HomeMy WebLinkAbout0152.095'.
City of Palo Alto
City Manager's Report
TO: HONORABLE CITY COVNClL
FROM: CITY MANAGER DEPARTMENT: FINANCE
DATE: FEBRUARY 23, 1995 CMR: 151:95
SUBJECT: INVESTMENT ACTIYITY REPORT -DECEMBER 1994
REOUEST
The purpose oflhis report is to provide Council mth inf<JCllllltion 00 the staIUS of the
City', investment pordOIio.
RECOMMENDATIONS
This is .ninfoonarlonal report and no Council oction is required.
POUQ'IMPUCATIONS
1 his report does DOt propose any ebanges to existing Cry polk-ies.
EXECUTM SUMMARy
Iaferes( Earaiaes
Interest rates have risen several limes during the last year in response 10 Federal Reserve
Bank in<:reases in the Federal Funds rate. As. result, the rate of return 00 the City',
partfoIi<> has been hiib<r than expected. The overall rate of return projec!ed foe 1994-95
has increased !ium S percent to S.1 pe=l Staff projects that to!aI portfolio interest
income .... ill increase from a target of $8.9 million 10 $9.7 milliou foe the fis<:al year, an
increase of U million.
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Market Valae
The marlcet value of !be City" investme!lt portf.oIio bas decreased to 97 percenl of the
purchase pri<:e, whicb amoor.ts to • differen<e 0( $4.9 mlIlion betw..,n the purchase pri<:e
and market value of !be securities in the portioIio. The c!e<linc in marlet value is
attributed 10 the rue in interest rates experienced over !be last )'eat and is • oonnaI
occummce when interest rates m..--rease. Many investment portfolios are afreI:Ied by 51)<.11
increases, mainly becllUSC securities must be sold at • loss 10 meet cash flow needs.
Howev .... the City portIOIio's liquidity is mat<~ 10 projected cash flow needs; and in
the next slx mooths approximately $51 million of lbe portI01ro wiil be maturing. There
is 00 need 10 sen securities 10 meet financial oNigatioos. The City maintains I sln!egy
0( t>L')'ing securities and boI<fmg \hem u.-.tilthe'.r stated maturity. 5<) the entire face value
of the securities ,.ill alway. be recovered.
The last time the market value o(the portfolio dropped siBJlilka.'ltly was in early 1989.
In March oftbat year, the mariel value als<> decrUled to 91 percent of!be purchase pri<:e;
and the difference l:etween the purcbase price and madel value was $1.7 millioi1.
Eventually, interest rates dedilled; ... -wI during the early 19900, the markel value of the
portlOlio showed • ..,bstaniial merea."" ever 1"=!!a5-, pri<:e. Sin<:e interest rates are nc(
expected 10 decline in "\lie Dear future, staff is investing in sbOOer maturities that are nc<
impacted as much by inleresl rate in~ This strategy will help reduce the difference
between purchase price and market value and .Im provide • good rale of return. If
interest rates <:antinue 10 rue, it wm also allow staff 10 reinvest at the higher rates as
funds mature.
Sta" Ipyesfment PoollD~rt.ses die Ma1imllm I.vestment Amoullt
The State of California's Local Agency I"vestment Fund (LAlF) raised the maximum
investment limitation from S 15 million to S20 millioo. per account effective &ep;ember I,
19'i4. Staff plans 10 take advantage ()f!he increased investment limit, wben needed, to
manage the City', sborI-term investment requirements. Since the City's investment policy
alIo ..... stafflo invest up 10 LAIrs maximum investment rl!Ilitation, the investment policy
00es DOl need to be revised.
L~ONMDITALA§E$ML~
~ is 00 need lOr an environmental assessment lOr Ibis report.
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cnY MANAGER Al'I'ROV AI-:
oc:
City of Palo Alto
inveStment Acthity
D<=mber 1994
ctJIUlENT POllTFOUO:
The par value 0( Ihe City', pcrtfolio is S 172
million, 1IIhic1l consists 0( $114 million, or 66
pe.'CeU. l'Il>Illrin& '111thln two yea..... Most of
Ihe investments, $153 DlI11ion, or 89 pera:llI.
., .. in United States iOYCIIllIl<DI securities. The
current martet V>Iue 0( Ihe portfolio is 97
perce.!II of cost and "'" avenoge life is 1.6 years.
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DECEMBER:S lM'ESrMENrsAIVD
YIELD TRENDS:
SU1f invested $2 million in UUF. bringing the
10iaI in~ in lAIF 10 S11 milLion. At Ihe
end 0( Decembor. LAlF bad • ~ly yield of
5.' percenL The Federal Rl=oerve Bank raised Ihe
Federal Fnnds note aoother one-balf of. percent,
making Ibis Ihe sevenlh increase in Ihe last year.
MCSI ecooomists p"'dict _Ihe Federal Reserve wiD wait and mooitor Ihe effects 0( Ihe increases
befoR mating any additional moves. Typically, it
!akes about • year lor Ihe impac .. of rale increases
10 be retlected in Ihe ecooomy. In Ille meantime
nIes have decreased slightlJl with "'" news !bat Ille
economy is starting 10 show olgns of. slow dc_.
Staff will c;:onUnue monitoc £ates and place
investments in short-term oecurities until Illere is •
more stable me enviromnen<.
rnporod br. YOWl .. Deportment
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llVTEllEST INCOME:
Interest income on all accrual basis foe
December was $766.557_ For the first six
months of 1994-95. _ incOOl< IOIaIed $4.(i
million. or 52 pera:nt oflhe 1994-95 bOOget of
$8.9 million. 1'be overaD "II" of reIwlI year
kHI ... 00 an accrual basis is 5.59 pera:DI .
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