HomeMy WebLinkAbout2000-05-01 City Council (8)City of Palo Alto
City Manager’s Report
TO:
FROM:
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT:ADMINISTRATIVE
SERVICES
DATE:May 1, 2000 CMR: 236:00
SUBJECT:CITY OF PALO ALTO’S INVESTMENT ACTIVITY REPORT
FOR THE THIRD QUARTER, FISCAL YEAR 1999-00
This is an information report and no Council action is required.
BACKGROUND
The purpose ofthis 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 1999-00. 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~ 2000
The City’s. investment portfolio is detailed in Attachment B. Itis grouped by investment type
and includes the category of investment, 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 March 31, 2000.
The face value of the City’s portfolio is $288.4 million. The portfolio consists of $13.8
million in liquid accounts and $274.6-million in U. S. government agency securities. The
$274.6 million includes $158.4 million in investments-maturing in less than two years,
comprising 57.7 percent of the City’s investment in notes and securities. The current market
value of the portfolio is 98.7 percent of the book value. During the third quarter, bond yields
steadily increased over the second quarter. Because the City’s practice is to hold securities
until they mature, changes in market price do not affect what the City earns in real dollars.
CMR: 236:00 Page 1 of 4
The average life to maturity of the investment portfolio is 1.75 years. The market valuation
is provided by Union Bank of California, which is the City’s safekeeping agent.
The portfolio shows an increase of $4.4 million from December 31, 1999 to March 31, 2000.
Whereas rapid growth in the portfolio in prior years was generated by augmentation of the
Calaveras Reserve, recent growth in the portfolio results from strong property, transient
occupancy, and documentary transfer tax receipts.
Investments Made During the Third Ouarter
During the third quarter, $16.0 million of government agency securities with an average
yield of 5.8 percent matured. During the same period, government securities totaling $20.0
million with an average yield of 7.0 percent were purchased. The City’s short-term money
market and pool accounts increased by $0.4 million compared to the third quarter. While
the City has had few problems making investments in the third quarter, it should be noted
that the treasury and government agency securities market is becoming increasingly
competitive. Federal buyback of debt and budget surpluses have caused the treasury market
to contract and placed the government agency market in demand.
.Availability of Funds for the Next Six Months
Unlike many small and medium sized cities that sometimes have to borrow funds for 30 to
90 days, the normal flow of revenues from the City’s utility billings, sales and property taxes,
transient occupancy taxes and g~neral user fees is sufficient to provide funds for ongoing
expenditures. Projections, excluding the Palo Alto Medical Foundation (PAMF) land
acquisition to be used for a park and housing, indicate receipts will be $109.8 million and
expenditures will be $108.0 million over the next six months, indicating an overall growth
of the portfolio of about $1.8 million.
Acquisition by the City of PAMF-owned land and the Roth building (expected in late May)
will eventually decrease the City’s portfolio by $10.5 million. As of March 31, 2000, the
City had $13.8 million deposited in the Local Agency Investment Fund (LAIF) and a money
market account that could be withdrawn on a daily basis. By the PAMF transaction date,
staff will have approximately $17 million available for this purpose and to meet any other
obligations. In addition, securities totaling $32.0 million will mature between April 1, 2000
and September 30, 2000. 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 1999-00, 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.
CMR: 236:00 Page 2 of 4
Investment Yields
Interest income on an accrual basis for the third quarter of 1999-00 was $4. 1 million. This,
combined with first quarter earnings,, equals 79.6 percent of the 1999-00 interest income
budget of $15.4 million. As of December 31, the yield to maturity of the City’s portfolio was
5.97 percent. This compares to a yield of 5.91 percent in the second quarter of 1999-00.
The portfolio’s yield is expected to increase in the fourth quarter. The City’s portfolio yield
compares to LAIF’s average yield for the quarter of 5.85 percent and an estimated average
yield on the two-year Treasury bond during the third quarter of 6.52 percent. Customarily,
the City’s portfolio yield exceeds the two-year Treasury yield. The steady increase in
interest rates over the past six months, however, has temporarily caused the City’s portfolio
yield to lag behind two-year Treasury securities.
Yield Trends
The Federal Open Market Committee (FOMC) has raised rates three times in the last two
quarters and it seems certain rates.will be raised in the future. On November 16, the FOMC
raised the Federal funds rate (the rate financial institutions pay to borrow money from the
Federal Reserve Bank) from 5.25 percent to 5.50 percent. On February 1 and again on
March 21, the Federal funds rate was raised another quarter point each time, going from 5.50
percent to 6.0 percent. During this same period, the yield on U.S. treasury and agency
securities continued to rise.
