DIRECTORS PRESENT: Lisa Herman, Chairman Ben Drake James Stewart STAFF PRESENT:

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1 DIRECTORS PRESENT: Lisa Herman, Chairman Ben Drake James Stewart STAFF PRESENT: MINUTES OF THE JOINT REGULAR MEETING OF THE FINANCE AND AUDIT COMMITTEE AND SPECIAL MEETING OF THE BOARD OF DIRECTORS OF THE RANCHO CALIFORNIA WATER DISTRICT Thursday, April 3, :30 a.m. Richard Williamson, Assistant General Manager Jeff Armstrong, CFO/Treasurer Craig Elitharp, Director of Operations & Maintenance Andrew Webster, Chief Engineer Eileen Dienzo, Human Resources Manager Jason Martin, IT/Customer Service Manager Mike Calvert, Operations Project Manager Kathy Naylor, Accounting Manager Rich Ottolini, Water Operations Manager Fred Edgecomb, Water Reclamation Manager Heath McMahon, Construction Contracts Manager Corey Wallace, Engineering Manager Design Bill Barnes, Field Services Manager Facilities Tim Carlisle, Field Services Manager Construction Warren Back, Engineering Manager Planning Dale Badore, Datacenter Operations Supervisor Vicki Browder, Budget/Debt Administrator Ruth Zintzun, Finance Administrator Milin Ream, Sr. Administrative Assistant/Recording Secretary OTHERS PRESENT: Roger Ziemer, Alternate, RCWD Finance and Audit Committee John Hoagland, RCWD Board of Directors William Plummer, RCWD Board of Directors Yannick Gagne, Aon Hewitt This Committee meeting is also noticed as a special meeting of the Board of Directors because a quorum of the Board may be present. Members of the Board who are not members of the Committee may attend and participate in the meeting, but only members of the Committee may make, second, or vote on any motion or other action of the Committee. Any actions taken pursuant to this agenda will be actions within the purview of the Committee and shall be approved by an affirmative vote of a majority of the quorum of the Committee. The Committee is not empowered to act for or on behalf of the Board or the District unless exercising delegated authority from the Board. Any

2 actions taken by the Committee shall be deemed recommendations of the Committee for future consideration by the Board at a separately noticed regular or special meeting of the Board of Directors. The Board of Directors retains all powers, privileges, and duties to exercise and perform the business of the District. Upon request, this agenda will be made available in appropriate alternative formats to persons with disabilities, as required by Section 202 of the Americans with Disabilities Act of Any person with a disability who requires a modification or accommodation in order to participate in a meeting should direct such request to the District Secretary at (951) at least 48 hours before the meeting, if possible. The meeting was called to order at 8:30 a.m. by Chairman Herman. ADDITIONS TO AGENDA Items may be added to the Agenda in accordance with Section (b)(2) of the Government Code (Brown Act), upon a determination by a two-thirds vote of the members of the legislative body present at the meeting, or, if less than two-thirds of the members are present, a unanimous vote of those members present, that there is a need to take immediate action and that the need for action came to the attention of the District after the Agenda was posted. There were no additions to the Agenda. APPROVAL OF AGENDA Chairman Herman called for approval of the Agenda of the Regular Meeting of the Finance and Audit Committee of the Rancho California Water District of April 3, 2014, as presented. Director Drake moved to approve the Agenda of the Regular Meeting of the Finance and Audit Committee of the Rancho California Water District of April 3, Director Stewart seconded the motion, and it carried unanimously. PUBLIC COMMENT An opportunity was given for any person to address the Committee upon any subject not identified on the Agenda but within the jurisdiction of the Finance and Audit Committee; however, any matter that requires action is to be referred to staff for a report and action at a subsequent Committee or Board meeting. As to matters on the Agenda, an opportunity is given to address the Committee when the matter is considered. There was no public comment. April 3, Finance and Audit Committee

