Finance Committee - Regular Meeting

Good afternoon and welcome to the Monday, July 20th meeting of the Finance Committee of the Olympia City Council. We're calling the meeting to order at 4.30 and roll call. We have all three of us, Kelly Green, Robert Vanderpool, and myself, Clark Gilman, in attendance. The next item is to approve the agenda. Have either of you had an opportunity to review the agenda and would you be prepared to make a motion? Motion to approve.

Second.

All right. We have a motion to approve the agenda. Any discussion? Seeing none, all in favor, say aye. Aye. All right. It's unanimous. We have an agenda approved. We don't have anybody signed up for public comment this evening, so we'll move to approval of the minutes of the June 15th committee meeting.

Move to approve the minutes.

Second. All right. All in favor, say aye.

Aye.

Great. We've approved the minutes from June 15th. And now we're on to committee business. And the first item this evening is a budget spotlight on citywide debt finance. Oh, and it's Kenzie. Joan does a lot of these spotlights.

If I could, just a second, just trying to make sure we can bring the presentation up on the screen. Okay. With our new team system here for a second.

We'll tread water for just a moment and see if the presentation will come on the screen. And I'll say the whole thing, that this is a budget spotlight on citywide debt financial audit briefings. presented by Kenzie Wang, our general accounting manager in the finance department. How about if we take a five-minute recess, because that was my best subject in school, and then we'll reconvene. We're just having a little bit of a technical difficulty getting the presentation to load onto the screen.

Thank you for the technical assistance.

We're reconvening, it's 4.30. And Kenzie, would you like to give us a budget spotlight on citywide debt? Thank you.

Yes, I would love to. Thank you, Council Member Gilman. I'm Kenzie, I'm the accounting manager. Did I already say that? So this is just meant to be a briefing on the city's current debt. Sean, if I can get the next slide. It's just a little mini agenda. I'll just go over the types of debt for background, debt limitations, that would be the city's current, and then also our current debt service obligations as well as retiring debt that's coming up.

Next slide, please.

So for some background, these are the debt types that local governments can issue. There's general obligation. We frequently call that geo debt, revenue debt, and then special assessment debt. And I will get a little more into those. Can you do the next slide, Sean? For general obligation debt, this is secured by the full faith and credit of the city. So in general, the money is gonna be secured by property taxes. And it just needs to get paid regardless of whether the city collects more or less property tax or any other kind of tax. So it's an unconditional pledge. So the two types are a limited general obligation or an unlimited. So the Limited doesn't increase the taxes to pay for the debt, but then the unlimited is voted. So the taxpayers need to vote in order to pass an increase in tax for that.

To the next slide.

So revenue, bonds, and debt are different. They are financed by enterprise funds that are self-supporting. So these funds usually have a charge for service, and the most common ones are like utilities, but other cities have ones like golf courses might operate as an enterprise fund if that land is owned by the city. They take in revenue. You could take out debt to improve the golf course, for an example. And then... Here, we just have water and sewer and stormwater infrastructure, which is what we have debt out for. So, well, I'll get into the limits a little more, but there's really no debt limit on that. You can theoretically raise rates as high as you could to cover that debt. Usually doesn't go over well with the population. But theoretically and legally, you could. Next slide, please. Special assessments are kind of exactly what they sound like. They're specific to a population that would get that debt assessed to them. Usually those people would just benefit. It would just be something that benefits a really small portion of the population. So for instance, like one neighborhood gets improved sidewalks. That debt would need to be paid by the residents there. Side note, the city doesn't have those right now and hasn't in at least several years. Next slide, please. So the debt limitations are established by the state constitution. So there are legal limits for how much debt you can take out. And if you'll go to the next slide, this is kind of what the city currently has. So it's based on the assessed value right there. We've got the 25 levy, which is what we'll collect in 26. So you can see that that first part for the limited vote, that's the one that doesn't need to get voted on, sorry, the limited geo debt. We've got a capacity of about 90 million remaining. So we've used about half of the capacity that we could use. And then the other piece where the residents can vote, we've got a lot more that's unlimited, but it's called unlimited, but it still has this limit on it.

So next slide, please. Oh, yeah, of course.

Yeah, so the, oh, it should be. Yes, you're right. That should be voted. That is a typo. Yep. And yeah, it does take into account both the non-voted and the voted when you're calculating into what you have remaining. Thank you for that.

Get the next slide, please.

So this is some of our geo debt that's outstanding right now. This is all available in our annual report. You can see it there, but I just kind of put this together so that you can see kind of the purposes that we tend to go out for debt for. I think we're all familiar with the debt that we issued last year for both the museum and for parks. And then we had some refinancings in 2020 and 2019. Those were good years with good interest rates to refinance. Can you do the next slide, Sean? And then we had some debt issuances that were older for building City Hall. And then in 2013, we had some bond taken out for the Washington Center and for... the streetlights for transportation.

Next slide, please.

So this is the debt service through 2055, which is when our last debt will mature. It's pretty steady. Each year it's about the same for those five-year chunks, you know, I would just divide by five. It remains pretty steady. There's obviously a dip in 39 when a lot of our debt that was taken out prior in the, you know, before 2020, when that expires or matures, excuse me. And if anyone wanted detail of this, I can get it for you, but this is just a general, you know, what we're expected to pay. The next slide. And this is some of our revenue debt. There's a second slide, but this is not just bonds. This is loans. So we've got the Washington Trust Fund loans, and then we also have loans from the Department of Ecology. They function as draws, so they don't give us the money all at once. We're not currently drawing on any, but when we were... we could expend the money and then take a draw on the loan. And the interest rates are really favorable for these programs. So next slide, please. Just a couple more of these. And then again, we also had the bond refinances in 2020 with those favorable interest rates. Those are actually held all by one bank right now. So we're just paying back one bondholder right now.

Next slide. This is the same kind of chart.

Again, I can grab detail for any for any of these, but this kind of just shows like what the city is obligated to pay in terms of the cash flow for the interest and principal.

Oh, yeah, of course. Yeah. So looking at this chart compared to the one on the general obligation debt service, uh, the, the ratio of like interest to principal on general obligation seem noticeably higher. Is that, is it just different rates on the different types of debt?

Yeah. So that is a lot of it. And also because those, um, those bonds tend to be longer, you know, 20 or 30 years, you've got really, um, interest heavy payments at the beginning of those. So those do taper off. Um, but these are usually a little shorter, um, I don't remember the exact timeline, but they're not, you know, they're private loans. So they're not going to go out for like 20, 30 years like that. And also these, I know most of these are at like a 1.5% interest. So like even when we had refinanced in 2019 and 2020, we weren't really getting that rate. These are like state programs.

Next slide.

That's it. Any other questions that came up from that?

Yeah, in the I'm not sure if this is for you or for city manager, Bernie, going really early on the slide on our current debt limit. So there's been discussions, clearly not action happening, but discussions around like waste resources and maintenance facility. So with our current debt capacity at 90 million for the non-voted debt. Am I remembering correctly that if we went out for bonds for both of those facilities, we're looking at about 90?

Yeah, so as it sits right now, the Carpenter Road waste resources will be revenue debt.

Oh, okay.

