meeting cut interest rates 25 basis points down to a range of four to four

and a

quarter. That's nice, but we're not invested in overnight investments. We're invested in six year bonds. And you can see that the in the six year bonds, obviously, interest rates came down because we made 6%, which is in excess of the yield of those bonds. Any questions about the year to date performance?

If if you go to the one year column, 12% gross of these, 11.91 net of these, and, very pleased to report that your your blended benchmark's 11.74. So in the last year, we outperformed that benchmark. We don't always do that. Very difficult to do. You know, about the best we can hope for anymore is from the benchmarks. And so, we're very pleased that it's been a good year. So

Yeah. I'll echo that because last year, we certainly were struggling with the the benchmark exceeding, so I had time

That's right.

Performance. So this is a very pleasant consistent with last quarter, actually, but we also had a nice. Very nice to see these kinds of trends. Mhmm. Yep.

So what what is the benchmark and where show up on this?

If you go to the previous page, page 12

Okay.

This is your benchmark. So it is 63% MSCI all cap world index, actually. And that that's a global stock market index. So that takes in the developed foreign and the emerging foreign as plus The US market. And then 29% Bloomberg Barclays Global Aggregate Bond Index.

And then six was it 5% S and P REIT, which is real estate, 2% s and p GSCI. The GSCI stands for Goldman Sachs Capital Inc, probably. That's a benchmark for commodities, 2%, and then 1%. Let's see. Three month UST bill index, which is a a proxy for cash. So that's the composition of the venture.

So as a comment that on page 13, the next page, we've got some extra indexes listed underneath the blue rows. And what that does is give us a little flavor for different types of benchmarks, how they were doing. So even though that's, for example, the S and P MidCap 400 index on page 13 is not the Pino Index, but it's on there for information purposes. Dennis, I I have always assumed.

Yes. Yeah. The you know, the purpose of the indexes have several purposes. One, the best explanation I've heard is and I like this one. The indexes and the benchmark should represent the pond from which we are fishing. But there's a lot of different benchmarks. And, you know, sometimes, big cap stocks rally. Sometimes, small cap stocks rally. And if we're underweighted, we're about to underperform in that period. But in the longer periods, everything sort of evens out. But, yeah, we have a lot of different benchmarks on here, and you can see, you know, the the differences between them over time.

So just to scurry us along, I think that the trust pension stats are very similar to this. Unless you have something more to add, Dennis, we might close this section out. Katie, please. Vice mayor.

Quick question about later

on, we're

gonna be looking at the investment policies, and I think it's going to impact this account. I'm not sure, but it adds global infrastructure. Do we have some performance information about what what would that entail?

We we haven't added it yet. We are we are recommending that we add a small portion of global infrastructure to the portfolios, and at that time, we'll add a benchmark. The global infrastructure in the last year or so has been performing like the stock market. And global infrastructure is very interesting. I'll keep this real brief.

The global infrastructure fund that we are using is investing in, at large part, in in the technology of a company that is purchasing five g purchasing cell towers, converting them to five g, and then leasing them. So at the end of the day, they basically hold if they needed to liquidate it. They hold small pieces of real estate. So it's hard to quantify them, but, yeah, global infrastructure is sort of a a an emerging part of the market.

Okay. And it's and it's saying global, so it's not in The United States?

Mostly US. But it yeah. You would you can't be global. There is a new global infrastructure benchmark. It doesn't have a long history, but we've started adding it to some portfolios that hold the global infrastructure fund.

So when we get to the policy item, we can discuss this part in some more? Okay. Alright.

One one bit that I do want us to to touch on, we expect to change we can go back to the preview well, let me highlight here, Chris. Under the fixed income, we have the Bloomberg, BARC, or global ag. We've discussed, this benchmark in the past. Kind of what Dennis was saying is our benchmark should be indicative of where what investments we have. Currently, we're closer to the Bloomberg US ag.

And so for the future, reports, we would like to show this as The US ag. If you go to the second page, can we go to under the fixed income section, we actually have both The US and global ag a little further now. And so you can see there. So we'll going forward, we'd like to use that as the the benchmark.

Right. We might as well keep the the global on there just as it is now. We can Yes.

Can walk in.

Thanks for clarifying that, Jonathan. So, again, I wanna move move on. We've got like, we can. We'll pick up some of these questions when we do the policy again. Any final questions? So I need to have the more of a pension. I'm seeing work done. So, very good. Thank you, Dennis, for your your report. I guess we do have members of the public out virtually that may be joining. So do we have any comments from the public?

We have no requests to speak on the same chair.

And we will move forward. A motion to let's see. No. I think this one we're accepting. So as chair, I hereby, accept for the committee, and we'll move on. Thank you, everyone. So item four is the receive the treasurer's investment report for the quarter ending September 30. And I do see a staff report, so why don't we Jonathan, you're presenting the staff report today?

Yeah. I'll start off, and then, at the end, we'll kick it off to Carlos with Chandler. So, again, this is for our investment, report for the quarter ending on 09/30/2025. As you can see here, these are our various, cash and cash equivalent, balances. The Wells Fargo, we have two balances that you can see some significant change, and I'll go into some of the detail that's behind the operating checking account in the following slide, but that decreased by about 40 thou $4,045,000,000 ish.

And like I said, that's we'll touch on that in the following slides. The cat of late for local agency investment fund, that one did increase by about 800,000. The invest, with Chandler, that increased by nearly 30,000 30,000,000. Sorry. 30,000,000.

And large part of that is due to a transfer from the, well, operating checking account to investments. And we'll go into a bit more detail on that the following slide. And then lastly, our PARs or a restricted for pension trust, and that increased by just over $1,000,000 for an overall decrease of about $15,000,000. And, again, on the next slide, we'll go into a bit more detail. So over the quarter, we have large disbursements at the beginning of the the fiscal year, first being for our CalPERS, unfunded accrued liability or UAL for $3,600,000, and this is a payment we make to CalPERS, and we save about three I wanna say three and a half percent in interest if we make a lump sum payment rather than pay it over the course of the fiscal year.

Second, we made $2,100,000 payment to plan JPA, which is our insurance for annual liability property. And, again, that was done in August. And lastly, the biggest change that occurred between Wells our Wells Fargo operating account and our accounting account relates to this transfer of $27,800,000, and this was made possible with a refinement, to our cash flow model. So we, in September, we implemented a new, model or a model that was developed by Irene, here, our finances intern. Concurrently, while developing this, this model, she's also been working with the policy so that with as we're moving along, the two can mirror each other As part of the, as you know, the internal audit work grant, program, Baker Chili will be reviewing the policy.

So as we were moving through this, we didn't wanna get ahead of ourselves and develop a model that did not really align with our policy or vice versa. And so, you'll see some, policy updates coming soon. But, again, this was made possible to, due to a heavy lift by Irene to develop that that model. So look, Roger.

Thank you, Irene, on behalf of our committee. We appreciate all the work here as an intern doing. So thank you.

And so with that, it'll kinda give us a bit more command of our cash on hand. So in time, we'll if you can go back. We'll refine some of the the the the the model, and so it's just gonna take a bit time. And, hopefully, you scroll back actually to the previous page. Currently, our operating checking account is at 2% of total portfolio. We do wanna drop that down probably by to another,

$2,000,000 or 2 and

a half to so that we will hover around $2,000,000 of funds sitting in our Wells Fargo checking account. Again, it's, they're sitting idly, but it is accruing interest at 3%. So it's it's it's doing something, just, it's not doing as much as what Carlos and his team can do with at Chandler.

K. And then let's go go to the next page.

And lastly, all investments are in compliance with state law, and the city has sufficient funds to meet its operating operating needs for the next six months.

So let's move to Carlos, and then we'll have some questions if we have some from Focus on

or take it from there.

Sure. Up to you.

