HomeMy WebLinkAboutStaff Report 320-08City of Palo Alto
City Manager’s Report
TO:
FROM:
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
JULY 28, 2008 CMR: 320:08
CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR
THE FOURTH 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 fourth 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 June 30, 2008
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.
The par value of the City’s portfolio is $357.8 million; in comparison, last quarter it was $359.9
million. The decline in the portfolio of $2.1 million is attributable to higher utility commodity costs.
Compared to the fourth quarter of 2006-07, the portfolio has decreased by $40.6 million. This is
primarily due to the establishment of an irrevocable trust fund for retiree medical benefits with the
California Public Employees Retirement System (CalPERS) and higher utility commodity costs. The
City transferred $33.8 million accumulated in its Retiree Health Benefits Internal Service Fund into
the new CalPERS retiree medical trust. In addition, hydroelectric generation for the year was lower
due to drought conditions, resulting in a need to buy replacement electric energy at high market
prices and, thereby, drawing down utility reserves. In the coming quarters, the City’s portfolio will
decrease further as a result of the City prepaying its annual employer pension costs. This pre-
payment will result in City savings because of the higher interest rate CatPERS earns, on average,
compared to the City’s portfolio yield. Savings from this transaction will be used to pay debt
associated with a new public safety building.
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The portfolio consists of $27.2 million in liquid accounts and $330.6 million in U. S. government
agency securities and certificates of deposit. The $330.6 million includes $143.0 million in
investments maturing in less than two years, comprising 43.3 percent 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.
The current market value of the portfolio is 101.4 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 3.47 years compared to 3.56 years last quarter and 2.74 years at the end of 2006-07.
Investments Made During the Fourth Quarter
During the fourth quarter, $27.5 million of government agency securities with an average yield of
3.7% percent matured. During the same period, government securities totaling $12.0 million with an
average yield of 3.8% percent were purchased. The City’s short-term money market and pool account
increased by $13.5 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. The liquid funds were increased in .anticipation of prepaying 2008-09
annual employer pension costs.
Availability 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 $193.0 million and expenditures will be $205.5 million over the next six months, indicating
an overall decline in the portfolio of $12.5 million. The decrease is attributable to prepaying the
Fiscal Year 2008-09 employer pension obligation of $16.4 million in July instead of making bi-
weekly payments. This has the effect of decreasing expenditures in subsequent quarters. The pre-
payment is expected to result in savings due to higher interest earnings from CalPERS’ investment
portfolio.
As of June 30, 2008, the City had $27.2 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 $31.1 million will mature between July 1, 2008 and December 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 fourth 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 the portfolio’s
assets, securities maturing over five years are 31.2 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 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
CMR: 320:08 Page 2 of 4
than five years until they fall 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 fourth quarter of 2007-08 was $4.1 million. This total is
8.1 percent lower than what the City received last fiscal year, primarily as a consequence of the
portfolio decreasing by 10.2 percent. As of June 30, 2008, the yield to maturity of the City’s
portfolio was 4.42 percent. This compares to a yield of 4.47 percent in the third quarter and 4.37
percent as of June 30, 2007. As higher yielding maturing securities purchased in prior years mature
and are reinvested in slightly lower yielding ones, staff expects the portfolio’s yield to slowly decline
in the coming quarters. The City’ s portfolio yield of 4.42 percent compares to LAIF’s average yield
for the quarter of 3.12 percent and an average yield on the two-year and five-year Treasury bonds
during the fourth quarter of approximately 2.41 percent and 3.16 percent, respectively.
Recently, there have been numerous news articles about the financial condition of the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie
Mac). These companies, charted by Congress to increase home ownership, either own or guarantee
almost half of the U.S. home mortgages outstanding that are worth some $5.2 trillion. These
institutions raise funds by issuing bonds which many municipalities like Palo Alto purchase. The
City currently holds $65.2 million or 18.2 percent of its investment portfolio in Fannie Mae and
Freddie Mac bonds. These fixed income investments are rated AAA due to their implicit backing by
the federal government and their line of credit with the U.S. Treasury.
