HomeMy WebLinkAbout1998-09-08; City Council; 14841; ANNUAL REPORT OF INVESTMENT PORTFOLIO8
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ANNUAL REPORT OF INVESTMENT
RECOMMENDED ACTION:
Accept and file report.
ITEM EXPLANATION:
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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, 1998
(FY97-98).
Assets in the investment portfolio totaled $252 million at the end of the fiscal ye
This is the highest amount ever for the portfolio and represented an increase oi
$53 million from the previous year. Cash and investments now comprise an
estimated 48% of the total assets reported by the City and its agencies. It is
expected that the investment portfolio will increase to $290 million by the end o
FY9 8-9 9 ~
The portfolio yield averaged 5.89% for the fiscal year just ended. This should b
the approximate average for the next fiscal year. Cash interest income totaled
$12.2 million in FV97-98 of which approximately $1.4 million went to the Genet-:
fund.
EXHIBITS:
1. City Treasurer's Annual Report of Investment Portfolio for the Fiscal Year
Ended June 30,1998
0 0 EXHI
CKY TREASURER
ANNUAL REPORT OF INVESTMENT PORTFOLIO
FOR THE FISCAL YEAR ENDED JUNE 30,1998
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
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, 1998 (FY97-98). 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, 1998.
FY97-98 MARKET REVIEW
I I I Federal Funds Target Rate I Adjustment Dates
6.25% -
6.W! -
5.75% -
5.50% -
5.25% -
cm - e-/. x 550%
5.00%
06/30/1997 OWW1998 W2W1 998 W3WI998
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. The federal
funds target rate was
unchanged for the entire
FY97-98. There was considerable
speculation that the
Federal Reserve would
increase the federal
funds target rate because of a surging stock market and low unemployment.
However, the recession in Asia, and a strong dollar vis-a-vis the currencies of
our major trading partners, served to limit the Federal Reserve’s options to raise
the federal funds target rate. (Higher interest rates in the U.S. would further
strengthen the dollar and cause greater, and unacceptable, trade deficits.)
Short-term interest rates
were remarkably stable
in the last half of the
spread between a one-
year treasury instrument
and a five-year treasury
instrument narrowed
considerably. The
financial markets did not
anticipate inflation in the
near term.
fiscal year, and the
- SHORT-TERM INTEREST RATES
U.S. Treasury Instruments
Fiscal Year 1997 - 1998 [p”-tI
6.5
5.5 67 -a. - - ” . *\<- P +&. - - 4- - - * - - -A.. -.
51 I I I I I I I I I
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
I ”
JUL AUG SEP OCT NOV DEC IAN FEB MAR APR MAY JUN -Five Year 5.898 6.221 5.985 5.717 5.823 5.705 5.431 5.580 5.612 5.637 5.525 5.465 - -Three Year 5.780 6.081 5.847 5.682 5.784 5.669 5.360 5.531 5.581 5.604 5.502 5.491 - * -One Year 5.408 5.559 5.438 5.347 5.533 5.476 5.259 5.391 5.380 5.379 5.3885.365
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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. It is
I I used by financial analysts
YIELD CURVE
6130197, 1213 1/97, 6/30/98
to asses the market's
expectation of inflation.
The yield curve will tend to
Jperceml
spread between the short-
become flat, that is the
will get narrower, when
term and longer-term rates
there is little expectation of """""~""_~ inflation in the near term.
The fiscal year started with
3 Mth 1 Yr 3 Yr 5 Yr 10 yr a spread of 132 basis
- points between 3 month
- 5.172%). By the end of
the fiscal year, the spread
narrowed to only 35 basis points (5.446% - 5.093%). This flat yield curve
confirmed that the financial markets did not see any near-term threat of inflation.
With a flat yield curve, there is a tendency to invest in instruments with shorter
maturities. (If the same interest can be earned on a two-year investment as on a
three-year investment, the tendency is to invest in the shorter investment
because it has lower market risk.)
rn -0613011997 s.172 5.651 6.059 6.372 6.491 3Mth- 1 Yr - 3 Yr 5Yr - lOYr
* -06/30/1998 5,w3 5.365 5.491 5.465 5.446 - - 42l3414997 5.342 5.476 5.669 5.705 5.741 and 10 year rates (6.491%
On a broader
perspective, average
short-term interest
rates have changed
little in the last three
years. The average
interest rates for
FY97-98 decreased
slightly from the
previous fiscal year.
The economic cycle
has been rather
stable for the last
three years.
COMPARATIVE INTEREST RATES *
One, Three & Five-Year Rates I pGq I I 8l I
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46- ;-
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A+
FY93-94 FY94-95 FY95-96 FY96-97 FY97-98
I FY93-94 FY94-95 FY95-96 FY96-97 FY97-98 (lunl -Five-Year 5.58 7.05 5.958 6.38 5.717 - -Three-Year 5.02 6.85 5.79 6.19 5659 - A -one-Year 4.07 6.23 5.459 5.68 5.410
'Fiscal Year Averages I
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FY97-98 PORTFOLIO ANALYSIS
INVESTMENT PORTFOLIO Total assets in the
investment portfolio at Dollar Amount of Assets (Fiscal Year End) piiiGF1 the end of the fiscal year
$300.0 , stood at $252.1 million.
