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Home My WebLink About2004-07-19 City Council (8)City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE: SUBJECT: JULY 19, 2004 CMR: 358:04 CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT FOR THE FOURTH 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 fourth 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 June 30, 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 portfolio as of June 30, 2004. The par value of the City’s portfolio is $368.9 million; in comparison, last quarter it was $357.8 million and at the end of last fiscal year it was 351.3 million. Growth in the portfolio ors 11.1 million since the last quarter is from a combination of lower utility power costs and the City’s continued efforts to constrain expenditures. The portfolio consists of $25.4 million in liquid accounts and $343.5 million in U. S. govermnent treasury and agency securities. The $343.5 million includes $111.8 million in investments maturing in less than two years, comprising 32.5 percent of the City’s investment in notes and securities. The current market value of the portfolio is 100.7 percent of the book value. Because the City’s practice is to hold securities until they mature, changes in market CMR: 358:04 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 2.90 years. At the end of last fiscal year, the average life to maturity was 2.82 years. Investments Made During the Fourth Quarter During the fourth quarter, $26.1 million of government agency securities with an average yield of 4.9 percent matured. During the same period, government securities totaling $32.8 million with an average yield of 4.2 percent were purchased. The City’s short-term money market and pool account increased by $4.4 million or 21.0 percent compared to the third quarter of 2003-04. Investment staff continually monitors 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 $145.7 million and expenditures will be $142.9 million over the next six months, indicating an overall growth of theportfolio of about $2.8 million. As of June 30, 2004, the City had $25.4 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 $24.7 million will mature between July 1, 2004 and December 31, 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 lnonths. Compliance with City Investment Policy During the fourth quarter of 2003-04, staff complied with all aspects of the investment policy. Attaclvnent 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 2003-04 was $4.0 million while the total for the fiscal year was $16.3 million. This total is 6.3 percent less than what the City received last fiscal year even though the portfolio has increased by 5.0 percent. The decline in interest earnings results from interest rate declines over the past year. As of June 30, 2004, the yield to maturity of the City’s portfolio was 4.29 percent. This compares to a yield of 4.36 percent in the third quarter of 2003-04 and 4.75 percent as of June 30, 2003. Even though interest rates are slowly increasing, the City’s portfolio yield will decrease further in the first quarter of 2004-05 as a result of continued reinvestment of maturing securities at lower interest rates. The City’s portfolio yield of 4.29 percent compares to LAIF’s average yield for the quarter of 1.44 percent and an average yield on the two-year and five-year ClVIR: 358:04 Page 2 of 4 five-year Treasury bond during the fourth quarter of approximately 2.74 percent and 3.92 percent, respectively. Yield Trends The Federal Open Market Committee (FOMC) increased the federal funds rate by 25 basis points to 1.25 percent in June 2004. This was the first rate increase in the last four years. At its June 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 economic growth remain equal. The FOMC is expected to slowly increase the federal funds rate over the next few years. While the City can expect declining yields on its portfolio in the near future, it can expect yields to increase gradually if the FOMC continues to raise interest rates. Funds Held by the Ci_ty 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 Progrmn (CAMP). Bond funds with U.S. Bank are invested in lnoney 