HomeMy WebLinkAbout2004-01-20 City Council (10)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:JANUARY 20, 2004 CMR: 127:04
SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR
THE SECOND QUARTER, FISCAL YEAR 2003-04
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 2003-04. The City’s investment policy
requires that staff report 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, 2003
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 December 31, 2003.
The par value of the City’s portfolio is $357.7 million; in comparison, last quarter it was
$353.9 million. Growth in the portfolio of $3.8 million since the last quarter results from
property tax receipts for the new fiscal year that are not received until the second quarter and
the City’s continued effort to constrain expenditures.
The portfolio consists of $23.8 million in liquid accounts and $333.9 million in U. S.
government treasury and agency securities. The $333.9 million includes $118.1 million in
investments maturing in less than two years, comprising 35.4 percent of the City’s investment
in notes and securities. The current market value of the portfolio is 102.9 percent of the book
value. Because the City’s practice is to hold securities until they mature, changes in market
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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 2.75 years.
Investments Made During the Second Ouarter
During the second quarter, $21.0 million of government agency securities with an average
yield of 5.8% percent matured. During the same period, government securities totaling $16.7
million with an average yield of 3.9% percent were purchased. The City’s short-term money
market and pool account increased by $8.1 million compared to the first quarter of 2002-03.
Investment staff continually monitor the City’s short-term cash flow needs and adjust 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. Projections indicate receipts will be
$144.4 million and expenditures will be $142.4 million over the next six months, indicating
an overall growth of the portfolio of about $2.0 million.
As of December 31, 2003, the City had $23.8 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 $33.7 million will mature between January 1, 2004 and
June 30, 2004. 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 second quarter of 2003-04, 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 second quarter of 2003-04 was $4.1 million. As
of December 31, 2003, the yield to maturity of the City’s portfolio was 4.48 percent. This
compares to a yield of 4.65 percent in the first quarter of 2003-04. The City’s portfolio yield
will decrease further in the second quarter of 2003-04 as a result ofreinvestment of maturing
securities at lower interest rates. The City’s portfolio yield of 4.48 percent compares to
LAIF’s average yield for the quarter of 1.64 percent and an average yield on the two-year and
five-year Treasury bond during the second quarter of approximately 1.84 percent and 3.23
percent, respectively.
Yield Trends
The Federal Open Market Committee (FOMC) has not changed the federal funds rate in the
last two quarters of 2003-04. Since it began cutting the federal funds and discount rates in
CIVIR: 127:04 Page 2 of 4
January 2001, the FOMC has reduced the federal funds rate by 5.50 percent and discount rate
by 5.25 percent to 1.00 and 0.75 percent, respectively.
At its December 2003 meeting, the FOMC maintained a"balanced" outlook on the economy.
This outlook reveals an expectation that the upside and downside risks associated with
sustaining economic growth are equal. The FOMC has acknowledged an improving national
economy, productivity gains, and stronger business spending. It has expressed concern,
however, about job growth and is expected to leave rates at the current level at its next
meeting and in the near future. The City can expect declining yields on its portfolio given the
FOMC’s low interest rate policy.
To somewhat offset the steady and dramatic drop in interest rates, staff has been purchasing
securities with longer maturities. The average life to maturity has increased from 2.27 years
in 2001-02 to 2.75 years in the second quarter of 2003-04. In addition, staff continues to
purchase the maximum amount of callable securities allowed under the City’s Investment
Policy. This strategy, which is possible given the size and stability of the City’s portfolio,
has kept the City’s yields relatively strong. Nevertheless, as older investments continue to
.mature, overall yields will continue to fall in future quarters.
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 Bank of America. The bond proceeds, bond 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 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 December 31, 2003.
