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HomeMy WebLinkAbout2008-02 ADM MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, February 13, 2008, at 5:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on February 13, 2008, at 5:00 p.m., in the Sanitation District's Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli, Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben, Vice Chair Administrative Services Bill Dalton Mike White, Controller Jon Dumitru Lilia Kovac, Committee Secretary Rich Freschi Bob Geggie Don Hansen Paul Loehr Darryl Miller Joy Neugebauer OTHERS PRESENT: Chris Norby Brad Hogin, General Counsel Christina Shea Christine Telish, PIMCO Jim Winder Paul Reitz, PIMCO Jim Ferryman, Board Chair Richard Kikuchi, Lance, Soil & Lunghard Doug Davert, Board Vice Chair DIRECTORS ABSENT: Sal Tinajero �ppTMEC�p (3) APPOINTMENT OF CHAIR PRO TEM FI D SANrtATgN d5�fPoCT No appointment was necessary. FEB 27 2008 (4) PUBLIC COMMENTS y�,/ There were no public comments. BY: (5) REPORT OF THE COMMITTEE CHAIR Chair Waldman welcomed new members Directors Shea and Hansen. (6) REPORT OF THE GENERAL MANAGER General Manager, Jim Ruth, did not give a report. Minutes of the Administration Committee February 13, 2008 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services, did not give a report. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, did not give a report. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the December 12, 2007 meeting of the Administration Committee. Directors Hansen and Shea abstained. END OF CONSENT CALENDAR (10) INFORMATIONAL ITEMS a. ADMO8-01 Investment Management Strategies Christine Telish and Paul Reitz from PIMCO, briefly presented the past performance investment strategy review and results of portfolio performance,which outperformed the Sanitation District's investment policy baseline. (11) ACTION ITEMS a. ADMO8-02 MOVED, SECONDED AND DULY CARRIED: 1)Approve a Purchase Order Contract with Lance, Soil& Lunghard, Certified Public Accountants renewing the second year of a two-year option for internal auditing services covering the period of March 1, 2008 through February 28, 2009 in the same not to exceed amount of$58,670 that was approved in the prior year; and 2) Direct Lance, Soil & Lunghard to perform specific internal auditing assignments as the Administration Committee deems necessary. b. ADMOB-03 After a brief discussion and clarification of the intent, the motion was revised to bring back to the Administration Committee staffs long-term recommendation as needed. It was then: MOVED, SECONDEDAND DULY CARRIED: Recommend to the Board of Directors to authorize the expiration of the Additional Retiree Benefit Account(AREA) agreement with Orange County Employees Retirement System (OCERS), and direct staff to administer the ARBA benefits to Minutes of the Administration Committee February 13, 2008 Page 3 retirees and to report back to the Committee staffs long-term recommendation as needed. C. ADM08-04 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to authorize Jim Ferryman, OCSD Chair,to enter into an agreement with Woodruff, Spradlin & Smart for legal services, appointing Bradley R. Hogin as Principal General Counsel with a rate schedule of $255/235/200/105 and automatic annual CPI increases. d. ADM08-05 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve the budget assumptions to be used for the preparation of the FY 2008-09 and FY 2009-10 two-year budget. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957(b)(1). There was no closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY Director Norby presented a brief overview of a tour of biosolids plant and field application in Kem County,and recommended that a group tour and public meeting be scheduled to meet with local lawmakers for land use discussions. Board Chair Ferryman reported that he had accepted a resolution of commendation from the Metropolitan Water District issued to the Orange County Sanitation District for the Groundwater Replenishment System. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (15) ADJOURNMENT The Chair declared the meeting adjourned at 6:20 p.m. The next regular Administration Committee meeting is scheduled for March 12, 2008, at 5 p.m. Submitted by: Lilia Kovac Committee Secretary STATE OF CALIFORNIA) ) SS. COUNTY OF ORANGE ) Pursuant to California Government Cade Section 54954.2, 1 hereby certify that the Notice and Agenda for the Administration Committee Meeting of Orange County Sanitation District to be held on February 13, 2008, was duly posted for public inspection in the main lobby of the Districts' offices on February 6, 2008. IN WITNESS WHEREOF, I have hereunto set my hand this 6th day of January 2008. c L is I ovac, Commiffeb Secretary Orange County Sanitation District HADEPTIAGENDA%DMIN COMMITTEEV.GENDA CENTIFICATION.DOC n ORANGE COUNTY SANITATION DISTRICT ph : NOTICE OF MEETING V 14)Bfi`c P41 l W: 11141%;'11Ihft ADMINISTRATION COMMITTEE a.sr aco4.tam Finance, Human Resources and Information Technology PU H.Ht I-nail.nl 1 987as 29 a 1 2) .nwt.Y,..s: m144Sh.l«.xl. ORANGE COUNTY SANITATION DISTRICT HP709 I018 Approve WEDNESDAY, FEBRUARY 13, 2008 - 5:00 P.M. Mae DISTRICT'S ADMINISTRATIVE OFFICES 10844 ELLIS AVENUE a1Obtl0a FOUNTAIN VALLEY, CALIFORNIA 92708 la,x,nl nun W W W.00SD.COM yiues:: h.. Main rwlernm lieldnn la.xn M:xlflnxtxl 9xan A regular meeting of the Administration Committee of the Orange a M.Ixa la rl.,el,a County Sanitation District will be held at the above location, date and time. M.o,x•1 Baaxi a n,'a Me. e rn.Au. S l ahp," mRT..:; sx: We Poll Ye:il,,a IIa:N Countv of Crones B.nit.ry Gletrlet. !.loot Mxxa M:JwdV 1]ry Water Gletricto I:v.lx H.nnl: To momtinn world-class Ieadersh,t in wastewater and water resource management. v xna, Ss "o 49 9 C,F�C�E EXy`p0 ADMINISTRATION COMMITTEE MEETING DATES Meeting Date Board Meeting Dates February 13, 2008 February 27, 2008 March 12, 2008 March 26, 2008 April 9, 2008 April 23, 2008 May 14, 2008 May 28, 2008 June 11, 2008 June 25, 2008 July 9, 2008 July 23, 2008 August - 2008 Dark August 27, 2008 September 10, 2008 'September 17, 2008 October 8, 2008 October 22, 2008 November 12, 2008 'November 19, 2008 December 10, 2008 `December 17, 2008 January— 2009 Dark January 28, 2009 *Meetings being held the third Wednesday of the month. ROLL CALL ADMINISTRATION COMMITTEE Finance, Human Resources and Information Technology Meeting Date: February 13, 2008 Time: 5:00 p.m. Adjourn: COMMITTEE MEMBERS (14) Mark Waldman Chair Phil Luebben Ice Chair Bill Dalton Jon Dumitru Rich Freschi Don Hansen Darryl Miller Joy Neu ebauer Chris Norb Christina Shea Sal Tina'ero Jim Winder James M. Ferryman Board Chair Doug Davert Board Vice Chair OTHERS Brad Ho in, General Counsel STAFF Jim Ruth, General Manager Bob Ghirelli, Assistant General Manager Nick Arhontes, Dir. of Operations & Maintenance Jim Herber , Director of Engineering Ed Torres, Director of Technical Services Lorenzo Tyner, Director of Finance and Administrative Services Lilia Kovac, Committee Secretary Jeff Reed, Human Resources and Employee Relations Mana er Mike White, Controller Kwepttagendawmin CommitteatP008W =02.Roll Cand. AGENDA REGULAR MEETING OF THE ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, FEBRUARY 13, 2008, AT 5:00 P.M. ADMINISTRATIVE OFFICE 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com (1) PLEDGE OF ALLEGIANCE (2) DECLARATION OF QUORUM (3) APPOINTMENT OF CHAIR PRO TEM, IF NECESSARY (4) PUBLIC COMMENTS (5) REPORT OF COMMITTEE CHAIR (6) REPORT OF GENERAL MANAGER (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES (8) REPORT OF GENERAL COUNSEL (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. Approve minutes of the December 12, 2007 meeting of the Administration Committee. Book Page I February 13, 2008 Page 2 END OF CONSENT CALENDAR b. Consideration of items deleted from Consent Calendar, if any. (10) INFORMATIONAL ITEMS a. ADM08-01 Investment Management Strategies (Book Page 9) (11) ACTION ITEMS a. ADMO8-02 1)Approve a Purchase Order Contract with Lance, Soil & Lunghard, Certified Public Accountants renewing the second year of a two-year option for internal auditing services covering the period of March 1, 2008 through February 28, 2009 in the same not to exceed amount of$58,670 that was approved in the prior year; and 2) Direct Lance, Soil & Lunghard to perform speck internal auditing assignments as the Administration Committee deems necessary. (Book Page 10) b. ADM08-03 Recommend to the Board of Directors to authorize the expiration of the Additional Retiree Benefit Account(ARBA) agreement with Orange County Employees Retirement System (OCERS), and direct staff to administer the AREA benefits to retirees until a suitable replacement third-party administrator can be procured. (Book Page 13) C. ADM08-04 Recommend to the Board of Directors to authorize Jim Ferryman, OCSD Chair, to enter into an agreement with Woodruff, Spradlin & Smart for legal services, appointing Bradley R. Hogin as Principal General Counsel with a rate schedule of$255/235/200/105 and automatic annual CPI increases. (Book Page 16) d. ADM08-05 Recommend to the Board of Directors to approve the budget assumptions to be used for the preparation of the FY 2008-09 and FY 2009-10 two-year budget. (Book Page 18) Book Page 2 February 13, 2008 Page 3 (12) CLOSED SESSION ..... . ..................-...........................-.................................._.......................-................_.........................................._..........................................-.....-...-....-.....