Finance Committee - Regular Meeting

Good evening. This is the May 19 meeting of the Olympia City Council Finance Committee, and we are waiting on one more member to come in the room. So we'll begin the meeting at about 04:05. Welcome, Kelly. Glad you're here.

Hi, friend. Thank you for your patience.

Alright. And we will call to order the May 19 meeting of the Olympia City Council Finance Committee at 04:05. A roll call has council member Kelly Green joining us on the remote screen and council member Jim Cooper excused. And I'm in the chambers. There's the roll call. Kelly, have you had an opportunity to consider the the agenda for tonight?

I have looked at the agenda for tonight, and I would move to approve it.

Alright. All those in favor of approving the agenda say aye. Aye. Aye. Alright. We have an agenda, and I don't believe there's anybody signed up for public comment this evening. Is that true? Okay. The next item, Kelly, is approval of the minutes from April 21.

I also had a chance to read those minutes, and I would move to approve them.

I will second that. Is there any discussion? All in favor of approving the April 21 meeting minutes as published, say aye.

Aye.

Aye. Okay. We have the minutes approved. And that brings us to tonight's committee business, which will start with Joan Lutz offering us a budget snapshot on cost allocations.

Hi, finance committee and members. My name is Joan Lutz. I'm the senior budget and finance analyst. And as you mentioned, we're here to take a deep dive into the wonderful world of cost allocations. Come on.

Everybody's excited. I know it. So what we're gonna discuss is, what our cost allocations, different types of cost allocations, and other general fund contributions, as well as answer any questions that you might have. So the first thing we have are what are cost allocations, and this is a methodology to distribute administrative functions across all funds that benefit from that function. So the cost for finance and payroll and HR and legal, those all get distributed, across multiple funds so that they each pay their fair share.

We use indirect cost allocation model for those, and then we also have a direct cost allocation model that we use for things such as city hall rent. So the space that you utilize and occupy is the space that you pay for. K. Oh, and then there are types of allocations. There's the indirect model.

Just went a little quicker than I thought. And that's to distribute things such as legislative and city manager's office, legal services, HR, IT, finance. Our new model that we had done in 2023 with FCS allows us to take certain things into consideration such as use. So for HR, if you have 10 recruitings one year and you have 50 recruitings the next year, it does an average, and so you do pay more over time to, to offset the use that you had. And so this is the last completed fiscal year, so this will be for 2025.

This is kind of yeah.

Council member Green has her hand up. Let's check and see how she how are you doing over there, Kelly?

Thanks. I'm good. I appreciate I was hoping to just interject a a a question pertinent to the last couple of slides before we move too far too deep. Just for my education, Joan, is this required of cities, or is this a choice our city has made? For example, like, is it an option to just say, you know, there are just administrative costs for things like legal services and HR, or is it required that we charge the different departments?

It is actually kind of a choice. It's good it's good, you know, accounting practice. There is nothing that says that the general fund can't contribute more. And so if we if we didn't allocate the cost out, general fund would be contributing more. So it's it's not a requirement, but it's good good accounting practice.

Thank you.

You're welcome. Jay?

Just to further answer that for council member Green is, for example, we have utilities and that, are paid through utility rates, but the utilities also utilize general fund services. So they have to pay their fair share, and that's the intention of of cost allocation is to make sure things like the utilities who are an enterprise fund pay their fair share as well. We also have, as you know, different levels of parks funding, and those services use these services as well. So I just wanted to add a little more context to why this is important.

Thank you. That's super helpful.

Thanks, Jay. Okay.

To have you continue.

Alright. No problem. Thanks for seeing that. So this is an example of, twenty twenty five's, cost allocation. So we had 5,600,000.0 costs that are eligible for allocation of a total budget of 17,800,000.0 because we allocate the cost out to all of the all of the entities, but general fund, of course, is not gonna charge general fund for services.

So it is they're paying their fair share just in the fact that they're not paying. That makes sense. Not real clear. And so you can see human resources is 1.3, finance is 4,000,000. So all of these costs add up.

We do the allocation based on the different methodologies, that FCS has determined that were good good uses such as, you know, number of, items that come before counsel, number of things that go to legal for, requests, number for payroll, it's the number of pay employees. K? And then we have direct cost allocations. And then, again, those are the people who receive direct benefit from the uses, such as city hall rent, maintenance rent, the fleet, your PC user rate and device rate. All of those things are directly attributed to the use that you get from it.

And that is cost allocations in a nutshell.

Great.

Oh, I didn't hear that.

Questions or or wonderings, Kelly? I did have

No. This was a pretty straightforward presentation. So as I I read it, the other day, I other than just, what I already asked, I don't think I have any additional questions.

And then so this slide is cost allocation in that that general fund contributes, but it's, something that we've determined or made a decision to contribute to. So there are things such as the development fee fund. We have a recovery rate of 85% that that we plan for them to get. So general fund pays the other 15%. Facilities has buildings that aren't occupied by city employees, so we can't charge allocate out rent like that.

So the general fund does have to support that. And then also workers' compensation fund, we've historically used funds above reserve to support. We have moved to the state program. But should, the claims become in higher than we estimate, the general fund will have to support that. That's the last one. Does

that prompt any questions, Kelly?

No additional questions from me.

Thank you. And I I just have one wondering. If you could briefly speak to we've had this priority based budgeting excitement of entering a lot more into this this big AI database, basically. Right? And and the question of indirects, if I I mean, generally, it doesn't make sense for general fund to charge indirects to general fund accounts.

But for purposes of seeking efficiencies or synergies, it might make sense to see whether there's dis disproportionate use of human resources or policy support or maybe maybe it doesn't matter because we're just gonna pay it anyhow. I'm I'm I'm I'm just curious if there will be potential learnings or impacts from the priority based budgeting as you're looking at this. Sean, please.

Sean Ward, interim finance director. For the record, we did not include indirects in our cost modeling this year.

It is an option for future analysis, going forward. We will steadily move forward with the way we have it allocated right now and possibly in the future look at indirects as as a possible set of efficiencies through the priority based. Okay. Well, thank you for the budget snapshot. I appreciate I appreciate having this opportunity to learn more for a few minutes at the beginning of each finance committee meeting. Yeah. The next item is a briefing on Citi Investments. And, Joan, I believe you're gonna lead this item off also.

Or I am going to just

oh. Oh. What's I'm just watching the slide deck there.

I am gonna introduce Mitch Henke. He is from GPA, government portfolio advisers, and he is the one who will be giving us an update on our portfolio.

Beautiful. Well, thank you, Joan. I appreciate the introduction. And council members, thank you for having me. As Joan mentioned, my name is Mitch Henke.

I am a partner and senior adviser with government portfolio advisers. We've been the investment adviser for the city of Olympia since 2015, so it's gonna be our tenth year this year. And, we very much appreciate the partnership in helping the city achieve its goals of safety, liquidity, and return. So I put together a presentation here today that includes a lot more information than we probably need to go through, so I'm gonna try to keep it a little bit more high level. But, I do welcome any of the council members or anyone else, interjecting at any point to ask questions or dive a little bit further into topics, especially since we're going to kick off with some market and economic updates.

And so our agenda today is just to review a little bit about the markets. We're going to talk about the investment portfolio, which includes both the total portfolio as well as the investment core component, which is the longer term aspect of the city's portfolio that's meant to kind of mute some of the interest rate changes over time and hopefully achieve a bit of a higher rate of return than some of the short term investment options would provide. And then we're just going to conclude with one quick comment on investment policy and leave you some more information to review if you do have any of your interest. So in terms of the market and economics, it's been a pretty wild last few months, as we all know. We've seen tariffs introduced.

We've seen them taken off. We've seen them put back on. We've seen them put on hold. And really, I think the interesting aspect of what it's done to the market is it's really just caused a lot of uncertainty. Businesses, organizations like yourself, don't really have a lot of clarity in terms of really what prices are going to be, if they're going to be increasing, if inflation is going to be up.

And so it's been a period where, again, I think there's just been a lot of uncertainty. But that's also really just led to the markets actually being pretty darn stable. I mean, interest rates have jumped around a little bit. But as we look back over kind of the last six and twelve months, they haven't gone anywhere in any significant direction. You know, we're still at a same level in terms of some of the interest rates that are most important for the city, you know, which are the short term rates, kind of the one to three month and the two year rate, which is really the one that if you're ever looking at the city's investments, the two year US Treasury is the best rate to just look at and say, hey, what should our portfolio roughly be looking like right now?