Right, so it hits differently, right? So then that piece comes off, and then if we were to consider a future maintenance center. That would go against the 9 that would go against the 90 million or against the 200 depending on how you finance it so for example councilmanically you have that 90 million but you could also choose for example to float a bond measure to the community to pay for the maintenance center and pay for it that way which should give you more capacity beyond the 90 okay thank you I'm looking over there to make sure I got that all right there in their heads.

So just to go a little bit further with that, while we have that capacity to essentially double what that would be, we're also currently paying between $7 and $8 million a year to service the debt. So it would be another $7 or $8 million a year that we'd be looking at. Is that what the payments would be on a $90 million maintenance center?

Yeah, roughly.

Yeah, yeah.

Which for me is why I went to a voted measure, because a facility that size would be really difficult for us to find a way to councilmanically fund. I think when we think about the needs of a future maintenance center, we think about fire stations, and we had this conversation at retreat, we think about a lot of the facility needs that we have, it's a significant number. And we probably go a lot farther packaging those types of projects together into larger voted measures that we would try to do and the council manically.

Thank you so is there anything else on the budget spotlight.

Okay.

It sounds like it's peaked our interest and we'll have more conversations as time goes along. So appreciate that. The next item is a city investments briefing. And Kenzie Wang is once again going to present. And will you introduce Mitch for us? Thank you.

Yes, thank you. So for the city investments briefing we have with us from government portfolio advisors our investment advisors Mitch Hanke he's the chief operating and compliance officer and also senior advisor Great, thank you everyone and it's a pleasure again to be here I think this is my third year presenting to the Finance Committee.

So always great to see everyone's face and be able to walk through and you know, not just a current status update of the portfolio and the markets, but this year we recently went through our annual strategy review with the finance team. And so we're going to present a few slides that kind of reinforce some of the basis for our continued recommendations on the structure of the portfolio.

So if we want to flip forward to a few slides from here. Thank you for your patience, Mitch.

We're experiencing the blessing of new microphones and new sharing technology here. And there it comes.

All right, beautiful.

So our agenda today, if you want to flip to the next slide, is we're going to touch on the current status of the markets. We're going to review the total aggregate portfolio, which includes the city's operating funds, as well as the bond proceeds that were issued in 2025, which is touched on for the parks and hands on children's museum. We're also going to touch on briefly just the kind of core investments, as we call them, the pooled investments here for the city. That's the operating funds that is really the key driver of the long-term earnings for the city and the one that we manage very closely to the recommended benchmark that we've aligned on with the city. And then I've also just included for reference, we won't go through them, but a current list of the holdings and transactions over the last quarter. So if we flip to the next slide, we're going to start with interest rates. This year has been a very fun year for interest rates, to say the least. You know, we really came into the year with markets expecting potential interest rate cuts due to some of the improvements in the inflation and strength in the labor markets. That reversed course pretty dramatically back in February with the conflict in Iran. In the last quarter while that's driven rates up, you know, we've really seen a pretty substantial shift in the yield curve So if you look at the top right hand chart here It shows you on the bottom where rates were from the three month to the ten year tenor in December in the middle you saw those rates increase in March there and you actually saw us going from an inverted yield curve where we've got you know, the shorter term rates actually paying more than some of those out to two years to a normal curve and We call it normal because this is what we typically see in the markets is that, you know, the longer you invest, the more you're compensated for investing longer. And even a nice jump in June tied to the inflation that has been caused due to the conflict in Iran and increases in oil prices and everything that then flows from the increases in oil prices. So you saw in the last quarters, the two-year treasury notes climbed by 38 basis points to 417, and the five-year investments jumped 28 basis points to 422. More recently with some of the, I don't know what exactly to call the agreements that have been in place since they haven't really been true agreements in terms of the stalemates and whatnot, oil prices recently fell throughout the end of the quarter. And you can see on the bottom here, the market didn't believe that that fall in rates or oil prices was going to be sustained. And so that's why you can see there's a really big divergence here in the price of oil relative to the two-year treasury. Two-year treasury stayed right up there because we knew there was a lot more work to be done. If we go to the next slide, this talks a little bit about what the Federal Reserve then has been doing relative to you know, a really big shakeup in the economic picture, especially tied to inflation. In Q2, two meetings were held. During both meetings, the Fed voted to keep the federal funds rate unchanged at 3.5 to 3.75. The inflation expectations, though, also have increased with each consecutive meeting. And so in the top right corner here, you can see the forecasts for the personal consumption expenditures measures. You can see those have increased from 2.5 percent to 3.3 percent this year. That's a really sizable jump in such a short period of time. Again, really driven by the increase in oil prices and the pressure that puts on the general economy. The good thing to think about is this isn't just oil for, you know, airplanes and cars and everything like that. but it is all the other byproducts of oil that we purchase as consumers, plastics, right? How many things have plastic in them these days? Almost every single thing that we buy. So that has a really big knock-on effects to just general prices in the marketplace. However, it was a little bit of a breath of fresh air to the markets is Kevin Warsh taking, beginning his term as the new Fed chair and coming in more hawkish, meaning wanting to be much more Focused on the data and not just cutting for cutting sake, but actually being, you know, um, more forward thinking and forward focused in increasing rates potentially tied to those increase in inflation pressures. Um, so what really has changed is, you know, chair wash now has said they're going to really be trying to. really reanalyze the data that the Fed uses as its basis for decisions, trying to be much more current. You know, a lot of our inflation data, a lot of our employment data, labor, it is very backward looking. It takes a lot of time for that data to really be collected and to be parsed through. And so what Warsh has said is there, you know, he's created several different committees within the Fed now to really evaluate how the Fed operates to try to be, again, more on the ball and more on point, including looking at more forward projected data as opposed to just, you know, backward looking data. And so with the worn around, with the comments that have come from the Fed now in the last meeting, really what you've seen is an increase in rate hike expectations. Going into the year again, the expectation was that there most likely be a cut in rates by the end of 2026. As of today, there's actually a 80% expectation by the markets that we're going to see a rate hike by the end of the year, primarily tied to these increases in inflation. So it's a little bit of a shift. And if we go to the next slide, we'll take a look at kind of the GDP and the inflation side of things. You know, really, price growth has accelerated. And so, I mean, this is, again, no surprise with, you know, really the supply of oil being, you know, really cut dramatically tied to the conflict in Iran. driving prices up. You saw PCE rose to 4.1% in May. On the chart here, we can see kind of the two different versions of PCE, the core PCE and the general PCE. Both are increasing. We do have stronger GDP, though. We did see a nice uptick in the GDP rate back in Q1 here, up to 2.1%. So that's a really big acceleration from just a half a percent back in Q4. And, you know, really that personal consumption is what's declining and really slowing down that GDP growth rate. We do expect and economists expect that the GDP will continue to trend positively. So it's not like we have, you know, a really concerning scenario. We don't have inflation rising and GDP declining, and that's a pretty strong concern. We do still have a pretty robust, if we flip to the next slide, labor market and a robust economy still. And so it's kind of this interesting scenario. We've got really two different factors that are driving interest rates and the Federal Reserve. You know, you got their two main mandates being, you know, the unemployment rate, and that's tied to the economy and to the labor market and inflation. And so I think what we've seen from the Fed in terms of their last meeting is they're commenting on they're going to really make sure they try to get inflation back down to that target of 2%. But we're pretty far off that right now. And so with a stronger economy, I think that does tend to lead where you see the markets now expecting rate hikes to try to rein in that inflation, to try to control that second aspect of their mandate. But otherwise, we've got a very strong labor market. Participation is decreasing. That's what's keeping that unemployment rate pretty low. You see actually hourly earnings starting to come down, so it's not all completely rosy. But otherwise, relatively strong labor market data here that is driving, again, some of those GDP growth rates as well. So I'm going to pause there. And that's a lot of the economic stuff. We're going to talk about credit spreads too in a second. But any questions on inflation, economic conditions, anything like that?

