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HomeMy WebLinkAboutStaff Report 310-07TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:JULY 23, 2007 CMR: 310:07 SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY ~PORT FOR THE FOURTH QUARTER, FISCAL YEAR 2006-07 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 fiscal year 2006-07. The City’s investment policy requires that staff report quarterly 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, 2007 The City’s investment portfolio is detailed in Attachment B. It is grouped by investment type and includes the investment issuer, date of maturity, current market value, 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, 2007. The par value of the City’s portfolio is $398.4 million; in comparison, last quarter it was $392.4 million. The growth in the portfolio of $6.0 million since the last quarter primarily results from the timing of cash flows. Sales tax ("triple flip") and in-lieu vehicle license fee tax payments are received in January and May 2007 instead of being received on a monthly basis. Compared to the fourth quarter of 2005-06, the portfolio has increased by $25.8 million. This is primarily due to electric fund sales of excess energy resulting from a wet hydro year. The portfolio consists of $12.6 million in liquid accounts and $385.8 million in certificates of deposit, and U.S. government treasury and agency securities. The $385.8 million includes $158.3 million in investments maturing in less than two years, comprising 41.0 percem of the City’s investment in notes and securities. The investment policy requires at least $50 million shall be maintained in securities maturing in less than two years. CMR: 310:07 Page 1 of 3 The current market value of the portfolio is 98.5 percent of the book value compared to 97.5 percent at end of 2005-06. It is important to note that because the City’s practice is to hold securities until they mature, changes in market price do not affect the City’s investment principal. The market valuation is provided by Union Bank of California, which is the City’s safekeeping agent, The average life to maturity of the investment portfolio is 2.74 years compared to 2.56 years last quarter and 2.22 years at the end of 2005-06. Investments Made During the Fourth Ouarter During the fourth quarter, $27.0 million of government agency securities with an average yield of 4.4 percent matured. During the same period, government securities totaling $38.0 million with an average yield of 5.1 percent were purchased. The City’s short-term money market and pool account decreased by $5.0 million compared to the third quarter. Investment staff continually monitors the City’s short-term cash flow needs and adjusts liquid funds to meet those needs and take advantage of investment opportunities. Availability of Funds for the Next Six Months Nom~ally, the flow of revenues from the City’s utility billings and General Fund sources is sufficient to provide funds for ongoing expenditures in those respective funds. Projections indicate receipts will be $ ! 68.7 million and expenditures will be $ ! 76.0 million over the next six months, indicating an overall decline in the portfolio of $7.3 million. The decrease is attributable to higher electrica!, water, and gas commodity costs and increased capital expenditures. As of June 30, 2007, the City had $12.6 million deposited in the Local Agency Investment Fund (LAIF) and a money market account that could be withdrawn on a daily basis. In addition, securities totaling $43.3 million will mature between July 1,2007 and December 31,2007. On the basis of the above projections, staff is confident that the City, will have more than sufficient funds to meet expenditure requirements for the next six months. Compliance with City Investment Policy During the fourth quarter of 2006-07, staff complied with all aspects of the investment policy. Attachment C lists the restrictions in the City’s investment policy compared with the portfotio’s actua! compliance. Investment Yields Interest income on an accrual basis for the fourth quarter of 2006-07 was $4.4 million. This total is 12.8 percent higher than what the City received last fiscal year, with the portfolio increasing by 6.9 percent. As of June 30, 2007, the yield to maturity of the City’s portfolio was 4.37 percent. This compares to a yield of 4.37 percent in the third quarter and 4.23 percent as of June 30, 2006. As lower yielding maturing securities purchased during the prior year’s low interest rate period are reinvested in higher yielding ones, staff expects the portfolio’s yield will continue to gradually rise in the coming quarters. The City’s portfolio yield of 4.37 percent compares to LAIF’s