But I think as we look forward, the the really big key is just clarity. The markets really move really based on clarity. And so when you see a lot of uncertainty, you're gonna get just a little bit of volatility, which is kind of what we've seen, just bouncing around a little bit. But as we have gotten a little bit more clarity with a couple of the trade negotiations that are starting to be announced, you've kinda seen the markets really stabilize in terms of what we think is gonna happen long term. And, you really what that looks like right now is we're still at actually very strong GDP numbers.

We're still seeing good rates return. We saw inflation actually come in much more muted this last week than expected. So inflation sitting at about 2.4% on a year over year basis, which is getting closer to that target rate that the Federal Reserve has kind of set forth for what their goals are. And so we really don't see even though the markets, as you can see in this top right graph, typically when you see the short term interest rates higher than the long term interest rates over a decent period of time, that typically is a signal that a recession is coming. We haven't seen that yet, nor do we really think that's probably the most likely outcome at this point.

Unless we really see the tariffs come through and be more onerous than, I think, what the markets are expecting right now, we probably get a smoother ride than I think most people are fearing or thinking is going to happen. But, again, still a lot to be determined.

So, yes, Clark. I don't wanna send us too far down this bunny hole, but I'm curious after so much uncertainty and disruption, why, like, a couple of initial trade negotiations would make you think that it wouldn't be four years of continuous disruption. And I'm so I'm sorry. I'm just making it, like, are there trends in your industry of moving away from treasury bills, moving away from federal government investments? And and is there particular reason for believing that, like, the first hundred days is when the wackiness happens and then things calm down?

No. I would definitely not say to the latter. I I don't think that because we've seen a few initial I don't even know if you can say much more than rumblings about trade negotiations starting to come to fruition, it means that volatility is likely gone. I mean, I think we especially since this has been such an aggressive campaign by the presidential office so far in terms of really setting this precedent and engaging in this course of action, it is a lot of uncertainty that is still out there. I think when you look at, though, the available investment options, one, you have to look at RCW, which is what the allowable investment universe is.

And then two, you have to look at just what the risk and return trade offs are going to be of different asset classes. And we're going to talk a little bit in our presentation about the investments the city currently holds and what we see moving forward with that. But I would say that the big overarching theme is that it's not likely to say we're going to cut treasuries out entirely because, frankly, those are still, when you look at the, again, risk return trade offs of relative assets, if we're talking corporate bonds versus supernational bonds, agency bonds, treasury bonds, you're still seeing treasuries providing the safest return return amongst all of those.

Thank you. I appreciate your commenting on that. I'm glad to Absolutely. Piece of moving

But I think this second page here just really shows what that uncertainty looks like. This top left chart just shows a dot plot of all of the Federal Open Market Committee participants and what their expectations are of interest rates over the next several years. And you can see, A, how vertically spread all of those periods are. That just shows you have some people thinking that those rates are going be higher than they are today by the end of this year, and others thinking they're going to be significantly lower than they are today. And right now, we're at about that four and a quarter, four and a half.

We're still kind of right in that area there. And moving forward, you can see that continued vertical spreads. There's not a lot of congruity with what those expectations are. And then on the right hand side, you also see what the markets are thinking. So that top right graph, the bottom line that is at Fed funds future rate, that's what the markets are thinking the rates are going to be in the future versus what the overall median of the Federal Open Market Committee are saying.

And so you can also see the divergence here. We think market participants are very aggressive in thinking what the rates are going to be much lower than what the Federal Open Market Committee is saying. And so that's where you just kind of see some of the divergence. And frankly, that's what drives interest rates, those market participants primarily. So as of today, the expectation is by the 2025 to see rates 50 basis points lower.

So two rate cuts lower is currently what's being priced in. But as of two weeks ago, that was a 4%. So with, again, some of the small moves forward in terms of these trade negotiations that are starting to be announced, you're starting to see, again, a bit more stability with where people think rates are going to go. Doesn't mean that's gonna continue. It's probably gonna be jumping around a bit bit more, especially as we get closer to this ninety day reprieve, which is about, what, sixty days out now.

We bet we're about a month into that. But we do think that we're still gonna see the general trend be interest rates start to slowly decrease moving forward. And that is I'll come back to this. I just want to maybe show this page right here. This is really what the analyst forecasts are for rates to be over the next several years.

As you can see, just kind of a slow and steady trend for what the two year and the ten year notes are going to be, but those area graphs just show again what some of the potential spread is between what those participants are expecting. So two more quick points I'll make before we talk about the portfolio. This actually, Clark, gets right into your question. This just shows here the difference in yields between treasuries and agency bonds and corporate bonds. And what we've seen up until very recently, just the last few weeks, is that that spread is really the difference you're getting compensated in terms of return above treasuries for investing in those different asset classes and taking that additional risk outside of the treasury investments.

And those spreads have been historically the tightest they have really ever been in a very long time. And so that means that if you are investing in treasuries, you're only getting, in some ways or going to corporate bonds, you're getting maybe 38 basis points more to go for that investment, which is a very low rate of return relative to taking the extra risk to invest in those types of assets. And so as a result, over the past probably two years, we have not seen enough opportunity in those different we call them credit assets to diversify outside of treasuries more. And so we've actually seen just an increase in the amount of treasuries and agencies that we've been buying for all clients, including the city of Olympia. But those are starting to now come back to historical norms.

Partially, we think, as we continue to see some of the GDP numbers and inflation numbers start to come back down and be a bit more normal, but also as we see some of the risk off attitude with people thinking the markets are going to be Okay with some of these trade negotiations starting to progress. So we do think it is a good time to continue to monitor those availabilities of higher spreads, which also means less risk in terms of some of the movements between those different asset classes that we hope to take advantage of here in the future. And then the last thing I'll just point out is how this bottom chart just shows how wild the ride has been for interest rates over these past twenty five years. You can see the three month bill, the two year note, the ten year note in this bottom chart, and just how up and down these rate cycles have been. And I think the really important point to think about here is that when we invest for the city, we are investing usually every month as maturities come due, sometimes every other month.

And so we're really spreading out these changes over time. And so the goal with building out the portfolio that we'll look at here in a moment is really to mitigate the sharpness of some of these interest rate changes over time and make a much smoother ride for the city while also investing a bit around that two year average range, which is consistent with the city's risk profile to hopefully earn, again, a more higher rate of return over the long run relative to holding things in cash, you know, your LGIP, things like that. So any questions on market and economics before we move on? All right. So again, I'll just hit on a few key slides here.

There's a lot of information. Feel free to jump in and ask questions as we go along. This first page is just a summary of the portfolio as of March 31. There are two main components to the Citi's total portfolio. That is your liquidity, which includes your US bank deposits and your LGIP funds, and your pooled investments, which is the larger component that we manage to the zero to five US treasury benchmark, which runs on average at about as you can see, effective duration here stands right at about two years.

And when we think duration, this is a really good way to think about it. This is kind of the most important risk measurement of the portfolio is that is how we control, again, how long the portfolio is invested. That two years represents the weighted average return of your total 150 or so million in capital. So that's how you wanna think about it is that that includes the weighted average return of both your principal for the investments that we have, also the coupons along the way. So it's about two years even though we spread out those investments, you know, between zero and five years in maturity.

So that average two year is really how long you would get your principal or your total funds back. What's really exciting is that we've seen the book yield, which is the yield of the portfolio, continue to increase quarter over quarter. It stands currently at 3.28% relative to the cost of the investments that we purchased it at. The pooled investments component, again, that's the longer component, is almost at 3.5%, which is a very healthy place. And I'm gonna go and show here the quarter over quarter difference in a moment or the year over year difference, which I think gives you a good snapshot of what those changes have been over the past year.

But the first thing we always put in these presentations is a very thorough compliance report, which just shows how closely we track every minute detail of your investment policy and RCW to make sure that the city is fully in line at all given points with those requirements to be investing. And so we track it both on diversification of your assets into different asset classes and also in terms of the maturity constraints of the overall portfolio. And so this is something we have built directly into our reporting system. If any changes are made to RCW or the city's investment policy, we update those coatings accordingly, and we have this available to the city staff on demand at any given point twenty four seven. So that's a it's a great way to be

able to do that. Mitch, I had a a question. We we actually had a conversation about this with the finance staff that municipals in the what's allowed for our portfolio could be a third of the investments, and they're 2%. Is it because there's just less to choose from, less volume of local government bonds than there is federal bonds? Or

Great question. Yes. So I'd say it's a couple different factors. I mean, one is when we look at any different asset class, municipals, agencies, corporate notes, the first thing that we want to look at is really the quality of the investments, and that is a pretty limited universe if we're sticking to trying to achieve AA or better. We can go a little bit lower at time of purchase, but we typically try to stick with investment options that we know are going to stay at AA ratings because those represent, I think, a very safe diversification component for the city.

