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Home My WebLink About1999-01-25 City Council (14)TO: City of Palo Alto City Manager’s Report HONORABLE CITY COUNCIL FROM:CITYMANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE:JANUARY 25, 1999 CMR:130:99 SUBJECT:t CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR THE SECOND 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 of the status of the City’s investment portfolio, as of the end of the second quarter of the 1998-99 fiscal year. The City’s investment policy requires that staff report to Council on the City’s portfolio composition, portfolio performance, and other key investment and cash flow information compared to Council-adopted policy. DISCUSSION Investment Portfolio as of December 31, 1998 The City’s investment portfolio is detailed in Attachment B. It is grouped by investment type and includes the category of investment, date of maturity, current market value, as well as the book and face (par) value, and the weighted average maturity of each type of investment and of the entire portfolio, as of December 31, 1998. The face value of the City’s portfolio is $268.8 million. The portfolio consists of $54.3 million in liquid money market accounts and $214.5 million in U. S. government agency notes and treasury securities. The $214.5 million includes $109.6 million in investments maturing in less than two years, which represents 51.1 percent of the City’s investment in notes and securities. The current market value of the portfolio is 101.2 percent of the book value. Bond yields during the second quarter remained low. Because the City’s investment policy and practice is to hold securities until they mature, changes in market price do not affect what the City earns in real dollars. The average life to maturity of the investment portfolio is 1.5 years. The market valuation is provided by Union Bank of California, which is the City’s safekeeping agent. CMR:130:99 Page 1 of 4 The portfolio grew by $5.9 million over the past quarter year, from $262.9 million on October 1, 1998 to $268.8 million on December 31, 1998. Growth in the City’s portfolio continues to be fueled by augmentation of the Calaveras Reserve. Investments Made During the Second Quarter During the second quarter, $24.1 million in government agency securities, which had an average yield of 5.74 percent, matured or were called. During the same period, the City purchased $23.8 million in agency securities having an average yield of 5.18 percent. The sharp decline in interest rates and government bond yields over the past four months has resulted in a significant number of City investments being called or redeemed; hence, the high volume of activity in the second quarter (yield trend analysis is presented below). The City’s short-term money market and local agency funds have increased by $6.2 million compared to the first quarter. Short term investments are much more attractive in today’s low interest rate environment. Availability of Funds for the Next Six Months Unlike many small 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 $112.8 million and expenditures will be $103.8 million over the next six months, indicating an overall growt~ of the portfolio of about $9.0 million. At the end of December 1998, $54.3 million was also available in funds that could be withdrawn on a daily basis from the City’s overnight accounts. In addition, $31.2 million in securities will mature between January 1, 1999 and June 30, 1999. Between projected growth in the portfolio and investment maturities over the next six months, the City will have more than sufficient funds to meet its expenditure requirements in the next six months. Compliance with City Investment Policy During the second 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 second quarter of 1998-99 was $3.95 million. Combined with first quarte~ interest income, the City has eamed 55.6 percent of its $14.2 million annual interest income budget. As of December 31, 1998, the yield to maturity of the City’s portfolio was 5.92 percent. This is below the 6.0 percent yield reported for the first quarter, reflecting the decline in overall bond yields. This compares to LAIF’s yield for the quarter of 5.47 and an estimated average yield on two-year agency securities of 4.59 percent. CMR:130:99 Page 2 of 4 Yield Trends During the first quarter, the Federal Reserve Open Market Committee (FOMC) switched from concerns about inflationary pressures to concerns about a slowing economy resulting from the Asian crisis, financial problems in Brazil, and credit tightening in the U.S. To counter these pressures, the FOMC decreased the Federal Funds rate by a quarter point in September 1998, a quarter point in October 1998 and another quarter point in November 1998. The Federal Funds rate now stands at 4.75 percent. The combination of rate decreases by the FOMC, demand for U.S. bonds, and low inflationary pressures have caused yields to remain at historical lows during much of the second quarter. Yields during the second quarter averaged around 4.4 percent for the two- year Treasury Note. While yields on the two-year Note rose to around 4.7 percent in the last week of December, they are expected to remain within a narrow, low yield range for at least the next year. Low interest rates have begun to impact the City’s portfolio. As noted above, the City’s portfolio yield has fallen below 6 percent to 5.92 percent. Lower yields on the portfolio should be expected in the next quarterly report. Persistently low yields have caused staff to shorten the term of funds invested. As interest rates begin to rise and exceed yields in the City’s short-term investment pools, staff will begin to draw down money invested in these funds (Local Agency Investment Fund [LAIF] and money market accounts), and begin investing in one- to two-year securities. Recent yields in LAIF have been running .6 percent higher than yields on two-year securities. Toward the end of December 1998, yields on the City’s money market fund began to sink below the rate offered on two-year securities. Consequently, staff will steadily invest available money market funds in shorter term (one to two year) agency securities during the third quarter. 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 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 is as of December 31, 1998, while balances in the deferred compensation accounts are as of September 30, 1998. ATTACHMENTS: A)Consolidated Report of Cash and Investments B)Investment Portfolio, as of December 31, 1998 C)Investment Policy Compliance CMR:130:99 Page 3 of 4 PREPARED BY: Joe Saccio, Senior Financial Analyst DEPARTMENT HEAD APPROVAL:¯ CARL YE.A~. Director, Mtministrative" Services CITY MANAGER APPROVAL: EMI]~’-Y HARRISON Assistant City Manager CMR:130:99 Page 4 of 4 Attachment A Consolidated Report City of Palo Alto Cash and Investments Second Quarter, Fiscal Year 1998-99 City Investment Portfolio (see Attachment B) Book Value $269.445,147 Other Funds Held by the City Cash with Bank of America (includes general, 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 $2,002,469 2,027,881 8,420 17,529 Total for Other Funds Held By City $4,056,299 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 $720,291 773,524 $1,493,815Total Under Management Employee Deferred Compensation Accounts (September 30, 1998) Wash. Mutual Bank ICMA Retirement Corporation ITT Hartford Total for Funds Under Management $ 720,992 22,437,452 28.537,362 $51,695,806 $ 53,189,621 Market Value $ 272,767,986 $2,002,469 2,027,881 8,420 17,529 $4,056,299 $720,291 773,524 $ 1,493,815 $ 720,992 22,437,452 28,537,362 $ 51,695,806 $ 53,189~621 GRAND TOTAL $326,691~067 $330~013,906 oo 00 oo oooooo ~ ~ ~ ~ O0 ~ 0000000 Attachment C Investment Policy Compliance as of December 31, 1998 No more than 10 percent of the portfolio in collateralized Certificates of Deposit (CDS) of any institution. No more than 30 percent of the portfolio in Banker’s Acceptance Notes. - No more than $5 million with any one institution. No more than 15 percent of the portfolio in Commercial Paper. - No more than $3 million with any one institution. Limit investments exclusively to those stipulated under types of investment. No more than 10 percent of the portfolio in Farm Credit Securities. No more than 2 percent of the portfolio in the Guaranteed Portion of Small Business Administration Notes. No more than 15 percent of portfolio in Mutual Funds. No more than 20 percent of portfolio in callable or Multi-Step-up government agency securities. Enough liquidity to meet one month’s cash needs. At least $50 million maturing in less than 2 years. No more than 20 percent of the portfolio shall be in investments maturing in more than five years. Market value of the portfolio will exceed 95 percent of the amortized cost basis of the portfolio. 0.00% 0.00% 0.00% No exceptions 2.6% 0.00% 8.8% 14.5% $54.3 million $109.6 million .10% 101.2% . a:comp1992