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Home My WebLink AboutBUDGET & FINANCE AGENDA 10-13-08 Central Contra Costa Sanitary District 5019 Imhoff Place, Martinez, CA 94553-4392 (925) 228-9500 . www.centralsan org BUDGET AND FINANCE COMMITTEE Chair McGill Member Nejedly Monday, October 13, 2008 3:00 p.m. Executive Conference Room 5019 Imhoff Place Martinez, California INFORMATION FOR THE PUBLIC ADDRESSING THE COMMITTEE ON AN ITEM ON THE AGENDA Anyone wishing to address the Committee on an item listed on the agenda will be heard when the Committee Chair caIls for comments from the audience. The Chair may specify the number of minutes each person will be permitted to speak based on the number of persons wishing to speak and the time available. After the public has commented, the item is closed to further public comment and brought to the Committee for discussion. There is no further comment permitted from the audience unless invited by the Committee. ADDRESSING THE COMMITTEE ON AN ITEM NOT ON THE AGENDA In accordance with state law, the Committee is prohibited from discussing items not calendared on the agenda. You may address the Committee on any items not listed on the agenda, and which are within their jurisdiction, under PUBLIC COMMENTS. Matters brought up which are not on the agenda may be referred to staff for action or calendared on a future agenda. AGENDA REPORTS Supporting materials on Committee agenda items are available for public review at the Reception, 5019 Imhoff Place, Martinez. Reports or information relating to agenda items distributed within 72 hours of the meeting to a majority of the Committee are also available for public inspection at the Reception. During the meeting, information and supporting materials are available in the Conference Room. AMERICANS WITH DISABILITIES ACT In accordance with the Americans With Disabilities Act and California Law, it is the policy of the Central Contra Costa Sanitary District to offer its public meetings in a manner that is readily accessible to everyone, including those with disabilities. If you are disabled and require special accommodations to participate, please contact the Secretary of the District at least 48 hours in advance of the meeting at (925) 229-7303. ft ", Recycled Paper Budget and Finance Committee October 13, 2008 Page 2 1. CALL MEETING TO ORDER 2. PUBLIC COMMENTS 3. OLD BUSINESS *a. GASB 45 Trust- Discuss any outstanding issues prior to Position Paper establishing a trust scheduled for November 6th Board meeting *b. Proposed Investment Guidelines for the Committee as recommended by Trucker*Huss 4. CLAIMS MANAGEMENT *a. Review Outstanding Claims 5. REPORTS/ANNOUNCEMENTS *a. Receive Internal Audit Report (Erik Stone and Beth Cortese from Protivity will attend meeting) *b. Update on AIG *c. Arbitrage Rebate Calculation *d. LAIF Update 7. REVIEW EXPENDITURES (Item 3.a. in Board Binder) 8. ADJOURNMENT * Attachment ~ Central Contra Costa Sanitary District BOARD OF DIRECTORS POSITION PAPER 3.a-. Board Meeting Date: November 6, 2008 No.: Type of Action: APPROVE RESOLUTION Subject: APPROVE RESOLUTION TO ADOPT THE GASB 45 PUBLIC AGENCIES POST-RETIREMENT HEALTH CARE PLAN TRUST AGREEMENT AND MASTER PLAN DOCUMENT AND AUTHORIZE STAFF TO INVEST $11.2 MILLION IN THE TRUST Submitted By: Debbie Ratcliff, Controller Initiating DeptJDiv.: Administrative I Finance & Accounting REVIEWED AND RECOMMENDED FOR BOARD ACTION: D. Ratcliff R. Musgraves James M. Kelly, General Manager ISSUE: Board authorization is needed to adopt the GASB 45 Public Agencies Post- Retirement Health Care Plan Trust Agreement and Master Plan Document, and to invest District monies in the Trust. RECOMMENDATION: Approve a Board Resolution adopting the GASB 45 Public Agencies Post-Retirement Health Care Plan Trust Agreement and Master Plan Document, and authorize staff to invest $11.2 million in the Trust. FINANCIAL IMPACTS: The adoption and subsequent establishment of a GASB 45 Post-Retirement Health Care Trust with PARS would include fees for administrative services, trustee, and investment management services, and additional fees associated with mutual fund investments. All-inclusive fees would be approximately $100,000 for a $10 million dollar investment balance and approximately $350,000 when the trust balance reached $50 million. AL TERNA TIVES/CONSIDERA TIONS: The Board could consider contracting with CALPERS or an individual bank, however, as discussed in prior meetings, this is not recommended. BACKGROUND: The Governmental Accounting Standards Board changed the accounting and financial reporting requirements for other post employment benefits, known as OPEB, with the implementation of its Statement Number 45 - Accounting and Financial Reporting by Employers for Post Employment Benefits Other than Pensions. The District provides medical insurance benefits to its retirees who meet certain eligibility requirements. Under Statement 45, governments are required to actuarially calculate their total OPEB obligation and the annual amount necessary to fund the obligation called the Actuarially Required Contribution (the ARC). Statement 45 requires footnote disclosure of the funding status of the total obligation, and requires recording a liability for unpaid portions of the ARC. N:\ADMINSUP\ADMIN\POSPAPER\Approve Resolution to Adopt Public Agencies Post-Retirement HCP 9-18-08.doc Page 1 of 2 POSITION PAPER Board Meeting Date: November 6,2008 Subject APPROVE RESOLUTION TO ADOPT THE GASB 45 PUBLIC AGENCIES POST-RETIREMENT HEALTH CARE PLAN TRUST AGREEMENT AND MASTER PLAN DOCUMENT AND AUTHORIZE STAFF TO INVEST $11.2 MILLION IN THE TRUST Statement 45 does not require funding to a trust, but unpaid liabilities on the books affect financial statement ratios and may adversely impact credit worthiness over time. The Board approved the inclusion of $5 million dollars (less the actual retiree health care premiums) each year for the FY 2006-2007 and FY 2007-2008 budgets to be set aside toward the OPEB obligation. An additional $5.2 million was approved in the FY 2008-2009 budget. On May 1, 2008 the Board approved the establishment of a GASB 45 Trust with PARS to fund annual contributions each year as directed by the Board. The purpose of the trust is to accumulate, hold, and distribute medical benefit plan assets for the exclusive benefit of retirees within the meaning of IRS Code Section 115. The Board Budget and Finance Committee has discussed various funding options and investment strategies. With the current volatility in the market, staff and the Finance Committee are recommending a moderate investment strategy which could be changed to moderate aggressive in the future when the market stabilizes. Further, to reduce the volatility and take advantage of dollar cost averaging, staff recommends investing the $11.2 million over ten (10) months, which equates to 10% or $1.1 million each month. The dollars would be moved after the first committee meeting each month, allowing the flexibility of increasing or decreasing the contribution amount based upon economic conditions. Two signatures would be required on any Trust transaction (the Controller and Director of Administration). Additionally, any amount exceeding $2 million would also require the General Manager's signature. Wi L.L be. t'N)d..'f' ,'elL (.,V IT~ f!'NGt/J Ge- Co rY\t'V\ ; IT P-e. ~ ~ I ',.j t:<. L r I!..c....o V'A-r-NJ...~"\'; 0 N Attached are the GASB 45 Public Agencies Post-Retirement Health Care Plan Trust . Agreement, Master Plan Document and Board Resolution, for review and signature. These documents were reviewed by District Counsel. The related legal documents will be signed by the Plan Administrator, as noted in the Board Resolution. RECOMMENDED BOARD ACTION: Approve a Board Resolution adopting the GASB 45 Public Agencies Post-Retirement Health Care Plan Trust Agreement and Master Plan Document, and authorize staff to invest $11.2 million in the Trust. N:\AOMINSUP\AOMIN\POSPAPER\Approve Resolution to Adopt Public Agencies Post-Retirement HCP 9-18-08.doc Page 2 of 2 3.b. Central Contra Costa Sanitary District October 10, 2008 TO: Budget & Finance Committee VIA: James M. Kelly, General Manager~ Randall Musgraves, Director of Ad4inistrJtion FROM: Debbie Ratcliff, Controller ti( SUBJECT: Investment Guidelines for Budget and Finance Committee At the Finance Committee meeting on September 29, 2008, the Committee reviewed an opinion letter from Trucker Huss, the District's benefit counsel, regarding fiduciary responsibility of Board Members with regard to investment decisions for the GASB 45 Trust. Mr. Trucker indicated that it is in the realm of prudence to dollar cost average the District's investments and prudent in these volatile times to be able to discontinue a strategy to invest in the market and instead remain in cash equivalents. He recommended written Board guidelines for investing by the Committee. Below are two options for Committee consideration. Option 1 The Board delegates full authority to the Budget and Finance Committee and staff to oversee the day to day operations of the GASB 45 Trust Portfolio. This oversight will be accomplished with the expertise of HighMark Capital and the attached Investment Guidelines Document for a moderate investment strategy. (See attached) The Finance Committee and staff will use a dollar cost averaging approach to entering the financial market and investing dollars. The $11.2 million designated for the GASB 45 Trust will be invested over 10 months, approximately 10% each month. Should the market fluctuate significantly either up or down, the Committee and staff, upon advice from HighMark Capital, have the authority to increase or decrease the monthly contribution amount. The Committee and staff will meet monthly with HighMark Capital to review performance results and discuss any changes that may be necessary. The Committee will report the results of the investment portfolio and significant decisions to the Board. N:\ADMINSUP\ADMIN\RATCLlFF\lnvestment Guidelines B&F 10-08.doc Option 2 The Board delegates full authority to the Budget and Finance Committee and staff to oversee the day to day operations of the GASB 45 Trust Portfolio. This oversight will be accomplished with the expertise of HighMark Capital and the attached Investment Guidelines Document for a moderate investment strategy. (See attached) The Finance Committee and staff will use a dollar cost averaging approach to entering the financial market and investing dollars. The $11.2 million designated for the GASB 45 Trust will be invested over 10 months, approximately 10% each month. The Committee and staff will meet monthly with HighMark Capital to review performance results and discuss any changes that may be necessary. The Committee will report the results of the investment portfolio and significant decisions to the Board. Additional Consideration Given the volatility of the stock market, cash constraints and governmental bailouts to shore up the financial institutions and markets, the Committee may want to formally state that any desire to modify the Investment Guidelines previously adopted by the Board, would be discussed with the Board prior to implementation. N:\ADMINSUP\ADMIN\RATCLlFF\lnvestment Guidelines B&F 10-0B.doc !