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RPVCCA_CC_SR_2012_06_19_07_Banking_Procurement_ServicesCITY OF MEMORANDUM q RANCHO PALOS VERDES Staff Coordinator: TO: FROM: DATE: SUBJECT: REVIEWED: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCI~ DENNIS McLEAN,DIRECTOR OF FINANCE &INFORMATION TECHNOLOGY JUNE 19,2012 BANKING SERVICES PROCUREMENT POLICY CAROLYN LEHR,CITY MANAGER L- Kathryn Downs,Deputy Director of Finance &Information Technology (CD RECOMMENDATION 1.Adopt the proposed City Council Policy for Banking Services Procurement,which would require a biannual evaluation of banking services and a competitive procurement process every six years beginning in 2012;and 2.Direct Staff to complete the competitive procurement process for banking services and bring forth a recommendation to City Council prior to the end of 2012. EXECUTIVE SUMMARY Mayor Pro-Tem Campbell requested that consideration of changing the City's current banking relationship with BOA be placed on the agenda for consideration by the City Council.On March 6,2012,the City Council made the following assignment to Staff: "Provide the staff report regarding the RFP to the Finance Advisory Committee to provide comments and recommendations back to the City Council by May 1,2012." At the same meeting,Council directed Staff to develop a recommendation to the City Council to diversify a portion of the City's cash portfolio into the Certificates of Deposit Registry Service (CDARS),preferably selecting a local gateway bank.Staff is currently in the process of establishing the CDARS relationship and expects to bring a recommendation with agreements to the City Council for approval soon,with a recommendation for Malaga Bank to likely serve as the gateway bank. Staff has prepared a proposed City Council Policy for Banking Services Procurement (see Attachment A).The proposed policy includes recommendations from the Government Finance Officers Association (GFOA),the City's Financial Advisor (Tim Schaefer of Magis Advisors),and the Finance Advisory Committee (FAC).The proposed policy would require 7-1 BANKING SERVICES PROCUREMENT POLICY June 19,2012 Page 2 of 5 a competitive procurement process every six years and a review of banking services and fees every two years,as recommended by the FAC. Staff recommends that the first competitive procurement process be conducted by the end of 2012.Even though Finance &Information Technology Staff are in the midst of redevelopment dissolution and an upgrade of the City's information technology system, Staff prefers to complete the competitive process sooner ratherthan later;as the demands of 2013 will include the two-year budget process,implementation of a new enterprise resource planning system and a possible competitive process for day-to-day information technology services.Having nearly completed the FY12-13 budget process,Staff believes it can prepare the RFP.As this is the first competitive banking process conducted by Staff, the incidental services of the City's financial advisorwould be used during the RFP process to ensure that all due-diligence steps are included.This incidental level of service would be absorbed by the FY12-13 budget. Alternate Recommendation: In light of the City's satisfaction with services and the expectation that the City would not experience significant fee savings (affirmed by the FAC),the City Council may wish consider the following alternate recommendation: 1.Adopt the proposed City Council Policy for Banking Services Procurement,with the modification to conduct the first competitive process in 2014,as opposed to 2012; and 2.Conduct a biannual evaluation of banking services and bring forth a report to City Council prior to the end of 2012. At the request of City Council,Staff has prepared an inventory of current banking services and fees and agreements (see Attachments E -G).When this matter was before the Council last,Staff advised the Council that a single agreement that memorialized all services does not exist.Upon review of the contracts file,Staff noted that the standard transactional (depository)agreement with Bank of America (BOA)is titled "Master Agreement"and references their standard fees for services.Staff believes that an umbrella agreement should be developed to include all transactional fees and services and reference all other non-transactional services and agreements (e.g.merchant credit card processing,purchase credit cards). DISCUSSION FAC Consideration The Finance Advisory Committee JFAC)discussed the procurement of banking services on March 28 th ,April 25th and May 23 r .The FAC finalized a memorandum to the City Council that outlines information the FAC considered,a draft policy and recommendations for procurement of banking services (see Attachment B). 7-2 BANKING SERVICES PROCUREMENT POLICY June 19,2012 Page 3 of 5 As part of its deliberations,the FAC: ~Received input from Mayor Pro-Tem Campbell who attended the March 28 th FAC meeting; ~Heard public comments from representatives of Malaga Bank and Occupy PV; ~Received the March 6,2012 Staff Report to City Council,along with a Staff presentation; ~Reviewed benchmarking information provided by Staff,and best practice recommendations from the GFOA; ~Asked questions of Staff,and received additional information as requested; ~Formed a Subcommittee (Members Ho and Santarosa)who conducted a teleconference with the City's Financial Advisor to discuss collateralization, competitive fees,regulations affecting public agency deposits,the banking re€Julatory environment,other legal requirements,and due diligence when considering banking services;and ~Finalized a Memorandum to the City Council originally prepared by Members Ho and Santarosa,and subsequently modified by Member James. The Banking Services sections of the minutes from each FAC meeting are attached to this report (see Attachment D). Information from the City's Financial Advisor On July 9,2010,the City's Financial Advisor provided a Memorandum to Staff with recommendations regarding the possible migration of the City's banking relationship.The Financial Advisor has provided additional information in a Memorandum dated April 18, 2012 (see Attachment C),which includes the original 2010 Memorandum and the GFOA Best Practice for Procurement of Banking Services by attachment. The Memorandum includes information about: ~The Automated Clearing House (ACH)services provided by the BOA ACH electronic network,which is used by small banks; ~The current regulatory environment for banks and expectations for the future; ~The Certificate of Deposit Account Registry Service (CDARS); ~Regulations affecting public agency deposits;and ~Recommendations for evaluation of financial institutions. Staff has incorporated these recommendations into the proposed City Council Policy,and is currently in the process of establishing a CDARS relationship. Inventory of Current Banking Services and Fees and Agreements At the request of City Council,Staff has prepared an inventory of current banking services and fees and agreements (see Attachments E -G).The inventory provides detailed information about the services provided by BOA,including depository account services, merchant credit card processing and the core banking agreements between the City and BOA. 7-3 BANKING SERVICES PROCUREMENT POLICY June 19,2012 Page 4 of 5 Inventory of Current Banking Services and Fees -Transactional-DDA (attachment E) The City's banking arrangement with BOA is subject to monthly transactional fees for processing deposits,disbursements and accounting.The fees are offset by earnings credits based upon the amount of the investable (available)cash balances in the demand deposit account (DDA).The fees include the FDIC pass-through assessment,depository fees,check disbursement fees,electronic ACH and wire transfer fees and accounting fees. BOA provides the City with several transactional discounts due to the bundling of merchant credit card services with transactional services (see Attachment E). The following excerpt,copied from the staff report,dated February 21,2012,is still applicable: "Although banking fees fluctuate with the volume of monthly transactions and offsetting eatnings credits,the total annual checking and [merchant]credit card service fees range from about $26,500 to $30,000 as follows: Range of Total Annual Checking and Credit Card Service Fees·Net of Earnings Credits v.Gross· Excluding Earnings Credits "Gross"• Net of Earnings Excluding Credits Earnings Credits Annual checkinq fees (net of earninq credits)$7,500 Annual checkinq fees (qross before earninq credits)$11,000 Annual credit card fees $19,000 $19,000 Total (range net of earnings credits v.gross - excluding earnings credits)$26,500 $30,000 Since the City has bundled a diversified service with Bank of America during the past several years,the City has experienced a very competitive rate structure." Inventory of Current Banking Services and Fees -Merchant Credit Card (Attachment F) The City's merchant credit card processing arrangement with BOA is subject to transactional fees.The fees include Interchange Fees assessed by credit card companies (the most significant cost),and other service fees.The average percentage credit card processing fee rate for non-website transactions is about 2.6%,including the Interchange Fee assessed by credit card companies.The percentage transactional cost of merchant credit card transactions for on-line processing of business license tax payments is greater, an average rate of about 5%.On-line credit card transactions are subject to additional fees for secured transactions.The City expects to collect more than $900,000 of revenue via merchant credit cards during the FY12-13. 