Loading...
HomeMy WebLinkAbout1999-08-02 City Council (26)TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE:AUGUST 2, 1999 CMR: 321:99 SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR THE FOURTH 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 fourth quarter of the 1998-99 fiscal year. The City’s investment policy requires that staff report 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 June 30, 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 June 30, 1999. The face value of the City’s portfolio is $279.5 million. The portfolio consists of $21.3 million in liquid accounts and $258.2 million in U. S. government agency notes and treasury securities. The $258.2 million includes $138.7 million in investments maturing in less than two years, which represents 54 percent of the City’s investment in notes and securities. The current market value of the portfolio is 100 percent of the book value. Early in the fourth quarter, bond yields continued to decline, meaning that market prices, which move in the opposite direction of yields, went up. Towards the end of the fourth quarter, yield and prices stabilized. Because the City’s investment policy and practice is to hold securities until they CMR: 321:99 Page 1 of 4 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 1.78 years. The market valuation is provided by Union Bank of California, which is the City’s safekeeping agent. The portfolio grew by $27.8 million over the last year, from $251.7 million on June 30, 1998 to $279.5 million on June 30, 1999. This growth primarily results from continuing augmentation of the Calaveras Reserve which was expected at midyear to grow by $15.5 million. Reserve numbers will be discussed in more detail in the Year End Financial Report in late Fall. Investments Made During the Fourth Quarter During the fourth quarter of the fiscal year, the City’s portfolio grew by $6.8 million. Staff replaced $16.2 million in matured and called government agency securities that had an average yield of 5.56 percent, with $44.90 million in similar securities having an average yield of 5.70 percent. $24 million of the securities purchased in the fourth quarter mature in less than three years. Finallyl short-term money market funds decreased by $21.9 million compared to the third quarter. Staff engaged in a high volume of security purchases in the fourth quarter. Interest rates moved up significantly at the end of the quarter, with rates on two year Treasuries rising from around 5.1 percent at the beginning of April to around 5.7 percent at the end of June. Concerns about inflation and indications from the Federal Reserve Open Market Committee (FOMC) that it was moving toward raising the Federal funds rate by .25 percent, pushed interest rates up. Taking advantage of rising rates, staff seized the opportunity to draw down funds in the City’s short-term investment pools, such as LAIF and its Fidelity money market fund, and invested them in 2 to 4V2 year securities. 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 $113.2 million and expenditures will be $107.6 million over the next six months, indicating an overall growth of the portfolio of about $ 5.6 million. At end of June 1999, $21.3 million was also available in funds which can be withdrawn on a daily basis from the City’s LAIF and Fidelity money market fund investments. In addition, securities totaling $25.3 million will mature between July 1, 1999 and December 31, 1999. On the basis of the above projections, staffis confident that the City will have more than sufficient funds to meet expenditure requirements for the next six months. CMR: 321:99 Page 2 of 4 Compliance with City. Investment Policy During the fourth 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 fourth quarter of 1998-99 was $4.04 million. Combined with first, second, and third quarter interest income, the City has earned $15.8 million or 11.2% more than its $14.2 million annual interest income target. The $15.8 million in interest income represents an increase of $1 million over 1997-98 fiscal year interest income earnings of $14.8 million. As of June 30, the yield to maturity of the City’s portfolio was 5.84 percent, below the 5.87 percent reported for last quarter, reflecting a decline in overall bond yields. Yield Trends On June 30, the FOMC raised the Federal funds rate (the rate financial institutions pay to borrow money from the Federal reserve bank) from 4.75 percent to 5.0 percent. This rate increase had been fully expected by the market and had been indicated publicly by the FOMC Chairman, Alan Greenspan. In a somewhat surprising move, however, the FOMC moved on June 30 to a "neutral