Let's just reassure me. That economists still have something to work with, that the broader economy is so resilient that no matter how capricious or how much windmilling happens from the executive branch, that this is still something you could still use econometricians to model this stuff or it. It's surprising to me that we could still have a rational approach.

Yeah, I mean, it's a good question. I think you have seen plenty of positioning from the administration. I think they're trying to find any way to make things look rosy and bright. I think what, again, the markets really breathed a breath of fresh air with the comments from, you know, Chairman Warsh. They really appreciate that. You know, I think the big concern out there and why you saw interest rates increase so much after the start of the conflict in Iran was the concern that if you had a lot of pressure from the administration for the Federal Reserve to cut rates, that what you're going to be creating is a lot more pressure on long-term inflation. And with the comments that have come and with the really stance that's being taken, that's really not the case. So I think you're seeing markets feel a little bit more relieved now that we're not going to see these inflationary pressures that are already pretty persistent and strong really be doubled down on because we're cutting interest rates and we're incentivizing more money to enter into the system. And so with that control of the front end, I think that's giving those longer term rate expectations a little bit of breathing room.

Thank you.

I appreciate that reassurance. As much as I can, right? And so, I'll just conclude, if you go to the next slide, with a look at credit spreads. It's been a very challenging market to invest outside of Treasury bonds. And if you look at the allowable investments that the city has, you're thinking corporate investments, you're thinking agency investments, you're thinking municipal investments. really over the last several years, we've seen what's called the spread, which is the difference in the interest rate you'd achieve by investing into a corporate bond versus that treasury bond as kind of the baseline. Those spreads have really been at historical low points, and there's been very little opportunity to take advantage of getting extra yield because when we do go out and invest in those other areas, we are Moving away from those investments that are backed by the full faith and credit of the U.S. government. Right. And so we do take on additional risk to add that incremental yield to the portfolio. That relationship, that risk return relationship just has not been in a positive place for several years now. And so I just want to put this up here to say, you know, this is something we look at very actively. We do not choose to invest outside of treasuries unless we feel that risk return trade-off is in a beneficial place for the city and for our clients. One thing that we have seen positively is some normalization of corporate bond credit spreads. And so we did add a couple bonds to the city's portfolio in the last quarter. We are going to continue to look for those opportunities moving forward. But really, that's the only game in town, so to speak, outside of treasuries right now. You know, every time we send a proposal, we're putting some of the agency options and it's literally the same exact yield as a treasury or maybe one basis point more. And in that case, it doesn't really make much sense to go add that extra risk to get that extra yield. So this is something that we're not entirely sure when this is going to start normalizing. Frankly, we thought it would normalize even more by now. But at least we're starting to see some of that normalization on the corporate bond side, which gives us some hope that we can add, again, some incremental yield above the treasuries over the next several quarters.

Could you describe – these charts or graphs are displaying – the relative return of each of these three categories measured against a treasury bond.

Yes, exactly. And you see the dark line is the three-year average of those spreads. And you can also see just the absolute yield pickup for each of those different asset classes. So it's just kind of comparing, here's what the average has been. Here's also what the absolute change is for a corporate bond, right? So you can see even the agency up here, you know, you're getting maybe four basis points, five basis points from time to time to go out there. In practice, though, it's even lower a lot of the times when we're investing for the city on a day-to-day basis. Kelly also has a question.

Could you please just define agency bullet for me?

Yes, absolutely. So an agency bond is like your Fannie Mae, your Freddie Mac. It is a government agency that does have the backing of the U.S. government, but is not a U.S. Treasury bill. Great. So if you go to the next slide, we'll transition to talking about the overall portfolio. So we have here listed is both the, again, operating, which is the pooled investments and the pooled liquidity accounts, as well as the recent bond proceeds accounts, both the investments portions and the liquidity portions for each of the different bond series from last year. Currently, the total portfolio book yield stands at 3.3%, and the effective duration, which is one I want everyone to really remember and focus on at 1.34 years. And so that duration is You know, the weighted average time for the return on your investments. So getting all the coupons, cash flows, maturities back to the city. So it's really the biggest measure of risk that we have as well, because it's really how sensitive the portfolio is going to be to changes in the interest rate environment. If we go into the next slide. This is, I'm going to show you a few slides now looking at historical cash flows that the city has. And so this is one of the main things that we look at with Michael and Kenzie when we go through the annual review process. This first graph shows you the seasonality of the city's cash flows. So this looks at really the last three and a half or so years of balance changes on a month over month basis. So this just takes the month end compared to the next month end and shows you what those changes are you know, either positive or negative. You can see there's a nice seasonality of flows where you have, you know, drawdowns in January. You have your increases in that April-May timeframe. You know, this just gives you a sense of what that profile looks like over the course of the year for the city. The one thing that I'll point out here is the very bottom of the table shows you the summaries of each given year. And so, really, as we looked at this with Michael and Kenzie recently, Our big takeaway is one, the average balances over the last three years have been increasing from about $150 million in 2023 up to $165 million in 2025. The other positive thing to see is that the minimum balances have also been increasing. So this is kind of the lowest point throughout the year measured on a month-end basis, went from $140 million to $153 million. So the city is trending upwards. If we go to the next slide, This shows then just kind of that total portfolio balances. And what we also model here is the ratio of how much liquidity you hold. So this is your LGIP and your U.S. bank deposits relative to that core investment portfolio. Could you translate LGIP? LGIP, the local government investment pool. So the funds that are held with the state that are immediately available as overnight liquidity, but you utilize them because they pay a better rate than your bank deposits will. And so the, you can kind of see that liquidity ratio. I think that's a really nice thing because as the balances change, we still look at that component relative to the total, right? So the liquidity component relative to the total size of the portfolio, you can see that that kind of ranges from, you know, anywhere from 16 to 25% over the 23 and 24 periods, we got a little bit lower in 25. And as we came into this year, you know, Michael and Kenzie did reach out and say, Hey, You know, we do feel like we need to put a little bit more on liquidity. And so we took a bit out of the core from some of the maturities that came due. And this is really the key I want everyone to kind of remember, too, is that each of these components really work hand in hand together. You know, we build that investment component to have maturities that are pretty darn consistent across the year. And it's meant to have those maturities so that in the event you're feeling like, oh, we're running a little bit lower in funds. We're having more expenditures at this point in time than we might have expected. We can easily take one of those maturities and just flow that through into the liquidity to kind of bolster those overnight available funds and put them back in or not when those balances recover. And so we are at a point now where we had a few of those positions mature out. We moved those to liquidity. You can see that that jumped kind of the liquidity ratio here in the last few months back up to that 20, 24%. And now we actually put more of those funds back to work in that core fund. So that's that flexibility that, you know, we build into this strategy knowing that we can't forecast exactly what expenses are going to happen which months, but we want to be very flexible and nimble to making sure that we take care of the liquidity needs of the city first. And then we can really refocus on, you know, putting things back into that longer-term core portfolio to drive those longer-term expected earnings when it's applicable and when it's appropriate. So, if we flip to the next slide, this is kind of that summary now, catch all of what that recommendation is. And so, you know, with those increases in the city's fund balances, you know, the big thing is, especially after we had to take a few maturities to cash, we said, first thing we're going to do is make sure we increase that liquidity component. As balances grow, we expect expenditures and some of those funds to spend more too, as revenues also come in more as well. And so we want to make sure that that kind of target level was increased as well as the minimum threshold that we keep in that liquidity component. So that was really step one. And then step two is in consultation with the team is we did feel we could put another five million back to work in the core that we had taken out over the course of the previous six months to really, again, anchor down with the nice, attractive yields that we're getting, at least from the market with those increased inflation expectations. Big thing is we're going to continue to really make sure. On a month-to-month basis, we're monitoring the liquidity, making sure that if we're getting close to that minimum range, that's really a flag to us to reach out proactively and say, hey, it looks like we're getting closer. Do we expect that to go down further? Should we be taking another maturity to cash? Or do we feel we can continue to reinvest in that pool of investments vehicle? So it's a really nice conversation trigger point for us to make sure that we're really well aligned and, again, really taking care of the needs for liquidity first and foremost. So those are the big takeaways from the annual review this year.

