I'd like to call the Monday, January 24th, 2022 Finance
Committee meeting to order and announce that this meeting has been audio recorded.
Let's go around the room and take a roll call.
I will start with myself and then go to my left.
Kathy sticker board member.
Lindsey Group Board member.
Teri Singer Board Member.
Michelle Agee Board Secretary.
Cheryl Purcell Business.
Manager.
Mike Davis Advisor.
Kip Shaw Board Member.
Saqib
Okay.
And is Kip the only one online?
No, I'm online.
Paula sits in Advisor.
Okay.
Right.
Of self assessment advisor.
Okay.
Now, I just wanted to remind everybody to please
wear your mask properly over your mouth and nose.
I know there was a reminder sent out today.
We are still universal masking at the school district.
The summary minutes are attached.
May I have a motion to approve the summary minutes?
So move. Lindsey Drew.
Second center.
Is there any discussion?
Okay.
All those in favor say I, i, i.
All those opposed say no.
Okay. The motion carries.
There is no unfinished business.
I did want to make an announcement that typically, at this time of year,
the committees reorganize after the new board is and that
sometimes committee members change.
We're lucky right now to have the same four board members
participate in finance
that have already been on this committee for a couple of years now,
which is good and I will continue as the chairperson for the committee
since I am the Treasurer through June 30th of this year for the District
and our new business,
we do have our auditors here to give us an audit review.
The additional.
Oh, okay.
We also before you come up, Matt,
I just wanted to introduce Cheryl Purcell.
She's our new finance manager for the Derry Township School District.
If you're online, you can see her sitting over where Mr.
Friends used to sit.
She started it early this January.
So this is just in her first few weeks of at the District.
I'm very excited to have her here.
And do you want to say anything, Cheryl?
No, thank you for having me.
I appreciate it.
I look forward.
To working with the district.
On financial matters.
Very excited.
Coming in at the tail end of this audit report.
But to kick off the wrap up last year and then we'll really dive into
what's coming.
Okay, What do we do?
Have Mr. Wilderson here.
I'd like to welcome you up to the microphone, Mr.
Waterson,
to review our audit for the from the previous school year.
There is an attachment there under this
agenda item as well.
So I'm going to give you the floor, Mr.
Waterson.
Thank you again.
Matt Wilderson. Principal Boyer and Ritter.
I've responsibility for the oversight conduct
of your annual financial statement audit.
Just kind of jumping right into this for the public
and anybody who may be watching online, we always review the stakeholders
as part of this process, which is why we do what we do.
You know, the first of all, you know, the school district,
I have it all the way at the bottom there, but they have the public trust.
They handle a lot of a lot of money.
They have a $63 million budget.
So the public at large is very interested in how
and how their money is being spent.
Additionally, the school district has $22 million of bonds
outstanding.
So those bonds are,
you know, monitored by rating agencies
and bond holders alike.
Also, the district
receives $2.5 million in awards this past year,
and that requires the district to have an annual financial statement audit
as well as a compliance audit.
And then finally, as part of your
the Pennsylvania Department of Education reporting, you're required to have
that have a financial statement audit of your annual financial report
that you ultimately submit to the Department of Education.
Looking at the audit process, you know, it's a
it's a it's a timeline that begins back right after the end of the year
and after the end of your fiscal year, June 30th, July, August timeframe.
We're reaching out.
We working we work with Mike French and
and and Regis in the past as Purcell.
Going forward, we come in and we look at all the ways
that the school district collects money and expense funds.
We look at the internal controls around that
and turn around and then
assess risk and start asking questions about what could go wrong,
not just in the internal controls and in the expenditure
and receipt of money, but in the financial reporting document
that you have here as that was that was provided to you tonight.
It's about a 90 page document.
Management's responsibility is the actual
financial statements as well as the notes.
But our our primary job is to assess as to what
whether or not these financial statements are materially correct
in accordance with generally accepted accounting principles.
So we go through your risk assessment and then we come back out
after the books have been closed and execute our audit plan.
Testing the balance sheet amounts as well as the income statement amounts
that are included in your financial statement audit.
And then finally, there's three different reports that we issue along with that,
the scope of the audit.
Obviously, that would include the general fund, capital projects, debt service
this year with Gatsby statement or Government Accounting Standards Board
statement number 84, you have a student sponsored activity fund.
That's a change from the lot
from the past years, any kind of trust in agency funds.
And then also the Food Service and Granada Fund are not a project fund.
Then we also have government wide financial statements
that would include not the general fund budget focus.
It's a current resources
focus that you have when you're doing your budget year to year.
This would include bonds, capital assets, long term liabilities.
So there's two different sets of statements in these
in this document that we're required to issue an opinion on.
Really quick, go back one slide there.
Again, I'm sorry, the student sponsored activity
fund in the past, that used to be an agency fund.
So that's the class of 2022.
It's their money.
They the the Government Accounting Standards Board
a couple of years ago went through and basically gave us guidelines
as to whether or not individual funds that are held in a fiduciary capacity
should remain as fiduciary funds
or if they should be shown more as a government fund.
And it really had to do with how much control and influence
administrative involvement that the school district has.
And with a lot of these funds, you do have some level of administrator involvement.
You have the advisors who are, you know, you're basically able to influence
and you know, they're signing off on the expenditures, etc..
So it's better
presented as a government fund and that's where it's presented this year.
It does have a little bit different presentation
and that it's up further in the statements.
But it's it's another change as required
by the Gaspé.
The two documents that you have is the full financial statement audit report.
The second is the required communication letter.