-"I; i. I,'",!:". It nr..t'.~tl;~'.i Ii Il\:j <.:h.nk. :\. J;tl1rk,' [k;~Plillll t.. ~I"lll:f p, k'r.l!: .I,,,hll; W"'JlLr I '<iI';' blllh.llIl: 'l{I,'fJ,!!dJ, rill-hit .\t1l", I. ,.'. , ,,:<:1 ! h:..hcr!. f. '~~'h'''\'~(f''] 11~t.41" ~:. "JOb,.. K.'\ j" r. ".j"I, TRUCKER. Huss ctHh':.I/\. Kllll.! Eli/.~h:r1r I.. I..,j; \.lA((h<:\... I . c. ItI:HIX S"~"''',,\1 P.ll,1 :,lH:Il..II,. I.. "Lhllll'~1 V!'1~ill\.1 1,1. l'uki"" km.;lct I)~d; (:h'"d~\ .J .\1 A"': (:''''(' A PROFE5~ION^L CORPORATION ATTORNEYS AT LAW 120 Montgomery Slret'l, Brd Floor San Francisco. ClldurnJ;l 94104-4398 ~p~'l:ul t.:l~lt:l:;t~: B:.H";'.ln P. Pft-tch.'r September 18,2008 ("11'(."111,,,,1 B;lrt>:1r~ [I. en:.-.! In; L, 1""1"1 VIA U.s. MAIL PRIVILEGED AND CONFIDENTIAL \X.', ;,,'r\ I )In-,-,. DIal lli ,:", ,~lI'::li Ms. Deborah Ratcliff Controller Central Contra Costa Sanitary District 5019 Imhoff Place Martinez, CA 94553-4392 Re: Fiduciary responsibility Dear Debbie: You have asked our opinion on certain fiduciary aspects of the District's Retiree Health Trust investment program. It is our understanding that the District is implementing a funding arrangement for retiree health benefits through a health trust formed pursuant to Gov. Code section 53620, et.seq. Under those statutory provisions, a government entity such as the District may form a trust to accept funding for retiree health benefits. All assets contributed to any such trust must be held for the exclusive purpose of providing benefits for retirees and their dependents or held for that purpose until the obligation is satisfied. The statutory provisions further mandate that the assets held in the trust are to be managed in a prudent manner, pursuant to fiduciary standards which mirror the standards set forth in the California Constitution for the administration of public pension funds. Not coincidentally, the statutory language also mirrors the fiduciary standards set forth in the Employee Retirement Income Security Act of 1974 (ERISA). It is our understanding that the Board of Directors of the District is considering making initial investments in the Retiree Health Trust ("Trust") in equal installments over a period of ten (or more) months. The extended investment period is intended to "dollar cost average" so that if the markets are volatile in the next ten months the market values at which the investments are made occurs over some period of time instead of being invested in a lump sum. It has been proposed that a committee of the Board will also have the authority to refrain from investing the contributions at any given time during the ten month investment period should the committee believe it prudent to do so. The specific question you have asked is whether the 11944652 TEl. (415) 788-3111 . F.~x (415) 42 1.2017 . WWW(ruckerhusscom Ms. Deborah Ratcliff September 18, 2008 Page 2 proposed ten month program, particularly with the ability to call a halt to further investments, is fiduciarily prudent. We believe the program as outlined above is prudent under the statutory framework and standards. We do not know what specific investments are to be made and do not have the expertise to comment on a particular investment strategy, asset allocation, etc. We can, though, comment on the process used to determine the strategy and the appropriateness of that process. Specifically, under the statutory guidelines, and companion ERISA regulations and decisions, it is the process used to arrive at the investment program that is the foremost requirement for fiduciary prudence. If the Board, or an appointed committee, reviewed the investment program for prudence and then determined to invest on a dollar cost averaging basis, such a process and program should be found to be prudent. When to invest and over what period, so long as well considered in advance, has not been the subject of any successful legal challenge of which we are aware. It certainly is within the realm of prudence, in our experience, to dollar cost average. It also should be considered prudent, in these volatile times in the investment markets, to be able to discontinue a strategy to invest in the markets, and instead remain in cash or cash equivalents. So long as the strategy has been discussed and considered, and is reasonable in the circumstances, the District should be found to have acted prudently. The courts, at least under ERISA, have not second- guessed the decisions of trust fiduciaries when investment performance has been negative or not as projected, where the fiduciaries have engaged in a prudent process in developing their investment strategy. We do suggest that the Board consider the development of some broad guidelines for the committee to follow in discontinuing the investment program. We do not believe, though, that the right to discontinue the program is in any way in itself prohibited or improper. Please let us know if you have any questions or comments and thank you for this opportunity to be of service to the District. Very truly yours, LA T:jah #944652 INVESTMENT GUIDELINES DOCUMENT Central Contra Costa Sanitary District Central Contra Costa Sanitary District Investment Guidelines May 2008 1 Central Contra Costa Sanitary District Investment Guidelines Document In response to the Government Accounting StanCllards Board (GASB) Statement Number 45 disclosure requirements for Other Post-Employment Benefit (OPEB) Plans, the Central Contra Costa Sanitary District has adopted a Section 115 Trust and Plan that seeks to satisfy these liabilities for certain eligible employees Executive Summary Client Name: Central Contra Costa Sanitary District Investment Authority: Full Investment Authority Account Number(s): To be determined Current Assets: $ 10 million (est. August 2009) Risk Tolerance: Moderate Objective Time Horizon: Long-Term Investment Objective: The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth below. The Plan's targeted rate of return is 7.0%. The Investment objective the District has selected is the Moderate Objective. The asset allocation ranges for this objective are listed below: Strategic Ranges: o - 20% Cash 40 - 60% Fixed Income 40 - 60% Equity Communication Schedule: Committee meetings monthly and potentially quarterly in the future. Monthly statements provided. HCM Portfolio Manager: Andrew Brown, CFA 415-705-7605 Andrew. Brown@Uboc.com HCM Back up -Portfolio Manager: Delbert Chang CFA 415-705-7603 Delbert. Chana@Uboc.com UBOC Administrative Officer: John Fulton, 415-273-2508 John. Fulton(Q>.U boc.com The managing director for HighMark Capital Management is Kevin Rogers, he can be reached at 949-553-2580 Central Contra Costa Sanitary District Investment Guidelines May 2008 2 Portfolio Constraints Income Needs/Cash Flow Required: Annual cost estimated to be at $2.2 million. Unique Needs and Circumstances: None Client(s) Signature: Date: HCM Portfolio Manager: Date: UBOC Administrative Officer: Date: Central Contra Costa Sanitary District Investment Guidelines May 2008 3 Detailed Information for Investment Guidelines Document Overview The purpose of this Investment Guidelines document (IGO) is to assist you and your Portfolio Manager in effectively supervising, monitoring and evaluating the investment of your portfolio. Your investment program is defined in the various sections of the IGO by: 1. Stating in a written document your attitudes, expectations, objectives and guidelines for the investment of all assets. 2. Setting forth an investment structure for managing your portfolio. This structure includes various asset classes, investment management styles, asset allocation and acceptable ranges that, in total, are expected to produce an appropriate level of overall diversification and total investment return over the investment time horizon. 3. Encouraging effective communications between you and your Portfolio Manager. 4. Complying with all applicable fiduciary, prudence and due diligence requirements experienced investment professionals would utilize, and with all applicable laws, rules and regulations from various local, state, and federal entities that may impact your assets Diversification Your Portfolio Manager is responsible for maintaining the balance between fixed income and equity securities based on the asset allocation. The following parameters shall be adhered to in managing the portfolio: Fixed Income · The long-term fixed income investments (greater than seven-years in maturity) shall constitute no more than 25%, and as little as 0% of the total Plan assets. · The intermediate-term fixed income investments (between three-seven years in maturity) shall constitute no more than 60%, nor less than 25% of the total Plan assets. · The high-yield portion of the Plan shall constitute no more than 10%, and as little as 0% of the total Plan assets. · The convertible bond exposure shall constitute no more than 10%, and as little as 0% of the total Plan assets. · The short-term fixed income investments (between one-three years in maturity) shall constitute no more than 25%, and as little as 0% of the total Plan assets. Equity · The domestic large cap equity investments of the Plan shall constitute no more than 45% nor less than 15% of the total Plan assets. · The domestic mid-capitalization equity investments of the Plan shall constitute no more than 10%, and as little as 0% of the total Plan assets. · The domestic small capitalization equity investments of the Plan shall constitute no more than 15% nor less than 0% of the total Plan assets. Central Contra