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HomeMy WebLinkAbout1998-10-26 City Council (14)TO: City of Palo Alto City Manager’s Report HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE: SUBJECT: OCTOBER 26; 1998 CMR:407:98 CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR THE FIRST QUARTER, FISCAL YEAR 1998-99 This is an information report and no Council action is required. BACKGROUND The purpose of this report is to inform Council on the status of the City’s investment portfolio, as of the end of the first quarter of fiscal year 1998-99. The City’s investment policy requires that staffreport to Council on the City’s portfolio composition compared to Council-adopted policy, portfolio performance, and other key investment and cash flow information. DISCUSSION Investment Portfolio as of September 30. 1998 The City’s investment portfolio is detailed in Attachment B. It is grouped by investment type and includes the category of investment, the book, face (par) and current market value, maturity date and days to maturity, and the weighted average maturity of each type of investment and of the entire portfolio, as of September 30, 1998. The face value of the City’s portfolio is $262.9 million. The portfolio consists of $48.1 million in liquid money market accounts and $214.8 million in U. S. government agency notes and Treasury securities. The $214.8 million includes $123.6 million in investments maturing in less than two years, representing 57.5 percent of the City’s investment in notes and securities. The current market value of the portfolio is 101.8 percent of the book value. Bond yields continued to decline, especially toward the end of the first quarter when yields on the 30-year Treasury bonds fell dramatically. This means that bond market prices, which move in the opposite direction of yields, went up. Because the City’s investment policy and practice is to hold securities until they mature, changes in market price do. not affect what the CMR:407:98 Page 1 of 4 City earns in real dollars. The City can expect, however, that as funds are invested in the near future, yields will be lower than yields over the past several years. The average life to maturity of the investment portfolio is 1.56 years. The market valuation is provided by Union Bank of California, the City’s.safekeeping agent. The portfolio rose by $11.2 million over the past quarter, from $251.7 million on June 30, 1998 to $262.9 mitlion on September 30, 1998. Over two-thirds of this growth continues to reflect augmentation of the Calaveras Reserve. Investments Made During the First O_uarter During the first quarter of the fiscal year, $17 million of investments with an average yield of 6.0 percent matured, while one $4.0 million security with a yield of 5.68 percent was added to the portfolio. The security purchased matures in less than two years. Yields on Treasuries and agency securities decreased sharply in the first quarter, particularly during the month of September. The yield on a 2-year Treasury note declined from 5.51 percent at the end of June 1998 to around 4.11 percent at the end of September, a 1.4 percent drop. The substantial movement of capital into U. S. securities because of the current economic uncertainty (see Yield Trends) has raised prices and, consequently, pushed down yields. Highly liquid funds deposited in the Local Agency Investment Fund (LAIF) and the City’s short-term money market fund increased by $14.2 million compared to the fourth quarter, as the yields in these areas are currently more favorable than that of Treasury instruments.- As of July 1, LAIF increased its ceiling on invested funds from $20 million to $30 million. The City now has $30 million invested in LAIF; the yield was 5.6 percent at the end of September. At the end of September, the City also had $18 million in its money market account, and the yield was 5.3 percent at month end. The low yields in the last quarters of 1997-98 and first quarter of 1998-99 have prompted staff to shorten the term of funds invested (in addition to investingavailable cash in the LAIF and the City’s money market account). " ~ As interest rates begin to rise or as.yields in the City’s short-term investment pools begin to drop, staffwill begin to draw down liquid funds and invest in longer-term securities. Staff will also pursue callable security investments, which have higher yields, provided they fall within investment policy guidelines. Availability_ of Funds for the Next Six Months Unlike manysmall and medium sized cities that sometimes have to borrow funds for 30 to 90 days, the normal flow of revenues from the City’s utility billings, sales and property taxes, transient occupancy taxes and general user fees is sufficient to provide funds for ongoing expenditures. Projections indicate receipts will be $115.2. million and expenditures will be CMR:~7:98 Page 2 of 4 $106.1 million over the next six months, indicating an overall growth of the portfolio of about $9.1 million. At the end of September, $48.1 million was also available in liquid funds that could be withdrawn on a daily basis. Moreover, securities totaling $30 million