July 27, 2006
(For Board: August 11, 2006)

REPORT OF THE FINANCE-AUDITING COMMITTEE

Honorable Board of Directors
Golden Gate Bridge, Highway
  and Transportation District

Honorable Members:

A meeting of the Finance-Auditing Committee was held in the Board Room, Administration Building, Toll Plaza, San Francisco, California, on Thursday, July 27, 2006, at 10:20 a.m., Chair Stroeh presiding.

Committee Members Present (5): Chair Stroeh; Directors Boro, Cochran and Martini; President Middlebrook (Ex Officio). Director Martini was appointed Committee Member Pro Tem for this meeting only.

Committee Members Absent (4): Vice Chair Pahre; Directors Eddie, Murray and Reilly

Other Directors Present (2): Directors Hernández and Newhouse Segal

Staff Present: General Manager Celia G. Kupersmith; Auditor-Controller Joseph M. Wire; Secretary of the District Janet S. Tarantino; Attorney David J. Miller; Deputy General Manager/Bridge Division Kary H. Witt; Deputy General Manager/Bus Division Susan C. Chiaroni; Deputy District Engineer and Acting District Engineer Ewa Z. Bauer; Public Affairs Director Mary C. Currie; Risk Management and Safety Director William L. Stafford; Terminal Superintendent and Acting Deputy General Manager/Ferry Division Rebecca Wessling; Budget and Program Analysis Manager Jennifer Mennucci; Executive Assistant to the General Manager Amorette Ko; Assistant Clerk of the Board Karen B. Engbretson

Visitors Present: Nancy Jones, Public Financial Management; Linda Slaughter, Randy Anger, Jeannette Mason and Jessica Mackey, Athens Administrators

     
1. Ratify Actions by the Auditor-Controller
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith outlined commitments, disbursements and investments made on behalf of the District.  A copy of the staff report is available in the Office of the District Secretary and on the District’s web site.

At the meeting, Nancy Jones described the latest economic news and current interest rates for the District’s portfolio.  She distributed a chart depicting yields for 2-Year U.S. Treasury Notes for the past five years.  She noted that it is significant that from July 2001 to July 2005, the yields for 2-Year U.S. Treasury Notes were under 4.0%, remaining low for quite a long time.  Ms. Jones noted that the current investment strategy for the District’s portfolio is to invest in shorter-term securities, since the yields on short-term securities are currently much higher than the yields on intermediate securities.  The District’s Portfolio Manager is also selectively investing a portion of the District’s portfolio in two-year and three-year securities at yields of between 5.50% and 5.55%, as part of a process begun in May 2006 to position the portfolio longer in case interest rates start falling.  She stated that it is assumed that the Federal Reserve Bank will soon reach the end of their course of raising interest rates, having increased interest rates 17 consecutive times.  Ms. Jones further stated that the District’s portfolio is currently earning an average of 4.54%. 

Discussion ensued, including the following:
     
 
  • Chair Stroeh inquired as to whether the fact that many institutional investors and banks are currently investing on a short-term basis would have an effect on the yields for short-term securities.  In response, Ms. Jones stated that while short-term securities are currently earning higher yields, short-term investors should be cautious about concentrating their entire portfolios in short-term securities.  She explained that any geopolitical event, such as the current turmoil in the Middle East, has a tendency to adversely affect the market and cause the market to go down.  She noted that in such an event, the yields on short-term securities decrease, and demand goes up for longer-term government securities such as 2‑Year U.S. Treasury Notes.
     
 
Staff recommended and the Committee concurred by motion made and seconded by Directors COCHRAN/BORO to forward the following recommendation to the Board of Directors for its consideration:
     
 
RECOMMENDATION
     
 

The Finance-Auditing Committee recommends that the Board of Directors authorize the following actions by the Auditor-Controller:

     
  a. Ratify commitments and/or expenditures for the period June 1, 2006, through June 30, 2006, totaling $44,759.76
     
  b. Ratify investments made by the Auditor-Controller during the period June 13, 2006, through July 17, 2006, as follows:
     

 

SECURITY

PURCHASE

DATE

MATURITY

DATE

ORIGINAL

COST

PERCENT

YIELD

Bear Stearns CO, Inc.,

Commercial Paper

06/19/06
07/19/06
7,960,221.75
5.22

UBS Finance Delaware

Commercial Paper

06/26/06
07/26/06
3,534,453.96
5.255
UBS Finance Delaware Commercial Paper
06/26/06
07/26/06
7,585,635.13
5.255
Dexia Delaware Commercial Paper
06/27/06
08/07/06
5,663,736.03
5.28
Credit Suisse New York Certificate of Deposit
06/29/06
08/04/06
4,920,000.00
5.32
Morgan Stanley Commercial Paper
06/30/06
07/26/06
7,057,037.51
5.27
Fortis Bank New York Certificate of Deposit
07/05/06
08/07/06
4,820,000.00
5.29
Citizens Bank (RB Scotland) Certificate of Deposit
07/10/06
08/10/06
10,000,000.00
5.33
FHLB Disc Note
07/10/06
07/12/06
6,328,199.47
5.12
Wells Fargo Bank NA Certificate of Deposit
07/12/06
08/02/06
6,328,997.15
5.28
     
  c.
Authorize the Auditor-Controller to re-invest, within the established policy of the Board, investments maturing between July 18, 2006, and August 14, 2006, as well as the investment of all other funds not required to cover expenditures that may become available.
     
  d.

