HomeMy WebLinkAboutStaff Report 126-08City of Palo Alto
City Manager’s Repor
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE
SERVICES
DATE:JANUARY 28, 2008 CMR: 126:08
SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR
THE SECOND QUARTER, FISCAL YEAR 2007-08
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 fiscal year 2007-08. 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 December 31, 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 December 31, 2007.
The par value of the City’s portfolio is $390.8 million; in comparison, last quarter it was $397.5
million. The decline in the portfolio of $6.7 million is attributable to higher utility commodity costs.
In the coming quarters, the City’s portfolio will decrease, primarily as a result of transferring
approximately $30 million from a City retiree medical reserve into a CalPERS trust fund and from
higher electric commodity costs.
The portfolio consists of $19.6 million in liquid accounts and $371.2 million in U. S. government
treasury and agency securities and certificates of deposit. The $37t.2 million includes $151.3
million in investments maturing in less than two years, comprising 40.8 percent of the City’s
CMR:126:08 Page 1 of 4
investment in notes and securities. The investment policy requires that at least $50 million shall be
maintained in securities maturing in less than two years.
The current market value of the portfolio is 101.7 percent of the book value. 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 2.82 years last quarter.
Investments Made DurinR the Second Quarter
During the second quarter, $23.0 million of government agency securities with an average yield of
4.2% percent matured. During the same period, government securities totaling $9.5 million with an
average yield of 4.8% percent were purchased. The City’s short-term money market and pool account
increased by $6.6 million compared to the first 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.
Availabiliw of Funds for the Next Six Months
Normally, 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 $185.2 million, and expenditures will be $217.1 million over the next six months, indicating
an overall decline in the portfolio of $31.9 million. Again, the decrease is primarily attributable to
funding the retiree medical trust fund and from higher electric commodity costs.
As of December 31, 2007, the City had $19.6 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 $39.0 million will mature between January 1, 2008 and June 30, 2008. 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 second quarter of 2007-08, staff complied with all aspects of the investment policy except
the 20 percent callable limit on U.S. government agency securities. Due to a drop in the portfolio’s
assets, callable securities are 20.1 percent of the portfolio. The investment policy states that an
overage in this category that is due to a reduction in the portfolio’s size is not a violation of the 20
percent callable restriction. The callable percentage limitation will be restored as callable
investments mature or if the portfolio grows. Staff will not invest in callable securities until they fall
below the policy’s 20 percent limit. Attachment C lists the restrictions in the City’s investment
policy compared with the portfolio’s actual performance.
CMR:126:08 Page 2 of 4
Investment Yields
Interest income on an accrual basis for the second quarter of 2007-08 was $4.5 million. As of
December 31,2007, the yield to maturity of the City’s portfolio was 4.46 percent. This compares to
a yield of 4.45 percent in the first quarter of 2006-07. As lower yielding maturing securities
purchased in prior years mature and are reinvested in slightly higher yielding ones, staff expects the
portfolio’s yield to slowly rise in the coming quarters. The City’s portfolio yield of 4.46 percent
compares to LAIF’s average yield for the quarter of 4.97 percent and an average yield on the two-
year and five-year Treasury bonds during the second quarter of approximately 3.46 percent and 3.77
percent, respectively.
Yield Trends
The Federal Open Market Committee (FOMC) decreased the federal funds and discount rate rates in
the last two quarters by 1.0 percent and 1.50 percent, respectively. These rates currently are 4.25 and
4.75 percent, respectively. The consensus is that further rate cuts are likely. Some economists are
forecasting a 0.50 percent decrease in rates as a consequence of the deteriorating economic
conditions. The FOMC, however, continues to monitor consumer spending and inflationary and
credit risks closely. Even though interest rates have declined in recent months, the City’s portfolio
yield is expected to slowly increase in the coming quarter due to the mix of investments. If the
FOMC does cut rates by 0.50 percent, the portfolio’s long-term yield is likely to decline.
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 fisc!! 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 December 31, 2007.