7-4 BANKING SERVICES PROCUREMENT POLICY June 19,2012 Page 5 of 5 Inventory of Essential Banking Agreements (Attachment G) When this matter was before the Council last,Staff advised the Council that a single agreement that memorialized all services does not exist.Upon review of the contracts file, Staff noted that the standard transactional (depository)agreement with Bank of America (BOA)is titled "Master Agreement"and references their standard fees for services.Staff believes that an umbrella agreement should be developed to include all transactional fees and services and reference all other non-transactional services and agreements (e.g. merchant credit card processing,purchase credit cards).The inventory contained in Attachment G includes essential depository,treasury,commercial (purchase)credit card, merchant credit card processing,and the "Master"(depository transactions)account agreements.The City has also entered into a number of ACH agreements to allow for electronic transmission of monies with trusted organizations,especially with governmental agencies: ATTACHMENTS A -Proposed City Council Policy for Banking Services Procurement B -Finance Advisory Committee Memorandum dated May 23,2012 C -Magis Advisors Memorandum dated April 18,2012 D -Finance Advisory Committee Meeting Minutes -Banking Services Discussions on March 28,2012,April 25,2012,and May 23,2012 E -Inventory of Current Banking Services and Fees -Transactional-DDA F --Inventory of Current Banking Services and Fees -Merchant Credit Card G -Inventory of Essential Banking Agreements 7-5 Attachment A CITY COUNCIL POLICY NUMBER: DATE ADOPTED/AMENDED:June 19,2012 SUBJECT:Banking Services Procurement banking fees Biannual Evaluation The Oity Treasurer shall perform a biannual and services,which are defined to POLICY: 1.Demand deposit accounts; 2.Merchant credit card processing; 3.Payment card program;, 4.Custody arrangements (0\JUtzed). :};~:1~"<:;.:l;1:~;~;;§;;~;" The biannual evaluation should cori:~I~er:":j::;1;f;~j:;:::::>;: ':.,.·:::~~:::~.:;§fi~~;**"·';·;;;;::i~~:;iI1j~~;::;, 1.The financi."~:,of the::::i~ity's bankin'9 institution(s),which may include a.of th "titution;~~;((onsolidated Reports of Condition and Income eports'~an deIiRt~~.ency rates,charge-offs,compliance with public c .."":~*requirements,and audited financial st.",,:t~to,rmed r City Staff or a treasury advisor; 2."","rre;~!~::<le customer satisfaction with the existing banking ',"0''''t't t'()",x'"<;:;t::S:iIF'IS I u Ion s ';::::~i;::;;:,. 3~:::~~(lY changes tQ~~~rvIC .,[1d fees;and i',\V'\:'!\~>-}';'\'/4.''.ed changes~:~f servicfes. ,i~:~';:;,'::>~~~; The resu't;'ii'j:~;!~l shall be reported to the City Council. Competitive pr~~~~§~~~:ry Six Years The City's Purchasing Ordinance (Chapter 2.44 of the Municipal Code)provides an exception for financial services (such as banking)from the bid requirements. Recognizing that a competitive process is costly and the benefits derived may not outweigh those costs,the City Council has determined that it is in the best interest of the City to conduct a periodic competitive process for the procurement of banking services. 1 of 2 7-6 Attachment A The City Treasurer shall initiate a competitive procurement for banking services every six years beginning in 2012.The process shall include a Request for Proposal (RFP)that includes services (both required and optional),fees, earnings credit rates,and availability schedules for deposited funds.The competitive process will replace the biannual evaluation of banking services and fees,in the year in which the competitive process is performed. Prior to issuing the RFP,the City Treasurer shall perform a comprehensive evaluation of needs and services;which may include meeting with several banking institutions to identify desired services to be added~to the RFP. ,ti~,~~:;~\f"< The City Treasurer's evaluation of Proposals should ip;~li1~te: ;.;,J.'{<,;:;:'<::~~~::<:; 1.A determination of whether the institutrotf:i:meet~;:;~Qr exceeds federal .regulatory capital requirements;."S;::';?:·.';::~::<: 2.The institution's knowledge of.~:~~i':>ability to adhY!id~~>.to California Government Code collateralizati9.1li!i~~;ijquiremen!s;;:::;;k:i{;<: 3.A confirmation of Federal D~~~~}t In~.~\~~)lce Corporatl~n (FDIC) coverage;'<?:;ii:::.;'.::;;;~?:{J?::' 4.The institution's experien~~:serving th :~>V nment sector; 5.The benefits and costs~~fl:~~~f\¥ing for::~~~{)'ices through direct fees, compensating balances,o:~~~.ct5':,..,tion of~t~~\.two; 6.The institution's use of tech:h~"ogy;;}~; 7.The customer,~.".·.:~Ievel p'~~;p '.:n1j$;::~~IJ.,~~inquiries to identify the satisfaction 1.e~~F'C)&t~:er locar;',;;r'nments:::::" 'J,<"',:,:"'"·",::/;:"'<".r.', ,:,';}:~:2,;~<,">·':~~;~:~~-,<'~~;!~;:.;" Prior to making">"":comme9~ition,the'~:~:j:ty Treasurer shall utilize independent bank evaluation s.;·~~s~~t@:~f .....~!e 'G;~~t to verify the creditworthiness of up to three '~:~~~,~I irfsl'~.~!l~ns pa".:~li;f;1:g in the competitive process.The indePE1"o""':<':>eX(~!~;~tor::::::@l~Y be a financial consultant with the necessary exp~ce to perrd~he 'e~~tion.The':;~:~~Q:~to City co~~ijtl,:sh~2i~:;include: ,:,,/,;,;,),~ :.:;>::: 1.Prop~~~d cont~~cts that specify services,fees,and collateralrequir~'nii(~~:?;;:'~'~1,? 2.Results d "',~City Treasurer's evaluation; 3.Results of tne independent evaluator's evaluation of creditworthiness;and 4.A recommendation to either continue the City's current banking relationship(s),or to retain the services of a new banking services provider. 2of2 7-7 Attachment B MEMORANDUM To: From: Date: Subject: Rancho Palos Verdes City Council Finance Advisory Committee May 23,2012 Procurement of Banking Services 1.Assignment from City Council In response to an earlier inquiry from one of the City Council members,on February 12, 2012,Staff prepared a Memorandum entitled "Consider Request for Proposal-City Banking Relationship".In that memorandum,Staff recommended that the Council: "1)Direct Staff to: a)Retain a consultant to perform a comprehensive evaluation ofthe banking products,services and technology currently provided to the City,as well as additional desirable cost-effective services and products,leading to the preparation of a Request For Proposals ("RFP")for banking services;and b)Upon completion of the RFP,conduct a competitive process for banking services leading to a recommendation to the City Council to enter into an agreement for banking services with one qualified bank; 2)Separately develop a recommendation to the City Council to diversify a portion of the City's cash portfolio into the Certificates of Deposit Account Registry Service ("CDARS"),ensuring opportunities for selecting a local gateway bank." On March 6,2012,the City Council considered the above recommendations,directed Staff to provide a copy of its memorandum to the Finance Advisory Committee (FAC), and requested FAC to provide comments and recommendations concerning the subject matter of part 1)of Staff s recommendation. 2.Consideration by the Finance Advisory Committee On March 22,2012,the members of the FAC received the above assignment as part of its meeting packet for its March 28,2012 meeting. 1 7-8 Attachment B On March 28,2012,the F AC met,received a presentation from Staff and discussed the issues.Councilman Campbell attended that meeting and provided additional input and responses to questions from FAC members.At the conclusion of that discussion,the Chair appointed committee members Ron Santarosa and Tuan Ho to act as a subcommittee,study the issue further and report back to the FAC at its April 25,2012 meeting.The Chair requested the subcommittee to consider four areas: •The Government Finance Officer's Association (GFOA)'s statement of Best Practices relating to the procurement of banking services; •The importance of a cost-benefit analysis of the Request for Proposal (RFP) process; •·The importance of establishing and/or improving the transparency of the City's banking practices;and •Whether the City should consider community based providers,and if so,how. The subcommittee obtained additional information from RPV's Director of Finance, Dennis McLean,its Deputy Director of Finance,Kathryn Downs,and the City's Financial Advisor,Tim Schaefer of Magis Advisors.On April 24,2012,the subcommittee sent a report to the remaining committee members as part of the materials for the next FAC meeting, The subcommittee reported that from a purely financial viewpoint,there is very little potential benefit compared to the costs that would be involved in the RFP process.E.g., based upon Staffs cost estimates,using the low-end of the advisor expenditure,the high- end ofthe fee range and assuming an arbitrary 10%[$3,000]fee savings per year,it would take 3.3 years to break even.1 The subcommittee reported that the GFOA recommends: •That state and local governments establish a procurement process and assure periodic reviews of banking services. •That a treasury management review and comprehensive evaluation be performed prior to the issuance of an RFP to ensure that the treasury manager asks for all required and optional banking services. This calculation does not include the cost of Staff time.Staff estimated that the amount of time required to prepare for and process a banking RFP and implement a change could be as much as 200 hours.Even if we assume that this number could be reduced to 100 hours,a blended,fully-burdened rate for stafftime of$175 per hour would result in an additional cost of $17,500 (assuming a change in banks),extending the hypothetical break even point to over 10 years. 