HomeMy WebLinkAboutStaff Report 221-08City of Palo Alto
C ty Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:APRIL 28, 2008 CMR: 221:08
SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT
FOR THE THIRD 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 third 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 Port%lio as of March 31. 2008
The Cib."s investment portfolio is detailed in Attachment B. It is grouped by investment
type and includes the investment issuer, date ofmaturib~, current market value, the book
and face (par) x alue, and the weighted average maturib~ of each b’pe of investment and of
the entire portfolio as of March 31, 2008.
The par value of the City’s portfolio is $359.9 million; in comparison, last quarter it was
$390.8 million. The decline in the portfolio of $30.9 million is attributable to the
establishlnent of an irrevocable trust fund for retiree medical benefits with the California
Public Employees Retirement System (CalPERS). The Cib; transferred $32.8 million
accumulated in its Retiree Health Benefits Internal Service Fund into the new CalPERS
retiree medical trust. In the coming quarters, the City’s portfolio will decrease further as a
result of the Cita, beginning to prepay its annual employer pension and retiree medical costs.
This pre-payment will result in Cib~ savings because of the higher interest rate CalPERS
earns, on average, compared to the CitT’s portfolio yield. Savings from this transaction will
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be one component of a financing plan to pay debt associated with the plaimed construction of
a new public safety building.
The portfolio consists of $13.7 million in liquid accounts and $346.2 million in U. S.
government treasu~ and agency securities and certificates of deposit. The $346.2 million
includes $123.8 million in investments maturing in less than two years, comprising 3~.8
percent of the City’s investment in notes and securities. The investment policy requires at
leas~ $50 mitlion shall be maintained in securities maturing in less than two years.
The current market value of the portfolio is 103.~ 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 maturi~~
of the investment portfolio is 3.~6 years compared to 2.74 years last quarter.
Im estments Made Durin~ the Third Quarter
During the third quarter, $76.5 million of government agency securities with an average yield
of 4.2% percent matured. During the same period, government securities totaling S51.5
million with an average yield of 4.5% percent were purchased. The Cib~’’s short-term money
market and pool account decreased by $5.9 million compared to the second 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.
Availabilivv of Funds for the Next Six Months
Normally, the flow of revenues from the Cib~"s utilib~ billings and General Fund sources is
sufficient to prox ide funds for ongoing expenditures in those respective funds. Projections
indicate receipts xxill be $185.5 million and expenditures will be $196.7 million over the next
six months, indicating an overall decline in the portfolio of $11.2 million. The decrease is
primarily attributable to prepaying the fiscal year 2008-09 employer pension obligation of
S16.4 million in July instead of making bi-weekly payments. Again, the pre-payment is
expected to result in savings due to higher interest earnings from CalPERS’ investment
portfolio.
As of March 3 !. 2008, the City had $13.7 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 $38.9 million will mature between April 1,2008 and September
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 CiW Investl-nent Policy
During the third quarter of 2007-08, staff complied with all aspects of the investment policy
except the 30 percent limit of securities with maturities beyond five years. Due to a drop in
CMR: 221:08 Page2 of 4
the portfolio’s assets, securities maturing over five years are 34.1 percent of the portfolio.
The investment policy states that an overage in this categoo, that is due to a reduction in the
portfolio’s size is not a violation of this restriction. This limitation will be restored over time
as maturities decline to less than five years or if the portfolio grows. Staff will not invest in
securities with maturities greater than five ?,ears until the portfolio percentage falls below
the policy’s 30 percent limit. Attachment C lists the restrictions in the City’s investment
policy compared with the portfolio’s actual performance.
Investment Yields
Interest income on an accrual basis for the third quarter of 2007-08 was $4.4 million. As of
March 31. 2008, the yield to maturib, of the Cib,’s portfolio was 4.47 percent. This
compares to a yield of 4.46 percent in the second quarter. As higher yielding securities
purchased in prior years mature and are reinvested in slightly lower yielding ones, staff
expects the portfolio’s yield to slowly decline. The Ci~;’s portfolio yield of 4.47 percent
compares to LAIF’s average yield for the quarter of4.19 percent and an average yield on the
two-year and five-year Treasm’y bonds during the third qua~er of approximately 2.07 percent
and 2.73 percent, respectively.
Yield Trends
The Federal Open Market Committee (FOMC) decreased the federal funds and discount rate
rates in the last three quarters by 3.0 percent and 3.75 percent, respectively. These rates
currently are 2.25 and 2.50 percent, respectively. The FOMC continues to monitor consumer
spending, inflation, and credit risk closely. The CiD"s portfolio yield is expected to slowly
decrease in the coming quarters as the FOMC keeps rates low due to the ailing economy.