3 Item 1. Consider Approval of Pension Funding Strategy and Related Actions CFO/Treasurer Jeff Armstrong addressed the Finance and Audit Committee (Committee) to introduce Yannick Gagne with Aon Hewitt, who has been working closely with staff over the last few months on Rancho California Water District s (RCWD/District) pension funding strategy. He reported that today s Committee presentation would address two elements: 1) actual funding strategy and contribution level recommendations, and 2) the funding vehicle for discretionary contributions. Referencing a PowerPoint (PP) presentation, Mr. Gagne provided a brief project recap. He noted that based on the discussion and feedback during this process, staff has developed a proposed five-year plan to accomplish the steps to increase the current funded status of the District s pension plan. Explaining, he conveyed that the subject plan calls for a series of contributions in the next five years, commencing with fiscal year (FY) through FY Next, Mr. Gagne reviewed staff s analyses and the options that were presented at a previous Committee meeting utilizing the strategies and economic benefit of using reserves. He noted that although the options highlighted on the current PP slide are not what staff is recommending today, it is merely a reminder of how the District can reduce its deficit. Highlighting a PP slide detailing staff s new recommended scenario, Mr. Gange advised that it was the Board of Directors goal to fund the pension deficit, yet remain prudent, and not over commit District assets. Based on this, staff s recommendation is to establish a course for the next five years, reassess its position at the end of year five, and then build the next following five-years after that. Moreover, Mr. Gagne explained that staff s new option of using reserves calls for a $5.0 million contribution in year one, plus $1.5 million for each of the next four years. By taking this action, he conveyed that by year 2019, RCWD could essentially eliminate half of its pension deficit by being proactive and making extra contribution payments. He further noted that not only will this effort reduce the unfunded pension liability, but also, based on expected investment returns, could potentially result in an economic benefit of $1.4 million over the five-year period. At this time, discussion ensued amongst the Committee and staff regarding the projected earnings being based on the California Public Employees Retirement System (CalPERS) estimated rate of return model. Mr. Gagne advised that what essentially drives portfolio expectations are the decisions made regarding its asset allocation. He stated that there are different levels of risk in order to achieve a greater return. Continuing, Mr. Gagne s presentation focused on reviewing the funding vehicles for discretionary contributions. He reported that previous discussions identified that there were significant advantages to setting up a side fund as opposed to merely sending the funds to CalPERS. Mr. Gagne further conveyed that one of the most important value items, if the money is set-up in the District s own pension trust, is April 3, Finance and Audit Committee

4 RCWD retains the cash flow flexibility that has been established. However, if the money is routed straight to CalPERS, their actuaries and board decide how funds are factored in and what the resulting contribution would be. Touching on the potential downside of a side trust, Mr. Gagne explained loss of scale and the concept that small funds typically experience higher expenses and generate lower returns. Never-the-less, even with loss in scale, he stressed that it should not be viewed as a deal breaker in whether or not the District chooses to setup a Section 115 Trust. The Committee and Board engaged in discussion as to investing with CalPERS versus the Section 115 Trust. The discussion focused on the simplicity of contributing only to CalPERS and not having another account to keep track of and maintain. However, there was also interest and comments made regarding advantages of the District maintaining its cash flow flexibility. Addressing the comments from the dais, Mr. Armstrong advised that staff is comfortable with either approach; yet, was merely presenting the Section 115 Trust approach due to its cash flexibility and allowing the District more control. Following review and discussion, Chairman Herman entertained a motion from the Committee. Director Drake recommended Board of Directors approval of the pension funding strategy of a $5 million contribution to increase the current funded status of the pension plan in fiscal year , and $1.5 million on an annual basis through fiscal year Director Stewart seconded the motion, and it carried unanimously. Following approval of Director Drake s motion, he offered the following. Item 2. It was moved by Director Drake to forward the discussion of the funding vehicles for discretionary contributions to the Board of Directors for further review without a recommendation. The motion was seconded by Director Stewart, and it carried unanimously. Presentation of Fiscal Year Draft Operating Budget CFO/Treasurer Jeff Armstrong addressed the Finance and Audit Committee (Committee) to report on Rancho California Water District s (RCWD/District) Fiscal Year (FY) Draft Operating Budget (Budget), as well as review a few items including reserve use, budget based tiered rates, and the draft Proposition (Prop) 218 Notice. Continuing, Mr. Armstrong noted that staff has conducted a few workshops and meetings related to the budget and presented rate impacts, and reserve use recommendations. He conveyed that staff conducts quality reviews following the outcome April 3, Finance and Audit Committee

5 and direction received from Committee and Board of Directors (Board) meetings and advised that after a recent review, staff discovered a miscalculation, related to reserve use, which results in a good benefit to the District. Moreover, Mr. Armstrong explained that this discovery changes staff s recommendation for reserve use over the next few years. Although the rate impacts remain the same, through staff s discovery, RCWD will not need to use as much reserves as originally projected. The new reserve amounts are outlined in the following tables: Rancho Division Water & Energy 2.8% 2.9% 2.4% 2.7% 2.4% Reserve Use/(Replenishment) $166K $0K $0K $0K $0K Santa Rosa (SR) Division Water & Energy 2.0% 1.9% 2.2% 2.2% 2.1% Reserve Use/(Replenishment) $0K ($100K) ($150K) ($200K) ($350K) Next, speaking on budget based tiered rates, Mr. Armstrong reported that an increase in well-related costs are driving an increase to Tier I charges in the Rancho Division. He explained that these costs include unregulated containment monitoring, as well as ARC flash studies. As for the SR Division, he indicated that their costs are less since this Division is not inuring similar cost drivers as on the Rancho side. Pointing out that a draft version of the Prop 218 Notice was included in the Committee information packet, Mr. Armstrong reported that legal counsel has reviewed the document and further noted that in order to meet noticing requirements/compliance; the notice must be mailed out 45 days prior to the Public Hearing of June 12, He further stated that the mailing would be sent to both registered account holders and property owners. With regard to the pass-through element noted in the draft Prop 218 Notice, Mr. Armstrong reported that staff is proposing to have a resolution adopted related to passing through import water, energy, and consumer price index rate increases. He noted that a resolution was adopted five years ago, which passed-through increases from the Metropolitan Water District of Southern California (MWD). Since this resolution is now expired, staff is proposing to adopt a new one, which would provide the opportunity to have complied with all noticing requirements for any future increases for MWD wholesale water fees and charges through FY commencing July 1, At this time, the Committee and the Board engaged in a brief discussion regarding the elements of the pass-through resolution. April 3, Finance and Audit Committee