Thanks. Good to see you in person, Carlos. For you, they see you on the screen nowadays.

It is nice to see you guys in person. So before I turn into maybe we can put the presentation. You've got it on there while you get

it up there. I can

just keep my comments brief. You you just a reminder that these are your operating funds, so it's an unlike your post retirement medical trust that you have with our friends at US Bank. This is a different type of investment. The objectives are mandated by California government code. Those objectives are safety followed by liquidity then followed by return. This is, these are operating funds that you use to make payments like CalPERS and all the other operations that you have. So they they have to be kept very safe. And and, of course, they're they're it's mandated that you invest them in high credit quality, fixed income securities, generally five years or shorter. There are instances when you go longer, but but, generally, you you're you're five years or shorter. This is an actively managed portfolio.

We don't just simply purchase a a bond and clip our coupon and collect our income. It's an actively managed portfolio where we may sell out of some securities before maturity if we think that there's an advantage to the portfolio to do so. We do have a strategy. That strategy is to invest primarily between one and five years with a duration target of approximately two and a half years. So everything is always built around that strategy.

Every port every bond that you have in this portfolio is of course, it it has a reason for being there. We're not just buying it because it looks good, but because it's furthering the duration to where we want it to be, because we're rebalancing asset classes to where we need it to be, or because we're trying to generate some sort of return or some outcome down down the line. So having said that, unlike, unlike your longer or or longer term portfolio that you have, very well diversified amongst different asset classes to address, retiring medical and pension type assets, this this portfolio is, again, focused on fixed income securities. And and, what am I trying to say here? What I'm trying to say here is that unlike the longer portfolio where you're driven by valuations of companies and and and different sectors of the stock markets, this is primarily driven by where interest rates move, and interest rates move around where we think the economy is going to be.

So having said that, I'm gonna spend about one minute talking about that, and then we're gonna move on to the actual portfolio. So the key things the key takeaways, of course, are that the government has shut down. This is, I think, the now the second longest or longest time period where the government is shut down. That, of course, has an impact on fiscal policy over the long run, not so much over the short run, and investors are keenly focused on where that's gonna end up. But, yes, on on the political side, but also just on the fiscal side.

How how long will we should we will we be shut down? How long will it be until government workers get a paycheck? What kind of an impact will that have to gross domestic product and economic growth in The United States? The second factor, of course, is that as the government is shut down, there are key economic data that are released by government agencies, and and we're not getting those. So when the Federal Reserve is making decisions on how to move the economy economy along with stimulation in in the form of lower interest rates, they're kind of flying a little bit half long.

The two key metrics have been that people really focus on that that, of course, the Federal Reserve has as part of their mission is to, control prices and to promote employment. And the price, we we got a little bit of a reprieve because that was a delayed number. It was released last Friday. The inflation the consumer price index, that's that's an inflation measure, was released. It came in a little bit lower than anticipated at 3.1, but certainly elevated from what we've seen over the past year.

It just tells you that that inflation is a little higher than what we expect it to be, but but not as bad as we think. The second piece, of course, is the employment number. I think you're all aware that the first Friday of every every month, there's a release from the Bureau of Labor Statistics giving us the, the the change in non fund payrolls. We have no idea what that looks like because it hasn't been released. The last number was was a below expect expectations number.

It it it it it's just been shadowing or foreshadowing, I should say, a trend that we're definitely looking like we're at the end of the business cycle. Things are slowing down. The economy is in need of a little bit of a stimulus, which kinda gives more fuel for the Federal Reserve lowering rates. The Federal Reserve did lower rates in September, by 25 basis points. It's expected that they'll do that two more times. That will have a dual impact on your portfolio. Remember that these are fixed income securities, and you make money in two ways. You're collecting interest income, of course, and then the fair value of the investments gets booked into your in in in your through your accounting. So having said that, lower rates means that into the future, you're gonna be reinvesting at lower rates. You average about two and a half years.

You have investments from overnight all the way up to five years. But, as as those rates come down, it'll take a while for you to reset lower because you follow a longer duration strategy. The returns have been good. I would estimate that about two thirds, supposed to three quarters of your return came from interest income because you've had some great yields. The rest of it came from fair value appreciation. We capture that in the return numbers, whether that was that was realized through a sale from maturity or not. And even if it was just a book on paper to show you what what what just to giving you a holistic view of the portfolio, That's called the total return. If we turn to page number 17, I can

give you an overview of

the portfolio. As of as of the September 30, the portfolio was a $205,100,000. You were earning an interest income of let me rephrase that. A yield of maturity of 3.32%. That is the interest income that you are due to earn into the future assuming that nothing changes. That's on an annualized basis. Obviously, when we reinvest, we're gonna be reinvesting at a lower rate because that's what what rates are available in the markets today. So gradually, that should come down even more. You can see from three months prior that that's it's already come down $3.73. The market yield is the yield you would get on the portfolio had you invested it on the date of this report.

That's $3.38. If you think about it logically, if I'm going to reinvest any cash that looks like this strategy, like this portfolio, that's that it it infers a a general an average rate of what I'm going to pick up with those new investments. So you can infer a reinvestment rate. That reinvestment rate, again, is lower than it was three months ago. It was over 4%. And I said like I said, that that has had a dual impact. It means that the portfolio has a higher valuation. It's it's it's grown in value. But into the future, your earnings will be lower. I do wanna highlight a couple things on page 18. We still you

know, when you're at the

end of the business cycle, when financial conditions are uncertain, when we have uncertainty due to fiscal policy and tariffs, and and then, of course, just volatility in the markets of what's what's really gonna happen. We we tend to to, trend towards, high credit quality. We always buy high credit quality. We just go up in quality whenever possible. So the bulk of your portfolio is still in treasury securities. That's the first thing I wanted to note. The second is, of course, you have a sizable cash position. That's that infusion of cash that came in from staff. At that point, we we we hadn't started investing it yet. You it just got captured in the reports right at quarter end.

If you look at that a few weeks later, you'll see that that gets diminished. And, of course, we diminish that gradually, incrementally. If you turn to page number 24, you can see the return for the last twelve months ended September 30 was $4.41. As I said, about two thirds to three quarters of that number came from interest income. The rest is being fueled by fair value appreciation, which has been fueled by lower rates. Rates have been falling, causing your investments to go up in value. The last three the last three months ended September 30 were $1.30. When you look at the, the the net of fees, it's $1.01 29 for the quarter. $4.41 for the year, $4.33 for the portfolio. You're clearly beating the benchmark on a on a, before and after fees basis.

I would tell you that, that this portfolio is is is structured right now and performing as designed. We don't anticipate any big credit stories. One thing to keep in mind, of course, is that there were two banks lacking any other economic news that can be had by investors because of the government shutdown. Investors have been focusing on whatever else is out there. The two big news that came out were two bankruptcies.

First Brands, which is an auto parts supplier, and and their off balance sheet financing and some questions regarding that. And the other news, of course, was was due to, Tricolor, which was a an auto, lender, basically, to a lower tier credit. And those two bankruptcies, it it made some investors question, are we gonna have a bigger credit issue? You've got some bankruptcies going on. Our observation and our analysis right now from our credit team is that that that's probably going to be limited more towards the regional banking level, which is generally a banking sector that you don't hold in your portfolio, nor do we think that this is a malaise that's going to spill over to the rest of the, investment grade credit world.

Apart from that, you're you're doing well. We we, we always look forward to the values going up, but, of course, the income will come down. Income hits your budget, the values don't. They hit your your year end financial statements. Combined, they're a good story. But from a budget perspective, I would budget just slightly lower for next fiscal year. Any questions?

Yeah. But while we, include this section, the clarifying from the committee members, for either the staff report or the Carlos who's excellent as the same And sync Do have any payers got one?

