HomeMy WebLinkAbout0542.094--'~-
City of Palo Alto
____ <.:'!~_~anager:'s Rep()r!
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: ~l.NANCE
DATE: DECEMBER 19, 1994 CMR:542:94
SUBJECT: INVESTMENT PORTfOLIO STA TV,
Thi' purpo'Se of this TepDrt is to tnfi)JITI Council ')n the ~;.JTU$ c~f (h~: City's in\eJ.tmt:.lt
'Portfolio. In light of the recent r,e\\'~ reports. on lh.;: i!i\,.;stm(m pr\.-\h.l~,rl.-' of th.-: Onngc
County ~>ol~ staff has expanded the mUDthly ii1"r;'~lmt.'nt ;jcti"'ir), tCr',lft 1() rr('.yidc more
information on th.-:. City's im·estlntnt roli.:y :mJ flJ,J,I:-t:l'I.'".
RECOMMENDAT10Nioi
This is. an rnformational rer(1rt 31\d no Council a;':~~(ln \.::l Te'~\l;,,-·d.
POLlO' Th1l'L1CA,:H9NS
This report dcxs not propose any changes to ex~sllng City po:icie<.;.
EXECUTIVE SUMMARY
j!@cknouud
On a monthly basis, staff prepares an investment activity report to provlde Council with
information em monthly investment activity. Due to recent events regarding the (>range
County pool, staff i. expanding the monthl), repor". to provide additional inlOrmation on
the City's investment poliCY and investment portfolio status.
Staff reviews theCh)"s investment polic), and pll:~nL" it to Cmmcil for approval annually
during the budget process. The City's investment policy focuses on safety, liquidity and
yield, in order of importance. Consequently, (he policy timit3 inyestments to those that
are virtuaUy risk :free with predktable rates of return Stat)' adheTl.·s to a practice of
buying securities and holding them until th.eir stated rnatwity. Thi_" rr;,lC{ic~ :.:ontributes
to the City's conservative investment posture.
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Reverse R()!!!Il'_bau Aereemenls
Recently, concerns have arisen about the use of reverse repurchase agrcem..:nts (uve~e
repcs) by various investment funds a.~d pools. A reverse rcpo is an agreement by the
investor (e.g. local agency) to post a security it owns as collateral, and a bank or dealer
tempoouily exchanges cash for this collateral. for a specific period of time, at an agrec<l
upon interest rate. In the public "",tor, reverse rcpos rna)' be used to offset t""'POrary
cash flow requirements in place of borrowing funds Dr selling securities. However. the
funds received from reverse repos can be ll~ to speculate on the direction of in~crest
rates. In other words~ the fund.c; could be u'ied to try to gain 2; greater retllrn than the cost
of borrowing. Furthermore, portfolios can be Icvcrdged b)' using tnt: security purchased
v,rith the "borrowed fhrids" as colla~cral for additional funds to invest. The' City's
investment policy (Attac,hment A) explk.itly prGhib~t5 the us.e of rc\'ei~,\! repUE" Staff hil'io
contulUalJy excluded revers.: repos from the list of allowable securitie'; fi), ir.\'e~tmenL due
to their volatility and higher Ie-vel of risk. Staff has nOl, 3.nd win nnL kyer .. g~ tJlt
portfolio to specu_1ate on interes! rate t1Uc.:tu3Iions.
;Qerivatives
Another group of securities recently under scrutiny lS derivatiyes.. A oerh;'ative is 3
financial instrument created from. or whose value depends on (is th.-rind from), the value
of one Of more widerlying assets or indices. The tenn "derivative" refers to jr:~tfllmeI1t'S
or features, 5w;:h as coliatlTaJized mortgage obligations. forwards, futures, currency 2ild
interest rate swaps, options) caps and flooT'S. The City's i.nvestment policy doe,; net allow
for investments in this type of securities.
The term "derivatives1
! could be liberally interpreted to ;nclude caHablt and step-up
s""unties, because they contain what are knoYoTI as "fflIbedded option,". Callable
securities are defined as fixed interest rute government ag::m::y securities, that give t..'le
issuing agency the option ofretuming the invested funds. at a specifh:: point in tlni;;. Step
ups are govenunent agency securities on which the interest rate increases ("steps·up") at
preset intervals. Step-up securities also bave Ii callable option that aHO\\'s the, issuing
agency to return tile invested funds at a preset interval. Unlike the derivatiyc products
mentioned above, callab!es and step-ups have standard options thai are created by the
government agencies issuing the security. In any event, the City's investment polley
limits the percentage of callables and step-ups the portfolio rna)' hold to 10 percent for
each category. Currently, the portfolio contains 9.4 percent in caUable and 5.9 percent
in step-up S€CllritiC's.
Paj:e 2 or 5
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Slate l.ggil Acero Investment Fund
As is. the case with nUllY other !(~ municipalities and districts, staff invests in the
State's Lucal Agency Investment Fund (LAIF). The investment policy limits the City's
invo>"tmertt in LAIF to $15 milHoll and prohibits investment in any county pools. Tne
State Tro:asurer's Office produces monthly reports detailing LAlF's investment activities
and holdings, which are reviewed by City staff to ensure that slated practices are
maintained. Also, LAIF's investment policies a..'1d practices are overseen by a review
board composed of member. of the business community and local government. LAIF is
limited to investing no more than 10 percent of the portfolio in reverse repos. and these
must alwa)'S be matched in maturity to the ",-investment. Currently, LAIF has
apPiOximatel), 8 percent of its portfolio in reverr.e repus. Government Code Section
16429.3 states that IImoney placed \\'ith the State Treasurer for deposit in LAIF by cities,
cOlJnties, cr sp<.-cial dist!icts shall not be subject to impoundment or seizure by liEy state.
officis! or state agency." Ac..::ording to State Trcasurt'r Kathleeil Brown, this. would
prevent the State Pouj from ever taking action such a.'" that \vhich is n:po;1<;d to be
contemrjat~d by Omnge County.
