August 24, 2006
(For Board: September 8, 2006)

REPORT OF THE FINANCE-AUDITING COMMITTEE/
COMMITTEE OF THE WHOLE

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

Honorable Members:

A meeting of the Finance-Auditing Committee/Committee of the Whole was held in the Board Room, Administration Building, Toll Plaza, San Francisco, California, on Thursday, August 24, 2006, at 10:55 a.m., Chair Stroeh presiding.

Committee Members Present (8): Chair Stroeh; Vice Chair Pahre; Directors Boro, Eddie, Grosboll, Murray and Reilly; President Middlebrook (Ex Officio)
Committee Members Absent (1): Director Cochran
Other Directors Present (4): Directors Hernández, Martini, Moylan and Newhouse Segal

Committee of the Whole Members Present (12): Directors Eddie, Grosboll, Hernández, Martini, Murray, Newhouse Segal, Pahre, Reilly and Stroeh; Second Vice President Boro; First Vice President Moylan; President Middlebrook
Committee of the Whole Members Absent (7): Directors Ammiano, Brown, Cochran, Dufty, Kerns, McGoldrick and Sandoval

Staff Present: General Manager Celia G. Kupersmith; District Engineer Denis J. Mulligan; 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; Risk Management and Safety Director William L. Stafford; Director of Planning Alan R. Zahradnik; ; Public Affairs Director Mary C. Currie; Capital and Grant Programs Manager Gayle S. Prior; Assistant Clerk of the Board Karen B. Engbretson; Executive Assistant to the General Manager Amorette Ko

Visitors Present: Nancy Jones, Public Financial Management; Linda Slaughter, 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 disbursements and investments. A copy of the 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 noted that interest rates for longer-term securities, such as two-year U.S. Treasury Notes, peaked in late June and fell throughout July, decreasing by almost one-half of one percentage point in that period. Ms. Jones stated that the District’s Portfolio Manager has been extending the portfolio significantly, investing $25 million of the District’s portfolio in two-year, three-year and five-year securities at yields of between 5.25% and 5.53%, as part of a process begun in May 2006 to position the portfolio longer in case interest rates continue to fall. She stated that after 17 consecutive interest rate increases, the Federal Reserve Bank decided against a further increase at their meeting of August 8, 2006. She further noted that all economic indicators, such as the Gross Domestic Product, the housing market, employment, manufacturing and consumer spending, show that the economy is slowing down. She stated that the District’s portfolio is positioned well during this transition period in the market. The current investment strategy for the District’s portfolio is to reinvest maturing funds in intermediate-term securities targeted to the District’s long-term cash flow needs.

Staff recommended and the Committee concurred by motion made and seconded by Directors MURRAY/PAHRE 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 July 1, 2006, through July 31, 2006, totaling $14,745.75;
     
  b. Ratify investments made by the Auditor-Controller during the period July 18, 2006 through August 14, 2006, as follows;
     
SECURITY
PURCHASE
DATE

MATURITY

DATE

ORIGINAL

COST

PERCENT

YIELD

Dexia Delaware Commercial

Paper

07/19/06
08/07/06
2,963,765.08
5.25
FHLB Notes
07/19/06
06/28/11
5,014,550.00
5.531

UBS Finance Delaware

Commercial Paper

07/26/06
08/28/06
7,618,699.33
5.315

Morgan Stanley Commercial

Paper

07/26/06
08/07/06
10,633,359.00
5.25

Bank of America NA

Certificate of Deposit

08/02/06
09/14/06
6,299,000.86
5.375

Credit Suisse New York

Certificate of Deposit

08/04/06
09/05/06
4,945,000.00
5.31

General Electric Co.,

Commercial Paper

08/07/06
09/07/06
6,466,520.79
5.27

DEPFA Bank PLC NY,

Certificate of Deposit

08/07/06
09/07/06
12,000,000.00
5.30

Citigroup Funding, Inc.,

Commercial Paper

08/07/06
09/21/06
5,697,041.47
5.295

Deutsche Bank Financial, LLC,

Commercial Paper

08/10/06
09/11/06
10,045,809.61
5.26

 

     
  d.