The second thing is just the relative risk return valuation trade off relative to treasuries. And so that's what I was commenting on earlier, is that with municipal bonds, we really strike a target range of anywhere from maybe 10% to 20 is what a normal environment we'd want to have in a municipal bond. But when we go through periods like we've seen the last few years where, again, we're not getting much in extra return to take on the extra risk, then we start to scale that back more tactically until those levels of risk return normalize. And we feel more confident being able to take that risk because we're going to be achieving the extra return that we should be getting for that extra risk. So that's gonna be a general component.

I'm gonna flip down while we're on this topic here to just the asset allocation. I'll go back up here in a moment. But this just gives you a snapshot here at the March of what that portfolio asset allocation looks like. It's about 51% in treasuries, about 33% in US agency bonds. Again, these are the two components that we felt very comfortable over the last few years investing in given the relative value.

Supernationals, municipals, corporates, very low. And, again, that's just tied to the last few years at how little yield that we are picking up to go straight out into those different asset classes. So we have seen these come back a bit more towards normal levels, which gives us more confidence investing in them. And so I think you can see, you know, over the next year these start to come up more closer to those target long term averages that we're seeking. So I'm going to flip back up here and just talk a little bit about this slide, which represents a kind of comparison between last year at this time and this year.

So you can see a lot of these characteristics of the portfolio remain very unchanged. Duration, which is, again, our key risk measurement, remains right at about one point eight years across the total portfolio. That stayed consistent. The maturity profile in the exact same way at the bottom left hand side of the screen there. What's been very exciting is seeing the increase in book yield.

We've gone from just shy of 3% to almost 3.3% over the last year. That represents a 35 basis point increase in spreads, and you'll see in a moment here then what that has meant for the city's actual earnings on the portfolio. The other thing that's really exciting to see is the bottom right hand number there, the net unrealized gains and losses. So this just reflects the value of the portfolio currently relative to what those investments were purchased at. And when we think about investing in bonds, in fixed income, the value has a negative correlation with interest rates.

So if interest rates increase, the value of the portfolio decreases. Just simply said, because I can go buy a bond then today at a higher rate than I just bought my last bond for. So when we see interest rates decrease, the value of the portfolio goes up and vice versa. And so this change of almost nearly $3,000,000 in the total portfolio's net unrealized gains or losses just shows you that over the last year, we or the city has purchased investments that have appreciated in value as interest rates have decreased over time. And so that's not just the ones that we purchased, but also the ones that we previously have held that have appreciated in value by about, again, nearly $3,000,000 over the past year.

And again, we do expect that the long term trend over the next few years is going to be continuing decreases in the interest rate environment, which should further increase the overall value of the city's portfolio moving forward. So any questions on just some of those key metric comparisons at all? All right. I'll hit on a few more things just at a high level, but this is just a really nice snapshot when you have time just to see month over month of what the changes in balances, yield has been, duration, things like that. Again, you can see that duration for the most part stayed extremely consistent aside from when some of the, you know, liquidity balances bump up when you receive some of your bigger inflows as a city.

But overall, we've seen a very consistent profile, and that's really what we wanna be able to see is, you know, those two pieces, the pooled investments, which is that longer term component, and the liquidity, which is your your more reserves, your short term cash on hand, you know, those both play a very important role where we just wanna try to make sure that in the overall strategy that we're working, with your team, the finance staff, to ensure that the amount of liquidity that we hold gives you the necessary amount of reserves to pay those day to day obligations, have some rainy day funds so that we can make sure that that pooled investments can stay invested over time consistently. As maturities come due, we can reinvest them to kind of, again, continue to maintain that duration profile and make sure that we're really anchoring down the earnings of the portfolio using that longer term component. So those things do go very well hand in hand. But the nice thing in how we manage it is that both components have maturities very regularly, right? So even that core strategy, if you do ever come across a period where you got some big unexpected expenses that have come up, we still do have those regular maturities that we can take out of that core strategy, buffer those liquidity balances.

And then when you kinda see your liquidity restock, so to speak, we can put more back in and kinda maintain that profile. And this just is another way to look at that safety liquidity aspect of your city goals here. As you can see that you have about 15% of your overall funds that will mature before a quarter year. You've got another 10% that mature between a quarter and three quarters of a year and another 6.7% before a year. So you've got a lot in that zero to one year component, which, again, just make sure that if any of those unexpected things come up, we do have plenty of funds in order to make sure we don't have to sell investments or anything like that.

And then this is just a snapshot of how the portfolio in terms of that asset allocation we touched on earlier has changed over the last year. And so on the far right hand side, you can just see the change numbers. Your treasuries have gone up about 3% or so. You've actually seen some increases overall in some of the other asset classes as mainly the decreases have come from some of those pooled short term funds overall. We touched on credit ratings, but as you can see, we try to keep a very high quality profile in terms of the types of corporate bonds, municipal bonds that we do invest in for the city.

And so everything currently is double a or better. It's not problem if we see something on single a. It's just we really try to stick with things that we know are gonna consistently stay above that double a level. And then the last thing that I'll touch on here before just opening up to any questions is looking at some of the returns for the total portfolio. So as we mentioned, both of those components, the short term investments, that liquidity, overnight funds, things like that, And those pooled investments work well together, not just to achieve the goals of safety and liquidity, but also to help with return.

And the short term funds have paid very handsomely over the last few years, actually at a higher level up until very recently than the two year, on average, duration of the longer term portfolio. But what has been exciting is just seeing how much earnings have been generated as a result. So you can see in the top left hand corner there, the book income has been $1,300,000 over the past year. That's an increase of nearly $300,000 over the previous year. And that just, again, speaks to that increase in yields that we've been able to pick up with the very favorable interest rates that we've been able to achieve here over the past year.

So I'm gonna pause there. I think that's everything I really wanted to cover. There's a few more pages in here. I'm very open to any questions. There's holdings.

The one thing that I will touch on is just the fact that we do have one recommendation when the investment policy is next reviewed, and that is just to increase the weighted average maturity of the total portfolio from two years to two point five years. This just gives us a little bit of extra flexibility when you do have periods where balances go a little bit lower to continue to invest out to the long end in that investment core account, that pooled investments, so we can continue to stick with that two year duration in that component without having to go a little bit short. So again, it's not trying to go be more risky than we otherwise would. It's just kind of the nature of a fluctuating portfolio balances when you have some of those drawdown periods is that, otherwise, we kinda get right up against that two year mark. And so having 2.5 gives us a little bit more flexibility to maintain kind of the course for the strategy.

That's good. So you're gonna have to somebody in the room will remind me whether this was the pro did we change to two years a year ago, or was this the proposed change? And because we didn't finish updating the policy, we didn't implement it yet. Is this the same change we were asked to make last year? So and we were all three in support of it last year. So we just need to get it done, I think. Yeah. Correct. Okay. Thank you. And council member Green, you can't see the room, but it's a very friendly looking room. So any very technical or clear back on what do these words mean, all those questions are welcome right now.

Thank you, council member Gilman. No. I I mean, this is my first opportunity to to go through one of these reports, and so, I could probably ask technical questions for days, but, I appreciate you, hitting the highlights, and and I feel like I have a good feel for, for how things are going. So thank you.

Great. Well, thank you.

Mitch, one thing that we we a change we've made in recent years was including corporate notes in the investment. And and then I I know it's it's under 2,000,000 right now. And when we looked last year, it was just two sort of construction bonds, like one for Apple and one for Walmart or something like that. Do you know if we're in a similar place this year or it looks it looks dollar volume wise, like, we're we're still just a couple customers.

Yeah. Very similar place. And when we look at the universe of and we maintain a approved kind of corporate credit list ourselves, but it only has about 30 to 35 positions on it that we can buy at any given time that meet the quality criteria that we're looking for. And then it's really just some function of whether any of those issuers go issue new debt. That's usually one of the more attractive periods that we can go pick up some additional corporate exposure because we get typically some better rates of return on those new debt issuance.