And then I just want to point out on that, when we talked about the balance variances, you see the twice-a-year property tax payments and the quarterly B&O tax being a lot of what makes big humps and makes us cover months in between those just for whatever that's worth.

Great. So if we go to the next slide, as always, we take a very, very, very detailed view of the portfolio compliance. And so this is a very long list of the rules that we have hard coded in our reporting system. This captures every aspect of your investment policy, which is also in compliance with RCW, to make sure that every single trade we make, every single time we see monthly balances reported, We're checking the portfolio then against the investment policy to ensure that we remain in compliance. Um, this is, I think 1 of the big strengths that we have in terms of how detailed we go into. Um, so these 2 pages here are again a snapshot of the policy diversification constraints. the maturity constraints, if we go to the next page, and the credit constraints that the investment policy has. And again, this is something that we see daily. Anytime we see maybe balances drop, it can get some of these into warning levels, which are about 10% above or below the actual maximum thresholds that we set. And so again, really good monitoring that we do to have the right conversations and ensure that we're not getting too far ahead of ourselves with the investments that we're making. If we go to the next slide, this is just a quarter over quarter comparison, if you want to go two more actually now, of the total portfolio relative to March 31st. So, you know, not a lot of big changes, and that's a really important key. When we choose the strategy and we really align on that, we choose a benchmark for the city. That benchmark is the zero to five year U.S. Treasury index for the pooled investment vehicle. We'll look at the profile of that portfolio and what that looks like, but really the main driver of that benchmark that we choose is the duration and the duration profile of the portfolio.

Yeah.

Thank you. Can we actually go back one to the compliance? Yes, that one. Thank you. So, there are a couple in that upper category that look like the actual is above the policy limit, but note that they're in compliance. Can you help me understand those two numbers better?

There are difference in minimum numbers. So like in that top chart, we have to have a minimum of 25% of the portfolio under one year. You currently have 51%. So it's just tied to the wording.

I had maximum in my head.

There you go. So yes, there are some maximums where we can't cross the upper level. There are some minimums where we can't cross below that lower level. Thank you. Mm-hmm. So if you want to flip ahead again, if I may, absolutely describe.

So we see the book yields being, you know, sort of in that same range as we were talking about the returns on these investments and then the total portfolio performance. Does that mean that we actually net a half of a percent?

In the quarter. So when we look at total return, so I'm going to take a quick tangent and then I'm going to come back to that. Thank you. As I mentioned a bit before we talked about compliance, really the key that we look at is creating a disciplined strategy within the city's investments. And that is first and foremost choosing a benchmark that provides the right risk and return characteristics that mirror kind of what the city's objectives are. And so that benchmark that we chose and have managed for quite some time is the zero to five-year U.S. Treasury index. That runs at about a duration of 2.1 years. And so you can see up here that pool of investments is about two years right now. That kind of upper right on the left-hand chart there, the pool of investments effective duration, that's what we compare against the benchmark. And what we use that benchmark for is not just measuring our returns and making sure that we're returning like the benchmark, but also that we're constructing the portfolio to be very similar to that benchmark. The key being, we choose the benchmark for those risk and return characteristics. Unless we build the portfolio very similar to the benchmark, we're not going to achieve those risk and return characteristics if we don't. So it really provides a few different things. One is a blueprint for how we should construct the portfolio and ensure the portfolio consistently matches that index profile. And then two, if we do that, we should then also be able to outperform that benchmark over time through some of the strategic choices that we make in terms of where we put duration and from some of our diversification outside of those treasury investments. And so the difference between the book yield and the total return is the book yield is going to be just that interest earned on the portfolio. The total return is also going to incorporate the price changes given the changes in interest rates. So if interest rates go up, it's going to have a negative effect on the value of your portfolio. Basically means if you've got a 4% bond and you can go get a 4.3% bond in the market, Well, you're not going to pay $100 for that bond, right? You're not going to pay par for it because you can go get a better yield elsewhere. So the value of that has to adjust in order to get the same effective return for your investment and vice versa. If rates go down, you're going to see the market value of your portfolio increase. And so the total return performance is really that discipline and making sure we stay very much attuned to that benchmark, knowing if we do stray we do introduce additional risk of the market value fluctuating more than the benchmark otherwise would.

So if I could just ask a little bit more, just to make sure this is better than burying it in the yard. The actual increase in the portfolio quarter to quarter is a half percent increase.

And that's affecting both the market value changes and the interest that the city. I understand, but it's both elements.

And So over a longer period of time, is it that our actual increase in the value of our portfolio only inches up by half percent, or is it sort of a time series and because we don't cash out the appreciation of different elements? Correct. Yes, it's the latter, right? So it is going to fluctuate up and down. So in a longer look, we'd be heading closer to the 3%, but if you look at this last quarter, we're just a half a percent up from the previous quarter.

