HomeMy WebLinkAboutStaff Report 121-06Rep r
TO:HONO1L~BLE CITY COUNCIL
FROM:
DATE:
SUBJECT:
CITY MANAGER
JANUARY 30, 2006
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 121:06
CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR
THE SECOND QUARTER, FISCAL YEAR 2005-06
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 2005-06. 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. 2005
The City’s investment portfolio is detailed in Attachment B. It is grouped by investment t)’pe and
includes the investment issuer, date ofmaturi~~, current market value, the book and face (par) value,
and the weighted average maturiW of each b~pe of investment and of the entire portfolio as of
December 31. 2005.
The par value of the CiW’s portfolio is $344.6 mi!lion; in comparison, last quarter it was $346.3
million. The decline in the portfolio of $1.7 million is attributable to: (a) the settlement between
PG&E and Western Area Power Administration for electric transmission which resulted in additional
cost to the Ci~, of $1.6 million; and (b) the delayed sales ("triple flip") and in-lieu vehicle license fee
tax payments. Instead of receiving the delayed revenue payments on a monthly basis, they will be
paid in January and May 2006. If not for the settlement payment and the delayed revenue receipt, the
portfolio would have increased by $1.8 million.
The portfolio consists of $12.6 million in liquid accounts and $332.0 million in U.S. government
treasury and agency securities. The $332.0 million includes $123.8 million in investments maturing
in less than two years, comprising 37.3 percent of the Ci~,’s investment in notes and securities. The
current market value of the portfolio is 98.3 percent of the book value. Staff anticipates this ratio will
stabilize over the next few quarters as the low yield environment of the past three years transitions to
high interest rates based on Federal Reserve Board actions. It is important to note that because the
CMR: 121:06 Page 1 of 3
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 2.52 years.
Investments Made Durino, the Second Quarter
During the second quarter, $15.0 million of government agency securities with an average yield of
5.2 percent matured. During the same period, govermnent securities totaling $2! .0 million with an
average yield of 4.5 percent were purchased. The City’s short-term money market and pool account
decreased by $7.6 million compared to the first quarter of 2005-06. 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 investment opportunities.
Availabilits~ of Funds for the Next Six Months
The normal 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 $178.0 million and expenditures will be $175.4 million over the next six months, indicating an
overall growth of the portfolio of about $2.6 million.
As of December 31, 2005, 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 $27.3 million will mature between January 1, 2006 and June 30, 2006. On the
basis of the above projections, staffis 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 2005-06, staff complied with all aspects of the investment policy except
the 20 percent callable limit on U.S. government agency securities. Due to a decline in the
portfolio’s assets mainly attributable to the Enron settlement payment, callable securities now are
20.3 percent of the portfolio. The investment policy states that an overage in this categols~ due to a
reduction in the portfolio is not a violation of the 20 percent callable restriction. The callable
percentage limitation will be restored as callable investments mature. Staff will not invest in callable
securities until held callable securities fall below 20 percent of the City’s portfolio. Attachment C
lists the restrictions in the City’s investment policy compared with the portfolio’s actual compliance.
Investment Yields
Interest income on an accrual basis for the second quarter of 2005-06 was $3.7 million. As of
December 31, 2005, the yield to maturity of the City’s portfolio was 4.13 percent, the same yield as
the first quarter of 2005-06. With short-term interest rates moving upward slowly, staff expects the
portfolio’ s yield to remain at current levels in the coming quarters. The City’s portfolio yield of4.13
percent compares to LAIF’s average yield for the quarter of 3.41 percent and an average yield on the
two-year and five-year Treasury bond during the second quarter of approximately 4.36 percent and
4.39 percent, respectively.
C~’IR: 121:06 Page 2 of 3
Yield Trends
Since June 2004, the Federal Open Market Committee (FOMC) has increased the federal funds and
discount rate by 3.25 and 3.50 percent, respectively. These rates cun’ently are 4.25 and 5.25 percent,
respectively.
In its last meeting, the FOMC indicated that its spate of rate increases may be coming to an end.
With an outlook that economic growth is on solid ground and inflationary risks are being contained,
the FOMC may raise rates by another 0.25 percent to 0.50 percent. Even with further rate increases,
the City’s portfolio yields are expected to rise slowly because of the considerable lag time between
the rise in interest rates and the portfolio’s ability to reflect them. This is a consequence of the
portfolio being weighted at lower-yield instruments purchased in the past three years.
Funds Held by the City or Managed Under Contract
Attact~nent 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
and Bank of America. 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. Treasu~ 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, 2005.