But also then again, just that spread on the secondary market of how much a corporate note of the same maturity profile is trading at relative to a treasury. And so that's where over the last few years and that's why this has kind of been a number that's consistently stayed the same place we haven't seen very much opportunity in that yield relative to the risk we take on those corporate notes. But that has very recently started to change. So we are seeing more opportunity here just in the last month or so that we're keeping a close eye on. And that as we start to see some of the, again, developments and progressions with the trade negotiations, we we expect that rate to hopefully steady out too because we also don't wanna just go jump into this if it's a very blip in the pan type of situation.

So but we we are optimistic that we can continue to add to some of the corporate exposure here in the future. But again, we keep that at about maximum 10% for the city of Olympia. That's really the target level that we want to get to, but the markets really give us what we can take to. So

I see. City manager Bernie has come on screen. Go ahead, Jake.

Sharon, because I'm not sitting next to Sean to elbow him to say where are we going next, I just wanna make sure as Mitch finishes up that we maybe pivot to talking about the ethical investment statement, not policy change, and and what that means for our investment mix and kinda where we're going. I wasn't sure if if the finance team is gonna pick that up as soon as Mitch is done or if it's part of this conversation.

I was waiting for your direction on that, Jay, since we've had conversations with, Clark previously.

Yeah. So so and I don't know how much you guys have shared with Mitch about the policy, Sean.

We've had the same conversations, but he has not seen the draft.

So I guess, chair, as, for you and, kind of evergreen, there is a draft ethical investment statement that was attached that you had, some email about, that you emailed out to the the rest of the committee chair. And I just thought we would check-in on thoughts on that so that we can continue to see about moving that forward.

Great. Well so if I may, I'll I'll I'll go ahead and introduce you a little bit, and then I'll let you, share your thoughts, Kelly. Is that okay? I I I was struck that we had sort of dropped a couple of items that had been council resolutions but hadn't translated into policy. Even though I realized that there were not investments that were in violation of of those resolutions from council, I I thought that it would be really good housekeeping to have it be explicit and be in the investment policy if if we prohibit investments in nuclear weapons, fossil fuels.

And so it's up on the screen here, but it it's just it's a it's two paragraphs describing what we would strive to invest in and what we would refrain from investing in. And then the third paragraph is suggesting that over this next year, we'd have a plan to clarify both the the process for council review periodic review of the investment policy and and and how we would demonstrate that the investments were in line with the policy. So we'll just kinda clean up.

Looks fantastic. And so for some further identification in how we handle this, we do have a environmental, social, and governance approved list of mainly corporate bonds and commercial paper that we can utilize for clients that are seeking an ESG kind of favorable approach. We also have no fossil fuel lists as well. And so, again, given that the universe we already start with is pretty darn limited, it just means limiting that slightly more to be able to achieve those goals, for clients that choose to do so. So this should not be any issue whatsoever in my mind.

I'm I'm glad that you that it's something you feel like you could administer. And, Kelly, would you like to share your considerations of the of the proposal?

Thanks, chair Gilman. I think I mean, the little bit of conversation I just heard, I think, helped answer some of my questions. One thing that jumped out at me, and and maybe you can speak to conversations that were had about this at the time, but some of the language just felt subjective, and my question was who makes those determinations? So for example, phrases, now I've gotta find it again. Phrases like, supporting the needs of peacetime daily life. Like, who interprets that?

Well, I'll I'll just take a step I mean, first, the the the document was intentionally broad to talk about what to strive for and what to refrain from rather than mandating and prohibiting. But there are a couple There's the the ESG lists that Mitch referred to, and there are a couple of other global organizations, including the AFSC, the American Friends Service Committee, that does extensive research and publishes for an an investment organizations and and local governments their assessment of these these conditions in corporations and countries around the world.

And I'll just share that from so my my background is both working with private clients and working with government clients. And so to your to your point, councilperson Green, it is subjective at times. And so part of, I think, the goal that we'll want to work together on is establishing really what the criteria for exclusion is right off the bat, which we can use metrics to determine. And then from there, I would say it'd be a good practice for the council to just review the holdings on a regular basis and make sure that in just the, you know, review of the credit that you do own, that it still matches some of the more subjective aspects of the policy.

And, Jay, I see you've you're ready to weigh in here.

Thank you. I think it's a really good question. As I read this, I kinda read the first paragraph as kind of an intro where the meat of really what we're looking at is that second paragraph, which gets into the specifics. And to Mitch's point, I think we can work on a a set of metrics, with our investment advisers to make sure that we're in compliance with that second paragraph that's there, in particular. And so that's kind of the approach I thought we would take with our finance team and working with our investment advisers, if that's helpful.

That is helpful. Yeah. And I think, you know, what you said and what GPA just shared, I mean, that really I I love the intent of this. I love the goal of this. I just wanted to make sure that, it is, you know, that it's feasible to operationalize it, and it sounds like you all have approaches to that. So so, yeah, as as long as that's the case, I would be, in favor of this.

That's great. And and I will add that the I know the the first paragraph is sort of aspirational, and it it may be, that it that this language makes it's something I feel strongly about that you wanna state the affirmative as well as what you don't wanna have. And this might leave room for more local or smaller scale investments that are outside of the portfolio that you manage that are in in things that we wanna encourage or and things like the fund we're setting up right now to help pay development permitting and and impact fee costs for affordable housing projects. That that sort of anyhow, I that so I felt strongly about having a first statement that was about the affirmative of what we hope that our $160,000,000 might impact the world in a good way as well as providing stability and some return to us. So that's so there's a a little bit of soapboxing and a little bit of practicality together, council member Green.

Which with that, let me ask one follow-up question. And I think I know the answer, but I just wanna have it be explicit. So, obviously, this statement is typically talking about companies. When we talk about how much of our funds are invested in US treasury, US departments? Does this extend into those conversations?

Typically, no. Just because when we look at the different types metrics available and what we're trying to measure, it's typically looking at those mainly corporate and commercial paper type of investments. But we can also work together to determine if the kind of tact or the, like, strategic asset allocation levels that we work with you all to set should be shifted in order to accommodate more investment in certain areas that you may want to target.

I had some community advocates who sat with me to go through all in more detail each of the investments, and I will say they were, like, a lot in Department of Agriculture. You know? Pretty specific narrow little investments that were safe from these kinds of concerns. But as we if as we intend to scale up and diverse scale up the corporate notes and diversify the portfolio more, that's where I think that having this policy in place ahead of those actions makes a lot of sense. And I'm gonna I was gonna try not to say anything else about the federal administration in in this segment of the agenda tonight, but I but I have to say that I I hope your firm is also watching for when you ring the really big bill bell and say that treasury notes are starting to get kind of weird too Mhmm.

And that, you know, I I don't know. I mean, do you have consultants or experts who are watching other countries around the world who've transitioned to a more authoritarian government and what happened to their markets and what does a large institutional investor do in a scenario like that. And how it's I know we we can't have all the answers, but it's it it is something that's on my mind is whether or not in a couple of years from now, treasury and federal government bonds would will will continue to behave in the same way they are now.

Yeah. I mean, it's a fair question. And when we look at long term allocation, allocation, we want to have significantly less treasuries long term. And so yes, I think we're our intent is to hopefully see a market where not just in evaluating the risk and return of treasuries, but also the other types of asset classes. You know, it's all a relative measurement type of approach that we're taking.

And so, you know, councilmember Gilman, to your point, it could be that we've started to see some of the spreads normalize of some of those corporate notes, and that stays the same way, which actually underpins the strength and the, I wouldn't say risk free nature, but the risk and return benefit of the treasuries is even getting stronger. I mean, that's what you would see if you start to see some of the other types of assets we can invest in pay a lot more than a treasury would for the same type of maturity profile. That signifies that the treasuries are incredibly stable and continue to remain that way. And that's kind of the direction things are going. But it doesn't mean that we're not also being very deliberate in evaluating the US government, because there are concerns there.

I don't think there are concerns that say we need to sell our treasuries currently or we need to try to move out of treasuries if that risk return relationship stays where it is right now. But it is something we're looking at into the point where we did see a recent downgrade of the US government just in the last week. So that is very much a concern. It's tied to the budget that the current administration is proposing in terms of how much it's going to add to the federal deficit. So those are all things we are keeping a very close eye on. We don't see the risks yet of those things being to a point where we need to start to diversify out of treasuries, but it is something we're keeping a very close eye on.

