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Attachment 4Filename: LGTCFinCommResolution15Jan2019 011119 January 10, 2019 Submitted by Terry Duryea, non -voting member of Finance Committee To Honorable Mayor and Town Council In reading Town Staffs proposed Resolution in Agenda Item 7, Town Staff proposes shifting the focus of the Finance Committee from addressing the risks and opportunities associated with the Town's Pension and OPEB obligations, to a new focus, enhancing Town revenues. At the same time the draft resolution eliminates the Town Council's right to direct the Finance Committee to serve in an advisory capacity on "special projects". This effectively removes Council's influence over the Financial Committee's activities. The proposed draft also eliminates from the current Finance Committee Charter "Annual review of proposals and make recommendations to address the Town's CALPERs unfunded pension and OPEB liabilities". It does not make sense to eliminate this focus as the Town's unfunded pension liability continues to grow and is larger now than it has been at any time. Lastly, the first "WHEREAS" paragraph in the draft resolution is narrower, eliminating the reference to the "need for adult resident input to Council and staff regarding financial policy issues, and to promote citizen participation and understanding regarding the financial condition of the Town." These changes appear to be designed to put the Council Finance Committee under the control of Town Staff, rather than under the control of the Town Council as it is currently. Town Staff will have effectively derailed the Finance Committee as it was intended to operate originally. The Staff Report makes the argument for this shift because the Pension and OPEB Oversight Committee should be the ONLY body discussing investment strategies. I'm not sure why the Staff memo said ONLY, but given Town Council's fiduciary responsibility, if I were a member of the Oversight Committee, I would want an objective review of asset allocations and investment strategies by someone other than Town Staff which has a vested interest in these decisions. Allowing 3 Town residents with relevant financial experience as non -voting members on the Town Finance Committee was an experiment. I ask each Council member, 3 of whom have been on the Finance Committee, to ask yourself if you feel you received value from the Finance Committee meetings under the current Charter. If so, that would imply the experiment is working. And if that is the case, then why would you shift, and I would argue narrow, the Finance Committee Charter? Off the top of my head, I can recall 4 Staff recommendations that the Finance Committee did not accept, the first 3 being significant, the 4th one relates to draft Finance Committee minutes that potentially demonstrate a conflict of interest with Staff. Specifically: • When the Section 115 Plan was set up, Staff recommended the Town follow the most conservative asset allocation initially. The 2 voting Finance Committee members did not agree and recommended a more aggressive asset allocation to Town Council • In the most recent Finance Committee meeting, Town Staff recommended changing to a more conservative asset mix for the Town's OPEB Plan managed by CALPERs. The two voting members did not accept Town Council recommendation. Neither did the Town Council, even though Town Staff made the same recommendation for a more conservative asset allocation to the Town Pension and OPEB Oversight Committee • After extensive discussion of the draft 2018 CAFR MD&A, the 2 voting Committee members did not accept the Town Staff recommendation to approve the draft 2018 CAFR as presented to the Finance Committee. As a result of discussion at the Finance Committee meeting, Staff made changes to the draft 2018 CAFR before submitting it to Town Council for approval ATTACHMENT 4 • At the October Finance Committee meeting, the 2 voting members directed Town Staff to edit the draft August 6, 2018 minutes to provide an objective description of comments made by the public, rather than the evaluative description in the draft I can't help but take this recommendation it directed at the 2 current citizen non -voting members, possibly because we have been critical of decisions made by Town Staff in the past. You can look to the last Town Council meeting for an example. After the meeting I pointed out to Town Staff that their response to a Town Council member question was not just misleading, but was incorrect. Having said that, I do want to recognize that once Town Staff became aware of their mistake, they notified Town Council members that their original response was wrong and Staff provided the correct information to Council. Furthermore, I would have thought as a member of the Finance Committee, the Town Staff would have given me the courtesy to notify the non -voting members that there would be an agenda item at the January 15, 2019 Town Council meeting seeking to shift the role. It feels like the Town Staff does not respect the citizen non -voting members or value their insight. In the Staff Report, Town Staff considers setting up the Finance