will mature between October 1, 1998 and March 31, 1999. The City will have more than sufficient funds to meet expenditure requirements for the next six months. Compliance with City_ Investment Policy During the first quarter of 1998-99, staff complied with all aspects of the investment policy. Attachment C lists the restrictions .in the City’s investment policy, compared with the portfolio’s actual compliance. Investment Yields Interest income on an accrual basis for the f’trst quarter of 1998-99 was $3.95 million. This is 27.7 percent of the 1998-99 interest income budget of $14.2 million. The effective rate of return for the fiscal year, as of September 30, was 6.0 percent. This compares to LAIF’s yield for the quarter of 5,65 percent and an estimated average yield on the two-year Treasury note during the first quarter of 5.11 percent. Yield Trends During this quarter, the Federal Reserve Open Market Committee (FOMC) moved from a position of implementing an interest rate increase to keep inflation in check, to a position of reducing interest rates to keep the economy growing. Ominous events such as economic .dislocation in Asia, the collapse of the Russian economy, financial problems in Brazil, the tightening of credit in the United States, and weakness in domestic employment and corporate profits prompted the FOMC to reverse direction on interest rates. On September 29,-1998 the FOMC decreased the Federal funds rate by a quarter point. Many economists are predicting additional r&luctions in the near future. The City, therefore, can expect lower percentage yields, on future investments and on the portfolioin the coming year. Funds Held by the City_ or Managed Under Contract Attachment A is a consolidated report of all City investment funds, including those not held directly in the investment portfolio. These include cash in the City’s regular bank account with Bank of America; bond proceeds, which the City itself manages in a separate investment account; bond reserves and debt service payments being held by the City’s fiscal agents and by the City; and employee deferred compensation accounts (investments directed by the individual employee, .but technically considered City funds reserved for the employees). The most recent data on funds held by the fiscal agent and the City is as of September 1998, while balances in the deferred compensation accounts are as of June 30, 1998. ¯ CMR:40"/:98 Page 3 of 4 ATTACHMENTS: A)Consolidated Report of Cash and Investments B)Investment Portfolio, as of.September 30, 1998 C)Investment Policy Compliance PREPARED BY: Joe Saceio, Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CARL YEATS// Director, Ada’iinistrative Services CITY MANAGER APPROVAL: CC:N/A Assistant City Manager CMR:407:98 Page 4 of 4 Attachment A Consolidated Report City of Palo Alto Cash and Investments First Quarter, Fiscal Year 1998-99 City Investment Portfolio (see Attachment B) Book Value $263,273,053 Other Funds Held by the City Cash with Bank of America (includes generall imprest, and other accounts) 1995 Utility Revenue Bond Proceeds Fidelity Fund - Treasury Class I Petty Cash at City Facilities (as of 6/30/98) Cash with Washington Mutual Bank $2,105,110 2,791,412 8,420 11,969 Total for Other Funds Held By City $4,916,911 Funds Under Management of Contracted Parties Fiscal .Agent Debt Service Payments and Reserves First Trust California Golf Course Certificates of Participation Reserve Fund Palo Alto Public Improvement Corporation Lease/Reserve Fund $ 712;067 Total Under Management Employee Deferred Compensation Accounts (1) (June 30, 1998) Great Western Bank ICMA Retirement Corporation ITT Hartford $ 729,542 23,790,634 Total for Funds Under Management 54.388.869 GRAND TOTAL ~ 324.053~182 Market Value $ 268,073,254 $2,105,110 2,791,412 8,420 11,969 $4.916r911 $ 712,067 $ 729,542 23,790,634 29 868 693 $ 54.388.86.9 $328,853,383 oo~ooooo~oooooooooooooooooooooo~ 0 8888 O0 00000000000 0 O0 O0 ATTACHMENT C Investment Policy Compliance as of September 30, 1998 No more than 10 percent of the portfolio in collateralized Certificates of 0.00% Deposit (CDS) of any institution. No more than 30 percent of the portfolio in Banker’s Acceptance Notes.0.00% - No more than $5 million with any one institution. No more than 15 percent of the portfolio in Commercial Paper..0.00% - No more than $3 million with any one institution. Limit investments exclusively to those stipulated under types of investment.No exceptions No more than 10 percent of the portfolio in Farm Credit Securities..80% No more than 2 percent of the portfolio in the Guaranteed Portion of Small 0.00% Business Administration Notes. No more than 15 percent of portfolio in Mutual Funds.6.9% No more than 20 percent of portfolio in callable or Multi-Step-up 1613% government agency securities. Liquidity enough to meet one month’s cash needs.$ 48.1 million At least $50 million maturing in less than 2 years.$123.6 million No more than 20 percent of the portfolio shall be in investments maturing in .15% more than five years. Market value of the portfolio will exceed 95 percent of the amortized cost 101.8% basis of the portfolio.