HomeMy WebLinkAbout2003-07-28 City Council (15)TO:
City of Palo Alto
City Manager’s Report
HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
July 28, 2003 CMR: 371:03
CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT
FOR THE FOURTH QUARTER, FISCAL YEAR 2002-03
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 2002-03. 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, 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 June 30, 2003.
The value of the City’s portfolio is $351.3 million; in comparison, last quarter it was $341.3
million and at the end of last fiscal year it was $339.7 million. Growth in the portfolio of
$10.0 million since the last quarter primarily comes from Utility operations. Lower power
costs in the electric fund due to the abundant rainfall, for example, contributed to the
portfolio rise.
The portfolio consists of $13.1 million in liquid accounts and $338.2 million in U. S.
government treasury and agency securities. The $338.2 million includes $117.1 million in
investments maturing in less than two years, comprising 34.6 percent of the City’s investment
in notes and securities. The current market value of the portfolio is 105.1 percent of the book
CMR: 371:03 Page 1 of 4
value. Because the City’s practice is to hold securities until they mature, 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 2.82 years. At the end of last fiscal year, the average life to
maturity was 2.27 years.
Investments Made During the Fourth Quarter
During the fourth quarter, $34.4 million of government agency securities with an average
yield of 4.6 percent matured. During the same period, government securities totaling $57.0
million with an average yield of 3.2 percent were purchased. The City’s short-term money
market and pool account decreased by $12.5 million compared to the third 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.
Availabili _ty 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
$155.1 million and expenditures will be $148.6 million over the next six months, indicating
an overall growth of the portfolio of about $6.5 million.
As of June 30, 2003, the City had $13.1 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 $27.5 million will mature between April 1, 2003 and September
30, 2003. 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 fourth quarter of 2002-03, 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 fourth quarter of 2002-03 was $4.2 million while
the total for the fiscal year was $17.4 million. This total is 8.1 percent less than what we
received last fiscal year even though the portfolio has increased by 3.4 percent. The decline
in interest earnings results from interest rate declines over the past year. As of June 30, 2003,
the yield to maturity of the City’s portfolio was 4.75 percent. This compares to a yield of
4.91 percent in the third quarter of 2002-03 and 5.39 percent in June 30, 2002. The City’s
portfolio yield will decrease further in the first quarter of 2003-04 as a result ofreinvestment
of maturing securities at lower interest rates. The City’s portfolio yield of 4.75 percent
compares to LAIF’s average yield for the quarter of 1.77 percent and an average yield on the
CMR: 371:03 Page 2 of 4
two-year and five-year Treasury bond during the fourth quarter of approximately 1.41 percent
and 2.53 percent, respectively.
Yield Trends
The Federal Open Market Committee (FOMC) decreased the federal funds rate by 0.25
percent on June 25, 2003. The last rate cut was eight months ago in November 2002. Since it
began cutting the federal funds and discount rates in 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 June 2003 meeting, the FOMC adopted a "balanced" outlook on the economy. This
outlook reveals an expectation that the upside and downside risks associated with sustaining
economic growth is equal. However, more recent comments by the FOMC chairperson have
been more positive about economic growth due to the rising stock market, tax rate cuts, and
low interest rates. The FOMC intends to leave rates at the current level, but is open to the
possibility of a further rate cut. The City can expect declining yields on its portfolio given
current and potential interest rates, and as long as the economy remains soft.
To somewhat offset the steady and dramatic drop in interest rates, staff has been purchasing
securities with longer maturities. As stated, the average life to maturity has increased from
2.27 years in 2001-02 to 2.82 years in 2002-03. In addition, staff has purchased the
maximum amount of callable securities allowed under the City’s Investment Policy. This
strategy, possible given the size and stability of the City’s portfolio, has kept the City’s yields
relatively strong. Nevertheless, as older investments mature, overall yields will fall
significantly in future quarters.
Funds Held by the Ci~ 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, certificate 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, 2003.
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of June 30, 2003
C)Investment Policy Compliance
CMR: 371:03 Page 3 of 4
PREPARED BY:
TARUN NARAYAN f
Senior Financial Analyst
DEPARTMENT HEAD APPROVAL:
CARL YEATS
Director,;trative Services
CITY MANAGER APPROVAL:
Assistant City Manager
CMR: 371:03 Page 4 of 4
Attachment A
Consolidated Report
City of Palo Alto Cash and Investments
Fourth Quarter, Fiscal Year 2002-03
(Unaudited)
Book Value Market Value
City Investment Portfolio (see Attachment B)$358,455,527 $376,874,138
Other Funds Held bv the City
Cash with Bank of America
(includes general, impresL and other accounts)
Pe~,AVorking Cash (as of 06/30/03)
Total - Other Funds Held By City
2,007,750 2,007,750
11,305 11,305
2,019,055 2,019,055
Funds Under Management of Third Party Trustees *
(Debt Service Funds and Reserves)
US Bank 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 Impvt. Certificates of Participation
Impvt. Fund, Cost of Issuance, Reserve Fund
192,828 192,828
350,876 350,876
2,489,417 2,489,417
1999 Utility Revenue Bonds
Construction Fund 249,808 249,808
2002 Utility Revenue Bonds
Debt Service Account 18,473 18,473
California Asset Manao_eruent Pro~am (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
738,598 738,598
1,337,720 1,337,720
18,960,461 18,960,461
12,168,458 12,168,458
Total Under Trustee Management 36,506,639 36,506,639
$ 396,981,221 $ 415,399,832GRAND TOTAL
*These funds are subject to the requirements of the underlying debt indenture.
** U.S. Bank investments are in ruoney 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.
0
0U
0
ATTACHMENT B
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000000000000000000000000000000000000000000000000000000000000000000
000000000000000000000000000000000
000000000000000000000000000000000
Om~OmOOOOOO~OOOOOOmOOOOOOOmO00000
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 o o o o o o o o o o o o o o o o
~~ZZZZZZZZZZZZZZZZ
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investment Policy Compliance
As of June 30, 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.
Investment exceeding 10 years maturity that were authorized under investment policies prior to FY O0-1
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 shal! 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 (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 Compliance
0.03%
13.78%
Full Compliance
$117.1 million
$12.3 million
$0.8 million
105.13%
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
Full Compliance
19.50%
0.03%
None Held
None Held
None Held
Investment Policy Compliance
As of June 30, 2003
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 ! 02 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 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.
None Held
None Held
None Held
None Held
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
Full Compliance
None Held
Full Compliance