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HomeMy WebLinkAbout1999-08-24; City Council; 15367; Annual Report Of Investment Portfolio- hB# 16-3 67 TITLE: MTG. 8124199 , ANNUAL REPORT OF INVESTMENT DEPT. TRS PORTFOLIO RECOMMENDED ACTION: CITY OF CARLSBAD -AGENDA BIL 99 CITY MGR: a Accept and file 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, 1999 (FY98-99). Assets in the investment portfolio totaled $299 million at the end of the fiscal year. This is the highest amount ever for the portfolio and represented an increase of $47 million from the previous year. Cash and investments now comprise an estimated 52% of the total assets reported by the City and its agencies. It is expected that the investment portfolio will increase to $350 million by the end of FY99-00. The portfolio yield averaged 5.71% for the fiscal year just ended. This should be the approximate average for the next fiscal year. Cash interest income totaled $14.8 million in FY98-99 of which approximately $2 million went to the General fund. 1. City Treasurer’s Annual Report of Investment Portfolio for the fiscal year ended June 30,1999 C/N TREASURER ANNUAL REPORT OF INVESTMENT PORTFOLIO FOR THE FISCAL YEAR ENDED JUNE 30, 7999 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 the City and all of its agencies, including 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, 1999 (FY98-99). 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 comparisons are made with the preceding four fiscal years. Finally, a statement is offered regarding the prospects for the fiscal year commencing July 1, 1999. FY98-99 MARKET REVIEW Federal Funds Target Rate 6.90% - Adjustment Dates 5.75% 6.50% ;l l 6.60% 1=-I&m ],,, 5.r 4.60% , W3Ol98 9129198 10!16t99 11117199 6/30/99 Federal funds rate is a key money market rate that correlates with rates on other short- term credit arrangements. It is the interest rate that banks charge each other for overnight loans. The Federal Reserve changed the federal funds target rate four times in FY98-99, first lowering it from 5.5% to 4.75% in three increments of 25 basis points, and then finally increasing it to 5.0% at the end of the fiscal year. Short-term interest rates during the fiscal year reflected the markets anticipation of Federal Reserve actions, first declining and then rising. In the first half of the fiscal year there was virtually no ’ spread between one-year and five-year rates. The yield curve was essentially flat. The financial markets did not anticipate inflation in the near term. This, however, changed in the I SHORT-TERM INTEREST RATES U.S. Treasury Instruments Fiscal Year 1998 - 1999 I 6 I JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JW JUL. AUG SEP OCT NOV DEC JAN FBB MAR APR MAY JUN 5.49 4.791 4.221 4.233 4.484 4.542 4.542 5.308 5.100 5.211 5.5825.695 5.48 4.768 4.269 4.107 4.517 4.533 4.566 5.200 4.975 5.058 5.4005.565 5.35 4.8494.3934.176 4.500 4.519 4.497 4.875 4.705 4.7684.9645.061 last half of the fiscal year when interest rates not only increased but the spread between one-year and five-year rates also increased. The yield curve became steeper as five-year rates grew faster, reflecting the market’s growing concern with inflation. The yield curve is a YIELD CURVE graphic presentation 6/30/98,12/31/98,6/30/99 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 assess the market’s 3Mth 1 Yr 2Yr 5Yr IOYr expectation of 3 halI 1 Yr 2 Yr 5 Yr 10Yr inflation. G G5 5.475 z65 5.446 The yield curve will tend to 4.457 4.519 4.533 4.542 4.646 4.648 5.061 5.565 5.695 5.831 become flat, that is the spread between the short-term and longer-term rates will get narrower, when there is little expectation of inflation in the near term. The fiscal year started with a spread of 34 basis points between 3 month and 10 year rates (5.45% - 5.09%). By the mid-year (December 31) the spread dropped to 19 basis points (4.65% - 4.46%). These flat yield curves reflected the market’s unconcern with inflation. This changed somewhat at the end of the fiscal year when the spread increased to 118 basis points (5.83% - 4.65%). By year end, the market expressed a concern about inflation. With a steeper flat yield curve, there is a tendency to invest in instruments with longer maturities because of their higher rates. On a broader perspective, average short-term interest rates have trended down for the past two years. Average interest rates for FY98- 99 decreased slightly from the previous fiscal year. COMPARATIVE INTEREST RATES * One, Two & Five-Year Rates I 8 3 ! I 1 FYSS-96 FYSG97 FY97-98 FY98-99 FY95-% FY96-97 FY97-98 FY98-99 Ilg-Ffj-F ‘Fiscd Yew Avenges FY98-99 PORTFOLIO ANALYSIS INVESTMENT PORTFOLIO Dollar Amount of Assets (Fiscal Year End) 5200.0 $252.1 $250.0 $100.0 $50.0 $0.0 II FY94-95 FY9596 !