---- Dudng the wurse of conducting Me business sat forth on this agenda as a regular meeting of the Committee, the Chair may convene the Committee in closed session to consider matters of pending real estate negotations, pending or potential litigation,or personnel matters, pursuant to Government Code Sections 54956.8, 54958.9, 54957 or 54957.6,as noted. Reports relating to (a) purchase and sale of real property; (b) matters of pending or potential litigation; (c) employee actions or negotiations with employee representatives; or which are exempt from public disclosure under the California Public Records Act, may be reviewed by the Committee during a permitted closed session and are not available for public inspection. At such time as final actions are taken by the Committee on any of these sub)ecle.the minWes.will reflect all required disclosures of information. a. Convene in closed session. b. Reconvene in regular session. c. Consideration of action, if any, on matters considered in closed session. (13) OTHER BUSINESS COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT (15) ADJOURNMENT: The next regular Administration Committee meeting is scheduled for March.12, 2008, at 5 P.M. Book Page 3 February 13, 2008 Page 4 Agenda Pcsfino: In accordance with the requirements of California Government Code Section 549542, this agenda has been posted in the main lobby of the District's Administrative offices not less than 72 hours prior to the meeting date and time above. All written materials relating to each agenda item are available for public inspection in the office of the Clerk of the Board. Items Not Posted: In the event any matter not listed on this agenda is proposed to be submitted to the Committee for discussion and/or action, it will be done in compliance with Section 54954.2(b) as an emergency item or because there is a need to take immediate action, which need came to the attenfion of the Committee subsequent to the posting of agenda, or as set forth on a supplemental agenda posted in the manner as above, not less than 72 hours prior to the meeting date. Public Comments: Any member of the public may address the Administration Committee on specific agenda items or matters of general interest. As determined by the Chair, speakers may be deterred until the specific Rem is taken for discussion and remarks may be limited to three minutes. Matters of interest addressed by a member of the public and not listed on this agenda cannot have action taken by the Committee except as authorized by Section 54954.2(b). Consent Calendar: Al matters placed on the consent calendar are considered as not requiring discussion or further explanation, and unless a particular Rem is requested to be removed from the consent calendar by a Director of staff member,there will be no separate discussion of these items. AR items on the consent calendar will be enacted by one action approving all motions,and casting a unanimous ballot for resolutions included on the consent calendar. AR items removed from the consent calendar shall be considered in the regular order of business. The Committee Chair will determine if any items are to be deleted from the consent calendar. Items Continued: Items may be continued from this meeting without further notice to a Committee meeting held within five(5)days of this meeting per Government Code Section 54954.2(b)(3). Meeting Adioumment: This meeting may be adjourned to a later time and items of business from this agenda may be considered at the later meeting by Order of Adjournment and Notice in accordance with Government Code Section 54955(posted within 24 hours). - Accommodations for the Disabled: The Board of Directors Meeting Room is wheelchair accessible. If you require any special disability related accommodations, please contact the Orange County Sanitation District Clerk of the Board's office at (714) 593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability and the type of accommodation requested. Notice to Committee Members: For any questions on the agenda or to place any items on the agenda, Committee members should contact the Committee Chair or Clerk of the Board ten days in advance of the Committee meeting. Committee Chair: Mark Waldman (714)827-1969 Committee Secretary: Lilia Kovac (714)593-7124 Ikovac@ocsd.com General Manager. Jim Ruth (714)593-7110 indh@ocsd.com Assistant General Manager Bob Ghirelli (714)593-7400 rghirelli0ocsd.com Director of Finance and Lorenzo Tyner (714)593.7550 Ityner(olocsd.com Administrative Services Human Resources and Employee Jeff Reed (714)593-7144 ireed(clociid.com Relations Manager H:Weptlagendal4tlmin CommfttW2008t0208W3.021308 Admin Agentladoc Book Page 4 February 13, 2008 ADMINISTRATION COMMITTEE AGENDA CALENDAR Item Action March Local Sewer Service Fee Program Action March Information and Technology Strategic Plan Informational March 2008-09 and 2009-10 Budget Update Informational Book Page 5 MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, December 12, 2007, at 6:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on December 12, 2007, at 5:00 p.m., in the Sanitation Districts Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli, Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben,Vice Chair Administrative Services Steven Choi Mike White, Controller Bill Dalton Rich Spencer, Employee Relations Supervisor Jon Dumitru Lille Kovac, Committee Secretary Darryl Miller Bob Geggie Joy Neugebauer Chris Norby OTHERS PRESENT: Ken Parker Brad Hogin, General Counsel Sal Tinajero Ed Soong, PRAG Jim Winder Larry Crandall, Operations Committee Chair Jim Ferryman, Board Chair DIRECTORS ABSENT: Rich Freschi Doug Davert, Board Vice Chair (3) APPOINTMENT OF CHAIR PRO TEM No appointment was necessary. (4) PUBLIC COMMENTS There were no public comments. (6) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. (6) REPORT OF THE GENERAL MANAGER General Manager,Jim Ruth, did not give a report. Book Page 6 Minutes of the Administration Committee December 12, 2007 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services, did not give a report. (8) REPORT OF GENERAL COUNSEL Bred Hogin, General Counsel, did not give a report. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the November 14, 2007 meeting of the Administration Committee. END OF CONSENT CALENDAR (10) ACTION ITEMS There were no action items. (11) INFORMATIONAL ITEMS a. ADM07-60 Leadership Academy Rich Spencer, Employee Relations Supervisor, briefly presented an overview of the training program designed to fill the Sanitation District's leadership training needs and management philosophy. The program will be presented to the Board of Directors for approval on December 19, 2007. Staff will explore the possibility of the participants acquiring college credits towards higher education. b. ADM07-61 Debt Financing Program Overview Director of Finance and Administration, Lorenzo Tyner, presented the Sanitation District's financing program broken into steps that identified the use, the reasons, and mechanics of issuance of Certificates of Participation for financing capital improvement projects. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 64957(b)(1). There was no closed session. Book Page 7 Minutes of the Administration Committee December 12, 2007 Page 3 (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS. IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (15) FUTURE MEETING DATES The next regular Administration Committee meeting Is scheduled for February 13, 2007. at 5 p.m. (16)ADJOURNMENT The Chair declared the meeting adjourned at 6:45 p.m. Submitted by: Lilief Kovac Committee Secretary Book Page 8 ADMINISTRATION COMMITTEE nemng 0a0e TOBd.or W. 02/13/W AGENDA REPORT 1.1.1n.. Bern Numbe Orange County Sanitation District ADMW1 FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: INVESTMENT MANAGEMENT STRATEGIES GENERAL MANAGER'S RECOMMENDATION Informational item. SUMMARY Pacific Investment Management Company (PIMCO), the District's external investment manager, will make a presentation at the Administration Committee Meeting on the results of the Investment Management Program at the December 31, 2007, mid-year point and to discuss PIMCO's economic outlook and strategy going forward. ADDITIONAL INFORMATION Attached in separately bound documents is PIMCO's Strategy Review of the Sanitation District's Investment Management Program for the quarter ended December 31, 2007. PRIOR COMMITTEE ACTION N/A JDR:LT:MW Fo,m No.oW mz 0 wMeoa.owvw Book Page 9 ADMINISTRATION COMMITTEE MaangDo" Tosd.ofDir. 02/13/07 AGENDA REPORT It Item Number ADMOS-02 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: RENEWAL OF THE INTERNAL AUDITING CONTRACT GENERAL MANAGER'S RECOMMENDATION (1) Approve a Purchase Order Contract with Lance, Soil & Lunghard, Certified Public Accountants renewing the second year of a two-year option for internal auditing services covering the period of March 1, 2008 through February 28, 2009 in the same not to exceed amount of$58,670 that was approved in the prior year; and (2) Direct Lance, Sall & Lunghard to perform specific internal auditing assignments as the Administration Committee deems necessary. SUMMARY At the direction of the Committee in FY 2005-06, staff solicited a request for proposal (RFP)to provide 600 hours of Internal Auditing Services, with the option of auditing the following two years at the Committee's discretion. The RFP was submitted to eight firms specializing in providing auditing services for local governments. After completion of the RFP process, Lance, Soil & Lunghard's (LSL) proposal was deemed to be the most qualified, and responsive to the Sanitation District's needs, and LSL was selected to serve as the Sanitation District's internal auditors. Based on the high level of work performed by LSL, and their willingness to conform to the Committees reporting timelines, the Administration Committee renewed their contract staff in February 2007. At this time, staff is again recommending that their contract be renewed for the second year of the two-year option renewal at the same not to exceed amount of$58,670 proposed during the initial contact year and the first year option renewal. Recommended Areas to Be Considered in Future Internal Audits Although staff has no knowledge of any improprieties or irregularities within the accounting or operational activities of the Sanitation District, following are typical areas the Committee may want to consider in future internal audits: Form N0.oVF10la 7, wo Ro -r Oep1.151 PwiveO',01I 7 Page 1 Book Page 10 i 1. Audit large contractors progress payments for accuracy and appropriateness. This would mean auditing their books and records to the progress payments. 2. Contract Management. 3. Proper billings to end users, including permittees. 4. Expenditures conform to Sanitation District Ordinances, Resolutions, policies and procedures. 5. Employee Expense Reports conform to Board Ordinances and Resolutions. 6. Employee Salaries and Benefits conform to Board Ordinances and Resolutions. 7. Credit Card purchases conform to policies and procedures. 8. Sanitation District Contributions are Board approved. 9. Sanitation District memberships conform to policies and procedures. 