bias" on future interest rate hikes. This bias means the FOMC is considering no near term policy action to raise or lower interest rates. Given that foreign economies have firmed, economic activity in the United States has continued to move forward at a steady pace and much of the financial strain has eased, the FOMC was comfortable in raising the Federal funds rate 25 basis points. To the FOMC the conflicting economic forces of rising productivity and low unemployment mean that inflation may remain in check and not warrant further rate increases. Indeed, recent CPI data indicates extremely low inflationary pressures. It is expected, therefore, that yields will fluctuate in a relatively tight band in the coming months. In the near future, rates on the bellwether 30 year bond are not expected to significantly vary above or below- 6.0 percent and the Federal Reserve is not expected to raise the funds rate again. The City realized a 5.84 percent annual portfolio yield for Fiscal Year 1998-99, representing a 25 basis point decline from the 6.09 percent earned in 1997-98. The decline in annual yield is a direct result of an overall drop in interest rates. 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. The most recent data on funds held by the fiscal agent is as of June 1999. CMR: 321:99 Page 3 of 4 ATTACHMENTS: A)Consolidated Report of Cash and Investments B)Investment Portfolio, as of June 30, 1999 C)Investment Policy Compliance PREPARED BY: Joyce White, Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CDireA~ctorY, EA~Trflinistrative Services CITY MANAGER APPROVAL: EMILY HARRISON Assistant City Manager CMR: 321:99 Page 4 of 4 Attachment A Consolidated Report City of Palo Alto Cash and Investments Fourth Quarter, Fiscal Year 1998-99 CUnandited) City. Investment Portfolio (see Attachment B) Book Value $279.767.523 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 6/30/99) $3,738,020 1,669,157 7,770 Total -- Other Funds Held By City $5.414.947 Market Value $ 279.798.064 $ 3,738,020 1,669,157 7,770 $ 5.414.947 Funds Under Management of Third Party. Trustees (Debt Service Funds and Reserves) US Bank Trust Services Golf Course Certificates of Participation Construction Fund & Lease Payment Fund Civic Center Certificates of Participation Reserve Fund & Lease Payments Fund California Asset Management Program Golf Course Certificates of Participation Reserve Fund Total Under Trustee Management $ 639,132 842,975 738,564 $2.220.671 $ 639,132 838,775 7~8,564 $ 2.216.417 GRAND TOTAL $287.403.141 $ 287.429.482 oooo~o ooooooo~ooooo~ooo 0 o < O. oo_ z oz, 00000000000000000000000~ u- u,. 0 ATTACHMENT C Investment Policy Compliance. as of June 30, 1999 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. Not to exceed 270 days maturity. No more than 15 percent of the portfolio in Commercial Paper. Not to exceed 180 days maturity. No more than $3 million in any one institution. The following investments are prohibited: -Reverse Repurchase Agreements -Derivatives as defined in Appendix B of the Investment Policy -Negotiable Certificates of Deposit -Medium Term Corporate Notes 0.00% 0.00% 0.00% None held No more than 10 percent of the portfolio in Farm Credit Securities.2.6% No more than 20 percent of the portfolio in callable or Multi-Step-Up government 15% agency securities. Liquidity enough to meet one months’s cash needs.Sufficient liquidity At least $50 million maturing in less than two years.$138.7 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. Commitments to purchase securities newly introduced on the market shall be made no more than three (3) working days before pricing. All securities shall be delivered to the City’s safekeeping custodian, and held in the name of the City, with the exception of: -Certificates of Deposit -Mutual Funds -LAIF million .1% 100% No exceptions 100% Compliance No more than 2 percent of the portfolio in the Guaranteed Portion of Small.0.00% Business Administration Notes. No more than 20 percent of the portfolio in Mutual Funds No more than 10 percent of the portfolio in any one Mutual Fund. Mutual Funds shall: Attain the highest ranking in the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services, or Have an investment advisor registered with the Securities and Exchange Commission with not less than five years experience investing in the securities and obligations, and with assets under management in excess of five hundred million dollars, and Invest solely in authorized securities of the California Government Code, and The purchase price of shares of beneficial interest purchased shall not include any commission that these companies may charge. 1.4% 1.2% Full Compliance