Costa Sanitary District Investment Guidelines May 2008 4 · The international equity investments of the Plan shall constitute no more than 15% and as little as 0% of the total Plan assets. · The real estate investments of the Plan shall constitute no more than 10% and as little as 0% of the total Plan assets. Permitted Asset Classes and Security Tvnes The following asset classes and security types have been approved by HighMark for use in client portfolios: Asset Classes · Fixed Income o Domestic Bonds o Non-U.S. Bonds · Equities o Domestic o Non-U.S. o Emerging Markets o Real Estate Investment Trust (REITs) · Cash and Cash Equivalents Security Types · Equity Securities o Domestic listed and unlisted securities o Equity and equity-related securities of non-US corporations, in the form of American Depository Receipts ("ADRs") · Equity Mutual Funds o Large Cap Growth and Value o Mid Cap Core o Small Cap Growth and Value o International and Emerging Markets o REITs · Exchange Traded Funds (ETFs) · Fixed Income Securities o GovernmenUAgencies o Mortgage Backed Bonds o Corporate Bonds and Notes · Fixed Income Mutual Funds o Corporate o Government o High Yield o International and Emerging Market o Convertible o Preferred · Closed end funds · Cash and Cash Equivalents o Money Market Mutual Fund o Commercial Paper o CDs and Bankers Acceptance Prohibited assets · Precious metals Central Contra Costa Sanitary District Investment Guidelines May 2008 5 . Venture Capital . Short sales · Purchases of Letter Stock, Private Placements, or direct payments · Leveraged Transactions · Commodities Transactions Puts, calls, straddles, or other option strategies, · Purchases of real estate, with the exception of REITs · Derivatives, with exception of ETFs Rebalancina Procedures From time to time, market conditions may cause your asset allocation to vary from the established target. To remain consistent with the asset allocation guidelines established by this Investment Guidelines document, your Portfolio Manager will rebalance the portfolio on a quarterly basis. Duties of Responsibilities of Portfolio Manaaer Your portfolio manager is expected to manage your portfolio in a manner consistent with this Investment Guidelines document and in accordance with State and Federal law and the Uniform Prudent Investor Act. HighMark Capital Management is a registered investment advisor and shall act as such until you decide otherwise. Your portfolio manager shall be responsible for: 1. Designing, recommending and implementing an appropriate asset allocation consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. 2. Advising the committee about the selection of and the allocation of asset categories. 3. Identifying specific assets and investment managers within each asset category. 4. Monitoring the performance of all selected assets. 5. Recommending changes to any of the above. 6. Periodically reviewing the suitability of the investments, being available to meet with the committee at least once each year, and being available at such other times within reason at your request. 7. Preparing and presenting appropriate reports. 8. Informing the committee if changes occur in personnel that are responsible for portfolio management or research. You shall be responsible for: 1. The oversight of the investment portfolio. 2. Providing your portfolio manager with all relevant information on the Plan, and shall notify him or her promptly of any changes to this information. 3. Advising your portfolio manager of any change in the Plan's circumstances, such as a change in the actuarial assumptions, which could possibly necessitate a change to your overall risk tolerance, time horizon or liquidity requirements; and thus would dictate a change to your overall investment objective and goals for the portfolio. 4. Monitoring performance by means of regular reviews to assure that objectives are being met and that the policy and guidelines are being followed. Central Contra Costa Sanitary District Investment Guidelines May 2008 6 Communication As a matter of course, your portfolio manager shall keep you apprised of any material changes in HighMark Capital's outlook, recommended investment policy and tactics. In addition, your portfolio manager shall meet with you no less than annually to review and explain the portfolio's investment results and any related issues. Your portfolio manager shall also be available on a reasonable basis for telephone communication when needed. Any material event that affects the ownership of HighMark Capital Management or the management of the portfolio must be reported immediately to you. Disclosures Union Bank of California, NA and HighMark Capital Management, Inc. are wholly owned subsidiaries of UnionBanCal Corporation. Investments are not deposits or bank obligations, are not guaranteed by any government agency, and involve risk, including loss of principal. Central Contra Costa Sanitary District Investment Guidelines May 2008 7 co Q Q N I Q) Q I - CJ o "C S c 'i: c.. ~ ns E E ~ U) e ~ ~ "C C (1) c.. >< W c z ::) LL W (.) Z ~ ::) tJ) Z LL ...J W tJ) en Q) u - "2: c:: Q) Q) E en Q) c:: = - 0 Q) +=> en m ..... 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Q) Q) Q) >>> en en 1ii CiCiCi c o +:: ca u o ...J -'" -'" Q) Q) ~ ~ o 0 Q) "5s=a5 ~~~ 3:3:~ gl <Xl <Xl <Xl ~~~ ~~a5 C) C) C) ~I ! ~ ~ ~ '*I: co o o ~ o o II) ex) II) ~ ;; 8 o L!) N ..... :5 c:i II) N ..... <II E "ij <3 .s ::I <( 1ii '0 I- N C') 5.~. Central Contra Costa Sanitary District October 7, 2008 TO: BOARD OF DIRECTORS' FINANCE COMMITTEE JIM KELL~~ RANDY MU RA \t S Rf/IM. fL ANN FAR LL {) DEBBIE RATCLIFF ,.??~ CURT SWANSON (p9- FROM: ~ KURT DARNER, DEVELOPMENT SERVICES SUPERVISOR@fD SUBJECT: 2008 SEWER SERVICE CHARGE INTERNAL AUDIT REPORT VIA: INTRODUCTION In March 2008, Protiviti, an independent auditing firm, was hired by CCCSD to perform an internal audit of the CCCSD Sewer Service Charge program. CCCSD management and staff welcomed this audit as a way of checking new Sewer Service Charge billing practices and to seek ways to further improve the program. The results of this audit were of interest to CCCSD management and staff because of the significant recent changes in the Sewer Service Charge calculation and billing software, and the changes in business practices needed to use the software the way it was designed, and for program consistency. The Internal Audit Report created by Protiviti provides a detailed and comprehensive review of the Sewer Service Charge processes. The report is accurate, however, additional information is needed to clarify some of the statements made in the report. This memo will provide additional information and explanation about the Sewer Service Charge Program for specific audit observations mentioned in the Internal Audit Report. OBSERVATION NO.1 - SEGREGATION OF DUTIES The audit report states that "the Sewer Service Charge revenue process is almost entirely managed by one employee and there is little to no review of the calculations, data input, or invoicing process." An Engineering Assistant III (Brenda Wener) has the primary responsibility to administer the Sewer Service Charge program based on established procedures. Her work and the ongoing processes are directly supervised by me, with periodic review of the work by Principal Engineer Jarred Miyamoto-Mills. C:\DOCUME-1\DRA TCl -1\lOCAlS-1\Temp\MemotoFinanceCommittee_1.doc During the Sewer Service Charge calculation process each year, there are twelve types of reports generated by the billing software and eleven custom program inquiries created by Brenda that she reviews to determine if there are any errors in billing or in consumption reads from the water districts. Also, after calculation of each fiscal year's billing, the total anticipated revenue is checked by me to be sure that we have met our projections for the upcoming fiscal year. All customer requests for adjustments of a Sewer Service Charge billing are reviewed with me prior to implementation and require two signatures. OBSERVATION NO.2 - ALTERNATE RESOURCE I BACKUP The audit report states that "there are limited backup options for employees performing the Sewer Service Charge process". An Engineering Assistant II (EA II) has been given limited access rights and is currently being cross-trained to provide additional back up. It is expected that the EA II will be fully trained by October 1, 2009, which is the date that all Sewer Service Charges will have been submitted to the County tax roll and direct bills will have been issued for fiscal year 2009-10. OBSERVATION NO.4 - HTE SYSTEM CUSTOMIZATION In 2005, HTE (now "SunGard") informed CCCSD that it would no longer support the custom Sewer Billing program then in use for administering the Sewer Service Charges. As a result, we purchased SunGard's CX software, or Customer Utility Billing program. As a result, CCCSD and SunGard began converting historical Sewer Service Charge billing information for use in the new program. During this conversion, several CCCSD staff were involved in many weeks of on-site training, as well as the creation of new user classes, consolidation and reformatting of consumption credits, calculation of blended rates for shared water meters, and detailed quality control checking of accounts to ensure the billing information was converted correctly. The new software was put into operation starting with the 2006-07 fiscal year billing. An operating manual was provided with the utility billing software that provides for the overall functionality of the program. The manual does not address the billing issues that are unique to the CCCSD billing process. There have been four special programs that have been written specifically for CCCSD: 1) conversion of water consumption data provided by four water districts for use in the utility billing program; 2) creating a sum of all billings on one parcel (e.g. shopping centers); 3) adjusting less than minimum charge billings to the minimum charge per parcel; and 4) the annual transfer of sewer billings for collection on the county tax roll. These special programs, as well as CCCSD sewer billing procedures and business practices are being documented in a supplemental manual maintained by Brenda that I expect to have completed by the end of this calendar year. SSC PROGRAM CHANGES IN RESPONSE TO AUDIT FINDINGS Improvements made in the Sewer Service