Funds Held bx’ the Cit-,~ or Managed Under Contract
Attachment A is a consolidated report of all Cib~ investment funds, including those not held
directly in the investment portfolio. These include cash in the City’s regular bank account
x~ith Wells Fargo. The bond proceeds, reserves, and debt se~wice payments being held bv the
Cita:’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 March 31, 2008.
CMR: 221:08 Page 3 of 4
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of March 31, 2008
C)Investment Policy Compliance
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
TARUNS NAtL&YAN .....~/~ ---
~
alyst
Director, Administrative Services
EMILY’,HARRISON
Assistant Ci~; Manager
CMR: 221:08 Page 4 of 4
Consolidated Report
City of Palo Alto Cash and Investments
Third 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 \~ith CAMP (University Ave. Parking Garages)
Petty/Working Cash (as of 03/31/08)
Total - Other Funds Held By City
Book Value
$ 362,359,231
Market Value
$ 375,235,324
4,516,019 4,516,019
577,903 577,903
12,338 12.338
5,106,260 5,106.260
Funds Under Management of Third Party Trustees *
(Debt Service Proceeds)
US Bank Trust Ser~ ices **
1995 Utility.’ Revenue Bonds
Debt Service Fund
1998 Golf Course Certificates of Participation
Debt Service Lease Payment Funds
1999 Utility’ Rex enue Bonds
Construction and Debt Service Funds
2002 Cixic Center Certificates of Participation
Lease Payment and Reserve Funds
2002 Downtown Parking Imp\t. Certificates of Participation
Rese~a’e and Lease Payment Funds
Escrow Account for Partial Defeasance of Bonds
2002 Utility Revenue Bonds
Reserve and Debt Serx ice Funds
47 47
582 582
26,190 26,190
35!,401 351,401
238,80t 238,801
891,034 891,034
24,318 24,318
2007 Clean Renewable Energy Tax Credit Bonds
Cost of Issuance 204 204
California Asset Management Proaram (CAMP) ***
1998 Golf Course Certificates of Participation
Reserve Fund
2001 University Axe. Parking Bonds
Reserx e Funds
2002 UniversiD, Ave. Parking Bonds
Rese~we and Admin. Funds
2002 Utility., Revenue Bonds
Construction and Reserve Funds
Total Under Trustee Management
GRAND TOTAL
729,156 729,156
656,826 656,826
3,318,400 3,318,400
1,759,775 1,759,775
7,996,734 7,996,734
375,462,225 $ 388,338,318
*These funds are subject to the requirements of the underlying debt indenture.
** U.S. Bank inx estments are in money market mutual funds that exclusively in\ est in U.S. Treasury securities.
*** CAMP investments are in money market mutual fund which invest in bankers acceptance, ce~-tificate of deposit,
commercial paper, federal agency securities, and repurchase agreements.
ATTAC~’~ENT B
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Investment Policy Compliance
As of March 31, 2008
Attachment C
1 General Investment Guidelines:
a) The max. stated final matur ty of individual securities in the portfolio should be 10 years.Full Compl!ance
b) A max. of 30 percent of the par value of the portfolio shall be invested in securities with maturities Not in Compliance
bey’ond 5 years.34.05%(Exceed limit due to decline in portfolio.)
c) The City shall maintain a minimum of one month’s cash needs in short term investments.Full Compliance
d) ,At least $50 million shal! be maintained in securities maturing in less than 2 years.$123.8 million
Plus two managed poo! accounts which provide instant liquidity’:
-Loca! Agency Investment Fund (LAIF) - maximum investment limit is 5;40 million $12.2 million
- FideliD’ Investments $1.5 million
e)Should market xalue 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.103.53%
d)Commitments to purchase securities new y introduced on the market shal! be made no more than three (31)
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’.
3 U.S. Government Agency’ Securities:Full 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 known 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.15.56%
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 portfolio;0.20%
b) No more than 10 percent of the par value of the portfolio in coltateralized 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 flom authorized CiD 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 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.
whichever is lesser.
Investment Policy Compliance
As of March 31, 2008
Attachment C
7 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 \alued 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 of SI.00.
9 Mutual Funds:
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.
I0 Negotiable Certificates of Deposit (NCD):
a) No more than 10 percent of the par value of the portfolio.
b) No more than $5 million in any one institution.
11 Medium-Term Corporate Notes:
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 shal! have a minimum rating of AA from a nationally recognized
rating service.
d) No more than $5 million of the par value nay’ 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.
12 Prohibited Investments:
a) Reverse Repurchase Agreements
b) Derivatives as defined in Appendix B of the Investment Policy’
13
None Held
None Held
None Held
Full Compliance
None Held
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