AdditiooaJ See.uri!l:
To further ensu."1:" th-t: safety of the portfolio, staff' carefully analyzes non-government
lssued securitie5 allowabie. for investment, and Ijmil~ investments in these instrument ... to
top-rated financ!.'11 institutions. In additlon, sLafThas implemented other internal controls.
For example. the person responsible for in .... ~sting funds must have authorization from a
higher level manag:r to complete investment transactions. Also, no securities can be sold
without the prior approval of the Director of FinanCi!; and. the nwnber of staff members
who can inVe!>i City funds i5 limited and must he approved by the Drrcctor.
A'i part of the recommendations resulting from the Organizational Revi.ew, the current;y
vacanl Treasury Man::sger position will be eliminated, and this function is now being
shared by the Assistant Finance Director and a Treasury Senior Financial Analyst. Stan"
wiU continu.: to monitor the impact of this decisLon, to ensure that the reduction in
su.ffmg and any cQnsequent i!ICrease. in risk for the City's investment purtfolio are
acc.eptable.
Ligoidity Regui~ments_
'111e investment policy requires that there be liquidity enough tl1 meel one month's ca.;;h
needs and that at least $50 milHon in investments have a term of 1"wo years or less. Since
the Ci!:y's investment practice is to buy securities and hold lItem until their stated
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maturit)" staff must invest ""ith future cash needs in mind. [n addition, staff must
nW.ntain suffident funds in yet")' short-term investments (under six months) to cover
e:xpc::nd.ttun:, Sotmo ofthc instruments used for short-tenr~ investrnents are money market
mutual ftmds. c-Ollateralized certificates ofdeposir. bankers' acceptances, commercial paper
and LAIF.
Ov«alL the City !l\!lintains • liquid investment portfolio. The funds invested in LAlF ($7
milJion) can r.e witi-.dnrnll at an)' ti:mc. in addition. $29.5 mtltion, or 17.5 percent of the
portfolio, ,,-jji rT'.41ture 'within the neXl sh.: m01 .... ths. The portfolio's average life is only i ,8
years.. ·~1th $109 miliion, or fA perc.ent of the portfolio, maturing """ithin 1\vo years, By
maintaining tilis I iqu.id position, staff eruure-s: al.at there are sufficient investments maturing
!o {;-:)\'('T t;:o.:pendilure-s on aJ: ongoing ba.:;ls, Swff has be-en succe;;;sful in managing cash
flow i(" ITI(?e'l City exp;::nditures.. and lhere has not been 311.)' need to sell a s~curii)' for
Hqllidit), r~M,,:nlS.
Yirig
At1er staff has \.'!isurea tf)e ::.atety and liquidiry criteria specified in the inve$tmcnt policy
a.rt satisHed, it then fct.,.;usc<; on yieid. The overall rate of return of the-portt'o!Lo is
COf!lpared to LAW and ct"rtair. U.S. treasuries as a performance benchmark, Staff dnes
not try tv emulate returns of other fund", or portfolios. The investment policies and
practices used by statT o\'-:r the years havt' provided the necessary pmtt:ttion of principal
wi tIl better than average returns.
Carrelll Portfolio
Slliff predominantl), invests in U.S. government securities. As the at'.ached (Xtoller ]994
Inv<stroent Activity Report shows (Attachment B), $157 million, or 92 perocnt of the
Si71 million portfolio, is myestffi in government securities. The remaining funds are
invested as foHows: $7 million in L4.1F, $6 million i.n collateralized certiticates of deposit
and $100,000 in a money market mutual food. Staff has dccted not to invest additional
funds in certificates of deposit, banKers acceptances, commercial paper or money market
mUTUal funds, c\'l!n thougb iovcslment in these securities is permitted by the Investment
Policy. This is because recen{ intere3t rates on these securities have been barely above
U.s. government 5-eCurities, not offering sufficient compensation for the e:\"posure to the
additional level of risk.
Due to th:: s.ix Fe-derat Rest'T\,t' Board increas.es. in the Federal Funds r3te, interest rates
ha\'e risen considerab!) in the last eight months, As a result. the market value of the
Pug, 4 01 5
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sc:curitie:s held in the City's ir.vestma'lt portfolio !la.\ declined. a normal c .. :currencc
whenever interest t1ltes rise. The market \aJue of the Ciry'~ portfolio ha.'i declined: to 98
percent of the cost of the =urities Howe\'CI', ,ioce the Cit) maintains 3 'buy and hold"
stmegy, upon moturity, for <zco ,,,,"rit) hdd in the City', portfolio, the entire principal
amount will be =overe<i, In addition, sinu the Cit) has ad<qu.ile liquidity, there is no
need to seU sc:curi ties before their stated maturity,
nsc,u, IMP ACf
There is no fiscal impact generated h~ thlS rep,}rt
EN\'jRONMENIALMi'iE3.S;I1 E ,';1
'D1cre is no need to an :::ndr'..-'llm(,j1t,,1 ,D,~(·,.<rTlt"f~! k!f ihi" rq'i-'r':
AITACHMENT~
A) City of Palo Alta StJtement of [nYC'5lm('ni Pc.lic~
B) Investment A~ti\,lty Report ~ October i99-'
PREPARED BY: Lala Perti .. rinancjaJ Analyst
Melissa Cavallo, Assistant Finan(:c Director
DEPAR1MENT HEAD APPROV AL:
CTIY MANAGER APPROVAL:
cc: rJa
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AHACItEIH A
CITV OF PALO ALTO
Sttlt:ement of Investment ~cliC)'
ItJ'TfSQpm;rION
As a charter eity, Palo Alto operates its }X"Oled idl~ cash inveetme.."lt6
under the pr..ldent iuves~or rule and in conformance yit.b. california. li!w.