Charge Program since the internal audit in March 2008, include: C:\DOCUME-1\DRA TCl -1\lOCAlS-1\Temp\MemotoFinanceCommittee_1.doc · Supervisor review and sign-off of all SSC adjustments made to the county tax roll, direct billing accounts, and refunds (Observation No.1). · Reformatting of the Sewer Service Charge Monthly Report to provide detailed account and adjustment information (Observation No.1). · Sewer Service Charge calculations prepared by the Permit Counter staff, which are collected at the time connection fees are paid I are now being attached to the application given to Brenda for customer input into the billing software (Observation No.3). · A consultant has been engaged to assist with identified problems and/or questions about the software. A scope of work is being developed to have this consultant provide some software customization to create additional reports and queries for enhanced quality control checking (Observation No.4). · All spreadsheets supplemental to the Sewer Service Charge billing software have been password protected and/or made "read only" so that they cannot readily be overwritten or changed (Observation No.5). CONCLUSION Overall, I believe that Protiviti did a remarkable job in breaking down and understanding the complex processes involved in the Sewer Service Charge program. Their review and subsequent report has provided management and staff with the assurance that the annual Sewer Service Charges are being assessed correctly. Most of the comments and suggestions provided in the Internal Audit Report were implemented immediately by staff. 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Central Contra Costa Sanitary District October 9,2008 TO: Budget & Finance Committee FROM: Randall Musgraves, Director of Administration f./ftIA SUBJECT: District Insurance Program and AIG Developments As you may have learned, AIG's financial troubles have expanded beyond those addressed by the Federal Reserve's $85 billion last month in exchange for 80% of AIG's stock. On October 8, 2008 the Federal Reserve loaned AIG another $37.8 billion to address further cash flow problems. Attached are three recent articles regarding this and related issues. The District has three insurance policies in force with AIG subsidiary companies. The companies providing coverage to the District are regulated insurance companies that continue to meet the financial capacity and reserving requirements imposed by insurance regulatory agencies. Since these subsidiary companies are sufficiently funded with dedicated capital, we do not believe that the cash flow concerns of the parent company affect the subsidiaries' capacity to pay claims at this time. We previously reported staff's intent to look at alternative coverage to protect the District should AIG's financial problems eventually put their subsidiary property and casualty insurance companies at risk. We reviewed the coverage, terms and pricing of several other companies. As shown on the attached table, the current coverage alternatives do not meet the District's needs. However, we expect the insurance industry to develop new programs and to enhance coverage, limits and terms in existing property and casualty programs in order to meet the coverage needs of concerned AIG clients. We will continue to investigate these opportunities as they become available and keep the committee advised accordingly. Please feel free to contact myself or Safety & Risk Management Administrator Shari Deutsch if you have any questions or would like any additional information. H:\Forms\Memo to BFC re AIG Mktg 10090S.doc co o - o ~ U) CI) > ~ cu c .. CI) ... <( CI) C) ca .. CI) > o o "0 "0 m .... .9 ,~ o a. .... 0) ..c: - o c: m "0 0>0) c: 0) '0 c: 'i:: "0 o.s 0) 0 ,~ ;: ~ I 0) c: 0.0 E = 8 E .s c: 0 c 0 ~ CI) c: ~ E I 0 EO) - - en o 0_ o :J E o ,- - CI) .9 e? ~ ~ ~ &. .~ 0 tnC3~ CI) 0) c: a: Cl 0 ... CI) 'C ... cu o en :!:: E c: c: 0) c: .2 g>0) E Q) ~ E L{) > .... L{) ~ 0 o.~ () 0) - ~ c ~ o~ ~ ~ B E ~ 0) "0 c: 0 ~ m c: .... ..c: 0) 0 - .2>- 0) 0> ~ .~ 0) .- w c: 0 c: 0) a. 0) .... .... ..c: 0) 0) ~..c:..c: 0.;:- E 0 g o - m 0"0"0 ~ ~ ~ 0) ,5 c: :Q :J o ;: I c: :~ E o ~ ~ o - c: c: ,2 .~ ,~ ~ c: c: 0 O)~ E m 0) c: e? E o 0) "0"0 c: c: 0) 8 ~ 0) '~ e? E ~ en .... c: :!:: .9 .... 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Securities Lending Agreement with Federal Reserve Bank of NY October 8, 2008 · The Federal Reserve Bank of NY has agreed to provide liquidity to AIG's securities lending program by borrowing investment grade fixed income securities from AIG's domestic life insurance companies, on commercial terms and conditions, in exchange for cash. In this arrangement, the Fed acts in its traditional capacity as lender of last resort. · The total amount the NY Fed is authorized to borrow is $37.8 billion. AIG's securities lending obligations totaled $37.2 billion as of October 6. The lending agreements were executed yesterday. · This arrangement is an effective method to provide liquidity to the Securities Lending program while providing enhanced credit protection to the NY Fed by giving them possession of third party investment grade securities. · The arrangement allows additional time for AIG to work towards its current strategy to wind down its securities lending program. · This arrangement is separate and distinct from the $85 billion credit facility, which is a loan from the Fed. This new arrangement contemplates the Fed stepping in as a counterparty in a traditional commercial financing transaction, on commercial terms and conditions which reflects the Fed's status as lender oflast resort. · AIG, the Fed and State insurance regulators are working cooperatively to support the interests of the company and its policyholders. This is one example of this cooperative effort. American International Group Inc. AIG: NYSE; Financials/lnsurance - Multiline American International Group, the insurance giant, consists of an assortment of businesses that run the gamut from aircraft leasing to life insurance for Indians to retirement plans for elementary schoolteachers. While the main insurance unit and some other parts of the business remained profitable, in the fall of 2008 complex deals made by one unit dragged it to edge of ruin, as the mortgage market underlying the transaction melted down. On Sept. 17 the Federal Reserve announced that it was taking control of the company in an $85 billion bailout meant to prevent the havoc across international markets that would likely follow the company's collapse. The company's complex structure and aggressive approach reflects the determination of the man who built A.I.G., Maurice R. Greenberg, to create an global empire operating in complementary businesses. Not even the company's annual reports to shareholders or its regulatory filings offer a chart of its complex corporate structure. Though its name is American, the company is rooted in Asia. According to company lore, its founder, Cornelius Vander Starr, a World War I veteran, traveled to Asia with only 300 Japanese yen (less than $3 by today's exchange rates) in his pocket and started the firm in Shanghai in 1919. With a partner, he sold marine and fire insurance and expanded rapidly throughout the Philippines, Indonesia and China by hiring locals as agents and managers, a business strategy AI.G. uses today. Nearly half of AI.G.'s 116,000 direct employees - about 62,000 people - are in Asia. In 1960, Mr. Greenberg joined the company, following his mentor, an executive at Continental Casualty Company in Chicago. Mr. Greenberg focused on making giant commercial deals, increasing its share of the life insurance business and writing what were, decades ago, unusual types of coverage, like insurance against kidnapping and protection from suits against a company's officers and directors. A.I.G.'s problems rest in the company's London-based financial products unit, part of its financial services group, which is exposed to securities tied to the value of home loans - the same kind of securities that forced Lehman Brothers into Chapter 11 bankruptcy proceedings the day before A.I.G. was bailed out. The financial products group sold credit-default swaps, complex financial contracts allowing buyers to insure securities backed by mortgages. Many of the buyers were European banks. As home values have fallen, the value of the underlying mortgages has declined, and A.I.G. has had to reduce the value ofthe securities on its books. The company's distress came after an unusual period of turmoil at the company. Early in 2005, questions arose about financial transactions that had the effect of making the company's earnings look better. Mr. Greenberg resigned as chief executive after regulators sent a wave of subpoenas to the company; eventually AI.G. restated earnings covering a five-year period. His successor tried to restore confidence in the company but his efforts did not meet with investor approval and he was replaced after the company announced that it lost $7.8 billion in 2008's first quarter. In August it announced that it had lost another $5.3 billion in the second quarter. In September the main financial ratings agencies made clear that they would downgrade A.I.G. ratings if the company were not able to raise more capital to back its obligations. A frantic scramble for investors was unsuccessful, leading a reluctant Fed to conclude that a bailout was unavoidable. A.l.G. to Get Additional $37.8 Billion - NYTimes.com Page I of2 lbt Nrtu lork limtl f'lyt IrIOS.Co'n P.ONHR'O,.NOc'( FQO.." m..:BAsEit! SPCW5.DRE.D IY _'.