6 In closing, Mr. Armstrong announced that next year staff is going to rebuild and parallel test its budget and rate models. He conveyed that this extensive effort would assist in ensuring information accuracy and improve overall staff work efficiencies. Following review and discussion Chairman Herman entertained a motion from the Committee. Item 3. Director Stewart recommended Board of Directors approval of the proposed rates, fees, and Operating Budget for fiscal year to become effective July 1, 2014, and adoption of a five-year pass through resolution for increases from the Metropolitan Water District of Southern California only. Chairman Herman seconded the motion and it passed 2 to 1, with Director Drake opposed. Discussion of Investment Manager Services Finance Administrator Ruth Zintzun addressed the Finance and Audit Committee (Committee) to provide an informational update on the value of using an external investment manager to oversee Rancho California Water District s (RCWD/District) investment of funds. By way of a PowerPoint presentation, Ms. Zitzun reported that RCWD maintains a total balance of approximately $315 million in cash and investments. This balance is the combination of several portfolios, consisting of District cash; trust funds for District bond issuances; the RCWD Retirement Medical Benefits Plan; five separate Community Facilities Districts; and one Assessment District. Ms. Zintzun advised that historically, the District has used an external investment manager to achieve its objectives of safety, liquidity, and return. At this time, she highlighted the key benefits of utilizing an investment manager. Next, Ms. Zintzun advised that RCWD, for over 20 years, has utilized the services of Chandler Asset Management (CAM) to act as an external investment manager to assist in maintaining its portfolios in a manner consistent with the District s Investment Policy and Bond Indentures. She noted that since inception, CAM has achieved an annualized portfolio for RCWD of 0.52 percent over the benchmark. Concluding staff s presentation, Ms. Zintzun briefly explained the many additional beneficial services from CAM. The Committee thanked staff for the report and continued to the next order of business. April 3, Finance and Audit Committee

7 Item 4. Review of Financial Statements February 28, 2014 A. Statement of Net Position B. Statement of Revenues, Expenses and Changes in Net Position C. Statement of Cash Flows Presented for the Finance and Audit Committee s (Committee) review and acceptance were the Rancho California Water District (District) Financial Statements of February 28, Included in the Committee information packets, which were received by Committee members prior to the meeting, were copies of the District s Financial Statements as of February 28, 2014 and a report, which included a written summary, and graphic illustrations of operating and non-operating revenues and expenses for the month of February Following review and discussion of the February 28, 2014 Financial Statements, Chairman Herman entertained a motion from the Committee. Item 5. Director Drake recommended Board of Directors approval of the February 28, 2014 Financial Statements. Director Stewart seconded the motion, and it carried unanimously. Review of Treasurer s Report; Certification of Cash Sufficiency and Related Investment Activity, as of February 28, 2014 Presented for the Finance and Audit Committee s (Committee) review and acceptance were the Rancho California Water District (District) Treasurer s Report and Certification of Cash Sufficiency for February Included in the Committee information packets, which were received by Committee members prior to the meeting, were copies of the Treasurer s Report and Certification of Cash Sufficiency, Cash Reserve, Compliance and Treasury Fund reports, and individual investment activity reports for the month of February Following review and discussion, Chairman Herman entertained a motion from the Committee. Item 6. Director Drake recommended Board of Directors approval of the February 28, 2014 Treasurer s Report. Director Stewart seconded the motion, and it carried unanimously. Review of Outside Contracts, Capital Projects, and Purchasing Reports The Finance and Audit Committee (Committee) accepted the Outside Contracts Summary, Capital Projects Status Report, and Purchasing Reports, as presented, without discussion. However, for informational purposes, CFO/Treasurer Jeff April 3, Finance and Audit Committee

8 Armstrong announced that Project No. D6092 Bear Creek Pressure Regulator Station would be added to the April 10, 2014 Board of Directors (Board) meeting agenda for further review. At this time a brief discussion ensued amongst the Committee, Board, and staff related to the said project. Item 7. Review and Ratification of the Register of Audited Demands for the Period February 26 through March 25, 2014 The Finance and Audit Committee (Committee) reviewed the Register of Audited Demands for the period February 26 through March 25, Accounting Manager Kathy Naylor reviewed the Register of Audited Demands, and provided further clarification on Warrant Nos , , , , , , , , , , , and The Committee accepted the Register of Audited Demands, as presented and forwarded it to the Board of Directors for approval. Item 8. Director Drake recommended Board of Directors approval of the Register of Audited Demands for the period February 26 through March 25, 2014, totaling $8,436, Director Stewart seconded the motion, and it carried unanimously. Adjournment There being no further business to come before the Committee, the meeting was adjourned at 10:50 a.m. Milin J. Ream, Recording Secretary April 3, Finance and Audit Committee