Correct, yes. Thank you. Yeah, and so you're going to see that market value change influence positively at times and influence negatively at times that total return. We still measure that. There's a lot of advisors. There's a lot of entities and government out there that don't look at that. We think it's a really critical aspect because, again, it ensures that we're remaining disciplined to manage the portfolio similar to the benchmark that we chose. The other thing I'll point out is in the bottom right-hand corner, you can see that in Q1, the portfolio actually appreciated by $214,000. In Q2, it lost $340,000 in value, and that is tied to the interest rate increase that we saw in the markets having a negative impact on the value of the portfolio. So that's something, again, we keep a very close eye on. We're not trying to go extend duration right now. We're actually staying very neutral, which is meaning that as the index goes, we should see your portfolio go as well. If we flip to the next slide, this just shows the asset allocation change on a quarter-over-quarter basis. Really, the big difference is we saw an increase in the bank deposits and pooled funds, again, tied to what we just talked about. and a very small increase in the corporate investments. So we were able to add about $2 million to the corporate portfolio over the last quarter. And again, we hope to see more opportunities where we get a good return for the risk that we take with those corporate investments. And we'll see in a minute also the mature or the rating levels that we target. On the next slide, this is just a snapshot of the overall duration profile of the portfolio. Um, so you can see, we have a considerable amount. About 50% of the portfolio, uh, in that 0 to 1 year area. Um, and then this is just the other profile you can see out to 1 to 2, 2 to 3, 3 to 4. so something that we show every quarter in our statements for the, for you all. Um, and again, 1 of the key factors is just the benchmark that we choose making sure that we have sufficient funds under 1 year under 2 years, um, to meet those city needs and meet your objectives. The next slide is the ratings of the portfolio. About 20% of it is not rated. That is tied to your bank deposits and the local government investment pool holdings. The rest of it is very, very, very high quality. So you can see about 75% or so, the remaining almost 75%, sitting at AA or better. And so our philosophy is to stay as high as we can on that credit quality scale. You know, we think we can get sufficient return or extra yield by staying within that AA or better space, not having to go even all the way down to that AA, kind of the lowest level of that. We try to stay as high as we can there. We think that's a really prudent way to ensure, again, that we stay disciplined with the management of the city's funds. The last two slides I'll cover really just focus on the pool of investment portfolio. So as I mentioned, this is really the key long-term driver of earnings for the city. And you can think of it two ways. One is we want to ensure that we keep enough funds liquid for the city so that you can maintain day-to-day operations, really safety liquidity return in that order, right? The next step, though, is making sure that we don't overinvest or keep too much funds liquid. That takes away from the long-term value generation that investing out two, five years or more can have for the city. So this is just a nice snapshot to show over the last year, the portfolio has returned 3.23% relative to the benchmark of 2.97%. And really, we're seeing some very strong returns here over the past three and six months as well. We're very pleased to see. Any questions on performance?

I'm sorry to be full of them here tonight, but, um, so the, um, the sense inception, um, over 10 years ish, um, we see a 1.7% return and it looks like the, the fee is just one is essentially one 10th of a percent. So it's, it's, um, I guess it sounds like it's a safe, this is kind of like people used to say about savings bonds, right? It's safe and you hardly make squat compared to all the flashy investors. So I understand that it's safe. It doesn't look like you're making a killing out of managing our money. That's not where it's just, just literally it's the security is, is, is the, Looks like it's the bigger driver than trying to earn dramatic returns on this.

Yep, exactly. And you can see that period as well from 2015 reflects one of the most, I'd say crazy, because I think crazy is the right term, in interest rate environments that we've ever seen, where we had rates at almost zero for several years through COVID. And so this is that 1.7 or so percent net of fees that reflects both the higher interest earning periods before COVID those COVID periods and now us recovering from COVID and continuing to chart upwards. All right, well, if we flip to the next slide, this is the last one from the presentation before I take further questions. Always important as well to see what we call the shock analysis, which this measures that core or that pooled investment portfolio and the value change that you'd experience based on the duration of that portfolio relative to changes in interest rates. So I just really want to put you on that far right column. that's a 1% change in rates. What that means is for your portfolio market value of 134 or so million invested to a two-year duration, if we see a 1% increase in interest rates, it would mean the portfolio value would be decreasing by $2.7 million, and vice versa if we see a drop in interest rates of 1%. And so this is just a nice way to, again, if this were to happen, this is what that impact would be. But the big thing I'll note is that we're not buying and selling holdings. We're buy and hold. And so this isn't something that should ever impact the city. The only time it ever would is if we overinvest in that pool of investments and we need to pull money out faster than maturities would allow us. And therefore, we have to find positions to sell in order to do so. Otherwise, this doesn't have any impact. It is, again, just more this is going to happen as interest rates change. You know, interest rates go up, interest rates go down. It's going to have an impact on the market value of the portfolio. But this is a key measure of the risk that the city takes that we look to manage by ensuring that we choose that right duration profile for you all.

I think you addressed this question, but I'll ask it just to make sure my brain's in the right place. So based on what you said early on about kind of where the Fed is at and what some of the expectations are, either one of these feels like a possibility. Is that fair to say?

Yes, very fair to say. Thank you. Very fair to say. I think, again, what's been interesting is seeing... The expectations for a Fed rate hike come into play has actually led to some stabilization of some of those longer-term interest rates. That's what's happened in the very recent term. Obviously, you saw from one of those earlier charts, quarter over quarter, the rates have just really picked up. we saw rates higher than they were even a month ago or so, tied to some of the concerns before the last Fed meeting of if they were still going to look to cut rates and that impact that would have on increasing long-term inflation. So people are getting skittish about the fact that they might need to receive even more return on investments for putting money out to five years or so. So right now, it is really up in the air, especially for the longer rates. I think Again, markets are expecting a rate hike. I think that is a probable scenario, given inflation is still kind of peaking and going upwards. Is that going to have an impact on those longer rates, that two five-year interest rates? I don't know. It might keep them steady. It might say, hey, you don't have to worry as much about inflation. It could drop them. That's, I think, the real interesting thing that we'll see play out here over the next six to 12 months. And so with that, we are staying neutral in duration. So that means we don't want to deviate from the benchmark. We want to stay right on it. It could go down. It could go up. So we don't want to make a play or a strategic decision to try to increase returns by shifting that duration around at this point in time.

And Mitch, it's okay if you want to pass this to one of the other folks, but we're discussing the impact that inflation has on the investments we've made. But could you or one of the other folks speak for a moment to, if our growth of this portfolio came out to sort of an average of about 1.7%, And the cumulative inflation from 2015 to now is Godzilla percent. The buying power of this $135 million is decreasing. I just wanted to confirm that understanding that $135 million is not what it used to be. It's hard for me to even use the word that we're investing in. We're trying to safeguard it. We're holding on to it. It's worth less than the pile that we had a few years ago. This is a weird world.

Sure is. And it is the way to look at it, right? And I think that's the big... challenge that many governments are facing right now is that kind of prospect of we have all these things we need to accomplish, all these buildings we need to maintain, services, and we know that it's going to get more expensive to do that in the future. So how do you make best use of the bonds and the portfolio and whatnot to keep everything moving in the right direction?

Yes, please. I think What you hit on is really something that's strategic. This a lot weighs on this process. I appreciate the partnership with government portfolio advisors because both Kenzie and I monitor the cash flow and really what you're talking about is that balance and it can be difficult sometimes anticipating what the city's needs are. The investment of taxpayer resources is weighs heavily on our responsibility making sure that we're following the policy that you've directed us to and at the same time maximizing interest earnings to the point we can because we do budget as a revenue source for that so there's a lot at play here I think to just make sure we're meeting all of those goals of both the policy having the liquidity we need because at times as you can see that variation and when we're receiving our cash, I think sometimes it's more of an art than a science. One can be a little more conservative as one was during this winter to keep more cash on hand because you just don't know maybe what you're going to need. You don't want to go to those long, I don't want to go to the investments and have to take the penalty of pulling them out of that. it's a real balance in the, um, advisorship and partnership we have with GPA really proves, um, well for the city.

Got one more.