Committee as a Finance Commission with resident members. I'm not sure what the purpose is. Speaking personally, I was willing to spend the hours it took to be an effective Finance Committee member because I thought I could make a difference. I felt this because there was continuity and context from meeting to meeting, and there was an expectation of the material we would receive prior to each meeting as the agendas were generally discussed in advance. Because there is much information to digest before the meeting, it would be even more difficult to add value if it was a Commission because the continuity would not be there nor the context. As I expressed earlier, I ask each Town Council member to ask yourself if you felt you received value from the Finance Committee operating under its current Charter. If you believe you did, I ask you to reject the Staff Recommendation. Instead, you should expand the Finance Committee focus to allow it to support Town Council to make better informed decisions, especially related to allocation of financial resources. Respectfully, Terry Duryea, Non -voting Citizen Member of Finance Committee PS: I am sorry I cannot attend the Tuesday meeting as I have a conflict with a Board of Trustees meeting at Regional Medical Center, a sister hospital of Good Samaritan Hospital Laurel Prevetti From: Sent: Saturday, January 12, 2019 1:17 PM To: Laurel Prevetti Subject: Finance Committee Reduction of Responsibilities and Staff taking over the Council Responsibilities Attachments: A suggestion for the new revised FC.docx Memo attached for the Council meeting of 1/15/19 Jak VanNada Los Gatos Community Alliance J. Town Council Meeting 1-15-19 Dear Town Council, I would like to suggest a different view of how a Finance Committee could become an even bigger asset to the Town Council. As you know, I am an interested citizen, but not a member of the Finance Committee. I'll put this in perspective by looking back to 2016 when our coffee -group of citizens first discovered there were questions we had about the CAFR's. As I was one who advocated an advisory committee in the first place, I'll start with the context of this discussion and reasons that you may NOT want to reverse the momentum of the Finance Committee. My proposal is that you first look backwards to understand the potential advantages going forward with a strong advisory body to the Council. Until the new Finance Committee was developed in early 2017, it consisted of two council members and several from staff meeting 1-2 times per year. Though well intended, neither Finance Committee member had professional financial experience — especially in the complex world of government finance. In reviewing the limited minutes of the one or two meetings per year that we found of the Finance Committee meetings, the only working knowledge of government finance was owned strictly by the Staff. If knowledge is power, that puts the Council at an immediate disadvantage. There can be no "intelligent financial discourse" when only one of the parties knows all of the rules. It's a fact of the town's political life that most, if not all of the Council Person's, will not have the knowledge needed to totally understand government finance. Few if any in the town's history have been trained in high finance. Town business has been conducted as it has been for years, if not decades. In my opinion, the town's financial reporting system has been locked in outmode reporting methods. We have chosen template reports for years to reduce the time it takes to create meaningful reports. As one simple example in the budget, you can find a line item for total salaries and benefits, but not a corresponding line in the CAFR. It takes a monumental effort to determine how the town budgeted compared to how the town performed. It should not be that hard for Council, nor the citizens to understand. Council Members often do not know what to look for, nor the questions to ask. That's not where they have been trained. Currently, by profession or by training, we have two attorneys, one real estate agent, one engineer and one environmental scientist. If there are mistakes in the budget or the CAFR, they are hard to find and harder to understand. Often, no one understands the consequences. More often, the Council Members did not know what they were looking for. Even with my business background, I have to be schooled in town finances regularly by others with much greater knowledge than I. I, nor the council, do financial management everyday for a living, and in my case, it often does not sink in nor relate to previous lessons I've been given. I just know that numbers, and the accuracy of those numbers may have complex consequences for which 1 would be clueless without help from professionals. What I have found is that if there were transparency issues, they were easily tucked away in rarely read footnotes, or for that matter, hidden in plain sight. For example, in 2016, we did not find one Council person aware of the $13.6 Million of unfunded OPEB liabilities tucked away in Footnote 10 of the CAFR's. We brought that to the forefront once we discovered it, and