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

Action by the Board - Resolution
CONSENT CALENDAR

     
 
AYES (11):  Directors Eddie, Grosboll, Hernández, Murray, Newhouse Segal, Pahre, Reilly and Stroeh; Second Vice President Boro; First Vice President Moylan; President Middlebrook
NOES (0):   None
     
2.
Authorize Budget Increase in the Bus and Ferry Divisions’ Operating Budgets for FY 06/07 Relative to State Operating Assistance Income
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith reported on staff’s recommendation to authorize budget increases in the FY 06/07 Bus and Ferry Divisions’ Operating Budgets relative to State Operating Assistance income.    

The report stated that on June 9, 2006, the Board adopted the FY 06/07 Operating and Capital Budget, which included State Operating Assistance income in the amount of $18,498,700.  Based on the final enacted FY 06/07 State Budget, transit operators will be receiving an increase in funding in this fiscal year.  This increase is attributed to the following factors:
 
  • Higher than expected prices for diesel fuel have resulted in a statewide increase of 21% in base State Transit Assistance funds, providing approximately $12.3 million for the Bay Area.
  • Funds resulting from the “spillover” provision of state law are projected to double due to skyrocketing fuel costs and a moderate overall state economy.  These “spillover” funds are expected to provide additional $87.6 million to the Bay Area.
  • The State of California will be repaying two prior years’ worth of Proposition 42 funds that have been previously suspended, and this payback will increase the Bay Area’s Proposition 42 increment to the base State Transit Assistance funds by $37 million.
     
 

The report also stated that the District’s share of the total increase in State Operating Assistance income is $5,175,399.  In accordance with the five-year Agreement with the Marin County Transit District for Marin Local Bus Service, $1,023,452 of the District’s share will be credited back to Marin County to support local transit services, with the remaining $4,151,947 available to support Golden Gate Transit regional bus and ferry services.  The report explained how the funding would be allocated by the Metropolitan Transportation Commission over the next three fiscal years.

The report further stated that it is recommended that the FY 06/07 Operating Budget reflect a total increase in the amount of $2,495,453 for State Operating Assistance income.  This additional funding will increase the Bus Division Operating Budget by $2,194,096 and increase the Ferry Division Operating Budget by $301,357.  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 EDDIE/REILLY to forward the following recommendation to the Board of Directors for its consideration:
     
 
RECOMMENDATION
     
 
The Finance-Auditing Committee recommends the Board of Directors authorize a budget increases in the Bus and Ferry Divisions’ Operating Budgets for FY 06/07 relative to State Operating Assistance income as a result of an increase in funding to transit operators, as follows:
  a.
Increase in the FY 06/07 Bus Division Operating Budget in the amount of $2,194,096; and,
  b.

Increase in the FY 06/07 Ferry Division Operating Budget in the amount of $301,357.

Action by the Board - Resolution
NON-CONSENT CALENDAR

     
 
AYES (11):  Directors Eddie, Grosboll, Hernández, Murray, Newhouse Segal, Pahre, Reilly and Stroeh; Second Vice President Boro; First Vice President Moylan; President Middlebrook
NOES (0):   None
     
 
[Note:  The above recommendation was forwarded to the Board of Directors meeting of August 25, 2006, for action.]
     
3. Discussion Regarding Updates to the Five- and Ten-Year Financial Projection
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire presented a report on the District’s financial projection for the ten-year period from FY 07/08 through FY 16/17. The report included the following sections, as well as a detailed narrative on each of these sections: Introduction: What is a Projection? Why is a Projection Essential; Fiscal Strength of the District; Projection Findings; Assumptions; and, Next Steps; as well as the following Appendices: Appendix A, Projection; Appendix B, Assumptions; Appendix C, Ten-Year Capital Plan Projection; Appendix D, Capital Contribution Calculation; and, Appendix E, Reserve Structure.

The report contained a five- and ten-year financial projection of operating and capital project revenues and costs to the District. The projection reflects the maintenance of all current policy decisions, including the current operating service levels, the current capital project schedule and the current revenue assumptions. Future policy decisions to change tolls, fares and/or service levels are not included in this projection.

The report stated that the fiscal strength of the District is best tracked by comparing the level of reserve funds available for operating and capital costs, with the time period necessary for the projected needs of the District to exhaust those resources. Historically, the District has maintained reserve funds for capital projects and operating expense emergencies. The FY 06/07 Operating and Capital Budget is expected to keep the reserves constant throughout the year, but it is anticipated that next year’s FY 07/08 Operating and Capital Budget will encumber all available reserve resources, due to large capital projects that begin in that fiscal year, such as the Main Cable Recoating project. The report noted that it is the policy of the District to have fully funded reserves to cover all its legal liabilities and commercial paper obligations. A full description of how the reserves will be managed for fiscal years FY 06/07 and FY 07/08 is outlined in the report and in Appendix E.