2 7-9 Attachment B •Considering a Request for Information [RFI]or meeting with several banks in advance ofthe RFP process to determine ifthere are other products or services that the agency might potentially use. The subcommittee recommended that RPV develop and adopt a banking services procurement policy to enable the City to realize the full benefit of the GFOA Best Practices,and that such a policy should identify: •Which banking products or services are subject to periodic evaluation.While the GFOA and Staff identify merchant card processing and payment card programs as banking services,non FDIC-insured financial institutions can provide these services too.In addition,GFOA identifies safekeeping or custody arrangements as banking services.The City's current depository bank does not provide safekeeping or custody arrangements for the City's investments. •The methods used to reevaluate products,services and providers [e.g., consultations,RFIs,RFPs,etc.]; •The time periods for reevaluation of each category of products,services or providers; •The dollar value ofthe banking product or service subject to competitive procurement;and •The minimum competencies,qualifications and financial condition required of providers to be retained by the City. The subcommittee also suggested that a banking procurement policy could address the cost-benefit ofRFPs,and define and consider the appropriateness of using community- based providers. On April 25,the FAC met and discussed the subcommittee report,heard public comments and agreed that any decision to prepare an RFP for banking services should be a part of an overall policy.This should not be an issue which simply resurfaces periodically. The FAC further agreed that in light of the size of our City,there is a very limited likelihood of actual financial savings compared to the time and cost that would be required for an RFP for banking services at this time.2 Finally,the FAC noted that there are no banks actually headquartered in Rancho Palos Verdes and that from an ease and management standpoint,most of the banks that could 2 The Director of Finance and Technology for the City of Los Altos told us (1)that changing banks does not always provide better pricing,which is very competitive.He felt that the primary reason to consider a change is service. 3 7-10 Attachment B provide the minimum competencies, qualifications and financial condition which the City might require,are readily accessible in the general local area. Few cities have banking procurement policies.We were able to obtain the following information from peer and/or neighboring cities: •Hermosa Beach does not have a policy and has not issued an RFP in more than 14 years.Its new City Treasurer is currently conducting an informal process and has proposals from 10 banks. •Laguna Hills has a single sentence policy that provides,"In the selection of banking services,a competitive public request for proposal will be used at least every five years."The scope of that process and any related decisions are the responsibility of Laguna Hills'Deputy Treasurer/Finance Director under the direction of the City Manager/Treasurer. •Lomita does not have a policy.They did issue an RFP for banking services 3 years ago at the request of one of its city council members,but had not done so for at least 10 years prior to that time. •Los Altos does not have a policy,but does review pricing on a regular basis. •Manhattan Beach does not have a policy and has not issued an RFP in 11 years.3 •Palos Verdes Estates does not have a policy and has not issued an RFP in a "long time". •Redondo Beach does not have a formal policy,but its elected city treasurer has an informal practice of issuing an RFP for banking services every 5 years.After its most recent RFP process,Redondo Beach retained Bank of America. •Rolling Hills does not have a policy and has not issued an RFP for at least 10 years. •Rolling Hills Estates does not have a policy and has not issued an RFP for at least 10 years. •Saratoga does not have a policy.It has not issued an RFP for banking services during the five years that the current finance manager has been there,or to her knowledge,for at least five years before that. 3 Manhattan Beach became dissatisfied with its banking relationship with Wells Fargo Bank in 2001.At that time,Wells Fargo was going through a merger and failed to provide Manhattan Beach with the levels of service that it wanted.The city decided to change banks,issued an RFP,and,as a result,moved its banking services to Union Bank. 4 7-11 Attachment B In connection with acquiring the above information,we spoke with financial representatives from a number of cities.Almost all of them commented that from a cost-benefit standpoint,there is little to be gained from the RFP process at this time. 3.Recommendation re establishment of Banking Services Policy The FAC is specifically responding to the Council's request for a recommendation concerning the City's procurement of banking services.We have not included any discussion of provisions which already exist or might form a part of a more extensive overall finance management policy.4 The FAC also recognizes that there are administrative considerations upon which Staffmay wish to comment and non-financial considerations (such as the recent efforts by Occupy RPV)which the Council may wish to consider. Therefore,the banking services procurement policy prepared by the FAC for the City Council's consideration is submitted as Exhibit A to this Memorandum in outline form. It is the recommendation of the FAC that the City Council consider the attached policy along with any comments which Staff may have,modify it as may be appropriate, including inserting specific responses where there are options [highlighted in red]5,and adopt the policy.6 In summary,the attached policy provides for a biennial review of banking services and an RFP process for the City's major banking services every six years.We recognize that there are a few cities which utilize RFP procedures every 5 years (the great majority do not),but recommend the attached policy (1)because ofthe disproportionate expenditures 4 In his July 10,2010 letter to the City from Tim Schaefer of Magis Advisors warned that "...policies and procedures come with a cost -sometimes a significant cost. Policies and procedures must be developed and vetted.Staff must be trained and oriented to the policy goals.Time and systems must be dedicated to the maintenance of these protocols.Larger agencies normally have staff resources sufficient to develop a degree of specialization needed to manage these processes.Many smaller agencies find this very difficult,particularly in stressful budgetary times.For that reason,we have advised you to proceed cautiously in the development ofthese practices and policies,recognizing that the need for safety is paramount,but that staff resources are already very thin.In short, the'gain'from the change must justify the cost,both initial and ongoing." 5 The FAC notes the position stated in the Staff report concerning immediate allocation of Staff time,and commends the determination of when any reporting process and/or a requirement to initiate an RFP process should commence to the discretion of the Council. 6 We note that the City's Investment Policy was adopted by Minute Order,and that its Reserve Policy was adopted by Resolution. 5 7-12 Attachment B of resources involved in such a process,and (2)because scheduling such procedure an even number of years apart will allow it to be tailored into the biennial reporting process. The FAC believes that Staff would have the capability to conduct the RFP process without hiring an outside consultant;however a consultant may be necessary if the Council has competing demands on Staff. Contracts for banking services with both existing providers and newly selected providers should comply with the provisions of the Rancho Palos Verdes Code of Ordinances, Chapter 2.44 -Purchasing System, and the California Government Code. 6 7-13 Attachment B Exhibit A -Proposed Banking Services and Procurement Policy for the City of Rancho Palos Verdes 1.Staff shall bienially evaluate all of its banking services (including,but not limited to,demand deposit accounts,merchant credit card processing and payment card programs,and safekeeping or custody arrangements)and costs and report the results of that evaluation in [even-numbered /odd-numbered years]to the City Council,together with recommendations,if any,for changes. a.The evaluation shall consider,inter alia,changes,if any,in methodology, technology and/or available products and services;changes,if any,in costs for products and services utilized by the City of Rancho Palos Verdes;and changes in management practices or financial condition of local banking institutions. b.The evaluation shall consider both institutions used by the City of Rancho Palos Verdes and other competing institutions in the general local area. 2.Staff shall initiate a process of competitive procurement for its demand deposit accounts and merchant credit card programs every six (6)years,beginning in [20-l.The process shall include the issuance of a request for proposals (RFP) that includes services,fees,earnings credit rates,and availability schedules for deposited funds. a.Prior to the issuance of an RFP,Staff shall (a)use Requests for Information (RFI)and/or meet with at least three (3)banks to determine if there are any products/services available that the City might be interested in adding,and (b)conduct a treasury management review and comprehensive evaluation7 to ensure that any and all required and optional banking services are covered in the RFP. b.As a part of such RFI and/or interview process,Staff shall evaluate its payment card programs,safekeeping or custody arrangements or other banking products or services and determine if it is appropriate to include additional products or services in the City'S RFP for banking services. 