And, and, um, when you, when you talked about the relative risk or the ratings of, of some of the investments we made, um, It's my guess that the school district and local governments are a lower rating. Are those considered higher risk for us to invest in other local governments as opposed to farm home administration or whatever?

It's a good question. I think it really depends on the specific entity at which is issuing the bond. They'll have a rating. by one of the national rating agencies that usually is, you know, the best measure of risk that you'd be taking. They are relative, you know, all the different investments that we have are rated, right? From treasuries to agencies to corporate to municipal bonds. But we also then need to kind of look behind the scenes and behind the curtain a little bit too, just to really understand, are they general obligation? Are they revenue based? general obligation are going to be much stronger in terms of the protections. So those are all things that we evaluate when we look at those types of investments.

And I raise that because I just want to plug again that if the returns are relatively the same and the risk isn't a whole lot more, I would rather we were investing sort of one way to do social investing is to invest in other local governments who are doing things that we're glad they're doing. And I know that adds a layer of complexity to the decision making. And I don't want to disrupt the stability of what we have. But if there are ways to nudge, because we're also talking about 1% or 2% is the part of the portfolio that we have in those directions. But I just want to say that if we can direct this money to do some good, as modest of a chunk as it is in the world, I'm in favor of that. Well, I think traffic has died down, and we're so grateful you drove up tonight.

Absolutely. Thank you again for having me. It's a pleasure to be able to present again this year, and I look forward to next year as well. Great. Thank you, Mitch.

And thank you, Kenzie, for leading this work. Do we have you for another item? Kenzie. Yes.

Thank you, Mitch.

All right. Oh, it's our audit story. Yes. Next, we're going to receive a briefing on the results of the 2025 financial audit presented by Kenzie Wong, our genuine and general accounting manager. Yes. Kenzie.

I'm going to change my title now. Thank you. Thanks. Yes. So this is a summary of the 2025 financial audit. We exited just a couple weeks ago. So first slide, please. So, a little bit of background. This is the annual comprehensive financial report. That's the actual document that's being audited by the state auditor's office, SAO. The report contains the financial statements for our fiscal year 2025 and all the notes to the financial statements, which provide the details of all those balances that are in there. It also contains budget to actual information and statistical tables of the last 10 years. So historical information is available in there as well. So this document really shows what actually happened during 2025. One of the reasons it's in the middle of 2026 now and we just get the auditors to finish. So as the name implies, it's annual. So we do get this audit every single year. With the SAO, it's, I mean, audit, it doesn't sound good, but we really do view them as a partnership. They're able to help us improve. They're able to let us know where our processes could be better. And it's not meant to be an adversarial relationship. It actually is, it's very helpful. And throughout the year, we also submit questions to them, to their help desk to get guidance on technical accounting. And we really do appreciate the work that they do when they perform this audit. So next slide, please. Some background on their reporting. These are the three levels of reporting, starting with findings. Those are the highest level. They report significant deficiencies and material weaknesses in internal controls. They can report misappropriation, any noncompliance. or just a number being really wrong, like materially incorrect. And these require a response from the auditee, and then they get followed up on and audited more intensely for the next audit to make sure that that's been rectified. The next level is a management letter. So if the deficiency is not material, but it warrants the attention of management. This is the level of reporting that we'll get. It's referenced in the audit report, so if someone is looking at our public audit report and they see, they'll know that it's there, but it's not going to have all the details the way a finding would. This also requires follow-up and subsequent audits, but the procedures to audit aren't as intense or as detailed. And then the exit items are the lowest level of reporting. And these we always expect because they're really best practices, things we would do in a perfect world if we had infinite staff to do things and infinite time to do things. So they're not communicated at all. They're really just for internal improvement and just FYIs for our team. And then next slide, please. I guess before I get into the results, anyone have questions on either background? Okay, so 2025 results on the annual report, we have an unmodified opinion, which means that the financials are fairly presented. And we did not have any findings or management letter items on the financial statements. So Well, I'll get into that. But this is an improvement from prior years. In our first year after we implemented Workday, we did have that highest level of finding just due to several reporting errors throughout the statements. And then the year after that, we had a management letter. And then this year we have nothing. So exit items only, which is the goal. So it's been really nice to see that continuous improvement as we've worked out the kinks to that. So the next slide, please. So we have upcoming audits. Usually the single audit is performed in conjunction with the financial statement audit, with the annual comprehensive financial report. This year it was not due to audit staffing. So we're issuing those separately. So that's why the single audit is actually upcoming. We're actually exiting this week. want to say Wednesday, yes. So no issues that I've heard of. So unless something crazy happens last minute, that should be a clean report as well. They choose a different program every year. So it is the audit itself is required for any entities, entities that expend more than a million dollars of federal funding. So it's really an audit on behalf of federal agencies. That $1 million threshold is new for 25. Prior to that, it was $750,000. But, you know, we get a lot of federal funding. We expend it. We pretty much will always expect to have a single audit. And this year, they selected the highway project. Planning cluster, I believe, is what it's called. But it's a lot of the transportation grants. So for us, that was like Phones Road, Martin Way, all the projects that use that federal funding. So total expenditures, 3.7 million. That was up from 24. So that was the single audit. And then the accountability is also coming up. up. They have not started that yet. It's expected to start in September. And this is kind of this is usually a non financial audit, they may look at financial processes. But in general, it's it's to make sure that the city's procedures are in line with policy and best practices. And they really can select anything. Um, In the past, they've done cash handling. They've looked at the Open Public Meetings Act to make sure we're adhering to that. They've looked at police cash and investigative funds, things like that. So I would say usually they pick something that either hasn't been looked at in a while or They pick something where if someone has written in to ask them to look at it, or they may interview people at the city just to see where their areas of concern may be, and they can pick an area based on that as well.

And then my last slide, please.

So this is... Finance is the liaison. It's the touch point for these audits, and we are the SAO contact. But a clean audit is really citywide. It's, you know, every time we ask different departments to do something, it's so that their information can come in clean to us so that we can report it out correctly. So, it really is a really big effort for everyone citywide. So, we really do appreciate it. Departments are very receptive when we ask for those changes. And then, of course, the formal audit report is available on the state auditor's website. I can also send you a more direct link if you're interested. But it's pretty searchable. So the improvements we've had have been very much a citywide effort. I just want to emphasize that because we do ask a lot of departments, especially knowing that they may not have, like, the financial background. Yeah, I think that's it for the briefing. If anyone has questions, happy to answer those.

Would you like to add anything to the wrap-up and praise there?

I would. You know, Kenzie mentioned that, you know, in our history from time to time, you know, we've had a finding. We get a management letter. It's nothing that we ever want. But what I'm always the most proud of is the work that we're doing year over year to correct things when we see them. We've never had in my time here, any findings that are around misappropriation or any, or any misdeeds by our, uh, our finance team. They've been, as Kenzie said, I think as the council knows our time in the transition to workday was tough and taxing on everybody. And I think we expected as we came out of the other side of workday that we'd have some issues and they, they weren't as significant, I think, as any of us thought, but we had some, but, um, I'm really proud of our team because our finance team, just everything they do is with care. And they take everything that comes out of these audits with seriousness. And one of the things I appreciate about Kinsey's comments is we don't, the auditor is not looking for gotchas. This is a partnership. And I love the way that Kinsey framed that because them coming here, we want them here. We want to be doing things right. We want to be good stewards of our finances. We want to make sure that we're fully transparent in our dealings. And so we value them, we value their relationship, and we learn from everything that we find and we get better. And this team does it over and over again. So I'm really pleased to see a year with nothing. It is what we want and appreciate all the hard work.

