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HomeMy WebLinkAboutStaff Report 196-06City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:APRIL 17, 2006 CMR: 196:06 SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR THE THIRD 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 third 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 March 31. 2006 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 March 31, 2006. The par value of the City’s portfolio is $355.8 million; in comparison, last quarter it was $344.6 million. The growth in the portfolio of $11.2 million primarily results from cash flow and not from operating performance. This includes: (a) delayed sales tax ("triple flip") and in-lieu vehicle license fee tax payments received in January and May 2006 instead of being received on a monthly basis, (b) lower commodity costs in the electric fund due to the abundant rainfall and hydropower availability, and (c) the timing of payroll periods whereby third quarter payroll expenditures were lower than the prior quarter. The portfolio consists of $13.8 million in liquid accounts and $342.0 million in U. S. government treasury and agency securities. The $342.0 million includes $147.7 million in investments maturing in less than two years, comprising 43.2 percent of the City’s investment in notes and securities. The current market value of the portfolio is 97.8 percent of the book value. Staff anticipates this ratio to 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: 196:06 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 2.29 years. Investments Made Durin~o the Third Quarter During the third quarter, $12.7 million of government agency securities with an average yield of 5.8% percent matured. During the same period, government securities totaling $22.7 million with an average yield of 4.9% percent were purchased. The City’s short-term money market and pool account increased by $1.2 million compared to the second 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. Availabili _ty 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 $167.3 million and expenditures will be $164.0 million over the next six months, indicating an overall growth of the portfolio of $3.3 million. As of March 31, 2006, the City had $13.8 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 $31.6 million will mature between April 1, 2006 and September 30, 2006. 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 Poticv During the third quarter of 2005-06, staff complied with a!l aspects of the investment policy. 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 third quarter of 2005-06 was $3.7 million. As of March 31, 2006, the yield to maturity of the City’s portfolio was 4.16 percent. This compares to a yield of 4.13 percent in the second quarter of 2005-06. With short-term interest rates moving upward slowly, staff expects the portfolio’s yield to gradually rise in the coming quarters. The City’s portfolio yield of4.16 percent compares to LAIF’s average yield for the quarter of 4.05 percent and an average yield on the two-year and five-year Treasury bond during the third quarter of approximately 4.59 percent and 4.54 percent, respectively. Yield Trends Since June 2004, the Federal Open Market Committee (FOMC) has increased the federal funds and discount rate by 3.75 and 4.0 percent, respectively. These rates currently are 4.75 and 5.75 percent, respectively. In its last meeting, the FOMC indicated that economic growth was on solid ground and that inflationary risks appear contained. The FOMC obliquely hinted that its spate of rate increases may be coming to an end. Should higher commodities prices increase inflationary risk, however, the CMR: 196:06 Page 2 of 3 FOMC will tighten rates further. Even with additional rate increases, the City’s portfolio yields are expected to rise slowly. There is a 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 with lower- yield instruments purchased over the past three years when interest rates were low. 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 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. 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 h_e~l~by~the fiscal agent is as of March 31, 2006. PREPARED BY: TARUN NA~,/I~_ " ANSenior Financial Analyst DEPARTMENT HEAD APPROVAL: M_.__~ D~)_ector, a ~//~a_t}~_ve~.S.~)rv i c e s CITY MANAGER APPROVAL: ~~"~ ~/"ldtk-~-4-~ .~’~ E~MILY HARRISON Assistant City Manager ATTACHMENTS: A)Consolidated Report of Cash and Investments B)Investment Portfolio, as of March 31, 2006 C)Investment Policy Compliance CMR: 196:06 Page 3 of 3 Consolidated Report City of Palo Alto Cash and Investments Third Quarter, Fiscal Year 2005-06 (Unaudited) Attachment A City Investment Portfolio (see Attachment B) Other Funds Held bv the City Cash with Bank of America Cash with Wells Fargo Bank (includes general and imprest accounts) Investment with CAMP (University Ave. Parking Garages) Petty/Working Cash (as of 03/31/06) Total - Other Funds Held By City Book Value $360,054,988 Market Value $352,067,094 156,466 156,466 4,514,706 4,514,706 525,294 14,195 5,210,661 14,195 4,685,367 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 Lease Payment, Improvement, and Reserve Funds Escrow Account for Partial Defeasance of Bonds 2002 Utility Revenue Bonds Debt Service Funds 193 i93 13,636 13,636 84,232 84,232 353,441 353,441 240,404 240,404 914,673 914,673 55,202 55,202 California Asset Management Program tCAMP) *** 1998 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 726,931 726,931 879,926 879,926 4,054=947 4,054,947 1,789,646 1,789,646 9,113,231 9,1!3,231 $ 374,378,880 $ 365,865,692 *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. Treasuw securities. *** CAMP investments are in money market mutual fund xvhich invest in bankers acceptance, certificate of deposit, commercial paper, federal agency securities, and repurchase agreements. 0 0= ~ ,<,9.o ATTACHMENT B 000000 o ooooooooooooooq~ q ~ q ~ ~ q~ q q~ ~q g g g g g ~ g g g g g g g g g ~5 g g 0000000000000~000000000000000~000 0000000000000000000 0 0 0 0 0 0 0 {:3 0 0 0 0 0 0 0 0 0 0 0 0 0 0050 5050 ooooooooooooooooooooooooooooooooo oooo~o o~o g~oo ~oo~oooo~o~o ~ 88888 888 ~88 ~q~q~qqqqqqq~qqqq~qqqqqqqqqqqqqq000000000000000~ 0000000000000000 0~0000~00000 0 0 <~ ~4 000000000© 000 0 Investment Policy Compliance As of March 31, 2006 Attachment C General Investment Guidelines: a!The max. stated final maturity’ of individual securities in the portfolio should be 10 years. 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 day’s before pricing. f) Whenever possible, the City’ xxill 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 xalue 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) el) Rollovers are not permit-ted 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 day, s maturity.’. c) No more than $5 million with any’ one institution. Commercial Paper:None Held Full Compliance 3.18% Full Compliance $147.7 million $0.7 million $13.2 million 97.78% Full Compliance Full Compliance Full Compliance Full Compliance Full Compliance Full Compliance Full Compliance 19.62% Full Compliance 0.56% 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 maturiD~. 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, 2006 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 valued at 102 percent or greater of the funds borrowed against those securities. 8 Money Market Deposit Accounts Full Compliance a) Liquid bank accounts xvhich seek to maintain a net asset value of $1.00. 9 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. 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: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 nationa ly recognized rating serx ice. 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 CiD are downgraded by’ either rating agencies to a level be!ow AA it shall be the City’s policy to review the credit situation and make a determination as to x~hether to sell or retain such securities. 12 Prohibited Investments:Full Compliance a) Reverse Repurchase Agreements None Held b) r..)erivatives 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