HomeMy WebLinkAbout1996-09-10; City Council; 13804; Investment portfolio annual report0 e \ .=;- 9
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CITY OF CARLSBAD -AGENDA BILL
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MTG. 9 ’10 ” 5ii;
TITLE:
CITY MGR: 2 DEPT. TRS
ANNUAL REPORT OF INVESTMENT
PORTFOLIO I
RECOMMENDED ACTION:
Accept and file report.
ITEM EXPLANATION:
City Policy requires the City Treasurer to render an annual report of the City’s investmc
portfolio. This report is for the fiscal year ended June 30, 1996 (FY95-96).
Assets in the investment portfolio averaged $138.2 million in FY95-96, an increase
approximately $1 7 million from the $121.3 million average in FY94-95. The yield on t
portfolio averaged 5.91%, which was a decrease from the 6.04% from the previous fisc
year. A higher portfolio yield is expected in FY96-97, however, in response to higk
market rates. Cash interest income totaled $9.1 million in FY 95-96 of whi
approximately $1.3 million went to the General fund.
EXHIBITS:
1. City Treasurer’s Annual Report of Investment Portfolio For the Fiscal Year End
June 30, 1996
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0 0 Exhibit 1
CITY TREASURER’S
ANNUAL REPORT OF INVESTMENT PORTFOLIO
FOR THE FISCAL YEAR ENDED JUNE 30,1996
CASH MANAGEMENT AND INVESTMENT PROGRAM
The City Treasurer is charged with the design of an effective cash management
and investment program consistent with the California Government Code, the
Carlsbad Municipal Code, and the Carlsbad Investment Policy. Among other
activities, this includes arranging for banking services; forecasting all cash
receipts and expenditures; investing all inactive cash; and reporting all
investment activities.
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 and its 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. If it is beneficial to the City, compensating balances may be
kept in the account to offset bank service charges.
It is only after this detailed 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 to achieve the goals stipulated in the
City’s Investment Policy: safety of principal, sufficiency of liquidity, and maximum
yield. A buy and hold investment policy is generally followed to ensure greater
safety of principal. Through a staggering of investment maturity dates, the
through the economic cycle.
The investment portfolio is a pool of assets representing inactive cash from the
various funds of three legal agencies: the City of Carlsbad, the Carlsbad
Redevelopment Agency; and the Carlsbad Water District. Cash received into the
pool is invested without regard to the agency and the fund from which it
originated. Accounts are maintained, however, that identify the cash contributed
and the interest earned by each agency and fund involved.
This report summarizes and analyzes the activities of the investment portfolio for
the fiscal year ended June 30, 1996 (FY95-96). Amount of assets, yields
achieved, and cash incomes are presented. To give perspective to these
measurements, movements in market interest rates are provided, and
portfolio is designed to ensure liquidity and achieve an average market yield
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comparisons are made with the preceding four fiscal years. Finally, a statement
is offered regarding the prospects for the fiscal year commencing July 1, 1996.
FY95-96 IN PERSPECTIVE
Federal Funds Target Rate The Federal Reserve
reduced the federal Adjustment Dates funds target rate 75
basis points (XI%) from I 6*2=a/o 1 6.00% to 5.25% in three 6-oo%l 5.75% -.IIDLLIIIII 1 5.50% 1 %
increments during the
year. The federal funds
target rate stood at
5.25% as the fiscal year
ended. The federal L"L.3 5.25% funds rate is a key
money market rate thal
correlates with rates on
other short-term credil
5.00%
6130195 7/6/95 12119195 1131196 6130196
arrangements. It is what banks charge each other for overnight loans.