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
I $252.1
_". .
$199.5
This is the highest
amount ever for the
portfolio. It represents
an increase of $52.6
million, or 26%, from the 1 preceding fiscal year.
~ I FY93-94 FY94-95 FY95-96 FY96-97 FY97-98 I I I
The City publishes a Comprehensive Annual Financial Report (CAFR) at the end
of each fiscal year. Among other information, this report presents a balance
sheet showing the
total assets owned
by the City and its TOTAL ASSETS OF CITY AND ITS AGENCIES*
and investments 11 CASH/INVESTMENTS RELATIVE TO
agencies. Cash vl
1 OOYO
as a percentage of
$400 total assets have $500 80%
been rising for the
past three years. $300
At the end of $2oo FY97-98, cash
and investments $100
60%
40%
20%
comprised
estimated 48% of an I $0 0 Yo
FY92- 93 FY93-94 FY94-95 FY95-96 FY96-97 FY97-98
the total assets OTotal Assets 0 Cashllnvestments -% of Total Assets reported in the 'Source: ComprcLive hval Financial Report. Note: Total Assets of City and Its Agencies is ?n estimated mount for FY97-98.
CAFR. It should -
be noted that infrastructure assets such as streets, street lights, sidewalks,
curbs, gutters, trees, and medians are not required to be reported in the CAFR,
This is expected to change, however. An accounting rule-making body called
the Government Accounting Standards Board (GASB) is expected to issue a
statement that would require infrastructure assets to be reported as part of the
total assets owned by public agencies. At that time, cash and investments will
comprise a lower percentage of total assets owned.
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SOURCE OF POOL ASSETS
(Dollar amounts in millions)
6/30/97 613 0/9 8
$ 23.6 $ 14.5 $ 33.5 $ 19.2
$1 05.4
Total Assets - $199.5 Million Total Assets - $252.1 Million
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The portfolio is an investment pool comprised of inactive cash from the various
funds of three agencies: the City, the Water District, and the Redevelopment
Agency. 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 $52.6 million, or 26%, the Capital Projects
fund increased by $28.3 million, or 37%. The Enterprise fund, a second major
source of assets for the portfolio, increased by $13.0 million, or 22%. The
General fund increased by $9.9 million; its percentage increase of 42% was well
above the total portfolio percentage increase of 26%.
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The average yield of the portfolio for this past fiscal year increased to 5.89%
from 5.77% the year before. In the last half of the fiscal year, however, the
PORTFOLIO YIELDS *
With One Year T-Bill Yields -1
6.5 -
6 +,
5.5 - . -.A""""- &""
5- e
,& - - * -" * "". .
4.5 -
A,* 4 .**
I I 3
3.5 -
FY93-94 FY94-95 FY95-96 FY96-97 FY97-98
/-.-T-BIIII -Portfolio FY93-94 FY94-95 FY95-96 FY96-97 FY97-98
5.99 6.04 5.89 5.77 5.89
4.07 6.22 5.46 5.68 5.41
- average yield
started to decrease
in response to
decreased market
rates. The
investment strategy
of the portfolio is
designed to achieve
an average market
rate of return. Since
at least 50% of the
portfolio must
mature within one
year, and in the
'FiscalYearAveages absence of a
sustained flat yield
curve and rapid changes in market interest rates, the yield of the portfolio will
tend to be 20 to 30 basis points above one-year market rates.
Investments in the Local Agency Investment Fund (LAIF) typically comprise 10%
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 YIELD COMPARISON I year rates. It is a m very useful cash
PORTFOLIO EX-LAIF VS. LAIF
JUL 1995 - JUN 1998
management tool.
investments also
provide a general
performance
benchmark for the
remainder of
portfolio
investments since
lAlF investments
The yield sf WlF 6.3 ,
6-2 6.1 e
61 \. -
..................... I Jul-95 Nov Mar Jul-96 Nov Mar Jul-97 Nov Mar
-1 6.221 6.137 5.814 5.755 5.788 5.841 5.943 5.947 5.936 Id95 Nov Mar Jul 96 Nov Mar Ju197 Nov Inn
5.95 5.805 5.633 5.587 5.600 5.588 5..681 5.710 5.672
are managed by I I
the State Treasurer using the same general parameters as those followed by the
City Treasurer. Historically, other investments in the City's portfolio have earned
approximately 20 to 30 basis points more than investments in LAIF.
