HomeMy WebLinkAboutStaff Report 10009
City of Palo Alto (ID # 10009)
City Council Staff Report
Report Type: Informational Report Meeting Date: 2/11/2019
City of Palo Alto Page 1
Summary Title: Investment Activity Report
Title: City of Palo Alto Investment Activity Report for the Second Quarter,
Fiscal Year 2019
From: City Manager
Lead Department: Administrative Services
Background
The City’s investment policy requires that staff report to Council quarterly on the City’s
portfolio composition and performance compared to the Council-adopted policy; discuss
overall compliance with the City’s Investment Policy; and provide recommendations, if any, for
policy changes. In addition, staff will also provide a detailed list of all securities and report on
the City’s ability to meet expenditure requirements over the next six months. T his report is to
inform Council of the City’s investment portfolio performance as of the second quarter ending
December 31, 2018 and to disclose staff’s cash flow projections for the next six months.
Discussion
The City’s investment portfolio is summarized in Graph 1 and detailed in the Investments by
Fund report (Attachment B). The Investments by Fund report groups the portfolio’s securities
by investment type and includes details of 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.
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The par value of the City’s portfolio is $527.1 million; in comparison, last quarter it was $511.2
million. The $15.9 million portfolio growth since the last quarter primarily results from timing
of cash flows. Compared to the first quarter of the fiscal year, there was an increase in property
tax receipts totaling $15.4 million; debt service payments decreased by $3.9 million (majority
paid in Q1). In addition, $10 million in securities matured in the second quarter and (discussed
later in this report) $37.6 million of securities were purchased.
The portfolio consists of $25.6 million in liquid accounts and $501.5 million in various
investment types as detailed in the below Table 1. The investment policy requires that at least
$50 million be maintained in securities maturing in less than two years. The portfolio includes
$157.8 million in investments maturing in less than two years, comprising 29.9 percent of the
City’s investment portfolio. In addition, the Investment Policy allows up to 30 percent of the
portfolio can be invested in securities with maturities beyond five years; actual at the end of
the second quarter is 28.6 percent of the portfolio.
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Table 1:
Up to 1
Year
1 to 2
Years
2 to 3
Years
3 to 5
Years
Over
5 Years
Portfolio
Total *
% of
Portfolio
U.S. Treasury 9.50$ -$ -$ 10.50$ -$ 20.00$ 3.8%
U.S. Agency Bonds 45.5 37.2 34.4 76.9 112.4 306.4 58.1%
U.S. Municipal/ State Bonds 5.6 5.3 24.0 26.2 36.7 97.8 18.5%
Negotiable Certificates of Deposits (NCD)12.3 4.2 8.8 23.3 1.5 50.1 9.5%
U.S. Corporate Bonds 5.5 7.2 7.0 0.1 - 19.7 3.7%
Supranational Organizations Bonds - - 1.0 6.5 - 7.5 1.4%
Liquid Accounts (LAIF & Fidelity)25.6 - - - - 25.6 4.9%
Grand Total 104.0$ 53.8$ 75.2$ 143.6$ 150.6$ 527.1$ 100%
% of Portfolio 19.7%10.2%14.3%27.2%28.6%100.0%
* $18.9 million or 3.6 percent are in investments that directly support Environmental, Social, and Governace (ESG) activities
(aka "Green" Bonds)
Maturities - Par Value (millions)
Investment Type
The current market value of the portfolio is 98.4 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,
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 3.71 years compared to 3.60 years last quarter.
Investments Made During the Second Quarter
During the second quarter, $12.0 million of securities with an average yield of 1.3 percent
matured. During the same period, per Table 2 below, government securities totaling $37.6
million with an average yield of 3.5 percent were purchased. The expectation is interest rates
and City’s portfolio’s average yield will continue to rise. The City’s short-term money market
and pool account decreased by $9.7 million compared to the first quarter. Investment staff
continually monitors the City’s short-term cash flow needs and adjusts liquid funds to meet
them.
