HomeMy WebLinkAboutStaff Report 305-06City
City of Palo Alto
Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
JULY 24, 2006 CMR: 305:06
CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR
THE FOURTH 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 fourth 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 June 30, 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 June
30, 2006.
The par value of the City’s portfolio is $372.6 million; in comparison, last quarter it was $355.8
million. The growth in the portfolio of $16.8 million since the last quarter primarily results from the
timing of cash flows. Sales tax ("triple flip") and in-lieu vehicle license fee tax payments are
received in January and May 2006 instead of being received on a monthly basis. In addition, the
Electric Fund’s cost for electricity purchases are the lowest in the fourth quarter due to the greater
availability ofhydropower. Compared to the fourth quarter of 2004-05, the portfolio has increased
by $23.5 million.
The portfolio consists of $13.2 million in liquid accounts and $359.4 million in U. S. government
treasury and agency securities. The $359.4 million includes $162.6 million in investments maturing
in less than two years, comprising 45.2 percent of the City’s investment in notes and securities. The
current market value of the portfolio is 97.5 percent of the book value compared to 100 percent at the
end of 2004-05. Staff anticipates this ratio will stabilize over the next few quarters as the low yield
environment of the past three years transitions to higher interest rates based on Federal Reserve
CMR: 305:06 Page 1 of 3
Board actions. 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 2.22 years compared to 2.75 years at the end of 2004-05.
Staff purposely reduced maturity dates given the structure of the yield curve and to maximize yields
in a rising rate environment.
Investments Made During the Fourth Quarter
During the fourth quarter, $14.6 million of government agency securities with an average yield of
5.4% percent matured. During the same period, government securities totaling $32.0 million with an
average yield of 5.4% percent were purchased. The City’s short-term money market and pool account
decreased by $0.6 million compared to the third 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.
Availability 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 $160.4 million and expenditures will be $156.1 million over the next six months, indicating an
overall growth of the portfolio of $4.3 million.
As of June 30, 2006, the City had $13.2 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 $38.5 million will mature between July 1, 2006 and December 31, 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 Policy
During the fourth quarter of 2005-06, 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 compliance.
InvestMent Yields
Interest income on an accrual basis for the fourth quarter of 2005-06 was $3.9 million. This total is
2.Tpercent higher than what the City received last fiscal year, with the portfolio increasing by 6.7
percent. As older maturing securities are reinvested with higher yielding ones, interesting earnings
will slowly rise. As of June 30, 2006, the yield to maturity of the City’s portfolio was 4.23 percent.
This compares to a yield of:4.16 percent in the third quarter and 4.17 percent as of June 30, 2005.
With short-term interest rates moving upward slowly, staff expects the portfolio’s yield will continue
to gradually rise in the coming quarters. The City’s portfolio yield of 4.23 percent compares to
LAIF’s average yield for the quarter of 4.51 percent and an average yield on the two-year and five-
year Treasury bond during the fourth quarter of approximately 4.99 percent and 4.98 percent,
respectively.
CMR: 305:06 Page 2 of 3
Yield Trends
Since June 2004, the Federal Open Market Committee (FOMC) has increased the federal funds and
discount rate by 4.25 and 4.50 percent, respectively. These rates currently are 5.25 and 6.25 percent,
respectively and at the end of 2004-05 these rates were 3.25 and 3.50 percent.
In its last meeting, the FOMC indicated that economic growth is moderating but that inflationary
risks would be monitored closely. The FOMC again obliquely hinted that its spate of rate increases
may be coming to an end. Should higher commodities and energy prices increase inflationary risk,
however, the FOMC will tighten rates further. Even without additional rate increases, the City’s
portfolio yields are expected to rise slowly as lower-yield instruments purchased over the past three
years are re,invested in higher-yield instruments.
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 held by the fiscal agent is as of June 30, 2006.
PREPARED BY:
TAR~N~ARAYAN
Senior Financial Analyst
DEPARTMENT HEAD APPROVAL:
CARL
Director,
CITY MANAGER APPROVAL: ~, ~~~)
EMILY HARRISON
Assistant City Manager
Services
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of June 30, 2006
C)Investment Policy Compliance
CMR: 305:06 Page 3 of 3
Consolidated Report
City of Palo Alto Cash and Investments
Fourth Quarter, Fiscal Year 2005-06
(Unaudited)
Attachment A
Ci,ty Investment Portfolio (see Attachment B)
Other Funds Held by 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 06/30/06)
Total - Other Funds Held By City
Book Value
$ 376,139,478
Market Value
$366,676,378
6,143 6,143
4,486,263 4,486,263
531,583
14,095
5,038,084
14,095
4,506,501
Funds Under Management of Third Par ,ty 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
108 108
21,452 21,452
84,948 84,948
352,677 352,677
239,889 239,889
915,468 915,468
61,536 61,536
California Asset Management Program (CAMP) ***
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
734,722 734,722
.866,084 866,084
3,995,086 3,995,086
1,788,005 1,788,005
9,059,975 9,059,975
$ 390,237,537 $ 380,242,855
*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. TreasmT 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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Investment Policy Compliance
As of June 30, 2006
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 d, ays before pricing.
f) Whenever possible, the City will obtain three or more quotations on the purchase or sale of
comparable securities (excludes new issues, LAW, 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 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.
Full Compliance
1.29%
Full Compliance
$162.6 million
$0.8 million
$12.4 million
97.50%
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
19.67%
Full Compliance
1.34%
None Held
None Held
Investment Policy Compliance
As of June 30, 2006
Attachment C
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.
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.
10 I 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
12
13
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.
ProhibRed Investments:
a) Reverse Repurchase Agreements
b) Derivatives as defined in Appendix B of the Investment Policy
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