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%. 

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

PURCHASE

DATE

MATURITY

DATE

ORIGINAL

COST

PERCENT

YIELD

Bear Stearns CO, Inc.,

Commercial Paper

UBS Finance Delaware

Commercial Paper

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

Action by the Board - Resolution
CONSENT CALENDAR

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.

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

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

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

Section VI.        Next Steps

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.

• 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.

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

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.