Because the stock prices of these publicly traded companies have declined significantly due to
concerns over mortgage defaults, the U.S. Treasury has taken steps to make its implicit guarantee
more explicit. These steps include, for example, making available a short-term line of credit of
$2.25 billion and seeking Congressional approval to temporarily increase the line of credit limit.
Due to the importance of the two agencies to the U.S. housing and mortgage market and the severe
financial consequences of their failure, staff believes it highly unlikely that the City’s investments are
at risk. Nevertheless, staff believes it prudent to discontinue purchases ofFannie Mae and Freddie
Mac instruments until market confidence in these agencies returns.
Yield Trends
The Federal Open Market Committee (FOMC) decreased the federal funds and discount rate rates in
the last year by 3.25 percent and 4.0 percent, respectively. These rates currently are 2.00 and 2.25
percent, respectively. The FOMC continues to monitor consumer spending, labor market, inflation,
and credit risks closely. In light of higher commodity costs, including energy prices, the FOMC
inflationary concerns have heightened. The City’s portfolio yield is expected to slowly decrease in
the coming quarters given the low interest rate environment.
Funds Held by the Cite/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
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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, 2008.
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of June 30, 2008
C)Investment Policy Compliance
PREPARED BY:
TARUN NARAYAN
Senior Financial Analyst
DEPARTMENT HEAD APPROVAL:
Services
CITY MANAGER APPROVAL:
gTEVE EMSLIE
Deputy City Managers
CMR: 320:08 Page 4 of 4
Consolidated Report
City of Palo Alto Cash and Investments
Fourth 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
Total - Other Funds Held By City
Book Value
$360,034,281
Market Value
$ 365,134,933
5,705,779 5,705,779
581,860 581,860
12,838 12,838
6,300,477 6,300,477
Funds Under ManaRement 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 Impvt. Certificates of Participation
Reserve and Lease Payment Funds
Escrow Account for Partial Defeasance of Bonds
2002 Utility Revenue Bonds
Reserve and Debt Service Funds
116 ll6
514 514
26,362 26,362
353,316 353,316
240,088 240,088
876,422 876,422
24,493 24,493
2007 Clean Renewable Energy Tax Credit Bonds
Costoflssuance 205 205
California Asset Management 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
715,644 715,644
661,323 661,323
3,359,976 3,359,976
1,807,132 1,807,132
8,065,591 8,065,591
$374,400,349 $ 379,501,001
*These funds are subject to the l’equirenaents 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.
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ATTAC~ENT B
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Attachment C
Investment Policy Compliance
As of June 30, 2008
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 secorities with maturities Not in Compliance
beyond 5 years.31.17%
(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 shall be maintained in securities maturing in less than 2 years.$143 million
Plus two managed pool accounts w,hich provide instant liquidity:
-Local Agency Investment Fund (LAIF) - maximum investment limit is $40 million $26.1 million
- Fidelity Investments $1 million
e) Should market value of the portfolio fall below 95 percent of the book value, report this fact \vithin a
reasonable time to the City, Council and evaluate if there are risk of holding securities to maturity.101.42%
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 qnotations on the purchase or sale of
comparable securities (excludes new issues, LAW, City of Palo Alto bonds, money market
accounts, and mutual funds).Full Compliance
U.S. Government Securities:i Full Compliance
a) There is no limit on purchase &these securities.
b) Securities will not exceed 10 years matnrity.
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.16.21%
b) Securities will not exceed 10 years maturity.
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 collateralized CDs in any institution.
c) Purchase collateralized deposit’s 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.
Banker’s Acceptance Notes:
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.
Commercial Paper:
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.
None Held
None Held
Investment Policy Compliance
As of June 30, 2008
Attachment C
None Held7Short-Term Repurchase Agreement (REPO):
a) Not to exceed 1 ),ear.
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
,a) Liquid bank accounts \vhich seek to maintain a net asset value of $1.00.
9 Mutual Funds:i None Held
i 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.
10 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.
11 Medium-Term Corporate Notes:i None Held
a) No more than 10 percent of the par value of the po~folio.
b) Not to exceed 5 ),ears matnrity.
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 secnrities.
12 Prohibited Investments:Full Compliance
a) Reverse Repurchase Agreements -None Held
b) Derivatives as defined in Appendix B of the Investment Policy
13 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