ATTACHMENTS:
A)
B)
c)
Consolidated Report of Cash and Investments
Investment Portfolio, as of December 31, 2003
Investment Policy Compliance
CMR: 127:04 Page 3 of 4
PREPARED BY:
~enAnR~~~aalyst
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
CARE YEATS /
Director, Administrative ServiNes,,
HARRISON
Assistant City Manager
CMR: 127:04 Page 4 of 4
Attachment A
Consolidated Report
CiD’ of Palo Alto Cash and Investments
Second Quarter, Fiscal Year 2002-03
(Unaudited)
Book Value Market Value
City Investment Portfolio (see Attachment B)$364.757,507 $375,308,483
Other Funds Held by the City
Cash with Bank of America
(includes general, imprest, and other accounts)
Petty!Working Cash (as of 12/31/03)
Total - Other Funds Held By City
2,638,040 2,638,040
9,805 9,8O5
2.647.845 2.647,845
Funds Under Manao_ement of Third Party Trustees *
(Debt Service Funds and Reserves)
US Bank Trust Sen, ices **
Golf Course Certificates of Participation
Construction Fund & Lease Payment Fund
2002 Civic Center Certificates of Participation
Lease Payment Fund. Reserve Fund, & Cost oflssuance
2002 Downtown Parking lmpvt. Certificates of Participation
Impvt. Fund, Cost of Issuance, Reserve Fund
12,591 12.591
350,602 350,602
1.509,804 1,509,804
1999 Utili~ Revenue Bonds
Construction Fund 250,443 250/443
2002 UtiliD~ Revenue Bonds
Debt Sen, ice Account 11,554 11.554
California Asset Mana~,ement Prod_ram (CAMP) ***
Golf Course Certificates of Participation
Reserve Fund
2001 University. Ave. Parking Bonds
Impvt. Fund, Cost of Issuance, Reserve Fund
2002 UniversitT Ave. Parking Bonds
Impvt. Fund, Cost of Issuance, Reserve Fund
2002 UtitW Revenue Bonds
Construction Funds and Resen, e Fund
714,987 714,987
1,127.280 1.127,280
10,454.818 10,454,818
11,526,309 11,526,309
Total Under Trustee Management 25.958.390 25,958.390
GRAND TOTAL $ 393,363,741 $ 403,914,718
*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.
*** C,-MMP 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, 2003
Attachment C
General Investment.Guidelines:
a) Beg. FY 00-01, the max. stated final maturity of individual securities in the portfolio should be 10 years. Full Compliance
Investment exceeding 10 years maturity, that were authorized under investment policies prior to FY 00-C 0.02%
b) A max. of 30 percent of the par value of the portfolio shall be invested in securities with maturities
beyond 5 years.14.03%
c) The City, shall maintain a minimum of one month’s cash needs in short term investments.Full Compliance
d) At least $50 million shall be maintained in securities maturing in less than 2 years.$118.1 million
Plus two managed pool accounts which provide instant liquidity:
-Local Agenc?, Investment Fund (LAIF) - maximum investment limit is $40 million $23.1 million
- Fidelity, Investments $0.8 million
e) Market value of the portfolio will exceed 95 percent of the amortized cost basis of the portfolio.102.88%
d) Commitments to purchase securities newly introduced on the market shall be made no more than three (3)
working day, s before pricing.Full Compliance
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).Full Compliance
U.S. Government Securities:Full Compliance
a) There is no limit on purchase of these securities.
b) Securities will not exceed 10 years maturity.
Full ComplianceU.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 the?, "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) Beginning FY 00-01, securities will not exceed 10 ?,ears maturity,.
Full Compliance
Full Compliance
Full Compliance
18.31%
Investment exceeding 10 years maturity. Authorized under investment policies prior to FY 00-01.0.02%
4 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 federally insured large banks that are rated by’
Moody’s or Standard & Poors.
d) For non-rated banks, deposit should be limited to amounts federally insured (FD1C)
e) Rollovers are not permitted without specific instruction fiom authorized City, staff.
5 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.
6 Commercial Paper:None Held
a) No more than 15 percent of the par value of the portfolio.
b) Having highest letter or numerical rating from Moody’s or Standard and Poor’s.
c) Not to exceed 180 days maturity,.
d) No more than $3 million with any one institution.
Investment Policy Compliance
As of December 31, 2003
Attachment C
lO
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.
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 an), one institution.
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.
Medium-Term Corporate Notes:
a) No more than 10 percent of the par value of the portfolio.
b) Not to exceed 5 ),ears maturity,.
c) Securities eligible for investment shall have a minimum rating of AA from Mood’s and/or Standard & Poor’s.
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 CiDr’s policy to review the credit situation and make a determination as to whether
to sell or retain such securities.
None Held
None Held
None Held
None Held
Prohibited Investments:
a) Reverse Repurchase Agreements
b) Derivatives as defined in Appendix B of the Investment Po cy
Full Compliance
None Held
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