-" October 9, 2008 A.I.G. to Get Additional $37.8 Billion By BARRY MEIER and MARX:W[L:L.lAM~_WALSH The federal Reserve Board said Wednesday that it would provide up to $37.8 billion to the embattled insurer the American International Group to help it deal with a rapidly dwindling supply of cash. The additional assistance is on top of $85 billion in a bridge loan that the Federal Reserve extended to A.I.G. in September, but it will take a different form. A spokesman for AI.G., Nicholas Ashooh, said the new assistance was intended to keep the company from having to draw down the Fed loan so quickly. The Fed threw AI.G. the $85 billion lifeline shortly after the collapse of l&hma!1Jlmth~rs, when the financial markets were reeling and there were doubts the system could weather the demise of another big financial services company. At the time, the Fed's loan was the most radical intervention ever by the central bank in a company's affairs. Even as AI.G. now works through a major overhaul, the rest of the insurance industry is still struggling with the continuing turmoil in the financial markets. Shares of MetLife, the nation's largest life insurer, fell 27 percent on Wednesday to close at $27 a share after the company said its third-quarter earnings would be down significantly from a year ago and that it had to raise new capital. Its earnings were hurt by lower investment returns, lower fees on variable annuities, and losses on its investments in troubled companies like Lehman Brothers, AI.G. and Washington Mutual. MetLife offered 75 million shares at $26.50 a share on Wednesday. The Allstate Corporation's stock fell 21 percent on Wednesday amid investor concern that it, too, would have to raise new capital. The Hartford Financial Services Group said this week that it would raise $2.5 billion. The bailout of AI.G. has not gone smoothly. Shares were greatly diluted by the Fed's original move, and investors have been asking why they were not allowed to vote on the terms of the bailout. Then the company surprised analysts last week by disclosing that it had already drawn down $61 billion of the Fed loan. The speed of the drawdown led credit analysts to downgrade some of its debt and put other types of its debt on negative credit watch, signaling that other downgrades were possible. This week, former A.I.G. executives were questioned by members of Congress, who wanted to know whether GQldman Sachs and other business partners had benefited from the bailout. Goldman Sachs has said that it had no meaningful exposure to losses from AI.G. A.I.G. said Wednesday that it would use the $37.8 billion from the Fed to improve the liquidity of its http://www.nytimes.com/2008/ I 0/09/business/economy /09insure.html ?sq=aig&st=cse&sc... 10/9/2008 A.I.G. to Get Additional $37.8 Billion - NYTimes.com Page 2 of2 securities lending business, which is losing cash rapidly. By stopping that flow, A.I.G. said, it would be able to preserve more of the Fed loan and use that money more effectively to wind down the affairs of A.I.G.'s troubled structured finance division, known as the financial products unit. Under the latest agreement, the Federal Reserve Bank of New York will accept up to $37.8 billion of fixed- income securities from A.I.G.'s regulated life insurance subsidiaries and will give the subsidiaries cash collateral in return. That will help the insurance subsidiaries to settle existing transactions in their securities lending business. In that business, the insurers lent securities to investors, like hedge funds, and received both the value of the securities and a fee in return. The insurers then invested those funds in other instruments, such as mortgage- backed securities. But now that the value of mortgage-backed securities has plummeted, A.I.G.'s insurance subsidiaries do not have the money to repay their securities-lending partners when they bring back the securities they borrowed and want their money back. By stepping in and permitting A.I.G. to lend the securities onward to the New York Fed, the Fed will allow A.I.G. to preserve cash. It will also keep A.I.G. from having to mark down the value of the securities at a time when their market value is constantly changing. The central bank said that the new program would help A.I.G. use cash more effectively and provide enhanced credit protection to the taxpayers, who stand behind the $85 billion loan. Michael J. de la Merced and Sharon Otterman contributed reporting. CmlYr!gb12..Q!!8. I!J!!.NllW.~Ilm..ltlL~Qm.P.!Im: Privacv Policv I ~ Ic~rrectlon'sl RSS I I First Look I ~ I Contact Us I Work for Us I ~ http://www.nytimes.com/2008/ I 0/09/business/economy /09insure.html?sq=aig&st=cse&sc... 10/9/2008 A.I.G. Takes Its Session in Hot Seat - NYTimes.com Page 1 of2 Ibt Nnu lork lime, n 'Y' t {ll'l e ~:; , c; () rr'l .',N"".'"'ONO.' FUR"" TSAR.' 'E'~. 5PC.S-ORE;J I..... .. ..-:'It October 8, 2008 A.I.G. Takes Its Session in Hot Seat By MJCHAEL.J.:.Jl.~J.!lME.RCED and SHAR..Ql'!LQTIE.RMA1'1 A day after Richard S. Fuld Jr. was compelled to explain the millions of dollars he made at Lehman Brothers, two former executives of the American International Group took their turns in government witness chairs on Tuesday, answering critical questions from lawmakers about business and pay practices and outsize spending that continued even after the company received an $85 billion lifeline from the government. One particular point of contention during the hearing before the House Oversight and Government Reform Committee was a weeklong retreat that a life insurance subsidiary, AIG General, held for its top sales agents at the St. Regis Resort in Monarch Beach, Calif., only a week after the government extended its $85 billion loan last month. The $442,000 in expenses for the week included $150,000 for food and $23,000 in spa charges, according to documents obtained by the committee. Joe Norton, A.I.G.'s director of public relations, said in an interview that the event had been scheduled last year, though he did not know whether executives had considered canceling the retreat after the bailout. In addition to questions about spending, the two A.I.G. executives who appeared before legislators, Martin J. Sullivan and Robert B. Willumstad, faced sometimes heated inquiries into risky bets by the company on complicated financial products that insured mortgage-backed securities. A.I.G., for decades the largest insurance company in the world, must now sell wide swaths of its businesses to repay the government loan, made because of the potential catastrophe that the company's bankruptcy would have unleashed. Mr. Sullivan was criticized for his reassurances to investors about A.I.G.'s health in December despite warnings from company auditors that its exposure to those contracts was growing. And many legislators berated the two men for large pay packages dispensed to top executives despite evidence that the company's financial health had begun deteriorating in 2007. Mr. Sullivan was questioned by several lawmakers over why he had requested that accounting losses from A.I.G.'s exposure to these swaps be excluded from calculating one particular compensation plan. The two former executives also took criticism from their outspoken predecessor, Maurice R. Greenberg, who sought to deflect responsibility in a statement to the committee. Yet Mr. Greenberg, who also questioned the need for the government's de facto takeover of the company as part of its rescue package, declined to appear, citing illness. http://www.nytimes.com/2008/ 1 0/08/business/economy /08insure.html ?sq=aig&st=cse&sc... 10/9/2008 A.I.G. Takes Its Session in Hot Seat - NYTimes.com Page 2 of2 The nearly five-hour hearing was the second this week held by the House committee after the pointed questioning on Monday of Mr. Fuld about the collapse of Lehman, the investment bank he led. Committee members, led by Henry A. Waxman of California, are seeking more information from troubled financial companies after the passage of the Bush administration's $700 billion bailout plan last week and the chaos gripping the markets. "A.I.G. had to be bailed out by taxpayers because of your investments in credit-default swaps," Carolyn Maloney, Democrat of New York, said. "I don't believe any of your management deserves a bonus." Mr. Sullivan, who was ousted as A.I.G.'s chief executive in June, and Mr. Willumstad, who was the company's chairman before succeeding Mr. Sullivan, blamed wider market tremors for the company's stumbles. They also attributed A.I.G.'s $25 billion in write-downs to mark-to-market accounting rules, which forced the company to take paper losses that led to debilitating credit downgrades. Yet both Democratic and Republican lawmakers dismissed those arguments, citing testimony from a former chief accountant for the Securities and Exchange Commission. "A.I.G. is blaming its downfall on accounting rules which require it to disclose losses to its investors," the witness, Lynn E. Turner, said. "That's like blaming the thermometer, folks, for a fever." Instead, lawmakers focused on efforts by company management to shield inquiries into the London subsidiary that had underwritten the derivatives contracts that became devalued during the global credit !;risis. Both PricewaterhouseCoopers, the company's auditor, and an independent accountant complained of a lack of access to the London unit and its leader, Joseph Cassano. The accountant, Joseph St. Denis, said in a statement to the committee that he had been deliberately blocked from questioning Mr. Cassano because he might "pollute the process." Mr. St. Denis later resigned in protest. Mr. Cassano has continued to draw $1 million a month in consulting fees from A.I.G., a fact that aroused ire from several lawmakers. He earned $280 million over the last eight years. For his part, Mr. Greenberg sought in his written statement to cast A.I.G.'s troubles as arising after he left in 2005, under the shadow of an accounting inquiry. "When 1 leftA.I.G., the company operated in 130 countries and employed approximately 92,000 people," Mr. Greenberg said in a statement. "Today, the company we built up over almost four decades has been virtually destroyed." When asked about Mr. Greenberg's contention that risk controls at A.I.G. had loosened after his departure, Mr. Sullivan argued that risk controls had actually tightened since then. COJly[jgN;!O_Oe Th!!N!!w.YorUim!!$ComJl~nY Priv~~~ I Search I QQrrections I_~~J I Eilli..!.QQJ\ I ~ I Contact Us I Work for Us I Site MaD http://www.nytimes.com/2008/ I 0/08/business/economy /08insure.html ?sq=aig&st=cse&sc... 10/9/2008 A.I.G. Uses $61 Billion of Fed Loan - NYTimes.com Page 1 of2 C!~t Nt\1J l10rklimes n'il,n)CJ~; conl ORiNTER.rRIENOlY F'l~I4At ~~..' S PCNS-OREO BY .&..~.'" October 4, 2008 A.I.G. Uses $61 Billion of Fed Loan By MARY_WIL..YAM.