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Table 2:
Up to 1
Year
1 to 2
Years
2 to 3
Years
3 to 5
Years
Over
5 Years
Portfolio
Total *
% of
Purchase
U.S. Agency Bonds 1.5$ 1.5$ 9.4$ 12.4$ 33.1%
U.S. Municipal/ State Bonds 0.5 2.4 1.9 10.7 15.5 41.1%
Negotiable Certificates of Deposits (NCD)2.2 2.2 5.9%
Supranational Organizations Bonds 1.0 6.5 7.5 19.9%
Grand Total 2.0$ -$ 3.4$ 12.1$ 20.2$ 37.6$ 100%
% of Purchase 5.3%0.0%9.0%32.1%53.6%100.0%
* $0.9 million or 2.3 percent are in investments that directly support Environmental, Social, and Governace (ESG) activities
(aka "Green" Bonds)
Investment Type
2019 Q2 Security Purchases - Par Value (millions)
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 $276.8 million and expenditures will be $267.7 million over the next six
months, indicating an overall growth in the portfolio of $9.1 million.
As of December 31, 2018, the City had $25.6 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 $41.4 million will mature between January 1, 2019 and March 31, 2019.
Based on the above and staff’s revenue and expenditure forecast for the next six months, 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 second quarter, staff complied with all aspects of the investment policy. Attachment
C lists the major restrictions in the City’s investment polic y compared with the portfolio’s actual
performance.
Investment Yields
Interest income on an accrual basis for the second quarter was $2.9 million which is $0.36
million or 14.3 percent higher over the same period last year. As of December 31, 2018, the
yield to maturity of the City’s portfolio was 2.29 percent. In the second quarter, LAIF’s average
yield was 2.2 percent while the average yield on the two-year and five-year Treasury bonds was
approximately 2.80 percent and 2.88 percent, respectively. The rising interest rate is expected
to increase the portfolio’s yields. Historically, the City’s portfolio yield has outperformed the
two-year and five-year Treasury bond rates, however with the recent rapid interest rate rise
that is no longer the case; this is an expected occurrence. As the City’s laddered portfolio
investments mature in the next year or two, funds are expected to be reinvested in higher
yielding securities. Graph 2 shows the City’s yields and interest earnings for the past 17 years.
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5.9%
4.3%Palo Alto's Yield
4.5%
2.9%
1.8%
2 Yr. Treasury
5 Yr. Treasury
LAIF
2.2%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
0%
1%
2%
3%
4%
5%
6%
Int. Earnings
(Millions)Yields
Fiscal Year Quarters
Graph 2: Yields and Interest Earnings
City’s portfolio duration is 3.71 years.
Yield Trends
The Federal Open Market Committee (FOMC) raised the federal funds and discount rates to
2.25 and 3.0 percent in December 2018, respectively. In the past year, both rates have risen by
0.75 percent. The FOMC restated its view of a robust economy and maintained a similar
outlook when they met in November 2018; this includes strengthening labor market with
inflation and unemployment remaining low. Business fixed investment spending has moderated
while household spending has grown. The FOMC expects future rate increase to be gradual and
dependent on the economic outlook. Though the continued expectation is rates will rise,
factors that could keep a lid on rate increases include: low inflation, weak wage growth , and
domestic and global economic uncertainties.
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
US Bank and Wells Fargo. A description of the City’s banking relationships can be found in City
Council Staff Report ID # 7858. 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
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agency securities, and repurchase agreements. The most recent data on funds held by the fiscal
agent is as of December 31, 2018.
In January 2017, the City established a Section 115 Irrevocable Trust (Public Agencies Post-
Employment Benefits Trust) administered by Public Agency Retirement Services (PARS). This
fund it not governed by the City’s Investment Policy, however, is discussed in this report for
administrative ease. It is the City’s intent to prefund pension costs and began to address the
Net Pension Liabilities (NPL) as calculated by Governmental Accounting Standards Board
Pronouncement No. 68 (GASB 68). The Section 115 Trust offered by PARS has five portfolios
from which to choose in making investments of City funds. The City has selected the
“Moderately Conservative” portfolio which is the second most conservative. Additional
information on this trust can be found in City Council Staff Report ID #7553. Through
November 30, 2018, principal investment contributions of $5.48 million have grown to $5.52
million. As of November 30, 2018, the net return since inception (May 2017) has been 0.69
percent.
Fiscal 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
• Attachment B: Investment Portfolio
• Attachment C: Investment Policy Compliance