Yes. So there's I I see three different accounts. So 10659, 1063, and 10664. And Where are you looking on the reports on In the report, it's PDF page 95. You'll see the account balance for account 10659. And then on PDF page so that that is balance of $2.00 5, And that's that to do

That'd be I'm sorry. I cut you off. The channel report number?

I think she's looking at pages pages 17, and I think she is also referring to page 26 and then, of course, page 29. And I can and I can walk you through those.

Okay. So I think the first one is the standard Chandler account that we're used to, the 10659? Correct. Okay. The next one, it's, it went from 120,000,000 for June 30. It's at 75,000,000 September 30. That's $1.00 $6.06 3. I think that's OPEB and pension. Not sure.

Not quite, but you're kind of along the right track. So that's we if you note at the top of that, it's it's titled the reporting account. Those are assets in the operations bucket of the city, so it wouldn't include OPEB and and another. Those are separately managed and separately held, to their own investment policy. These are other operating assets that that the city would rely on to make payments and things like that, but those are not assets that we manage. We just simply report on them on your behalf so that you have a place to see them altogether. So that would include Leith, and it would include your bank account.

Okay.

Thank you.

And then and then the third, which which you also referred to, is a consolidation of the two.

Ah, okay. Because I was like, where's all that money? Exactly. Darn. Yeah. Okay.

Alright. Thank you. Good. Any others?

I had a super general question. When the rates go down, does our benchmark change?

No. No. The benchmark I really like the way you said that earlier. It's a pond that we fish in, and that's exactly right. The the benchmark is an indication of the market in which you're investing, the amount of risk that you're taking on, and it provides you an expectation of what kind of return ballpark you should be getting. So as interest rates shift, that's a market shift, but it's not shifting the amount of risk that you're taking on in this portfolio. Of all the types of risk that you're taking on in this portfolio, the largest one that I would identify is well, it's market risk. Okay? Okay. Default risk is is big because people are worried if a company blows up and they're not able to pay back their debt, then, of course, that's a bad thing.

But but the the bigger one that impacts the portfolio return on a day to day basis is is is your duration, your which I talked about two and a half years. Your duration is a measure of how your market value in your portfolio is impacted for a shift in interest rates. Let me rephrase that. For a market for interest rates falling or rising, that duration number lets us know how that market value will change. And that bigger than that that has the biggest impact on your return over the long run-in a fixed income portfolio like this.

So as interest rates go down, your duration informs us how your portfolio will be impacted, but we are still maintaining a similar level of risk. We we have a way we we have a we we have permission. We have the ability to shift that duration slightly shorter or longer depending on where where our analysis is telling us where rates are heading. But we primarily constrain it because if we make a wrong call on that, it can have a a a very significant negative impact on the portfolio. And remember, this is safety and liquidity.

So we tend not to move very far from that target. We can drift, our duration the the duration of the port of of of the benchmark actually found on page 17 is two point four eight years as of September. Yours is 02/21, but that's only because of that cache infusion. If you look at the prior quarter, it was a February, and we're working to build that back up to somewhere around the two and a half range. Our call right now, and it has been since the 2023, has been to be slightly longer than our benchmarks because we've been anticipating rates to go lower.

And indeed, if we take a look at page number 13, the chart on the left hand side will demonstrate that that's exactly what's happened. Rates have been falling. We've been sort of in this end cycle of investment of of of the business cycle, and and we're at a point where where the Fed has to step in and stimulate. But just because that's happening doesn't mean that we change the benchmark. The only thing that would change the benchmark would be if all of a sudden staff came back to us and said, we're needing too much cash flow out of this, and we need to hold our money closer to the vest, shorter, more maturities coming in.

So then we would visit a shorter benchmark, or, the city came back to us and said, you know, the the the level of volatility that we're experiencing with this approach is is too much. It's we're not we're not comfortable with with the volatility of return. We need to ratchet back the risks of shortening. That's the only period that we that we would look at something something different. Longer, is a little tougher. I've never yet run across a city that has investments significantly longer than five years that can actually support their operations. That was a very that was a lot. I apologize, but I hope that that answers

your question. No.

It does.

Thanks, Carlos. Hannes, I have kind of

a follow-up question. I was gonna ask, like, in this, like, falling interesting environment, you know, what do you do you do anything differently? I think you kinda addressed that in Sheila's question. Another question is, like, what is the spread between what's in Chandler versus, like, the checking account that you mentioned? You you mentioned 3%?

Yeah. So we keep we've got the out of our total portfolio, which would include

I I think you were showing, like, you moved a bunch of cash from the checking account or Wells Fargo checking account to the Chandler account. Right. 26 I'm curious what is the the spread between, like, what, you know, Chandler is giving me versus the checking accounts.

So currently, in Wells Fargo can change it at any point, but they did inform us that they were gonna hold that 3% through to 06/30/2025.

Three months ago, we were reinvesting at a four zero three. Okay. Today, we're reinvesting at somewhere around a three thirty eight.

So we still have at least point three or 38 basis points that are challenged. I don't know since then if you've had an opportunity to invest in other opportunities between as of September 30 to today. So it's kind of dropped down since then, but it could have been at least point at 38 basis points.

The the the rates aren't static. They they move, as you're aware, and some days are good, and and sometimes we we wait. We look at the yield and determine when we should wait for this release. Not that there's much of a release these days, but we may wait for an event, or we we're looking geopolitically. This is part of what this is sort of our secret sauce.

We make these decisions, and we may hold off. The one thing that I will highlight, and and I wanna bring you back to page number 13, is that there is still an inversion of the treasury yield curve. If you look at the right hand side chart, which is coming in just a moment, this is the term structure of interest rates from overnight well, from three months in this chart all the way up to thirty years. We're just looking at a yield relationship between shorter treasury securities and longer treasury securities and and how much yield they're they're providing. Logically, you would normally believe that a shorter when you're lending your money out for a shorter period of time, you cannot charge as much interest as you can if you're lending your money for a longer period of time.

Longer longer investments, longer loans are are generally carry a risk premium because there's more time for bad things to happen, and you you wanna get compensated for that. There's also more time for investment opportunities to roll by that you're gonna miss out on because you're invested in this investment. And you could see that there's there's an next page, page 13. There is an inversion of the yield curve. If you look at the right hand side chart on the left side, the left hand side of the right hand side chart, there's a a kink.

That's called an inversion, and and and that happened for I I can get into the economic reasons why we talked about them over the past two years. I won't. But but what I wanna say is that that is giving an advantage to short term investments right now from a yield perspective. And you would think, well, why don't we just pile into those shorter investments because we have more yield? But what I can tell you is that if you look at where that was a year ago and even three months ago, it was much higher than it used to be.

And because they're shorter, they reinvest. They they the money comes back to us to reinvest faster, and you can see that we would have had to reinvest at a lower rate. When you buy the longer investment, you're actually picking up something longer or higher and hanging on to it for a longer period of time. There's a breakeven analysis that's part of what we do to make sure that we're making money at the end of the day versus what's happening.

Thanks for that, Carlos. Hope that helps a bit. I I'd like to bring us to a closure of this segment with a question for the staff on the staff report. It's kind of a philosophical question, but, to me, if we look at page two of the staff report, there's a comparison. I like comparisons between the September 30 balances on the general ledger for cash and investment versus the 06/30/2025 general interest balance.

But when I look back at our previous audit committee report for June 30, the, you know, $5,000,000 difference. So, typically, I I have talked to staff till they're sick of hearing me, describe this, but I kinda don't wanna page back to the previous reports all the time because I assume they're gonna be equal to what what's shown unless there's some, qualification. And there could well be a qualification in here. That's why I phrase it as a philosophical idea. Maybe, Jonathan, you can shed some light for me on well, can can we assume that prior numbers are static on future reports and maybe even on this one if we understood the report?

Certainly. And then it's it's a great question. And in theory, if we're able to close out our books quickly and on time, well, to before we issue this No. It it should remain static. As it was the end of the the the fiscal year and we were still in the process of closing our books when we reported out, there will be a variance.

