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HomeMy WebLinkAbout1997-09-02; City Council; 14337; ANNUAL REPORT OF INVESTMENT PORTFOLIO0 0 37 CITY OF CARLSBAD -AGENDA BILL 1 AB# m DEPT. HD: TITLE: P MTG. 9/2/97 ANNUAL REPORT OF INVESTMENT CITY ATTY: 3 PORTFOLIO DEPT. TRS CITY MGR:~ - RECOMMENDED ACTION: Accept and file report. ITEM EXPLANATION: City Policy requires the City Treasurer to render an annual report of the City’ investment portfolio. This report is for the fiscal year ended June 30, 1997 (FY96-97). Assets in the investment portfolio totaled $199.5 million at the end of the fiscal year This is the highest amount ever for the portfolio and represented an increase of $48. million from the previous year. It is expected that the portfolio will increase to $23 million by the end of FY97-98. The portfolio yield averaged 5.77% for the fiscal year just ended. This should be thc approximate average for the next fiscal year. Cash interest income totaled $12J million in FY96-97 of which approximately $1.4 million went to the General fund. EXHIBITS: 1. City Treasurer’s Annual Report of Investment Portfolio for the Fiscal Year Ended June 30, 1997 0 WI is 3 er= Q8 ,. w 0 \- \ 3 4 0 x 3 - c , < e EXHIBIT 1 0 C/TY TREASURER ANNUAL REPORT OF INVESTMENT PORTFOLIO FOR THE FISCAL YEAR ENDED JUNE 30,1997 CASH MANAGEMENT AND INVESTMENT PROGRAM The City Treasurer is charged with the design of an effective cash management 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. and investment program consistent with the California Government Code, the 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 portfolio is designed to ensure liquidity and achieve an average market yield 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, 1997 (FY96-97). Amount of assets, yields achieved, and cash incomes are presented. To give perspective to these measurements, movements in market interest rates are provided, and 1 I 0 0 1 comparisons are made with the preceding four fiscal years. Finally, a statement is offered regarding the prospects for the fiscal year commencing July 1, 1997. FY96-97 IN PERSPECTIVE Federal Funds Target Rate The federal funds target rate was relatively stable Adjustment Dates in FY96-97. The Federal Reserve increased it by 25 basis 1997 from 5.25% to 5.75% - 5.5%. This rate hike was the first policy move in 14 months and the than two years. By taking this action, the Federal Reserve served to address incipient inflationary pressures. However, inflation news became favorable, and no further rate increases were made. The federal funds rate is a key money market rate that correlates with rates on other short-term credit arrangements. It is what banks charge each other for overnight loans. 6.25% - 6.00% - points (.25%) in March 5.50% - o/ 5.50% 5.25% - first increase in more 5.00% 6130196 3/25/97 5120197 6130197 notice that it stood ready Short-term market rates drifted downward in the first half of the fiscal year. This was reversed in November as the market started to anticipate a rate increase by the Federal Reserve. This anticipation was confirmed by the Federal Reserve action in March. SHORT-TERM INTEREST RATES US. Treasury Instruments Fiscal Year 1996 - 1997 7, )I 6.5 ,- a- \ 0‘ .m- ”-5 -1 6 5.5 0 -. “c - ” -% #_*x^* ’=2$’ -* “4 * . ,. X * ~ - ** ” ** -- 41 -L ” - .<” * - - 5 I I I I I I I I I I I JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN to drift downward, a signal that the financial markets TI thought that further the market was correct. increases by the Federal Reserve would not soon be made. It turned out that Market rates again started -Five Year 6562 6.728 6453 z 5.828 z6 ~4 6.387 6.718 6.565 6.496 6372 JUL AUG SEP OCT NOV DEC JAN E MAR APR MY JUN - -Three Year 6.358 6.518 6.256 5.86 5.682 6.010 6038 6.220 6.562 6.398 6.338 6.209 - * one Year 5.826 5.889 5.680 5.404 5.347 5.488 5.567 5.666 5.997 5.887 5.762 5.651 2 0 0 The yield curve is a graphic presentath of the difference between short-term and longer-term interest rates of U.S. Treasury instruments on a given day. It is used by financial analysts to asses the market's expectation of inflation. The yield curve will steepen, that is the spread between the short-term and longer- term rates will get larger, when inflation is expected to grow. The fiscal year started with a yield curve YIELD CURVE * that had a spread of 156 6130196, 12/31196,6130/97 basis points between 3 month and 10 year rates spread at mid-year declined to 123 basis -1 7 (6.71 %-5.15%). The 6.5 6 points (6.42%-5.1 go/,). By 5.5 the end of the fiscal year, the spread was 132 basis 5 3 Mth 1 Yr 3 Yr 5 Yr ,o Yr points (6.49%-5.17%). rl= 5.49 - I Yr - 3 Yr - 5 Yr IO Yr This relative stability of - 6130196 5.15 - - 12l31l96 5.19 6.27 6.46 6.71 6.01 6.21 6.42 another confirmation that ))I 4 *6/30/97 ;.24 5.89 6.4 6.57 6.71 the yield curve was 5.67 - - the financial markets did not see any near-term threat of rising inflation. FY96-97 SUMMARYKOMPARATIVE ANALYSIS Total assets in the portfolio at the end of the fiscal year stood at $199.5 million. This is the highest amount ever for the portfolio. It represented an increase of $48.1 million, fiscal year. These increases themselves were record highs for one year. or 32%, from the preceding INVESTMENT PORTFOLIO Dollar Amount of Assets (Fiscal Year End) IMillionsI $240.0 $200.0 $160.0 $120.0 $80.0 $40.0 $0.0 FY92-93 FY93-94 FY94-95 FY95-96 FY96-97 3 0 0 SOURCE OF POOL ASSETS 6/30/96 6130197 Total Assets - $15 1.4 Million Total Assets- $199.5 Million The portfolio is an investment pool comprised of inactive cash from the various funds of three agencies. The majority of portfolio assets come from the Capital Projects fund, which is also the fund that experienced the greatest increase in terms of dollars. While the total portfolio increased by $48.1 million, or 32%, the Capital Projects fund increased by $23.5 million, or 44%. The Enterprise fund, a second major source of assets for the portfolio, increased by $12.3 million, but its percentage increase of 27% was below that of the total portfolio. The General fund increased by $5.6 million from the prior fiscal year. Its percentage of the portfolio remained at 12% for both FY95-96 and FY96-97. 4 - 0 0 Average short-term interest rates increased slightly from the previous fiscal year, reversing the decrease from the year before. A growing global economy appears to have shortened the economic cycle. Growing international trade, international borders, instant communications, and shorter product lives, have all worked to shorten our economic cycle. easier movement across - - COMPARATIVE INTEREST RATES * One, Three & Five-Year Rates 8 78s 6 5 "_ -~*&"m"w"-* " 4 3 .: * """ 1 FY92-93 FY93-94 FY94-95 FY95-96 FY96-97 N92-93 N93-94 FY94-95 N95-96 N96-97 (Jwl TI-," - Five-Year 5.55 5.58 7.05 5.958 6.38 - -Three-Year 4.72 6.85 5.79 6.19 - * -One-Year 3.48 4.07 6.23 5.459 5.68 - - The average yield of the With One Year T-Bill Yields year decreased to 5.77% PORTFOLIO YIELDS * from 5.89% the year p+ portfolio for this past fiscal 7- before. At year end, 6.5 2 6 5- 5.5 - however, the average yield -\ & - -. , " .h""----i started to increase in 4.5 - market rates. The ""-4 4- response to increased investment strategy of the 1 3 , , 3.5 -,, FY92-93 FY93-94 FY94-95 FY95-96 FY96-97 - - - portfolio is designed to -porffo,io zy-93 FY93-94 FY94-95 FY95-96 FY96-97 achieve an average market 5.99 6.01 5.89 5.77 least 50% of the portfolio rate of return. Since at year, the yield of the = 3.48 4.07 6.22 5.46 5.68 'Fiscal Year Averages must mature within one portfolio will tend to follow one-year market rates. 5 e 0 Investments in the Local Agency Investment Fund (LAIF) typically comprise 10% YIELD COMPARISON PORTFOLIO EX-LAIF VS. LAIF JUL 1995 - JUN 1997 6.3 , 6.1 6.2 & 61 \ 5.8 5.9 L 5.7 ! \ ~- 5.6 1-d 5.5! ........................ V Jul-95 oct Jan06 Apr JUl-96 03 Jan-97 APr yl ::2:l 6.143 6.022 5.808 5.755 5.766 5.797 5.884 5.948 Id95 Oct Jan96 Apr Ju196 Oa Jan97 Apr Jun "IF 5.784 5.65 5.538 5.587 5.601 5..583 5.612 5.638 to 20% of the total portfolio. LAIF is an investment pool managed by the State Treasurer. Investments in LAIF provide the City Treasurer daily liquidity at interest rates that approximate one year rates. It is a very useful cash management tool. At the same time, however, the yield of LAIF investments provide a general performance benchmark for the remainder of portfolio investments since LAIF investments are managed by the State Treasurer using the same general parameters as those followed by the City Treasurer. Historically, other investments in the portfolio have earned approximately 20 to 30 basis points more than investments in LAIF. Cash income from portfolio investments was $12.6 million in FY96-97, an average of over $1 million per month. The General fund received an approximate total of $1.4 million in FY96-97. The General fund receives interest income to a 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 f - - 'U PORTFOLIO CASH INCOME For Fiscal Years Indicated piZEFl $1 5.0 $12.60 $12.0 $9.0 $6.0 $3.0 $0.0 M92-93 FY93-94 FY94-95 FY95-96 FY96-97 lnction of assets in the portfolio, the market rates at - - the time of the investments, and the interest payment schedules of the issues. 