Short-term market rates SHORT-TERM INTEREST RATES declined in the first half of U.S. Treasury Instruments
the fiscal year in response Fiscal Year 1995 - 1996
to the action taken by the 7 Federal Reserve. After the
last rate reduction in
January, however, the
market started to anticipate
that the next Federal
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5.5 ...."........"". L ..._._ -=" ...: Q+." *.."I ,.- * __... ...- a::--- e' _.." ... .....-
Reserve action would have .Jl!JL AUG SEP Oh NOV OEC JAN FEB MAR APR MAY JUN
4.5
to be a rate increase to
offset a threat Of inflation. -Five Year G 6.Lo z z J.s2 F 5.23 5.73 6.08 6.41 6.63 6.46 rn JUL AUG SEP OCT NOV DEC E E MAR APR MAY JUN
With the economy growing -+-Three Year 5.99 5.96 5.91 5.68 5.40 5.21 5.02 5-54 5.88 6.18 6.42 6.27
--+- One Year 5.65 5.64 5.67 5.54 535 5.13 4.89 5.22 5.38 5.61 5.74 5.67
faster than expected, and
with the failure of US Treasury Instruments
Washington to achieve
meaningful deficit reduction, the financial markets perceived a threat of inflation.
interest rates started to rise as a result.
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The expectation of inflation is usually accompanied by a steepening of the yield
curve. The yield curve is a graphic presentation of the difference between short-
term and longer-term interest rates of U.S. Treasury instruments on a given day.
The yield curve steepens when the spread between the short-term and longer-
term rates gets larger. The fiscal year started with a yield curve that had a
spread of 64 basis points YIELD CURVE * between 3 month and 10
The spread at mid-year
6130195, 12/31/95, 6130196 year rates (6.20%-5.56%).
7 declined to 50 basis points
*________.__...........-..* (5.57%-5.07%). At that ,__,"._..__.... ......
6 *""' .__" ._...... ._.- point, the market did not
see any immediate
resumption of inflation.
However, by the end of
.._.." .__._... .. ..-. ---"a """""-"" """""
5 ($'" "_" .c"""""""-
4
3 Mth 1 Yr 3 Yr 5 Yr l,,'Yr the fiscal year, the yield r-"l 3Mth ::;; I Yr E 5 Yr l0Yr curve steepened - 6130195 Ssa -
5.62 5.85
- -
5.97 6.20
-0- 12/31/95 5.07 5.21 5.37 5.57 considerably and the .--&.. 6130196 5.15 6.21 6.46 6.71 spread increased to 156
US Treasury Instruments basis points (6.71 %- 5.15%). The financial
markets at that time were betting that the Federal Reserve would see inflation as
an increased possibility and thus would raise the federal funds rate.
FY95-96 SUMMARYKOMPARATIVE ANALYSIS
Average assets in the portfolio
increased by 14% from the
preceding fiscal year.
Portfolio assets averaged
$138.2 million in FY95-96, an
increase of approximately $1 7
million from the $121.3 million
average in FY94-95. Total
portfolio assets at the end of
the fiscal vear, June 30, 1996,
were $151.4 million.
INVESTMENT PORTFOLIO
Dollar Amount of Assets *
$100.0
$80.0
$60.0
$96.6
$40.0
$20.0
$0.0 1 -
FY91-92 FY92-93 FY93-94 FY94-95 FY95-96
Fiscal Year Averages
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SOURCE OF POOL ASSETS The investment pool totalec
$151.4 million at the close o
the fiscal year. Inactive cast As of June 30,1996
$18.6 $8.3 9.4
$10.6
$6.1
' $46.4
$53.6 . _1 General
I Special Revenue
Other
Capital Projects
E4 Enterprise
eB Tmst Funds
internal Service
from the Capital Projects fun(
and the Enterprise fun(
together represented 66% o
the pool. At the end of the
fiscal year, asset!
representing inactive cash o
the General fund were $18.(
million, or approximately 120/
of the portfolio.
Total Assets - $151.4 Million
Average market interest
rates decreased this COMPARATIVE INTEREST RATES *
past fiscal Year, One, Three & Five-Year Rates
reversing the cyclical
trend from the two 8 ,
previous fiscal years. It 7
is interesting that the 6
only two years. Growing 4
economic cycle lasted 5
ih
'*
international trade, 3
capital more easily Fy91-92
moving across FY91-92 FY92-93 N93-94 FY94-95 w
and shorter product
"" ---
"" """"""" *." .._ .." -.. ...__ .._. .._ __..... (.. .... .... __..... ... ...