And we should have highlighted that here, And we'll we'll include that as part of what goes to counsel, kind of identifying what was the the difference. Most of it landing on the general fund, and that was due to some transactions that had yet to post. And so they were reconciling items that had yet been processed. And so we'll we'll identify what those those those amounts were, and we'll include in the staff report going to council.

Super. That answered my question. And I know we've got this, of course, there's gonna be changes to the general ledger adjustments after a particular report. So, that was what I was hoping I would hear. Why don't we move to comments from the public, or if there are any, Lindsay?

We have no hands raised on Zoom chair.

Outstanding. Although we welcome public comments, we are up against the gun on time today. So why don't we move to a motion? And I've got a question for for us as a committee. It it says we our action item is we received the investment. And, you know, my question for us is, can we recommend to city council that we accept its sub modification that Jonathan's just mentioned? Or should we just accept it, in which case we can move on? I'm comfortable either way, but it's kind of two city council members here. Is it of any use?

I don't think so. What you're suggesting is is excellent.

Okay. Why don't Yep. Everybody's okay with that. Why don't we have a motion to that effect if that's So moved. Okay. So moved. So, Lindsay, were you able to capture that?

I I need a second.

Is there a second? A second. Okay. Any discussion, comments on the motion? Alright. Well, we take a vote. All in favor of that motion, aye. Aye. I see it's unanimous. Excellent. Thanks, everybody again for I appreciate your in person business this time.

Absolutely. Thank you.

Moving on to the item agenda item number five, we've got the received the internal audit and the internal audit fraud, waste and abuse programs update. And I saw Chelsea there earlier. Welcome, Chelsea.

Thank you. Thank you. Very nice to see you all today. I will share my screen, and we can begin looking at our internal audit status update. Can everybody see my screen?

Not yet. Yes. Now we can.

Oh, perfect. Okay. So we still have one outstanding project for last fiscal year, and that's the grant management internal control review. I'm happy to report that we actually provided a draft report to, staff today. And so by next audit committee meeting, I'm hoping that I will be able to present this to you all.

So wrapping that one up really quickly here. So then that brings us into our current fiscal year, '26, and looking at those projects. So number one is the council wide policy review inventory. We were able to initiate this project. We had our kickoff meeting already done, and we've sent a document request list to staff.

So, you know, activities for next period, we're gonna continue to assess the received documents and schedule those relevant emails. This is a fairly large project, and it's gonna take us, we estimate, between October through February. So, this will be another another status update next time around. That takes us into the investment cash flow policy and review recommendation. So this was supposed to take off in October.

We were hoping to finish in January. We have initiated the project, but we were still I know that there's a lot going on for poor Jonathan right now. And so I think that we're gonna receive the policy, the investment policies in the next couple of weeks. So that's really when our work will continue, and we can move forward. The citywide internal control review, this is scheduled from November through February.

We are on track and, ready to start this project next month, and we'll be happy to report back some of our, some of our our, I guess, improvements and whatnot, sometime by the next audit committee. And then last but not least, we have our ongoing internal audit services. This is, you know, a plethora of different things can really having me come here today as well as helping monitor the fraud, waste, and abuse hotline and looking at audit validation. So going into our fraud, waste, and abuse hotline statistics, we do show you what has happened quarterly. And so there was one complaint that we received this quarter.

It was an employment matter. We referred it to appropriate city officials, and that has, that has been closed. We do show you, like usual, our total reports that we have had from 2022 when we started this program to present, and we also show our outstanding reports and how how many of those have the days outstanding associated with them. Is there any questions about anything I've reported thus far before I move into the validation stuff?

I can kick it off, Chelsea. You 'll remember from previous meetings, we often ask you about the ones on the far right bottom. The outstanding report stays open, and there's a lot of confidential information. And and I was thinking about when I looked at it, what what is an outside person might I I wonder about a six hundred and seven day outstanding? And we talked that you can't disclose because there's NDAs and other issues.

But I wonder if we could have maybe an asterisk or something. If somebody looks at hundred and seven days outstanding and then a few others, it it maybe a little asterisk would say, well, these are all being looked at in accordance with the city's policy, whatever that may be, that may be available for a link that they could look at or something. It's not like we're not paying attention to these things, although we as the audit committee can't do much about them other than ask you this question. What do you think about a footnote? Is that or city staff too if you you have a a thought of throwing it out?

Absolutely. I think that's a great idea, and definitely shows the due diligence on Baker Tilly's side as well as city management side. And so, I can we can next time have an asterisk, and I can also let you know the last time that Baker Tilly followed up with city management on these outstanding reports because that is that is happening, frequently.

Super. I appreciate that. Any other questions for? Excellent. Yep.

It's it's it's clear to me. I'm not sure it it's clear to everyone, but the total reports are 38 reports closed. We need open our 10. So the rights the columns on the right side are directly associated with the 10 open ones. Right? Correct. Correct. Okay. So the most recent one is is has is outstanding for ninety five days?

That is correct.

Okay. So there is no open claim that is less than three months old.

Great. We had one open claim, or we had one fraud waste and report we received this quarter, and it closed. Okay. This quarter. So these are open outstanding reports are all from prior quarters. Yeah. Okay. Thank you, Chelsea.

Yes.

Chelsea, I don't see any other outstanding questions right now that we have as a committee. So why don't we march

Really to quickly, let me show you the open, the audit recommendations. This is part of that ongoing report, you know, our ongoing services that we provide the city. I'm happy to say that there are 49 validated recommendations. We were able to, close one recommendation that had been outstanding this quarter. So there is 29 open recommendations left.

And this is the this was the finding that we were able to close, and it was around governance. Any questions about the audit recommendations?

I have a comment. I really like this. And I know you started presenting this, I think, at our last meeting. So it's nice to see this as a recurring, report, and I think we may over time, find it very useful.

Wonderful.

Why don't we move to see if there's any public comment then, Lindsey?

We have no hands raised on Zoom chairs.

Outstanding. Well, you're welcome. Okay. Our action item is to receive this report. So I appreciate the quality work, and I hereby declare we've received it. Thanks, Chelsea.

Thanks, everybody.

Okay. Item six on our agenda. Action item is to review and accept the OPEB and pension trust investment policies. And I'm looking at a staff report here. Jonathan, you want to kick it off?

Yeah. So for the most part, the the OPEB and pension policies will remain unchanged. The one bit that would that we are proposing is the inclusion of global infrastructure to an asset class. Did notice just now that there was a paragraph kinda highlighting what the reasoning behind including that asset, and went ahead and included there that somehow fell off the the the, the staff report, which should have been. It's like, well, what why is it there?

And and it when you were asking the questions, like, oh, let me go back to the staff report to find out. Yep. It was missing. So when we let me quickly go home. So, again, this is, the infrastructure is to kinda diversify some of our, our asset classes or have the ability to to invest in other options. And included in there, we would be providing this snippet in our staff report to counsel, so it provides that reasoning. But I have Dennis here who would provide a a more robust response to or a comment as to why global infrastructure should be included as an asset class.

Yeah. Very quickly, These new asset classes form over time. And in in the industry, global infrastructure has emerged as the new asset class. And as it's as it's sort of coming alive here, we see it as something that it just as it states up here, inflation hedging, which means that in periods of high inflation, it ought to do well because it's mostly income producing real estate, stable cash flows, and historically low correlation to traditional equities. That's the that's the brass ring for which everybody's reaching.

Can we find an asset class that will not perform just like equities? Because if it performs just like equities, just like stocks. But if we can find something that might go up and the market goes down, that's what we're looking for, that reduces the overall volatility of the portfolio over time. So that's why we'd like to see it. And as part of this, what we'd like to do in the investment policy is add this as a permanent s.