-S_WALSH The hmerican International GrQill2 said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies. The emergency loan was supposed to buy the company time to sell its troubled assets in an orderly manner. But the sell-off has not yet begun, and now the insurer faces the additional pressure of trying to sell the businesses at a time when potential buyers are having trouble borrowing money. Moody's downgraded A.I.G.'s senior unsecured debt on Friday and said it might downgrade other types of the company's debt, which could make it more expensive for A.I.G. to borrow money and do business. A.I.G.'s chief executive, Edward M. Liddy, told securities analysts on Friday that $53 billion to $54 billion of the Fed's loan had gone to shore up A.I.G.'s troubled structured-finance unit and its securities lending business. Another big block of the Fed's money has been used to support A.I.G.'s daily operations, Mr. Liddy said in a conference call, because demand for the company's commercial paper has dried up as a result of the worldwide credit crisis. After the conference call, Standard & Poor's said it had changed A.I.G.'s credit watch status to negative, expressing concern about whether A.I.G. would be able torestructure with the help of the Fed, as planned. The change indicated that a downgrade could be coming. It was a series of downgrades in A.I.G.'s credit ratings in mid-September that set off certain contractual provisions requiring the insurer to post billions of dollars of collateral with its trading partners, a catastrophic event that led to the huge federal bailout. Since then, A.I.G. has not released any information about whether additional ratings downgrades would lead to any additional collateral calls. Both ratings agencies cited concerns about A.I.G.'s rapid use of the Fed's loan. "The $61 billion draw to date on the facility is much larger than we had previously anticipated," said Rodney A. Clark, an analyst with Standard & Poor's, explaining the change in outlook. A.I.G. is required to pay back its borrowings from the Fed within two years. Mr. Clark said that to raise the money, the rapid drawdown of the loan made it likely that A.I.G. would have to sell off more businesses than Standard & Poor's had expected. http://www.nytimes.com/2008/ I 0/04/business/04insure.html ?sq=aig&st=cse&scp=6&page... 10/9/2008 A.LG. Uses $61 Billion of Fed Loan - NYTimes.com Page 2 of2 This would leave "a much smaller and less diversified A.I.G." to payoff a proportionally bigger debt to the Fed, Standard & Poor's said in a statement. In the conference call, Mr. Liddy detailed which of A.I.G.'s subsidiaries he intended to keep and which he was putting up for sale. Over all, he said, the company would hold on to its property and casualty insurance business in the United States and its general insurance businesses outside the country. Together, they generated revenue of about $40 billion in 2007. In addition, Mr. Liddy said A.I.G. would keep a continuing ownership in its foreign life insurance businesses, most of which operate in Asia. Other than that, he said, virtually everything else under A.I.G.'s corporate umbrella was for sale. That would include its life insurance companies in the United States, its retirement operations on four continents, its aircraft leasing business, its consumer finance business and other lines of insurance and reinsurance. Mr. Liddy said these were valuable businesses for which A.I.G. had already received many expressions of interest, although he acknowledged that there was a big difference between a nibble and an actual sale. He said that the Bla~kslQn~~rQJJP and JRMQr1m!LCh~~g had been hired to put the businesses up for sale. Earlier, Mr. Liddy had indicated that he hoped A.I.G. would be able to retain its life insurance business in the United States. But in the conference call on Friday, he said that solving the problems of the financial products unit, which dealt in complex debt securities and credit derivatives, "has caused us a lot of pain." "We do intend to wind down that operation," he said. "It is not something you can announce on Friday and expect to do by Monday." Mr. Liddy said that all of the energy being expended on that troubled unit was aimed at winding down its affairs - not getting them up and running again. "We are not entering into any new activity" there, he said. In response to questions, Mr. Liddy said it was impossible to say exactly how much money A.I.G. would have to raise to pay back the Fed and emerge from its crisis as a smaller company with adequate capital. "It's kind of a Rubik's Cube," he said. "We need to be very flexible" because of the fluid economic environment. He said that in addition to using the $85 billion Fed loan, A.I.G. would be able to participate in the $700 billion bailout program signed into law by President Bush on Friday. The additional help from the Treasury might ease some of its financial burdens, Mr. Liddy said. C9Py.rlQ.hUO.Q!l Th!!N!!w...YQrkT.iml'~..CQmp<!ny. Privacy Polk:y IS_a.~ I Corrections I RSS I I ElrMJ...QQ!\ I ~ I C.2...I11~ I WQfJ!JQL!JJ!. I ~jj!!Ml!R http://www.nytimes.com/2008/ 1 0/04/business/04insure.html ?sq=aig&st=cse&scp=6&page... 10/9/2008 Breakingviews.com - When $85 Billion Just Isn't Enough - NYTimes.com Page I of2 itlJr :Xe\u t)ork llmts ;-1 y t I f )'~ f~~ c_.'; ~., I':,.. I;' .~ HTEA ,RIEHOLY "JR'U' TBASIlHE SPCldOUO .,' ~HI M October 10, 2008 llREAKJNGVIEWS.COM When $85 Billion Just Isn't Enough By LAUREN SILVA and DWIGHT CASS When $85 Billion Just Isn't Enough If it were one of its own customers, American International Group would struggle to get a life insurance policy. The company took an $85 billion rescue loan from the Federal Reserve. It promised to sell pieces of itself to repay the loan, and gave the Fed the right to an 80 percent ownership stake. Now, A.I.G. has gone back to the Fed for $38 billion more. The move highlights how little may be left for shareholders. Consider A.I.G.'s asset sales. The top lots on the block will probably be its overseas life and retirement businesses. If the company could sell all of these for, say, 10 times 2008 estimated earnings, it could bring in some $50 billion. The company's United States life and retirement business might fetch about $20 billion if sold at eight times earnings, which would be closer to the valuation of a rival, MetLife, today. Then there is A.I.G.'s aircraft leasing business, now on the group's books at $7.5 billion. A.I.G. might collect another $10 billion selling things like a stake in the fund manager Blackstone and real estate like the Stowe Mountain Resort in Vermont. Add it all up and A.I.G. would have $87.5 billion on hand. As oflast Wednesday, A.I.G. had drawn down $61 billion from the Fed. Going back for more on Wednesday suggests it is close to exhausting the full $85 billion that the Fed originally offered. With the additional $38 million from the Fed, then, A.I.G. will owe the Fed up to $123 billion. After selling its other businesses and repaying that amount to the Fed, A.I.G. would still have its property and casualty arm. At nine times earnings - generous, considering that Travelers trades at six times - the business would be worth around $37 billion. Net that against the remaining Fed debt, and shareholders might have $1.5 billion of value left over, if they don't have to repay pre-existing lenders. That's less than a quarter of the current market capitalization - and the Fed's hugely dilutive shareholding will leave much less for other shareholders. Of course, A.I.G. would also still own the financial assets that have caused so much trouble. They have been written down heavily, but markets are still deteriorating. An upturn or the government's rescue program could increase their worth. But right now there isn't much value for shareholders to hang their hopes on. A Day of Reckoning Wall Street and its regulators are gnawing their fingernails. Financial firms are about to learn how much they http://www.nytimcs.com/2008/10/10/businessIlOviews.html?pagewanted=print 1011 0/2008 Breakingviews.com - When $85 Billion Just Isn't Enough - NYTimes.com Page 2 of2 stand to gain - or lose - on derivatives linked to Lehman Brothers' credit. Banks, hedge funds and others use the credit:::defaultswap. market to sell and buy protection against borrowers' defaults. Protection sellers agree to pay buyers the difference between the face value of the debt, usually 100 cents on the dollar, and what investors expect to recover through the bankruptcy process. Lehman, which filed for bankruptcy last month, has about $113 billion of bonds outstanding, according to Reuters Knowledge. It's impossible to know how much protection has been written on that debt, because credit derivatives are privately negotiated and not all buyers of protection hold the underlying debt. It's likely that the amount of C.D.S. linked to Lehman is at least several times the size of its borrowings. A representative Lehman bond that fetched 95 cents on the dollar in late August is now trading at about 11 cents. Firms that sold credit protection on that debt should expect similarly big losses. Bond prices aren't an exact barometer of C.D.S. losses, however, in part because of the different characteristics and holding costs of derivatives and bonds. So, after a default, derivatives buyers and sellers use an auction-based system to come to a consensus forecast on potential recovery. Sellers subtract that from 100, multiply the result by the amount of C.D.S. protection they've sold and that's what they owe protection buyers. The Lehman C.D.S. auction process is set for today. Large amounts of cash are likely to change hands as a result. But there's a winner for every loser in this market, so the net effect on the financial system should be minimal. Except that no one knows if all the losers will be able to pay - and that's what has Wall Street worried. LAUREN SILVA and DWIGHT CASS For more independent financial commentary and analysis, visit www.breakingviews.com. C9.pY,r:!ght2,QQe IIJ"N~_Y9r:!1,.Ilm""C9.mpl!!U ~rIvacy Policy I St.mI1 I C~ I RSS II EkJ1..I.22k I liem I Contact Us I 'lQr.!l.1otlIt I S~ http://www.nytimes.comI2008/10/1 O/business/I Oviews.html?pagewanted=print 10/10/2008 Market Place - Insurance Industry Joins Banking Giants on the Hot Seat - NYTimes.com Page 1 of 3 i:lJt ~rtu lork ~mt,G r" t In c.:~_; (" .