Thank you, Mitch. Aren't you glad you read that crucial conversations book now? When we're in this moment, you're ready to go. Of course. Yeah. So a question I have is we have both the changing the the to the two and a half year in in investment Weighted average maturity. Yeah. Weighted average return. And also incorporating this ethical investment statement, we we don't have this item scheduled as an action item this evening. What what is the path for getting the investment policy back in front of council to approve those changes? Jay, go ahead.

Thank you. And you've because the finance committee made a decision on the weighted portion of this already, I think that one can move forward to counsel. What I might recommend if you're comfortable is, to make a motion to and approve this policy at the finance committee level this evening, or we can always bring it back if you want, for an actionable item. But I think it's been it's in your packet. We've had good discussion on it. I think if you're ready to take an action on it, you can tonight, and then we can move both those items together to the council as part of a policy change update.

Great. And I'll just add that council member Cooper emailed me his his general support for this this statement as as it's written. He's he's at a a conference for his day job work right now, but has considered the items for tonight. Council member Green, what what's your pleasure?

Yeah. I mean, so it sounds like there's been a lot of conversation on this even prior to tonight. It sounds like city manager Bernie and and the folks with GPA are comfortable with this. So I I would be happy to make a motion to send this forward to counsel.

Wonderful. I would second it. Is there any other discussion, Kelly?

Not from me.

All those in favor, aye. Aye. Aye. Thank you. Alright. And, Mitch, anything else we should know before you before you go?

No. It's just been a pleasure to be here, and thank you for having me.

Thank you. And thank you for a decade of keeping a a close eye and managing our portfolio. We appreciate that very much.

You're very welcome, and thank you for your continued confidence in GPA.

Our next item is the consideration of the hands on children's museum funding strategy recommendations. And and we'll yes. Yeah. And we'll invite Patty Belmonte, executive director, and as much of your team as would like to join at the table here to however you'd like to play it. We're glad to have you here in the room tonight. You're not just the board. No. Okay. Is there any introduction from staff, or should we just oh, Jay.

You can take it and jump right in if you're ready.

Thank thank you, city manager Bernie.

Well, my apologies for being remote. I am also at a conference, this week. So and I've noticed as I've been in the meeting, I get some Internet stability issues from time to time. So, hopefully, I won't freeze on you. And if I start to have those, I might turn my video off.

But appreciate the opportunity to be at the finance committee tonight. This is actually a very exciting item to be in front of you. Our discussion this afternoon is consideration of a funding strategy and approval of a bond sale for the future expansion of the Hands On Children's Museum. I am joined both in the room, as you noted, and online for this discussion by Patty Belonte, the executive director of the Hands On Children's Museum. And I I can't see, but I I from the discussions, I bet she has a host of supporters sitting behind her.

And then also on the call with us is Scott Bauer with Northwestern Advisors and then Deanna Gregory with Pacifica Law Group. They collectively, are our bond counsel. That's how we've referred to them when we've talked to you in the past, and they, work side by side with us to put this proposal together this evening. So I just wanna welcome Scott and Deanna. They'll just should, you have any questions tonight that are technical in nature around the sale of the bonds or kinda how we put the bond, structure together.

So and, of course, our finance team has been engaged well all along the way in these discussions. So the expansion project is estimated at $30,500,000 with $20,500,000 coming from proposed bond bail and then 10 point $10,000,000 coming from private fundraising. I'm gonna start with some background information and then turn it over to Patty, who's gonna provide an overview of the success of the museum and the need for expansion, and then I'm gonna finish up with an outline of the of the details of the proposed bond sale. So just in terms of project background, the original public facilities district was formed in 2003. And what a public facilities district is by by state law, it's it's a point o 33% state sales tax diversion that was established by the legislature that allows for public facilities public facilities to come to existence, provide a funding source for projects like that that benefit our community.

Back in 2003, there's a lot of history here, but I'm gonna shortcut this, that the Hands On Children's Museum and The Rack and Lacey, the Regional Athletic Complex, were chosen as the projects to fund back then. And the p f the original PFD that was formed in 2003 had a twenty five year time frame of funding from 2003 to 2028. So the museum opened in 2012. It is a mix of public facilities district funding and private fundraising, and the PFD funding to this point has been really been used for debt service, and the private fundraising has been used to do to build out the in interior of the museum and and the exhibits and things like that. So the original phase of the museum that's that's in in existence today was a mix of $9,000,000 in PFD revenues paid which helped pay the debt service and then $9,000,000 in fundraising.

And, when the original PFD revenues go through 2028, that that and the bond payments is repaid, through that time. Next slide. And then things happened. In 2017, the PFD funding was extended an an additional fifteen years out 2043. And then in this legislative session, it's proposed to be extended an additional fifteen years out to 2058.

And this year in particular, proposal, what allows it to do allows us to do is is think about a longer term for a bonds for a bond sale. In this case, we're gonna be looking at a thirty year term, and we'll talk more about that in a minute. But that's just wanna give some quick background before I start moving to Patty to talk about expansion. So just any questions on kind of the background of PFD and kinda where we are?

I think we're good for you to move forward, Jay.

Okay. I think I'm gonna turn it over to Patty. And then, again, I will take it up after Patty talks a bit about expansion planning, and we'll talk about the details of the bond.

Thank you, Jay. Hello, everyone. As you heard, I'm the CEO of the Children's Museum. And behind me, I have my awesome fabulous board members, including Jaemin May who is our Capital Finance Chair. And really I have shared a lot of this with you before, but this is just a refresher on where we are with the expansion.

How am I there. No? We're not advancing. K. I could I'll just queue you. Okay. Thank you. I've already failed, Jay.

Okay. Is not an option.

So just a reminder, one of the drivers that is pushing this expansion is that we serve a lot of people a year in a community of our size, 315,000 visitors in the last year. Along with that, as part of that big number, we have a commitment to access. We served 130,000 visitors through one of 30 different access programs. So they're coming to the museum either free or reduced. In addition, our quality has long been a driving factor for visitation.

And we're a consistent best of award winner. Next slide. I'd like to say that what's great about the Children's Museum is that it not only stimulates a lot of economic development and provides a lot of benefits in the early learning area, but we also enrich the quality of life in Olympia for our residents and for the whole region. And then we are, when we started this project, part of the goal of this project was to bring more visitors to the downtown. And we know that we're doing that from the comments that they make.

Next slide. So we're drawing a lot of out of town visitors to the museum. You can see this first quote from visitors in Paris who went three times during their trip here. We regularly get social media posts that hands down is the best hands on children's museum in Washington. And of course, we're very friendly with all of our other children's museums and support them too, but it's nice to hear that.

As part of that access program, we have our largest single program within the access suite is the EBT family program. So anyone can enter the museum showing an EBT card or a WIC card and pages $3 And you can see here, this is a recent comment that keeping this affordable is so important to these families. We see that a lot. We're also serving a lot of school districts in six regions around the museum. And recently Madison Elementary students were there learning to be young engineers by designing their very own art bots.

Next slide. So we've done a lot of homework on this expansion. And one of the things we did is take a look at our history over time. Back in 1996 when we were located in the old school pizzeria space downtown, we were serving about 15,000 visitors a year. And you can see that with the exception of COVID years, we have grown pretty consistently our entire history.

We are estimating in our next expansion that we'll serve about 60,000 more visitors than we do now each year. And you can see with the green bars what happened to visitation as each expansion happened. The expansion number four was done over time. And that was our outdoor space in the current museum that we are in now. Next slide.

The other thing that we have thought a lot about, because obviously if you're pulling more than a third of your visitation through access programs, they are not paying what it costs. So we've been thinking about that. What we know right now is that we're going to be able to strengthen our business plan in the expanded museum, which will help us offset the costs of serving such a large access population. This is just our largest program, the EBT program. And that was our largest year, 2023.

It's over a half $1,000,000 just to fund that one program. Next slide. So when we thought about expansion we asked ourselves what will growth solve for us and what unique opportunities exist. 2019 was our highest visited year and then COVID you know slowed that down a bit. But in that year, it was really obvious to us that we were overcrowded. We were getting posts about being overcrowded. We were getting visitors talking to us about that. It also, you know really affects your efficiency. Right now we have two preschool classrooms. We promised our teachers in the beginning we not flip them.