Barely state, you know, global infrastructure under alternative assets, and then and then put it in the table with a strategic asset allocation, you know, with a three and a half percent target to be funded from currently in both real estate and commodities. So right now, real estate plus commodities is 7% target, and we're recommending that that be three and a half percent real estate and three and a half percent global infrastructure. We have no interest in commodity investments right now. And and I'm not sure if we will. And very quickly, one of the reasons for that is because commodities are so hard to invest in.

The only way we can invest in them with liquidity, the ability to get out, is is investing in a mutual fund that is itself investing in commodities futures contracts. And they don't have a really good track record of making one. That's a very difficult thing to do. Very high cost. So you can see here, we're recommending, you know, we're gonna take commodities to zero, real estate to three and a half, global infrastructure to three and a half. So really a minor change to the overall mix.

Why don't we move to questions unless Jonathan, you got some more to add?

Yeah. That's that's the gist.

I see the vice mayor's done one for Go

for it.

So my question was, since this Glory infrastructure is a new asset class, did you see? Does it mean that in the past, we could not invest with this asset?

Yeah. Good

question. Not fall into one of those other Correct.

Ten years ago, there were no global infrastructure funds. So they're they're sort of a new a new animal. You could ultimately invest in something similar to it by by investing in real estate technology. But now this is sort of a an industry that is sort of that real city.

So it's something new that's

It's new.

Done for

Yes.

All investments.

Yeah. Yeah. Just there were no global infrastructure. Well, that was ten years ago. And and, again, you know, five years ago, I think they were all so new that no one really we didn't really have a great level of trust. But now we feel very comfortable.

Yes.

Thank you. Thanks. I'm I'm not sure I understood the example that you had, but it sounded as though it could be, yeah, investing in domestic property, basically, the holes that a five g network might want to use to install their hardware. Like, what we're seeing in Cupertino, we've got Verizon here. Is that the sort of thing you're

Well, they and and forgive me. I probably glossed over that too quickly. We have the fund managers from one of our preferred companies come in and talk to us. And and we and this was a year or so ago, we basically said,

what is global

infrastructure? What are you investing? And and he explained at that time, the majority of the fund, so over half of the fund, was invested in companies that specialize in purchasing five g I'm sorry, purchasing cell towers all over the country. They then go to the cell tower. They replace all the technology,

bring it to five g.

Now they own it, and then they turn it to sell it to the wireless carriers and say, we can either sell it to you or we can lease it to you. So that's a very profitable business. So that was that's about half of it. The other half is global infrastructure in terms of massive construction projects, highways and bridges. One thing to keep in mind there is a lot of the money from the American Rescue Act, which was passed under the Obama administration, is still not spent, and it's in the pipeline.

A case in point is there's a bridge in Cincinnati I happen to be familiar with. It's across the Ohio River with two interstates come together, massive infrastructure project. It'll be in the billions, and they they're going to start turning nerd on that early next year. It's already in the pipeline, and it's come it's it's allocated at the federal level. That's not the only one. There are several other projects like that. So if we can invest in those projects and the companies that are getting those contracts

So I can understand the investing in the companies that are getting the contracts,

but

I don't understand how you can if the if the government is funding it, I don't understand how we can invest in in that bridge.

Why investing in the stocks of the companies that that contract? Okay. Yeah.

I get that part. Yeah.

These massive construction.

So Chad told her. John Deere.

That's Very good example. Okay. Yeah. That'll flow all the way up the the vertical. It'll it'll flow all the way up that interest. Absolutely.

Okay. So, looking sort of internationally at my only concern because global infrastructure could be, building a massive refinery. Is that something that we're interested in funding or supporting? So there could be there could be investments like that that really aren't things that we want to be supporting for

There definitely could be. You know, with mutual funds, we have limited ability to carve those out. It is three and a half percent target of the portfolio, relatively small. It's not a, you know, the core of the investments we're going into. But, yeah, with the mutual funds and ETFs that we're using as vehicles to invest the pension and the open, we really have limited ability to to target in industries or, you know, things of that nature.

K. So we would have to, as a council, determine some sort of direction for investing if there's classes or, I should say, sectors that we're not interested in or, you know, or that we are interested in. If there's an interest at this point from the whole council to to look into that, but there's been some questions about some of our investments here and there. So when it says global, you know, there's always a little concern of if that's gonna be an investment in a particular country. Do we agree with with their their politics?

Right. Right.

Those kinds of things.

Okay. That's something we're very open to that. If you have concerns at the council level, share those with us. We'll kinda screen through the portfolio, see what we can do, report back to you, and say, you know, here's what you're invested in. If we wanna exclude something, here's here's the way to do it, or we'll be honest with you and basically come

back and say it.

It's But Mhmm. But we we can certainly take

a look at that.

Yeah. So, basically, anything that would put us in the newspaper for us seeing it. Good. Right. Thank

you. Yeah.

Now I'm. Yep.

Hello. I have a quick question.

So between real estate and global infrastructure, are any of the companies in those portfolio, like, in the AI data center build out, like Oh. Or whatever, you know, like, the big the big techs are subcontracting. Like

I I'll have to report back on you. I have not had that question before. That's a good one. I'll find out what portion of of the real estate well, NGI. Yeah. What portion of those are supporting data center construction? Yeah. That's becoming I think that'll be one of the big the next big controversies. That's a good question. I'll have to get back

with them. And I've got a philosophical question about this table. It's all very nice. But I just heard you saying in commodities in the near term, it's, correct me if I'm wrong. But to me, that doesn't seem like a major category that Citi should be investing in, and and for historical reasons, it's there.

But I see there's all sorts of other asset categories or whatever we wanna call them on the next couple of pages of the policy. And wouldn't it make sense to maybe simplify this little table instead of having a bunch of assets? Because we do have on page three or four a whole bunch of assets that may not, at this point, have as a target. So is it something where you prefer? I don't wanna suggest limiting. My question relates to how much are you limited by having that table list specific assets that are otherwise also listed on page three and four. Do we need to have it on there in order for you to feel that you've got to go ahead?

I think it's good to have a table because it really does a good job of setting the expectations. And and this isn't limiting in any way. This is variable.

Right.

If, for instance, we listed probably 10 or 15 different types of securities, and we'll only purchase, you know, maybe half of those.

Which is why I was thinking commodities would be like that. Why do we have to list it separately? It's zero anyway. I'd be more than

happy to just cross it off.

But it's still listed on as a permitted asset.

Yes. It's in future

change your your perspective. So I guess that's my question is, why do we why don't we just have two or three categories like the equities, the stocks, and the other for alternative investments? If, anyway, maybe my question is, does anybody object to getting rid of the commodity line to simplify the table somewhat? Who wants to invest in commodities here?

Not me. No. But I was gonna suggest the same, actually, to remove commodities given that it's not aligned with with the investment objective. But my other question was, Dennis,

is

this correct to say that global infrastructure could potentially be a subset of equities given that we're not investing in single names and we're investing through funds and and index? It it certainly could be a subset of equity, but it's it's been broken out now, and this is just sort of becoming commonplace in the industry. And so we're you know, so this isn't just something that we are doing. It's it's really the whole industry sort

of going that way. Yeah.

And then the other question is whether we wanted to include the the whether the global infrastructure could only be invested in funds and and and tree investors and not individual names as a consideration.

Why don't we move that question or discussion to a motion? Let me get a motion. I don't think have one second. Any more questions? Staff or Dennis, I think we're we're good on that. Lindsey, anyone from the public asking to speak?

We do have one hand raised on Zoom. Excellent.

Who's that?

One moment. Welcome, San Rao.

Yes. Can you hear me?

Yes. We can hear you now.

Okay. Yeah. I did not see the pop up with the unmute options, so I guess I was welcomed without the unmute pop up. I I do have some comments here. So my first comment is that the reporting obligations require that the quarterly reporting includes the year to date rate of return.