InveetU'.ento !Ire miLde with the judgement and care, u ... '1der 'thE! cicC"UmSt.ancea
then prevailing, W'hich investors with prudence. discretioI"., a:"ld
intellige. ... ce would rn.a.ke considering the safety of t.bei~ capiLal as well
as prcbable income.. This affo:;:-ds the City a broad Upi"ctI"U.'"f1 of in.".est'1!lent
opportuniti'<!s, so 101".g as the :)nv-estrr,ent is clp.~i:1-'.!d prudent ar.j i:s;
d.l1owanle und~:r current legi~lation Df the Stato cf' C"aLfol'nld .)rd '..-i~-:
charter of the City of Pa~o Alto.
f;;;lo Alto strives to w..al.ntain th'" l<':vel of .invest:-::ent: "t a.ll id2.o:' f,-,r.·.:Lq
as nea~ 100 percent as posfOibl.e, thro'lgh daj_ly ~n.j pro:i ecl~j ':3.13[j ;: le',,'
dets:rminations. Investments are r:'_acie so tfl,<o;t. r:-..aturiti,,,,, ;,.:.t<=h or prf>ceQ':'
cash ueeds -:>f the Cit~!.
PHILQSQ?ID'
The basic premise underlj·ing Palo Alto's investr:'.ent philoscphy is tG
ineur.e that s1.lfficient money is al .... ays av.ai l.able t<.' me€t Cllrrent
expendi tures .
The City ia able to take advantage of the. relati'.rely lar~e reservoe
balancfI!B maintained by ita utilities, which allo· .... it to taka advantage
of the ger~eral tendency of the market to 9r-ovide a. higher ret:.JT.n for
longer-term investments (known as llq'..;.idit.y preference!. Up to 10
percent of the portfolio rr-.ay be in investments mat.l.1ring in more thdn five
years. Co~eequently, in che long run, the City should ~ ... -er-age a. hi9her
total return than moat citiea without such reserves to invest.
The economy, the money markets, and various financial ir.S'i:it.utions tsud.
as. the Federal Reserve System) are "~onitored carefully 1:0 dBSE'SS the
p:t:obable course of interest rates. In a market with inc=-easing int.erest
rates, the City will tend to invest new cash in securl.t:ies with
relatively shorter maturities. This will allo .... · the funds to be available
for other investments when the interest rates are higher.
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A!JTHQRI2IP I!(VSSTM:gNT PBBSQNNE"
Idle cash management and investment tr~~5actions are the re8pon8i~i11ty
cf the Finance Department.
The DeJ:lartment of Finance is under the <.:ontrol of the Director of
Finatlce, who i9 accounta.ele to the City Manager. The depart.ment iB
<:-ompoQed of the di viaions of Administration, Acc:ounting, Treasury,
Budget, Purchasing, and Real Estate, as set forLh in Sections 2,OB,180
through 2.08.1~O of the palo ~lto Municipal Code,
The Treasury Division is under the supervision of a '!'reasury Manager, 'Who
i& accountable to the Director of Finance, The duties of the Treasut-y
Manager include managing the City's portfolio of treasuzy investments,
remaining a~countable for the City' /0 t.rea.suq' balance, deve10ping aud
monitoring t.he City's cash flow mQd€l and de\"e}opir!9 long-ter.-r, revenue
and financing strategies and forec~sts.
A Financial Analyst :=:€ports to the TreasU!:-y Mar~,'lgp.:r _ 'lee Fill2l.Y;cial
Al'..alyst assists the Tr~asu1:"-l' Man:lg'2'r i.n tb~ pun:hCisc a,:,;d Sale of
secu:r:i.ties. The Financial Al"1al.yst alt~o prepar~s tr,t' rrnnthli leFor:-t, a'ld
dailY records. all in'lest:.m-=_at transactioTleo as to t.ho:'! type af iDvef;tr;'1~nt..
amQunt, yield, and maturity. <::aElh flow projecti0n~ are prepare.d <;is
needed,
The Director of Fir.aIlce (;Ir designeo2! ie. authorized to ma~e all
transf\ctions allowGd by the Statement of Investment Policy.
may authorize the: Treasu!"'i Ma_uager or Fina..ci.a.l An.3.1yst to
luvp.stments within cl~arly specified paramet~rs.
.irNeetment
He or she
entel' into
In all circumstances approval from the Director of Finance is required
oofore selling securities from the city's pOT.tfolio, The Treasury
Manager and the Financial Analyst may also transfer no more than $S
nti.llion in a. day from the City: s: general account to anyone financial
institution, without the prior approval of the Dir-ector of Finance,
No other person has authority to make Investment transactions without the
written authority vf the Finance Director,
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rfpRs OF ] NYKS1MRN1"
Inve8tments are limited to the following media:
1. Securities of the u.s. Gov~rnment, or its agencies
2. certificates of Deposit (or time Deposita} (CD)
3. Negotiable Certificates of Depoait (NCD}
". 8an.icer' 1;. Acceptance Notes (SA)
5. Connercial PQ~r
6. Local Agency InvestTI\E'nt Fund (LAIF)
7. Short-~erm Repurchase Agreements (REFOl
13. Cit.y of Palo Al to Bonds
9. Money Market Ac-counts j and
It). Hutl.l.ai Funds. -..which a!'~ ILli.ted essentially to the above
investments and further uefined in note 9 of App~ndlx A.