10. Comprehensive review of all key Accounting policies, procedures, and processes to ensure that all related internal controls are well designed, properly implemented, and adequately maintained. Staff recommends that the Committee direct the Sanitation District's contracted internal auditors to perform an internal audit review of the first item listed above. Staff believes that auditing large contractors for appropriate billings could generate the largest possible return on funds spent on contracted internal auditing services. PRIOR COMMITTEEIBOARD ACTIONS In February 2006, the Board approved a Purchase Order Contract with Lance, Soll & Lunghard, Certified Public Accountants, to serve as the Sanitation District's contracted internal auditors for fiscal year 2005-06, for the period of March 1, 2006 through February 28, 2007, for an amount not to exceed $58,670, and with an option to renew the contract for two one-year periods based on approval by the Administration Committee. In February 2007, the Administration Committee approved the first year renewal of the two-year renewal option on the Purchase Order Contract with Lance, Soil & Lunghard, Certified Public Accounts, to serve as the Sanitation District's contracted internal auditors for fiscal year 2006-07, for the period of March 1, 2007 through February 28, 2008, for an amount not to exceed $58,670. ADDITIONAL INFORMATION An Evaluation Team comprised of the Director of Finance, Controller, and Accounting Manager determined that Lance, Soil & Lunghard (LSL) was the best qualified firm to serve as the Sanitation District's internal auditors based on the following observations: 1. The firm has provided auditing services to local governments for over 75 years and has been consistently been named one of the "Top Accounting Firms" in Orange County by the Orange County Business Journal. Fom,No.R 1024 Ppenpa Re —F" Dap1.151 ga 1.01M1 7 Page 2 Book Page 1 I 2. They provided extensive examples on internal auditing services provided to other governmental clients. 3. They described in detail their thoroughness in conducting internal auditing services. Based on the Evaluation Team's recommendation, the Committee approved the selection of LSL to serve as the Sanitation District's internal auditors. During FY 2005-06, LSL completed an internal review of the Sanitation District's capital improvement program's procurement procedures and related internal controls and issued their independent account's report to the Committee in October 2006. During FY 2006-07, LSL completed an internal review of the Sanitation District's agreement with the Orange County Water District (OCWD) regarding the construction of the Groundwater Replenishment System, and audited the subsequent billings from OCWD to ensure conformity with the agreement. This proposed purchase order contract complies with authority levels of the Sanitation District's Delegation of Authority. This item has been budgeted. JDR:LT:MW FOM No.o 1M npenea�—FM Oop1.151 XeriaeE:01N Page 3 Book Page 12 ADMINISTRATION COMMITTEE MeeBng3 0 0o.8 013a FO8 roW718.. oz/3 / e AGENDA REPORT Number inn Number ADMDO-03 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: ADDITIONAL RETIREMENT BENEFIT ACCOUNT GENERAL MANAGER'S RECOMMENDATION Authorize the expiration of the Additional Retiree Benefit Account (ARBA) agreement with Orange County Employees Retirement System (OCERS), and direct staff to administer the ARBA benefits to retirees until a suitable replacement third-party administrator can be procured. SUMMARY The ARBA agreement with OCERS is scheduled to expire March 31, 2008. Prior to the Board's extension of the agreement, it was scheduled to expire December 31, 2007. The purpose of the extension was to allow staff an opportunity to review and analyze options for establishing a Retiree Medical Plan Trust (RMPT); whereby ARBA benefits would continue to be administered by OCERS. These options became available after Governor Schwarzenegger approved AB1124 on October 8, 2007, which allows for the contribution of funds through Post-Employment Benefits Trust Accounts. OCERS agreed to extend the existing ARBA agreement for a period of up to 90 days to allow OCSD time to establish the proposed trust agreement. Staff has concluded its analysis and has determined that an irrevocable trust agreement covering the ARBA benefits alone is not practicable. A recent actuarial valuation on the unfunded accrued liability (UAL) for ARBA and the OCSD-paid medical insurance benefit that includes only current and future retirees hired prior to July 1, 1988 is $7.4 million and $9.9 million, respectively. Both of these retiree medical plans are contained in the Memorandum of Understandings between OCSD and bargaining units. Staff does not believe that an irrevocable trust set up to partially fund only 42.8 percent of the total UAL is practical, and OCERS is not willing to include in the irrevocable trust funding and provide third-party administrative services for the OCSD-paid medical insurance benefit, or to continue to provide third-party administrative services for ARBA without the establishment of the trust. FO,m No.mim3 �,s. omimr Book Page 13 Moreover, staff does not believe that it is material to the District's financial assets taken as a whole, to set up an irrevocable trust to partially fund the UAL for both the ARBA and OCSD-paid medical insurance benefit, even if supported by OCERS. Based on this reasoning, the recommendation is for staff to perform the administrative duties of paying out ARBA benefits in the near term, and search for a third-party administrator to provide this service on an ongoing basis. The in-house cost to administer ARBA payments is approximately $920 a month, which can be absorbed in the interim by existing resources. PRIOR COMMITTEEIBOARD ACTIONS November 2007: The Board approved an extension of the ARBA agreement with OCERS, extending the contract for a period of up to 90 days. October 10, 2007: An update on the status of the ARBA agreement and administration was provided to the OCSD Board of Directors. The Board was notified of the signing of AB1124 on Monday, October 8, 2007, which would likely change the direction OCSD would choose to administer the benefit in the near future. May 24, 2006: The second amended ARBA agreement was approved by OCSD's Board of Directors. May 10, 2006: An amended agreement for the ARBA benefit was presented to the FAHR Committee to address depleting ARBA benefit funds. In addition, a timeline for addressing intermediate and long-term issues with retiree plan benefits was discussed. ADDITIONAL INFORMATION ARBA was established in 1996 with the Orange County Employees Retirement System (OCERS) to provide retirees with a medical premium offset of$10 per month for every year of service with the Orange County Sanitation District (OCSD), up to a maximum of $250 per month. ARBA was funded through OCERS' Unallocated Fund Balance (UFB) which contained excess earnings of the system. Due to the diminishing returns in recent years, there are no longer excess earnings available for use by the Plan Sponsors. In December 2002, the ARBA agreement was amended and a reserve account, the Retiree Medical Benefit Reserve (RMBR), was established. RMBR contained three years of projected ARBA payments as a safeguard for agencies to evaluate funding of future payments. OCSD began using RMBR to fund ARBA payments in July 2003. The ARBA agreement was amended on May 24, 2006 to extend the termination date to December 31, 2007. Form No.O 103.3 Rmimmi,Q IA7 Book Page 14 OCSD currently has a total of 187 retirees and 34 survivors on the OCERS pension payroll. Of the 219 individuals, 113 are receiving ARBA benefits, of which 31 are enrolled in OCSD group medical plans. Moreover, 46 individuals are receiving OCSD-paid medical insurance and will become eligible for ARBA upon the expiration of their OCSD-paid medical insurance. OCSD-paid medical insurance provides for 2.5 months of paid medical insurance premium for every year of service with OCSD. The 2.5 month benefit is more costly to OCSD and was frozen to include only employees hired prior to July 1, 1988, of which only 116 of the 584 active employees remain on OCSD payroll. Once the 2.5 month benefit expires, the retirees are moved to ARBA, which lowers the overall cost of retiree medical insurance. JDR:LT:MW:PL:KE Folm No.O iW3 PmieeE'..1.7 Book Page 15 ADMINISTRATION COMMITTEE aa.oroo-. AGENDA REPORT Orange County Sankatlon District F=A '�,rT ea DCM i4 8 FROM: Jim Ferryman, Board Chair Originator: Bradley R. Hogin, General Counsel SUBJECT: AGREEMENT FOR LEGAL SERVICES GENERAL MANAGER'S RECOMMENDATION Authorize Jim Ferryman, OCSD Chair, to enter into an agreement with Woodruff, Spradlin & Smart for legal services, appointing Bradley R. Hogin as Principal General Counsel with a rate schedule of$255/235/200/105 and automatic annual CPI increases. SUMMARY Please see attached memorandum. PRIOR COMMITTEE/BOARD ACTIONS On December 21, 2005, the Board of Directors authorized the Board Chair to negotiate and enter into an agreement with Woodruff, Spradlin & Smart for legal services, appointing Bradley R. Hogin as Principal General Counsel. ADDITIONAL INFORMATION OCSD paid $1,180,824 to Woodruff, Spradlin & Smart for legal services rendered during the 2006-07 fiscal year. Assuming the same level of service and billable hours, the proposed 7% rate increase would represent an increase of approximately $83,000 over the 2006-07 fiscal year. ATTACHMENTS 1. Memorandum dated 02/05/08 from Brad Hogin Book Page 16 LAW OFFICES OF WOODRUFF, SPRADI.IN & SMART A P LOF06610NAL CORPORATION $5$A xF0. 9OULNIA6O.5 UIT6 1200 COSTA MLSA, CA 02626-7670 (711)559.7000 MEMORANDUM TO: James Ferryman,OCSD Chair Doug Davert. OCSD Vice-Chair CC: James 1). Ruth, OCSD General Manager Robert Ghirelli,OCSD General Manager FROM: Bradley R. I login, Esq. DATE: February 5, 2008 RE: Rate Increase As we discussed, ) am requesting a fee increase in our contract with OCSD. I will ask that the item will be placed on the agendas for the February meeting of the Administration Committee and the February meeting of the full Board. Since our last fee increase, the cost of living has continued to rise,and our costs have risen accordingly. The current fees are $235 per hour for me, $220 per hour for other partners, S 190 per hour for associates,and$99 per hour for paralegals. These fees were set two years ago, in January of 2006. Since that time,the CPI has risen by about 7%. 1 am requesting increases averaging roughly 7%,to $25 523 5/200/1 05. The requested fees arc well within the market range for large special districts. As general counsel for OCWD, for example, Rutan&Tucker charges fees for lawyers ranging from $235 per hour to$265 per hour. The requested fees remain substantially discounted from market rates that are typically charged to private clients. I am also requesting that the new contract include an automatic annual adjustment based on increases in the CPI, so that the fees keep pace with the cost of living going forward. Please let me know if you have questions or comments. 