~NT[R rRIENOLY Fa~..., T~.m., ~P:kS.OAE.o!V _ n..::. n October 10, 2008 MARKET PL>\CE Insurance Industry Joins Banking Giants on the Hot Seat By MARYWILUAMS WALSH Months after the stocks of big Wall Street financial firms first came under attack, insurance companies are now being battered, suggesting that a similar round of consolidation and recapitalization may be in store for that industry. Insurance stocks have plunged more than 30 percent in the last five days, with Prudential Financial the big loser on Thursday. Prudential's stock fell $10.02, to $33.27 a share, and it is now 42 percent lower than a week ago. A United States senator's offhand remark hurt the group last week, but the group is continuing to suffer far more than the broader market. Investors are worried about falling earnings and the prospect that many in the sector may need additional capital, which would dilute their own shares. Hartford Financial Services Group raised $2.5 billion by selling shares to Allianz, the German insurer, on Monday. The Hartford's shares closed at $20.11 Thursday, down $4.75. MetLife, the largest American life insurer, which warned earnings would be sharply lower in the third quarter, raised $2 billion in a stock sale on Wednesday. Even though existing shareholders were left with a smaller stake in the company, investors seemed heartened that the company could get funds readily, making it one of the few winners on a day when all 30 stocks in the Dow Jones industrial average fell. MetLife closed at $28 a share, up $1. When the government bailed out American International Group, there was little talk of a widespread downturn in the insurance industry. A.I.G. was seen as unique because it was a large issuer of a type of derivatives contracts that were far less prevalent at other insurers. Those derivatives brought A.I.G. to the precipice. But now a wave of losses is moving throughout the insurance industry, caused by the seize-up of the credit markets and declining investment values. "Insurance companies tend to focus on high-quality investments," said Douglas L. Meyer, an insurance analyst at Fitch Ratings. When the declines were mainly in the lower-quality investments, he said, the industry was relatively sheltered from harm. Now, though, Mr. Meyer said, "the depths of the current credit crunch is starting to affect the high-grade securities, so that's starting to affect the insurance companies more." For now, analysts do not see insurers in precarious situations. But if the investment losses keep mounting, they will start eating away at insurers' capital. Even insurers with conservative investment portfolios, like http://www.nytimes.comI2008/1 0/ I O/business/l Oplace.html?pagewanted=print 10/1 0/2008 Market Place - Insurance Industry Joins Banking Giants on the Hot Seat - NYTimes.com Page 2 of3 MetLife, are not immune. The investment losses will also pose a problem for insurers with big retirement divisions, especially life insurance companies. They deal in investment products that guarantee a certain rate of return. Now the insurers will have to make those payments out of their diminished assets. Insurers whose business models involve large amounts of short-term paper, or other obligations that are maturing soon, also risk being caught short if the credit markets stay frozen. If they have to start selling securities to produce the cash to pay their obligations, they could end up dumping the instruments in a market that has many sellers and almost no buyers. "If the distressed market conditions persist, this will negatively impact insurance company liquidity," Mr. Meyer said. Fitch lowered its outlook for the life insurance sector to negative from stable at the end of September. It said it thought some insurers had delayed recognizing unrealized investment losses this year, in hopes their impaired assets would regain value. But that has not happened, so the industry is likely to write down more impaired assets in the coming months. Weaker institutions may have trouble raising new money if their capital is eroded, and the government may be unwilling to come to the aid of more insurers after rescuing A.I.G. That suggests a consolidation and reshaping of the industry is in store. Though MetLife was one of the first big insurers to raise capital in this downturn, it appears to be one of the least in need. Even before it sold 75 million shares for $26.50 a share Wednesday, it had some $4 billion more than the level associated with a strong capital base. John Hall, a securities analyst at Wachovia, said in a report issued Thursday that he saw MetLife's stock sale "as a pre-emptive maneuver to facilitate the company's ability to take advantage of emerging strategic opportunities, including the possible acquisition of A.I.G. units." A.I.G. has announced it is selling a large number of its insurance subsidiaries to raise money to payoff its $85 billion bridge loan from the Federal Reserve. MetLife, meanwhile, has expressed an interest in expanding its foreign operations. As of Thursday, Hartford Financial Services had been among the most punished by investors. Its stock has lost more than half its market value this month, prompting the Connecticut insurance commissioner, Thomas R. Sullivan, to issue a statement on Thursday that the Hartford's "financial strength remains solid." Hartford's slide began in earnest after a comment by Senator HaJJ"YReid, Democrat of Nevada and the majority leader, during the debate over the $700 billion Treasury bailout program. Mr Reid said in a television interview that he had heard that a major insurer, "one with a name that everyone knows," was on the verge of going bankrupt. He later said he misspoke. Property and casualty insurers tend to be somewhat less vulnerable to investment fluctuations than life http://www.nytimes.com/2008/10/10/business/l0place.html?pagewanted=print 1011 0/2008 Market Place - Insurance Industry Joins Banking Giants on the Hot Seat - NYTimes.com Page 3 of3 insurers, but they are also showing signs of strain. Even the A shares of Warren E. Buffett's well-known holding company, .B~r.ks.hireJ::Iath~way, have lost market value, closing Thursday at $114,000, down $4,000 a share, and off 17 percent in the last five days. Mr. Buffett is nevertheless making big investments in municipal bond insurance and in companies like GQldmjJ.J]B~l<;:hs and G~J:teral El~J;;tri~. But most insurers are under siege. Prudential Financial issued a statement Thursday saying the operati~g income from its financial services businesses would be no more than $375 million in the third quarter, compared with $907 million in the third quarter last year. Along with other investment losses, Prudential will write down investments on securities in Lehman Brothers, A.LG. and Wa-.ShingtonMutual. Prudential, which will issue its third-quarter earnings on Oct. 29, also said it was suspending a stock buyback program to conserve capital. CODvriaht 2008 The New York Times ComDanv Privacy Policv I ~ I Corrections I Rssll~J ~IContacl Us I Work for Us I SM.MIR http://www.nytimes.com/2008/ 1 0/ I O/business/ 1 Oplace.html?pagewanted=print 10/1 0/2008 ~, 2008 208 PAGE A10 AIG's role in market crisis probed II Documents show company cxeC'Utives hid the full extent of the firm's risk)' financial product'; from auditors By Andrew Taylor ASSOCIATED PRESS WASHINGTON - Less than a week after the federal government had to bail out American Interna- tional Group Inc., the company sent executives on a $440,000 retreat to a posh California resort, lawmakers in- vestigating the company's meltdown said Tuesday. The tab included $23,380 worth of spa treatments for A1G employees at the coastal St. Regis resort south of Los Angeles even as the company tapped into an $85 billion loan from the government it needed to stave off bankruptcy. The retreat didn't include anyone from the financial products division that nearly drove A1G under, but lawmakers still were enraged over thousands of dollars spent on catered banquets, golf outings and visits to the resort's spa and salon for execu- tives of AIG's main U.S. life insur- ance subsidiary. "Average Americans are suffering economically. They're losing their jobs, their homes and their health insurance," House Oversight Com- mittee Chairman Henry Waxman, D- Los Angeles, scolded. "Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation." The hearing also revealed that AIG executives hid the full range of its risky financial products from au- ditors, both outside and inside the firm, as losses mounted, according to documents released Tuesday by a congressional panel examining the chain of events that forced the gov- ernment to bail out the conglomer- ate. The panel sharply criticized AIG's former top executives, who cast blame on one another for the compa- ny's financial woes. "You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insur- ance companies in the history of our country." said Rep. Carolyn Maloney, D-N.Y. "You were just gambling bil- lions, possibly tril- lions of dollars." AIG, crippled by huge losses linked to mortgage defaults, was forced last month to accept the $85 billion govern- ment loan that gives Sullivan the U.S. the right to an 80 percent stake in the company. Waxman unveiled documents showing, for instance, that federal regulators at the Office of Thrift Su- pervision warned in March that "cor- porate oversight of AIG Financial Products ... lack critical elements of independence." At the same time, Pricewaterhouse Cooper confiden- tially warned the company that the "root cause" of its mounting prob- lems was denying internal overseers in charge of limiting AIG's exposure access to what was going on in its highly leveraged financial products branch. Waxman also released testimony from former AIG auditor Joseph St. Denis, who resigned after being blocked from giving his input on how the firm estimated its liabilities. .-:-----..,.... 