And I wanna point out that the report that was received earlier does not have that. What you are showing in the reports are yield, which is less interesting when it comes to the equity section or the equity summary. So you're showing current yield, and you're showing annual income projected, but you are not showing the rate of return on a year to date basis in the quarterly reporting. I just wanna point that out. My comment today on this section of the agenda is gonna be two things.

One, I wanna point out that in the policies under the equity investments, you are not allowing the investment in ETFs for equities in The US markets. You're allowing for equities in the emerging markets, but in The US markets, you're requiring mutual funds. And I wanna observe, as Chair Schmidt probably knows well, that ETFs are a lower cost investment compared to mutual funds. And for consistency reasons, perhaps this policy is outdated, but there is no reason to not allow ETF investments in The US markets. The second comment that I have is I would like the committee members to consider a motion to amend the policy to move single stock investments to prohibited investments and only allow investments through instruments such as ETFs and or mutual funds to protect the interests of the city so that diversification is maintained.

While the while the chosen vendor may may choose to diversify through single stock, I believe that unnecessarily complicates the investments. And if you look at the rate of returns, the returns have lagged the S and P 500. They have lagged the total market investments. They have lagged the technology index, and we could go through any number of indices. So I would like to urge the committee members to amend the policy to include ETFs for The US markets and to prohibit single stock investments.

I will further urge the committee members to reject the recommendation on global infrastructure and instead to consider a more simplistic investment policy that invests in the total market for The US market, such as a VTI ETF or the total global market that is a VTE ETF. So consider VTI or VT. Right now, the investments are grossly underperforming all indices. And so I urge you to really simplify these investments and prohibit single stock and encourage and require ETF investments primarily unless there is reasons not to do that and and to certainly not have to invest in single single companies for the infrastructure. Thank you.

Thank you, Sam. Lindsay, are there any others?

We have no other speakers on Zoom, chair.

Alright. We'll close out the public comment section then. And what I'd like to propose is that we maybe have a motion here, and then we can deliberate on it. Mhmm. Here, I guess, what my concept again, this is one of those where the suggested action, it means that we review and accept.

And this is one, again, where we can forward to city council with our recommendation to if we have any amendments to it, which I think might be appropriate based on historical than what we've done with committee, but there's not an appetite for that to go can so indicate.

As soon as chair, we could collect the comments that we made here and accept the accept the report, but forward on our comments to the council fully for full consideration regarding the data centers, the what should the council want to adopt a some kind of investment policy regarding the types of investment, fossil fuels, and the like in the future. It was at least open to that possibility of having that conception if there were any other concerns about having this policy change.

Okay. That's a neat idea. We can accept after we do some more deliberation here then and then have a set of comments to forward as well or frame it all into one motion. So it's appealing to both. I'm gonna need help on deciding this, but I guess I have to look. Did anybody else have a particular preference with experience in procedural procedure?

I was wondering if it would make sense to bring this back to the next committee meeting or or a future committee meeting by taking into account this the the comments and giving everyone a chance to provide their input as opposed to just sending it directly out to the council.

And that's very interesting because I think we have some outstanding questions on what actually is global infrastructure. We don't have a time limit on these policies. Don't know. I think it might be an annual thing, but, yeah, totally. Well, I suppose.

This is a tricky one because I I've asked the question, but I haven't gotten a response. Certainly, with our investment policy, the one that's managed by Chandler, that needs to be done timely. This one does not have a deadline, but unlike where we did sit with investment policy, it ends at the end of the fiscal year. This one might be a bit of a challenge. We've historically taken it to counsel in the first meeting in December, so there might be a window there if there is a deadline, and I'll have to take a look into it, to see if there's no investments that could be done in that window if there's no policy governing the the investment. So it essentially sit static. It should invest

I mean, as as I recall. That's a great and you might have some experience too. It's Jennifer. Right? Angela. Angela. Sorry. Angela. I apologize.

And that is kind of at the discretion of the city because there's a wide range of how cities and agencies treat their investment policies. So I guess the the short answer would be at the discretion of the city. Typically, from my experience, we don't see agencies putting a deadline on these policies as they most often are kind of evolving, which is why we we do come out and meet with the city. So not that we encourage it to be changed every quarter, but

Yeah.

There is the options that it is a evolving documentation.

Right.

So that being said, hate to do this, so

I'll kick it back over to Jonathan.

Yeah. No. I think that I think that's helpful because there's one more question, which is sort of reading the. There's also some staff comments that you guys may not have had chance to reflect on. There may be other types of questions like the vice mayor was raising and some other questions here that that you might wanna include in a report that addresses that. So there is that benefit of more more thinking from the internal as well as we could have it as a separate item in a future meeting.

What we can do is include this.

You could also look up what the rules are, whether I I'm pretty sure over the years, we've I can remember back where where we would skip a couple of years before we would re look at the policy. It doesn't mean it's correct. But

We will have that special meeting in, the November, December. We can include that as part of that conversation and then take it to counsel, shortly afterwards.

Okay. That to me, that makes some sense. I'm seeing some nodding in the head. No one's really objecting to that. So why why don't we do that? Why don't we table the Americans? The British and the Americans use table in different ways. I'm going over to England, so I apologize, guys. But I think table in America means we're gonna take it until we're gonna put it on the side and not make it, and we're not gonna accept this this time until we have more report back from city staff, maybe input from and cars for that matter, and maybe the insidious. Of people can chime in.

So do do you wanna recap what your questions were so it's clear, or do you think it's already been I'm clear.

I'm just wondering if we're not continuing the item to to the next special meeting. Is that including me to have a motion to that effect?

It's a Good question. More what we're doing. I'm asking. Protocol is July. Is that we're all gonna look at you?

This is new to me. So, let me

just pass it through that way so in case just to kinda cover ourselves, send me your I know that we continue this item to our next special meeting. Third second.

I'll second.

Okay. We've we've got a motion. We've got, any any, comments on the motion? Have we given enough description of what the staff is gonna come back with? I think we we didn't have it. And staff can reach out independently. That's not prescription. So Certainly. I think we got it outlined enough. Alright. Why don't we do that? Let's take a hold on the motion. All in favor? Aye.

Aye.

Nobody opposed. Another unanimous. Doing a lot of unanimous stuff to us. Very good. All right. Thanks, everybody, for input and more research required. Excellent. We'll move on then to agenda item seven, which is the receive the fiscal year twenty four twenty five annual feedback for update. And I see Sofia there. Welcome, and, I turn it over to you because I don't see a staff report. Thanks, Sophie Sofia, for joining us.

Sure. Thank you. Good event, good afternoon. Can you guys hear me okay?

Yes.

Thank you again. So good afternoon, everybody. So I'm here. I'm Sofia Co, and then from the group, I'm an engagement partner for the Citi's fiscal year twenty twenty five financial statement audit. So I would like to brief, give an update on the annual, financial audit as of now.

So our interim field work, which focused on the city's internal controls over significant transaction cycles that we identify, and the field work started in May. And at that time, we only had few, remaining items to follow-up. The year end, audit, which mainly focused on the, balances validation, we started the year end field work around September 22, and we substantially wrap up the field work in early October. Our audit manager who is also on the line, who's Marco, and he actually went on-site to the city last week to assist with some final review of audit, items and coordination to move on to our reporting phase. The draft report has been, shared with the city's management team to verify balances and assist in, preparing the management discussion and analysis and also the statistical section.

So, currently, the audit draft report and audit files are undergoing our internal review, including my review and also our call quality control department review. We are anticipating sending a second draft within this couple of days after the review is wrapped up. Our goal is to finalize a report and present it to the audit committee on the next committee meeting, and then followed by submission to the city council in December. But, of course, contingent upon completing all the audit, open items. So when I come back to the audit committee next time around, I will have a presentation prepared with our other result and some financial information for community members to further review and comments.