;'.npendiY. ;.. provides a r:1ore det.ai led d~scrlptiQn of each investment
·.·ehicl~ and its sec1.lr:ity and liquidity fe;:;.tl.!re..s. ~~03t of the City's
shorr. ·terr, lllV<3st.I-'£:nts .... 'ill be in seCllritia:.s .... ·hi.ch pay principal upon
::-.ar~1..2ri::y, ·"hil .. ~ l.orlg"terr:J ill'Ji;!st~ent6 i"'ilY b~ in t;ecurities whicJ"l.
p'3'ric-:5ically .("epa.t' ~)TincipD.l a.~ "">":\1 as it1t.~!:E"st. ~ost of the ~ity's
in .... ~.'lt.r:1ents 'Will ~ at a fixed rate, HQ\ievf!:r, !:)Qn:e of the investments
;;-,::1}, D'E!" at a variable rate.
If:!YfSTMFJiJ CEITisI:"
Cr~tp.rja !Cl:' selecting investments are {in orde:' of impon:.ance):
1. Safety.
2, r.iquidity, a..d
3. Yield.
Qae pt Broker, And Qealers
The r'inanc~ Department maincains a list e,f acceptable brokers and
aealers. Any broker or dealer rnur.t have at laast three years experience
operating with California munic:ipalities. maintain an inventc!ry of
t:raciiI::g securities of at leaact $10 million, and be apP'::'-.Jved by the
Finance Director before being added to the City' 8 list of approved
brokers and dealers. A. broke:: or dealer will be removed from the lioSt
should there develop a history of problems, [i.e., fail to deliver
securitj.ell as promised, failure to honor transactions as quoted, 01·
failure to provid.e reasan<'lble: information).
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RcyiOW and Rcpgrtjnq 9P lny"tmentft
Koothly, ~ Finance Department ~ill revie~ performance in relation to
the Council-adopted policy. ~nthl)', the Department wilJ report to the
Council, in a manne~ approved by the Council, its pe~for~~nce in relation
to this poliq' a.nct ~'Cplain il11Y deviatio:1 from the policy and
recc:.ae..r:'ld.8.tiuos for cha..cgelS, it a...,y -The Council will revie ..... thi s
policy annually as part of the Budget F'rQce.9l! All changes .in policy
PItWIt ~ $pproved by the CD'.l11c.il pr.lor to impleInE!lltation.
Speed":c Inyestment Strat.egy
Depending upon the Cir;~"s tinan.:::..~t s-itu.atiQ!l and conditions in the. ""oney
~d;.ets, the in·,;e~tr.'lent 6trates-'l ,..ill change to achieve the appropriate
balance or safety, liquidit.y ar,d yield.
Have-r~o:n in .:.;p<>r,aUon f-::n-at. least t.hre€' years, with
Fositi.',,~ earnings fC'I at least three of the past four
~ . .l3rteIs of operatio:); and
RepoI:t equit'; in exC'e~s of J, t'-tHc€'nt ot a!Js€ts; and
P.eport sc!'.eduled itens not ill excess of 1.5 percent of
.lil5oetS.
o No more than )0 p€Icent of the portfoliu in negotiable CDs.
No more tr~l $2 million with ~~y one institution.
No negot.iable CDs with maturities beyond 90 days.
An Lustitu~ion must meet the SamE safety teats as
collateralized CDs.
c No !",ore than 30 percent of the portfolio in Hanke.l"s
Acceptance Notes.
No more than $5 million with anyone institution.
o No more than lS p+~r('ent of the pon.folio in COlmercial Paper.
No ~0re tharl $3 nillio~ with anyone institution.
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o Limit invelStments exc1'usLvely to thOiJe stipulated under
types of investments: \spe:cificaU }', t.here ... .ill l:-e no
1nv~etment8 involving ReVE'Tl!le Pur-chase t\SI'eem€'rtt:E=) _
o No nev F!lrm Credit Securities ..
o No more than 2. perce.rot of t.he portfolio in th~ G\.l.a.riU\t~ed
Portion of Sma.ll Business Adl'!'.inistracio:l Notes.
Q No more th.A.n 15 percent of portfolio in Iofut.ual F"'..l1lds.
o No more than 10 percent of portfolio in csll<l.ble agency
eeC'uxitiel:l:.