There's a number of key issues
that we go through in there, certainly that the R.S.
letter, as we call it, identifies what management's responsibility
is and the preparation of the statements and then the internal controls.
Our job is to report, you know, we point out in here that the adjustments
that were made as part of the audit, as part of the final corrections,
we didn't view any of these adjustments as being significant or material
to the to the routine financial reporting processes that the district has.
So that's kind of an important note.
We would have to
identify any kind of disagreements with management,
and there were none through the course of the audit.
We as your auditors go through and look at all your balances
and then if we have any suggested journal entries or adjustments,
we talk that through that with our mike
and just provide support for why a change should be made
and then they'll agree to change things or not change things from
the end.
I've already talked about that one, so maybe we can skip over that.
Other significant points.
No uncorrected misstatements.
This would be where we suggested a journal entry
and they said, Hey, Matt, that's that's not material.
Move on.
And I would still give you guys a clean opinion, but those changes would be left
til next year.
Presumably that didn't happen again.
There was no significant issues discussed with management prior to our retention
and that would be that's a significant and there were not really
any difficulties encountered in performing by the audit.
So the looking down the road you have,
the GASB has been the Accounting
Standards Board has been busy through the COVID.
They deferred all of the Gatsby implementations,
you know, So this year, you know, you had to do the fiduciary standard,
but next year you have leases that's taking any kind of operating leases
that you have for buildings,
large equipment,
instead of just having a disclosure in your financial statements about them,
you have to put them on your books as a liability
and then you're going to
on the other side of the balance sheet, you're going to have an asset for those
and write it off over the period of time for that asset.
It's really just trying to between the financial accounting world
and the government accounting world, they're just trying to make sure
all the liabilities are on the books of these entities.
But that's the big
change coming up in FY 22,
and we'll be ready for that
looking down.
And that's really as I look at it, that's really the only other one that has
so only one that has any significant implication to the school district.
As I kind of look down the road.
Would that include our iPads, stuff like that or.
Well, yes, it would.
It would include that.
But so your iPad liabilities are already on your books
because we looked at them and they were classified as capital leases,
which means that we record the liability and then we record the asset
and we appreciate the asset and then we write the liability off
as you make the payments.
So last year, I think you had probably $800,000 or so of
purchases, as
in the FBI is in the year under audit here.
You can see if you get back into your your long term obligation note and note
nine, you'll see there that you had a
an increase in your capital obligations.
This is trying to capture, if you would have a long term lease
on a building where you're renting space, if you're renting vehicles
and it's a way for it would be a way for local governments
to incur debt incur obligations without necessarily
putting it on their balance sheet.
So that's what this is really trying to capture,
because they already had the lease purchase
obligations, they had already captured that.
Does that make sense?
Yes, I got it. I'm looking at that note right now.
Note number nine. Yeah.
That's under the it's in the second part of that one.
Okay. Thank you.
Okay.
You can see it there for 866,080
under the increases
as part of as part of your audit, obviously
we issued opinion on the numbers, but also the notes are also included
in our opinion for being consistent objective, fairly stated.
So we just kind of list out some of those notes
that would be of interest to somebody
that's going to be going through your financial statements.
Certainly the deposits investments talks about, you know, where
where does the district have their funds,
you know, the beneficial interest in perpetual trust,
we would note in a description on that included a disclosure
on the roll forward and the activity in there over the year, and then a summary
of all your various long term assets and liability obligations.
And then finally, any kind of commitments that the school district would have.
The big
picture on, on these financial statements
is the three three opinions and reports that Boyer and Ritter issues.
The first one has to do with the overall
financial accounting and notes the financial statements that were done.
I'm pleased to report tonight that the school received an unmodified
or unqualified opinion. Clean opinion.
It's the highest level opinion that can be issued by a CPA firm
means that your financial statements are presented in accordance
with generally accepted accounting principles.
So congratulations.
It's a lot of day to day work.
And by by your by your finance folks,
as well as the board's commitment to solid financial reporting.
Second area has to do with the compliance.
As I mentioned before you about $2.5 million in federal awards
this year.
You had you did receive some some code money
and we'll know that a little bit later this year.
We are looking at your school lunch program as part of our compliance
rotation.
Imagine next year we'll be looking at the covered grants and the extra money
that you would have received and the utilization of that.
And looking at and looking at the compliance,
we're required to issue an opinion on your compliance as a school district.
Through this, the Uniform Guide into the single Audit Act.
Two things.
You received an unmodified opinion there as well,
as well as the fact that we didn't identify any kind of material weaknesses
or significant deficiencies in your internal controls or compliance.
The final thing that we looked at
was in your internal controls over financial reporting.
And again there we did not have any kind of material weaknesses
or significant deficiencies that gave us concern.
You know, I go back to the fact that, you know,
we talk about material audit adjustments and those kind of adjustments
that might occur.
And the fact that we didn't believe that any more material
to your audit processes or your your financial board reporting.
So that's that's the
first that's one big point that kind of underlies our comment here
about a lack of material weaknesses in your in your programs.
So take a quick look at this.
The summary of the
general fund financial statements.
I realize that it might be a little bit small.
A couple of things I just wanted to point out, though,
I kind of gave you I show 2019 and 2018 and then 2020 and then a little bit
of a budget to actual if I'm looking at the 2021
actual versus 2020 actual, you can see there your local revenues,
you know, took I took a dip
between those two years as, you know, kind of expected
weather.
And I think those the big dip there is about $1.5 million,
primarily your payment in lieu of taxes payment
as well as a dip in your amusement taxes.
So between those two, you know, one,
the pilot was $700,000 down on the amusement tax was 600 down.