The report further stated that the projected ten-year deficit of $267 million is approximately $28 million less than last year’s $295 million estimate. The projected five-year deficit is $87 million, $2 million less than last year’s $89 million estimate. The report noted that the decision by the Board of Directors, at its meeting of August 11, 2006, to establish a trust for retiree post-employment health benefits, has resulted in less of a decrease in the deficit. This year’s financial projection includes an option to fully fund the first ten years of a 30-year amortization of the cost of retiree post-employment health benefits, in accordance with new Government Accounting Standards Board requirements. The report noted that if the option to fund this new trust were not included, the five-year deficit would be $65 million, which is an 85% reduction from the original $441 million deficit reported in 2002. Information supporting these numbers is included in the staff report and is further detailed in Appendix A. The report also described why the five- and ten-year deficits remain, noting that the operating budget is in deficit and multi-year plans to raise revenues are not yet in place. Once the operating budget is balanced and these multi-year plans are in place, the total deficit will be dramatically reduced or eliminated.

The report also contained a description of operating revenue and expense assumptions that were used to prepare the financial projections, which are listed in detail in Appendix B. Of note, this year’s projection includes changes in expenses due to higher projected commercial paper interest rates, future liability for retiree post-employment health benefits and FasTrak maintenance cost savings.

The report also described the capital program assumptions. The FY 07/08 through FY 16/17 Ten-Year Capital Projection, provided in Appendix C of the staff report, identifies $867 million in capital needs over the next ten years, requiring a District contribution of $220 million. This plan has been structured to systematically maintain and sustain existing Bridge, Bus and Ferry capital investments within existing staff resources. Grants are generally assumed to fund 80% of capital projects and 80% of core Bridge paint and rehabilitation projects, consistent with prior experience. The 80% grant funding assumption will be reviewed each year to reflect current experience. All projects have been reviewed and rated essential for the continued operation of the District, and the timing of each project balances the operational need for the project with the availability of staff resources to complete the project in a timely fashion. Project costs are inflated by 2.7% in the out-years based on the inflation factor used by the California Transportation Commission for the State Transportation Improvement Program.

The report further stated that the District will continue the process of addressing the projected deficit at a special Board of Directors meeting and workshop scheduled for September 8, 2006. The workshop will include education on the potential paths to balance the District’s long-term financial plan the merits of the various options, with the goal to produce a revised Strategic Plan for Achieving Long-Term Financial Stability for consideration by the Board. Staff plans to implement the plan in the years ahead, including incorporating it into the current FY 06/07 Operating and Capital Budget, where appropriate. A copy of the 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, describing the overall financial health of the District, as depicted in the chart on page three of the staff report. He noted that the total amount of reserve funds available for capital and operating has steadily increased over the past three fiscal years. Mr. Wire highlighted the inclusion in the financial projection of the option to fund the trust for retiree post-employment health benefits and how the funding of such a trust will impact the size of the five-year deficit. He further described the assumptions that were used to prepare the financial projection, noting that since the projection does not assume policy changes, the projection is based on current toll revenues. In addition, the projection reflects the Five-Year Fare Program adopted by the Board, but does not include fare revenue increases beyond those five years. In conclusion, Mr. Wire stated that the information presented in the financial projection would be used to continue the process of addressing the projected $87 million deficit during the strategic planning discussions at the Joint Board of Directors Meeting/Workshop on September 8, 2006.

Discussion ensued, including the following:

     
 
  • Director Pahre inquired regarding emergency reserves which are retained by the District in case of economic uncertainties.  In response, Mr. Wire explained the difference between unrestricted reserves and restricted reserves, as detailed in Appendix E of the staff report, stating that the unrestricted reserves include the capital reserves, the operating reserve and the emergency reserve.  He stated that under a policy set by the Board of Directors, the District funds the operating reserve at 7.5% of the budget and funds the emergency reserve at 3.5% of the budget.  The capital reserves are expected to be fully spent, while the operating and emergency reserves will remain fully funded throughout the baseline period in the financial projection.  He further explained that the emergency reserves can be used for an emergency event, or an emergency outlay for a particular capital project.   He also described the restricted reserves as those that are not available for operations or capital projects, such as the retiree health benefit reserve and the Bridge self-insurance loss reserve.
     