And they become birthday party rooms on weekends when we don't have enough room for that. Or on busy special event times they become event rooms. Which it takes a lot more staff planning, etcetera, to do that. We also, in the current facility, because we had to think about, you know, what we could afford, we did give up our traveling exhibit gallery. And it's something we've regretted from day one.

We know that bringing in exhibits from other places is a great way to expose our region to exhibits they might not get to see otherwise. But it's also a good part of the business plan. So, we would make sure that we did that this time. And then, as Jay just said, we have this availability of time sensitive funding that can't be used for any other project. And the key is that we have to use the funding.

We have to plan for the future of the funding before the current bonds are paid off. And so that is also driving this. Next slide. Before we decided to expand, we thought about what can we do with what we have. And we implemented multiple space saving strategies. We extended our hours. Instead of ten to five we went to nine to five seven days a week. We expanded our events to multiple days. Boo Bash used to be a two day weekend event. It's now a five to seven day event to try to spread the visitors out.

We have had some success in selling timed tickets, but what we've learned through this process is that a lot of our families with really young children simply don't want to commit because you don't know if there might be a meltdown before when they've already purchased a ticket. We have successfully promoted more after hours parties and field trips to try to relieve crowding during the day. Next slide. And even with that, what came along with the pandemic was a much lower tolerance for crowds in the post pandemic world. And we're still seeing that several years later.

Next slide. The next piece of research that we did is benchmark ourselves against our peers. So if you look at the purple visitation line, we looked at various museums that we followed through the years that are serving between two hundred and three hundred and seventy two thousand visitors. And in all of those cases you will see that we are serving our visitors in less square footage than the other museums. So we looked at square footage, we looked at visitation, and we looked at outdoor space.

Next slide. We also looked at visitation of regional museums, museums that are in our area, so that you could see how much visitation we pull compared to museums you might be familiar with, like the Art Museum, the Museum of Glass, Kids Quest Children's Museum in Bellevue, in a much larger community, you can see that we are really pulling a lot of people. I went ahead and put in the Museum of Flight so you could have a comparison for what a really large museum in our region is serving. Next slide. We also looked at the growth plans for Thurston County.

And we are already over 300,000. But through 2040 we're projecting growth in our demographic. We have both grandparent and primary family members. So we're reaching the whole spectrum. Next slide.

We also participated in a destination master plan study recently done by Experience Olympia and beyond. And the I think it was over a thousand visitors were asked what are the key drivers that are creating their interest in coming into Thurston County? And as you can see, family fun, attractions, museums, heritage culture, festivals, events, and waterfront, all things that we encompass, were in that top quadrant. Next slide. So then we looked at what is the right what data do we need to look at for being right sized in our planning?

And this, like the slide I showed you before, takes a look at how many visitors are being served in various square footages, and what their operating budget size is. We also took two museums that we've tracked from the time I've been here as the museums that are just ahead of us in the next stage of growth. And originally, when we did our feasibility study with local architects and builders they had suggested that we needed 70,000 square feet to serve the people we're serving now and plan for growth. But when I look at this, I see that more than doubling is too ambitious. And so that guided us in our thinking about this next expansion we would plan for another phase in the future.

The building would be designed in that way, but we wouldn't bite off more than we could chew. Next slide. Then once we had that information we said what are our minimum expansion needs? And so we knew that we needed to double our exhibit square footage from 12,000 to 24,000 square feet. That was a given.

But there are other things that will really be benefited from an expansion, including our preschool classrooms are currently inside the Children's Museum main building. And we really, operational issues and safety issues, we want to create an early learning center that would be in the new building. We, I've mentioned a few times the traveling exhibit gallery. We want to do that. And then we've been developing our culinary programming for kids for the last five years.

And we believe that's a huge area of growth for us. It's a great way to teach math and science skills. And so we're planning for a culinary kitchen and lab as well as classroom in the new space. And then we've been leasing parking from the port for the last four years. And so we will be expanding the parking as well.

Next slide. We've actually done two feasibility studies now in the last two years. And we've looked at so I love to remodel. And I was sure that we could maybe just push out some of the walls in the current space and gain the space that we needed. But the feasibility study shows us that no, we couldn't possibly.

And it's actually more cost efficient to do a second building that's connected by a ground bridge or a sky bridge. So that's the concept we're working with. Behind those two buildings you see that the parking lot's expanded. And then in the yellow you see some of the things that we're adding. If we can afford it and we get enough space in this round we would like to do a tween lab. So extending the museum to middle schoolers. And I just flew in from Albuquerque two days ago where we visited the museum there. And they have a teen lab. We're not quite ready for those teens. But we think a tween lab would be great.

And there was wonderful ideas that we were able to pick up from Albuquerque. Next slide. So in concept the building looks a lot bigger than the current building, but it would be actually probably less, a little bit smaller size than it's showing here from the feasibility study. And we're targeting that new building of 20,000 to 30,000 square feet, but an additional acre of outdoor learning. Next slide.

So the next thing we did was a funding feasibility, and we've been working very closely with Jay and the city as well as the PFD to figure out how much in funds would be able to be supported without any input from the city. Meaning no financial input from the city. And we've identified that 20,500,000.0 could come from PFD funds. We've already secured 1,500,000.0 in the state appropriation. 1.6 in building for the arts grant.

We are in the middle of our Board of Directors campaign. They set a very ambitious goal for themselves of $1,000,000 And I'm delighted to say that we're over $700,000 right now. And we haven't done all of the gifts. So we think we will meet that goal. We are also working on a 2,000,000 foundation grants goal. We've already received approval to ask for almost all of that. So, different foundations that we have relationships with over many years. So, we feel very confident there. And then the last category is our $3,000,000 in individual business and community gifts. And we feel that's very doable.

So that will happen after our Board of Directors campaign is finished. Next slide. And then this just shows you, looking at the photograph, if we if we did because we're doing a progressive design build, we will build to the budget that we have. And so this is sort of an alternative with 23,000 square foot building and adding a little bit less onto the parking, but still having a future area to expand on. Again, we're very early in the process because we don't have the design build team selected yet.

But this is another way of looking at the expanded space. Next slide. If we have to phase, so let's say a question you might have council members is what happens if you don't raise that full $10,000,000 Right now the building can be built with PFD funds, so we would have the building. The museum's portion would pay for exhibits, FF and E, and the labs, the culinary lab, the STEAM lab, the early learning center. And if we needed to, we could phase even this phase.

And so when we opened in our current space, we the outdoor space was just a pile of dirt, as you can see there. And over several years we added one exhibit at a time. And in 2019 we finished building out the Outdoor Discovery Center. So that would be an option as well. We could phase outdoors.

Next slide. As we think about phasing, we do plan to preserve spaces that drive revenue so that we can stay as strong as we can in managing a larger space. Next slide. So in closing, we like to think that we are growing our community's treasure. And with that we are making early learning arts and science accessible for more people.

As well as people who maybe can't access because of income or other barriers. We are enhancing our quality of life for our area residents, contributing to economic vitality to the region. We're a national green museum. We are recognized nationally as a green museum. And one of the things that we love about this project is just like the project that we're on now, we're building on a brownfield site, which means we're cleaning it up and returning it to the public for the public's benefit. There is no direct cost to the City as PFD funds are restricted to the Children's Museum project and will be used to build the building. That's what I have.

Before we shift to, information about the bond details, any questions for Patty about expansion?

Go ahead, council member Green.

Thanks. Patty, this is gonna be a really easy question, but I I just feel like I need to ask it. So the slide you showed comparing square footage and operating, expenses for some of the other museums, obviously, more square footage, your operating budget has to go up. Would that primarily come from as you've modeled this, do you expect that primarily to come from additional visitors, revenue from events, that kind of thing, or do you foresee that being additional fundraising that that you all are gonna need to do?

So there there will probably be both because that would be that would follow our model. So one good thing about this children's museum is that 70% of our operating budget is earned revenue. And we've had to do that because we're a bigger museum in a smaller community. And then 30% comes from contributed revenue. And so we would strive to keep that percentage the same.

And we have done our business model. What's helpful is that we've had several expansions over the years so we could model how much we were able to increase our budgets, comfortably over those expansions. So, Kelly, that's exactly what we're doing this time, and that's what we expect will happen.

Thank you.

Great. And I'd I'd like to ask, the the large parking lot, is that also the additional land for potential expansion for an additional phase of expansion?

