HomeMy WebLinkAboutStaff Report 1963City of Palo Alto (ID # 1963)
City Council Staff Report
Report Type: Informational Report Meeting Date: 8/1/2011
August 01, 2011 Page 1 of 3
(ID # 1963)
Summary Title: Investment Report
Title: City of Palo Alto’s Investment Activity Report for the Fourth Quarter, Fiscal
Year 2011
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 fourth quarter. 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 $373.0 million; in comparison, last quarter it was $361.7
million. The growth in the portfolio of $11.3 million since the last quarter primarily results from
the timing of cash flows. For example, one quarter of the City Sales tax receipts (“triple flip”)
and in-lieu vehicle license fee tax payments are received in January and May 2011 instead of on
a monthly basis. The May receipts are reflected in this report. The portfolio consists of $32.5
million in liquid accounts and $340.5 million in U. S. government treasury investments, agency
securities, and certificates of deposit. The $340.5 million includes $81.8 million in investments
maturing in less than two years, comprising 24.0 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 103.9 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,
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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 3.48 years compared to 3.59 years last quarter.
Investments Made During the Fourth Quarter
During the fourth quarter, $27.9 million of government agency securities with an average yield
of 3.4% percent matured. During the same period, government securities totaling $28.5 million
with an average yield of 2.8% percent were purchased. As higher yielding maturing investments
continue to be re-invested at lower interest rates and interest rates remain at historical low
levels, the portfolio’s yield is expected to further decline. The City’s short-term money market
and pool account increased by $10.7 million compared to the third quarter. Investment staff
continually monitors the City’s short-term cash flow needs and adjusts liquid funds to meet
those needs.
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 $199.3 million and expenditures will be $192.7 million over the next six
months, indicating an overall growth in the portfolio of $6.6 million.
As of June 30, 2011, the City had $32.5 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 $15.7 million will mature between July 1, 2011 and December 30, 2011.
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 fourth 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 fourth quarter was $2.9 million. As of June 30, 2011,
the yield to maturity of the City’s portfolio was 3.07 percent. This compares to a yield of 3.20
percent in the third quarter. The portfolio yield is expected to decrease in future quarters as
staff continues to re-invest higher-yielding maturing securities at lower interest rates. The
City’s portfolio yield of 3.07 percent compares to LAIF’s average yield for the quarter of 0.48
percent and an average yield on the two-year and five-year Treasury bonds during the fourth
quarter of approximately 0.55 percent and 1.88 percent, respectively.
Yield Trends
In the last 2 ½ years, the Federal Open Market Committee (FOMC) maintained the historical low
federal funds and discount rate at 0.25 and 0.75 percent, respectively. The consensus FOMC
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outlook is that the continued slow pace of the economic recovery, without significant
improvement in the labor market, requires maintenance of low interest rates to stimulate
economic activity. Improvements in businesses and household spending in equipment and
software are offset by the depressed housing sector. The FOMC is expected to maintain lower
rates for an extended period to create jobs and sustain the economy growth. Based on current
interest rates and FOMC monetary policy, the City’s portfolio’s yield is expected to continue to
decline to below 3 percent.
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. 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, 2011.
Resource Impact
This is an information report.
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 (PDF)
·Attachment B: Investment Portfolio, as of June 30, 2011 (PDF)
·Attachment C: Investment Policy Compliance (PDF)
Prepared By:Tarun Narayan, Senior Financial Analyst
Department Head:Lalo Perez, Director
City Manager Approval: James Keene, City Manager
Book Value Market Value
City Investment Portfolio (see Attachment B)377,953,419$ 392,694,824$
Other Funds Held by the City
Cash with Wells Fargo Bank 954,778 954,778
(includes general and imprest accounts)
Investment with CAMP (University Ave. Parking Garages)594,654 594,654
Petty/Working Cash 14,728 14,728
Total - Other Funds Held By City 1,564,160 1,564,160
Funds Under Management of Third Party Trustees *
US Bank Trust Services **
1998 Golf Course Certificates of Participation
Debt Service Lease Payment Funds 390 390
2002 Civic Center (Tax Exempt) Certificates of Participation
Reserve Fund 350,502 350,502
2002 Downtown Parking Impvt. (Taxable) Certificates of Participation
Reserve Fund 249,365 249,365
2002 Utility Revenue Bonds
Debt Service Fund 797 797
2009 Water Revenue Bonds (Build America Bonds)
Project, Debt Service, Reserve, Cost of Issuance Funds 29,202,379 29,202,379
2010 General Obligation (Library) Bonds
Cost of Issuance Fund 37,877 37,877
California Asset Management Program (CAMP) ***
1998 Golf Course Certificates of Participation
Reserve Fund 624,261 624,261
2001 University Ave. Parking Bonds
Reserve Fund 641,064 641,064
2002 University Ave. Parking Bonds
Reserve and Admin. Funds 3,235,398 3,235,398
2002 Utility Revenue Bonds
Reserve Funds 1,778,955 1,778,955
2010 General Obligation (Library) Bond
Project Fund 22,680,323 22,680,323
Total Under Trustee Management 58,801,311 58,801,311
GRAND TOTAL 438,318,890$ 453,060,295$
* 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.
*** CAMP investments are in money market mutual fund which invest in bankers acceptance, certificate of deposit,
commercial paper, federal agency securities, and repurchase agreements.
Fourth Quarter, Fiscal Year 2010-11
(Unaudited)
(Debt Service Proceeds)
Attachment A
Consolidated Report of Cash Management
City of Palo Alto Cash and Investments
1 General Investment Guidelines:
a) The max. stated final maturity of individual securities in the portfolio should be 10 years.Full Compliance
b) A max. of 30 percent of the par value of the portfolio shall be invested in securities with maturities
beyond 5 years.28.3%
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.
Plus two managed pool accounts which provide instant liquidity:
- Local Agency Investment Fund (LAIF) - maximum investment limit is$50 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.103.9%
d) Commitments to purchase securities newly introduced on the market shall be made no more than three (3)
working days 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
2 U.S. Government Securities:Full Compliance
a) There is no limit on purchase of these securities.
b) Securities will not exceed 10 years maturity.
3 U.S. Government Agency Securities:Full Compliance
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;Full Compliance
- the interest rates at which they "step-up" are known at the time of purchase; and Full Compliance
- the entire face value of the security is redeemed at the call date.Full Compliance
- No more than 20 percent of the par value of portfolio.18.1%
b) Securities will not exceed 10 years maturity.
4 Bonds of the State of California Municipal Agencies None Held
a)Having at time of investment a minimum Double A (AA/AA2) rating as provided by a nationally
recognized rating service (e.g., Moody’s and/or Standard and Poor’s).
b)May not exceed 10 percent of the par value of the portfolio.
5 Certificates of Deposit:Full Compliance
a) May not exceed 20 percent of the par value of the portfolio;0.045%
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.
6 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.
Attachment C
Investment Policy Compliance
As of June 30, 2011
Investment Policy Requirements
Compliance
Check
$81.8 million
$30.3 million
$2.2 million
Attachment C
Investment Policy Compliance
As of June 30, 2011
Investment Policy Requirements
Compliance
Check
7 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 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.
8 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.
9 Money Market Deposit Accounts Full Compliance
a) Liquid bank accounts which seek to maintain a net asset value of $1.00.
10 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.
11 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.
12 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 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.
13 Prohibited Investments:
a) Reverse Repurchase Agreements
b) Derivatives as defined in Appendix B of the Investment Policy
14 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
Full Compliance
None Held
Full Compliance