Investments was also down as well
in the in terms of your general fund investments, Matt.
May I ask a question?
In referring to the pilot payment, is there a difference?
You know, we have a pilot payment with the medical center.
That's a true pilot payment, whereas the giant center that we did not receive
is often referred to as a pilot payment, but actually
is not a contractual pilot agreement.
Does that is there differentiation in the way that it is reviewed
for audit purposes, since it's not something that we're able to collect upon?
It's just a longstanding agreement?
Well,
especially when it comes to your general fund.
No, because you didn't receive that money and you're not going to get that money.
You're going to get the money
when the you know, the revenues go back up in Hershey Park.
Right.
And so there's not necessarily a difference
in the way we look at it from the audit standpoint.
If there was a long term obligation down the road
to make those repayments, it would fall into play
maybe in your government wide statements, but that wouldn't be showing up in this.
Okay. Thank you.
The second thing that I would point out,
if you look at 2020 actual versus
versus 2021, you can see your federal revenues
in 2020 was $900,000
and it went up by $1,000,000 in the in the 2021 year.
That's a large part.
You're you know, the Tobin relief money.
The final thing there
is is the extended term financing
and it's an it's not it's not a budgeted revenue
and that's like an accounting requirement that we have.
And that's actually I already mentioned that number to you, Cathy.
That's the those are the leases.
So what's required under the under the government accounting
standards is that we recognize that as revenue and as expense.
So when you look below and you see that your expenses
are up over your budget,
there's $866,000 in there as well.
So it's just gross stuff.
When your financial statements, but it did not change the bottom line.
As you see
here at the very bottom, you can see that your total 2021 budget,
you had expected to utilize $1.8 million of general fund budget.
You ended up using 1.2 to $5 million
of your general fund budget of of fund balance.
Sorry.
So looking at the next slide, we talk about the food service fund.
Two little things to point out here.
Certainly everybody knows that the if you look at the differences
there between 20 and 21 or the string of
revenues up until 2020, 2017 to 2020, now around
$1,000,000 for food service revenues local under the local revenues.
Obviously, that took a took a big hit
and then a lot of those and then you had a slight increase
between 20 and 21 and your federal and state revenues.
And then, you know, you can see there that the general fund transfer,
the amount of the general fund had to kick in was $413,000 in the 2021 year. Now.
But that's just
I just want to quickly point that out.
Looking at your capital project funds.
Now, keep in mind, this is a combination of both
the capital reserve and the capital projects.
But if you look at the string of payments, you have the year ending fund balance.
As of the 630, 21 is about $6 million.
And this past year you spent
$2,091,000, some of it on
safety upgrades for the majority of it on safety upgrades.
I believe.
Well, as a chiller in the elementary school.
But between your capital reserve
and your capital projects, both of those have about $3 million
each.
Looking at your fund balance restrictions,
you can does it want you to have a quick look at this?
You know, if you look at the bottom right corner there, you can see
that your total fund balance
is around $68 million.
And of that, you know, I have it's broken down
to a couple of different classifications here.
The non spendable is really just that
it's you don't you don't have the ability to spend that money.
So when you have that perpetual interest in the beneficial interest
in a perpetual trust, a 50 more, $54 million,
you know, you can only access that a little bit at a time.
And then you have moving down,
you have another $6 million
that has restrictions on it
between the Capital Reserve and the Capital Project fund.
That's all under that one capital project fund number,
but that's restricted by law in terms of what
you're able to spend that on.
So you have to be, you know, kind of conscious as to
you can't just pull that out and transfer that over to your general fund.
There has to be a special and I generally as buildings building improvements.
And then you look
down to the general fund and you see what you have there.
You have a total of $8 million there of funds available,
of which $4.8 million is is unassigned
and the rest is set aside for health
benefits and retirement stabilization.
Now that retirement stabilization, I'll point out
that number has been the same since to at least 2017
that I put my graph together on when I was looking at this.
The health benefits number is $500,000.
And I guess kind of my comment on that is,
you know, you guys had a total of $5.8
million this year of actual health care,
you know, expenditures or you're self-insured,
you have a max of four point I'm sorry, $6.8 million.
So I'm not sure I don't know what amount
you actually budgeted for in terms of an expenditure.
There.
But just
kind to keep that in mind that you had $1,000,000 of
you could have had to spend you have a couple of unfortunate incidents,
another million dollars and you would potentially fully
exhaust that $500,000.
But I don't know where again, I don't know what that other number is,
which is the amount that the district budgeted for.
Well, in
years past, we had discussed of reallocating,
putting more money with the health benefits and less in the retirement.
And we can do that. We just didn't do it yet.
Reassign it.
We had we had transferred from the pizzas to the health care
to to increase the cushion
that was there for
unexpected
increases.
And this money's all committed by the board.
So, you know, the board can act to rebalance that and reallocate that
however they
however they wish or to turn it even as an aside.
But that's not generally what happens.
That probably had something to do
with COVID 19, with higher expenditures in health care.
I actually thought we had done it.
That you know where that's coming from.
So I thought, okay.
I'm sorry, we haven't touched those in a while.
A long time. They've just sat there.
Yeah, exactly right.
That's exactly.
And we were talking about reassigning them different numbers
because we didn't think we needed as much in retirement anymore,
perhaps more in health.
But he's going to look at if we ever did it.
I didn't think we ever did it, but maybe we did.
Okay.
Yeah.
This is go this is Terry saying.
I thought a couple of years ago and this may not be applicable.
We took some money that Derry Township Technical School
redistributed back to us and.
We felt we set that aside for.
Health care.
Now, is that health benefits?