6 e 0 FY97-98 PREVIEW Economic forces on the intern,ational, national, state, and local levels all have an effect on market interest rates and future City revenues. For over a year, the interest rate markets have been expecting inflation to reappear. The unemployment rate, a reliable leading indicator of inflation, was signaling its return. Conventional wisdom held that since the unemployment rate was below 6% for over a year, and since at 4.8% the unemployment rate was at its lowest level since October 1973, inflation surely would soon follow. The conventional wisdom did not prove to be correct. Greater participation by the United States in a growing global economy, together with a sustained, and growing, annual foreign trade deficit of $100 billion, kept both wage rates and interest rates in the United States lower than they would expected to continue. Simply stated, we do not need to employ more labor in order to meet a growing domestic demand. As long as foreign countries are willing to accept and hold our dollars (read lOUs with a trade deficit), we can consume more (foreign goods) without employing more Americans. A sustained unemployment rate that is less than 6% is no longer a dominant leading indicator of looming inflation in the United States. While there may be other forces working to raise interest rates, a shrinking labor pool of Americans will not have the same effect on wage rates and interest rates that it once had. On the national level, the promise of working toward a balanced budget in the year 2002 will have a tendency to keep interest rates lower. However, this will not take place if the market senses that this is yet another broken promise to balance the budget. It will probably take at least one year to see whether the president and congress are serious this time, but in the interim, the promise of a have otherwise been. This trade deficit and the resulting net export of jobs is balanced budget will tend to keep market interest rates lower. On the state level, California will experience its fifth straight year of economic growth. Moreover, this growth in the California economy will be at a higher rate than the rest of the country. A strong California economy will serve to strengthen revenues on the local level. Closer to home, while San Diego County will continue its slow but steady growth, Carlsbad will out-petform the rest of the county by a wide margin. Increases in sales tax revenues, transient occupancy tax revenues, and assessed property values together are expected to total three to four million. Continued development activity will result in further increases in revenues. On the expenditure side, cash payments for the new library will start on November I, 1997 and will continue through April 1999 at a rate of $600,000 per month, or a 7 rl) e total of $4.8 million in FY97-98. Over all, assets in the portfolio should increase to $230 million, an increase from the $199 million that existed on June 30, 1997. Inactive cash from the General fund should increase to approximately $28 million. Approximately $72 million of investments with a fixed maturity date will mature in FY97-98. Most of these investments have yields above the market interest rates that are expected to exist at the time the investments mature. Proceeds from these maturing investments will be reinvested at the expected lower market rates. Additionally, yields on our LAIF investments are expected to decrease as short-term market rates decrease. At the end to this past fiscal year, June 30, 1997, the total portfolio had a yield of average yield for the total portfolio for fiscal year ending June 30, 1998 will remain at 5.7% to 5.8%. 5.9%, above the average of 5.77% for the entire year. It is expected that the 8