Good job. Yes, absolutely.

thank you kenzie for bringing this and i've had the the good fortune that for a decade now i've been doing the accountability interviews and the exit conferences for the city for the regional planning council and for inner city transit at different audits and um so i've learned a lot about this two-way street of of how collaborative the auditors are in in trying to urge us towards best practices And also grateful that in our local organizations that there just hasn't been issues of the malfeasance or misappropriation of funds. It's been more, as you were saying, about if you had unlimited time and unlimited staff, would you consider documenting things this way? And so we strive for that. But I just, I'm really grateful for your work. And We're going to let somebody else present the last item, if that's okay with you. But when we have three more items queued up, we'll call you back. Yeah. Thank you, Kenzie. Yeah. Next up, we have history of the Washington Center funding strategy briefing that our finance director, Mike Givens, is going to present to us.

Thank you, Chair. For the record, Mike Githin's finance director. I also want to acknowledge that Jill Barnes, executive director of the Washington Center for the Performing Arts and some staff are here. So thank you and welcome. This is intended as a bit of a history and also a focus on some of the funding around the lodging taxes and explanation. So I'm going to kick us off with some topics, if you would take us there. So just some basic facts of our partnership. That's a long-standing one, as I learned as I was doing the research for this between the City of Olympia and the Washington Center for the Performing Arts. Some of the financial history, the city investments, as I mentioned, a review of the lodging tax and then funding opportunities. So I'll get into it here with some of the basics of the partnership between the City of Olympia and the, I abbreviate in here, WCPA in places. So just to note that. So the City of Olympia, as you know, owns the building that houses the Washington Center, and then the nonprofit operates the business that is conducted within the walls that we all know and love. The operating agreement between the city and WCPA, we had a first agreement in 1992. It was updated in 2018 and then amended in 2022 to extend that to 2042. So that's the operating agreement that we're under. There are some OMC or Olympia Municipal Code that authorize some of our funds. The OMC that ends in 021 designates the Washington Center for Performing Arts or WCPA Fund 021. It used to have the word endowment in it, but we've taken that out because in the strictest sense of the word endowment, you spend just the interest, but that wasn't what we were following. So if you maybe in the history remember that name, that's why it doesn't have it anymore. and then the OMC ending in 025 that authorizes Fund 025 for the Operation and Maintenance Fund. Next slide is just a description of the WCPA Fund 021. It contains revenues from the sale of certain properties and other outside contributions. So the authorized uses are to broaden the use of the city center to all citizens and groups within Olympia. This is taking largely from the municipal code, the language. The maintenance, operation, repair, upkeep, or improvement of the center. And then remediation and sale of property at the southwest corner of Black Lake Boulevard and Cooper Point Road is designated when that happened to be able to remediate that, and then at the point that that property would be sold, that would go into the fund. And disbursement out of this fund, as with all city funds, has to be authorized by an appropriation of the city council. Typically, you see this as we're bringing the annual budget to you. On occasion, then, through quarterly budget amendments, we might be... have need to authorize some expenditures from this so on the next slide we have the operations and maintenance fund which is 0 to 5 this contains revenue from lodging taxes and then transfers from WCPA fund to support operations and maintenance that we abbreviate O&M sometimes interest earnings off that amount in the fund And then donations for operations and maintenance and other funds authorized by city council and then the uses of this fund are for the operations and maintenance of the Washington center. On the next slide as you know the latest really investments in the interior renovation of the center occurred in 2022 I think This was a massive fundraising effort on the part of the Olympia Center. It certainly was a lot of hard work beyond just the fundraising, the grants that were part of this that were obtained. The city of Olympia also contributed $3.8 million as part of that total $8.8 million investment in the revitalization and renovations of the center's public and backstage spaces so as a reminder the city of olympia owns and maintains the physical facility and we budget for this annually next oh please yes pause i just want to highlight here i know mike just said it but um

We've invested in the Washington Center, and the Washington Center is also invested in the center, right? So when you look at the $8.8 million renovations completed, we've contributed 3.8, which means the museum and those that operate it through their capital campaigns have also raised significant dollars to improve the facility. So I just... As I know Jill's sitting behind me and her team, I just want to say thank you for that and acknowledge that because we started this conversation about a partnership, and that's what this is in every sense of the word. So I just wanted to add just a little bit more to that.

Yes, it truly was a massive fundraising effort. Private donations from local businesses, individuals, and foundations, and then the grants that were obtained through the Washington Commission. Department of Commerce building for the arts program so all of that together made those renovations possible so. It truly was a partnership so on the next slide I'm going to talk just a bit about lodging tax because we don't delve into this a lot until maybe budget season toe so to just kind of open this up a bit and explain it is the purpose in these slides so What lodging tax is levied? There's a 4% that the city of Olympia levies and it's two components. So the first 2% tax is authorized by an RCW and it's a credit against sales tax. And so I tried to explain it here because that can be a bit confusing rather than an additional charge to the guests that would be staying at a lodging establishment. This means the 2% does not increase the final tax rate that customer pays, but redirects a portion of standard sales tax to local governments for tourism promotion. And that's where that first 2% comes from. In 1982, the city of Olympia created the Lodging Tax Fund. And now state law requires that WCPA apply for funding. Some of the I mentioned that it. Redirects that for tourism promotion so when you think about some of the limits on these it's for tourism and marketing events and festivals. Tourism facilities and nonprofit operations so as you think about where the alt act the committee that advises on this the lodging tax advisory committee really all of those applications then meet these qualifications so the second 2% of lodging tax is authorized through that another RCW in series it's not a credit against sales tax so the city imposes a separate 2% basic lodging tax and then it comes with these additional requirements that the lodging tax advisory committee overseas and those limits on the use of the funds so that's where the total and 4% comes from 2% of it's a credit and then the 2% of it is a tax that lodgers if you will yes at established lodging establishments pay and then the next slide talks about that second 2% requirement that we must adhere to per RCW. We have a Lodging Tax Advisory Committee. WCPA, among many organizations, can and do apply for funding. The applications are submitted under a timeline to that committee, the LTAC Committee for Use. And then they review and recommend to City Council, as you have seen through the budget process annually, for then us to disperse those funds through the next fiscal year out of the budget. So Council has the final approval. And then we have reporting requirements. The city of Olympia has to report to the state of Washington how the funding was used. And then the recipient of the lodging tax dollars reports back to the city. So I think those requirements really ensure that we're following not only our internal ordinances of a city, but the RCW as well in the true sense of are these then following those recommendations for what lodging tax should do and give back to the community.

Can we interrupt for just a moment for a question?

Sure.

Thank you, Clark. What happens to the first 2%? As far as? So second 2% gets awarded through the LTAC process. What happens to the first two?

So the first 2% will have a requirement that there's an application for funding. and so state law requires that an organization would apply for that funding I'm struggling to the distinction between the first 2% and the second 2% are those all part of the same LTAC process so the LTAC committee really distributes that second 2% and so the first 2% would come to the city for application can you describe our current

practice in the current distribution of the first 2%?

