july st santa barbara city council finance committee meeting and we have two items on our agenda but first if we have any public comment from anyone who'd like to speak on any items that are not on our agenda see context so in ninety six and mister hart you might have i'm not sure you were here for that but in one thousand nine hundred and ninety six is when the city first established its reserve policies and that was you know on the heels of a recession and all that and that policy had been  company now with a plan to restore it but the other thing we did was we for the first time imposed or added a reserve requirement for internal service funds not all of them but it's but most of them and the facilities management fund was one of them and it basically said we're go set up a reserve requirement of ten percent it wasn't designed to speak to disasters like we have in the general fund or enterprise funds it was just for operational purposes unexpected ups and downs and either costs or revenues so we're here to speak to that to that policy chair heart and committee members i'm here to talk today about our proposed reserve policy change in the facilities management fund so i'll give a little bit of background as it relates to this fund and our reserves in this fund and then talk about the proposed policy change so starting back in fiscal year fourteen back then we had reserves above policy and we also had some significant capital maintenance that was being deferred and so considering those two factors we evaluated the need for access reserves within the facilities fund and so part of that evaluation we looked at risks to the funds in that particular facilities fund that may draw on the reserves themselves and so those often will be something that's of an unexpected nature maybe the equipment failure or roof leak something of that nature and so looking at those risks we felt that an interim policy goal of two hundred and fifty zero was sufficient to cover those kind of unexpected issues and so we requested that which would bring us below the policy reserves and then allowed us to put the excess reserves to work on some of the critical facility capital needs at that time and that was something i'll just you know also mention that that was something we mentioned during the budget process that year with the council it was just something on an interim basis to get at some of those critical capital needs so leaks equipment failures things that you know unexpected damage to city facilities things like that that our facilities fund would need to get at and we also have an ongoing capital maintenance deferral we still have an ongoing capital maintenance need in the fund and so that brings us to our proposed policy change which really is meant to balance the appropriate reserve level with prioritizing getting at this critical deferred maintenance  help really avoid any costly repairs that we do on an urgent basis so if something happens unexpectedly because we're not able to get to the plan maintenance that's going to cost us more in the long run and so we'd like to put these reserves to work on an ongoing basis and so proposing this policy change would allow us to do that on an ongoing basis and so looking at it in summary our current policy is a ten percent of the operating budget in this fund which with a seven six million dollar budget inside a reserve of about seven hundred and sixty mm i talked about the interim goal that we've been using to try to get at some of those capital needs of two hundred and fifty zero the proposed policy changed today's to have a reserve of ten percent of the building maintenance program budget which is really the program within the facilities fund that would get at some of those unexpected issues that may come up and so that would put us at a two with a two nine million dollar would put us about two hundred ninety six thousand dollars reserve that's more than our interim goal so we feel good about that part of it and so the result would be balancing the interest of the city an appropriate reserve level for unexpected issues w also getting at some of the critical capital needs rather than having the money sitting in reserves and so it would really free up at least another four hundred sixty six thousand dollars that we could put toward those capital needs so  we're asking for your recommendation of the row of the proposed policy change for approval by city council thank you mister piece are there questions our overall city reserve policy it's the good yeah so it's it's looking at from different fund types so we have a general fund reserve which mister smart was talking about we also have the enterprise fund reserve policy and then what we're really talking about with this fund is the inner internal service funds which is just one reserve of ten percent of the operating budget and so that's and so we're proposing to change that from ten percent of the operating budget to ten percent of the building maintenance program budget and so this wouldn't affect the overall city reserves that we have the rsa reserve policy no not in any other fun besides the facilities maintenance fund and then how did you on your trying to get to the the two hundred and fifty thousand dollars level for this how did you arrive at that number as being sufficient to meet your needs it was looking at the risks to the revenue streams in that fund how much what what kind of we could unexpected basis such as roof leaks such as equipment failures things of a smaller nature and that's what we got to the two hundred and fifty and so i take it just for my understanding is that by putting more into these these issues now and the preventative maintenance that million no it's not okay so we're not double reserving it we are not double reserving we are reserving the general fund for emergencies and we are reserving in this fund i don't know if you consider that double reserving but for the unexpected needs you know that we're looking at for ten percent of the operating budget budget or ten percent of the building maintenance program budget it's looking at the unexpected issues that could be impacting this revenue stream in this fund yeah i double reserve i just mean if this was part of the three hundred plus million in the normal general fund process then we would have a double reserve i'm not sure if that's the right accounting term yeah so three hundred million dollar number is citywide we have individual funds and our policy