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, colnmercial paper, federal agency securities, and repurchase agreements. The most recent data on funds held by the fiscal agent is as of June 30, 2004. ATTACHMENTS: A)Consolidated Report of Cash and Investments B)Investment PortfoliO, as of June 30, 2004 C)Investment Policy Colnpliance PREPARED BY: TAR~~RAYAN Senior Financial Analyst ~CMR: 358:04 Page 3 of 4 DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CARE YEATS / Director, Adm?istrative Services ....... --E@LY HARRISON Assistant City Manager CMR: 358:04 Page 4 of 4 Attachment A Consolidated Report City of Palo Alto Cash and Investments Fourth Quarter, Fiscal Year 2003-04 Book Value Market Value $377,027,463 $379,548,849City Investment Portfolio (see Attachment B) Other Funds Held by the City Cash with Bank of America (includes general, imprest, and other accounts) California Asset Management Program (CAMP) University Ave. Special Maintenance/CIP Funds Petty/Working Cash (as of 06/30/04) Total - Other Funds Held By City Funds Under Management of Third Party Trustees * (Debt Service Funds and Reserves) 1,848,858 .1,848,858 500,029 500,029 11,695 11,695 2,360,582 2,360,582 US Bank Trust Services ** Golf Course Certificates of Participation Construction Fund & Lease Payment Fund 2002 Civic Cen~er Certificates of Participation Lease Payment Fund, Reserve Fund, & Cost of Issuance 2002 Downtown Parking Impvt. Certificates of Participation hnpvt. Fund, Cost of Issuance, Reserve Fund 1999 Utility Revenue Bonds Construction Fund 2002 Utility Revenue Bonds Debt Service Account 1995 Utility Revenue Bonds Debt Service Account California Asset Management Program (CAMP) *** Golf Course Certificates of Participation Reserve Fund 2001 University Ave. Parking Bonds Impvt. Fund, Cost of Issuance, Reserve Fund 2002 University Ave. Parking Bonds Impvt. Fund, Cost of Issuance, Reserve Fund 2002 Utility Revenue Bonds Construction Funds and Reserve Fund Total Under Trustee Management GRAND TOTAL 14,008 14,008 350,788 350,788 1,361,804 1,361,804 164,154 164,154 18,026 18,026 66 66 716,264 716,264 933,077 933,077 8,086,357 8,086,357 11,571,437 11,571,437 23,215,982 23,215,982 $ 402,604,027 $ 405,125,413 *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. ~ o 0 0n ATTACHMENT B oo o o o oo o o ooSS o o o o So o o oooo o o~oooooo~£~oo~oo ooooooooo o o o o o o o o 6 5 ~ 5 5 6 ~ 6 d d ~ 5 5 d 5 5 d 5 qqqq£qqqqqo o o o o o o o o o o o o o o o ~dddJddd~ddd~dd~d~ddd~d o ~#n ~ L~ 00000000000000000000~0000~O0 O0 oooooooooooooooooooooooooooooooooo o o o o o £ o q q q o q ~ q q q q £ q £ q £ q q q q q q £ ~ £ q ooooooooooooooooooooooooo~ooooooo~ooooooooooooooooo~°°°°°° 0 -- o oo o o ooooo ooooooooooooo o o o o o o o o o o o o o d d d d d d d d d d d d d d d d d d d dooooooooooooooo oooooooo~oooooooo oooooooo oooooooooooooooooooo 888888888888888888888888888 oooooooooooooooooooooooooooooo .o ~ ~ n~ ooooooooooooooo oooooooooooooo~ooooooooooooooooooqqqqq~qqqqqqqqooooooooooooooooooo o o o o o o o oo o o o o ~~~~~ooooooooooooo~ooooooo~oooooooooo~oooooooo~ooooooo~ooo~ooooooooo~ oo oo ooooooo oooooooooooooooooooo .R .R .R .R .R .~ .~ .R .R .~ .R .R .R .~ .~ .~ .~ .~ .~ .~ .R Investment Policy Compliance As of June 30, 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 Wior 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 investme~t policies prior to FY 00-01. Certificates of Depositi 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 (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 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 Colnpliance 0.01% 14.64% Full Compliance $111.8 million $24.6 million $0.8 million 1 O0.66% Full Compliance Full Compliance Full Compliance Full Compliance Full Compliance Full Compliance Full Compliance 18.79% 0.01% None Held None Held None Held Investment Policy Compliance As of June 30, 2004 Attachment lO ll 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 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 Mood’s and/or Standard & Poor’s. d) No more than $5 million of the par value may be invested in securities of any singl.e 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 Full Compliance None Held None Held Full Compliance None Held Full Compliance