I I I
FY92-93 FY93-94 FY94-95 FY95-96
international borders, II"" - --- Three-Year Five-Year 6.70 5.98 5.55 5.58 5.02 7.05 6.85 5.96 5.19
... c.. One-Year 4.77 4.07 6.23 5.46
lives, have all worked to
shorten our economic Fiscal Year Averages
cycle. As the fiscal year ended on June 30, 1996, interest rates were increasin
in anticipation of a Federal Reserve action either in its July or August meeting.
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The average yield of the PORTFOLIO YIELDS * portfolio for this past fiscal
With LAIF & One Year T-Bill Yields year decreased to 5.91%
81
7p77 6 5 ". """ _..- _." "" ~ _"" :2:2-.:y
4 "" e-... ,._.....*d
-._. -a----- .._ -... -""" -/- "-.e . ....*.-........ -,--.-.
3
FY91-92 FY92-93 FY93-94 FY94-95 FY95-96
""- FY91-92 FY92-93 FY93-94 FY94-95 FY95-96 rl 6.32 4.76 -0- LAIF 439 5.47 5.n -Portfolio 7.37 6.55 5.99 6.04 5.91
...A" T-Bill 4.77 3.48 4.07 6.23 5.46
Fiscal Year Averages
from 6.04% the year
before. At the same time,
the Local Agency
Investment Fund (LAIF)
increased to 5.72% from
5.47%. LAIF is an
investment pool managed
by the State Treasurer. It
is used as a performance
benchmark since assets
invested using the same
deposited in LAIF are
general parameters as
those followed by the City Treasurer. However, LAIF can be expected to
respond more quickly to changes in short-term market rates because its
investments are in shorter maturities.
Cash income from
portfolio investments PORTFOLIO CASH INCOME
was $9.1 million in FY95- For Fiscal Years Indicated
96. Of this amount, the
General fund received $9.1
approximately $1.3
million. The General
fund receives interest
income to a greater
degree than its share of
the pool assets because
interest not required to
be held bv other funds
$9.0
$8.0
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1 .o
$0.0
reverts to the General
fund. Cash income is a
function of assets in the portfolio, the market rates at the time of the
investments, and the interest payment schedules of the issues.
FY91-92 FY92-93 FY93-94 -94-95 FY95-96
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FY96-97 PREVIEW
San Diego County is experiencing a slow but steady growth that is expected to
extend into FY96-97. Continued development in Carlsbad is also expected to
continue its growth. Both of these events should serve to increase total assets in
the portfolio to approximately $170 million, an increase from the $151 million that
existed on June 30, 1996. Inactive cash from the General fund should increase
to approximately $21 million.
Following the end of the fiscal year, market interest rates increased on news of
stronger economic activity. Jobs grew at nearly twice the pace of the labor
force, pushing the unemployment rate to a six-year low of 5.3%. At the current
pace of job growth, unemployment could reach 5% by December 31, 1996.
Conventional wisdom holds that an unemployment rate below 6% is inflationary.
Additionally, strong demand by consumers reduced factory inventories,
portending increased factory output.
In spite of these inflationary signs, the Federal Reserve chose not to increase
the federal funds rate at its July 2, 1996 meeting. As a consequence, the market
reacted with higher interest rates.. Alan Greenspan, Chairman of the Federal
Reserve, subsequently reported to Congress on July 18 that a slowdown in
economic activity is expected in the second half calendar year 1996. This took
some of the steam out of market interest rates but still left a rather steep yield
curve. The market is still signalling a threat of inflation. Many analysts expect
the Federal Reserve to increase the federal funds rate at its next meeting on
August 20.
Approximately $53 million of investments with a fixed maturity date will mature in
FY96-97. Most of these investments are at yields below the market interest
rates that are expected to exist at the time the investments mature. Proceeds
from these maturing investments will be reinvested at higher market rates.
Additionally, as the average age of the portfolio decreases investments will be
made in the 3 to 5 year range, which will also be at higher market rates. Finally,
yields on our LAlF investments are expected to increase as short-term rates
Increase.
At the end of the fiscal year, June 30, 1996, the portfolio had a yield of 5.7%.
This monthly yield should steadily increase to 6.2% by June 30, 1997, averaging close to 6.0% for FY96-97.
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