o Nt> more than 10 percenc of port fo.:. io U1 g;) .. rf2!T .. :~'e!,j!... .!:;ency
Mul-ci ~Step~'.!p securi ti. • .::s
Ligui 9i ry
Any inyest~~ilt mu."t. b·: .::va11.!atO'::1 Dn its :-:n~:'C" t'·"JJ: 3.1~,~ 1 "·"".::C rc;t,->
risk. If the security :C':..lsc. be l'.'T,)lci:;.t,"d, it. r-1 J' r.,),;,-: .j "'~,<l; .;_.:n-:,,12'_ d...:'\d
n~ed to be .sold at a 1013:9, t"..nd if inter.;>st I,;-;t.:''5 i.'"H.:rc'::'R'_', c.r,c '.'all.::e ot
an investment may go down,
The market rate risk is very 10'001 for u.s, a3'en('ie~ dnd BA$ sir:::e tl",ere
is ar, active r.arket ltl these ;:lecur}.ties, .\L is r.K~rp difficult to Lind
a purcr.aser of UCDs or crn1l~rcial paper, ar.d I"",c,:;t CC,s ca.l'"'J,Ct be
Llquid..ated ..... ithout a substal-.tial lOGS of ~nteresf-. tlsl..:ally. thp ]or,ger
term the invesement the larger degree of int~rest rate ri~\. It interes~
rates incz-ease, it is: likely that the lcng-t.~rm inveHt'W"OtS W'Culd
d<ecrease in value, This iB prlTradly a factor tar-eecut:it.ies .... h.ich ha. ... e
I'I'IaturitiE:8 in fO.-XceS8 of two yeArs. since alrr:.)st allot tl1e irl':e~t.ment6
held by the City of Palo Alto with maturities in ex.ce~s. of t. .... c y~ars are
u.s. government !Jecuricies, it is poBsible to maintain fairly ac:curac.e
records on t.he ma.rket value. of t.hese securJ.tiee and &h()lol the rr.ar'lte-t VCllu1l::
and. potential loss to inte:rest rate -risk. This risk is a part of all
long-term investment port-tolio9 a.nd does 1'l.Ot become an irrpc.rl-ant factor
unless there i$ a need fo.l.' the cash, and the lose (if any) must be
realized.
The iollo .... ·ing are liquidity constraints:
o Liquidityenougb to meet one ~~nth's cash nee~~.
o At least $50 million ;'"'HuTiri.q in less n-,Ol.!1 2 :,.eaI>~
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No more than 20 percent of the ponfolio shall ~ in
inveRtmenta maturing in more than five yeat"s,
Any eeq-u::rity purchased ...,ith a Il1at.urity greater than 10
years may pay principal as well as interest on a pe~iodic
bacis.
Hilrket value of the portfolio will exceed 95 percent of thE'
cost b&sis of the portfolio. Should the ratio fall bElo~ 95
percent the Finance Department will rest.r.ict futUT~
investments t.o those maturing in one yeaX' or lesl> .:md/or
liquidate securities as deemed financially prudent ul"ltil the
ratio is achieved.
Cc,:rmitl'!lents to purchas€ new !Jccuritie-s shall );e r:'.ad~ nCl "',ore
tban thr"!-e 1,3, working G.a.y~ ~f(')re. pri'=\.n-;f,
Yield, whicb Ie; dBfin€d as the return OD. an investc:ent. -,,'i 11 :>~ thr ,-hi L"(l
criteria ~or investm~nts, after BafiOtj' and 1 iq'.l~d).ly.
Whenever p088~ble, the City w1.11 obtain tht-,="e or nt8'I"e bids en the
purcha~e or sale of ~ecuritieB an~ take the higher yield on purchase or
high.e-r price on sale. Thill rule ... ill not apply to r:.e\.l issues .... hich are
pUl:chaaed at market no more than t.h~ee \3) working days betole pric.i..r.g,
LAIF, Clty of Pal() Alto bonds, money ~.arkel; a.:.:counts or r'rrJtu3.1 fur:..J.s,
which shall be evalu(lted se'Pat'"dte.ly"
Adopted by City Council October 22, 1984.
Monthly reporting effective Janu;ary 1985.
~~~d and Adopted DY City Council June 2~, 1995.
Amended by City Council December 2. 1985.
Amended by City Council June 23, 1986.
Amended hy City Council June 22, 1987 .
.An'lended by City Co'meil AUg'.lst 8, 1988
Amended by City Council November 28, 19ae.
~~nded by City Council June 26, 1989.
Amended by City Cowlcil May 14, 1990.
Amended by City Council June 24, 1991.
A~ded by City Council June 22, 1992.
Amended by City Council June 23, 1993.
Amended by City Council November 18, 1993.
A.'T\ended b~' City Council J\me 20, 1994.
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APPENDIX A
EXPLANATION OF ALLOWABLE INVESTMENTS
1.. 0 s r.gyemmept As-Vey $eCBrj po leg. IJ. S. Government Agency
Obligations include the securities of th~ Federal National Mortgage
Association (FNMA), Federal Land B~~~s (~~). Federal Intermediate
Credit Bank& (PICB), Banks for cooperatives, Feceral Home Loan Banks
(FaLSJ, Go~~~~nt National Mortgage Association (GNMA) , Federal
Home Loan Mortgage Corporation (.FHL.'I4C). Student Loan Marketing
Association (SJ..MA), small IIuainesl'i Ad.mir~istration (SBA) and
Tennef;see Va.lley Authority (TVA). Federa,l Agency securitieD are
deDt oblig~tion& that essentially reault from lending programs of
the Government. Federal agency securities differ from other types
of ~ec\Jrit.ies: as .... ell as a.mong the~.aeb.)es. '1'h~ir charact.e:r:ist.it:a
o:iepend on the is:;uing agency. It. i8 possible to distinguish three
types of issues: C~) participation certificates (po:;..led
secu:rities), (P) Certificate of Interest (pooled leans). (e)
3.
r.otes, bonds, and debentures,
.e.).;plicitly backeci by tb~
Th~ s~C'..lritie~ of a few agenci'~s are
full faith a..I1d cred:it. ot the U.S.
GoveUlrtEmt. All issues 0 however, have defact.o backir:g tro~ the
fede:!:al government., ana. it is highly llI'.likely th<'it the governr:;ellt
'Would let any agenc,:y default on its obligations.