3.No later than in its biennial report next following an RFP process,Staffshall report the results of such process and make a recommendation to the City Council either to retain existing banking products and services or to change one or more of such products or services. a.Before making its recommendation to the City Council,Staff shall (1) utilize independent bank evaluation services to review the financial health 7 A suggested list of products and services to be considered is set forth in Paragraphs 4 and 5 of the GFOA's Best Practice guideline for Procurement of Banking Services. 7 7-14 Attachment B ofthe existing and/or applicant institutions,and (2)confirm that the City's deposits are fully insured by the FDIC or collateralized. b.Staffs recommendation shall (1)address the adequacy of the capitalization of the existing or proposed provider and the extent of its utilization ofthe latest technology,and (2)include an evaluation ofthe quality of the provider's customer service and a cost-benefit analysis of any proposed change. c.Such report shall also include a statement with respect to Staffs evaluation and determinations with respect to payment card programs, safekeeping or custody arrangements and other banking products and servIces. 8 7-15 Attachment C MEMORANDUM MAGIS ADVISORS pll-bHet ftnlttl-ce ~otHtithtfiS: To:Dennis McLean Director of Finance &Information Technology City of Rancho Palos Verdes From:Tim Schaefer Magis Advisors Copies:Kathryn Downs Deputy Director of Finance &Information Technology Date:April 18,2012 Subject:Additional information on possible migration of City's commercial banking relationship(s) This is a follow up to the telephone conversation we had Monday afternoon,April 16,2012,and to our previous communication to you dated July 9,2010 on the above matter. SUMMARY The discussion in the City is focused on (1)whether the City would benefit from establishing a commercial/depository relationship with a new bank;and (2)whether such a change in banking services would be cost-effective.In brief,the answer to the first question is unknown,and the answer to the second is "probably not." THE PRESENT SITUATION Presently,the City uses Bank of America as its primary depository.Bank of America provides general commercial banking services to the City including,checking account (demand deposit),Automated Clearing House (ACH)services and associated or related services generally accompanying these,such as stop payment orders,currency and coin handling,night deposit services,etc.Of these,the ACH services may be the most significant.ACH is an electronic network for financial transactions that processes large volumes of credit and debit transactions in batches.ACH credit transfers include direct deposit payroll and vendor payments,which I understand that the City is presently using. The City pays for its banking services through a process known as "account analysis."The typical bank analysis system calculates and reports monthly activity charges and presents that data on the customer's monthly statement.The depositor's statement summarizes monthly account balance information in addition to providing a detailed listing of monthly activity charges,categorized by related service. 1301 Dove St.,Suite 380 "Newport Beach,CA 92660 "Telephone:(949)428-8363 www.magisadvisors.com 00117083.DOCX7-16 Attachment C Memorandum toMr.McLean and Ms.Downs City of Rancho Palos Verdes April 18,2012 Page 2 The typical information presented consists of:(1)the depositor's daily ending ledger balances after all transactions have been posted;(2)the average amount of each day's ledger balance that is in the process of collection (called the daily "float");the average collected balance,which is the ledger balance minus the float;(3)the amount of the collected balance that the depository must keep on reserve with the Federal Reserve to comply with banking regulations (these reserves are computed by applying the applicable reserve rate to the average collected balance);(4)the investable balance,which is the average collected balance in that account available after deducting the reserve requirement for that account (and which is also used in the calculation of the "earnings allowance"discussed below);and,(5) the collected balance needed to offset the cost of analyzed services for all accounts in the relationship. These initial steps then determine whether the depositor's average collected balance is sufficient to offset the ~ost of the services that the bank has furnished to the depositor during the applicable analysis period. An "earnings allowance"is calculated by multiplying the earnings credit rate by the number of calendar days in the analysis period,divided by the number of calendar days in the year,then multiplied by the investable balance.It is common that some fee-based charges are not eligible to be offset by the earnings allowance.An excess credit is incurred when the earnings allowance amount is greater than the total analyzed charges.This is,of course,good news for the bank.On the other hand,a deficit fee occurs when the earnings allowance is less than the total analyzed charges (deficit fees are commonly referred to as balance deficiency fees). THE CURRENT ENVIRONMENT FOR BANKS-IN GENERAL The commercial banking industry is in a period of very significant transition at the moment.For example,the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,signed into law in July of 2010,severely curtails the "swipe fees"banks charge merchants for processing debit-card transactions.The industry claims that the effect of that element alone will reduce bank revenues by billions of dollars a year.The near collapse of the banking industry in the financial crisis of late 2008 and early 2009 has also provoked regulatory proposals that are likely to profoundly affect the profitability of the banking sector.By way of example,the Basel III accords (the international regulatory framework for banks and other financial institutions)establish limits on the leverage that banks can apply to their balance sheet through lending and securities trading.This reduced leverage is almost certain to ramp up the industry's quest for additional fee income.The challenge with managing through all of these seemingly conflicting matters is with the timing.Not all banks will be impacted the same,and not all banks will be subject to the evolving regulation on the same schedule.Nevertheless,the City should remain aware that the changing regulatory environment will likely impact its costs of banking services going forward. Should the City "shop around"for alternatives to its current banking arrangement at this time?We do not recommend that at the moment.The specific implementation of the new regulations will occur over the next several years.Many of the interpretations of the regulatory guidance remain to be 7-17 Attachment C Memorandum to Mr.McLean and Ms.Downs City of Rancho Palos Verdes April 18,2012 Page 3 written.We expect that the regulated institutions will aggressively lobby the regulators to soften or delay the implementation of them until profits are fully restored to their pre-2008 level. This is a difficult issue,since it requires formation of judgment calls that are difficult to support with empirical evidence.That's because there are few opportunities to compare costs that are exactly equal among banks so that comparisons can be made without adjustment bias. OBSERVATIONS The literature available from the GFOA provides useful guidance on this matter.For example,the GFOA's "Best Practice"entitled Procurement of Banking Services recommends that state and local governments establish a specific procurement process as well as perform periodic reviews of their banking services.GFOA also recommends implementing a "due diligence"process to select banks to perform such services.That is why the dynamic regulatory environment presents the current challenge-it is difficult to develop a due diligence process that is based on data that may change in unknown ways. The GFOA's Best Practice also encourages a thorough review and comprehensive evaluation of the agency's needs and tolerances before issuance of an RFP for banking services.We endorse that position and strongly recommend it to you.As we suggested on the telephone,we believe that meetings with banks likely to be respondents to an RFP will be fruitful.It will enable you to better understand what services the City is using that will probably remain unaffected by the changing regulatory environment and avoid costly mistakes associated with banks that may choose to change their service delivery focus as a result of the new framework.In short,we encourage the City to move deliberately on this matter and avoid hasty actions,relying instead on thoughtful,deliberate responses to a changing climate. We would be happy to discuss this with you further if you would like a closer examination of the process.Please let us know if there is additional data or analysis that you would like to have as you deliberate over this matter. MAGIS ADVISORS Timothy J.Schaefer Principal Owner/President Attachments: 1.GFOA Best Practice,Procurement of Banking Services (1997,2004,2005,and 2010) 2.Memorandum from Magis to the City dated July 9,2010 7-18 Attachment C BEST PRACTICE Procurement of Banking Services (1997,2004,2005,and 2010)(TIM) Background.State and local governments use a wide variety of banking services for the deposits,disbursement, and safekeeping of public funds.Prudent procurement practices require the reevaluation of banking services on a periodic basis.In addition,continual changes in technology,treasury management practices,and banking industry structure offer public funds managers opportunities to reevaluate banking services and costs. Recommendation.The Government Finance Officers Association (GFOA)recommends that state and local governments establish a procurement process and assure periodic reviews of banking services.Adhering to a defined due diligence in selecting banking services and establishing proper controls will help a government achieve its objectives of appropriate and cost-effective banking services while protecting its funds and reducing risk to its reputation.Governments should consider including the following practices in their procurement of banking services: 1.Periodically initiate a process of competitive procurement in accordance with the state and local laws and regulations,for major banking services.The process should use a request for proposals (RFP)that should include services,fees,earnings credit rates,and availability schedules for deposited funds.In addition,it is important to utilize independent bank evaluation services to verify creditworthiness of the financial institution prior to award of a contract and throughout the contract period. 