average yield for the quarter of 5.25 percent and an average yield on the two-year and five-year Treasury bonds during the fourth quarter of approximately 4.96 percent and 5.01 percent, respectively. CMR: 310:07 Page 2 of 3 Yield Trends The Federal Open Market Committee (FOMC) has left the federal funds and discount rate rates unchanged for the past year. These rates currently are 5.25 and 6.25 percent, respectively. The consensus continues to be that the FOMC will not lower rates in the near future. The FOMC continues to monitor inflationary risks closely. Although the FOMC recognizes weakness in the housing sector, it is more concerned about higher commodity costs and a tight labor market that increases inflationary risks. With interest rates rising over recent months, the City’s portfolio yield has gradually increased and is expected to continue increasing in the coming quarters. 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 Wells Fargo. The bond proceeds, reserves, and debt service payments being held by the City’s fiscal agents are subject to the requirements of the underlying debt indenture. The trustees for the bond funds are U.S. Bank and California Asset Management Program (CAMP). Bond funds with U.S. Bank are invested in federal agency and money market mutual funds that consist exclusively of U.S. Treasury securities. Bond funds in CAMP are invested in banker’s acceptance notes, certificates of deposit, commercial paper, federal agency securities, and repurchase agreements. The most recent data on funds held by the fiscal agent is as of June 30, 2007. PREPARED BY: TAR~UN NARAYAN Seni6r Financial Analyst DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: Director, ~ministrative Services Assistant City Manager ATTACHMENTS: A)Consolidated Report of Cash and Investments B)Investment Portfolio, as of June 30, 2007 C)Investment Policy Compliance CMR: 310:07 Page 3 of 3 Consolidated Report City of Palo Alto Cash and Investments Fourth Quarter, Fiscal Year 2006-07 (Unaudited) Attachment A City Investment Portfolio (see Attachment B) Other Funds Held by the City Cash with Wells Fargo Bank (includes general and imprest accounts) Investment with CAMP (University Ave. Parking Garages) Petty/Working Cash (as of 06/30/07) Total - Other Funds Held By City Book VaLue $ 400,554,21 I Market Value $ 394,580,130 1,862,052 1,862,052 558,166 13,738 13,738 2,433,956 1,875,790 Funds Under Management of Third Partv Trustees * (Debt Service Proceeds) US Bank Trust Services ** 1995 Utility Revenue Bonds Debt Service Fund 1998 Golf Course Certificates of Participation Debt Service Lease Payment Funds 1999 Utility Revenue Bonds Construction and Debt Service Funds 2002 Civic Center Certificates of Participation Lease Payment and Reserve Funds 2002 Downtown Parking hnpvt. Certificates of Participation Lease Payment, Improvement, and Reserve Funds Escrow Account for Partial Defeasance of Bonds 2002 Utility Revenue Bonds Debt Service Funds 202 202 472 472 25,705 25,705 358,957 358,957 244,397 244,397 883,018 883,018 9,758 9,758 California Asset Management Proaram (CAMP) *** 1998 Golf Course Certificates of Participation Reserve Fund 2001 University Ave. Parking Bonds Improvement, Reserve, and Admin. Funds 2002 University Ave. Parking Bonds Improvement, Reserve, and Admin. Funds 2002 Utility Revenue Bonds Construction and Reserve Funds Total Under Trustee Management GRAND TOTAL 714,094 714,094 823,835 823,835 3,631,582 3,631,582 1,762,557 1,762,557 8,454,577 8,454,577 $ 411,442,744 $ 404,910,497 *These funds are subject to the requirements of the underlying debt indenture. ** U.S. Bank investments are in money market mutual funds that exclusively invest in U.S. Treasury securities. *** CAMP investments are in money market mutual fund which invest in bankers acceptance, certificate of deposit, commercial paper, federal agency securities, and repurchase agreements. ooooo o o o < ATTAC~ENT B oooooooooooooooooooooooooooooooooooo 000~0000 0 E,’- ...j > ..~ ....................... ~ ~ N~ ~ %No ......oo o o o o o o o o o o o o o o oooo j ~ ,..I > ooooooooooooooooooooooooooooooood d d d d d d d d d d dd d d dd d d dd d d d d d d d dd ~ d doooooooooooooooooooooooo~ooooooooo o o ~ o o o o o ~ o o o o o o ~ ~ o o o o o u0 o o o o uo o ~ o o ~ ~ ~ ~ ~ ~ ~ ~ o o o o o o o o o o o o o o o o o o o o o o o o o _1 >’ ooooooooooooooooooooo~ooooooooo 5 ~ 5 ~ .......o o o o o ~ ~ o ~ ~ ~ ~ ~ o o o o o o o o o o 121 :~ 0 ~ ~ 0 0 o o o o o o o o o o o o o o o o o o o 0 o o o o 0 0 0 © 0 0 0 0 o o o o o 0 o o o o o o o 0 o ~ o o o 0 O O o o o d d d d d d d d d d d d d d d d d d d d d d d d d ~ ~~ooo ooooooooooooooooo ~ 0 © ~o ooooooooo o o ~o _..I ~’ Investment Policy Compliance As of June 30, 2007 Attachment C 1 General Investment Guidelines: a) The max. stated final maturity of individual securities in the portfolio should be 10 years.Full Compliance b) A max. of 30 percent of the par value of the portfolio shall be invested in securities with maturities beyond 5 years.16.20% c) "File City shall maintain a minimum of one month’s cash needs in short term investments.Full Compliance d)At least $50 million shall be maintained in securities maturing in less than 2 years.