ATTACHMENTS:
A)
B)
C)
Consolidated Report of Cash and Investments
Investment Portfolio, as of December 3 !, 2007
Investment Policy Compliance
CMR:126:08 Page 3 of 4
PP~PARED BY:
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
Financial Analyst
Director, Administrative Services
EMILg HARRISON
Assistant City Manager
CMR:126:08 Page 4 of 4
Consolidated Report "
City of Palo Alto Cash and Investments
Second Quarter, Fiscal Year 2007-08
(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 12/3 t/07)
Total - Other Funds Held By City
Book Value
$ 392,236,214
Market Value
$ 398,695,295
5,523,449 5,523,449
572,452 572,452
12,338 12,338
6,108,239 6,108,239
Funds Under Management of Third Party 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 lmpvt. Certificates of Participation
Reserve and Lease Payment Funds
Escrow Account for Partial Defeasance of Bonds
2002 Utility Revenue Bonds
Reserve and Debt Service Funds
16 16
1,173 1,173
25,960 25,960
356,453 356,453
244,821 244,821
914,769 914,769
24,208 24,208
2007 Clean Renewable Energy Tax Credit Bonds
Cost of Issuance 190 190
California Asset Mana~zement Program (CAMP) ***
1998 Golf Course Certificates of Participation
Reserve Fund
2001 University Ave. Parking Bonds
Reserve Funds
2002 University Ave. Parking Bonds
Reserve and Admin. Funds
2002 Utility Revenue Bonds
Construction and Reserve Funds
Total Under Trustee Management
GRAND TOTAL
712,351 712,351
650,587 650,587
3,303,441 3,303,441
1,762,442 1,762,442
7,996,411 7,996,411
$ 406,340,863 $ 412,799,945
*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. Treasuu’ 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.
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Investment Policy Compliance
As of December 31, 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.19.97%
c) The 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.$151.3 million
Plus t~vo managed pool accounts which provide instant liquidity’:
-Local Agency Investment Fund (LAIF) - maximum investment limit is $40 million $17 million
- Fidelity Investments $2.6 million
e) Should market value of the portfolio fall below 95 percent of the book value, report this fact within a
reasonable time to the City Council and evaluate if there are risk of holding securities to maturity.101.66%
d) Commitments to purchase securities newly introduced on the market shall be made no more than three (3)
working days before pricing.Full Compliance
f) Whenever 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.
U.S. Government Agency Securities:
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 known at the time of purchase;
- the interest rates at which they "step-up" are known at the time of purchase; and
- the entire face value of the security is redeemed at the call date.
-No more than 20 percent of the par value of portfolio.
b) Securities will not exceed 10 years maturity.
Not in Compliance
Full Compliance
Full Compliance
Full Compliance
20.09%
(Exceeds the 20 percent limit due to portfolio size decline)
4 Certificates of Deposit:Full Compliance
a) May not exceed 20 percent of the par value of the portfolio;0.18%
b) No more than 10 percent of the par value of the portfolio in collateralized CDs in any institution.
c) Purchase collateralized 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) Rollovers 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 day’s maturity,.
c) No more than $5 million with any’ one institution.
6 Commercial Paper:None Held
a) No more than 15 percent of the par value of the portfolio.
b) Having 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.
x~hichever is lesser.
Investment Policy Compliance
As of December 31, 2007
Attachment C
10
11
12
13
Short-Term Repurchase Agreement (REPO):None Held
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.
Money Market Deposit Accounts Full Compliance
a) Liquid bank accounts which seek to maintain a net asset value of $1.00.
Mutual Funds:None Held
a) No more than 20 percent of the par value of the portfolio.
b) No more than 10 percent of the par value with any one institution.
Negotiable Certificates of Deposit (NCD):None Held
a) No more than 10 percent of the par value of the portfolio.
b) No more than $5 million in any one institution.
Medium-Term Corporate Notes:None Held
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 from 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. Government, its agencies 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 sell or retain such securities.
Prohibited Investments:Full Compliance
a) Reverse Repurchase Agreements None Held
b) Derivatives as defined in Appendix B of the Investment Policy
All securities shall 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