2.Have contracts for banking services that specify services,fees,and other components of compensation.If applicable,this should include tri-party depository contracts that require that the custodian complies with collateral requirements. 3.Identify a primary relationship manager who will serve as a central point of contact,understand the needs of the entity and be able to offer recommendations for service improvements. 4.Evaluate the relative benefits and costs of paying for services through direct fees,compensating balances,or a combination of the two (blended).Factors to consider in this evaluation are the earnings credit rate,reserve requirements and insurance fees on deposits. 5.Evaluate the government's needs in comparison to the costs and benefits of specific banking services, including: •Electronic balance and transaction-reporting services (image access and usage) stop payments payment capabilities deposit capabilities transmitted analysis and statements digitized storage of paid checks and statements stale date check management access to safekeeping/custodial information access to investment performance reporting •Accounts 7-19 Attachment C controlled disbursement collection account zero-balance interest-bearing investment sweep account •Security features positive pay services including payee positive pay service (which is payee matching) reconciliation services Automated Clearing House (ACH)blocking/filtering services check to ACH conversion Non-sufficient funds (NSF)/ACH conversion for representment of NSF check (Represented Check Entries,RCK) collateral requirements (reporting by the custodian required) •Treasury management services lock-box services credit card receipt merchant services safekeeping or custody arrangements (delivery versus payment,DVP) procurement cards stored value (payroll)cards Web links for Internet payment for services 6.A treasury management review and comprehensive evaluation should be performed prior to the issuance of an RFP to ensure that the treasury manager asked for all required and optional banking services.Consider using a Request for Information (RFI)or meeting with several banks in advance of the RFP process to determine if there are any products/services available that your jurisdiction would be interested in adding.This preliminary work is necessary periodically to take advantage of changes in banking services and technology as new services become available.In the event that these services are procured through the use of a request for proposal,the request for proposal and the vendor response should be included as part of the contract. References. •An Introduction to Treasury Agreements,Linda Sheimo,GFOA,1993. •An Introduction to Treasury Management Practices,GFOA,1998. •Banking Relations:A Guide for Governments,Nicholas Greifer,GFOA,2004. •GFOA Best Practice,Collateralization ofPublic Deposits,2007. Approved by the GFOA's Executive Board,March 5,2010. 7-20 MAGISADVISORS public finance consulting To:Mr.Dennis McLean Ms.Kathryn Downs City of Rancho Palos Verdes From:Tim Schaefer Date:July 9,2010 Re:Possible migration of City's banking relationship or services ISSUE PRESENTED Attachment C MEMORANDUM COpy You have posed the following question to us:"Should the City consider altering its banking relationship in order to better support local banks?"We believe that this may be unnecessary. SUMMARY The City may wish to consider an alternative as an interim step.The alternate proposal involves a program that we have discussed with you in the past -placement of time deposits using the "certificate of deposit account registry service"(or "CDARS").Using this approach may enable the City to accomplish the goal of a modest diversification of its deposit exposure without incurring the staff time and expense required to accomplish a wholesale review of its banking relationship at this time. It is our view that the transfer of a major portion of the City's balances to another institution might be costly,both in terms of what it pays for banking services and the amount of staff time and effort needed to accomplish the move.Such a move should be undertaken only when there is relative certainty that the move will enhance the City's safety or efficiency in its treasury operations.Additionally,City staff has advised us that annual fees for the current banking relationship are about $7,000,and that they are generally satisfied with the services provided by Bank of America. The current legislative and regulatory environment is in flux.Accordingly,it is not possible to evaluate improvements to safety or efficiency at this time.Nevertheless,we have attempted to identify some of the issues that the City might face should it decide to elevate the discussion.We have also suggested some protocols it may wish to institute to enable an objective review of the situation,though it is the establishment of the protocols that is most difficult due to the factors discussed next. There are significant changes in store for banking regulation arising from the pending enactment of the financial reform bill (now known as the "Dodd-Frank bill")that would leave the financial services industry largely intact,but which would create a much larger network of regulation that would 1301 Dove Street,Suite 380 Newport Beach,California 92660 Telephone:(949)428-8363 00108234.DOCX 7-21 Memorandum to Mr.McLean and Ms.Downs Re:Possible migration of City's banking relationship or services July 9,2010 Page 2 Attachment C COpy presumably reduce the likelihood of another financial crisis similar to the one that began in late 2008. The bill's final passage is expected within the next several weeks.It is widely expected to set off a rush of activity:two long-standing bank regulators would be combined;and,regulators would have to launch more than 20 studies on controversial topics such as limiting the risky activities of big financial firms and setting precise capital reserve standards for banks.It is this last feature that provokes our caution in making a move at this time.A more complete discussion and rationale follows. How SHOULD RANCHO PALOS VERDES PROCEED? It is clear that the likely battle over financial reform will now move from the Congress to the regulatory network - a major portion of which hasn't even been created yet.That is why we have concluded what the Chair .of the Federal Deposit Insurance Corporation concluded many months ago -smaller institutions represent greater risk for uninsured deposits than do the larger ones.It may be lamentable, but it is true.So,how should the City proceed in the meantime? BACKGROUND Public agencies use a wide variety of banking services.Among them are deposits (including direct deposits),automated disbursement and collection programs,and safekeeping of public funds.Until the 1970s,most public agencies'treasury functions were limited to making sure that the bills were paid on time.Excess cash was typically left idle in the checking account.If investing was being done,it was usually confined to placement of excess funds into certificates of deposit at local banks.During the high interest rate environment of the late 1970s and early 1980s that changed.Today,a public agency's bank provides a wider array of services and the treasury function has become much more sophisticated and time consuming.Recent developments in banking technology have made a significant difference in the way public agencies manage their cash -both in the banking system and in their related investment activities.The use of day-to-day electronic transactions based on pre-arranged agreements between the City and its vendors and other public agencies is commonplace.This is the case with virtually all public agencies.To remain effective,these activities must be closely coordinated. The banking system is experiencing turmoil unlike any seen since the Great Depression of the 1930s.In 2010,for example,86 banks have failed since January 1st -an increase of more than 90%by number over the equivalent period in 2009.In the full year 2009,the FDIC reports that there were there were 140 bank failures nationwide versus just 25 failures in 2008 and only 3 in 2007.The collapse of the housing market,and the increase in mortgage delinquencies and home foreclosures,coupled with the more stringent credit standards (including standards that banks impose on one another)have allied to this dramatic increase.The typical pattern of bank failures today involves the erosion of risk-based capital coupled with mounting loan losses primarily from residential mortgages and,more recently,from commercial loans.The number of FDIC "problem banks"and financial institutions on the FDIC's "watch list"rose to 775 at the end of the first quarter 2010 -an alarming increase. 