Certifl cate.s pf nep9Rit A Cert:ificate cf Deposit (CD) is ,1 receipt
for funds deposited in a bank, savings bank, or se.vings and loan
association for a specified period of time .at a specified :rate of
inte:::esl. Denominations are $100,000 and up. The first $100,000
of a certificate of Deposit is gua.ranteed by the federC!ll Deposit
Insuta.nce Corporation (FDIC) if the deposit is w.~th a bank or
savings bank, or t~~ Savings AB6ociation Insurance ~xnd (SAIF) if
the deposit is with a savings and loan. CDs with ~ face value in
excess of .$100.000 can be col1aterali~ed by U. S. GoverT".ment Ageli.cy
and Treasury Department securities or first mortgage loans.
Gove~~t securiciss must be at least 110 percent of the face value
of t:he CD collateralized in excess of tt..e first $l{IO,.aOO. Tne value
of first mortgages must be at least 15D percent of the face value
of the CD balance insured in excess of the first $lCO, OeD.
Generally. CDs are issued for more t.han l<l days and the maturity can
be selected b}' the purchaser.
NesQti"bJe CertHicate of Deposit Negot~able Certificat.es of
Deposit (NCDs) are u8ually supported only by the strength of the
issuing institutivn, but can be sold at any ti::ne and thus provide
liquidicy.
... B-a,nker§ I Acceptance p. 83nker's Acceptonce is <:\ negotiable time
dr~ft or bill of exchan9~ dra~ on and accepted by a commercial
bank. Acceptance of the draft irrevocably obligates the bank to pay
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tbe bearer t.he face amount of the draft at rr-..aturity. 8As are
uaually created to finance the import and expor': of goods, the
shipment of g~ within the United Statea and storage of readily
.. rketable staple commodities.
In Qve;::-10 years or usage in the United States, there has been no
known ilU!ltar.ce of p:rir:cipal loss to a.'1Y investor in BAs. In
aOdition to the guarantee by the accepting bank, the transaction is
ident.ifi~d .... ith a specific t:omnodity. warehouse receipts verify
t.hat 'C.he pleeged c:cnmodit:"es exl-at. and, by definition, these
~itie8 are readily marketable. The sale of the underlying
SoodB generates the necessary tunds to liquidate lh~ indebtedness.
SAs enjoy maIKet.abiUty since the Federal R~.s1!rvc 2ank is authori1ed
to b'.lY ard sell pri~ BAs ... ·.ith rraturilies of up to nine months. The
federal !<eser,'~ H~.n:.:; enters into rep·..l.tchase agreements in the nOl1nal
-:','ur$-:! of C~'f':n r..arket ot:erati011S ·.,:ith BA dealers.
Eh-s ",-r·," soi.a .,n_ a discoU.'1t fro;>r· p3 r . AA .?cceptaoC'e is Ued to a
speci fi.c lea,"' t L'H"."'V.'~ ic~\ .. t.h~!:~fore, I;he a:Tount dJ':d rr..a.turity of tr.~
accepLa~c~ is !~xed.
5. (·QjITi'Ift'·\~i31._~ C.~,~rcial paper" r.fjtes 8r~ uns€c'...ll.:ed prc'mis~ory
~oteg of u',jl..lF>tri",l carpOI-dt:ions, utilities, and ban}: holdi.ng
c~anie.s" Interest is discounted from. ?",r a.....d ca]<..'ulated using
actual n'Z.ber Q( days ~n a 360-day year. The notes arc in bearer
form ...,itll IT.aturitie;:: ft'OT; one to 270 days t:;elected by the purchaser,
an" der~~inat.iar;s ge:-.erally start at $100, C'OO.
S-eccmda.ry tT.a!":<.e:: fe.!' cc"w:~:rcl.2>.l papet' "'"CItes and an
~ note prior to maturity.
There is ,3. small
tnvesto!" rr.ay se 11
CCllW:\ercial pap:!r notes are backed by unused lines: of credit from
fll&jor banks. S"JI:t"oe iss'...Ier' s notes are insured .... hile Borne are back-ed
b).' in-evocable lett'i!rs of credit frOO", major banr..s. State law limits
a City to investrr.ent9 in United States corporations having as:'!ets
in excess of th'E: hundr-ed mi Ilion dollars with an lOA" or higher
rating for the is,uer' 8 dei>antures. Cities may not invest more-than
30 percent of idle cash in commercial pape~.
€. ~ agency Tpy,:.strr"n~ Fupd P"'jI""lpd ne"Q,;it.... The Local ]\,gency
Investtl"lent F-' . .l.mi [LA!F) ..... aG establishf!c by the state to enable
treasurers to place funds in a pool for investmencs. ?hc City is
limited to an investment of the amount allo ..... @d by LAIF (currently
$15 millioni _ UIP has been part.icular1y beneficial t.o those
jurisdictions with small portfolios. Palo A1to uses this fund tor
5hort~tern. investr;enl-, liquidity, _lnd Jde-l0.
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______ . ______ ~ ____ .~ ~ ____ ~.~_,..·N· ........ I ... IIII.IIII ...
? a:p'ircba,c Aarecoopc' A RepurchaGe Agreement (REPOS.) H! not i!Ii
8ocuxity. but a contractual arrLr.gement bet~~en a financial
institution or dealer and an investor. The agre~ment nOrMally can
run for one or more days. The investo~ puts up funds for 6 certain
number of ~y8 at a 6tated ;dcld. In return t,...~ Investor take9
title to 4 gi~~ blc~k of se~iti~B ~ collater31. At ~turity the
2~euritie8 lire repurchased iL""l..d the funds repaid. plus interest.