563321 1 Book Page 17 ADMINISTRATION COMMITTEE M71ng Date TOBd ur M. oul31m oZtj7 7 AGENDA REPORT I AD Numbe Ien Numbe ADMOB-OS Cnange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance & Administrative Services SUBJECT: CONSIDERATION OF BUDGET ASSUMPTIONS AND BUDGET CALENDAR FOR PREPARATION OF THE FY 2008-09 AND FY 2009-10 TWO-YEAR BUDGET GENERAL MANAGER'S RECOMMENDATION Approve the budget assumptions to be used for the preparation of the FY 2008-09 and FY 2009-10 two-year budget. SUMMARY In preparation of the Sanitation District's budget, the Administration Committee establishes the Budget Assumptions and approves the Budget Calendar. Staff will make a brief presentation at the Committee meeting. PRIOR COMMITTEEIBOARD ACTIONS None. ADDITIONAL INFORMATION Currently, there are no proposed changes to the District Fiscal Policy. ATTACHMENTS 1. Preliminary Budget Assumptions 2. Budget Calendar 3. Fiscal Policy Book Page 18 Preliminary Budget Assumptions 2008-10 Proposed Budget February 2008. The rate study will Assumptions verify: the appropriateness of the allocation of costs for operating, Economic Assumptions maintaining, refurbishing, and • Inflation for Orange County in FY replacing facilities to serve existing 2008-09 is projected to be 2.4 wastewater dischargers, the percent based on the 2008 projected appropriateness of the allocation of percentage change in consumer costs for expanding and building price index obtained from the new facilities necessary to provide December 2007 Economic and additional wastewater treatment Business Review report prepared by capacity, that the cost of providing Chapman University. A 2.4 percent the service and the allocation among inflation factor will also be used for fee payers is adequately based on 2009-10. appropriate cost of service principles and applicable legal standards, that Revenue Assumptions the appropriate allocation of costs • Years 1 and 2 of the five-year between and among pollutants Proposed Sewer Service Fee Rate (BOD, SS and Flow, including the Schedule will be ratified by the basis for allocation of non- Board. assignable costs), and that the appropriate amount of charges and • For FY 2008-09 and FY 2009-10 the the allocation of those charges district-wide rate for a single-family among fee payers, for the added residence(SFR) will increase 10.4% costs of providing (i)full secondary and 10.0% to$201.00 and $221.00, treatment and (ii)the ground water respectively. replenishment system. • A Proposition 218 rate increase • No estimate of the changes to the notification is required to be mailed capital facilities capacity charges to all Revenue Areas except 14. rates will be made at this point. Note that each $1 increase in rates generates approximately$900,000 • Revenues will be budgeted to reflect in annual revenue. 4,000 Equivalent Dwelling Unit (EDU) connections, the average of • The connection fees, or capital the past ten years. facilities capacity charges, that were adopted in March 2004 will capture • Permit user rates for flow, BOD, and only those infrastructure costs that SS will be updated in accordance relate to additional capacity. Other with the rate study that is scheduled infrastructure costs such as to be completed in February 2008. improved treatment, rehabilitation, refurbishment, and replacement, will Annexation fees capture both the net be supported through user fees. current assets and the equivalent property tax allocations totaling • A rate study to adjust the capital $4,235 per acre. facilities capacity charges is expected to be completed in Page 1 of 5 Book Page 19 FY 2008-09 & 2009-10 Budget Manual • Annexable property in the District's • All existing secondary treatment service area sphere is minimal; facilities will be operated and consequently, no FY 2008-09 nor FY maintained at full capacity during FY 2009-10 income from annexation 2008-09 and FY 2009-10. fees is anticipated. • Interim short-term disinfection • Property tax revenues are being facilities will be operated at optimal proposed to increase 5% in FY performance levels that will allow the 2008-09 over FY 2007-08 actuals, reduction of$2 million in operating and 5% in FY 2009-10 over FY costs. 2008-09 budget. • Operating expenses are expected to A 2% annual increase in Assessed increase as a result of increased in Value is authorized by the state authorized personnel, personnel constitution and is included in the salaries, electricity, natural gas, increases noted above. The chemicals, and biosolids management. additional increase in assessed value is from authorized increases to . Average daily Flow for FY 2008-09 market value when property is sold and FY 2009-10 is projected to be at a higher value. 230 million gallons per day(mgd). This is 38 mgd below the Interim • Earnings on the investment of the Strategic Plan Update projection, but District's operating cash and is 6 mgd above the actual for the reserves will be budgeted at 4.00% first 5 months of the current year. of the average cash and investment The final actual flow for FY 2006-07 balance projected for each fiscal was 229 mgd. year. Staff has consulted with PIMCO to get estimates for the next • Staffing requests, not to exceed 1% year's rate of return on investments. growth, are anticipated for FY 2008- 09 and FY 2009-10. • A $256 million COP debt issuance is scheduled for FY 20D8-09 in order to • Vacant positions as of 12/31/07 will assist in the funding of the$364 be projected and expensed at 50% million CIP outlay scheduled for FY of step 1 for the rest of FY 2007-08. 2008-09. • A 5% vacancy factor on authorized A$173 million COP debt issuance is positions will be budgeted for FY scheduled for FY 2009-10 in order to 2008-09 and FY 2009-10 (a assist in the funding of the$235 reduction from the actual 8% million CIP outlay scheduled for FY vacancy factor in FY 2007-08). This 2009-10. vacancy factor accounts for time spent for recruitment and turnover. Operating Assumptions . MOUs for OCEA, Local 501, and • Dry weather urban run off will SPMT were completed in FY 2006- continue to be treated for free up to 07 and will be considered in the FY 4 mgd with a 10 mgd maximum. 2008-09 and 2009-10 budgets. Salary adjustments based on the Page 2 of 5 Book Page 20 Preliminary Budget Assumptions MOUs include a range adjustment of These funds will be allocated to 4%that will be effective for all appropriate line items during the employees as of the first pay period year after requests and justifications beginning in July each year. for unanticipated needs are Additionally, all employees not approved by the General Manager. already at the top step will be budgeted to receive a 5.0% • Resource needs for strategic step/range increase. initiatives will be included in each fiscal year's budget. • Retirement costs for employees enrolled in OCERS have been Capital Improvement Program assessed at a rate of 24.84% of the Assumptions employee's base salary for FY 2008- • The FY 2008-09 and 2009-10 cash 09. This percentage will also be flow budgets are the amounts based assumed at this time for FY 2009- on the most current Validated 10. Part-time employees' retirement Capital Improvement Program (CIP). benefits are calculated at 7.65% (FICA rate). The baseline CIP cash Flow for FY • Other employee benefits and 2008-09 is $364 million and for FY insurances will be preliminarily 2009-10 Is $235 million. budgeted to increase 10% in total Continual evaluation of the CIP by each year. the Asset Management Team may • The proposed operating budget will result in deferral or reduction of continue to reflect an emphasis on some projects and a resultant safety, technical, and management increase in O&M repair costs for training. The proposed FY 2008-09 materials and services, if the net and FY 2009-10 budgets will include cash flow impact is a decrease. a budget for training that is equal to The FY 2008-09 and 2009-10 CIP two percent of regular salaries and budgets will increase only for critical wages' projects not previously identified in • An amount equal to half of one the Strategic Plan Update. percent of the Operating materials At the midpoint of FY 2007-08, and supplies budget will be a p° contingency for prior year re- $130.3 million, or 43.0%of the appropriations. Since the current $302.7 million CIP budget, was year's budget lapses on June 30, a expanded. The total projected contingency is needed in the annual outlay is expected to succeeding budget year for goods or approximate budget at year-end. services ordered at the end of one For FY 2006-07, $280.3 million of budget year but not delivered until the $266.1 million CIP projected the following year. cash flow, approximately 105.3%, • An amount equal to one percent of was expended. the Operating materials and supplies Debt Financing budget will be the General The District will issue new debt in Manager's contingency budget. the form of Certificates of Page 3 of 5 Book Page 21 FY 2008-09 & 2009-10 Budget Manual Participation as needed to fund the of the first installment of the property CIP and to maintain reserves. tax allocation and sewer service user fees which are collected as a • A $256 million COP debt issuance is separate line item on the property scheduled for FY 2006-09 in order to tax bill. The level of this reserve will assist in the funding of the $364 be established as the sum of an million CIP outlay scheduled for FY amount equal to six months 2008-09. operations and maintenance expenses and the total of the annual A$173 million COP debt issuance is debt (COP) service payments due in scheduled for FY 2009-10 in order to August each year. assist in the funding of the $235 million CIP outlay scheduled for FY An operating contingency reserve 2009-10. will be established to provide for non-recurring expenditures that • Debt will only be used for CIP, not were not anticipated when the for operating expenses. annual budget and sewer service • Capital financing plans which include fees were considered and adopted. fewer future borrowings and higher The level of this reserve will be user fees after FY 2009-10 will be established at an amount equal to considered. ten percent of the annual operating budget. • Borrowing is proposed only for A capital improvement reserve will facilities which do not add capacity be maintained to fund annual and that are funded by all users for increments of the capital replacement, rehabilitation, and improvement program. The long- improved treatment. term target is for one half of the Reserve Assumptions capital improvement program to be • The current reserve policy was funded from borrowing and for one reviewed by Public Resources half to be funded from current Advisory Group(PRAG) and the revenues and reserves. With this Board during FY 2003-04. program in mind,the target level of changes were proposed and this reserve has been established at one half of direction was given to continue to the average annual maintain reserve levels at a level capital improvement program through the year 2020. that is adequate to offset exposure to variable rate COPs due to interest Catastrophic loss, or self-insurance, rate increases. reserves will