really governed governs what we call operating funds so we have a lot of funds that really like to think about facilities i'm sorry fleet management or replacement we're just replacing vehicles very little operations involved we didn't think at the time in two thousand and twelve or even back in ninety six that we needed to reserve for that but in the facilities there's enough operations going on that we thought it needed a reserve it's just that in that fund encompasses communications telephone and  services things that really don't have any sort of ebbs and flows we don't have to any really any need to have a reserve in those programs so we but we do believe it's appropriate to have a ten percent reserve within the facilities portion of that you know to maintain that so that's where the ten per comes in but it's separate from what we have in the general fund what we have in our enterprise funds they all have their unique reserve requirements this is just for the internal service fund within that than that program within that fund that we think is a propria to have a ten percent reserve and that's the two hundred and ninety six thousand dollars great thank you and he just answered one of my questions about the difference between the expenditures in the adopted facilities operating budget and the building maintenance program budget  does the history of having those unplanned events the the cost of those events is there a cost history that you know gives us comfort about this two hundred ninety six thousand dollar reserve that that that covers most events that have occurred historically chair heart and committee mike will chair facilities in an energy manager yeah historically it's less than two hundred fifty thousand dollars and and really these sort of events are driven by lack of maintenance right the types of things we see are when there's a storm our roofs that are ten years past their useful life will leak caused water damage will spend ten to a hundred thousand dollars repairing dry wall and roof and leaks and so the intent is that instead of having this money kind of sit dormant get out ahead of some of this stuff and avoid these these deferred maintenance problems that kind of lead to these emergency repairs  but historically we haven't had anything larger than two hundred fifty two thousand dollars in the way of facility maintenance issue i mean you kind of separate these things like mister sue mario mentioned it's not necessarily intended to reserve against some giant disaster that's a that's that's a different issue it's really just internal to this program well that makes sense and you know you're trying to fit the balance point between putting all of that money to use to eliminate deferred maintenance but at the same time having some protection against events and so this is that you know trying to find that sweet spot is the real question and that's so historically if the expenditures are less than that two hundred and fifty thousand and you're proposing you know to do ten percent which today two hundred ninety six thousand dollars you're comfortable that though any of those events that are going to occur are going to fit within that amount and so we're putting the maximum amount of money into eliminating deferred maintenance but at the same time detecting against the historical range of events that do occur which is what you're trying to do is yes and i like the two hundred and fifty thousand dollars number but this just makes more sense tying it to something that moves with time and so it's tied to a program at ten percent that'll kind of grow with inflation over time so that it's actually pinned to something million into that and with the addition of measure c were at about one two million so i would point to total know two point two point two to two point five total depending on what goes on with measure c and so then we're looking at kind of three hundred to four hundred thousand a year and deferred maintenance in the early terms i would consider all of that critical so we've been really up against this backlog for quite some time so if we were to try and get after that all now in the next few years it would be a pretty horrendous cost and i consider it all pretty critical in the first five years i'm just concerned with the fluid use of the word critical because we want to avoid a situation where we're we're crying wolf or so azura is there a facilities definition for critical is it something like a roof that's beyond its life or how does the the report you generate differentiate between critical and and just deferred mainly roofing and mechanical equipment so anything that's involved with the roof a roof that's beyond its useful life i mean we still have during storms there are a dozen buildings that will leak and so anytime you get water penetrating into the facility like that it can just open up a can of worms so i consider any roof that's not performing its job of keeping water out of the building a critical maintenance need well and that concerns me that you're telling us today that we have a bunch of roofs that aren't working is that what you're telling us well they're there above us they're sustaining but we do have roofs that leak during storms and working to repair those and what's the timeline to getting those all fixed as soon as possible so this is all in with our measure c funding and arkan are deferred maintenance funding that's coming this year we are we prioritize r yet i think just to put this in context the city has been struggling with addressing deferred maintenance for decades and we were very fortunate to have the voters approve measure c which provides us a significant new funding stream that is now being able to address the issue that did not have a solution previously the the past fiscal situation was that there weren't revenues to address that backlog of deferred maintenance but now we're in the position where we're working through a transition to where we're  gonna get on top of all of those and so there's there's a little bit of time that's necessary to to move from there wasn't a path to there is a path and we're going to get to that situation where we don't have those those problems but it can take a little bit of time and that this is a piece of that puzzle cuz you're gonna be able to dedicate the four hundred to five hundred thousand dollars additional money on an annual basis to plugging the gap that you just described and that this change in policy is exactly