UBu.all~, amounts a.re-S500.000 or mc')re, b'JC some repurcha,sp'
agre-ecaent8 elm be !rn'.all er ,
8. Krm'Y Max,_t A.ccgunts M-on~y l'oarKet Df!po.sit. ~c-co-....... tQ ar.e. Ir..a.rket
senaitive bank acC"ourrts, which art" <I',faila..ble to de-p...")sito!'"s a~ any
time without penalty_ The !..r.t~rpst tate is ge_ner'aliy cc::rnp-a.rabl~ to
rates or. 1!'.iO~.e_y r:-At';';'et ;:;, ... t\!3.1 f'ill,ia. (hcuqh any individual bank's
rat~ t:-.ay be higher or 10-.1.'. Tr:e~e .;lccC'un~ti 3.re inS\lTed by t.he
Federal L'epcsi': InS'..l!:'lI;~':: :DIForat.lc:-, ,;::r the 5-?l'.-ir,gs AE~ociatio:n
In$u::anc~ F:.lr".d.
9.
hI rJiversi!:iE"d ,.a,,~,::e7."":J;_ C.:;>'Ti"l:-,.es, 'lS c":fi.rei b',' sEcticill 2J.7,)1 ~
of t1:o3. Re\'enu~ ,::u-"j j'aX3~:! C'" c'';,:·:ie. Tc.' l;<> .-:'19:' L] e t(',r ~ n\'eElt"'~nt,
thee~ ll.'.!".ds. ['",1,.;C:Oc.'
a. Attain the higr.ef.t raniong i'l tte highe£.t lett.;~r al:a nu..~rical
rl!!: ing prcvided by r,Qt. less tha.n t...-o of the three h.t",:,:.est
Aatiouall>' recogn~zc::.j !"atir!g 5e!.·Vl.Ces; or
b. Have an imler.t;;.eI"lt.; ad\';\.s':n s:eJist~l:ed \ ... ith t:b.~ S .. :-.:-urir.ies allL:l
iixcr.,,",nge C~iss i'-':l .... :i th r,0t less th.dl' five years e.xperienc.s
inv'!!'sting in the se>;C1Jritiea ~d cbliga.~_i"nf::; as authorized b~'
subdivisions <aJ to 1m). in.:lusive, of .'iection 53601 of. the
California Govern.~~nt Cod.e, and loIith assets under manag~ment
in eXCf!!8S o! fiv~ hl.iI1dreo I":'.illi-::m dollars; ;u}d
c. Iuvest solely in those 8ecurities ~.d obligations auth~rited
:;;y Sections 53601 a..-..d 536..35 of t.he ca1ifo:t.'"r'.ia Gove~t Code.
Where the Investment policy ot the Cit]' of Palo Alto may be
~re restrictive t.han the State Code, the Policy authorizes
i.nve.stments ~:n O".utual tur.ds .... hicb ahall have minirr.al
investment in sec"'J.r-itie~ other ... ise restricted by the City's
po!icy. M,:i.ilimal :invest'!:,-ent is c:!:'"fined as less than 5 pel"Cent
of ehe m'J.tu ... l f~'ld po:-;:.folio: and
d. The purcr..aee price of shares: ot befj~fic:ial inc.er~st purchased
shall not include any ClAl'"rni6sicm th3.t these companies may
chaI-g@.
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ATTACHM;:;>T !l _________ _
Citv of Palo Alto
InveStment Activity
Ocwber 1994
CURJIENT PORTFOLIO:
The par value of the City's portfolio it. $171
milllori. which consists of $109 milHon. 0, 64-
perccru, maturing wiilim two years. Most of
the investments" $)58 million, or <n percent,
are in United StaI.es govermnerd. '!.eCUrities., The
current market value of the portfvlio is 98
percent of cost and the average life is. 1.8 yeai$,
Year·to--Date I1"!H·;~.ma.t Incr)me
OCTOBER'S INVESTMENTSAJIiD t1ELD
TRENDS:
Staff invested $3 million in a goverrunenr agency
security, with a maturity of two y'!a..1"S and a rate (.>f
return of 6.7 per;;;ent Interest r"tes rose again in
October. as flnancial markelS contin<Jed to ~huild
in." the Fedenl Funds 1<"", inc= by tile Federal
Reserve Board. As inteI1!:.t rates continue (0 rise.
the spread between the portfolio rale of return and
the two-year US Treasury widens This s.pread
results from purchases. made hefnee Ihc: inttTest fate
increases, with lower r~les of return. lowerLng the
overall portfolio rate of rerum.
