HomeMy WebLinkAbout1995-09-05; City Council; 13292; ANNUAL REPORT OF INVESTMENT PORTFOLIOAW /3.-7?@- TITLE:
MTG. 09/05/95 ANNUAL REPORT OF INVESTMENT PORTFOLIO I DEPT. TREASURY I I CITY MGR. -2SP
RECOMMENDED ACTION:
Accept and flle report.
ITEM EXPLANATION:
City policy requires the City Treasurer to render an annual report of the City’s
investment portfolio. This report is for the fiscal year ended June 30, 1995 (FY 94-
95).
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Assets in the investment portfolio averaged $121.3 million in FY 94-95, an increase
of $1 2.9 million from the FY 93-94 average. Market interest rates increased abruptly
in FY 94-95, exposing portfolios of many other agencies and counties that had risky
investments or insufficient liquidity. .Many of these agencies found it necessary to
sell securities at a loss. Carlsbad, with its conservative investment policy and
oversight, had no risky investments and was always in a sufficiently liquid position
to meet all obligations. No investments were sold at a loss. The average yield of
the portfolio increased slightly to 6.04% from 5.99% the year before. Interest income
totaled $7.2 million of which $1.3 million went to the General Fund.
EXHIBITS:
City Treasurer’s Annual Report of Investment Portfolio dated June 30, 1995.
1 r
e EXHIBIT 1
CITY TREASURER
ANNUAL REPORT OF INVESTMENT PORTFOLIO
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
CASH MANAGEMENT AND INVESTMENT PROGRAM
The City Treasurer is charged with the design of an effective cash management and investment program, using all monies flowing
through the City', bank accounts and keeping all available funds invested for maximum return on investment, consistent with the investment policy approved by the City Council. Among other activities, this includes the arranging for banking services; the forecasting of all cash receipts and expenditures; and the investing, accounting, and reporting of all inactive cash.
Accurate cash forecasts are the bases for optimizing interest revenues. This ranges from developing a cash budget for the fiscal year to the daily monitoring of individual deposits and checks as they are entered by the bank. With on-line access to the bank's computer, the City Treasurer attempts to predict daily the account activity (checks and deposits) and the ending balance. Only sufficient cash is kept in the bank in order to cover uncollected funds and checks that are expected to clear the account that day. Additionally, a compensating balance may be kept in the account to offset the bank service charges
beneficial to the City is determined by a formula, the rate schedule for which is determined monthly with the bank. It is only after this detail process that cash available for investment can be identified. Forecasts of interest rates for up to five years are then made to determine how far on the yield curve investments could or should be made. All inactive cash is then promptly invested by the City Treasurer. A buy and hold investment policy is generally followed to ensure greater safety
of principal; it is also designed to achieve an average yield through the economic cycle.
The investment portfolio is a pool of assets representing inactive cash from the various funds of three agencies: the City of Carlsbad, the Carlsbad Redevelopment Agency, and the Carlsbad Water District. A fund is an accounting mechanism used to
distinguish the purpose for which cash was received and expended. Cash received into the pool is invested without regard to the
agency and the fund from which it oric~inated. Accounts are maintained, however, that identify the amount of cash that each
agency and fund has contributed to the investment pool.
This' report summarizes and analyzes the activities of the investment portfolio for the fiscal year ended June 30, 1995
(FY94-95) . Amount of assets, source of assets, yield achieved, and
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anticipated for that day. Whether a compensating balance is
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cash income generated are presented. To give perspective to these
comparisons are made with the preceding four fiscal years.
Finally, a statement is offered regarding the prospects for the
fiscal year commencing July 1, 1995 (FY95-96).
measurements, movements in market interest rates are provided, and
FY94-95 IN PERSPECTIVE
The most significant market occurrence in FY94-95 was the rapid
rise in short term interest rates brought about by the Federal Reserve. One-year
Treasury
instruments rose from SHORT-TERM INTEREST RATES
to 7.28% in 5.38% in June Fiscal Year 1994-1 995
December, before retreating to
5.74% at the end of the fiscal year, June 30,
1994. Three- year and f ive-year rates had similar relative movement. This
Percent
8.00
. 7.50
-
7-00 .
8.50 .
6-00
. S.50
.
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5.00 ' I JUL AUG SEP OCT NOV DEC JAN RB MARAPR MAY JUN
Flve Year - 6.72
5.74 5-82 6.27 6.49 6.48 6.89 7.28 633 6.06 593 6.48 5.38 One Year +t+
698 6.94 6.74 6S2 6.91 7.41 7-80 7.63 7.25 6S1 6.41 6.29 Three Yr i-
6.06 6.S 6.84 7.07 7.05 7.53 7.82 1-77 7-61 7.28 6.79
July 1994 - June 1995
U.S. Treasury Instruments
volatility in 1 I market rates exposed agencies with portfolios that held risky investments, or that were leveraged, or that had insufficient liquidity. Many agencies were forced to sell securities at a loss to meet their cash needs. Two local county investment pools, one local city, and one local irrigation district found themselves in this position. (Several other local agencies faced similar problems but they did not receive media attention.) Carlsbad, however, was not faced with this problem because of the City's conservative investment- policy and oversight review. The City's policy does not allow risky investments or leverage, and it requires that at least 50% of
the investments mature within one year. Consequently, the City was always in a sufficiently liquid position to meet all obligations.