Accept the Investment Report for June 2006 prepared by Public Financial Management.

Action by the Board - Resolution
CONSENT CALENDAR

     
  AYES (5):      Chair Stroeh; Directors Boro, Cochran and Martini; President Middlebrook (Ex Officio)
NOES (0):      None
ABSENT (4): Vice Chair Pahre; Directors Eddie, Murray and Reilly
     
2. Authorize Budget Adjustment Regarding the Execution of a Professional Services Agreement with Booz Allen Hamilton, Inc., Relative to RFP No. 2007-FT-2, Consultant to Provide Technical Specifications for Golden Gate Ferry Fare Equipment
     
 

This item was referred to the Finance-Auditing Committee from the Building and Operating Committee meeting of July 27, 2006, for concurrence with a budget adjustment.  In a memorandum to Committee, Deputy General Manager/Ferry Division James Swindler and General Manager Celia Kupersmith reported on staff’s recommendation regarding the execution of a professional services agreement with Booz Allen Hamilton, Inc., relative to RFP No. 2007-FT-2, Consultant to Provide Technical Specifications for Golden Gate Ferry Fare Equipment.  The report stated that this multi-year capital project to design and implement an automated fare gates and ticketing system for the Golden Gate Ferry is 100% grant funded with Regional Measure 2 funds in the amount of $1,600,000.  The report further stated that a budget adjustment in the amount of $115,000 is necessary in the FY 06/07 Ferry Division Capital Budget, in order to fully fund the current fiscal year’s projected costs of $165,000 for this project.  This recommended budget adjustment will be funded from the project’s future fiscal year’s budget.  A copy of the staff report is available in the Office of the District Secretary and on the District’s web site.

Staff recommended and the Committee concurred by motion made and seconded by Directors BORO/MIDDLEBROOK to forward the following recommendation to the Board of Directors for its consideration:
     
 
RECOMMENDATION
     
 

The Finance-Auditing Committee recommends that the Board of Directors authorize a budget adjustment in the amount of $115,000, in the FY 06/07 Ferry Division Capital Budget, to be funded from the project’s future fiscal year’s budget, regarding the execution of a professional services agreement with Booz Allen Hamilton, Inc., relative to RFP No. 2007-FT-2, Consultant to Provide Technical Specifications for Golden Gate Ferry Fare Equipment.

Action by the Board – Refer to the

Building and Operating Committee Meeting of July 27, 2006
     
  AYES (5):      Chair Stroeh; Directors Boro, Cochran and Martini; President Middlebrook (Ex Officio)
NOES (0):      None
ABSENT (4): Vice Chair Pahre; Directors Eddie, Murray and Reilly
     
3. Approve Actions Relative to GASB Guidelines on Accounting and Reporting Retiree Health Benefit Liabilities
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided staff’s recommendation regarding the creation of a trust to fund retiree health care and other post-employment liabilities. The report stated that the Government Accounting Standards Board (GASB) guidelines require the District to report liability for retiree benefits and encourage public agencies to provide for yearly pre-funding of these liabilities through a trust.

The report explained that the District currently follows a pay-as-you-go practice for paying the cost of retiree health benefits, i.e., only expensing the cost of retiree health benefits actually paid out each year. The report contained a chart which depicted how the pay-as-you-go practice would have a potentially exponential cost impact over the next few decades. The report further stated that the District has an estimated actuarial liability of $110 million for the future cost of retiree benefits already earned by current and past employees. The report noted that the average additional contribution needed to fully fund the 30-year amortization of the post-employment liabilities would be $4 million per year in each of the next five years.

The report contained six sections, detailing the options given to the Board as a result of several new GASB requirements on post-employment benefits, as follows:

 

Section I. The New GASB Requirements on Post-Employment Benefits;
Section II. The District’s Actuarial Liability for Post-Employment Benefits;
Section III. Decision to Fund the District’s Liability;
Section IV. Operation of the Trust and Future Actuarial Reports;
Section V. Feasibility of Funding the GASB Requirement; and,
Section VI. Next Steps.