How it's been done? Sure, that's the first 2% has just been awarded to the Washington Center in the past automatically, I guess you'd say.

And I think Kelly's question is, so it's It's a city council decision that doesn't have a legislative requirement that it go through the Lodging Tax Advisory Committee. Is that correct? That's correct.

Let me phrase that just a little differently. So that is how it has been happening.

Correct.

But not how the RCW says it should happen.

Correct.

Thank you.

Okay.

So we'll pick up, I think, at the last slide where there's other funding opportunities for not only the Washington Center for Performing Arts, but other nonprofits and groups that support arts in the city. And that's the Inspire Olympia funding. So this is the voter approved program that dedicates a portion of the city sales tax to fund local nonprofit organizations and it supports groups that are focused on arts science heritage and culture as was written into that measure WCPA can apply can apply for inspire Olympia funding and has in the past and has received funding for the most recent 2 year cycle that runs 2026 through 2027 So that's another funding opportunity. And I think that ends the presentation, and we're happy to take questions or clarify anything.

Clarify a little bit here. Certainly.

So I'm asking the same question, I guess, a different way.

So the first 2%, and that has been kind of automatically applied to this point. Does that, does the RCW say that it has to go through LTAC or is that still just council attic?

That it has to go to an LTAC committee? Yes.

No, no. But it's within the purview of the council to decide it. Correct. Okay. It's just the second 2% has to go through LTAC.

Correct. Because we're levying that. Okay. as a city. So there are certain parameters around how it's administered.

And I guess my other question is, when did the RCW change that it shouldn't be automatic? The first 2%? In 2013. 2013.

Okay.

You just missed it for a decade or so. Yes. Okay. Thank you.

City Manager Jay would like to add something.

Yeah, I think the only thing I would add here to your questions is this is the first year where the Washington Center will apply, and we're working through with the LTAC committee, and I'll be working through with staff on what that looks like and the Washington Center. So we've been meeting with them to kind of work through process here and how this will all come together, and we can do a follow-up with you once we have a little more certainty around what that process will look like.

I just want to ask a clarifying question because I heard an answer to your question that doesn't sound accurate to me. In the RCW for LTAC, there is no percentage of LTAC that is awarded councilmanically. It all goes through the LTAC committee, correct?

Correct. I still don't hear that. What I hear is that the first 2%, the legislative change required us to have some sort of application but not that we refer it to our lodging tax advisory committee. So, I mean, from what I'm hearing, what I would suggest is that council has our own process for the first 2% and the second 2% remain as they have been through the LTAC, but I would not involve the LTAC in the first 2%.

So the description we recently, so myself and Mayor Pro Tem Nguyen, went through an orientation with LTAC staff, and our understanding was that all of LTAC goes through the LTAC committee. We have, because of this agreement, not included that first 2%, but it's supposed to be, which is the change we're talking about. So there's nothing in the RCW that gives councils authority to award it. The RCW says that councils create the committee that awards the funds. If

my interpretation of staff uh explanation from that meeting is correct yes i guess ultimately council adopts the budget that would approve those recommendations from ltac and the funding so apologize for the confusion but i think we're trying to put this together a bit on that um first two percent part so does that help answer so

the presentation didn't sound like the answer we just had. So I guess I'd be curious both if we could, we can look at the RCW language and we can see if there are other communities in Washington who have taken a different path for that first 2% that comes from the state sales tax.

Yeah, I think as I mentioned, this is new this year. And we're working through process around this to make sure we get it right. And we've got it right in terms of the application process and how decisions are made around it. But my expectation right now in this moment in time is that it will go through LTAC committee. But if that changes as we continue to work through this, we'll update the council.

Can I ask a different softball question?

The former landfill site. What's... Broadly, what's the appraised value of that? What's the state of remediation? And are we actively listing or marketing it right now?

We are actively listing and marketing it. I don't have the numbers off the top of my head around appraised value and market value, but we can get those for you.

I was just thinking that's part of this whole, the gap in funding that we could conceivably create We also have that property that's been sitting for a long time, hoping to find a taker.

I just approved a contract to get an appraisal of that property because it's been quite a long time since it was appraised. So it'll be a little while yet, at least 90 days.

But in the coming months, we'll have an updated appraised value, and we have it actively listed. And I know part of it's just waiting for the right user to come along.

But I will answer to your other question is we've worked under an agreed order with an ecology. So for those listening at home, it's a former landfill site that we have been remediating for some time. We have a remediation plan that's in place with Ecology that's approved by Ecology. So it gives us certainty in terms of how we sell the property. And then so as someone who's buying the property, you also want certainty on what your responsibilities are going to be around that cleanup. So we're pretty far along with Ecology in that process, far enough along that we feel comfortable marketing the site and then working with a development team to move that forward.

So other questions or thoughts on this item? Go ahead, Robert.

Again, I just want to, next time this comes back around, even in our one-on-ones, just to let us know what the RCW specifically says and what are other cities doing around this? Because I want to make sure that we're not just automatically given to LTAC if it's something that we have the purview to change. It doesn't seem like I have a clear answer right now.

And I think Just in the purpose of this lodging tax is to really I think also promote interest within the city brings visitors and I think we could all see that the Washington Center for the performing arts brings people into our community that dine at restaurants stay at lodging facilities. buy fuel for their vehicles, do all the things that stimulate the economy. So these are partnerships that reinvest in our community and the city. So thank you.

Good. I've considered us joined at the hip from the creation of the center. So I just really clear that I want us to be, I hope we can, I mean, we need to be compliant, but I also hope we can

solve this in a way that continues the relationships great well this brings us to the end of regular business items do you have any reports for us this evening mike just a a brief comment um and this is around the june monthly financial report it's available on the city website and i'll be giving an update to city council as you might remember we agreed to do this quarterly And so I'll be at next Tuesday on June 28th at council to talk about it. It's a midway point in our fiscal year and a good time to look at the financials and also a good preparation as we really are digging into the 2027 budget. So it will be kind of a dual purpose, but I'm looking forward to that. So thank you.

Thank you. And I'll just say, so tune in for Mike's presentation to council because here's a teaser. We are still holding our own with sales tax. Yes.

City Manager Bernie. I'm going to do you one better than that because I just got the quarterly, the second quarter, and I'll give you just a little sneak peek as to how Mike's going to talk about this next week to council. So this time last year when we got – when I was – received the second quarter budget update and I was looking at revenues and expenditures, I was concerned to the point that I put a spending freeze in place with staff. We put a hiring freeze in place, we put a spending freeze in place, and we were diligent in terms of watching our spending. We are not in that same place as of mid-year this year. Part of that is we did a lot of really good work structurally with the budget to tighten up some of the expenditures to be more realistic in terms of how we budget for some of those. but we're in a much better financial position mid-year this year than we were mid-year last year. So part of that is revenues are doing well. The other part is expenditures are also doing well, and we're right where we should be at mid-year. So really happy to report that, and I think we'll have a good conversation about that next week. Anything for good of the order? No.

Well, then it's see you tomorrow. Yes. So we'll adjourn at 6.02 and we will return as a finance committee next month. Same bad time.