There's two, parcels right now that we are securing from the Port Of Olympia. And, that would be one, is at the back of the parking lot, and one is, what would that be? It would be parallel to East Bay. And so those two parcels. And once we know what we will have the funding to build, we'll decide how much of those two parcels will be built.

But in the end some future Board and Director can redevelop that whole area. I would love to think that there may be a parking garage at some point in the future so that that area could be redeveloped with buildings twenty five years from now.

Thank you. And this may be a question for Jay or one of the other folks, but I was I was remembering that with both hands on and the Washington Center that the city is responsible for the shell of the building. So my understanding with this new building, we'd be responsible for maintenance of the shell of the building and the mechanical systems. Is that correct?

Yes. Same relationship, we'll have with the expansion as we do on the first phase, which is we'll have responsibility for the major structural components of the building, including mechanical, and then everything on the inside, and the kind of the minor stuff is responsibility of museum.

One of the nice things about the legislation that just was signed to extend the PFD is that there will likely be funding sitting in the account that is more significant than we've seen in the current version of PFD funding. And so over time, if an exhibit needs to be replaced or the current building will be older and something major might need to happen, there will be more money than there has been in the past to do that work from the PFD.

Thank you, Patty. That that's something I had understood in our earlier conversations was that there might be sort of a a maintenance reserve saved along the way, which is always an aspiration. And then I know sometimes reality bumps up against that. But Yes. We definitely plan for that. That's that's terrific.

And you're gonna see oh, I'm sorry.

Go ahead, Jay.

I was just saying you're gonna chat in a moment when we look at and we talk about the details of the bond sale.

And then my last comment is just being so excited about the idea of the large hall, event space in in the new building that, it's been a long time since I was a kid, but I've had a lot of opportunities to be an adult accompanier. And it's nice to have a little bit of less crowded space to step into, because the five year old has more tolerance than I do for the chaos. So so the the combination of more open space and more open hall is is something I I really feel the difference in different museums, and I I I would be grateful for that.

Thank you for for letting us know.

Jay, would are are you gonna take the next segment here?

And, again, apologize for my camera not being on. I've already been kicked out of the meeting twice while Patty was talking. Sorry, Patty. So I'm gonna keep my camera off and hope we can get through this. But attached to your staff report was a spreadsheet for the bond sale that has proposed funding scenario. That spreadsheet has a lot of numbers, and that's why Scott's here tonight. So if you have very specific questions about what's in the spreadsheet, Scott's here to help walk through any of those. But what I thought I would do is just kinda walk you through the high level of what's here. It's a $20,500,000 proposed bond sale over thirty years. The average repayment is somewhere in the neighborhood of about $1,500,000 if you look over the course of the term of of the bond.

We've tried to stay conservative in our approach to looking at this in a few ways. One is that the revenue rate, kind of the rate of revenue growth, we've assumed it to only be at 2% in the first four years. It there's just some uncertainty about, what may happen the next four years, and we're trying to account for that. So we've remained conservative. And then we've left the growth rate at 4% in the remaining, terms of the bond.

And I'll just note that, you know, the average in the last, fifteen years has been about has been over 4%. So what that means is there'll be years we'll take in more PFD revenues and years we'll take in less. It's just subject to to how sales tax moves up and down, very similar to how, our operating budget works as well. But we think we've been conservative in the approach. The other thing we just talked about this is and you'll see this when you look at the spreadsheet in the kind of the very far right column, is we have what's called the hands on children's museum fund.

And that fund balance, over the course of this term will not drop below. The lowest point it drops to is $360,000. And that is to make sure that there's always money in the fund for things that are likely to come up, repairs and other things either for particularly on the first phase, and then as we move along, things that might come up in phase two. The museum is also agreeing to carry a $1,700,000 security fund. And the reason they're doing that is if there's ever a year where the PFD revenues that come in do not cover the bond payment, the museum picks up the difference.

And so the way they've done that is is to set up a security fund. Now, my hope and our hope is that that never happens, that we never have to ask the museum for a contribution to the bond payment. But we've accounted for that and, with the museum, and I appreciate Patty and her board and her finance team for their work to to get that in place. The other thing as you look at the at the very tail end is that if you assume that we don't spend any money over the over the the the term of the bond, which probably is not totally logical, but if you didn't, there would be a $10,000,000 fund balance at the end. And so as we talk about the future and, the future museum expansions and, what another museum board might do twenty five, thirty years from now, there may be a chunk of money there for them to consider doing something with.

So, again, I think we've been very conservative in the approach we've taken here. I might, ask Scott or Deanna if they wanna add in anything here that I haven't covered, before before we kinda get to the next piece. So, Scott, Deanna, or Patty, anything more you guys wanna offer to this conversation?

This is, Scott Bauer. Good, good evening. Jay, I think you've you've covered it. I think there is in tism in this spreadsheet also. You know, the debt service that we're showing, you know, in today's bond market is probably on a little bit of the conservative side at the moment. We'll see as bond debt service fluctuates, but we did want to make sure that at least we were showing something that looked conservative at the moment and hope interest rates cooperate with us until the bonds are sold.

Good evening, everyone. I'm Deanna Gregory, Pacifica Law Group. No. I think, Jay, you also covered it. I think it's we are diving into the bond ordinance now and working into all the details of the bond issuance and the pledge of the those PFD revenues towards the repayment of the obligation.

Just one thing about that kinda rainy day fund or set aside account that Jay had mentioned is that that will be available to pay debt service on the bonds, but just won't be pledged to the bondholders. So we don't have a a sinking fund or a reserve fund, I should say, necessarily on these bonds, but it will be available in the event that that we will need to there's there's a shortfall in any given year. And that's that's where we're at right now. So we're just working through the ordinances and and, get everything get everything moving based on this discussion.

Any questions from the finance committee? If not, I'll go through some next steps. And I'll just end with this as you get to questions. I fully support this proposal, and the recommendation that's in front of you and support the finance committee approving, this bond and this funding strategy and recommending to the full council for approval. So with that, I'll turn it to final questions, and any action.

Terrific. And I'm looking for council member Green on the screen. I don't see her right now.

Oh, I'm I'm here. I do have one question if if I can. Please. So just easy question for Deanna and Scott. From where you sit, what, what is the in this scenario, what is the biggest risk to the city? And and in your estimation, what are the odds of that risk?

Well, I think I think it's maybe what was addressed in, you know, whether there could be a shortfall in any particular year. You know? So and and maybe that's most, you know, potential in the early years. You know, we hit a recession, and it's not a 2% growth rate. It's a negative 5% growth rate, and there may be some period of time coming out of there.

But, again, I think that's, you know, somewhat mitigated by that, fund that was just discussed. So, again, I I guess I I could see it, you know, potentially a year to year issue, but, you know, net net, sales tax growth rates have been better than, you know, what is what is shown here. So, you know, at the end, probably more likely to have that, surplus. But, again, just more of a year to year, concern, but which is mitigated again, I believe.

Right. No. I I would agree with that from that mitigated from that conservative with the the assumptions that have been made and, of course, that fund that's available. From a bondholder perspective, I think the legal risk is also mitigated because there's not only a pledge of the PFD sales and use taxes, but similar to previous obligations that the city has issued for the museum. There's also a full faith and credit pledge of the city.

And so bondholders will be looking to not only the PFT revenues, but also that backstop. So it's that risk from the bondholder perspective and then having that low if if there is a time when there is low sales taxes to have that impact the city necessarily. That's also mitigated in that way.

Perfect. Thank you.

I Scott and Deanna, I appreciate both of you being here tonight to speak to the proposal, and I I appreciate the reassurance. I I feel very, very confident that we've we've been briefed and stepped through this over a couple of years more than a couple of years now. Guess there's a little COVID pause and then getting back to it. So I I don't see any surprises. I appreciate the solid work and the opportunity afforded by the legislature.

And then I just wanna just to say, to remind us that this is state sales tax that funds the public facilities district. It's state sales tax that we're allowed to divert for a local use rather than a new tax on a a community or an additional local tax. And that's that's a huge opportunity. And and I'm also grateful to the efforts of the board and your other supporters of creating the, essentially, the local match to to make this a reality. So council member Green, do you have any other comments? And if not, there's a motion in order, and I don't know if you have that in front of you.

I can find it if it's in the agenda.

I will read it, and you could make it. How about that?

That's sounds great.