be maintained for • The current reserve policy is property damage including fire, flood summarized es follows: and earthquake, for general liability and for workers' compensation. A cash flow reserve will be These reserves are intended to work established to fund operations, with purchased insurance policies, maintenance and certificates of FEMA disaster reimbursements and participation expenses for the first State disaster reimbursements. The half of the fiscal year, prior to receipt potential infrastructure loss from a Page 4 of 5 Book Page 22 Preliminary Budget Assumptions major earthquake has been annual fluctuations. There is no estimated at$1.3 billion. The level established target for this reserve. of this reserve has been set to fund the District's non-reimbursed costs, Miscellaneous estimated to be $57 million. Accumulated capital funds will be . The budget document will be in a set aside for certain specific, short- biannual format with two, one-year term capital improvements as the budgets presented for FY 2008-09 need and availability arise. and FY 2009-10. A capital replacement/renewal reserve policy has been established The budget worksheets for to provide thirty percent of the operating costs will contain one funding to replace or refurbish the column for FY 2008-09 and one current collection, treatment and column for 2009-10. The column disposal facilities at the end of their will represent all collection, useful economic lives. treatment, and disposaltreuse costs. The current replacement value of these facilities as of 2006 is estimated to be $3.05 billion for the collection facilities and $2.51 billion for the treatment and disposal facilities. The initial reserve level has been established at$50 million, which will be augmented by interest earnings and a small portion of the annual sewer user fee, in order to meet projected needs through the year 2030. Provisions of the various certificate of participation (COP) issues require debt service reserves to be under the control of the Trustee for that issue. These reserve funds are not available for the general needs of the District and must be maintained at specked levels. The current level of required COP service reserves is projected to be $107.8 million. Accumulated funds exceeding the levels specified by District policy will be maintained in a rate stabilization fund. These funds will be applied to future years' needs in order to maintain rates or to moderate Page 5 of 5 Book Page 23 Budget Calendar Tasks Responsibility EveM/Due Date PHASE I—BUDGET PREPARATION CIP— Call for Projects Issued Engineering 09/12107 CIP— Project Description/Justfication and CLR Forms CIP Budget 0928/07 Submitted to Engineering Planning Coordinators CIP—Training for FY 2008-09 CIP Business Case Jim Burror As Needed Preparation CIP—Project Business Case Preparation CIP Budget 925/07— 10/13/07 Coordinators CIP— Business Cases Submitted to Engineering CIP Budget 10/15/07 Planning Coordinators CIP- Budget Preparation Training (CIP Database) Financial Planning As Needed CIP— Review Project Submittals & Make 'Go/No Go" Supervisors/ 11/07/07- 12/07/07 Decision Managers CIP— Review Project Submittals& Finalize EMT 12/10/07-02/01/08 Preliminary Budget Assumptions Identified. Financial Planning 01/11/08 Preliminary Budget Assumptions Presented to EMT Financial Planning 01/14/06 Draft Budget Calendar Presented to EMT Financial Planning 01/14/O8 CIP— CIP Database Opened for Input Financial Planning O1/14/08 Update to Strategic Initiatives Finalized MT& EMT 0121108 Board Holds First Reading of Regional Sewer Service Board of Directors 0123/08 User Fee Schedule for 2008-09 Preparation for Budget Kickoff/Training Session: Financial Planning 0123108 • Salary and benefits downloaded to Excel worksheets • Develop line item worksheets with mid-year actual expense • Prepare/update budget instruction manual Budget Kickoff/Training Session: Financial Planning 0128/08 • Distribute budget manual update • Conduct budget training session • Distribute budget worksheets for each division including -Prior year actual, Current year budget, and Six months of current year actual amounts Operating Divisional Budgets: New Position/Additional Divisional Budget 02/11/08 Employee Decision Packages Due to Financial Planning Coordinators (Edith Smith, Ext. 7568) Operating Divisional Budgets: Equity Adjustment& Divisional Budget 02/11/08 Position Reclassification Decision Packages Due to Coordinators Human Resources (Ann Sullivan, Ext. 7143) 1 Book Page 24 itFY 2008-09 & 2009-10 Budget Responsibility Event/Due Date [Operating Divisional Budget 02/11/08 Budget: Training Request Forms Due to Coordinators Resources (Richard Spencer, Ext. 7164) 02/11/08 l Equipment Budget: Vehicle Capital Equipment Divisional Budgeton Packages Due to Fleet Services (Chuck Coordinatorsn, Ext. 7647) Capital Equipment Budget: Computer Capital Divisional Budget 02/11/08 Equipment Decision Packages Due to Information Coordinators Technology(Rich Castillon, Ext. 7283) Budget Assumptions Presented to Admin Committee Budget Team 02/13/08 Mid-Year Financial Report to Administration Committee Admin Services 02/13/08 Department CIP—Project Request with Project Information Entered CIP Budget 02/20/08 in CIP Database Completed Coordinators CIP—Request Review—On-Line Supervisors/ 02/20/08-02/27/08 Managers& Department Heads Division Budget Packages Due to Financial Planning: Divisional Budget 02/25/08 • Projection of current year actual operating costs Coordinators • Proposed operating costs for 2008-09&2009-10 • Operating Budget Expense Detail • Preliminary Contractual Material& Services Form • Capital equipment decision Packages (other than computer and vehicle decision packages which were due on 02111/08) • New program decision packages (Financial Planning will collate and bind these items— along with salary information - into the Preliminary Division Budget Document for review by the General Manager.) Critical Goals, Strategic Planning and Five Year EMT 0227/08 Staffing Plan—Steering Committee Meeting Board Holds Second Reading, Public Hearing, & Board Of Directors 0227/08 Adopts Regional Fee Ordinance Mid-Year Financial Report to Board Finance Department 0227/08 CIP—Request Finalization and Division Manager Division Managers 0228/08 Review Completed Complete the Compilation of the Preliminary Division Financial Planning 02/29/08 Budget Document CIP—Request Finalization and Department Approval Department Heads 0229/08 2 Book Page 25 Budget Calendar Tasks Responsibility Event/Due Date CIP— New Project Numbers Assigned Planning Division 02/29/08 CIP—Completed CIP Budget Delivered to Finance CIP Budget 03/03/08 Coordinators PHASE II-BUDGET REVIEW Divisional Budgets- Distribution of Preliminary Line Financial Planning 03/03/08 Item Requested Budgets to Department Heads and Managers CIP - Committee Review CIP Committee 03/03/08 CIP - Resource Availability Review Engineering & O&M 03/03/08 CIP - Review Workshop Financial Planning & 03/06/08 Department Heads Divisional Budgets - Budget Review Meetings with GM, General Mgrs. Office, 03/10/08-03/14/W Budget Staff, and Department Representatives- Financial Planning, & review budget& initial decision packages Division Coordinators CIP—General Manager and Designees)Approval General Manager 03/13/08 Divisional Budgets—Performance Budget Documents Divisional Budget 03/21/08 Due to Financial Planning (Edith Smith): Coordinators • Organization Charts • Performance Results (2006-07) • Performance Measures (2007-08) CIP Schedules Through 2020 Completed Financial Planning 03/27/08 Divisional Budgets - Completion of Preliminary Budget Financial Planning 03/28/08 and Compilation into Departmental Budgets PHASE III-BUDGET PRESENTATION CIP- Final CIP Budget Document Preparation and Financial Planning 04/17/08 Incorporation into Final Budget Document Board Holds First Reading of Local Sewer Service Board of Directors 04/23/08 User Fee Schedule for 2008-09 Board Holds First Reading of Industrial User Fee Rate Board of Directors 04231108 Schedule for 2008-09 Initial-Proposed Budget finalized Financial Planning 05/01/08 Initial-Proposed 2008-09&2009-10 Budget Financial Planning Ops—OSM7/08 Presented to Committees Admin-05/14/08 General Manager's Budget Message Completed General Manager/ 05/07/08 Financial Planning 3 Book Page 26 FY 2008-09 & 2009-10 Budget Tasks Responsibility EvenVDue Date Approval of General Manager's Budget Message General Manager 05/12/08 Final-Proposed Budget to Printer Financial Planning 05/14/08 Board Holds Second Reading, Public Hearing, & Board of Directors 05/28/OS Adopts Local Sewer Service Fee Ordinance Board Holds Second Reading, Public Hearing, & Board of Directors 05/28/08 Adopts Industrial User Fee Rate Ordinance PHASE IV-BUDGET DELIBERATIONS Final Draft- Proposed 2008-09&2009-10 Budget Financial Planning Admin-06/11/08 Presented to Committees Ops—08/12/08 Public Hearing & Board Adoption Board of Directors O8/2S/08 PHASE V—DISTRIBUTION OF BUDGET Final line item budget and equipment budgets Financial Planning 07/10/OS distributed to Departments PHASE VI-BUDGET DEBRIEFING Budget Debriefing Financial Planning 07/17/08 • Global changes that occurred in this year's budget. • Changes since the Department's original submittal. • Changes that occurred as a result of Board action. • Results of Budget Survey. • Overview of Budget Monitoring with PeopleSoft Enterprise One Software and review of Budget Coordinators Responsibility. • Overview of CIP Budget Monitoring. • Suggestions for Budget Process Improvements. 