Typr of (nl'estmftlts
~,~,,,,~,,~ ~'o_,~
~~I""~
..:.' ..... ,.'tI"' .. ;.oo~
(LlC~~,:~
U,F L:aI,~")...-·.......:
',S.T.~",,!:S.~_~,""""'"
ISTfRESTISCO.\fEi
[rH¢,"c:5t ill~\.im<! lin :HI .L'.:C: u"j bJ ~i:;. f~1;
.xplcmr,..;r \'.h $797.970 Fm ~h" fH<;i f,)UI
months of [99 ... -95, ifl'~rc~.1 tflla:t'd 503 I
miliion. or 35 r~n::clli ofLll< 1~-95 fI...Jd.~:[ (If
58,9 rniili"n. '[l:e ettt"\.':li\'<;": r.He n(re-mrn ,:--0 an
ac~nul bsis f:,lr the Ii~al ~ear jo;; ~,59r-oercenl
yitldTrend
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, .:.t ci .. 'fA' ~.# ,:t ~~ .. l ~4' ,§
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Prepared by: Finance Dtpartment ---
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City of Palo Alto
City Manager's Report
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CMR:543:94 throuqh 553:94 --NO STAFF REPORTS ISSUED WITH THESE WJMBRRS
TO:
FROM:
DATE:
City of Palo Alto
__ C_i--,~_l\:fa~~ger'~ __ Jlep_ort
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT', FINANCE
DECEMBER S, HI94 CMR:554:94
\
SUBJECT: STATUS OF LYTfON GARDENS m SEMI·Al'INl.lAL DEBT
SERVICE PAYMENT ON INSURED BONDS: PAYMENT MADE
BY OFFiCE OF STATEWIDE HEALTH PLANNING
REOUEST
'nlt: PIJtjX'se of rhis report is to inform Council of the <"tat us of the Lyttt1n Gardens III semi·
a.1..I'!ual debt service payment, due Dc"mber 10. 1994. Lynon Garden'S Inc, (LGl) lacks
Sl.lft;~i':at fu..n.de; t(1 make ti1e p;.'l)Tn~j1t of S·H3,291), The Ofrire d' Statewlce Health Pl,mning
(OSHP) has proc':ssl;'d 3: request fer the SWk Contr,)llt:r'~~ Offi,,-e 10 par S406.00{l to cover the LGJ
~1ortagc and .rnake the debt ,5,(n icc paym~nt
RECQMl',fEl'o1)ATlONS
TIllS is 2I1 information,,1 rept1r1 and no Council action is required.
POLICY IMPLlCATlOI'lJi
This. fqX)rt does not propose any changes to exi~ing City policic:;,
EXECUTIVE SUMMARY
LGI is a California nonprofit publk benefit (....1fporation. establisbed in May 1980 by Community
Housi.r.g £nc. (Ci-n). em, also a nonprofit public benefit corporation, was cTeate-d in February 1970
for the purpose of developing housing for senior citizens with low income~
Lytto~ Gardens m is a skiiled nursing taciiity arid convalescent hospital, built b,. CHI, and Ir ... cated
on Webster Street in Palo Altfl. In October 1981. the City issued $9.6 million in City ofPah; Alto
Insured Health }'3::"iiity Revenue Bonds, 10 acquire. construe' and equip L ynon JII. In October 1982,
and again in December 1986. the City <;od'tance refunded the bond.s. The 1~"1. financtng was in the
~riocjpal amount of SUA million and had a S1.2 million reser\'e.
LUI made its semiannual interesl. [l3ymenB regularly until Dect:mber 1989, \vhen, due 10 r.ashtlow
problems, il was unable to make full payments. This caused Bank of America., the U1Jstee, to apply
funds in the bond reseTve account to meet the debt st!Tvic," obligation. Since that time, stall has
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CORRECTION !!
THE PREVIOUS DOCUMElvT(S) AMY HAVE
BEE]V FIL~lV1ED INCOl-?RECTLY .....
RESHOOT F()LLOWS
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City of Palo Alto
Jnnstrnent Activity
Octorer 1m
ClfRRE"'T POR TFOLlO:
The p.u ,.aJue of the Cit)"s portfol:o i!> S!7!
million, wruchconsu.tS 0fSW9 mill inn, or 64
percef'J, rmturing within two )"e.1fS. :\1ost l.li
the im't-stments, $\.5& miUior1, or 92 -percem.
are i ... l United States ~~mmel')t o;¢.;urrties. TIl';"
current rtt2.r~et vike cf !he :rx:no:fc:litl j:; Q8
percent ofc05l a.'id the ,J,'enge lIfe i~ l.S yeJr'
.~"'-i-r.;.. --""<;::';"4 :-,; ...... -~ .... /~
~'r !
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_ ~,~ -'c' •... c, ... " •• ~
Type of In"'$tm~"ts
,,, .. ~,,,.,,~ ~~-,~
~'-"'J'''''''''
.,..s'OOC'-a_:'!""
C:~_Jl~
I .... ,"""~~I.....::
I :';-":""~ ~_L'"r""'"
1.\ TUIEST [SeO.HE:
iFH':h'q ir;,um,~' lln .1f1 J.;.!~nJ:11 b.a~i'; jor
S<;,!e:Tl~...:r '>1\;3:> 57n,970. FeH tIle [ir')l four
11k'n(h~ \If 1994-9-"', imcre'SC hlia!d $3,1
m~!Ji('n. !)f 35 po:rccnrof Ehe 199·P)) blJdgetof
~S_9 milliQn. Th~ df(-.;li\'e rate of return l1[1 an
:';l',TJal b.1.;'~~ fL~r aK: fj~'11 )ear j .. 5.59 pcrcefjl.
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OCTOBER'S lNVESTMENTSA,\D HELD
TRENDS:
Staff invested $3 mill!on in A go\'~rnment .. gtili.:)'
security, with a maturity of (wo )'ea.I'i and .. rak of
return of 6.1 percent. Interest rates rose again in
()(:taber, as financial markets. continw.ed to 'build
in' the Federal Funds Jill, increases by the Fcd,r.il
Reserve Bo&rd. As iru.eresl rates {;oJll.inue Ia rise.
the spread betvw·een the ponf()iio tate of return ~nd
the two-year US Treasury widens.. This spread
results fNm 'Pll-rchaY!s tn.!-de t~f,\l¢ th\: lll-lei\!~( r;c~1.'.
IflCre-flscs. with lower rates of [erWIn, lOWering the
overall portfolio rate ofrenull
Pr«pa.rtd by: :Fmaate Departmenl
Y~ld Trend
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