Okay. So I'm wondering if you might be willing to make a motion to move to approve the funding strategy recommendation and bond sale for the expansion of the Hands On Children's Museum and to forward to the full city council for consideration.

I would absolutely make that motion, and I just wanna make an additional comment. So I guess I haven't moved yet because I'm gonna make an additional comment. I'm just, I I really appreciate all the work that's gone into this. I'm really excited about this. You know, the the numbers, Patty, and your board and your team on, visitations that that come through that museum and folks who come to this community to to go to the museum, stay there, you know, eat in the city, stay in the city.

I just think it's an incredible asset. And so I love that that there's a vision to expand it, keep it really, exciting, keep keep finding new ways to utilize it. I'm just really excited to see this come to fruition. So having said that, I will move, Clark's the verbiage that Clark shared.

Second. Alright. Any other discussion? Seeing none, all in favor of the motion to approve the funding strategy recommendation and bond sale for the expansion of the Hands On Children's Museum say aye. Aye. Aye. Great. Thank you for coming tonight and for your work.

Thank you so much. We really appreciate it.

Thank you.

Sure.

And we'll see you for a moment of celebration when it comes on the council agenda. K. Yeah. Great. City manager, are you still with us?

Yes. Terrible.

Wonderful. Would you would you

You all look frozen on my end.

We're froze. We're we're still in action here. So

Okay. I'm gonna walk through this, next presentation, which is some midyear retreat planning. Nothing surprising here. We talked a little bit about this at your session, a week a week ago. So I think this is just kind of reaffirming kind of a plan for midyear retreat discussion around budget sustainability.

So in terms of agenda, again, I'm just here to seek some guidance from the finance committee on the budget sustainability topics, for the council's midyear retreat. And keep going. And, again, that what I'm hoping to get and and leave the midyear retreat with is some is a shared approach, with the council and the city manager and our executive team for how we're gonna balance the 2026 operating budget. So in terms of the topics and, again, this will look familiar to you because I speak to you at the study session, last week, but we're hoping to break the study session down into a bit of learning, which is to spend some more time on priority based budgeting. We're gonna have draft results on program and costing and revenues, alignment to focus areas, and and perhaps we're hoping to see even some insights and some recommendations out of that, out of that process.

So we'll take a look at that. We'll give you your next iteration of information around comparable cities. In particular, we're looking at kind of the number of employees through, per capita. And, you'd asked the question a while back, and it came up at your January annual retreat about how have our support services, which here we're calling central services staffing, kept pace with our growth in other departments. And so we're gonna talk a bit about that.

I will then, share with you, your request a summary just so we're all on the same page of where we took reductions last year just as a way to just ground us into kind of the work that's been done already. And then I'll share a breakout of where is the general fund. So when you look at our $110.11 $111,000,000 of general fund, how does it break down by department? And then if you back out where we have dedicated revenues that offset and pay for portions of that, what's that landscape look like of what's left, of your general fund that's that I would call, in this case, discretionary that you could look at? So we'll talk about that.

And then, I mentioned this as well is, I wanna also take a pause in a moment to really talk about how we are doing in in 2025. Because, you know, before we can get to talking about 2026, we've got to finish up this year. And how we finish up this year could also determine what we look what 2026 looks like. So, we'll bring you a look at kinda where we are with sales tax revenue to date, b and o tax revenue to date, basic life support transport revenue to date, what we had budgeted and what we're taking in. Looking at this one's more of an expenditure, and that is kind of the jail cost.

As as the committee is aware, last year, we went over budget on our jail cost, so it's something that we're tracking at a a finer detail this year. And then where are we with the development fee fund? And that one's important because is if the development fee fund does not in all the revenue we expected it to, the general fund has to cover the difference. So all of these five items together, I review on a quarterly basis with the finance team and with those directors because together, they collectively tell us, you know, where we're heading for in terms of year end and collectively what the impact is on the general fund. So I'll bring you that look so we can look at that together, at the midyear retreat.

And then and then we'll start to talk about an approach for 2026. We'll talk about, confirm new revenues. We've been having an ongoing conversation about b and o. I've also learned a bit more about house bill twenty fifteen, that was signed by the governor today and and how that funding could be available to us next year. So I'll bring an update on that as well.

So we'll talk about some new revenue opportunities. We'll talk about the department directors and I have already started a conversation about how do we build capacity in the 2025 budget to kinda build our fund balance, exploring things like a spending freeze, in the latter part of this year and some other ideas that they have generated that we're generating for how we might generate some additional capacity into 2026. So we started that work, and we're gonna bring you a list of items for your consideration. I'm excited to actually bring that to you. There's some really good initial work done by the ex executive team department directors to give to bring some ideas forward.

Again, we'll take a look at fund balance, and, maybe even make some projections on where we hope it might be at the end of the year, and then if we took some reductions, how that might impact that. And then, again, I wanna talk about a shared approach and some guidelines for how we might evaluate reductions together so that as I start to move forward and work with the executive team and I bring proposals to the council in later in the year around our budget, I'm doing it in a way that I start with kinda some guidelines from the council in terms of where your interests are, things that you're okay with us looking at, and things that maybe you're not okay with us looking at, in terms of options. So, I think it'd be a good a good opportunity for us all to leave the midyear retreat on the same page about our approach for how we're gonna address any potential reductions. So that's really what I have for you tonight. Again, we talked a bit about this at the midyear, and my purpose of tonight is just to do one other check-in with the finance committee in case there's anything missing, from this conversation from your view or anything else I need to add to the conversation at the midyear retreat.

So I'm gonna stop talking and turn it over to you for any questions or input.

Yeah. Leah, I'll let you lead off.

You. Yeah. And and I'll be easy. I have no questions, Jay. I think this takes into account a lot of the conversations we have had both as finance committee and as the full council. So I think this is, robust. I think it's about as as much as it seems, reasonable to touch on midyear, recognizing how much, you know, just won't be known until, the year goes on. So I'm I'm really looking forward to to seeing all this, and I hope we can walk away with, you know, you and your team feeling really good about, just our how we intend to approach budgeting generally next year and, and what's on the table. So, yeah, I'm I think this is thorough.

Right. And I'm going to agree with council member Green that, this I I just I appreciate the the opportunity for council to both review all of this and and the transparency of sharing all of this work as as you're shaping the budget. Council member Cooper had one suggestion, and that's in the two places where we're going to bring up business and occupation tax, that as much as possible that we focus on and emphasize on the rate and the exemption threshold and not try to create a whole long conversation about the categorical exemptions because it's a intriguing bunny hole, and we could spend a long time asking why we exempt pigeon racing. But it it it might not be fruitful. And and there may also be some limitations of what we can disclose because it gets down to individual enterprises for some of those exemptions.

So, anyhow, that was his suggestion. And and otherwise, I'm I'm really pleased with this plan for the retreat.

Hugh, we tend to agree. I think, you know, we did have a conversation about a laundry list of exemptions that are there. I've gotten a little bit of feedback from a couple council members, so we're gonna you know, we'll look into a couple of things in advance. But I agree that it'll be hard to to get into any detail about exemptions. I think it's an easier conversation around the threshold and the rate, and and and where we might end up there and then the exemptions. I think, you know, one the things that Brandy pointed out is what will be difficult is even if we removed it, what we think the impact could be, will be hard to know. So, but I agree with you there. And then, if if anything, as we do some further look at those exemptions sticks out between now and the entry, I can share that with with counsel.

Wonderful. Thank you, Jay. Is there anything else on this item before we move on?

Not for me. I appreciate the time.

Oh, and and we're we're glad for the work. Well, this this is a that's our last business item, which brings us to reports and updates. Jay, do you have any updates for us this evening?

Do not. Other than, I cut out right at the end of your motion on the hands on item. And I just wanna just express my gratitude for I know Patty's left the room, but for her and her team and their work and for the council's faith in in them and in this work. So I didn't get a chance to make that comment, so I'll make it here and just say thank you.

Council member Green, any reports or updates this evening?

I have no additional reports or updates.

Well, then we'll turn to Sean, Joan, and Owen and see if there are any updates.

Only that the next finance committee, you'll have your new finance director on board.

And then I did, one thing. Kenzie asked that we push the, 2024 finance audit, snapshot to, August as it will be wrapping up in July.

Owen, any updates, reports that you need to get to us tonight? Alright. Seeing no further business before us, we will adjourn the finance committee at 05:48PM. Thank you for your work tonight.

Thank you all.