Concerned with the economy’s exuberance, the Federal Reserve is expected to increase rates
by a minimum of .25 percent and as much as .50 percent on May 16. Moreover, given
emerging signs of inflation and the consumer’s reluctance to stop spending, additional
tightening of rates several more times this year is likely. The steady increase in fixed income ¯
instruments bodes well for additional interest income. As rates rise, however, there will be
a dampening effect on the economy and potentially on other City revenue sources such as
sales taxes.
In general, yields on the City’s portfolio should increase in the next several quarters.
Between current yields and the Federal Reserve’s disposition to inc{ease rates, yields on
short-term securities should be maintained at around 6.0 percent. In the long’term, however,
given demand for treasury and agency securities resulting from the Federal government’s buy
back of debt, the currently inverted yield curve, and the stock market’s volatility, rates will
fluctuate and potentially go down. As the demand and price for fixed income investments
increases, interest rates move in the opposite direction or lower.
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; bond proceeds, which the City itself manages in a separate
CMR: 236:00 Page 3 of 4
investment account; bond reserves; and debt service payments being held by the City’s fiscal
agents. The most recent data on funds held by the fiscal agent is as of March 31, 2000.
ATTACHMENTS:
A)Consolidated Report of Cash and Investments
B)Investment Portfolio, as of March 31, 2000
C)Investment Policy Compliance
PREPARED BY:Tarun Narayan, Senior Financial Analyst
Joe Saccio, Manager, Investments and Debt
DEPARTMENT HEAD APPROVAL:
CARL YEATS~
Director, Admirffstrative Services
CITY MANAGER APPROVAL:
Assistant City Manager
CMR: 236:00 Page 4 of 4
Attachment A
Consolidated Report
City of Palo Alto Cash and Investments
Third Quarter, Fiscal Year 1999-00
(Unaudit¢d)
Book Value Market Value
Ci.ty Investment Portfolio (see Attachment B)$287,227,555 $283,517,861
Other Funds Held by the Ci,ty
Cash with Bank of America
(includes general, imprest, and other accounts)
1995 Utility Revenue Bond Proceeds
Fidelity Fund - Treasury Class I
Petty Cash at City Facilities (as of 6/30/99)
Total - Other Funds Held By City
2,018,120
939,008
7,770
2,964,898
2,018,120
939,008
7,770
2,964,898
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
Civic Center Certificates of Participation
Reserve Fund & Lease Payments Fund
1999 Utility Revenue Bonds
Construction and Cost of Issuance Funds
California Asset Management Program (CAMP)
Golf Course Certificates of Participation
Reserve Fund
Total Under Trustee Management
663,936
801,066
5,029,557
715,010
7,209,570
$297,402,022
663,936
791,691
5,029,557
715,010
7,200,195
$293,682,953GRAND TOTAL
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Investment Policy Compliance
As of March 31, 2000
Attachment C
No more than 10 percent of the portfolio in collateralized Certificates of Deposit (CDS) of any
institution.
No more than 30 percent of the portfolio in Banker’s Acceptance Notes.
-No more than $5 million with any one institution. Not to exceed 270 days maturity.
No more than 15 percent of the portfolio in Commercial Paper.
- Not to exceed 180 days maturity. No more than $3 million in any one institution.
The following investments are prohibited:
-Reverse Repurchase Agreements
- Derivatives as defined in Appendix B of the Investment Policy
-Negotiable Certificates of Deposit
- Medium Term Corporate Notes
0.00%
0.00%
0.00%
None Held
No more than 10 percent of the portfolio in Farm Credit Securities.3.5%
No more than 20 percent of portfolio in callable or Multi-Step-up government agency securities.13.1%
Liquidity enough to meet one month’s cash needs.Sufficient
Liquidity
At least $50 million maturing in less than 2 years.!158.4 million
No more than 20 percent of the portfolio shall be in investments maturing in more than five years.0.00%
Market value of the portfolio will exceed 95 percent of the amortized cost basis of the portfolio.98.7%
Commitments to purchase securities newly introduced on the market shall be
made no more than three (3) working days before pricing.
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
-LAIF
No more than 2 percent of the portfolio in the Guaranteed Portion of Small Business
Administration Notes
Mutual Funds Shall:
- Attain the highest ranking in the highest letter and numerical rating prov!ded by not less
than two of the three largest nationally recognized rating services, or
- Have an investment advisor registered with the Securities and Exchange Commission
with not less than five years. Experience investing in the securities and obligations, and
with assets under management in excess of five hundred million dollars, and
- The purchase price of shares of beneficial interest purchased shall not included any
commission that these companies may charge.
No Exceptions
100%
Compliance
0,00%
Full
Compliance