     
 

Section I.           The New GASB Requirements on Post-Employment Benefits

The report described the specific GASB guidelines that govern post-employment (retiree) health benefits, requiring all public agencies to accrue the cost of the retiree health benefits they provide their employees and to show that on their balance sheet.  The two guidelines, GASB 43 and GASB 45, have different deadlines, depending on whether a public agency chooses to set up a trust or follow a pay-as-you-go method.  If the District elects to set up a trust, such a trust must by implemented by June 30, 2007, for FY 06/07.  If not, the pay-as-you-go financial reporting must be implemented by June 30, 2008, for FY 07/08.
     
 

Section II.         The District’s Actuarial Liability for Post-Employment Benefits

The report stated that in order to determine the District’s liability for retiree health benefits, staff undertook an actuarial study, as required by the GASB requirements.  The report noted that the District’s liability for post-employment benefits is made up of two parts:
  1.
Cost of benefits that have already been earned by either qualified retired employees or current employees; and,
  2.
The future cost of retiree medical benefits that current working employees are earning during the current fiscal year, in this case FY 06/07.
     
 
The report also stated that the total average cost of funding the unfunded liability would be $11.6 million per year.  The report noted that the yearly cost could change from year to year based on the actuarial studies that the District is required to undertake at least every other year.  The cost is influenced by changes in the cost of health care, the use of health care, the type of benefits provided and the number of eligible employees, retirees and their dependents.  All of these factors are in constant flux; and some are in the District’s control, while others are not.
     
 

Section III.        Decision to Fund the District’s Liability

This section of the report discussed the issues that would impact the Board’s decision as to the funding of the District’s liability for post-employment benefits, such as:
  1. Lack of future revenue growth;
  2. Debt holder concerns;
  3. Accuracy of expense;
  4. Increased investment earnings; and,
  5. Increased expenses now.
     
 
The report stated that staff recommends that staff be authorized to investigate options and to prepare documents for the Board’s approval to create a trust to fund retiree health benefits and other post-employment liabilities.  The options for financing the trust and the fiscal impact of those financing options will be brought to the Board during its yearly strategic planning and budget processes.
     
 

Section IV.        Operation of the Trust and Future Actuarial Reports

The report stated that if the District elects to fund its retiree health benefits through a trust, GASB requires that the trust be recognized for accounting purposes, that the trust be completely separate from the general fund of the District and that the assets, created by the trust, can only be used for post-employment benefits. The report provided additional details as to how such a trust would be operated, noting that the amount needed for contributions to the trust will be recalculated every other year by an actuary.

     
 

Section V.         Feasibility of Funding the GASB Requirement

The report explained the calculation of the average additional contribution needed to fully fund the 30-year amortization of the post-employment liabilities.   The actuarial amount of the unfunded liability of $11.6 million per year would be reduced by the amounts already budgeted under the District’s current practice, resulting in a net annual contribution of $4 million per year in each of the next five years, for a total of $20 million over that time period.
     
 

Section VI.        Next Steps

The report stated that the District fully intends to comply with the GASB reporting and accounting regulations.  If the Board chooses to continue its pay-as-you-go method of funding retiree health care, no further action is required by the Board.  If the Board approves the recommendation to set up a trust, staff will prepare the necessary documents and bring them to the Board in the next several months.  If directed by the Board, staff will include the cost of fully funding the trust as an option in the next financial projection due in the summer of 2006.  Options for financing the trust and the fiscal impact of those financing options will be brought to the Board during the yearly strategic planning and budget processes, under the principle that the Board would move away from funding retiree benefit costs on a pay-as-you-go basis.  A copy of the staff report is available in the Office of the District Secretary and on the District’s web site.
     
 

At the meeting, Joseph Wire summarized the staff report, noting that staff has kept the Board of Directors apprised of these GASB guidelines regarding post-employment benefits since they were adopted by GASB in June 2004, and that this recommended action would be the first opportunity for the District to proactively manage its retiree health care and other post-employment liabilities.

Discussion ensued, including the following:
     
 
  • Director Martini made the following inquiries:
    • He inquired as to whether the District has the option of graduating its contribution to the trust, for example, beginning with an amount totaling 50% of the recommended contribution and steadily increasing the amount of the contribution each year until it reached 100%. In response, Mr. Wire stated that the Board would have an opportunity to choose from a variety of funding options for the trust during the annual budget process, including his suggested option.
    • He inquired as to how the District would mitigate the relatively high risk associated with investing the post-employment liability trust funds at a high rate of return. In response, Mr. Wire stated that the investment policy established for the trust would balance the risk depending on the rate of return selected for the trust fund investments. He provided an example of the California Public Employees Retirement System, which entity successfully balances the risk in its portfolio.
     