it's at the front of the payment line today. It is such a large number that if just discovered today for the first time, I would envision the current Finance Committee bringing footnote 10 to the urgent attention of the Council where it could be discussed and dealt with by first delegating the investigative task to the Finance Committee (which has included 3 members of Staff). The Council then could delegate the responsibility to investigate and explain how the town got into the position of owing so much money, and yet not one of the Council knew. They would also be tasked with providing alternative solutions for both Council and Staff to discuss how the town could catch up to where it should have been years ago. It would be a collaborative effort not a competitive effort. We all want the town's performance to improve regardless of who finds out what. • In our short time, we have found over $12 Million Dollars that was misclassified and sitting in a dormant "demand deposit" account earning no interest. • Citizens have brought into focus the large amount of cash held by the town and provided data to show how a $10,000,000 payment to CalPERS today could save over $700,000 per year in "interest" debt. • It was the Finance Committee and the citizens who have brought to light the fact that we paid over $12 Million just in interest this past year — a number that I would propose sits at the top of every financial report the town produces. "Last year, the town paid $12,000,000 of interest in pension and OPEB debt". Those are dollars wasted, and it becomes more aggravating to know that when I watch our cash balance increase — earning a measly 1.5%. The Council does not get the cost of debt information from current financial reports. • The citizens pointed out that though Council Member Jensen asked for $700,000 to improve the roads, she was denied the request because she was told there was no money available. It was all allocated. Because it is not in the charter of the Finance Committee, the citizens analyzed the Internal Service Funds and found over $10,000,000 of cash - in a pass through fund - with at least a very conservative $3.4 to $ 5 Million over -funded. Not knowing the next question to ask nor having an argument against what the Staff was saying, Council Member Jensen accepted the statement by Staff that there was no money available. Knowing Council Member Jensen for the past 4 years, I am sure that If she knew there was $3.5-$5 million available, she would never have deferred so easily without asking the hard questions of Staff? • The citizens found that salaries and benefits had been excessively budgeted for 3 years in a row. The citizens pushed hard on the Council to realize that cash was building while we paid out 7.5% interest on pension and OPEB debt. Again, over $12 MILLION dollars last year. We're approaching the definition of insanity at this level. The fact that other cities do this is unacceptable as an excuse. • At the May 15, 2018 Council Meeting, the Council passed a resolution to review the current "waterfall reserve" policy, the resulting actual allocation of the FY 2018 excess reserves and make to any changes, if necessary, to both the underlying policy and the resulting allocation. There was a commitment made by Staff to address this in Q1 FY 2019 (October— November, 2018). That did not happen, but the citizens are bringing up this oversight now and want to know why this has been ignored? Though this is only a partial list, all of the above have financial consequences of which the Council would not have been aware without citizen and Finance Committee investigation. There is an extreme need for the Finance Committee to have the ability to tie all of the financial loose ends together. Why hamstring talent if it hides information needed to fix the cracks and plug the leaks. No one is watching the back door and every organization I know of has a back door, or a floor with leaks. This Finance Committee has highly qualified individuals that know where to find the leaks and how to fix the cracks in the foundation. Without a Finance Committee and the citizens filling in where the current Committee is not allowed to go, all of the above would be hidden in the financial closets of the town. There are so many responsibilities of Council in just serving the citizens - that for them stay on top of all responsibilities is unrealistic. The Finance Committee was set up strictly as an advisory committee for the Council, and was given a very short list of responsibilities that barely tie to the rest of the financial system. How many times has Staff told us that they are a small group of people working very hard. To me, it sounds and looks like they may be overworked because of that. If we've overbudgeted salaries by $4-$6 Million for at least three years running, couldn't the Staff hire an additional person and find the same stuff that we're finding? The key is transparency and accuracy. We all make mistakes. All organizations have cracks and leaks. We have the tools, the personnel and the money to fix them, but for too long, we have accepted less than optimal performance and