what's necessary to achieve that goal yes and committee member dominguez just to touch a little more on your question historically we've we've replaced one or two roofs a year and now with the introduction of measure c we're slating roof replacements at the eastside library fire station three fire station four and fire station five this year so that's already accelerating our previous funding levels to roof replacements and a lot of these minor renewals that we spoke about in the budget those are all driven predominantly by roofing replacements so that kind of comes first and then we'll deal with the building inside of that so even as soon as this fiscal year we're going to be accelerating our program to replace some of these these problematic roofs is there a motion for me i just wanted to ask because you said on an annual basis this isn't on an annual basis is it i just wanted to make sure we're not proceeding this is a one time because once the reserves dropped we're not getting that increment anymore yeah it really is just a delta between the policy gone so it'll free up roughly five hundred thousand dollars to use either once one time or a couple hundred thousand a year until the reserve policy is that would it be a tremendous amount of work to send us a list of like the rooftops that are the ones in the critical stage timeline yeah we did recently with some of the funding that we freed up we just recently had a number of citywide facility audits done and we're kind of feeding that into a capital capital program model and so that would be a good time is when i get all that data back i can come back and report on what that with the output is of that i have a number a list of roofs that do need replacing now but it would be nice to kind of paint a bigger picture okay great thank you very much is there a motion um second email recently i have appointed or selected a replacement that's miss jennifer thomas sc so she is as you know she was our county manager and now he's a treasure manager and for the next several months because of the capper and all that she'll be kind of working do  we get that filled but so in subsequent meetings she'll be making the presentation and i also want to remind you that we asked this committee i think i'm quarter ago maybe two quarters ago how frequent would you like to see th we i think we agreed that we would be doing these semi annually so this is sort of a year end report and then we'll come back to you again and january february with that for the second quarter after six months so you won't be seeing us every quarter like we have in the past just to remind you that so this is a report for the fourth quarter ended june thirty two thousand and eight so it's last fiscal year still and what i really want to cover you know in broad terms separate from this outline is and this is really the purpose of the report is just to show you and describe the performance at the portfolio this quarter in terms of primarily interest earnings and the like what activity we had the quarters of what purchases did we have and what maturities did we have and then the interest rate environment we talked a little bit about that because that's obviously what drivers you know earn through interest earnings and then lastly just should go through what the balances are at the ended last year so i apologize this is some real basic stuff i'd rather than go kind of what miss nima says in the past and  just to kind of come up with some who talked about some basic concepts and i'm sure you know most of this if not all of it but in terms of what's driving interest rates that we that generate interest earnings for us it's really federal monetary policy and that means that they  basically control or influence interest rates by affecting short term interest rates that are charged to to participating banks in the federal reserve system and by doing so they effect then what the banks will charge their businesses and companies for bor rowing purposes so if they are if they feel like the economy is really heating up then they're gonna looking to raise interest rates if the economy is sluggish they're gonna be lowering interest rates to strasberg investment so in the last seven so the lessons december two thousand and fifteen because we've had a strong economy and this is more nationally than locally they haven't raised interest rates seven times including an increase in this past june so right now the federal funds rate is and that's again the overnight money they charge to to banks that's in the one in three quarters to two percent range once upon a time it was zero to zero twenty five percent so it's gone up substantially but still very low relative to historical averages we typically or in the past we've seen that as high as five or four or five six percent they've also hinted that they will increase in federal rates two more times this year although we'll see if that actually transpires given what's going on with the tariffs and all that but currently their is what might the tariffs do to in terms of the economy and what might future rate increases due to the economy in terms of you know what was causing to go into recession which then drives interest rates so based on all that the treasury yields that we we've been investing in and generating have been have increased again historically low and we have seen that particularly in the two year range we've seen the largest increase in their yields between march a cumulative change you can see it's all going up we invest in the basically the zero to five percent five year term we don't ever invest in anything beyond that per our policy but just doesn't show you as ten year in the thirty year what those are doing we've talked about this before and just to be emphasized it that our objective is safety first so if regardless of what's going on the economy when the interest rate environment it really doesn't matter to us other than at the end of the day it does determine how much we get each year but we looked first for safety so we're investing in very secure investments that are highly rated and then we also look for to ensure that we have enough money in liquid money in order to pay our bills and and we talked about under the banking services contract and in that context that we typically have anywhere from twelve to fifteen million dollars in the bank in just cash and our checking account we also maintain money in our lei for local you just the investment fund at the state