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
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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
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Book Page 12
ADMINISTRATION COMMITTEE MeeBng3 0 0o.8
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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
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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
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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
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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
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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
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