4 Book Page 27 Fiscal Policy in Fiscal Policy Statement Completed Progress Comments General Financial Goals To maintain a financially viable Sanitation District that can maintain an appropriate level of wastewater treatment services. s To maintain financial flexibility by adapting to local and regional economic changes. To maintain and enhance the sound fiscal condition of the District. To ensure that the value added by every program and activity within the District is proportional to its cost;and to eliminate those programs and activities that do not contribute to the District's mission. To provide training opportunities to the greatest extent possible for available jobs within the organization for those employees working in programs or activities that have been reduced or eliminated. To provide employees with cross-training opportunities in order to achieve multi-tasking capabilities. Operating Budget Policies The District will adopt a balanced budget by June 30 of each year. The budget will be used as a fiscal control device as well as a financial plan. Budget preparation and monitoring will be performed by each division within the District,the organizational level of accountability and control. The Director of Finance will prepare a budget calendar no later than January of each year. An annual operating budget will be developed by conservatively projecting revenues and expenditures for the current and forthcoming fiscal years. During the annual budget development process, the existing programs will be thoroughly examined to assure removal or reduction of any services or programs that could be eliminated or reduced in cost. Page 1 Book Page 28 2008-09 & 2009-10 Budget In Fiscal Policy Statement Completed Progress Comments Current operating revenues will be sufficient to support current operating expenditures. ✓ Annual budgets including reserves will provide for adequate design, construction, maintenance and replacement of District capital facilities and equipment. ✓ The District will maintain all physical assets at a level adequate to protect the District's capital investment and to minimize future maintenance and replacement costs. ✓ The District will project equipment replacement and maintenance needs for the next five years and will update this projection each year. From this projection a maintenance and replacement schedule will be developed and followed. ✓ The District will avoid budgetary and accounting procedures that balance the current budget at the expense of future budgets. ✓ The District will forecast its expenditures and revenues for each of the next five years and will update this forecast at least annually. ✓ Revenue Policies Because revenues are sensitive to both local and regional economic conditions, revenue estimates adopted by the Board of Directors must be conservative. ✓ Staff will estimate annual revenues by an objective, analytical process that utilizes trend,judgmental, and statistical analysis as appropriate. ✓ Ad valorem property tax revenues of the District will be dedicated to debt service. ✓ Sewer Service User Fees will be projected for each of the next ten years and this projection will be updated annually. ✓ Expenditure Policies The District will maintain a level of expenditures that provides for the health, safety and welfare of the residents of the community. ✓ Page 2 Book Page 29 Fiscal Policy Fiscal Policy Statement Completed In Comments Progress The District will set fees and user charges at a level that fully supports the total direct and indirect costs of operations, capital improvements, and debt service requirements not covered by reserves. ✓ Capital Improvement Budget Policies The District will make all capital improvements in accordance with an adopted and funded capital improvement program. The adopted capital improvement program will be based on need. ✓ The District will develop an annual tive�year plan for capital Strategic Plan improvements, including design,development, projects needs implementation, and operating and maintenance costs. ✓ through 2020. All capital improvement projects approved in the annual operating budget are approved at the budgeted amounts through the completion of the project. The Board of Directors approves both the individual project total budget and the projected cash outlays for all capital improvement projects for the current fiscal year. ✓ Staff will identify the estimated costs, potential funding sources and project schedule for each capital project proposal before it is submitted to the Board of Directors for approval. ✓ Included in the Staff will identify the estimated on-going future Operating and Asset Maintenance costs, as well as staffing requirements upon Management completion for each capital project proposal before it is ✓ Plan II. submitted to the Board of Directors for approval. The District will use intergovernmental assistance and other outside resources whenever possible to fund capital improvements providing that these improvements are consistent with the Capital Improvement Plan and the District's priorities, and that the future operating and maintenance costs of these improvements have been included in the budget. ✓ Staff will coordinate development of the capital improvement budget with the development of the operating budget. All operations and maintenance resources required to implement the CIP have been considered and appropriately reflected in the operating budget for the year the CUP is to be implemented. ✓ Cost tracking for components of the capital improvement program will be updated quarterly to ensure project completion against budget and established time lines. ✓ Page 3 Book Page 30 2008-09 & 2009-10 Budget In Fiscal Policy Statement Completed Progress Comments Asset Management Policy In order to provide for the systematic planning, acquisition, In 2002,the deployment, utilization control, and decommissioning of capital Board approved assets,the following policies have been established: a Strategic Plan for development • The condition, performance, utilization, and cost of assets of a state-of-the- will be recorded down to the maintenance managed item art Asset component level. Management • A detailed, planned maintenance program is in place to n 20 Program. I ensure that the assets,facilities and systems perform to n a the Boaardnd approved their design criteria and meet their design lives. advanced AM • A system is in place to blend planned and unplanned practices. In activity to optimize the cost against the asset performance 2007,the Board requirements. ♦ directed a staff driven approach • Reliability Centered Maintenance techniques will be used on all future to optimize the maintenance plans and to identify any initiatives of the design alterations that are economically justified. v AM program as • Current levels of asset management service in terms of opposed to quantity and quality of service including condition, continued function/sizettype,regulatory requirements, reliability, and reliance on repair response times have been determined and outside documented. consultants • The full economic cost is charged on all asset management activities. • Asset Management maintains appropriate pricing and funding strategies that match the needs of the business to ensure sustainability. • Asset Management wnsiders the real growth of the District's service area and the way in which demands for service will change in the future, including population, unit demand,demographics, changing customer expectations, and changing regulatory requirements. • Monitoring and reporting is performed on the condition, Performance and functionality of the District's assets against prescribed service levels and regulatory requirements. • A conditionRunction index is linked with customer expectations at a cost that customers are willing to pay. s Page 4 Book Page 31 Fiscal Policy In Fiscal Policy Statement Completed Progress Comments • Future level of service options available and their associated costs are constantly analyzed. ✓ • An assessment of the relative risks,costs and benefits is derived for all investments in capital works, maintenance, and operations. ✓ • Individual asset management decisions are made only when the cost of all programs has been analyzed and the funding needs of the whole organization is known together with the knowledge of its impact on rates. ✓ • Necessary renewal programs to sustain the existing levels of service and condition of assets,as identified through the best appropriate process, is approved ahead of new capital works and services. ✓ • New capital assets for new works and services are approved only with the commitment of the recurrent (operations and maintenance)funding necessary to sustain the new works and services. ✓ • The financial, social, and environmental aspects of asset management will be reported on biannually. ✓ Vehicle Replacement Policy In order to provide safe, reliable transportation appropriate to the work to be performed,the following policies have been established: • The newest vehicles will be used for those purposes requiring the highest annual mileage. ✓ • Vehicles will be replaced when they are 10 years old or have accumulated 100,000 miles. ✓ • A vehicle may be replaced in advance of the above criteria if it can be reallocated to a low mileage use between the plants. ✓ • Electric carts are to be utilized for in-plant only uses. ✓ • When available, CNG vehicles or bi-fuel vehicles are to be utilized within the County(pump station runs, Source Control inspections, etc). ✓ • When available, CNG vehicles or bi-fuel vehicles are to be utilized to travel outside of Orange County(e.g., Environmental Compliance Monitoring of biosolids application sites, etc). ✓ Page 5 Book Page 32 2008-09 & 2009-10 Budget In Fiscal Policy Statement Completed Progress Comments Short-Temt Debt Policies The District may use short-term debt to cover temporary or emergency cash Flow shortages. All short-term borrowing will be subject to Board approval by resolution. ✓ The District may utilize Board approved inba-agency loans rather than outside debt instruments to meet short-term cash needs. Intra-agency loans will be permitted only if an analysis of the affected Revenue Areas indicates funds are available and the use of these funds will not impact current operations. The principal, along with interest at the prevailing rate as established by the District's Treasurer, will be paid to the lending Revenue Area. ✓ Long-Term Debt Policies Proceeds from long-term debt will not be used for current on- going operations. ✓ Before any new debt is issued,the impact of debt service payments on total annual fixed costs will be analyzed. ✓ Develop and maintain a board adopted debt policy. ✓ Accumulated Funds ti Reserve Policies A cash flow reserve will be established to fund operations, maintenance, and certificates of participation expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and the sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve will be established as the sum of an amount equal to six months operations and maintenance expenses and the total of the annual debt(COP) service payments due in August each year. An operating contingency reserve will be established to provide for non-recurring expenditures that were not anticipated when the annual budget and sewer service fees were considered and adopted. The level of this reserve will be established at an amount equal to ten percent of the annual operating budget. ✓ Page 6 Book Page 33 Fiscal Policy in Fiscal Policy Statement Completed Progress Comments A capital improvement reserve will be maintained to fund annual increments of the capital improvement program. The long-term target is for one half of the capital improvement program to be funded from borrowing and for one half to be funded from current revenues and reserves. With this program in mind,the target level of this reserve has been established at one half of the average annual capital improvement program