Presenter: Marc Puckett, Director of Finance/City Treasurer, City of Costa Mesa

1. Communications with Auditors and Audit Committees in these troubled times…A case study: Investing in Corporate Note….Bankruptcies? Presenter: Marc Puckett, Director of Finance/City Treasurer, City of Costa Mesa

2. What a year!

3. As it was described to me by one of our brokers, “This is definitely a 100-year happening.” • Indy Mac Bank, the Pasadena-based thrift failed. • Washington Mutual Bank failed in the largest bank failure in U.S. history. • Firms that were considered Wall Street titans have disappeared. • Bear Sterns, Wachovia, AG Edwards, Merrill Lynch and Countrywide were all purchased by other financial institutions.

4. “This is definitely a 100-year happening.” • 158 year old Lehman Brothers, the fourth largest investment bank on Wall Street failed. • Lehman Brothers filed for Chapter 7 (liquidation) bankruptcy protection on September 15. • The City of Costa Mesa has two Lehman Brothers Corporate Note Securities in its investment portfolio purchased in Dec. 2007 at a total cost of $5,049,700.

5. What now? PANIC?!?! • Securities dropped in value to $0.10-$0.13 on the dollar and have a current market value of roughly $500k –650k. • After the bankruptcy filing, the City has over $4.5 million in potential losses • Need to report potential loss….

6. Communications with Audit Committees and Auditors in these troubled times • Identify the specific details to be communicated. • Determine the timing of the communication. • Determine the form in which the communication will be made. • Determine relevant persons to communicate information to. • Identify the potential effect on the financial statements, determine whether audit adjustments are necessary and fully disclose in footnotes.

7. Identify the specific details to be communicated - Take stock: Overview of Costa Mesa’s investment portfolio • Safety, Liquidity, Yield always overriding investment objectives. • $111 million portfolio. • Investment Policy more conservative than State law. • Updated and approved annually by governing body. • Investment Oversight Committee reviews investment policy annually and treasurer’s reports monthly.

8. Take stock: Investment decisions • Reassess basis for making original investment purchases. • Investments complied with State law and were rated “A” or better when purchased and up until Lehman filed for bankruptcy on September 15.

9. Take Stock: Investment Policy Limitations • Investments complied with State law and were rated “A” or better when purchased and up until Lehman filed for bankruptcy on September 15. • Investment decisions reviewed with IOC.

10. Determine the timing of the communication “When you have bad news to tell, get it all out and position yourself to move forward”

11. Determine the form in which the communication will be made. • Begin preparing memo to communicate the loss – • Surveyed CMTA and CSMFO via group list for other public agencies with Lehman loss exposures. • Identified 56 California agencies with loss exposures totaling $350 million. • Formed Lehman Brothers Working Group. • Your not alone! There is strength in numbers.

12. Determine relevant persons to communicate information to - • Wrote draft memo to City Council and City Manager fully disclosing what had happened and the potential loss. • Met with City Manager, reviewed draft memo and asked for his input. • Met with Auditors, discussed impact on financials and how information should be disclosed. • Released memo to City Council and the Public (Press).

13. Identify the potential effect on the financial statements, determine whether audit adjustments are necessary and fully disclose in footnotes. • Added footnote disclosure: • Fully disclosed bankruptcy filing on September 15, and • Impact of bankruptcy on fair value of Lehman securities, and • Fair value of Lehman securities as of issuance date of financials.

14. Next Steps… • Established weekly conference calls with LBWG each Wednesday to discuss possible courses of action and opportunities to collaborate with these agencies on potential means of loss recoveries. • Hiring of bankruptcy attorney and sharing of costs. • Seeking legislative relief

15. Next Steps… Approached federal delegation from California and asked for relief to be included in the federal rescue plan being developed. Ultimately successful: • H.R. 1424, ‘‘Emergency Economic Stabilization Act of 2008’’ is in Section 103(7) which reads “the need to ensure stability for United States public instrumentalities, such as counties and cities, that may have suffered significant increased costs or losses in the current market turmoil. This language authorized the Secretary of Treasury, Henry Paulson, to use funds from the Troubled Asset Relief Program (TARP) to purchase troubled assets from cities and counties.

16. After passage of HR 1424 Members of working group sent joint letter to Secretary Paulson reinforcing that cities and counties were unintended victims and asking that he buy the troubled assets from cities and counties.

17. After passage of HR 1424 • Members of California delegation including Feinstein, Boxer, and Pelosi sent letters to Paulson supporting our efforts.

18. After passage of HR 1424

19. Next Steps… • Secretary Paulson intimated to congressional staffers that “no way, no how” were cities and counties going to gain access to the TARP funds. • LBWG asked Senator Feinstein to support a bill that would specifically direct or allocate funds from the TARP program to purchase troubled assets from local agencies.

20. Next Steps… • Met with Senator Feinstein in San Francisco on December 18. • She wrote follow-up letter to Paulson asking for a response to her first letter and that the TARP funds be used to purchase troubled assets from cities and counties. • Indicated that she would be introducing a bill to specifically authorize $10 billion from the TARP funds to purchase troubled assets from cities and counties.

21. Next Steps… • SB 116 introduced by Senator Feinstein at the opening of the 111th session of Congress.

22. Next Steps… • Companion bill (HR 467) introduced in the House by Rep. Jackie Speier. • Had hoped to tie-bar bills to Economic Stimulus bill moving through House and Senate.

23. Next Steps… • Also have requested support letters from national organizations including NACO, APTUS&C among others. (These two associations have agreed to write letters of support.) • Requested the GFOA to place ads in the GFOA newsletter to solicit input from members in other states that Lehman loss exposures.

24. Next Steps… • To date, have identified loss exposures totaling over $2 billion in 18 states including Alaska, Florida, Minnesota, Delaware, Texas, Illinois, Massachusetts, New York and California.

25. Possible outcomes • Secretary of Treasury will purchase troubled assets from Cities, Counties and Special Districts through TARP program. • Cities, Counties and Special Districts will wait until the conclusion of the bankruptcy liquidation and receive a portion of their principal investment from the trust.

26. Communications with Auditors and Audit Committees in these troubled times…A case study: Investing in Corporate Note….Bankruptcies? Questions?