for a similar purpose is easy to draw down versus having to sell a security but we is last which means that we don't we just buy into the market whatever interest rates are in that time we're gonna buy into that we just make sure we're sort of evenly distributing our securities over a five year period so that they're maturing in a way that provides us the liquidity we need to pay our bills and this is sort of just a benchmark which for your purposes in terms of your review of this it's it's an indication to you as to whether or not we are investing in a manner that's consistent with what the the what the market is and we're not being too aggressive or too conservative the blue line is our portfolio we're always going to be a little bit behind the other two benchmarks which is the two your treasury and the lay freight so those those two respond more quickly to changes in the interest rate environment so you can see like in the middle of this chart the blue line we've we reacted more slowly to the the drop in interest rates than the other two indices indices because we have a longer than two year but you know maturity typically but as long as you see us going in the same direction and we don't see that spread being too wide you'll know that where we're investing in a manner that's that's appropriate and not too risky this is something i wanted to show you just because it sort of adds some interest to the presentation because i know it's fairly mundane so this is the treasury yield curve two years ago so july of two thousand and sixteen and ignore that the far left because that's the lafe rate so if you look at the three month number zero point two eight i think that's what it says but you see the angle of this yield curve you could see it's very traditional it's there's a premium for going out longer so if you're an investor you would expect a little more premium if you're gonna invest longer term because you're locking up your money longer versus short term so very traditional real typical yield curve it sort of suggests you know things are somewhat normal then going back to last year you can see that the yield curve started to flatten out a little  bit so less of a premium to go out and then now this yield curve is really interesting because it's flattened out even more but primarily you'll see that the were you seen the biggest bump and all the rates are higher but where you've seen the biggest bump is in the middle and the two to three year range which is interesting so there is a much premium to go out three or four or five years not much more than just investing in three years or even two years and this again doesn't really mean much to us other than we know or investment in this environment so we're probably going to be biasing toward more over a two or three year insecurity but but not to a large degree because we still gotta fill in that five year sort of window or so we're still investing in five year with securities and for securities because that we want to make sure we have an even maturity ladder if you will but it's just hard to invest longer term because you know it does you don't get that premium this speaks more to me what's going on with the economy and what the future holds for the economy and there are books written about what what a flat yield curve means but most will tell you that one potential indicator of this is that we are headed toward some kind of a slowdown or a recession because people it just means people don't have that much confidence in the longer term that they do in the short term but that's all speculative there could be other reasons and but i just copper's the portfolio as a whole for the quarter and earn eight hundred sixty thousand dollars the general fund portion of that is one hundred and ninety five zero huge which extrapolate that works out to be about eight hundred thousand dollars for the year for the general fund i remember not too long ago where the general fund was tween million dollar earnings if you will each year so you can see still historically low earnings and interest rates you can see our cash and investment balance is two hundred six million dollars and i'll point out why that's so high in just a second this is the activity for the quarter we all again we're always buying and and and like we don't never see us or rarely should you see anything being sold because that's not how we do business we buy things and hold them and maturity to ensure that we don't ever lose principal and selling you know some cities will be more actively trading and to try to capitalize on the changes and market but we don't do that we take a much more conservative approach and just hold it to maturity but we did purchase eight million dollars of securities primarily in the federal agency securities that's primarily where we go to and then we had to nine dollars in sureties of also a federal agency security this is our portfolio you could see that it's a much higher number than what you've seen in the past has to do with the fact that we get property taxes coming in late into fiscal year and we are also holding on a lot of cash because and i think we've talked about this in the past in july we make sort of a prepayment to pers for  unfunded liability it's about twenty one million dollars that we paid out in july and we do that because rather than paid every month we save money by pre painted so there's the discount that substantive so several hundreds of thousands of dollars that we say by pre painted for us we have the cash to do so so there's no reason not to do that but that's why we had a lot of money sitting in the as of june thirty you can see our state of california lafe a sixty five million dollars that's the max we can invest in as capped out and we even had seventeen million dollars seventeen point seven million dollars the first line that you know checking account higher than normal again because we anticipated this payment in burt in july plus we had other payments that we knew about for property insurance and other kinds of insurance  this is just kind of a breakdown of the portfolio too far left you see agencies always dominate where we invest our money it's just unusual we'll see that life is a bigger slice of thirty one percent because of the reasons i mentioned but otherwise pretty typical allocation or distribution mister samar oh is there a motion i have a motion to approve the stack recommendation to forward this to the council and any all those in favor say