No investments were sold at a loss during the fiscal year.
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The City Treasurer made an in-kind withdrawal from the San Diego
County Investment Pool in FY94-95. An in-kind withdrawal is the withdrawing of securities instead of cash. It is an uncommon
event. This action was prompted because almost all of the voluntary agencies that were members of the county pool (mostly
cities and water districts together with SANDAG) were either withdrawing their cash at full value or were forecasting that they would, To meet these cash withdrawals, the county pool either had
to sell securities at a loss or borrow money. Either of these actions incurred a cost that had to be absorbed by the other member agencies. Additionally, the financial problems of the county and many of the cities created an atmosphere of uncertainty that threatened the future stability of the county pool. By making
a withdrawal of securities, instead of cash, Carlsbad did not endanger the pool or burden the member agencies with any cost. At the same time, and significantly, it protected Carlsbad's
investment and it avoided the future uncertainties of other
agencies. The securities withdrawn from the county pool all have a llAAAgl credit rating; they will be held to maturity, which will be
from 3 to 4 years; they are earning approximately 4.74%. Carlsbad currently has no investment in the San Diego County Investment
Pool
FY94-95 S.U"ARY/COMPARATIVE ANALYSIS
~~
INVESTMENT PORTFOLIO
Dollar Amount of Assets *
MIIIIons ,
140 I II
,20 -. - - - - - - - - - - - - - - - - - - - - - -
,DO __ - - - - - - - - - - -
ao-. - - - - - -
" FYOO-91 FYBI-92 FY92-93 FY93-94 FY94-95 1 75.5 \ 96.6 I 107.9 I 108.4 I 121.3 I
7 Average assets in the
portfolio increased by
12% from the preceding fiscal year, Portfolio assets averaged $121.3 million in FY94-95, an
approximately $13 million from the $108.4
million average in FY93-
assets were $128 million at the end of the fiscal year, June 30, 1995.
increase of
94 * Total portfolio
Flscal Year Averages I
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The investment pool
totaled $128.6 million at the close of the fiscal
year, June . 30, 1995. Inactive cash from the Capital Projects fund and
the Enterprise fund together represented over
64% of the pool. At the
end of this fiscal year, assets representing inactive cash of the
General fund were $14.7 million, of which approximately $1.1 million was for projects and services that had already
been approved.
SOURCE OF POOL ASSETS
As Of June 30,1995
Internal Servic
~~ vterprise
$40.1
Total Assets - $128 Million
Average market interest rates increased this past fiscal year, continuing the cyclical trend from the prior fiscal year. The
increase was more pronounced in the short end of one-year treasury bills, which averaged 6.23% in FY94-95, an increase of 2.16% from the preceding year.
notes, on the other I I Five-year treasury
hand, averaged 7 05% in
FY94-95, an increase of 1.4% from the precedinq
COMPARATIVE INTEREST RATES*
One, Three, 8 Five-Year Rates
year. Short-term rates
are controlled primarily
- ~: : : : /- --
8. by the Federal Reserve;
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longer-term rates, on 7- - -4.. the other hand, are influenced not only by actions of the Federal
Reserve but also by the 3- FYg0-M FYM-92 FY92-93 FYS3-94 FY94-95 market's expectations of
inflation. Thus r
7.05 5.58 5.55 6.7 7.98 Five-Year -
Three-Year .1. 7.6 5.98 4.72 5.02 6.85
interest rates of one-
year maturities reacted *Fiscal Year Averages
unison with the i
increases imposed by the Federal Reserve in FY94-95. As the fiscal year ended on June 30, 1995, however, interest rates were declining in anticipation of a Federal Reserve action. The market's expectation was confirmed
when the Federal Reserve reduced interest rates on July 6, 1995,
Market Raws
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6. - - \-?+ - - - - - - - 4-*#- -.
5. - - - - - - -%- - ."3& - - - - " 4.