7-22 Memorandum to Mr.McLean and Ms.Downs Re:Possible migration of City's banking relationship or services July 9,2010 Page 3 Attachment C COpy This is a significant phenomenon for depositors such as the City,and in particular for depositors seeking alternatives in smaller institutions.So long as those alternatives enjoy deposit insurance from the FDIC, there is no impediment to using these smaller organizations.However,in the City's case,its probable funding need would exceed the limits of readily available deposit insurance.A former California banking regulator,Walter Mix,was quoted in an article in February saying:"Banks are lending at a minimum,as problem assets are worked out and recapitalization occurs.""Most Cease and Desist Orders are for small and mid-sized banks,another indicator of where these failures are occurring,"Mix said. Fears of "contagion"from major bank failures led the Federal government in 2009 to increase availability of deposit insurance and to effectively nationalize several of the U.S.'major banks,including the City's p'rimary deposit bank -Bank of America.Eight major institutions (nine if you count Merrill Lynch,now part of BofA)received funds from the Treasury characterized as "bolstering healthy banks" to enable them to weather massive liquidity challenges.Despite this characterization of "healthy,"Bank of America also required additional government aid to help it cover the massive losses resulting from its acquisition of Merrill Lynch when that transaction closed in early 2009. This stabilization maneuver produced a corresponding increase in the credit ratings of these major banks.Today,in our opinion (and that of many other market participants)Bank of America's ratings remain at least several levels above where they would be without the massive government support that was infused into them in late 2008 and early 2009.The prevailing wisdom on Wall Street,echoed by the rating agencies,is that "too big to fail"is now an embedded fact,regardless of the passage of the Dodd- Frank bill. This "fact"has been publicly acknowledged by Sheila Bair,the FDIC Chairman.In late 2009,Bair warned that small community banks were struggling to compete against behemoths such as Citigroup and Bank of America.She specifically cited the $700 billion bank bailout as "proof"that Federal government is willing to spend whatever it takes to keep the biggest banks from going under.IIIToo big to fail'has become worse,"Bair told USA TODAY."It's become explicit when it was implicit before.It creates competitive disparities between large and small institutions,because everybody knows small institutions can fail.So it's more expensive for them to raise capital and secure funding."[emphasis by this writer]That is the essence of the problem facing the City.Migration of its banking relationship away from one of the "too big to fail"banks would trigger a requirement for a surveillance system that is not yet developed and the architecture of which cannot be determined until regulatory requirements are better understood. RATIONALE The general theory of safeguarding public deposits places greater importance on the safety of those deposits than is usually sought by private sector depositors.For that reason,in California (as well as many other states)public deposits must be secured by collateral.Federal law imposes certain 7-23 Memorandum toMr.McLean and Ms.Downs Re:Possible migration of City's banking relationship or services July 9,2010 Page 4 Attachment C COpy limitations on collateral arrangements between public sector depositors and their depository institutions.These arrangements have failed in the past -most recently in the Orange County bankruptcy fiasco in 1994.These failures left some public agencies unclear about their right to the collateral interest in the pledged securities.The control of collateral against public deposits is much more complex than it appears.Monies move in and out quickly,and the collateral itself is subject to market value risk.For those reasons,many public agencies combine several security features into their banking and depository relationships.These security features usually rely on a combination of deposit insurance,collateralization and a surveillance system over risk exposures to depository institutions.The Government Finance Officers Association has recognized many of these features in a "best practice"for collateralization of public deposits,most recently updated in 2007. To accommodate this confusing,and at times conflicting,set of needs,many public agencies develop fairly elaborate systems of risk control.These programs generally include a stated policy toward risk management.However,these policies and procedures come with a cost -sometimes a significant cost. Policies and procedures must be developed and vetted.Staff must be trained and oriented to the policy goals.Time and systems must be dedicated to the maintenance of these protocols.Larger agencies normally have staff resources sufficient to develop a degree of specialization needed to manage these processes.Many smaller agencies find this very difficult,particularly in stressful budgetary times.For that reason,we have advised you to proceed cautiously in the development of these practices and policies,recognizing that the need for safety is paramount,but that staff resources are already very thin. In short,the "gain"from the change must justify the cost,both initial and ongoing. RECOMMENDA nONS Should you decide to proceed in this manner,we recommend that you consider using a variation of the GFOA's best practice for procurement of banking services.Included in the criteria for selection of a depository institution is the evaluation of the relative benefits and costs of paying for banking services through direct fees,compensating balances,or a combination of the two.This best practice also recommends that a public agency conduct a comprehensive evaluation of its needs and systems prior to issuance of a request for proposals or solicitation of alternate depositories.The variety of services to be considered is listed in the best practice,a copy of which is attached to this memorandum. In addition to the matters discussed in the GFOA best practices,we believe that the following elements should be also be considered for incorporation into the City's policy guidance: 1.A framework for adequate protection of City funds that considers maintaining accounts only with commercial banks that meet or exceed Federal regulatory capital requirements;and 2.An institutionalized procedure for reviewing the financial condition and performance of all of the City's depositories;and 7-24 Memorandum toMr.McLean and Ms.Downs Re:Possible migration of City's banking relationship or services July 9,2010 Page 5 Attachment C COpy 3.Establishment of a system for recognizing early warning signs or problematic developments in the bank's financial health to include capital ratio,leverage or balance sheet trends,and significant changes in the loan portfolio. The new procedures might include: ./Periodic review of the bank's "call reports"(Consolidated Reports of Condition and Income)as submitted to the Federal Financial Institutions Examination Council (or whatever successor may be designated as a result of changes in the law or regulation arising from Dodd-Frank).This examination should also track loan delinquency rates and charge-offs . ./Periodic review of the bank's compliance with public agency collateralization requirements.This might entail review of the "local agency securities report"from the bank's third-party custody bank or agent to confirm compliance . ./Active,regular inquiry to the bank's management and/or regulators as to whether the bank is subject to any "regulatory agreement,""memorandum of understanding,""cease and desist order,"or "prompt correction required"notice from any regulatory agency . ./Examination of the feasibility or desirability of engaging an independent bank rating agency (Le. Sheshunoff,Bauer,etc.).(In the absence of engagement of an independent rating agency, consider developing a system to track the capital ratios used in the industry.The three principal ratios presently in use are:"total risk-based capital;"Tier 1 risk-based capital;"and "the leverage ratio.") ./At least an annual review of the reports of the bank's independent accountants,with particular emphasis on discussions about material weaknesses in internal control over financial reporting. As you can imagine,the commitment of staff time and resources to management of these risks can be quite significant.That is the reason many smaller municipalities avoid greater diversification and rely instead on combining deposit insurance with collateralization.This seems particularly relevant to the City.You may wish to consider,for example,establishing a way to estimate the cost-effectiveness of a change in your banking relationships in a manner similar to the way we've advised you to think about numerous diversifications of other treasury functions.If the diversification isn't producing measurable results in terms of saving you time or money (or improving safety),they arguably may not be worth the effort. We also strongly encourage a careful review of the mechanics of a transition to new depository banks. At the minimum,the solicitation of additional depository banks should also consider the time and expense associated with the following: ./Compatibility of the bank's balance and transaction reporting services; 7-25 Memorandum to Mr.McLean and Ms.Downs Re:Possible migration of City's banking relationship or services July 9,2010 Page 6 Attachment C COpy ./The bank's methods for digitizing paid checks and statements and the maintenance system for the digitized files;also,there should be some agreement about the duration of the bank's storage of these files and the manner in which City Staff can access the data; ./The bank's system for on-line access to paid checks,deposits,stop payment