through the year 2020. Levels higher and lower than the target can be expected while the long-term financing and capital improvement programs are being finalized. A renewal/replacement reserve will be maintained to fund the District's renewal, rehabilitation and replacement requirement costs associated with the District's existing capital plant and collection system over the next twenty years. The reserve was initially set at$50 million in 1998-99 and is annually augmented by interest earnings and a small portion of the annual sewer user fees in order to meet projected needs through the year 2030. Catastrophic loss, or self-insurance, reserves will be maintained for property damage including fire, flood, and earthquake; for general liability; and for workers' compensation. These reserves are intended to work with purchased insurance policies, FEMA disaster reimbursements, and State disaster reimbursements. Based on the current infrastructure value of$1.3 billion,the reserve level has been set to fund the District's non-reimbursed costs, estimated to be$57 million. Investment Policies The District's Treasurer will annually submit an investment policy to the Board of Directors for review and adoption. The investment policy will emphasize safety and liquidity before yield. s Accounting.Auditing,and Financial Reporting The District's accounting and financial reporting systems will be maintained in conformance with generally accepted accounting principles and standards promulgated by the Governmental Accounting Standards Board. Page 7 Book Page 34 2008-09 8r 2009-10 Budget in Fiscal Policy Statement Completed Progress Comments A capital asset system will be maintained to identify all District assets, their condition, historical cost, replacement value,and useful life. ✓ Quarterly financial reports will be submitted to the Board of Directors and will be made available to the public. ✓ Full disclosure will be provided In the general financial statements and bond representations. ✓ The District will maintain a good credit rating in the financial The District's community. ✓ AA rating was reaffirmed with the COP Series 2007A and 2007B debt issuances. An annual audit will be performed by an independent public accounting firm with the subsequent Issue of an official Comprehensive Annual Financial Report, including an audit opinion and a management letter. ✓ Page 8 Book Page 35 ORANGE COUNTY SANITATION DISTRICT (714) 962-2411 www.ocsd.com Mailing Address: P.O. Box 8127 Fountain Valley, California 92728-8127 Street Address: 10844 Ellis Avenue Fountain Valley, California 92708-7018 FY09 and FY10 Budget Assumptions February 13,2008 FY 2008-09 and FY 2009-10 Budget Assumptions 6 orange Counry Sanitation ostnct Budget Development Assumptions Economics • Inflation for Orange County is projected to be approximately 2.4% Revenue ♦ The OCSD single-family residence(SFR)will increase 10.5%in FYC"g and 10%in FY09-10 Budget Development Assumptions Operations ♦ Average daily Pow projections are reduced from 250 MGD to 230 MGD ♦ All existing secondary treatment facilities will be operated and maintained at full capacity ♦ Interim disinfection costs will be reduced consistent with recently approved Strategic Plan ♦ Operating expenses will increase in most areas are expected Distributed at the Finance & Administration ,`, Meeting FY09 and I Budget Assumptions ' February 13,2008 Budget Development Assamptiors Staffing ♦ Additional staling requests are not anticipated to exceed 1% ♦ A 5%vacancy factor will be budgeted for authorized Pcegfons ♦ Salary adjustments,based on the MOUs, will result in increases between 4%5% Budget Development Assumptions Reserves ♦ Current reserve policy is unchanged Debt Financing—Certificates of participates Icon ♦ The District will continue to issue COPS as the primary method of financing its capital program ♦ $250M in FY09-09 ♦ $375M in FY09-10 Budget Development Assumptions Capital Improvement Program (CIP) ♦ The cash Pow assumptions are based on the current Validated CIP ♦ The baseline CIP Is$364M for FYDB-09 and $235M to,FY09-10 2 FY09 and FYI Budget Assumptions February 13, 2008 Budget Development Key Managing Dates Administration Committee 1 V 09 and FY09-10 Budget Assumptions February Reviewof Revenueaand Me" Local Sewer Service Fee Ordinance Review of Expenditures and April Industrial Peimieee Rate Ordinance Board Meeting WReadingof: April Local Sevier Service Fee Whence and Industrial Permatee Rate Ordinance Budget Deatiopment Key Meeting Dales Operations Committee Budget Ov lewand Budget Presentwon May A June Administration Committee Budget Ebmen6 and Budget Presentation May B June Board Meeting Adoption of Local Sewer Servce Fee Ordinanceand May Industrial Rate Ordinance F Cfi and 1 y09-10 Budget June Questions? Visit Our Website: www.00SD.COm 3 919 ,92 Sol 91219 ,91911 • 11f119tSloss 19 , r ` 107 _ R _ -75 0 . 125 6682 - Finn 2 . 750 !in A -M � IlllllllllllllllllllllIlIlllll ( I ( I ( lI ( llllil A company of Alllanz 11 cromi m. Investment Management Program Orange County Sanitation District Strategy Review for the Period 41 September 30, 2007-December 31, 2007 Three-lime Morningstar• Fixed-Income Fund Manager of the Year(2007,2000,1M) llll ( l ( lll ( Illlllllllll ( Illlllllll ( Illll ( ll ( Agenda I. Statement of Objectives II. Recap of PIMCO's Investment Style and Resources III. 2007 Performance Results IV. 2008 Returns — Economic Outlook & Strategy V. Appendix Illlllllll ( ( ( lllllll ( III IIIItIIIIIIIIIIIIIIIIII Your Portfolio Objectives • Orange County Sanitation District's stated objectives are: — Safety — Liquidity — Return on Investments • We will continue to actively manage the portfolio to meet your objectives • Have any of your objectives changed for 2008 and beyond? 2 P I M C 0 ( ll ( ll ( ( Ill ( ( Illlllllllllllllllllllllll ( ll ( ( PIMCO's Active Management Approach = Consistent Added Value Top Down Strategies • Broad set of strategies r mum . . • Dynamic approach Value Added • Source success varies significantly over timein ale - Bottom Up Strategies Alpha Sources—An Active and Dynamic Approach to Portfolios r.. • rr �� rr ��. •r • Stability • Quality • Emerging • Inflation- Developed • Mortgages • Yield Curve Markets linked Non-U.S. Dollar Strategy • Yield • Duration • Credit • High Yield • Emerging • Developed • Corporate Recovery Markets Non-U.S. Dollar Underweight 3 P I M C 0 lllllllilllllllllllllllllllllll ( Illl ( Illl ( ll Investing in Resources to Achieve Your Investment Goals As of December 31, 2007 Depth of Resources Supports Long-Term Investment Philosophy • Mohamed El-Erian returns to PIMCO and begins • Over 30 Investment Professionals added in 2007, role as co-CEO/co-CIO contributing in investment strategy, analysis and analytics • Special consultant Dr. Alan Greenspan contributing to on-site quarterly strategy sessions • Credit research team includes 31 analysts worldwide • Broad participation in forecasting and investment • Total of 347 Investment Professionals worldwide in committees promotes innovation while ensuring continuity 10 global offices Breadth • Assets Under Management: $746.36 Market Segment Focus 29 Product Managers U.S. $543.2 Foundations Corporations Real Assets Equity Europe 133.2 Endowments Central Banks Emerging Markets Mortgages Japan 3e.4 Public Entities Taft-Hartley Global Absolute Return Asia 15.1 Insurance Subadvised Credit Tax-Sensitive Australia 13.3 Healthcare Variable Annuity Long Duration Structured Products Canada 3.1 Independent Financial Advisors Cash Management Asset Allocation PIVICO Institute Offers Educational Opportunities • Week-long Fixed Income seminars in Newport Beach • Custom educational programs to be held in June and September • Issues &answers conference calls • Topical visiting seminars 4 P I M C 0 lllllllllllllllll ( IIIlllllll ( Illlltlllllllll 2007 Performance Results As of December 31,2007 Total Return vs. Standard Deviation 0 Annual Performance (Since Inception) 8 9 ■Orange Ca Sanitation District 8 -Merrill Lynch Corp/ Govt 7 7 1-5 year Bond Index de c ?' 6 B. Orange County 01 Sanitatlon District c 5 6 4 a 3 c Merrill) Lynch S orp / Gov[ D I h h C Bond 4 98 99 00 01 02 03 04 05 06 07 0 1 2 3 4 5 6 7 B Standard Deviation of Return (%) Orange County SanitationDistrict Market Value as of Dec. 2007 $ 257,275,477 Since Inception r• r r Before Fees (%) 5.7 5.5 3.9 4.7 7.2 5.6 5.5 2.6 Merrill Lynch Corp/ Gov! 1-5 year Bond Index (%) 5.6 5.3 3.6 4.3 7.3 5.6 5.2 2.5 All periods longer than one year are annualized. 5 P I M C 0 ( llllllllllllllllllllllllllll111111 ( 1111111t Performance Review As of December 31.2007 Total Return vs. Standard Deviation 7 Annual Performance 6 (Since Inception) IL ■Orange County 6 Sanitation District ..5 Orange County a Citigroup 3-Month Sanitation District 5 Treasury Bill Index c 4 O =- 4 B Cltlgroup 3-Month rc 3 Treasury Bill Index 3 V _ 2 0 U a 0 98 99 00 01 02 03 04 05 06 07 0 1 2 3 4 5 6 7 8 9 10 11 12 Standard Deviation of Return (%) Orange County Sanitation District Market Value as of Dec. 2007 $ 103,886,989 Since Inception 09/30/95 10 Before Fees (%) 4.3 4.1 3.2 4.5 5.2 3.9 2.5 1.2 Ciligmup 3-Month Treasury Bill Index (%) 3.9 3.6 3.0 4.2 4.7 IS 2.2 1.0 All periods longer than one year are annualized. 6 P I M C O ( ill ( ( ( lllllllllllllllllllllllllllllllltilll 2007 Capital Market Returns As of December 31,2007 Capital Market Returns 20 Emerging ■Fixed Income Markets (LC) w Foreign Currency Commodities •Equity 15 ■Alternatives TIPS Long MSCI EAFE Hedge Treasuries Funds 10 n Emerging Foreign Bonds Investment Markets ($) Currencies Private Grade Credit Global 5&P Soo Equity � 5 0 Russell 2000 .5 U.S. Treasuries • Noil assets dominated returns in 2007 SOURCE:Lehman Brothers,Federal Reserve,JPMorgan,PIMCO In order from left to dghl,listed indices are:Lehman Brothers Aggregate:Lehman Brothers US TIPS;Lehman Brothers Long Treasury;Lehman Brothers Investment Grace Credit;JP Morgan Non-US Hedged;JP Morgan EMBI Global;JP Morgan GBI-EM Global Diversified Federal Reserve Board Real Broad Trade-Weighted Exchange Value of the U.S.Dollar;S&P 500;Russell 2000;MSCI EAFE;DJ AID Commodity;CSFB/Tremont Hedge Fund Index;Cembndge Associates US Private Equity Index, 7 P I M C 0 llll ( t11111111 ( illllllllillililllilllllll ( ll Risk Premiums Widened on Continued Subprime Fallout As of December 31, 2007 Following an extended period of stability and low risk premiums, continued dislocation in the financial markets during the fourth quarter causes spreads to widen beyond the previous highs achieved earlier in the year 275 MBS and ABS Spread Trend 210 Investment Grade Spread Trend 250 190 225 MBS —ABS n 200 u 170 175 H 150 150 n 125 n 130 '—" 100 g110 m 75 m 50 90 25 70 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Juo-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 650 High Yield Spread Trend 325 Emerging Markets Spread Trend 600 300 ,-,550 N 275 a 500 a 250 M 450 S 225 400 n' 350 200 ra 300 m 175 V 250 150 200 125 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 SOURCE:Lehman Brothers,J.P.Morgan Spreads are the average option adjusted spread for Me Lehman Brothers Mortgage Index,Lehman Brothers Asset-Backed Securities Inez,Lehman Brothers Corporate Investment Grade Index,Lehman Brothers Corporate High Yield Index. Emerging Markel spreads are the strip spreads for the J.P.Morgan EMBI Global Index. 