antiquated reporting The Council has the Finance Committee as a resource, and from the few examples above, you should understand that by limiting the committee to those listed in the draft resolution would not address these and other problems we have found. The Finance Committee needs to be involved (as an advisor to the Council) for all things financial. All financial functions intertwine and are all directly related to the financial management of the town. C:\Users\jvann\Documents\LGCA\Finance Committee\FC Reduction of Responsibilities\A suggestion for the new revised FC.docx Laurel Prevetti From: Sent: Sunday, January 13, 2019 8:57 AM To: Steven Leonardis; Rob Rennie; Marico Sayoc; BSpector, Marcia Jensen Cc: Laurel Prevetti; ': Rick Tinsley; j - Subject: Agenda Item #7 Attachments: Los Altos Hills Finance Commitee.pdf; spector on the budget.mp4 Dear Members of the Town Council, In evaluating the merit of the proposed resolution, each Council Member should ask: • What is the specific problem the Council is "fixing" by reducing the scope of the Committee? • How will the Council and residents of the Town be better served by this action? • What do you have to believe to conclude that this action is in the best interests of the Town? • Why take this action now? The Staffs recommendation is not in the best interests of the Council nor the residents. The recommendation appears to be driven by the Staffs desire to be the sole voice on financial policy issues. If approved, the Town Council would be single threaded to the Staffs point of view, regardless of the merits or the soundness of their recommendations. It is disturbing to think that none of the current resident members of the Finance Committee nor the Council Members of the Committee were consulted or involved in developing the recommendation and resolution. I doubt the recommendation reflects the collective best thinking of the current Finance Committee members. The process used to develop the recommendation is not correct and sends a clear message to every resident that the Staff does not want residents to have a seat at the table where various ideas can be openly and constructively discussed. Open discussion and the exchange of different ideas goes to the heart of how Town government should act when deliberating complex issues. Open debate improves the quality of decision making. It is very telling that the proposed resolution has struck the opening "whereas" in the existing resolution, which read — "whereas there is a need for adult resident input to Council and staff regarding financial policy issues....". This need has not gone away, so why strike it? In fact many of us believe the need is greater today given the complex world we live in. How is it good policy to REDUCE input to the Council on financial issues by narrowing the scope of the Finance Committee? The Staff has tried to frame the Finance Committee "scope" issue in terms of "broadening public involvement". The Staff has hypothesized that the appropriate "goal of the Town Council is to broaden public involvement in the budget process" and the discussion of the "Internal Service Fund Policy". Given this "goal", the Staff suggests that financial expertise is not required nor is a single committee required. I strongly disagree with this conclusion. We all know how complicated the Town budget is and the complexity of an Internal Services Fund. Financial knowledge and acumen is absolutely required when dealing with these matters. Having a Council Policy Committee determine the appropriate use and funding level of the Internal Services Fund makes absolutely no sense. What evidence is there that the Policy Committee would be in a better position to opine on the appropriate cash balance of a proprietary fund which must comply with GASB. 34 than the Finance Committee? 1 Let me summarize - the problem facing the Council has nothing to do with "broadening public involvement". The problem that needs to be addressed is how to make the Finance Committee the core working forum where Council Members, resident financial experts and Staff can do the heavy lifting of constructively discussing and ultimately agreeing on recommendations that can be made to the Council regarding critical, complex financial policy issues. This is why the current resident members of the Finance Committee expressed interest in reviewing the Town's budget to determine if there are additional financial resources which could be redirected to paying down unfunded pension liabilities. This is why the current resident members expressed interest in the Internal Services Funds to determine if there were additional financial resources which could be better deployed. The current resident members are financial experts and their observations are valid and insightful. Even the Town Manager has publicly stated on numerous occasions the tremendous value added that these resident experts have brought to the Finance Committee. Their viewpoints and advice need to be heard by the Town Council. This diversity of view is a progressive outcome and should be embraced by the Town Council. Why the effort to narrow their involvement, especially