'A,.f Three former AIG executives were summoned to appear before the hearing. One of them, Maurice "Hank" Greenberg - who ran AIG for 38 years until 2005 - canceled his appearance citing illness but sub- mitted prepared testimony. In it, he blamed the company's financial woes on his successors, former CEOs Mar- tin Sullivan and Robert Willumstad. "When I left A1G, the company op- erated in 130 countries and employed approximately 92,000 people," Green- berg said. "Today, the company we built up over almost four decades has been virtually destroyed." Sullivan and WilIumstad, in turn, cast much of the blame on account- ing rules that forced A1G to take tens of billions of dollars in losses stem- ming from exposure to toxic mort- gage-related securities. Lawmakers also upbraided Sul- livan, who ran tbe firm from 2005 until June of this year, for urging AIG's board of directors to waive pay guidelines to win a $5 million bonus for 2007 - even as the company lost $5 billion in the 4th quarter of that year. Sullivan countered that he was mainly concerned with helping other senior executives. I...... 1 .... Monday, October 6, 2008 C5 DEALS e:3 DEAL MAKERS DEAL JOURNAL Breaking Insight From WSJ.com AIG Rings Bell: Feeding Frenzy Private- Equity Firms With Financiall1ppetite Put Its Portfolio on Menu BY HEIDI N. MOORE American International Group just revealed what many private-equity firms, banks and asset managers want to know about the com- pany's plan to pay back an $85 billion government loan: What's for dinner? Nearly every major pri- vate-equity firm with an inter- est in finance, including Hell- man & Friedman, TPG and Corsair Capital, are expected to scrutinize AIG's portfolio. AlG CEO Edward Liddy knows this has been the sale that many have been waiting for. On a conference call he said "dozens and dozens" of acquirers would step up and that demand for prop- erties "will be very high." Here is what American IrIterna- tional Group is putting on the block: the U.S. life, retirement and pensions businesses, the domes- tic personal-lines prop- erty-casualty business and at least a minority stake in its foreign life-in~ surance business. All of AlG's noninsurance busi- nesses, including air- craft leasing, consumer- finance division, U.S. auto insurance, a reinsur- ance business and asset manager, are also likely to be put on the block. Edward Liddy AlG will sell nearly its entire life-insurance business, which includes its life-insurance operations in the U.S., Latin Amer- ica and Japan, but will keep a con- trolling stake in AlA, its life-insur- ance division in China, India, Ko- rea, Singapore, Malaysia, Thai- land and Vietnam. The company expects earnings growth of about 20% in those developing markets. The AlG sale provides hope for many private-equity firms who need to deploy funds raised during the economic boom in 2006-07 and are looking for quality assets. They have been sitting on the sidelines for much of the credit crunch so far. Hellman & Friedmail., for instance, has been one of the few firms to buy something recently, with its joint acquisition of Lehman Brothers' ~- vestment-management unit. Hellman's Frank Zarb is a former interim chairman of AlG. TPG, for its part, has about $17 billion to spend and has had spotty luck with its fmandal in- vestments so far this year. The firm agreed to buy a 23% stake in U.K. mortgage lender Brad- ford & Bingley, but pulled out after the lender was down- grade~ sharply by ratings firms. TPG also invested in Washington Mutual as part of a $7 billion capital infusion, but took a $1.3 billion loss when WaMu was seized by the Federal Deposit Insurance Corp. and sold to J.P. Morgan. Last month, TPG dropped out of the bidding for Constel- lation Energy in the belief that Warren Buffett's Mid- American Energy Holdings had struck the deal under terms that would make it ex- pensive to break up. Read continuous updates on the high-stakes world of deal making, Deal Journal, free online at blogs.wsJ.com/deals S.c. Central Contra Costa Sanitary District October 10, 2008 TO: Budget & Finance Committee VIA: James Kelly, General Manage~ Randall Musgraves, Director of~dminVstration FROM: Debbie Ratcliff, Controller AIA-. SUBJECT: Arbitrage Report - 1998 Refunding Revenue Bonds Every five years, the IRS requires the District to perform an Arbitrage Rebate Calculation on each of its outstanding bond issuances. The purpose of the calculation is to compare the interest earnings on the original Construction Account and the existing Bond Reserve Account to the interest rate paid on the outstanding bonds. Any excess earnings over the interest expense must be rebated back to the federal government. This was done to prevent tax exempt bonds from being used as a mechanism for increased investment earnings. Willdan Financial Services (formerly MuniFinancial) has completed the Arbitrage Rebate Calculation for the 1998 Refunding Revenue Bonds. MuniFinancial was used to perform the calculation in 2003. For 2003, the District was required to rebate excess interest earnings to the IRS in the amount of $18,378. This issue has no rebate liability for the period beginning November 12, 1998 and ending September 1, 2008. The next installment computation date for this issue will be through September 1, 2013. N :\ADMI NSUP\ADMI N\RA TCLl FF\Arbitrage Report-2008.doc 5 . d.. Central Contra Costa Sanitary District October 10, 2008 TO: Budget & Finance Committee VIA: James Kelly, General Manager~ Randall Musgraves, Director ofldmin{stration FROM: Debbie Ratcliff, Controller //)L SUBJECT: LAIF Update Staff contacted the Director of LAIF to discuss the safety and liquidity of the District's and other agency's investments. The Director of LAIF indicated that there were no noticeable withdrawals taking place other than withdrawals for the regular short term cash needs of the various agencies. LAIF staff has been prudently trimming down investments in Yankee banks (foreign banks with domestic branches). The $14 billion that was invested in Yankee banks has been reduced to approximately $7 billion as of October 10 and will continue to decline to $2 billion as these short term investments mature. The last maturity date is January 30, 2009. Monies are being reinvested in U.S. Treasuries. The foreign banks include countries such as Canada, France, England, Scotland, Germany, Belgium, Australia, Sweden and Ireland. (See attached Market Valuation) Also attached is a letter from Bill Lockyer, Treasurer of the State of California, that explains that if the State of California exhausts its investments in LAIF, then the participation by the State's General Fund in LAIF is zero. There is no provision for the State to then use other agency's deposits in LAIF. On a related area, as we draw down the District's LAIF account to be used to pay vendors, contractors, and payroll, that money is deposited into an account with Wells Fargo. Each week, staff calculates the amount needed to be drawn down, and the County Treasurer's office has LAIF transfer the indicated amount. These deposits are in a Wells Fargo Account for a very short period of time, approximately a week. This minimizes any potential risk should the bank develop financial problems. N:\ADMINSUP\ADMIN\RATCLlFF\LAIF Update Memo 10-08.doc State of California Pooled Money Investment Account Market Valuation 8/31/2008 Carrying Cost Plus Description Accrued Interest Purch. Fair Value Accrued Interest United States Treasury: Bills $ 1,568,630,680.56 $ 1,580,792,000.00 NA Notes $ 1,849,660,767.76 $ 1,841,170,000.00 $ 16,093,074.00 Federal Agency: SBA $ 559,760,565.76 $ 557,919,513.10 $ 2,405,391.59 MBS-REMICs $ 1,098,525,973.12 $ 1,087,638,150.02 $ 5,212,459.41 Debentures $ 3,976,499,642.15 $ 3,983,219,313.75 $ 48,119,768.21 Debentures FR $ 6,562,084,871.94 $ 6,552,497,920.00 $ 19,637,946.69 Discount Notes $ 6,509,108,949.89 $ 6,545,827,000.00 NA FHLMC PC $ 27,964.31 $ 28,562.83 $ 473.98 GNMA $ 156,765.43 $ 176,878.25 $ 1,552.40 CDs and YCDs FR $ 200,000,000.00 $ 200,000,000.00 $ 497,830.72 Bank Notes $ 800,000,000.00 $ 800,037,980.00 $ 2,260,666.67 CDs and YCDs $ 10,756,239,066.39 $ 10,755,337,814.50 $ 45,151,737.86 Commercial Paper $ 9,007,966,706.89 $ 9,028,762,026.38 NA Corporate: Bonds FR $ 294,403,555.44 $ 294,055,740.14 $ 852,285.96 Bonds $ 118,961,756.58 $ 119,804,127.80 $ 1,309,442.57 Repurchase Agreements $ - NA Reverse Repurchase $ (491,050,000.00) $ (491,050,000.00) $ (81,968,777.78) Time Deposits $ 9,171,000,000.00 $ 9,171,000,000.00 NA AB 55 & GF Loans $ 12,738,252,118.58 $ 12,738,252,118.58 NA TOTAL $ 64,720,229,384.80 $ 64,765,469,145.35 $ 59,573,852.28 Fair Value Including Accrued Interest $ 64,825,042,997.63 Repurchase Agreements, Time Deposits, AB 55 & General Fund loans, and Reverse Repurchase agreements are carried at portfolio book value (carrying cost). LAIF Deposits Are YOUR Money Page 1 of 1 ~ :/..oek;-~ Ca{ifornia State 'Treasurer Pooled Money Investment Account LAIF Deposits Are YOUR Money As Treasurer of the State of California, I believe it is my duty as California's chief fiscal officer to do all that I can to preserve and protect the financial integrity of this state. I do not take that responsibility lightly. Consequently, I have commented publicly that a national economic stabilization plan is absolutely and urgently necessary to begin to restore investor confidence in financial marketplaces. I have not advocated the specifics of any proposal, but I have said and I am convinced that failure by Congress to enact a timely and effective plan jeopardizes the ability of public and private debt issuers to come to market. Chief among those imperiled public debt issuers at the moment is the State of California, though many of your jurisdictions have surely also been affected by the credit freeze. As Controller John Chiang and I have recently mentioned publicly, the State's cash reserves will be depleted by late October, making passage of a stabilization plan and unlocking the nation's credit market essential to permit the state to meet its cash needs before the end of the month. As State Treasurer I am also the steward of State money and Local Government money which is voluntarily commingled within the Pooled Money Investment Account (PMIA). The State's fiscal crisis has an impact on the PMIA, but only to the extent of determining the pro rata participation of the State in the commingled fund. If the cash reserves of the State of California are exhausted, then the participation by the State's General Fund in the PMIA is zero. Nothing more and nothing less. There is no correlation between General Fund cash reserves and your funds on deposit in the LAIF. Those funds were yours before they were deposited, they remain yours while on deposit, and they will be returned directly to you upon only your demand. I or my staff will be happy to answer any questions arising from my comments regarding the state's financial condition and the need for Federal intervention in the financial markets, or from any event that might ever cause you concern. If you have a question or concern, please contact the professionals in my Investment Division and LAIF unit. Sincerely, ~~ http://www.treasurer.ca.gov /pmia-laif/news/ deposits.asp 10/6/2008