Is this still reflective of that
that we did two or three years ago?
We I'd have to research that. Mr.
SINGER Yeah.
Yeah.
I'd have we'd have to go back and look, I just remember in one
of the previous audits, I thought we had identified
that we had moved that money because I want to say maybe it was
2019 that
we felt comfortable moving some of that
excess reserve out of the piece of stabilization
because that had leveled off and that we had done a separate motion
and a business meeting of the full board to move that into the
health part of it. And
I'm recalling a conversation
when we had last year's audit review that that had been done.
But maybe I'm dreaming that but we can look at it.
It's that item for follow up.
But at the end of the day, these are all is a committed block of money.
And whether however you present it, it's subject to board change.
And, you know, I think it's something you should look at every year
in relation to where your medical class costs are,
what's been happening with the retirement, retirement numbers, etc..
Mm hmm.
Now, thank you for calling attention.
We will pay attention. Okay. Yep.
So is there any questions on the slide?
And you know how you know what the access to these funds are.
Okay.
The next slide I just want to point out the unassigned number.
Right.
Ignore the committed numbers there, please,
because I saw, like, something that guy that we would have to tweak.
But if you look at the unassigned number, which is the one,
the second from the bottom number there, you can see back even
until 2017,
your overall fund balance number has been around five, you know,
around $5 million up to a peak of $5.9
million in NY 2020 and then back down
and you utilize some more of your fund balance in FY 21.
So you're around 5 million bucks, which is
which is around seven, 7%
of your general fund expenditures.
So you just got to be mindful of the long term planning for,
you know, whether you have capital expenditures coming up.
And you also have to plan
for how where you where your ideal fund balance is.
Now, the Department of Education has has they throw out a
unassigned on designated fund
balance of around 8% as a cap.
So you're underneath that.
And some people will, if they go over that cap, they'll move money
over to a capital reserve fund or they'll commit those funds.
So you have, you know, another
$2 million sitting over in in your
in your committed funds as as a back up that could be reallocated that.
And then the clarification that that clarifies
why I just went and looked at in our 1920 budget
because it indicated then that we were transferring the $2 million
or the extra million and a half into the
the fund balance, the committed fund balance.
The number that we were discussing
previously was the half a million dollar reserve.
That's the budget number. Okay.
And then the $2 million that we see there under the 2021 column
in 2020 and 2021, that is what we moved.
So that's the actual so the slide before was budget, the SEC.
This slide is actual. Yeah. Okay.
So see how it's under general funds.
So that's within our general fund budget to pay for the right.
Anything.
You know, up to the stop gap
or stop loss insurance.
And then on the next slide is the committed
fund reserves
that we had moved the money over from PE serves to the health benefit.
So we have the $500,000 in the general Fund for Health,
but we also have the $2 million back up that we could draw from
if needed.
And the unassigned is we took the money out of there with from the last budget.
So we would like to come up with a plan at some point to replenish that.
Yeah, you want to kind of keep that at that 8% more.
You have adequate reserves for,
you know, the rainy day, kind of a kind of a rainy day,
so to speak.
But you also have, you know, capital
improvements, capital improvement plans coming up.
You know, $6 million is
is is is is is is a good chunk of change.
But if you're if you're looking at significant projects,
it doesn't go that far
anyway,
moving forward here.
Next slide, if you could, a couple other significant points of interest.
You're if you look at page 70,
there's a schedule of your school district, pension contributions,
you know, on your financial statements that shows
your Peters liability is $102 million is slightly up.
And I always make a comment here
that the district has fulfilled its requirements in this area.
You know, you don't you don't get to prepay or pay more or pay less.
It's they they they send you the bill.
You know that I look back and that thing was around 8%, about ten years ago.
Now it's up over 30.
So it's a significant
portion of your portion of your budget, $9.8 million is what you paid over there.
And 2021
also point out the page
43, you know, the uncollected taxes.
You know, there's those the the occupational taxes.
I think that's just
something that's been carried on your or you have an allowance for uncollectible
and I think it's just a matter of clean up of old accounts
may not generate much if any revenue at all.
On page 42,
again, I pointed out the beneficial interest in the perpetual trust
lays out some points there, but I'm sure you guys get a lot more detail
information from your friends at Fulton.
And then on page 82 and 83 is your schedule of expenditure.
Federal words are the details out, the different kinds of money
that you had or that you received throughout the course of the year,
but certainly
appreciate the opportunity to serve the school district
would entertain any kind of questions you may have at this time.
I have just one question on that piece was liability.
I remember a few years ago it was around 99 million.
Is that increase
attributed to the increase
in what we pay or because of employee growth?
It's a it's a combination of things.
I mean, really, it's
so, you know, so your
your share of the liability
means you have pages page 70,
your share of the liability
goes up or down in relation to whether or not your employee growth,
if you if your employees go up
faster than the general pool of employees,
then you're going to have a bigger chunk of that liability.
Obviously, also factoring into that has to do with
how they do in their investments.
A lot of actuarial
calculations and assumptions that that
that could I can potentially move that needle
again.
You know, I point out that you see what your your proportionate share did.
And if I can also.
Just explain for the benefit of the citizen advisors that in our audit
it states we have the pizzas liability of 102 million
but that the state
legislature by way of the governor pay
their portion.
You know each year we still own that ultimate liability.
But there's never been a time in history that the state has not fulfilled
their share of it to call in our total.
Yeah that's right.
And that's common on all the school districts because they have to they re
evaluate their commitment every year which we know they're going to do.
But at the same time, theoretically.
They've never.