in addressing the pension and OPEB matters and special projects if everyone agrees on the value they bring? I would also like to point out that the staff has conflated two very different issues, namely the Council's fiduciary responsibility to provide oversight to the two trust vs. the ongoing requirement to deal with the growing unfunded pension liability. The Oversight Committee has the fiduciary responsibility to solely act as Trustee for the two trusts. This trustee responsibility is well understood and distinctive from the Council's financial stewardship responsibility for managing the Town's overall financial position. The Staffs statement that the Oversight Committee should be the only body discussing investment strategies, asset allocations and actuarial assumptions FOR THE TRUST ACCOUNTS is not based on any legal requirement. This is simply an opinion offered by the Staff. What is a legal requirement is that as a Trustee, you must always act in a manner that is in the best interest of those who will receive these benefits. In that regard, having the Finance Committee who are financial experts, and have the skill and knowledge to make informed judgements regarding investment strategies, asset allocations and actuarial assumptions advise the Oversight Committee is consistent with acting in the best interests of the beneficiaries. Purposely taking the action to eliminate the Finance Committee's advisory role in favor of just the Oversight Committee members does not make sense. Several members of the Oversight Committee have publicly stated on numerous occasions they lack financial expertise. Taking this action, when there is no credible evidence to suggest that eliminating the advisory role of the Finance Committee is in the best interests of the beneficiaries, would put the Trustees in a very difficult position. The Town Council should clearly state how the beneficiaries are better off as a result of taking this action. The broader stewardship responsibility of the Town's overall financial position rests solely with the Town Council. It is the Town Council's responsibility, not the Oversight Committee to address the growing unfunded .pension liability and its impact on the annual operating budget. This Town Council has been advised by Bartel Associates that the increasing demand to fund the unfunded pension liability will have a material adverse impact on the Town's budget by capturing an increasing portion of the Town's financial resources. This is an issue that the Town Council working with the Finance Committee needs to diligently address. I have attached a video clip taking during the May 15, 2018 council meeting at which the FY 2019 budget was discussed. Listen to Council Member Spector as she openly speaks about her desire to find alternatives to fund this growing pension liability. She is seeking solutions other than those that have been presented by Staff. If the only solutions the Council hears are the Staffs views, how does the Council know there aren't other viable solutions which should be considered? The appropriate forum for ideas to be constructively discussed and flushed out is the Finance Committee. Lastly, I have attached an annual report issued by the Los Altos Hills Finance and Investment Committee to the City Council which will provide you with a very good idea as to how the City of Los Altos Hills is using their Finance 2 Committee. You can see how their charter specifically includes reviewing the annual budget and making recommendations to the City Council as well as the ability to study all fiscal issues and recommend possible improvements. Please compare their scope with the proposed resolution. Which scope will help the Town Council make better financial decisions and is in the best interests of the residents? I respectfully request you reject this ill-advised resolution. Phil Koen 3 AGENDA ITEM #2.A cv (1) +.• E— cp I a) w N > 2CE < E o o v V coC c ii o 0 0 CN O 0 as (Ni 0 r o cco a) 2 Committee Charter 6 _ 1- a1 >- C = RI a)a) 10 U E a) x a) 0 a) 1co as c V/ c 0 o m 0) m 4-J . , 01 a) _ c 0 0 E o 0 C O .6►L > U c a. V a)ur, 0- v 13 C a)U aN+ F- 10 L a) co . O > W 0 10 N 0 (11 0 0 U MI Ca) �' > '" co N 0_o aci-a a) oU �'ufoEaci�a� �QEEN�aJ EO u U o fl- n-13 O " a) 0 o c > U U >• W E U 0 O Li---- -0 E 0 Q 0 '1— �' 0 0 c o c �'13 ;-' 0 -a — 0 u) aci D csz N 004D0=Ec-0 .> a) c c > 1 "0 = c -0 c c001a1.0101n .C The only modification recommended is the deletion of "five-year" from the second bullet. The Committee • a) c 0 4-1 0 l0 t C 0 a0 t 0 .O _ 0 1n c 0 U a) .O O. a) w > c 11 0 a) rn --0 Cl. 113 w 0 o E C 0. O > N a) �O v a C L 4 Q) 71 > 0 r= -a L v v R A U) L E v > >- o E .a 11-1 v i- C N 0 4.1 wH aai E oQ E E c 3g > "E" a1i E 0 a' 0) as ca c �� � _c 03 E -Q a. ai E E O U '� v E c u) m E v va, E v ac3 .. c X 0) v 0 O a) U 0 > la N L C v a 4 .0 0 C ai m c 1-- — 0. v >. m v E0 s v a� v c 03 0 U w X 4-0 11= a E s v ��., 0 C L �0.�? ; E ( 3 •� N >. 0 6 y- _ v a5 L v 0 E a3 > w 0 > .N v U .� . y 4G) 01 in E m ..cv .v c 0. v C. 7 X 0 03 E V 0 CD_c76 U U 03 v C N U,>.O E E N -i N w C U .-�i N E-'—-a U d'� c 03� is 3 t6 w C U 0 07 0. q 0 v u) a0, c C O 0 t C c O. 2 4-. I-.3 a) 4-1 7 0 O 0 U i T 0 N 0 0 v Ot Q. O..