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:~
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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
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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
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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, 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
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6.5 ,- a- \ 0‘ .m- ”-5 -1 6
5.5
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“c - ” -% #_*x^* ’=2$’ -* “4 * . ,. X * ~ - ** ” ** -- 41
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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
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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
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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
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- 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
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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.
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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
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COMPARATIVE INTEREST RATES *
One, Three & Five-Year Rates
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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
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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
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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
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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.
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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
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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
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the time of the investments, and the interest payment schedules of the issues.
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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
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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
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