HomeMy WebLinkAbout1999-10-25 City Council (12).City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:OCTOBER 25, 1999 CMR:402:99
SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT
FOR THE FIRST QUARTER, FISCAL YEAR 1999-00
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 first quarter of the 1999-00 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 September 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 September 30, 1999.
The face value of the City’s portfolio is $282.0 million. The portfolio consists of $22.9
million in liquid accounts and $259.1 million in U. S. government agency securities. The
$259.1 million includes $145.7 million in investments maturing in less than two years
comprising 56.2 percent of the City’s investment in notes and securities. The current market
value of the portfolio is 99.6 percent of the book value. During the first quarter bond yields
maintained gains realized in the fourth quarter and moved higher toward the end of
September. As interest rates increase, the price of bonds, which move in the opposite
direction of yields, went down. Because the City’s practice is to hold securities until they
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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 1.67 years. The market valuation is
provided by Union Bank of California, which is the City’s safekeeping agent.
The portfolio shows an increase of $2.2 million from June 30, 1999 (fourth quarter) to
September 30, 1999 (first quarter). Because of the timing of an overnight $.5 million (sweep)
investment made on June 30, 1999, the portfolio change is understated by $1.0 million. This
investment had the effect of overstating the 1998-99 portfolio by $.5 million (a credit) and
understating the 1999-00 portfolio by $.5 million (a debit or withdrawal). Without this
timing effect the change from the fourth to the first quarter would have been an increase of
$3.2 million. Over the past several years, the portfolio has grown significantly. This growth
primarily resulted from augmentation of the Calaveras Reserve. Since the target for this
reserve is near and electric rates were decreased by 11 percent on July 1, 1999, the City will
not experience the growth rates seen in recent prior years.
Investments Made During the First Quarter
During the first quarter, $14.0 million of government agency securities with an average yield
of 6.2 percent matured. During the same period, government securities totaling $15.0
million with an average yield of 5.9 percent were purchased. The City’s short-term money
market and pool accounts increased by $2.5 million compared to the fourth quarter. With
two recent interest rate increases by the Federal Reserve Open Market Committee and hints
of a third increase due to rising concerns about inflation, the environment for fixed income
investments is positive. Staff will be active in investing available cash in the second quarter.
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 $115.6 million and expenditures will be
$114.2 million over the next six months, indicating an overall growth of the portfolio of
about $1.4 million. At end of September 1999, $23 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 $31.4 million will mature between October
1, 1999 and March 31, 2000. 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.
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Compliance with City. Investment Policy
During the first quarter of 1999-00, 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 first quarter of 1999-00 was $4.1 million. This
represents 26.7 percent of the 1999-00 interest income budget of $15.4 million. As of
September 30, the yield to maturity of the City’s portfolio was 5.84 percent. This compares
to a yield of 5.84 percent in the fourth quarter of 1998-99. The portfolio’s yield appears to
be stabilizing after several quarters of decline. This compares to LAIF’s yield for the quarter
of 5.21 percent and an estimated average yield on the two-year Treasury during the first
quarter of around 5.6 percent.
Yield Trends
The FOMC has raised rates twice in the last two quarters and it appears likely rates will be
raised a third time. 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. On August 24 the Federal funds rate was raised another quarter point from 5.0
percent to 5.25 percent. On October 6, the FOMC adopted what is known as a "tightening
bias" or a policy of raising interest rates in the future to control potential inflation. Reacting
to these events, the yield on the two-year and thirty-year Treasuries have risen in mid-
October to 5.84 percent and 6.28 percent, respectively. In comparison, at the beginning of
November 1998, the yields were 4.4 percent and 5.29 percent, respectively.
With wholesale prices jumping 1.1 percent in September (a .5 percent increase was expected)
and the FOMC already adopting a "tightening bias," a consensus is emerging that the FOMC
is certain to raise rates at its November 16 meeting. The rise in rates will result in higher
than anticipated yields on the City’s portfolio. Staff will take advantage of the current yield
environment to enhance interest earnings. While the rate hikes bode well for fixed income
portfolios, they are primarily intended to curb rapid economic growth and emerging signs of
inflation such as rising wages. Higher rates will cause a slowing of the economy and may
have a dampening effect on other City revenue sources.
Funds, Held by the City. or Managed Under Contract
Attachment A is aconsolidated 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 September 30, 1999.
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ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of September 30, 1999
C)Investment Policy Compliance
PREPARED BY: Joseph Saccio, Manager, Investments and Debt
DEPARTMENT HEAD APPROVAL:
CARL YEATS/
Director, Adgainistrative Services
CITY MANAGER APPROVAL:
Manager
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Attachment A
Consolidated Report
City of Palo Alto Cash and Investments
First Quarter, Fiscal Year 1999-00
(Unaudited)
City Investment Portfolio (see Attachment B)
Book Value
$282.048.376
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)
$1,675,090
1,689,652
7,770
Total -- Other Funds Held By City $3.372.512
Market Value
$ 281.976.502
$ 1,675,090
1,689,652
7,770
$3.372.512
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
1999 Utility Revenue Bonds
Construction and Cost of Issuance Funds
California Asset Management Program
Golf Course Certificates of Participation
Reserve Fund
Total Under Trustee Management
GRAND TOTAL
645,959
815,621
7,348,240
717,018
$9.526.838
$294.947.726
$ 645,959
809,696
7,348,240
717,018
$9.520.913
$294.869.927
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ATTACHMENT C
Investment Policy Compliance
as of September 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.2.5%
No more than 20 percent of the portfolio in callable or Multi-Step-Up 13.4%
government agency securities.
Liquidity enough to meet one month’s cash needs.Sufficient
liquidity
At least $50 million maturing in less than two years.$145.7 million
No more than 20 percent of the portfolio shall be in investments maturing in .07%
more than five years.
Market value of the portfolio will exceed 95 percent of the amortized cost basis 99.6%
of the portfolio.
Commitments to purchase securities newly introduced on the market shall beNo exceptions
made no more than three (3) working days before pricing.
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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
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.
.7%
.8%
Full
compliance
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