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Historical Unrealized Gains/Losses as Percent of Amortized Cost
July 1996 - June 1998
2.00%
1 .SO% -
I .OO%
0.50% --
V
-
-2.OQ% J
Jul-96 Oct-96 Jan-97 Apr-97 Jul-97 Oct-97 Jan-98 Apr-98
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All investments held in the portfolio will gain and lose value as market interest
rates fall and rise. Accountants refer to these changes in value as unrealized
gains and losses. The amount of unrealized gains and losses in the portfolio is
determined by the maturity length, the interest payment structure, and by how
much recent change has occurred in market interest rates. An unrealized loss
represents a potential loss of principal if the investments were to be sold prior to
their maturity. An unrealized loss also indicates that the portfolio is currently
earning less interest than had the same investments been made today. The
reverse is true for unrealized gains. With the investment parameters established
in the City’s Investment Policy, it would be unusual for unrealized gains and
losses to be much above 1.5% of amortized cost. The portfolio has performed
as designed by the City’s Investment Policy.
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Cash income from portfolio investments was $12.2 million in FY97-98. A change
in accounting was
made during the
fiscal year causing
cash income in
FY97-98 to be lower
than the previous
PORTFOLIO CASH INCOME*
For Fiscal Years Indicated
IMillionsI
$15.0
$12m60 $12.16
fiscal year. Had this
accounting change
$12.0
not been made, the $9.0
cash income for $6.0 FY97-98 would have
been reported as $3.0
$13.6 million. The
General fund
received an
approximate total of
$1.4 million in FY97-98. The General fund receives interest income to a greater
$0.0 L
FY93-94 FY94-95 FY95-96 FY96-97 FY97-98
*Commencing with FY97-98, cash income was reduced by purchased accrued interest ..
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 assets
in the portfolio, the market interest rates at the time of the investments, and the
interest payment schedules of the issues.
FY98-99 PREViEW
Economic forces on the international, national, state, and local levels all have an
effect on market interest rates and future City revenues.
For the most of FY97-98, many domestic economic measurements supported
the conventional wisdom that inflation would soon occur. The growth in the
money supply accelerated, the jobless rate of 4.3% was its lowest point in 28
years, and the stock market was reacting to “irrational exuberance’’ (in the words
of the Chairman of the Federal Reserve Board). There was, however, little or no
inflation, and the reason for this is not difficult to understand.
On the international level, large and growing trade deficits have kept wage rates
and interest rates in the United States lower than they would have otherwise
been. Because of the Asian crisis, this trade deficit and the resulting net export
of jobs is expected to continue. We will continue to be flooded with goods made
by workers earning a low wage. The existence of the Asian crises also makes
the Federal Reserve hesitant to raise domestic interest rates because such a
move would strengthen the dollar and exacerbate the trade imbalance. Roughly
10% of the goods purchased in the U.S. are imported from Asia. Prices for
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Asian imports fell 8.3% in the past year. In essence, we have been importing
deflation from Asia. This is expected to continue through most of FY98-99.
On the national level, the balanced budget has turned into a budget surplus
because of greater than expected tax revenues. Siphoning purchasing power from the economy suppresses demand and holds down interest rates. The
political question is how to get the purchasing power back into the economy.
Should the government or should the taxpayers spend the surplus?
On the state level, California has also experienced stronger revenues than
expected with a resulting budget surplus. Until the governor and the legislature
rates.
Although global and domestic forces have acted to keep inflation and interest
rates low, the low jobless rate in the U.S. will eventually start to overheat the
economy, or at least create the perception of doing so. If the federal reserve
does not increase the federal funds target rate before the end of calendar 1998,
it is likely that the yield curve will steepen with an increase in longer-term market
interest rates.
Closer to home, Carlsbad will continue its robust growth. Assessed property
values are expected to increase by 15%, while increases in sales tax revenues
and transient occupancy tax revenues are expected to increase by
8% and 5%, respectively. These increases alone are expected to be close to $4
million. These estimates are conservative since they do not include
consideration of revenues generated by the Lego theme park, scheduled to open
in the latter part of FY98-99. Development activity will probably remain at its
high level of last year. On the expenditure side, major cash payments will be
made for the library, street maintenance, and approved capital projects. Overall,
assets in the portfolio should increase to $290 million, an increase of 15% from
the $252 million that existed on June 30, 1998. Inactive cash of the General
fund should increase to approximately $37 million.
Approximately $82 million of investments with fixed maturity dates will mature in
FV98-99. Most of these investments have yields that are expected to closely
approximate the market interest rates that will exist at the time of their maturities.
Proceeds from these maturing investments will be reinvested at essentially the
same rates. Additionally, yields on our LAlF investments are expected to remain
essentially the same.
At the end of this past fiscal year, June 30, 1998, the total portfolio had a yield of
5.8%, which was about the average for the entire fiscal year. It is expected that
the average yield for the total portfolio for the fiscal year ending June 30, 1999
will be 5.75% to 5.85%.
decide what to do with the surplus, it will have a depressing effect on interest
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