orders,post- dated check cancellations,securities safekeeping records,custody reports for held securities (including collateral securities)and the like; ./Reconciliation of statements and compatibility with the City's existing accounting system; ./ACH filtering and blocking services and the process for managing them; ./The bank's methods for re-presentation of rejected items such as checks and drafts returned for "insufficient funds"and the manner in which the City is advised of these items; ./.The cost or re-programming or re-printing the City's checks,merchant terminals (for credit cards),and payroll vendors (presently about six); ./The availability of a "blanket"credit arrangement for certain charge cards carried by selected City employees,including the willingness of the selected bank to approve unsecured credit in the appropriate amount to handle this need; ./The migration of electronic payment and deposit instructions for the California Treasurer's Local Agency Investment Fund,the United States Treasury Direct investment program and similar payment and deposit instructions with the City's various counter-parties;and, ./The process for managing arrangements the City has with depositors of funds (other than itself)so that incoming funds can be properly identified and credited promptly to the City's accounts. We recognize that the steps described here are unlikely to be feasible now.Indeed,the recommendation to be patient with the unfolding situation in Washington argues against sudden,ad hoc moves.Nevertheless,there are some tools at the City's disposal that could enable it to diversify its deposits relationship to a minor degree immediately,pending outcome of the larger treasury review. Those tools include use of the "certificate of deposit account registry service"or "CDARS"deposit placement service for reserves or excess funds that are already being invested elsewhere.This matter is summarized at the beginning of this memorandum. CDARS is a program offered by nearly 3,000 member financial institutions of the CDARS network and is designed to provide investors the benefit of FDIC insurance for deposits up to $50 million.Currently the FDIC insurance maximum is $250,000 per depositor (effective through Dec.31,2013).CDARS maturities range from four weeks to five years.The depositor enters into a CDARS "deposit placement agreement" with a gateway member of the CDARS network.The gateway member,in turn,places the deposited funds with other members of the CDARS network,taking care to keep the deposited increments below the FDIC insured maximum deposit.The gateway bank then consolidates the information on all of the individual deposits and furnishes a single statement of account to the depositor to simplify bookkeeping. (The mechanics of the placement involve issuance of a number of individual certificates to the gateway bank as the custodian of the depositor's funds,and a third-party,who acts as a "sub-custodian"of the 7-26 Memorandum to Mr.McLean and Ms.Downs Re:Possible migration of City's banking relationship or services July 9,2010 Page 7 Attachment C COpy funds.)The CDARS program is specifically authorized under state law (AS 2011,enacted September 2006)and is being used by a number of public agencies throughout California. CDARS does exhibit some characteristics that should be considered before investing.Included in these considerations are:(a)"breakage"penalties for early withdrawals;(b)inherent illiquidity (CDARS certificates are deposits -not securities -there is no secondary market,they are not negotiable,they are not DTC eligible,etc.);(c)the risk of payment delays -the FDIC is under no obligation to return an insured depositor's funds at maturity -its obligation is to pay the insured bank,who then pays the depositor;and,(d)the risk of failure of the gateway bank.This last caution should be carefully evaluated before using CDARS to a significant degree.While FDIC insurance remains in force,the failure of a gate"Yay bank could introduce the remote possibility of minor payment delays while the FDIC establishes the right of the CDARS account holder to the funds on the gateway's books.Though this doesn't create risk of loss of the principal,there is the minor risk of loss of earnings and the potential for temporary illiquidity while the FDIC sorts things out.Of these risks,the primary one to consider is the liquidity matter.Prudent management of public funds relies on the mantra of "safety,then liquidity" before even considering "yield." CONCLUSION 1.We recommend that the City consider the CDARS program now as an interim diversification measure; 2.We recommend that the City maintain its current cash management and primary depository relationship,assuming no further deterioration in financial condition of the City's primary bank until the regulatory environment becomes more clear; 3.We recommend that the City begin gradual development of a framework for monitoring its banking relationship in a manner consistent with the GFOA recommendations cited above in order to be ready for changes in the regulatory environment and/or a change of primary depository; 4.We recommend that the framework for evaluating risk exposure to depositories not be finalized until the regulatory environment becomes more certain;and 5.We recommend that you develop a basic "minimum qualifications"level for any bank that you might solicit as a major depository of City funds to streamline the procurement process as much as possible. We are pleased to have been of service to you in this matter. 7-27 Finance Advisory Committee Minutes Attachment D Banking Services Discussions on March 28,2012,April 25,2012,and May 23,2012 Page 1 of4 March 28,2012 Minutes (Approved) Public Comments Teresa Snyder of Malaga Bank expressed interest in serving the City,and indicated that Malaga Bank would be willing to assist with a transition process. Ms.Snyder questioned Staff's estimate of 200 hours for the procurement and transition process. Deputy Director Downs provided a brief PowerPoint presentation outlining the Committee's assignment from the City Council,an overview of the City's cash portfolio,the existing relationship with Bank of America,the Request for Proposal (RFP).process,and an overview of major discussion points in the Staff Report to City Council dated February 21,2012.Deputy Director Downs distributed a Recommended Practice document from the Government Finance Officers' Association (GFOA). Member Santarosa opened the Committee's discussion by stating that within the Banking issue,there are three separate items being discussed: 1.Transactional services; 2.Merchant credit card processing services;and 3.Purchasing card program. Member Santarosa asserted that these three items are divorceable notions;and that it is right to look at a competitive process with items 2 and 3,as there will not be much savings derived from the bidding process for transactional services. Member Santarosa further asserted that if the Committee is looking at cost alone, it is not the right time to issue an RFP;but if the Committee is looking at service, that's a different question.Member Santarosa opined that establishing the CDARS relationship makes sense to improve local investment.Member Santarosa expressed the distinction between "Commercial"and "Thrift"banks; and asserted that transaction accounts are not the specialty of Thrift banks. Member Santarosa also asserted that transaction accounts require many demands;and that Thrift banks cater to personal accounts.Member Santarosa asked what threshold of expenditure would make public transparency worthwhile. Member O'Brien expressed the following two concerns. 1.Are we supporting local institutions?If so,Malaga Bank is outside of the City of Rancho Palos Verdes. 2.The City has not met the recommended practice from GFOA. Member O'Brien stated that there is nothing in the staff report that would compel him to recommend proceeding with an RFP;and asserted that the transparency issue is a political issue.Member O'Brien offered that the Committee is not 7-28 Finance Advisory Committee Minutes Attachment D Banking Services Discussions on March 28,2012,April 25,2012,and May 23,2012 Page 2 of4 supposed to weigh in on political issues,but give a recommendation on a fiscal issue. The entire Committee continued the discussion and asked questions of both Staff and Councilman Campbell.Chair Wang summarized the Committee's discussion by outlining the following four issues: 1.The financial aspect of an RFP process,which may not result in savings; 2.Support of the local business community; 3.Transparency;and 4.The recommended practice from GFOA. Chair.Wang,with oral assent from the other Committee Members,concluded that financially speaking,putting an RFP out to bid for the overall core package of banking is not worthwhile given the cost involved,staff time and any financial savings to the City. Councilman Campbell expressed that a transparent competitive process for procurement of banking seNices will help to build public trust. Staff answered questions,and clarified that the staff-time estimate of 200 hours includes preparation of the RFP,review of bank proposals,meetings with proposing banks,review of proposed banking agreements,a staff report to City Council,as well as the actual transition process to a new bank. Chair Wang asked for volunteers for a Subcommittee to prepare a draft plain- language recommendation for the Committee to consider at its next meeting. Chair Wang appointed the task to Members Ho and Santarosa.Staff was asked to:1)provide information about what comparable cities and/or cities on the peninsula have done with respect to banking RFP's;and 2)ask the Government Finance Officers'Association (GFOA)how "periodic"is defined within its Recommended Practice titled "Procurement of Banking SeNices"and report bank to the Committee. April 25,2012 Minutes (Approved) The Banking Subcommittee (Members Ho and Santarosa)submitted a report as late correspondence.Staff submitted information previously requested by the Finance Advisory Committee (FAC),including comparable information from other cities. Chair Wang asked whether the Committee agreed on the same conclusion that was reached during the previous FAC meeting,which was that a banking request for proposal (RFP)at this time did not make financial sense. 