And, overall, the audit process went really smoothly. Last year last year's audit already showed significant improvement compared to the, like, the year before, and this year's progress has been even more streamlined and efficient. So we will also like to take this opportunity to thank the Citi's management team for their strong collaboration and then timely support throughout the whole entire audit process. This will conclude my overview, and also the update for fiscal year twenty twenty five audit. I will be happy to answer any questions that you may have.

Thank you, Sofia. Any questions from the team? I've got one, which is timing of when you're available to make the, assuming the audit, is concluded as you indicated in a timely fashion. And I think we're we've been I've been seeing a number of different email suggestions on what who's available from what timing. So while we have you and your team and Mark and the city staff, maybe we can answer that question. What are we targeting currently?

So we we were originally targeting the week of Thanksgiving, and we understand that that was gonna be a hard sell seeing that most people may be traveling. But we were trying to be ambitious in getting the accurate to you guys as soon as possible. Based off of our initial polling, doesn't seem like that's gonna happen, we're gonna to wait till the following week, which is, I think, currently, I think the lead is December 1, which is that third

December 3.

Third. Thank you. It's that first, first Monday in December.

Okay. And that works for you, Sofia, then if everything comes together? December? I

was checking the calendar. Yeah. No.

You're checking. I'm actually out of town second through eighth. So

Are we Are we talking about December 1 or December 3? I thought we are talking about Monday on December 1?

Third. December 3.

December 1 better for me, which is the Monday, but that's me personally. December 1. Let's have some give and take words. Is December 1 too aggressive or not doesn't work for people?

December 1 works for me.

Okay. That works better for me because I'm on a plane the next day. To be honest, then you think it might work.

It will work for our team. And as as Sofia had indicated earlier, assuming that we're able to finish wrapping it, which all things based off of our projections will will certainly be able.

Well, so so maybe related to that is, are we now with the hybrid structure? Maybe Lindsay is the right one to answer this. Yeah. Members of the committee zoom in nowadays? I I know city council can do that, but can audit committee members do that?

Yes. Audit committee members can zoom in. There are some qualifications and things that we have to do in order to make that possible, but yes.

Okay. Well, let's maybe assume that's not happening. But if it didn't right now, I'd see I'm I'm hearing December 1, I suppose, four to six. Is that our usual? Certain levels.

I have to get out of

the Yes.

We do the morning if possible.

Yeah. Will's got a question if we can do the morning. You can I can do the morning, but prefer the afternoon myself?

What time in the morning?

I can do anytime up to two.

Does would one, two, 3PM work for everyone?

Yeah. It works for me. Sofia? She doesn't know where she's. Thanks, Sofia. Okay. Alright. Okay. It

works.

Let's target one to three on December 1. I think Anja's gonna get back on his calendar, but let's hope it it works for at least four of us and maybe more of us. All five would be marvelous. So given that we've gotten, any members of the public, let's go to the oral comment. Lindsey.

We have no speakers on Zoom, chair.

Okay. Thank you for that. Let's, we will now move to accept and receive this item. Thank you very much, Sophia and Mark. Thank you. We're invited and look forward to seeing you, December 1 probably.

Sure. Thank you.

Which brings us to agenda item eight, open gov budget format review presentation and finalize. Well, finalize is for the end of that. And we have a staff report, of course, and probably that's Tony or yeah. Tony.

We have a short presentation we'll be pulling up here as well. So this evening, we have a budget format presentation overview. First, we'll have a we'll talk about the budget subcommittee, and we'll go into the interactive budget format survey. And then the budget format focus group, we'll briefly talk about the some of the enhancements made from our PDF documents to the online version. And then we have a very a brief budget demo video for you, and then we'll discuss recommended actions followed by questions.

So the budget subcommittee was formed on July 28. The committee met four times since its creation, and a highlight of their topics include the following. We finalized the budget format format changes for both the operating budget and the IP budget. We also reviewed and finalized the interactive budget format community survey, which we'll go into further detail as well. Also, explore the options for budget format informational video as well as creating the budget format focus group to provide additional community feedback.

The interactive budget format survey was was open for three weeks, and here are some areas of concern that are also detailed in the staff report on page two. But we did call out here that some areas were the ease of finding information, how reliable is that data, and also concerns about eliminating the PDF documents, which leads us here to our budget format focus group. The group, met on October 15. It consisted of five community members, plus our two budget format subcommittee members. And, again, the some highlights of the areas of concern related to budget format or, again, keeping the PDF document, how searchable are, line items and categories.

Also, some concerns, you know, whether we can enhance some of the AI options and mobile friendly charts and enhancing those options as well. Here, we'll talk about some of the enhancements from the PDF to the online version. Staff have created an interactive table of contents, which links to all sections of the budget. Also, the financial policies are embedded as PDF documents. We had also included the CIP book into the OpenGov online format.

Also created navigation menu pages for departments and divisions. We also had added a CIP and CW capital improvement program and the council work program dashboards. And lastly, the division summaries were added. That is a new feature. Currently, do not have that in our document.

Now with this, our budget intern, Alexis, is on Zoom currently, but, she had prepared, this video to give you a side by side comparison of the PDF document next to the OpenGov format that we are transitioning to or, I guess, have in addition to the PDF document. And we'll play that for you. It's less than two minutes.

Oh, okay.

Sure how the sound will work.

One second.

We're gonna go through two ways to navigate here through publications. Hi, everyone. So today, we are going to navigate through the new budget publication to get to this city council program page. The city council program page is one of the pages here in the PDF version of the budget and we're gonna go through two ways to navigate here through the publication. So first, it would be through the table of contents, also known as index.

And here if we scroll down, you can see the council and commissions department, and then here the city council division, and then here to the city council program page. And as you can see, all the information here matches the information here in the budget book. And another way to get to this page is through the menu. So through the menu, you can see a department and then there's options to click on all these departments. Then here, you go to council and commissions, it'll bring you to this menu page.

And from here, you can see all the different divisions and programs within council and commissions. And since we want to go to the city council program, we can just click here and see that it again brings us to this page.

That was it for our demo video. The last piece here is, I believe we are just going to review the recommendations of the of tonight's item. So tonight, for your consideration, what we're receiving, the budget format review presentation is outlined in the budget format implementation action plan for the following recommendation numbers. And item two is to finalize the open gov budget format for recommendation to city council for their consideration at the November 18 council meeting.

Next slide, please.

That reiterates what we just discussed in the previous slide, but these are the next steps. If you are to approve the item this evening or to forward to finalize the recommendations, then it'll go to council in November. Great. At that time, we'll take it.

Thanks, Tony. Why don't why don't we open it up to committee clarifications? Anyone have a question? I I have one clarification. The vice mayor, I were the subcommittee that was referenced here in case, Will maybe was looking a little puzzled.

No. Not at all.

Any questions on on the presentation?

I didn't have a question on the presentation, but just in terms of public interest, how many people attended the focus group? How many responded to the survey?

We did have 10 that signed up. We did have five For survey. For the focus group. Oh, but sorry. For the focus group, there were 10 that hadn't registered, but there were five that attended, plus two set committee members. So there were seven, but there should have been, like, 17 plus or I'm sorry.

So it's 18 plus 12.

12. 12. Sorry.

Count me

extra people. Yes. I did not attend. As far as the survey, we had 18 respondents.

Thank you. Thank you. I promise. Okay. I I I would like to thank the city staff. We did have four meetings, but it felt like there were a lot more. There was a lot of material covered and a variety of participants. And and, of course, we wanna thank, Alexis for for her participation in the project. But why don't we move on to public comment? I saw one flash on screen. Guessing we've got, is is there only one, Lindsay?

Yes. We have one hand raised on Zoom, chair. Welcome, San Rao.