Liability that you have on your books of 100 could be 51 or somewhere
in that ballpark depending on how much they're going to reimburse.
I just want to share that because I remember the first time
I looked at it and didn't know what that was.
My jaw kind of fell to the ground.
So I was just like, it's something to do.
And and just on, you know, as a wrap up to just thank you.
I always really appreciate how much
information you
retain with how many of these you do, you know in your day to day.
And it adds to the confidence
we have in our financial management to know how invested in better.
Is glad to have the opportunity to serve.
I will point out like your net pension proportionate share on page 69
actually went down
from .20792.2075.
So even though your portion of the overall went down, your liability went up.
So, you know, like I said, it's a confluence of other factors.
Thank you.
This is Terry Singer.
Matt, there's been on in the past some press coverage
about things going on at the state level with pizzas and whatnot.
Is that any concerns of long term for the for the fund that have come to your.
Mind or not?
That's that's way above the area that I deal with.
All I can do is help.
You know, you guys you guys pay your retirement contributions as dictated by
the Peters Fund.
You know, certainly the pizzas will
and they have enough legislative oversight to kind of get to
the bottom to whatever was happening there and sort of got to let them do their.
Yeah. Okay. I just wondered if you heard anything.
Yeah. The investments. No, I haven't.
All right.
I'm going to.
Keep Shaw here.
Thank you very much for outstanding
presentation and for your strong work in our behalf.
This is greatly appreciated.
And having
having the same person
each year, I think is very, very helpful
to those of us who've been on the board for a while.
So please, please continue your strong work on our behalf.
Glad to do it.
Thanks again.
Any sense of advisors or board members have any more questions for Mr.
Alderson?
All right.
Well, thank you very much for coming. We appreciate it.
Thank you.
Okay.
Next on our new business agenda, we have a quarterly update on the Milton
Hershey Trust Fund from Fulton Bank.
Kathy, can you hear me?
It's Jerry. Leo.
I can hear you. Okay, great.
I know. Liz is there in person.
I regret that I could not be there in person tonight.
Just had some family matters to deal with that were unexpected.
But would it make sense for me to do just a really small background
for the new citizens that are on the the group?
Just give a little short background on the trust
and explain a little bit what it is before we go right into the numbers.
Sure. Okay.
So just as a way, a little bit of background,
you know, this was set up by Milton Hershey in his will
and it was a trust set up to benefit the Derry Township School District.
And it was nice
that the audit mentioned that, you know, that the school district is a beneficiary,
but not really a controller of the funds, not an owner of the funds.
The trust owns the funds.
But the nice thing is that the district does benefit from them
and originally, which would make sense.
The Hershey Trust Company served as trustee of those funds,
but due to a merger with another organization
that was not going to be in the trustee business, Fulton had the opportunity,
along with a few other firms in 2012, to become the trustee.
So it'll be the successor trustee to the Hershey Trust Company.
And we were fortunate enough
to win the business and be named trustee of the business.
So it really was a joint decision between the former trustee,
the school district, and then the new the new successor trustees.
That was Fulton Financial in September of 2012.
And then what happened is when Fulton took over,
we looked through the terms of the trust.
It basically required that we at least pay out the net
income semiannually or twice a year.
And if anybody has followed interest rates over the years
on some of these documents or written, interest rates might have been
11%, 7% on even just a certificate deposit in the bank.
I remember that during my time of being an investment officer,
but luckily the state legislature
looked at really what that meant
and what the intent was, and they passed a law.
It was Act 141 and Section 8113 of the Pennsylvania Probate
and the state's fiduciary code, the death code.
And it allowed trustees like, Fulton, to say, gee,
this does say we can only pay income, which is dividends and interest,
but dividends interest have gone down to 1%, 2%,
you know, much lower levels than what the intent was.
So the law was passed and it said that we as trustee
could redefine the net income for this purpose to be a fixed percentage
that won't be less than two or more than seven.
So, again, Liz, could price speak to this much better than I can.
But when you look at long term averages of financial assets,
I think Pennsylvania was saying, you know, there may be a time
a trustee has to go to two because everything is paying very, very low.
What we want to want want to go much higher than seven
because the history is just not there.
The markets consistently can give seven and and keep a trust growing.
So I think Pennsylvania was really smart in doing that.
So full term, when we took over that law was fairly new.
It was starting to be used by trustees.
And when we took over,
there were discussions with the school board and with the Finance
Committee to decide what really made sense.
So at the time, in 2012, 5%
was the payout that it switched to.
Who knows where dividends interests were at that time?
I have to go back and look, but you could have been looking at three,
three and a half percent.
So it really was a way to say let's set 5% as the payout.
Initially we did what the law said, which was a three year average.
That's what they recommended, a three year average market value.
And then again, because the markets fluctuate so much
and everybody thought it was prudent,
Fulton, you know, had discussions and said, let's go with a five year.
So what we do now, just to give everybody idea we do now, is we
take the market value on March 31st of the last five years,
then we figure out the average of that.
And up until this past year, we were at 4%.
So basically what happened is from about 2012, I think it started
in, let's see, started in 14.
So discussions between 12 and 15 were,
you know, looking at where rates were and what would happen in the markets.
It was like it might be prudent to back off from five and get to four
because we want make sure this trust is is growing,
that it's always there,
that if you're getting a percentage of a market value,
you want that market value to go up every year.
So that that percentage is a is a bigger payout.
So again, in concert with what was going on at the district,
the rate went from 5%, which started in 2012.
And then in 15 it went to 4.75 and then it kind of gradually went down.
The next couple years after that, until most recently,
it was a 4% that we've been calculating,
once again, listening to the beneficiary, which is the school district.