PREPARED BY:
TARUN~AN
Senior Fi@ancial Analyst
DEPARTMENT HEAD APPROVAL:
CARL YEATS /d~
Director, Administrative Services
CITY MANAGER APPROVAL:
EtlVIIL Y HARRISON
Assistant City Manager
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of December 31, 2005
C)Investment Policy Compliance
CMR: 121:06 Page 3 of 3
Consolidated Report
City of Palo Alto Cash and Investments
Second Quarter, Fiscal Year 2005-06
(Unaudited)
Attachment A
Book Value Market Value
349.605,204 $343,763,874City Investment Portfolio (see Attachment B)
Other Funds Held by the CiW
Cash with Bank of America
Cash with Wells Fargo Bank
includes general and imprest accounts)
Petty/\Vorking Cash (as of 12/31/05)
Total - Other Funds Held By City.
57,970 57,970
4 "~6~ 183 4.265.183
14.195 14,195
4,337,348 4,337,348
Funds Under ManaRmnent 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
Lease Payment, Improvement, and Reserve Funds
Escrow Account for Partial Defeasance of Bonds
2002 L tility Revenue Bonds
Debt Service Funds
191 191
15.310 15,3t0
142.355 142,355
348 ~’348.352
~_7.108 237.108
975.819 975,819
36,832 36,832
California Asset Mana~_ement Program i CAMP} ***
t 998 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
726,898 726,898
864,086 864,086
4,008,433 4,008,433
1,770,993 1,770,993
9.1~6..~77 9.126.377
363,068,929 $ 357,227,598
*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.
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Investment Policy Compliance
As of December 31, 2005
Attachment C
General Investment Guidelines:
a) The max. stated final maturity’ of indixidual securities in the portfolio should be 10 years Full Compliance
b) A max. of 30 perceni of the par xalue of the portfolio shall be invested in securities with maturities
beyond 5 years 4./o .,o
c) The City shall maintain a minimum of one month’s cash needs in sho~’t term investments.Full Compliance
d) A~ least S50 million shall be maintained in securities maturing in less than 2 years.$I 23.8 million
Plus t\~o managed poo! accounts which provide instant liquidity:
-Local Agency Investment Fund (LAIF) - maximum in\’estment limit is $40 million $0.7 million
- Fidel ty In\estments $11.9 mi!lion
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.98.34%
d) Commitments to purchase securities ne\~ly introduced on the market shall be made no more than three (3)
working days before pricing.Full Compliance
f} \V ~enever poss b e. the Cry, wilt obtain three or more quotatio.n.s on the purchase or sale of
comparable securities (excludes new issues, LA1F, City’ of Palo Alto bonds, money market
accounts, and mutual funds).Full Compliance
U.S. Government Securities:Full Compliance
a) There is no limit on purchase of these securities.
b) Securities will not exceed t0 years maturiLv.
U.S. Government Agency Securities:Not Compliant
a) There is no limit on purchase of these securities except for:
Callable and Multi-step-up securities proxided that:
-The potential call dates are knox~n at the time of purchase;Full Compliance
- the interest rates at which they’ "step-up" are knox~n 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.20.26%
EXCEEDS POLICY LIMIT DUE TO PORTFOLIO’S ASSETS DECLINE
b Securities will not exceed 10 years maturity’.
Certificates of Deposit:None Held
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 federa y 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: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.
Commercial Paper:None Held
a) No more than 15 percent of the par \alue of the portfolio.
b) Haxing highest letter or numerical rating from a nationally recognized rating service.
c) Not to exceed 270 days matur ty
d) No more than $3 million or I0 percent of the outstanding commercial paper of any one institution.
whichever is lesser.
Investment Policy Compliance
As of December 31, 2005
Attachment C
7 Short-Term Repurcbase Agreement (REPO):None Held
a) Not to exceed I 3ear.
b) Market \alue of securities that underlay a repurchase agreement shall be valued at 102 percent or
greater of the funds borrowed against those securities.
8 Mutual Funds:None Held
a) No more than 20 percent of the par value of the portfolio.
b) No more than I0 percent of the par \alue \~ith any one nst rut on.
9 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.
I0 Medium-Term Corporate Notes:None Held
a) No more than 10 percent of the par xalue of the portfolio.
b) Not to exceed 5 years matur
c) Securities eligible for investment shall have a minimum rating’{)fAA 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 instrumenmliW.
e) If securities ox~ned by’ the City’ are downgraded
shall be the City’s policy’ to rex iex~ the credit situation and make a determination as to whether
to sell or retain such securities.
11 Prohibited Investments:Futl Compliance
a) Reverse Repurchase Agreements None Held
b) Derivatives as defined in Appendix B of the Investment Policy,
12 All securities shall be delix ered to the City’s safekeeping custodian, and held in the name of the Full Compliance
Citx. with the exception of :
-Certificates of Deposit. Mutual Funds, and LAIF