 
  • Director Boro made the following comments and inquiries:
    • He commended Mr. Wire on the comprehensive staff report, which in his opinion is the clearest explanation he has seen regarding a very complex subject.
    • He inquired as to what would transpire if the trust fund did not meet the expected rate of return. In response, Mr. Wire stated that in such a situation, the Board would have the option to adjust the amount of the annual contribution to the trust fund.
    • He commented that retiree health care costs will continue to escalate as medical costs steadily increase, and suggested that one way to mitigate these expected cost increases would be to negotiate with active employees regarding their future retiree benefits.
    • He noted that the private sector has taken drastic steps to reduce costs associated with retiree benefits and pension plans.
     
 
  • Director Newhouse Segal inquired as to whether action by the Board on this matter is required before staff can proceed with addressing the issue of accounting and reporting retiree health benefit liabilities.  In response, Celia Kupersmith stated that at this time, staff is seeking a policy direction from the Board as to which course of action to pursue for funding retiree health care and other post-employment liabilities.
     
 
Staff recommended and the Committee concurred by motion made and seconded by Directors BORO/MARTINI to forward the following recommendation to the Board of Directors for its consideration:
     
 
RECOMMENDATION
     
 

The Finance-Auditing Committee recommends that the Board of Directors authorize staff to investigate options and prepare documents for the Board’s approval to create a trust to fund retiree health care and other post-employment liabilities, with the understanding that options for financing the trust and the fiscal impact of those financing options will be brought to the Board during the yearly strategic planning and budget processes under the principle that the Board would move away from funding retiree benefit costs on a pay-as-you-go basis.

Action by the Board - Resolution
NON-CONSENT CALENDAR

     
  AYES (5):      Chair Stroeh; Directors Boro, Cochran and Martini; President Middlebrook (Ex Officio)
NOES (0):      None
ABSENT (4): Vice Chair Pahre; Directors Eddie, Murray and Reilly
     
4.
Review of Golden Gate Bridge Traffic/Tolls and Bus and Ferry Transit Patronage/Fares for Twelve Months Ending June 30, 2006
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a schedule comparing categories of Bridge traffic for twelve months ending June 30, 2006.  A copy of the report is available in the Office of the District Secretary and on the District’s web site.

Action by the Board – None Required

     
5. Review of Financial Statements for Twelve Months Ending June 30, 2006
     
  a. Statement of Revenue and Expenses
     
   

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a financial statement entitled, Statement of Revenues and Expenses for Twelve Months Ending June 30, 2006. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

Action by the Board – None Required

     
  b. Statement of Capital Programs and Expenditures
     
   

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a financial statement entitled, Statement of Capital Programs and Expenditures for Twelve Months Ending June 30, 2006.  A copy of the report is available in the Office of the District Secretary and on the District’s web site.

Action by the Board – None Required
     
6. Review of Auditor-Controller’s Quarterly Report on Authorized Budget Adjustments and Budget Transfers
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a report summarizing budget adjustments and budget transfers authorized by the Board of Directors during the three-month period from April 1, 2006, through June 30, 2006.  A copy of the report, including attached charts outlining applicable budget adjustments and transfers, is available in the Office of the District Secretary.

Action by the Board – None Required

     
7.
Review of Auditor-Controller’s Quarterly Report on Contracts and Change Orders/Contract Amendments Executed Under the General Manager’s Authority
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a report summarizing all contracts and change orders executed under the General Manager’s procurement authority, as set forth in the Rules of the Board, during the three-month period from April 1, 2006, through June 30, 2006.  A copy of the report, including attached charts outlining applicable contracts and change orders, is available in the Office of the District Secretary.

Action by the Board – None Required

     
8. Closed Session
     
 

Attorney David Miller, at the request of Chair Stroeh, stated that the Committee would convene in closed session to discuss two matters of pending workers’ compensation litigation listed on the agenda as Item Nos. 9.a.1., James Johnson vs. Golden Gate Bridge, Highway and Transportation District (District) and 9.a.2, Samuel Knox, Jr., vs. District.

After closed session, Chair Stroeh called the meeting to order in open session with a quorum present. Attorney Miller reported that the Committee met in closed session, as permitted by the Brown Act, to discuss two items of pending workers’ compensation litigation, as listed above. Mr. Miller stated that with regard to the Item No. 9.a.1., James Johnson vs. District, the Committee recommended that this matter be referred to the July 28, 2006 meeting of the Board of Directors for necessary action. Mr. Miller further stated that with regard to Item No. 9.a.2., Samuel Knox, Jr., vs. District, the Committee provided settlement authority for disposition of this matter.

Action by the Board – None Required

     
9. Public Comment
     
  There was no public comment.
     
10. Adjournment
     
  All business having been concluded, the meeting was adjourned at 10:55 a.m.
     

Respectfully submitted,

/s/ J. Dietrich Stroeh, Chair
Finance-Auditing Committee