We had some discussions with Mike and with
with Lindsey and with Kathy and with Kemp, with everybody.
You know, the concerns over this COVID and the loss of revenues,
which we just again heard about in your financials,
it became very evident that we as trustee, you know, can listen and say,
wait a minute, there's a reason here and not stick at the 4%.
So for one year, everybody agreed that it really made some sense to do a 7%.
So the current payout this year, the school year
for 2021 through 2022 is 7%.
So we did a five year average on the March 31st of 2021
and then calculated that and again, we pay a march, June, September, December.
But because we calculate in March, we make that payment change
with your September payment.
So it kind of coincides with the with the school year.
So a little bit of background on when Liz goes over the numbers, she's
going to show you how well the investments did and the markets have done.
But she's also going to have
some things in there that show the payouts that we've made.
And it just kind of gives you an idea that I think that this is a conversation
for us all to have on a pretty regular basis.
You know, what should the percentage be?
We should probably set something in our world, usually 4 to 5.
Makes sense.
You think about retirement planning,
they often save, you know, spend 4 to 5% of your of your plan.
And you should be able to kind of be able to keep it going and not have it
be depleted.
But again, these are conversations that I think should probably be had every year
to look at the payout rate and just be sure that we're in the in the right place.
So that's a little bit of background.
Any questions for me on that or anything I can expand on?
Maybe I have a question for you.
This is Kathy Seger,
So payouts were always based on a percentage,
not on a set number,
because I thought we you know, we needed to budget on a set number
because it's obviously a percentage is going to go up with the if the.
Trust goes up. Yeah, that is correct, Kathy.
And I think that's why we calculate in March, we would always calculate in March.
And then what we do is take that number and divide it by four.
So you would have a set number.
So it is set once we do the calculation.
And I think the timing was purposely set that way so that you have that number
as you go into your budgeting for the next the next year.
Okay. Yeah.
This is Lindsay.
Thank you for that explanation because Kathy and I were actually talking
about this recently and trying to recall, you know, which way it went.
And I knew that it usually came out around a million and a half,
I believe, you know, somewhere on that.
So I guess maybe that's just attributed to the stability
of the market performance, you know, the fund performance,
you know, over time, with the exception of the increase over the last 18 months.
Yeah.
But we
don't typically have the conversation annually.
It had not Yeah it was right.
Not, not typically.
I mean with most year of trust we do set it like I said Liz
comprise speak to better than I can give a long term averages of the market
something in that 4 to 5% range really should be set and leave it there.
But I think the conversations to be had where there's something unusual, you know,
but yeah, if we were to take your payout
or leave it at seven, which the law allows,
if you were to leave it to seven, but we're only projecting six
and a half percent returns on a portfolio, even 100% equity portfolio,
we run the risk of depleting the value of this trust
and then you're getting a percentage of a smaller bucket every year.
So it's like we're trying to balance.
We want to keep this payout to growing, especially if we can just keep the number,
let's say 5%, you know, if we keep it five,
we'd love to just be able to see that payment going up every year.
But yeah, you are correct, Lindsay, that the best prudent way
is to set it and leave it.
But I think conversations like we had this past year were excellent
because it allowed us to go up, you know, higher than and still be within the law.
Yeah, you.
Well, I'm going to stay on.
But if we want to turn over to Liz, we certainly can can do that.
Well, thank you.
I'm going to get thank you so much.
Right up.
I think also for the benefit of the new members of this
finance committee,
we'll just go a little bit about what our investment process and philosophy is
and why we have an asset allocation of target of 65% equities
and 35% in fixed income cash as well as some alternatives.
So we have a three step process
and the first one is to determine what we think the expected asset returns
will be for the next ten years and project that.
And then we make most
we do an optimization process of combining several portfolios,
different mixes of stocks and bonds, as well as the cash and the alternatives.
Then we come up with some expected returns.
So when we talk about making a 4
to 5% distribution from the portfolio each year,
that comes to a 65% equity position,
that would be for a 4% distribution
because we think that allocation would be and we just completed our process,
it has declined down to six and a half percent.
Last year it was 7%
to do a
sustained 5% distribution from the portfolio,
we would be looking at an 80% equity allocation.
It also puts more risk in the portfolio.
So when you do have those negative views, it puts more strain on the portfolio.
It also then would decrease your payment for short period.
So we've come up with this 65% allocation to maintain
that 4% asset allocation.
The next step we look at is are there things happening in the market
that make us want to have more dollars in the equity market?
Do we want to tilt more towards domestic stocks or international stocks?
What do we want to do with the bond market when we see rising interest rates,
we call that tactical asset allocation.
And then last year, our tactical decisions paid off
well for the portfolio on the fixed income side,
what we did is we made sure we had an overall allocation
in our corporate issuances, including below investment grade.
We then also on the equity side, what we did
is we overallocated our dollars to the domestic market.
Those dollars were put primarily within the large
cap growth area, which was predominantly, predominantly technology.
So that really drove the equity markets last year.
As we look forward to this year,
I'm happy to report today's markets were flat
over half.
They dipped, they didn't quite significantly,
but they did bounce back in the last hour.
It was just amazing.
We were sitting there not believing it.
But what we are projecting for this year is a lot more volatility.
We said that day one and we got it.
The volatility numbers have really started to climb.
We expect that going forward.
We have concerns with inflation.
Some of that is driven by the supply chain.
We also have concerns with the rising interest rates,
not only because of inflation, but as you start to go through
the economic cycle, you see interest rates rise.
That's typically a good thing.