$158.3 miltion Plus two managed pool accounts which provide instant liquidity: -I,ocal Agency’ Investment Fund (LAIF) - maximum investment limit is $40 million $11.5 million - Fidelity Investments $1.1 million e)Should market value of tile portfolio fall below 95 percent of tile book vah,e, report this fact within a reasonable time to the City Council and evaluate if there are risk of holding securities to maturity.98.50% d)Commitments to purchase securities newly introduced on tile market shall be made no more than three (3) working days before pricing.Full Compliance t3 Wiaenever possible, the City will obtain three or more quotations on the purchase or sale of comparable securities (excludes new issues, LAIF, City of Palo Alto bonds, money market accounts, and mutual funds).Full Compliance 2 U.S. Government Securities:Full Compliance a) There is no limit on purchase of these securities. b) Securities will not exceed 10 years maturity. 3 U.S. Government Agency Securities:f:ull Compliance a) There is no limit on purchase of these securities except for: Callable and Multi-step-up securities provided that: -The potential call dates are knmvn at the time of purchase;Full Compliance - the interest rates at which they "step-up" are known at the time of purchase: and Full Compliance -the entire face value of the security is redeemed at the call date.Full Compliance - No more than 20 percent of the par value of portfolio.19.90% b) Securities will not exceed 10 years maturity. 4 Certificates of Deposit:Full Compliance a) May not exceed 20 percent of the par value of the porttblio:0.23% b) No more than 10 percent of the par value of the portfolio in collateralized CDs in any institution. c) Purchase cotlateralized deposits only from federally insured large banks that are rated by a nationally’ recognized rating agency (e.g Moody’s. Standard & Poor’s. etc.}. d) For non-rated banks, deposit should be limited to amounts federally insured (FDIC) e) Roltovers are not permitted without specific instruction from authorized City staff. 5 Banker’s Acceptance Notes:None Held a) No more than 30 percent of the par value of the portfolio. b) Not to exceed 180 days maturity. c) No more than $5 million with any one institution. 6 Commercial Paper:None tteld a) No more than 15 percent ofthe par value of the portfolio. b) t laving highest letter or numerical rating from a nationally recognized rating service. c) Not to exceed 270 days maturity. d) No more than $3 million or 10 percent of the outstanding commercial paper of any, one institution, whichever is lesser. Investment Policy Compliance As of June 30, 2007 Attachment C 7 Short-Term Repurchase Agreement (REPO):None tteld a) Not to exceed 1 year. b) Market value of securities that underlay a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities. 8 Money Market Deposit Accounts Full Compliance a) Liquid bank accounts which seek to maintain a net asset value orS1.00. None Held 11 Medium-Term Corporate Notes:None ! leld a) No more than 10 percent of’the par value of the portfolio. b) Not to exceed 5 years maturity. c) Securities eligible for investment shall have a minimum rating of AA t¥om a nationally recognized rating service. d) No more than $5 million of the par value may be invested in securities of any single issuer, other than the U.S. (iovernmcnt. its ageucics and instrumentality. e) If" securities owned by the City are downgraded by either rating agencies to a level below AA it shall be the City’s policy to review the credit situation and make a determination as to whether to sctl or retain such securities. 12 Prohibited Investments:Full Compliance a) Reverse Repurchase Agreements None tteld b) Derivatives as defined in Appendix B of the Investment Policy 13 All securities sbatl be delivered to the City’s safekeeping custodian, and held in the name of’the Full Compliance City’, with the exception of : -Certificates of Deposit, Mutual Funds. and LAIF Mutual Funds: a) No more than 20 percent of the par value of the portt\)lio. b) No more than I0 percent of the par value with any one institution. 10 Negotiable Certificates of Deposit (NCD):None l letd a) No more than 10 percent of the par value of the portfolio. b) No n-lore than $5 million in any one institution.