HomeMy WebLinkAboutStaff Report 418-08City Manager’s
City of Palo Alto
Summary Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:OCTOBER 20, 2008 CMR: 418:08
REPORT TYPE:
SUBJECT:
INFORMATIONAL
City of Palo Alto’s Investment Activity Report for the First Quarter,
Fiscal Year 2008-09
BACKGROUND
The purpose of this report is to inform Council of the City’s investment portfolio status as of the end
of the first quarter of Fiscal Year 2008-09. The City’s investNent 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
Current Financial Crisis
The City has a conservative investment policy and strictly adheres to the following in priority order:
safety, liquidity, and yield. During the current financial upheaval, the City has not lost any principal.
A "buy and hold," laddered investment strategy is strictly maintained so that principal is not risked
and liquidity is assured. The majority of the City’s investments are in federally sponsored agency
securities such as the Federal Farm Credit Bank, Federal Home Loan Bank, Tennessee Valley
Authority, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and
Federal Agricultural Mortgage Corporation. These fixed income bonds have atriple A rating and the
backing of the federal government. To date, the federal government has backed all of the debt issued
by troubled agencies such as the Federal National Mortgage Association (aka Fannie Mae) and
Federal Home Loan Mortgage Corporation (aka Freddie Mac). The City, by State regulation, cannot
invest in stocks so there has been no exposure to agency stock losses. In addition, the City does not
own any corporate bonds or any troubled commercial paper and does not participate in County
investment pools.
CMR: 418:08 Page 1 of 4
Investment Portfolio as of September 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 $329.7 million; in comparison, last quarter it was $357.8
million. The decline in the portfolio of $28.1 million is mainly attributable to the City prepaying its
annual employer pension costs. The portfolio consists of $10.0 million in liquid accounts and $319.7
million in U. S. govengnent treasury and agency securities and certificates of deposit. The $319.7
million includes $114.5 million in investments maturing in less than two years, comprising 35.8
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 101.2 percent of the book value. It is important to note
that the City’s practice is to hold investments until they mature so 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 3.62 years compared to 3.47 years last quarter.
Investments Made During the First Quarter
During the first quarter, $18.4 million of govelrmaent agency securities with an average yield of 3.7%
percent matured. During the same period, government securities totaling $7.5 million with an
average yield of 4.3 % percent were purchased. The City’s short-term money market and pool account
decreased by $17.2 million compared to the fourth quarter of 2007-08. The liquid funds were used
to prepay the 2008-09 annual employer pension costs, thereby resulting in an estimated savings to the
City on average and over-time of $295 thousand. Investment~ staff continually monitors the City’s
short-term cash flow needs and adjusts liquid funds to meet those needs and to take advantage of
available investment opportunities.
Availabili _ty 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 $204.6 million and expenditures will be $198.0 million over the next six months, indicating
an overall growth in the portfolio of $6.6 million.
As of September 30, 2008, the City had $10.0 million deposited in the Local Agency Investment
Fund (LAIF) and a money market account that could be withdrawn on a daily basis. In addition,
investments totaling $28.5 million will mature between October 1, 2008 and March 31, 2009. On
the basis of the above projections, staff is confident that the City will have more than sufficient funds
or liquidity to meet expenditure requirements for the next six months.
Compliance with City Investment Policy
During the first quarter of 2008-09, 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 perforrnance.
CMR: 418:08 Page 2 of 4
Investment Yields
Interest income on an accrual basis for the first quarter of 2008-09 was $3.8 million. As of
September 30, 2008, the yield to maturity of the City’s portfolio was 4.54 percent. This compares to
a yield of 4.42 percent in the fourth quarter of 2007-08. In the short term, as lower yielding
investments purchased in prior years mature and are reinvested in higher yielding ones, the
portfolio’s yield are expected to slightly increase. The City’s portfolio yield of 4.54 percent
compares to LAIF’s average yield for the quarter of 2.78 percent and an average yield on the two-
year and five-year Treasury bonds during the first quarter of approximately 2.35 percent and 3.09
percent, respectively.
Yield Trends
The Federal Open Market Committee (FOMC) decreased the federal funds and discount rate rates in
the last year by 3.75 percent and 4.5 percent, respectively. These rates currently are 1.50 and 1.75
percent, respectively. The FOMC’s concerns of slowing economic growth have significantly
heightened, while inflation concerns have decreased. The economy is faced with a tight credit
market, weak mortgage market, high unemployment, and unprecedented government interventions in
the private sector. Given the current volatility in the market, long-term interest rate trends are
difficult to predict.
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 September 30, 2008.
CMR: 418:08 Page 3 of 4
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
TARUN NARAYAN
Senior Financial Analyst
Director, Administrative Services
CITY MANAGER APPROVAL:
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of September 30, 2008
C)Investment Policy Compliance
CMR: 418:08 Page 4 of 4
Consolidated Report
City of Palo Alto Cash and Investments
First Quarter, Fiscal Year 2008-09
(Unaudited)
Attachment A
.Ci .ty 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
~a 1,680,147
Market Value
$ 335,631,025
4,945,924 4,945,924
585,579 585,579
12,338 12,338
5,543,841 5,543,841
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 Impvt. Certificates of Participation
Rese~we and Lease Payment Funds
Escrow Account for Partial Defeasance of Bonds
2002 Utility Revenue Bonds
Reserve and Debt Service Funds
145 145
300 300
26,498 26,498
351,035 351,035
238,690 238,690
873,721 873,721
101,786 101,786
2007 Clean Renewable Energy Tax Credit Bonds
Cost of Issuance 206 206
California Asset Management Program (CAMP) ***
1998 Golf Course Certificates of Participation
Rese~we 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
716,636 716,636
641,495 641,495
3,248,163 3,248,163
1,804,493 1,804,493
8,003,168 8,003,168
$345,227,156 $ 349~178,034
*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 ins estments 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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ATTACHMENT B
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Investment Policy Compliance
As of September 30, 2008
Attachment C
General Investment Guidelines:
a) The max. stated final maturity of individual securities in the portfolio should be 10 years.
b) A max. of 30 percent of the par value of the portfolio shall be invested in securities with maturities
beyond 5 years.
c) The City shall maintain a minimum of one month’s cash needs in short term investments.
d) At least $50 million shall be maintained in securities maturing in less than 2 years.
Plus two managed pool accounts which provide instant liquidity:.
-Local Agency Investment Fund (LAIF) - maximum investment limit is $40 million
-Fidelity Investments
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.
d) Commitments to purchase securities newly introduced on the market shall be made no more than three (3)
working days before pricing.
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).
U.S. Government Securities:
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~
Certificates of Deposit:
a) May not exceed 20 percent of the par value of the portfolio;
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 fi’om 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.
Full Compliance
29.58%
Full Compliance
$114.5 million
$9.9 million
$0.1 million
10t.18%
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
18.96%
Full Compliance
0.16%
None Held
None Held
Investment Policy Compliance
As of September 30, 2008
Attachment C
10
11
12
Short-Term Repurchase Agreement (REPO):
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
a) Liquid bank accounts which seek to maintain a net asset value of $1.00.
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.
Negotiable Certificates of Deposit (NCD):
a) No more than 10 percent of the par value of the pol-tfolio.
b) No more than $5 million in any one institution.
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 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:
a) Reverse Repurchase Agreements t
b) Derivatives as defined in Appendix B of the Investment Policy
13 i 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, and LAIF
None Held
Full Compliance
None Held
None Held
None Held
Full Compliance
None Held
Full Compliance