HomeMy WebLinkAbout2004-04-19 City Council (2)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:APRIL 19, 2004 CMR: 228:04
SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT
FOR THE THIRD 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 third 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 March 31, 2004
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 pol~folio as of March 31, 2004.
The par value of the City’s portfolio is $357.8 million; in comparison, last quarter it was
$357.7 million. Growth in the portfolio of only $0.1 million since the last quarter reflects the
impact of weak tax revenues (e.g. sales, transient occupancy).
The portfolio consists of $21.0 million in liquid accounts and $336.8 million in U. S.
government treasury and agency securities. The $336.8 million includes $115.7 million in
investments maturing in less than two years, comprising 34.4 percent of the City’s investment
in notes and securities. The current market value of the portfolio is 103.4 percent of the book
value. Because the City’s practice is to hold securities until they mature, changes in market
CMR:228:04 Page 1 of 4
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 2.79 years.
Investments Made Durin~ the Third Ouarter
During the third quarter, $29.7 million of government agency securities with an average
yield of 5.2% percent matured. During the same period, government securities totaling $32.5
million with an average yield of 3.7% percent were purchased. The City’s short-term money
market and pool account decreased by $2.8 million or 11.8% compared to the second quarter
of 2003-04. 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
$142.5 million and expenditures will be $141.0 million over the next six months, indicating
an’ overall growth of the portfolio of about $1.5 million.
As of March 31, 2004, the City had $21.0 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 $35.5 million will mature between April 1, 2004 and September
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 third 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 third quarter of 2003-04 was $4.0 million. As of
March 31, 2004, the yield to maturity of the City’s portfolio was 4.36 percent. This
compares to a yield of 4.48 percent in the second quarter of 2003-04. The City’s portfolio
yield will decrease further in the fourth quarter of 2003-04 as a result of reinvestment of
maturing securities at lower interest rates. The City’s portfolio yield of 4.36 percent
compares to LAIF’s average yield for the quarter of 1.48 percent and an average yield on the
two-year and five-year Treasury bond during the third quarter of approximately 1.66 percent
and 2.99 percent, respectively.
Yield Trends
The Federal Open Market Committee (FOMC) has not changed the federal funds rate in
fiscal year 2003-04. Since it began cutting the federal funds and discount rates in January
CMR:228:04 Page 2 of 4
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 March 2004 meeting, the FOMC continued to maintain 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 that inflation is
under control and the national economy continues to improve but job growth has not kept
pace. However, the job growth report in April for March 2004 was significantly higher than
anticipated. The sustainability of March’s job growth remains to be seen. Silicon Valley
continues to lag the national and state economic recovery. The FOMC is expected to leave
rates at the current level in the foreseeable future, but if job growth continues the FOMC is
expected to increase rates. The City can expect declining yields on its portfolio given the
FOMC’s current low interest rate policy.
To somewhat offset the steady and dramatic drop in interest rates, staff continues to purchase
securities with longer maturities. The average life to maturity has increased from 2.27 years
in 2001-02 to 2.79 years in the third 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 March 31, 2004.
ATTACHMENTS
A)
B)
c)
Consolidated Report of Cash and Investments
Investment Portfolio, as of March 31, 2004
Investment Policy Compliance
CMR:228:04 Page 3 of 4
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
TAR,~C~ARAYAN
SeniO6r Financial Analyst
CARL YEATS/" .
Director, Adm/nistrative Services
EMILY HARRISON
Assistant City Manager
CMR:228:04 Page 4 of4
Attachment A
Consolidated Report
City of Palo Alto Cash and Investments
Third Quarter, Fiscal Year 2002-03
(Unaudited)
Book Value Market Value
City Investment Portfolio (see Attachment B)$365,650,038 $378,084,103
Other Funds Held by the City
Cash with Bank of America
(includes general, imprest, and other accounts)
Petty/Working Cash (as of 03/31/04)
Total - Other Funds Held By City
4,356,866 4,356,866
10,195 10,195
4,367,061 4,367,061
Funds Under Management of Third Party Trustees *
(Debt Service Funds and Reserves,)
US Bmlk Trust Services **
Golf Course Certificates of Participation
Construction Fund & Lease Payment Fund
2002 Civic Center Certificates of Participation
Lease Payment Fund, Reserve Fund, & Cost of Issuance
2002 Downtown Parking hnpvt. Certificates of Participation
Impvt. Fund, Cost of Issuance, Reserve Fund
6,948 6,948
350,352 350,352
1,390,665 1,390,665
1999 l_ltility Revenue Bonds
Construction Fund 250,719 250,719
2002 Utility Revenue Bonds
Debt Service Account 33,940 33,940
California Asset Management Program (CAMP) ***
Golf Course Certificates of Participation
Reserve Fund
2001 University Ave. Parking Bonds
hnpvt. Fund, Cost of Issuance, Reserve Fund
2002 University Ave. Parkiug Bouds
hnpvt. Fund, Cost oflssuauce, Reserve Fund
2002 Utility Revenue Bonds
Construction Fnnds and Reserve Fund
716,428 716,428
932,363 932,363
8,965,858 8,965,858
11,549,563 11,549,563
Total Under Trustee Management 24,196,836 24,196,836
GRAND TOTAL $ 394,213,934 $ 406,647,999
*These fimds are subject to tile requirements of tile underlying debt indenture.
** U.S. Bank investments are in money market nmtual funds that exclusively invest in U.S. Treasury securities.
*** CAMP investments are in money market mutual fuud which invest in baukers acceptance, certificate of deposit,
commercial paper, federal ageucy securities, and repurchase agreements.
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ATTACHMENT B
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Investment Policy Compliance
As of March 31, 2004
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.
Investment exceeding 10 years maturity that were authorized under investment policies prior to FY 00-01.
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) Market value of the portfolio will exceed 95 percent of the amortized cost basis of the portfolio.
d) Commitments to purchase securities newly introduced on the market shall be made no more than three (3)
working days before pricing.
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).
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) Beginning FY 00-01, securities will not exceed 10 years maturity.
Investment exceeding 10 years maturity. Authorized under investment policies prior to FY 00-01.
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
Moody’s or Standard & Poors.
d) For non-rated banks, deposit should be limited to amounts federally insured (FDlC)
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 ofthe 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 Moody’s or Standard and Poor’s.
c) Not to exceed 180 days maturity.
d) No more than $3 million with any one institution.
Full Compliance
0.01%
14.47%
Full Compliance
$115.7 million
$20.2 million
$0.8 million
103.39%
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
17.22%
0.01%
None Held
None Held
None Held
Investment Policy Compliance
As of March 31, 2004
Attachment C
10
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 any 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 ofthepar value of the portfolio.
b) Not to exceed 5 years 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 City’s policy to review the credit situation and make a determination as to whether
to sell or retain such securities.
Prohibited 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
None Held
None Held
None Held
Full Compliance
None Held
Full Compliance