When you see interest rates rise because the Fed says the economy is strong
enough, we can raise those interest rates to not harm the economy.
But for some reason this year it's, oh my goodness,
they're not seeing it that way.
And then we also have at risk the valuations of the equity market.
I will tell you, they came down to more reasonable values over the past few weeks.
But then you also have the the Ukraine situation and what may happen in Europe.
So those are things on our radar screen.
We are keeping and monitoring those things.
So things we are doing right now are within our fixed income.
We continue to keep an exposure to corporate issues
because we think we see the credit
default rates still being relatively low.
We have moved into what we call floating interest rate bonds.
Those are bonds that take advantage of rising interest rates.
They also tend to be more high yield and lower credit quality.
So we need to continue to monitor that.
So we've
shortened duration and we put more exposure into corporates.
On the equity side, what we are seeing is that
we debated do we increase our international exposure?
We are waiting until there's some resolution with Ukraine.
We are still hesitant to go into the European communities
as well as the Japanese markets because of the concerns with Ukraine
and how the Soviet by gosh, I still call it the Soviet Union.
Russia is controlling the flow of oil into Europe.
So those are concerns there.
So we'll remain overweight, domestic.
The big move that we have made is we are starting
to see, well, again, the deep cyclical stocks do better.
Those would be your financials, the energy stocks,
those that are more sensitive to interest rate increases and a growing economy.
We think at this point we are pretty going to be evenly balanced
between the growth style, which continues to see revenue growth.
However, it's and it will continue to have revenue growth,
but we're seeing those deep cyclicals have a stronger revenue growth at this point.
And then when we see that move transition,
then we'll go back into the growth because we still believe long term
the growth style is a better style because that is where technology is.
The growth and the revenue and earnings growth.
We will also keep our eyes on earnings growth.
I'm happy to report IBM reported really strong earnings this evening,
so that's a good premonition for the markets.
But we'll see how the earnings season goes.
This this quarter.
We are expecting earnings to continue to do well for the near term.
We also think that the economy will do well this year.
It's slowly but surely will get back to its normal growth rate.
We still see some strong growth at the beginning of this year now start to abate.
So those are the things we look at when we do
our tactical allocation.
The step step we take as we
look at all the different managers and experts out there.
So with our fixed income, we have oh my gosh, we have so many managers
that we look at, we grade them based on their return and their risk.
We look at all these wonderful statistics that are developed for us
financial professionals, and we come up with the scoring system.
We also have an outside advisor
that does go to these investment firms and does their due diligence
to make sure that those investment firms
do their SCC filings.
They follow their own compliance issues
and they do have a succession plan in place.
We combine those and then we decide
which manager fits your particular portfolio the best.
So we want some stability, but we also want to take some risk.
So for your your core portfolio of bonds, we look at one manager called Federated,
and then for those that we go into, the the floating rate will pick
a different manager because that manager has better expertise in that area.
We do the same thing on the equity side.
We select the best long large-cap growth manager,
large cap value manager, mid-cap
small cap and on down the line
that process that we do.
Last year your portfolio returned 14.48%.
That's in the lower right hand corner.
The index that we compare this
against returned 11.28%.
So we had some outperformance in this.
The reason for this is because of those allocation decisions we made it also,
as the managers last year did well, we had several managers in fixed income
being the federated fixed income, which was your core manager did well.
We also had PIMCO, which did really well with the the corporate issues.
And then on the equities side, we had two managers that did really well,
one being Boston Partners, which was the value style manager,
and then our international manager.
Even though international underperformed last year,
the international manager did very well relative to its peers.
So that's why we did as well as we did last year.
We'll continue do that process going forward.
Any questions from the committee members?
This is Cathy Shaker.
I know that we have the February and the March Finance Committee meeting
to discuss if we want to
go back to the 4% or even consider anything slightly higher than that or not.
So I appreciate the history that we started at 5% in 2012,
moved up to 4.7, then moved back to 4%.
But I just wanted to kind of highlight some of the things you said about
if we would move to 5% draw,
you would have to increase the equities, but 5%
puts more of a strain on the trust
it would because it you're going to be pulling more dollars out
if we go to 5% permanently, that is when we would
raise the percentage to 80% for equities.
If we do a one year
draw at 5%,
we are still our long term target would be 65.
Okay.
I as a portfolio manager and my team would sit in our offices
and discuss whether we want to increase that
equity allocation over and above that 65.
If we want to pull it up to 70 or 75
on a short term basis.
Okay.
Sorry, I didn't have my mike
for the distribution last year when we went to 7%.
I recall that we had to go through a special approval process to increase.
Is that something that if we were to increase the distribution
for one time, for one more year
before going back to a lower distribution
for the future, would we have to go through that process again?
Sheri?
I'm going to let them know that we will do a stress test on the portfolio
to see what the impact of that would be and then share
you have some internal processes you need to go through.
Yes. So the law
is we can do between two and seven.
So I don't believe we'd have to go.
You know, if you want to go above seven in this next year, there's one more year
where you can.
The law was there was like a temporary law put into place.
So I think to answer your question more directly, Lindsay,
is that no, we would not have to go to committee again
because it's within that 2 to 7, which is in the statute.
Okay. Thanks.
And if you I don't want to speak.
For Kathy or Cheryl, but when we look at this again, you know,
next time, as we are entering the budget phase,
I know previously we've looked at it and been.
Able to kind of see.
A forecast of if we do this and this is what we would be able to anticipate.
And obviously I went back and looked at the balance
from just a 2018 event.
And when you look at the distributions you take in with the market performance,
you know, it is up $10 million compared to 2018 at the end of the first quarter.
