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HomeMy WebLinkAbout1999-05-03 City Council (12)City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE:MAY 3, 1999 CMR:225:99 SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR THE THIRD 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 third 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 March 31, 1999 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 March 31, 1999. The face value of the City’s portfolio is $272.6 million. The portfolio consists of $43.2 million in liquid money market accounts and $229.4 million in U. S. government agency notes and Treasury securities. The $229.4 million includes $133.8 million in investments maturing in less than two years, which represents 58.3 percent of the City’s investment in notes and securities. The current market value of the portfolio is 101.1 percent of the book value. 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 ClVIR:225:99 Page 1 of 4 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. The portfolio grew by $3.8 million since the end of the second quarter, from $268.8 million on January 1, 1999 to $272.6 million on March 31, 1999. Growth in the City’s portfolio primarily results from continuing augmentation of the calaveras Reserve. Investments Made During the Third Quarter During the third quarter, $26.6 million in government agency securities, which had an average yield of 5.56 percent, matured or were called. During the same period, the City purchased $41.53 million in agency securities having an average yield of 5.25 percent. The .31 percent decline in yield is a direct result of prevailing low interest rates. The City’s short-term money market and local agency funds have decreased by $11.7 million compared to the third quarter. Staff has steadily moved funds from the City’s money market fund into agency securities as the money market account’s yield began to fall below short-term security yields. 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 $109.6 million and expenditures will be $102.9 million over the next six months, indicating an overall growth of the portfolio of about $6.7 million. At the end of March 1999, $43.2 million was also available in funds that could be withdrawn on a daily basis from the City’s overnight accounts. In addition, $26.2 million in securities will mature between April 1, 1999 and September 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 third 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 third quarter of 1998-99 was $3.91 million. Combined with first and second quarter interest income, the City has earned 83.2 percent of its $14.2 million annual interest income budget. As of March 31, 1999, the yield to maturity of the City’s portfolio was 5.87 percent. This is below the 5.91 percent yield reported in the second quarter, reflecting the decline in overall bond yields. The current portfolio yield of 5.87 percent compares to the Local Agency Investment Fund’s (LAIF) yield for the third CMR:225:99 Page 2 of 4 quarter of 5.21 percent and to an estimated average yield on two-year Treasury Notes of 4.9 percent. Yield Trends During the last three quarters, the Federal Reserve Open Market Committee (FOMC) was less concerned about inflationary pressures and more con6emed about a potentially slowing economy resulting from economic dislocation in Asia, Brazil and Russia. Fearing the impact of international financial problems and credit tightening in the U. S., 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, resulting in a Federal Funds rate that now stands at 4.75 percent. The. combination of rate decreases by the FOMC, continued demand for U.S. bonds, and low inflationary pressures have pushed yields down over the last 3 quarters. Yields during the third quarter averaged around 4.9 percent for the two-year Treasury Note. Low interest rates will continue to exert downward pressure on the City’s overall portfolio yield. While yields are expected to remain within a relatively narrow, low range for the coming months, there are indications that the FOMC is becoming concerned about potential inflationary pressures. Should inflation accelerate, the FOMC would lean toward increasing rates. Persistently low yields have caused staff to shorten the term of funds invested. The average life of securities in the portfolio is 1.5 years. Since the end of the second quarter, yields in the City’s overnight funds have begun to decline as a result of the low interest rate environment. Staff, therefore, has begun to move liquid funds into two year agency securities which are currently yielding around 5.15 percent. Should interest rates begin to rise, staff would shift funds from LAIF and the money market fund into agency securities with maturities of two or more years. 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; and bond reserves anddebt service payments being held by the City’s fiscal agents. In prior Consolidated Reports of Cash and Investments (Attachment A), balances in deferred compensation plans were reported. Under new Federal law, deferred compensation plan assets are required to be held in a trust for the exclusive benefit of plan participants. Once assets are placed in a trust, the City’s general creditors cannot access those accounts in possible bankruptcy situations. Therefore, the need to reflect the deferred compensation plan assets in the City’s financial statements or reports is no longer necessary. CMR:225:99 Page 3 of 4 ATTACHMENTS: A: Consolidated Report of Cash and Investments B: Investment Portfolio, as of March 31, 1999 C: Investment Policy Compliance PREPARED BY: Joe Saccio, Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CARL YEATS// Director, Adrriinistrative Services CITY MANAGER APPROVAL: EMI~"~ H~SON Assistant City Manager CMR:225:99 Page 4 of 4 Attachment A Consolidated Report City of Palo Alto Cash and Investments Third Quarter, Fiscal Year 1998-99 City Investment Portfolio (see Attachment B) Book Value $273,542,250 Market Value $ 275,514,437 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 Total for Other Funds Held By City $2,153,120 2,051,233 8,420 16,941 $4,229,714 $2,153,120 2,051,223 8,420 16,941 $4,229,714 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 $727,854 779,675 $727,854 779,675 Total Under Management $1,507,529 $1,507,529 GRAND TOTAL $279,279,493 $281,251,680 00n "0 o~ 0000~000~00000000~00000000000000000 oo ooo~oo~o~oo~o~ " ~ 00000000000000000 ......... ~qq~qq~ 00000000 00000000 0 | o o ATTACHMENT C Investment Policy Compliance as of March 31, 1999 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 $3 million with any one institution. Limit investments exclusively to those stipulated under types of investment.No exceptions No more than 10 percent of the portfolio in Farm Credit Securities.2.6% No more than 2 percent of the portfolio in the Guaranteed Portion of Small 0.00% Business Administration Notes. No more than 15 percent of portfolio in Mutual Funds.4.8% No more than 20 percent of portfolio in callable or Multi-Step-up 15.3% government agency securities. Liquidity enough to meet one month’s cash needs.$ 43.2 million At least $50 million maturing in less than 2 years.$133.8 million No more than 20 percent of the portfolio shall be in investments maturing in .09% more than five years. Market value of the portfolio will exceed 95 percent of the amortized cost 101.1% basis of the portfolio.