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One-Year c 6.23 4.07 3.4% 4.77 7.01
quickly and more in
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The portfolio yield for PORTFOLIO YIELDS * the same as it was the FY94-95 was virtually
With LAIF & One-Year T-Bill Yields * year before, rising slightly to 6.04% from
time, the Local Agency
Investment Fund (LAIF)
- - , i increased to 5.47% from
9 Percent 5.99%. At the same
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6.23% from 4.07%. LAIF .3* 4.39%, while one-year 1 - - - - - - r - - -% - -*- *d- - - - ,
4" - - - - - - %. - - -. - -* - - ---;-4 .-~ -&- :- - - - -. treasury bills rose to
3 FY90-91 FY91-92 FY92-93 FY93-94 FY94-95 is an investment pool Portfolio -
LAlF * managed by the State I 6.04 5.99 6.55 7.37 8.23
6.23 4.07 3.48 4.77 7.01 T-Bill SWI
5.47 4.39 4.76 6.32 8.11 i
-. invested using the same deposited in LAIF are
a performance as ~
Treasurer. It is used
Comparison with one-year treasury bills is also useful because the
City's investment policy requires that a minimum of 50% of the portfolio mature within one year. However, because the portfolio includes ,investments made for more than one year, and because the investments are typically held until they mature, the portfolio
yield will lag behind changes in one-year rates;
Fiscal Year Averages benchmark since assets
general parameters as those followed by the City Treasurer.
Cash income from I
portfolio investments was $7.2 million in I PORTFOLIO CASH INCOME
FY94-95. Of this amount, the General fund For Fical Years Indicated
received approximately
SI i $1.3 million. The Million8
General fund receives _"""
greater degree than its share of the pool assets
because interest not required to be held by other funds reverts to the General fund. Cash
income is a function of Fy 90-91 FY 91-92 FY 92-93 FY 93-94 FY 94-95
interest income to a
. . .~ ~~ the assets in the portfolio, the market
rates at the time of the investments, and the interest payment schedules of the issues.
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FY94-95 PREVIEW
Inactive cash from the General fund should remain at approximately the same level as that in FY94-95. Cash receipts from principal
General fund sources (property tax and sales tax) are not expected to show much increase. The California economy, while growing somewhat, is lagging behind the rest of the country. Total average assets in the portfolio, therefore, are expected to remain at
approximately the same level they were at the end of FY94-95, i.e., $128 million.
After a rapid shift upward in the first 6 months of ~~94-95, the
Yield curve gradually flattened by the end of the fiscal year through a combination of rising short-term rates and declining
longer-term rates. The yield curve is used by many to predict the future . direction of the economy.
Historically, a flat yield YIELD CURVE*
6130194, 1211 5/94, 6130195 curve has
usually signalled the
peak of the 7.5 . - - - - - - - economic cycle with slower growth to follow.
An inverted
curve, on the 2'5 3 Mth I Yr 3 Yr 5 Yr IO Yr
other hand, - 6130194 *- 3.65 5.48 6.45 6 35 7.37 - when short-
5.67 5.55 6130135 # term rates
7.82 7.79 7.31 5.67 12115194 +
5.88 5.97 6.28
move above
long-term rates -- has
usually signaled a recession to come. This interpretation of the
Yield curve, while useful in the past, may not be as useful in the future- Changes in the economy have made historical data more problematic in predicting the future. Many of the cycles in the. economic system have been compressed, e.g., technological changes
are much faster and the life-cycles of products much shorter, job skills become obsolete quicker, and international investments are of greater magnitude and are more interest-rate sensitive. AS a consequence, the interval between the peak and trough of cyclical interest rates has been reduced considerably.
Market Rates
8.5
-3" 4 " i" "7-e" -7";z - - .
.I- 6.5. - - - - ~- 4. - - - - - - -. ,.-S-'- '- : - - - - - - -x - - .
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7.91
*US Treasury instruments
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The Federal Reserve lowered short-term rates on July 6, 1995. While the market is expecting another decrease, it is more likely that the Federal Reserve will stay with the status guo. The economic indicators are mixed and it is believed that the economy
will continue to approximate, or even out perform, its growth potential of 2.5%. This, together with a declining unemployment rate that has reached 5.6% (6% is considered to be the ftnaturallt rate) , will cause inflation to remain a concern for the Federal Reserve. The market will react to this perception by increasing longer-term rates and the yield curve will steepen as a result.
This scenario suggests a strategy for FY95-96 of investing in one or two year maturities.
Approximately $35 million, or 26% of the portfolio, will mature in FY95-96. Most of these investments are at yields above the market interest rates that are expected at the time the investments mature. Proceeds from these maturing investments will be reinvested at lower market rates, causing the yield of the portfolio to decrease. While the portfolio achieved an average yield of 6.04% in FY94-95, it is expected that this will decrease
to 5.7% in FY95-96.
As part of the continuing fallout of the Orange County bankruptcy, the state legislature will be considering and enacting legislation
aimed at improving the management of public investments. Most of the proposals that are only now being considered by the state have long been followed by Carlsbad. Such things as oversight review,
periodic reporting, a written investment policy approved by Council, reporting market value, and restricting leverage and investments in derivatives have been routinely part of the investment management in Carlsbad. As a member of the Legislative Committee of the California Municipal Treasurers’ Association, the
City Treasurer actively participates in providing comment to the state legislature regarding proposed legislation concerning the management of public investments.
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