HomeMy WebLinkAboutStaff Report 9269
City of Palo Alto (ID # 9269)
City Council Staff Report
Report Type: Informational Report Meeting Date: 6/4/2018
City of Palo Alto Page 1
Summary Title: Investment Activity Report
Title: City of Palo Alto Investment Activity Report for the Third Quarter, Fiscal
Year 2018
From: City Manager
Lead Department: Administrative Services
Background
The purpose of this report is to inform Council of the City’s investment portfolio status as of the
end of the third quarter; ending March 31, 2018. 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
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 $531.4 million; in comparison, last quarter it was $513.4
million. The growth in the portfolio of $18.0 million since the last quarter primarily results from
timing of cash flows. Contributing factors include not having to pay the bi -weekly pensions to
Public Employers’ Retirement System (PERS) because the annual employer contribution of
$22.1 million was partially paid in July 2017 and property tax receipts including earlier receipts
of special assessments for University Avenue Parking and General Obligation (Library) bonds. By
prepaying PERS instead of making payments with each payroll period, the C ity expects savings
of $0.8 million in PERS payments; however, the savings will be offset by the loss of
approximately $0.2 million in interest income. This results in net citywide savings of $0.6
million. The saving is a consequence of PERS’ ability to earn interest earlier and at a higher rate
than the City could realize. Property taxes are primarily paid around December/January and
April/May.
The portfolio consists of $8.5 million in liquid accounts and $522.9 million in U. S. government
treasury investments, agency securities, bonds of State of California local government agencies,
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bonds of some of the fifty United States, medium-term corporate notes, and certificates of
deposit. The $522.9 million includes $149.5 million in investments maturing in le ss than two
years, comprising 28.6 percent of the City’s investment in notes and securities. The investment
policy requires that at least $50 million be maintained in securities maturing in less than two
years.
The current market value of the portfolio is 98.3 percent of the book value. The market value
of securities fluctuates, depending on how interest rates perform. When interest rates
decrease, the market value of the securities in the City’s portfolio will likely increase; likewise,
when interest rates increase, the market value of the securities will likely decrease.
Understanding and showing market values is not only a reporting requirement, but essential to
knowing the principal risks in actively buying and selling securities. It is important to note,
however, that the City’s practice is to buy and 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 3.96 years compared to 3.68 years last quarter.
Investments Made During the Third Quarter
During the third quarter, $15.5 million of government agency securities with an average yield of
1.1% percent matured. During the same period, government securities totaling $67.3 million
with an average yield of 2.2% percent were purchased. The expectation is interest rates and
City’s portfolio’s average yield will continue to gradually rise. Th e City’s short-term money
market and pool account decreased by $33.8 million compared to the second quarter.
Investment staff continually monitors the City’s short term cash flow needs and adjusts liquid
funds to meet them.
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 $244.1 million and expenditure s will be $256.6 million over the next six
months, indicating an overall decline in the portfolio of $12.5 million. The decline is attributable
to pre-paying a portion of the Fiscal Year 2019 Public Employers’ Retirement System’s (PERS)
employer contribution of $25.9 million, representing the actuarial determined contribution
(ADC) payment for FY 2019. By prepaying PERS instead of making payments with each payroll
period, the City is expected to save $0.9 million in PERS payment; however, the savings will be
offset by the loss of approximately $0.3 million in interest income. This results in net citywide
savings of $0.6 million. The saving is a consequence of PERS’ ability to earn interest earlier and
at a higher rate than the City could realize. Without th is prepayment, the portfolio would have
increased by $12.8 million.
As of March 31, 2018, the City had $8.5 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 $38.3 million will mature between April 1, 2018 and September 30, 2018.
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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 third quarter, staff complied with all aspects of the investment policy. Attachment C
lists the major restrictions in the City’s investment policy compared with the portfolio’s actual
performance.
Investment Yields
Interest income on an accrual basis for the third quarter was $2.7 million. As of March 31,
2018, the yield to maturity of the City’s portfolio was 2.13 percent. The rising interest rate is
expected to gradually increase the portfolio’s yields. The City’s portfolio yield of 2.13 percent
compares to LAIF’s average yield for the quarter of 1.43 percent and an average yield on the
two-year and five-year Treasury bonds during the third quarter of approximately 2.15 percent
and 2.53 percent, respectively. For the past decade, the City’s portfolio yield has outperformed
the two and five year Treasury bond rates. With the recent rapid Treasury interest rate rise that
is no longer the case; this is an expected occurrence. As the City’s l addered portfolio
investments matures in the next year or two and is reinvested in higher yielding securities, the
City’s portfolio yield is expected to again outperform these Treasury interest rates.
Yield Trends
The Federal Open Market Committee (FOMC) has maintained the federal funds and discount
rates at 1.50 and 2.0 percent, respectively since raising it three times in calendar year 2017.
Inflation remains below the FOMC’s long-term goal of 2 percent but has moved closer to that
goal. FOMC view the risks of rising inflation to be gradual due to strengthening consumer
spending, improving labor market and strengthening economic growth. Business fixed
investment spending is growing strongly. The FOMC expects future rate increase to be gradual
and dependent on the economic outlook. Though the continued expectation is rates will rise,
factors that could keep a lid on rate increases include: low inflation, weak wage growth, and
domestic and global economic uncertainties.
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
US Bank and Wells Fargo. (A description of the City’s banking relationships can be found in City
Council Staff Report ID # 7858.) 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 March 31, 2018.
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Fiscal Impact
This is an information report with no fiscal impact.
Environmental Review
This information report is not a project under the California Environmental Quality Act;
therefore, an environmental review is not required.
Attachments:
Attachment A: Consolidated Report of Cash Management
Attachment B: Investment Portfolio
Attachment C: Investment Policy Compliance