Yes. Thank you, chair Schmidt and committee members. I was a member of the community outreach session that occurred. Thank you for having that, and hope to have hope to see many more. I did not see any discussion on the cost of this implementation.

So is the city gonna have to pay OpenGov additional license fees in exchange for the availability of this OpenGov stories feature? I think that's an element that I would like to see discussed. I would oppose any additional spend on OpenGov for this feature. As I have spoken before, I think for someone that is, from the financial background or is used to reading budget formats, reports and budgets have a standard format. And these OpenGov stories are nonstandard formats that don't necessarily match standard formats.

And so they tie us artificially into OpenGov. Should we wanna change in the future, it requires an additional transition. I also do not see OpenGov currently being mobile friendly. I was told it will be, but the study that was done, it was not. Perhaps it was because of image usage as opposed to actual data.

But I'm I'm concerned that we're we're we're spending an inordinate amount of staff time on this feature study. And the question I'd have is if staff were not doing this feature study, what would staff be spending their time on leading up into the budget session? And what is the opportunity cost of this transition to this feature that is taking away from some other item that our finance staff could be spending time on? Obviously, if there are areas that needed improvements, such as reporting in certain departments, maybe breaking out the senior center into its own fund as opposed to being the general fund, maybe looking at better reporting on the safe routes to school or other such areas. I'd like to see where we could be using staff time instead of this OpenGo features because it really isn't adding much value to someone that is used to reading PDF for financials.

I'm also concerned that the menu of stories may be a subset or may not report out on all of the potential areas. And while the PDF is retained, I think what really matters is what counsel will be presented during the actual sessions because the narrative and the document that they focus on is what will drive the discussions. So while the PDF may be somewhere out there, if the counsel is not looking at the PDF, then the discussion kind of drifts into what the stories are, and the stories may be a subset that may limit the discussion. For example, there may be no story on the senior center because there isn't a fund on the senior center. So I just wanna leave you with that and urge you to use your judgment and frugalism and frugality in in not spending city dollars on some, you know, fancy feature.

You know, I'm in the industry of building features, and I know that many of these features are fairly useless. And so I urge you to

be very honest and frugal.

Thank you, Sam. Yeah. I don't wanna make this a, interactive, but I as chair, I do wanna make some comments. I I feel like, this is we we look at as one of our municipal code involved, action items is to look at the format of the budget. So I I wanna first clarify that we we look at the format.

And then second, is that there there has been a consulting study that was underway put put underway, I don't know, a couple years ago that, maybe we could reference may maybe this is a good chance to not mind ourselves that that's the Bay Fertility study is a very good context that that maybe many other from the public would have a similar type of familiarity with that that process that was put in place. But I think that that document, we can reference it somehow immediately and possibly just send it to Sam. But, I think it provides a lot of answers, and they're they're I don't need to get into a a give and take, but, thanks again for the comments. Why don't we move to well, our action item here is actually this time to forward, I guess. Well, sorry.

I'm not as we get late in the two hour meeting here, finalize and then format for recommendation of city council. I think we are looking at an action item of recommending the staff report forward. So why don't focus on that as a motion, and then we can deliberate some more on that motion.

More so moved. And I would like to add that when this report goes to council, you're referencing the budget format. And perhaps if there were some more information about that in the staff report about what what the genesis of this is, I think that will answer those questions and

provide those details. But is there a second to like, you I don't Maybe you can simplify one more with that. Or Okay.

I think you can work with that.

Okay. Perfect.

That's perfect.

So the second. Perfect. Well, it's like that's great. Yeah. I want that idea a lot because I a lot of these acronyms, I struggle with. So I I I figured out what that is, but and that's in here. Just to not make light of it, there there is a lot of budget acronyms and reasoning. It's not like our our subcommittee suddenly came up with this the idea. So I think there's context there. Yeah.

Members of the public have some great insight and the idea of was this costing more. I think we did cover that. I don't wanna go into a lot of details on it, but unless city staff has some comment top of your head. But OpenGut is a module that the city's had for a number of years now. And as I understand it, this is an add on that's not costing a lot, but that is a great question to ask.

It is already included.

It's already included.

Already included. Okay.

We're excluding staff time, which, of course, is a big element here. And, you know, so any more questions on the motion? I might think of some normal golden table. But

I my only suggestion was that in the staff report, you

Not

not so much in history, but That this is state that this is really the first phase in implementation of these these recommendations that we. And why why did you pick fifteen, seventeen? Thirty. There's more. So if you could just read history and.

I think that's very helpful because, again, we we forget all that history. Certainly, that would be helpful in some way if it's possible. I'm not sure the demo I mean, I really appreciate the the deal, but I'm not sure it does justice to maybe the open bill. Are you envisioning who do what? Live session that the vice mayor and I saw when it goes to city council? Is

Yeah. Really, the this the intention for this video was to show everybody what we've been working on so far, but we actually are going to be creating another video in collaboration with our video team. I

think that would be very helpful. Okay. Well, showing the vote. Alright. All in favor of this motion, aye.

Aye.

See another unanimous passing here. So And now we're on to our agenda item number nine for our timeline. We got a little bit to finish this one up. So we got, received the proposed audit committee 2025 schedule and work plan, and we have a presenter here, our illustrious finance manager.

Thank you. So now finalize what date we're gonna be meeting on our December special meeting in December for the first. So included in there is the part from the Akver review. We also have the revisit 2026 work plan, for the audit committee. In addition to that, and we we just touched on this earlier, is to continue the open and and pension policy update. So and then shortly after that, likely, with that meeting, we'll award the act for and the policy to counsel in that sec December, which is, I believe, the sixteenth.

Very good. Thanks for making that presentation. A comment from me. There's a lot, really talking about this year's work plan, but it it's useful that next year often looks similar to this. And I gotta thank finance manager for having I've I've been involved in this committee for many years. Without this may look very simple to people, but it's very helpful to get an idea of where we're going. And amazingly enough, this isn't so easy to come up with. So thanks to that. Any, more clarification questions on this element? Everybody's here?

Alright. Well, I'm going to let's see. We're gonna just accept that. We would we have hereby received it. Thank you. And now we've got some more stuff like staff and committee reports, which we've had a bunch of already. I I don't see one there. I do have something to add on the committee member attendance of upcoming meetings and events. Two things. One, of course, we've got Wednesday where I already know many of us are gonna be there for the community service awards.

I'm so looking forward to seeing you. Some of us have travel. The second thing is I wanna call out the vice chair who's been stepping in for me, and the the mayor separately has meetings with commission chairs. And I think I'm gonna miss the third one in the world here, but you you you're available, I think, on the nineteenth. So, yeah, vice chair has stepped up to, make those meetings when I'm, unable to attend in person. So thank you. You're welcome. Anything you wanna report on the previous mayor meetings that you attended? I don't know if anything comes to

mind. The the last one was was an interesting one that we were actually kind of voting on the the press of war. Yeah. And then Mayo was very, very nice to actually start a meeting with some treats that she brought from

Mhmm. Excellent. Yeah. Yeah. I I remember the treats. That's a positive in those meetings.

That should be a lesson for you. Yeah.

Well, I missed out on my treat. It's been

some breakfast.

Right. But I guess it it it's in the context of there are things that that the audit committee does. Like, there was a subcommittee, and I look forward to now that we've got five members that I'm looking to the side of the table. But, I I hope we can get, more involvement in subcommittees and and spread around the wealth, next year. Okay. Any other comments from No.

Vice mayor. I'm excited for all the work that our interns have done this year. That's been great.

Thank you

so much. Really helped move things along, especially with the cash flow policy. We're waiting on that. So I'm really excited that that happened, and that we've got this budget format moving along as well. It's pretty pretty awesome. Thank you.

Good. Alright. Future agenda setting.

We'll take a.

I don't see any no reason. Hell is that. But We are hereby in turn. Thanks, everybody. What an exciting afternoon.