7-29 Finance Advisory Committee Minutes Attachment D Banking Services Discussions on March 28,2012,April 25,2012,and May 23,2012 Page 3 of 4 Member Santarosa affirmed Chair Wang's question and further stated that the Subcommittee's recommendation in the report was to formulate a banking policy that would provide a framework for making decisions. Member James asserted that he agreed with the recommendation of creating a policy,but that the policy was not developed with enough detail in the subcommittee's report. Member Ho stated that banking procurement should be treated the same as contracting out for all of city services. Deputy Director Downs then discussed the provisions and thresholds of the City's procurement process. Member Santarosa stated that the proposed Banking policy should cover both the frequency,while taking into account the financial implications,of rebidding for services. Discussion between the members continued on what the policy should encapsulate. Member Ho stated that there are ways to measure rates and services without a RFP.Member Ho further stated that because the issue was not regarding fraud or other criminal activity,a framework for reviewing banking services needed to be defined. Member Santa rosa asserted that the Committee recommendation should be to have Council ask staff to formulate a policy for banking services. Chair Wang concluded that he wanted to flesh out the recommendations made in the Subcommittee's report to give it more specificity and to discuss the item at the next FAC meeting. May 23,2012 Minutes (Draft) Public Comments Hans Grellmann,resident of Palos Verdes Estates,spoke on behalf of the Occupy PV organization.Mr.Grellmann indicated that his group was urging everyone to pull their money out of the banks that are "too big to fail." Chair Wang and Member James explained that Member James made some modifications to the draft memorandum to the City Council originally prepared by the Banking Services Subcommittee (Members Ho and Santarosa).Chair Wang indicated that he had reviewed Member James'modifications.Member James 7-30 Finance Advisory Committee Minutes Attachment D Banking Services Discussions on March 28,2012,April 25,2012,and May 23,2012 Page 4 of4 offered a few additional changes to the modified draft memorandum that was included in the agenda packet. The Committee discussed the memorandum,asked questions of Staff,and made additional edits to the draft memorandum. Member Santa rosa recused himself from voting on the modified memorandum, indicating that he is an officer of a commercial bank. Member de la Rosa motioned for approval of the modified memorandum. Member James seconded the motion.The modified memorandum was appro.ved unanimously by acclamation,with Member Santarosa abstaining. 7-31 Attachment E Inventory of Current Banking Services and Fees -Transactional -DDA .BOA Banking Service Category FDIC Assessment General Account Services Monthly Account Maintenance Service Charge Depository Services In-Branch Teller processed Banking Center Deposit Quick Business Deposit (QDB)/Night Drop Deposit (NO) Fee for counting Currency/Coin Deposit per $100 QDP/ND Fee for counting Currency/Coin Deposit per $100 inside the Banking Center Charge for Deposited Unencoded Checks Charge for Deposited Check that is returned for insufficient funds Paper Disbursement Services General Checks Paid Truncated Check Stop Pay Fee using Cash Pro Check Stop Pay Fee using client services General Automated Clearing House eACH)Services Monthly Fee for ACH Services ACH Consumer Off US Credits ACH payments to City vendors ACH Blocks to unauthorized debitors ACH Block Monthly Maintenance Charge ACH Debit Transfer Received Item not originated by the City ACH Credit Transfer Received Item not originated by the City Process of ACH items provided through an e-channel service Wire &Other Funds Transfer between two Bank of America accounts for the same customer Monthly charge for the CashPro Wire Transfer module. Information Services Cash Pro Online Subscription Banking Service Fees Being Eliminated by Using CashPro Returns Notification Photocopy Returns Notification Fax ACH Optional Reports Fax ACH Optional Reports Mail Unit Price Standard/Discount based on average passed on from 0.011 %monthly ledger balance FDIC $20.00 per account Standard $2.00 per deposit Standard $1.50 per deposit Standard $0.13 per deposit Standard $0.14 per deposit $0.13 per check Standard $6.00 per return Standard $0.16 per check Standard $12.50 per stop pay 4%Discount $12.50 per stop pay 42%Discount $25.00 per account 50%Discount $0.11 per item Standard $0.05 per item Standard $2.00 per block Standard $30.00 per account Standard $0.12 per sale Standard $0.12 per sale Standard $10.00 per file 50%Discount $3.00 per transfer Standard $$50 per account Waived BOA Website Cash Pro 50%-60% $49.95 Subscription Discount/Bundle $3.00 per photocopy $7.00 per fax $5.00 per fax $25.00 per report Cash Pro is Bank of America's online banking system that provides clients with secure direct access to information reporting,as well as the ability to initiate,track and research a variety of payments and receivables. BA Direct was the previous online banking product.Cash Pro replaced it.There are still some line items that show up on analysis as BA Direct or Direct,but those are really run through Cash Pro. Per item Fee for image access to Bank of America Direct Monthly Fee for image access to Bank of America Direct $0.25 per image $5.00 per account Standard Standard 7-32 Attachment F Inventory of Current Banking Services and Fees -Merchant Credit Card· BOA Annotations of fee descriptions: *Interchange Fees:These are the variable fees charged by Card Organizations for processing transactions.Factors that affect Interchange Fees include card type,information contained in the transaction and how/when the transaction was processed. **Fees:The range of transaction-based and/or fixed amounts charged for specific card processing services. ***Service Charges:Also known as Discount Rate -the amounts charged to authorize,process and settle card transaction. Details of Fees Interchange Fees* Charged &pass through directly by merchant cards.Not set by bank. Other Fees** Card Fees (per card holder transaction) Batch Settlement Fee (per transaction) Visa zero floor limit fee (per transaction) Visa misuse of auth fee (per transaction) Visa inti service fee (per transaction) US cross border fee (per transaction) Monthly Statement Fee Quarterly Maintenance Fee Service Charges*** Gross monthly charges per card (both credit and debit) Visa credits trans fee (per transaction) Electronic Authorization/Access Fee (per transaction)-Discover Electronic Authorization/Access Fee er transaction -Visa&Master $0.2500 $0.2900 $0.1000 $0.0450 0.40% 0.40% $9.9500 $23.7500 0.75% $0.2500 $0.0185 $0.0269 Interchange Charges Charged &pass through directly by merchant cards.Not set by bank. Fees Card Fees (per card holder transaction) Batch Settlement Fee (per transaction) Internet AVS Authorization Fee (per transaction) Global Gateway Monthly Usage Fee (per month) Address Verification Service -CNP AVS Fee (per required transaction) $0.2500 $0.2900 $0.0500 $25.0000 $0.0075 7-33 Inventory of Current Banking Services and Fees -Merchant Credit Card· BOA Annotations of fee descriptions: *Interchange Fees:These are the variable fees charged by Card Organizations for processing transactions.Factors that affect Interchange Fees include card type,information contained in the transaction and how/when the transaction was processed. **Fees:The range of transaction-based and/or fixed amounts charged for specific card processing services. ***Service Charges:Also known as Discount Rate -the amounts charged to authorize,process and settle card transaction. Visa misuse of auth fee (per transaction) MC processing integrity fee (per transaction) Monthly Statement Fee Quarterly Maintenance Fee Account Minimum Fee of $25 (for all service charges) Service Charges Gross monthly charges per card (both credit and debit) Visa credits trans fee (per transaction) Electronic Authorization/Access Fee (er transaction $0.0450 $0.0550 $9.9500 $23.7500 0.75% $0.2500 $0.0269 Interchange Charges Charged &pass through directly by merchant cards.Not set by bank. Fees Card Fees (per card holder transaction) International Service Fee (per transaction) Batch Settlement Fee (per transaction) Visa misuse of auth fee (per transaction) Visa inti service fee (per transaction) US cross border fee (per transaction) Monthly Statement Fee Quarterly Maintenance Fee Service Charges Gross monthly charges per card Visa credits trans fee (per transaction) VI debit returns trans fee (per transaction) Electronic Authorization/Access Fee (er transaction) $0.0750 $0.0925 $0.2900 $0.0450 0.40% 0.40% $9.9500 $23.7500 0.95% $0.0750 $0.0750 $0.0269 7-34 Attachment G Inventory of Essential Banking Agreements·BOA OPERATIONAL BANKING SERVICE ACH Software License Agreement Bank Depositor Agreement Master Agreement TREASURY SERVICE Authorization &Agreement for Treasury Service COMMERCIAL CARD Commercial Card Application &Agreement MERCHANT SERVICE Merchant Processing Application &Agreement Date 1/12/1999 7/20/2006 12/20/2006 6/28/2005 8/21/2006 6/22/2011 7-35