8 P I M C 0 Understanding Credit Risks Paid Off for Portfolios in 2007 As of December 31,2007 Spread Trends 400 600 • Markets re-priced credit and —MBS (LHS) —ABS (LHS) liquidity risk ^300 —Investment Grade (LHS) - - High Yield (RHS) 5w a • Tighter credit conditions created headwinds for global economy = zoo "�� �- 4off a • PIMCO underweighted credit in '07 N e m 100 300 N 0 200 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 U.S. Treasury Yield Curves 6 • The Fed eased and the yield curve steepened s • 2-Year Treasury yields fell by - 175 basis points a 4 /--= v • PIMCO focused on shorter maturities in '07 3 —Dec-06 —tun-07 —Sep-07 Dec-07 2 3m 2Y SY toy 30Y SOURCE:Bloomberg Financial Markets,Lehman Brothers Spreads are the average option adlustetl spread for the Lehman Brothers Mongage Index,Lehman Brothers Asset-Backed Secuntles(ABS)Index.Lehman Brothers Corporate Investment Grade Index,and Lehman Brothers Corporate High Yield Index.Returns for Mortgages,ABS.Corporate Investment Grade,and Corporate High Yield have been duration matched Lehman Brothers reponed excess returns relative to Treasuries(tern-matched position in Treasuries).The Treasuries outperformed against the benchmarks during the given time period. 9 P I M C 0 111 ( li ( Illlltll ( ll ( lll ( ( ( ( 1llll ( ( llll [ ( ( ( lll Second Half Rally Favored High Quality Sectors and Non-Dollar Currencies As of December 31, 2007 Sector Index Returns 1H '07 2H '07 12 • Flight to quality amidst the 9.73 a.75 7.92 8.60 market dislocation B 6.31 • Local EM debt continued its strong 5.0e performance on improving fundamentals �i a 2.87 2.69 and cash reserves 1.01 1.04 T 55 044 • PIMCO overweighted high quality li ° -0.02 as a prudent substitute to credit in '07 -a TSY MBS*IGC* HY TIPS Non- EM TSY MBS'IGC• HY TIPS Non- EM US Bond US Bond (LC) (LC) SOURCE:Lehman Brothers,Bloomberg Financial Markets,Federal Reserve Returns for Mortgages and Investment Grade Credits have been duration adjusted utilizing Lehman Brothers reported excess returns relative to Treasunes;Treasury performance Is the Lehman Brothers Treasury Index;High Yield performance is the Lehman Brothers Corporate High Yield;NomU.S. performance is the JPMorgan Non-U.S.Government Bond Index(hedged);Local EM Bond returns are the JPMorgan GBI-EM Global Diversified Index. 10 P I M C 0 ( lI ( Ill11111ll1llllllll111111111l111l111lll1111ll Portfolio Structured to Capitalize on Rate Cuts and Liquidity Premiums Orange County Sanitation District Long Term Portfolio Portfolio Characteristics Portfolio Attribution r. r• rr r . • rr Portfolio 2.5 2.2 22 Interest Rates: Effective Duration(yrs.) ' Index 2.4 2.4 2A Mortgages: - - Average Portfolio Quality AAA AA+ AAA Investment Grade: + + 90 Sector Allocations - Duration Weighted 79 SO 70 12131/06 70 66 ■09/30/07 ■12/31/07 60 53 BVAO a 50 u, 40 33 a 29 27 30 20 11 16 low- 07 30 0 0 'xr. 0 .... 0 ��/ 0 0.. 0 Gov't/ Mortgage Corp Dev Emg Mkt Muni/ Cash & TIPS` Backed Non-U.S.$ Other Equivalents Boxed Portion represents TIPS exposure. tt P [ M C O v w •ir V w v w r r w w w r r r r w w w w w w r w II1111111111111I1111111111111111111111111111 Slow U.S. Growth and Global Risk Aversion Present Downside Risks in 2008 Baseline Forecast U.S. Global • Deepening housing market • Vulnerable property markets in recession feeds into broader Europe and U.K. increase pressure economic slowdown on central banks to ease • Reintermediation of Shadow • Risk aversion and weak Banking System reduces financial consumption heightens liquidity deflationary pressures in Japan • Inflation remains tame as • Financial conditions in Emerging employment and consumer Markets remain strong as foreign weakness continues reserves accumulation continues • Fed will continue rate easing cycle U.S. Europe U.K. Japan 2.8 2.2 2. i 3.1 3.3 2.1 1.9 0.4 —1''A 13/a - 1'ti—21A 2-255 154-2 1?'.-2 'b 1-1Ys -1h —0 SOURCE:Bureau of Economic Analysis,Statistical Office of the European Communities.Japan Ministry of Internal Affairs and Communications,Japan Cabinet Office.PIMCO As of December 31,2007 Inflation YoY:U.S.inflation is Core PCE(note Core PCE is usually about 50 bps lower than core CPI).Eumzone inflation is EeroArea 13 HICP(headline),U.K.HICP(headline). Japan Inflation is CPI ex fresh food 12 P I M C 0 llll [ ( ll ( l ( lll ( 11 ( ll ( Illllllll ( l ( 11111111111 Increasing Loan Resets in 2008 Will Deepen Housing Market Recession As of December 31, 2007 Adjustable Rate Mortgages (ARMS): Monthly Resets 60 Dec-07 ■Subprime/Alt-A/ Unsecuritized • Total ARMS resetting in 2008 will _ so r•Prime/Agency exceed 2007 resets w 40 30 Dec-OB • U.S. government's plan to assist a I Ion, small subset of borrowers will have a �u limited impact 0 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 12 Months Supply of Total Existing Homes • Inventory continues to rise, 10 exacerbated by record foreclosures 8 • New and existing home sales have hit 6 multi-year lows 4 2 0 00 01 02 03 04 05 06 07 08 20 S&P/Case-Shiller Home Price Index • Housing price declines accelerated as is credit availability fell ;, 10 a t 5 • Inability of consumers to withdraw u o equity will pressure consumption o -5 -10 00 01 02 03 04 05 06 07 SOURCE:Credit Suisse,S&P,Fiserv,MacroMarkets LLC.Federal Reserve Board.Haver Amlylics 13 P I M C 0 Illl ( ( l ( ll ( ( l1 ( ( ( II11 ( 1 III 11 ( ( 111111 ( l ( 1 ( ItIt Portfolio Strategy: Positioned For Cyclical Downturn and Market Opportunities • Yield Curve: Focus on the front end to capitalize on steeper yield curves and expectation of Fed easing • Duration: Maintain duration above benchmark, diversifying U.S. exposure with global exposure • Mortgages: Add to historically cheap, high quality Agency MBS • Corporates: Maintain exposure while opportunistically adding where liquidity premium exists • Emerging Markets: Emphasize countries with strong fundamentals and growing FX reserves • Non-U.S.: Hold exposure to short-term securities in the U.K. and Australia as growth weakens • Currency: Employ EM currency positions as lower rates in the U.S. and the U.K. pressure the dollar and the pound sterling 14 P I M C 0 ( ( ( ( ( llli ( lllllll ( ( llll ( llllllllllllllllllll Assets Under Management by Strategy PIMCO's expertise spans all asset classes to provide effective solutions to meet investor needs Alternative Absolute Return Strategies LIBOR based vehicles:enhanced cash or pure alpha $10,564 ommodities Commodity-linked exposures enhanced with active bond portfolios 16,656 Real Estate Real Estate-linked exposure backed by inflation index bonds 85 aal Return TIPS and other inflation-hedging strategies 47,294 Tactical Allocation Tactical allocation among PIMCO funds,All Asset,All Asset All Authority' 15,521 Diversified Income Global credit combining corporate and emerging markets debt 13,543 CBOtCLO Collateralized bondsAoan obligations 5,677 Broad U.S. Market Large Cap U.S. SlocksPLUSe,SlocksPLUS®Total Retum,StocksPLUS®PARS, 34,325 Small Cap U.S. Fundamental IndexPLUS",StccksPLUS®Long Duration: International: Combines derivatives-based equity exposure with active bond management Japan, Europe Global, International Long Duration Focus on long-term bonds;asset liability management 48,602 Intermediate" Total Return,Moderate Duration 318,452 Cash Management` Low Duration, Enhanced Cash,Money Market 60,406 Credit Investment Grade Corporates,High Yield 35,482 Mortgages Emphasis on management of mortgage pass-throughs 22,094 Global Non-U.S.and global multiple currency formats 80,245 Emerging Markets Focus on solid credits with improving economic fundamentals 21,195 Municipals Tax-efficient total return management 10,456 Other 5,796 Total Assets Under Management: $ 746,301 M Assets as of December 31,2007.PIMCD now Includes the assets that it manages for third-parry clients of Its German affiliate,Allianz Dresdner Global Investors Germany.Potential differences in asset totals are due to rounding. All Asset strategies are invested in PIMCO Funds;these assets are not Included In the individual strategies. Stable Value assets have not been netted from US Total Return,US Moderate Duration and US Low Duration assets.As of December 31,2007.total Stable Value assets equal$19,688MM. 15 P I M C 0 ( Illllflll ( llllll ( Illl ( llllllll ! ( illllllllll 2007 in Review: The Subprime Crisis and the Unwinding of the Shadow Banking System As of December 31, 2007 2-Year Treasury Yield 5.4 6 5 3 9 4.6 5 13 4.2 2 4 8 10 14 w 3.8 11 16 12 17 a 3.4 15 3 18 2.6 2.2 ]an-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Subprime Emerges Contagion Spreads 1. Feb 27:Chinese stocks plummet 9%; Dow falls 4% 8. July 10:S&P and Moody's announce 13. Sep 18:Fed cuts target Fed Funds Rate 50bps negative ratings actions on over$12 billion to 4.75%, Discount Rate 50 bps to 5.25% 2. Mar 8: New Century Financial stops making loans; of bonds backed on subprime mortgages files for bankruptcy on April 2 14. Oct 15:Citigroup announces$2.2 billion in 9. Jul 18:Bear Steams announces two 3rd quarter write-downs on subprime 3. Mar 27: Bernanke:Subprime impact on economy hedge fund losses of over 90% mortgages and CDOs 8 financial markets"likely to be contained" 10. Aug 9:AIG warns that mortgage defaults 15. Oct 24:Merrill Lynch announces$7.9 billion Contained? spreading beyond subprime sector in 3rd quarter write-downs 4. Apr 24: Existing home sales down 8.4%in March, 11. Aug 16:Countrywide draws on 16. Oct 31: Fed cuts target Fed Funds Rate marking worst drop in 18 years $11.5 bn credit facility and tightens 25bps to 4.50% lending standards. S. Jun 12:Year-over-year foreclosures surge 90% 17. Dec 12: Fed cuts target Fed Funds Rate Major stock indices fall 10%from peaks, 25 bps to 4.25% 6. Jun 14: News emerges about large liquidations at indicating correction two BSAM subprime hedge funds 18. Dec 17-21:Central banks inject liquidity with 12. Aug 17:Fed cuts discount rate by 50 bps coordinated auction; Home price declines 7. Jun 22: Bear Steams offers$3.2 billion to bail out to 5.75% reach 6.8%; Super SIV bailout fund collapses one of the two failing funds SOURCE:Bloomberg Financial Markets 16 P I M C 0 v r 0 w � w � w .. w w L w w w w w w r w v Y� w W w . w YIY w w w w w illo w it £ w lip w