 
  • President Middlebrook inquired regarding the negative balance of $2,163,500 listed in Appendix E as the amount of reserves available for future capital projects.  In response, Mr. Wire explained that the figure appears as a negative amount because the money has already been allocated to future capital projects, although it will actually take up to five years to spend the entire capital reserves based on the length of time it takes to complete large capital projects.
     
 
  • Director Grosboll inquired as to whether the District has had an occasion to spend any of the operating or emergency reserves in the past few years.  In response, Mr. Wire explained that the District has not had to use the emergency reserve in the past five years, but has used the operating reserve on two occasions in FY 02/03 and FY 03/04 during the economic recession.  He further stated that the operating reserve is set up to be used in case there is a shortfall in revenues or higher than expected expenses in any particular budget. 
     
 
  • Director Murray made the following comments and inquiries:
    • She inquired as to whether the projection includes the “spillover” funds from the State of California that will be allocated to the District. In response, Mr. Wire stated that such “spillover” funds, included in the enacted FY 06/07 State Budget, will become available during the current fiscal year. He further stated that since the ten-year projection spans the period from FY 07/08 to FY 16/17, the “spillover” funds were not factored into the projection.
    • She inquired as to whether the projection includes Proposition 42 funds from the State of California that will be allocated to the District. In response, Mr. Wire answered in the affirmative. Ms. Kupersmith elaborated, stating that the previous item before the Committee, to approve a budget increase regarding State Operating Assistance income, includes Proposition 42 funds. She further stated that the District’s share of State Operating Assistance income will be spread out over three fiscal years, and that the funds allocated in FY 07/08 and FY 08/09 are included in the projection.
    • She suggested that the Board of Directors consider approving a position of support for Proposition 1B, the statewide Highway Safety, Traffic Reduction, Air Quality and Port Security Bond Act of 2006, also known as the Infrastructure Bonds. In response, Ms. Kupersmith stated that staff would prepare such a recommendation for presentation to the appropriate Committee and the Board.
     
 
  • Director Boro requested that staff prepare a list of District facility projects that could be funded with monies allocated from the Infrastructure Bonds, as well as show how that funding would impact the ten-year capital projection.  In response, Mr. Wire stated that staff would prepare such a list for discussion at a future meeting of the Finance-Auditing Committee.
     
 
  • Ms. Kupersmith announced that a Joint Board of Directors Meeting/Workshop will take place on September 8, 2006, and that the topic at the workshop will be the Strategic Plan for Achieving Long-Term Financial Stability.  She stated that the workshop will include a discussion on strategies to address the continuing deficit and build on work undertaken during the previous year by the Strategic Plan for Long-Term Financial Stability Advisory Committee. She noted that the September 8th meeting will be held off-site at the Log Cabin in the Presidio of San Francisco, beginning at 10:00 a.m. and lasting until approximately 2:00 p.m.

Action by the Board – None Required

     
4.
Review of Golden Gate Bridge Traffic/Tolls and Bus and Ferry Transit Patronage/Fares for One Month Ending July 31, 2006
     
 

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a schedule comparing categories of Bridge traffic for one month ending July 31, 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 One Month Ending July 31, 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 One Month Ending July 31, 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 One Month Ending July 31, 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. Closed Session
     
 

Attorney David Miller, at the request of Chair Stroeh, stated that the Committee would convene in closed session to discuss a matter of pending workers’ compensation litigation listed on the agenda as Item No. 9.a.1., Christine Kislowski vs. Golden Gate Bridge, Highway and Transportation District (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 one item of pending workers’ compensation litigation, as listed above.  Mr. Miller stated that with regard to the Item No. 9.a.1., Christine Kislowski vs. District, the Committee recommended that this matter be referred to the August 25, 2006 meeting of the Board of Directors for necessary action.

Action by the Board – None Required

     
6. Public Comment
     
 

There was no public comment.

     
7. Adjournment
     
 

All business having been concluded, the meeting was adjourned at 11:25 a.m.

     

 

Respectfully submitted,

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