° `~ U U 0 03 X v l0 C v i C, L _Q N E O L .0 >.. 0 O E A v a1j E O N >` N C u 0 C A C us N C Et ° > v c c 0 > U a= c ._ E v '� a3 ._ 03 .� TA � O- .. t t j- v.fl v .—, v v v E 0 2 0 () Jean Mordo John Radford N Tr O -a. O N C r ' r 1 c >0 O. �0+ L 0 0 Chairman: A V O 0 0 i 0 s 0 Jim Lai - 5/13 Associate Members: • We meet 8 to 10 times a year, depending on the work that needs to be done. • Attendance is from 70% to 100%. N N viD "CI g 2 '' '!11 0 •1., cd r0 'C U 5 rn ci_i ....4 0c) cg � 0 0 -IN - 64 CI) g"Ci 117) 0 ° VI CAg a) i Ri b 0 ▪ eto . ,� U 9. '47-1 N _,G4UwaP4� • • • • • • • • • 1) Prepayment of Town Hall lease Bidding policy endation of Ad Hoc Employee Compensation Committee GASB proposed new pension accounting standards Building and planning fees Payoff of pension side fund • • • • • • . • Introduction of quarterly financial statements N O 4-+ 0 0 . r, 0 lab 0 U bA • rn N O O 1M Ca1PERS changes to employer contribution rates • • • Building and planning fees and alignment with costs Laurel Prevetti From: Sent: Sunday, January 13, 2019 4:08 PM To: Rob Rennie; BSpector, Marcia Jensen; Marico Sayoc; Steven Leonardis Cc: Stephen Conway; Laurel Prevetti; Robert Schultz Subject 01/15/19 Town Council Meeting Item #7 - Finance Committee Town Council Members, I am glad to see this item on the agenda for the town council meeting. For the past two years there has been considerable concern surrounding the scope, priorities, agendas, and charter of the Finance Committee(FinCom) and it definitely needs clarification by the Town Council. During 2017 and early 2018 most of the concern came from me and other FinCom members since the Staff was unilaterally setting the agenda and avoiding the more strategic and financially significant questions facing the town: allocation to various reserves and internal service funds, investment allocations more consistent with our long term liabilities, more accurate and honest accounting for our Pension and OPEB liabilities (rather than just parroting CALPERS numbers which consistently understate the true liabilities), etc. It was frustrating, for instance, to spend time in three different meetings talking about the incremental sales tax proposal, a topic neither strategic nor financially significant by comparison, and one where the FinCom was not able to provide any recommendation to the Town Council despite Staffs best efforts. Over the course of 2018, the Chair and the other voting member of the FinCom began to exercise more control over the agenda (as they should per proper rules of order) and it was very encouraging that we began to seriously explore in earnest some of the biggest questions and financial challenges facing the Town. As a result, Staff began to express concern over the Charter of the FinCom and whether it was appropriate for it to delve into these sensitive topics which have historically had little, if any, oversight from anyone outside the Staff. This should not be surprising. It is a classic example of organizational behavior - after many years of autonomous operation with little oversight, organizations typically bristle at outsiders questioning longstanding practices and pointing out things that may have become inappropriate or suboptimal. Specifically, Staff has consistently resisted investing the Town's considerable cash balances in ways that are more appropriate given our large and growing long term liabilities. This manifests itself in a variety of ways: overly conservative investment allocations, excessive and redundant cash reserves and internal service funds, chronic budget padding or "cushioning" that limits the Town Council's authority to make long term financial or infrastructure investments, etc. As the FinCom members have increasingly pressed on these issues it is not surprising that some Staff members might be resentful and thus we have Item # 7 on your agenda. For the record, this was never discussed in any FinCom Meeting nor with me individually as a FinCom member. Of course, it is the Town Council's obligation to exercise its fiduciary duty to the best of its ability, and the Staff is obligated to implement the decisions of the Town Council (as opposed to the other way around). Obviously, the Town Council has the exclusive authority to create and empower any sort of advisory or oversight or study committee that it sees fit to assist it in carrying out its obligations. The Town sometimes hires paid consultants to advise us on these matters and often the consultant's recommendations seem closely aligned with those of our Staff. This is to be expected i since the consultants are normally selected and managed by the Staff. As Town Council members who are striving to make the best and most informed decisions on these critical financial matters, I encourage you to continue to select and empower unpaid resident "consultants" to help elucidate the most objective and unbiased collective wisdom of these strategic issues. I will not be able to attend the meeting on Jan 15 but will gladly respond to questions via email or phone. Thanks and best regards, Rick Tinsley 2