So that gives me confidence.
But trying to anticipate for for the future.
Will you be able to do the presentation for us where it shows if we do this
and do this and then you revert back to the four, seven, five or five
in the
future, you know what that looks like for,
you know, the long term reliance on it.
If we can do that analysis once again, and that's what I referred
to as the stress test. Okay.
Because I think you're more concerned about the downside risk of the portfolio.
Mm hmm. Okay.
And what would be your timeline to do that?
Well, we we would want to talk about this at the February and March.
Finance Committee because you need your decision on our percentage by March 31st.
Right,
Jerry?
Yeah, that's, that's correct. Yeah.
I think we have some wiggle room in there.
We do it as of March 31st, but we don't change the payment until September.
So I think what we do is we kind of calculate
in order to give you a number to see if you can work with that number.
So I would say we have
you know, if you're not decided by March, we can be a little, you know,
a little has a little time in there and really work with you
to come up with the real numbers should be or.
I know that on our side, we need some time to look at our numbers as well.
So We invite you for a quarterly update
typically, so you wouldn't be due back until April,
would we?
Sure.
Would we need them in March it to bring the stress test back
so we can get a clear picture.
And we've been talking about this issue show.
So we have been.
I have been having those conversations with with and Sherri on.
A timing basis.
So I think I'll defer.
To them on timing.
I would think
we would want to see something in that in like at least by March.
So we have an idea
that maybe the plan being then that we could make that decision
in April and really build that into that proposed final budget.
I think that should be our latest timeline is is April,
and that's something I would like to change.
Thank you.
So we will look at we will look at the stress test of the portfolio in March.
Okay.
I know we're running short on time.
It's 2 minutes after six.
Does anyone have any more questions for Fulton Bank about the Hershey Trust?
Your Kip Shore?
Here again, Sheri and Liz,
thank you for outstanding presentation.
Appreciate all of your hard
work on behalf of the trust and behalf of the district.
I just wondered if you run a analysis
of a portfolio that's 50% in Dogecoin.
You got the laugh.
Got the laugh.
Just kidding.
We have not done that yet.
And that's going to be the headline in the Hummelstown Sun.
Now, Dr. Schultz, out.
There in charge of school District AMVETS invests in those things.
Well, thank you very much and we'll look forward to seeing you again.
Thank you. Thank you. Thank you all. Thank you for your time.
So it's 603.
We have two more items.
Do you want to just go through them
very quickly since the attachments are there
or do you want to table them to the next meeting?
What do we have on for the executive session than.
I don't know.
I say we have a couple more minutes to play with here.
If you want to go over them quickly.
Yeah, I'll I'll Kathy, I'll defer to you on that.
Whatever.
Whatever you want to do is fine with me.
At least.
This is Cheryl.
I think what I heard coming from meeting with Mrs.
Secker is just a. Quick update on food. Services.
I will say as we started the meeting, this is week number four,
so I have not had a chance to really dive into food service operations.
I can tell you from brief conversations, I know
Mr. Barwin in my office and Mr.
Hummel, food Service director, have historically worked together on numbers
coming from both of them.
The thought process is
that they are very comfortable with the trends turning this school year.
So I did want to at least share the.
Last couple of months of operations that.
It is looking much better.
Mr. Hummel feels we're really on track to
turn this around this year.
As long as we can get supplies and keep staff and keep.
Kids in school.
So you know all those exact numbers.
Right?
So I wanted to at least point.
That out to, you know, for a little bit of comfort that is something that.
I will be spending a little more.
Time getting up to speed on and be able to have those conversations better through
the spring anyway.
Okay.
And the next item is the monthly update, general fund revenues and expenses.
And as I've talked. To Mrs.
Secretary, like I.
Want to be designing some things.
It will be a work in process a little bit to.
Bring some reports forward.
What works, what doesn't.
Just to get myself comfortable.
I like a year over year look.
So I'm just sharing these revenue and expenses.
There's two to spreadsheets in there, one for revenues.
One for expenses,
basically from a budgeted.
Current year standpoint where we're at year to date.
And then a look over
last year where we were at year to date as well as where we finished the year.
I think it's important to see
local revenues are pretty much you have everything in by now,
things will trickle in, but it's just good to know that we are trending.
I didn't see anything again, not having spent a ton of time in the details,
but just I don't see.
Anything that struck me as.
You know, really.
Out of. Out of line.
But again, we'll spend more time on their the same then for the expenses.
And this one is by function.
I want to take a little closer look at objects.
So this is just those high level functions that actually.
Were just in our audit report.
I'm looking at the instruction.
Instructional areas, support services,
your operations, which is your buildings and grounds.
And then the other areas.
Which is debt payments and transfers.
And that's where you would see actually I pulled that out.
There is a.
Budgeted 150,000. Dollar transfer to. General.
So from general fund to food services that we'll.
Look at through the spring.
Depending how
well they're doing, may or may not that these are not these are budget.
It transfers don't have to happen.
The only ones that really have to happen, of course, is your debt service.
Again, we'll keep looking at this, but these are kind of things
I want to start looking into some
some areas and see how we're trending and get a better feel for that as budgets
are due back from the department areas starting February one.
So that'll be the month of February is to really get
a handle on what the requests are and then start those budget meetings.
Does any have anyone have any questions?
We'll take some more time at the next meeting as well
to go through anything that we rushed in those.
Okay.
Well, I would like to
adjourn the
was there any public comment, anybody here or is it just
I didn't see any public attendance on the webinar.
So yeah, there is none.
Okay.
I move to adjourn the Finance
Committee meeting at 607.
Thank you.
See you all next door.