=Y9697 F’f97-96 FY9a99 increased by $47.1 million in the past fiscal year. Total assets in the investment portfolio at the end of the fiscal year stood at $299.2 million. This is again a record amount for the portfolio. Total assets in the portfolio have increased approximately $50 million each year for the past four fiscal years. Even though over $40 million of capital expenditures were made, total assets in the portfolio 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 all its agencies. The cash and investments managed by the< City Treasurer now represent 52% of all assets reported by the City and its agencies. CASH/INVESTMENTS RELATIVE TO It should be noted that TOTAL ASSETS OF CITY AND ITS AGENCIES* infrastructure assets piiiGq $000 3578 such as streets, street 100% lights, sidewalks, $500 60% curbs, gutters, trees, $400 60% and medians are not $300 required to be reported 40% $200 in the CAFR. This is $100 20% expected to change, however. 0% An $0 FY94-95 FY95-96 FY96-97 FY97.98 FYPB-99 accounting rule- -Total Assets lEEdCash/lnvestmonts -T-K of Total Assets making body called the *s.urrs: Coaprcb.l,i.rA..Y* Pi..“d.l rlrpon. tL.,c: T’oul Aur” of city .I.4 It. A,B~Oba ” .I u,,n.,.* em0.m L, n-9%99 1 Government Accounting Standards Board (GASB) has issued a statement requiring that all infrastructure assets be reported as part of total assets owned. This will take effect for Carlsbad for the CAFR dated June 30, 2002. At time, cash and investments will comprise a lower percentage of total assets owned. 4 SOURCE OF POOL ASSETS (Dollar Amounts in Millions) 6/30/98 6130199 $ 44.4 d 22.4 $118.9 $ 105.4 Total Assets - $252.1 Million Total Assets - $299.2 Million 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 ($118.9 million), followed by the Enterprise fund ($87.4 million), and the General fund ($44.4 million). The General fund experienced the greatest percentage increase. While the total portfolio increase by $47.1 million, or 19%, the General fund increased by $10.9, or 33% of its previous balance of $33.5 million. The increase in the General fund will not be as great in FY99-00 when $7.0 million approved by Council is transferred to the Capital Projects fund. PORTFOLIO YIELDS * With One Year T-Bill Yields FY94-96 1 FY95-96 FY96.97 FY97-96 FYSS-99 PY94-95 PY95-96 PY96-97 FY97-98 FY98-99 - --- - 6.04 5.89 5.77 5.89 5.712 6.22 5.46 5.68 5.41 4.722 *Fiscal Year Averaaes The average return of the portfolio decreased to 5.71% from 5.89% the year before. The portfolio yield is significantly influenced by changes in short- term market interest rates since approximately 35% of the total investments must mature within one year. The average interest rate for one- year U.S. Treasury Bills decreased to 4.72% from 5.41%, or 69 basis points. This decrease was a principal factor in the portfolio’s lower average return of 18 basis points (5.89%-5.71%). Investments are routinely made in the Local Agency Investment Fund (LAIF), an investment pool managed by the California State Treasurer. Investments in LAIF provide a desired measure of liquidity at attractive short-term rates, and typically comprise 10% to 15% of the total YIELD COMPARISON portfolio. In many PORTFOLIO EX-LAIF VS. LAIF respects, JULY 1995 - JUNE 1999 investments in LAIF 1 Percent 1 are comparable to having a checking account that pays an interest approximating one- year rates. It is a VW useful cash 5.2 -IL management tool. ,““.a‘ D.l?-S‘ JYI-96 D.C4‘ Jun..7 Des47 J”“-W D*c-@I JUl-l# The yield of lAlF investments also provides a general performance benchmark for the remainder of portfolio investments since the State Treasurer, in making LAIF investments, uses the same general parameters as those followed by the City Treasurer. Historically, City investments other than LAIF have earned approximately 20 to 30 basis points more. 6 Historical Unrealized Gains/Losses as Percent of Amortized Cost July 1996 -June 1999 200%, 1.50% , - Unreal G/L % -2oo?h Jld-96 oct46 Jima7 &x-97 J&97 OM7 Jm%8 &f-s u-90 0ct-w Jm-99 l+9B 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. Over the course of the economic cycle, the portfolio is expected to experience unrealized gains and losses that are approximately equal to each other as market interest rates change. With the investment parameters established in the City’s Investment Policy, it would be unusual for either unrealized gains and losses to be much above 1.8% of amortized cost at any one time. The portfolio has performed as designed by the City’s investment Policy. 7 Cash income from portfolio investments was $14.8 million in FY98-99. Of this, approximately $2 million was credited to the General fund. 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 I PORTFOLIO CASH INCOME* For Fiscal Years Indicated 14.82 FY94-95 FY95-96 FY96-97 FT9798 FY9a99 *Canmendngwithw97-98.ceshi-war~bypnhsrcdrcnwdi~. Hadthirehange not OcNITcd. cash income would have baa xporicd as $13.6 million in FY 97-98. 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. FY99-00 PREVIEW Domestic market interest rates are influenced primarily by national and international economic forces as well as domestic political considerations. Once again in the last fiscal year there were economic signs on the national level indicating that inflation would soon occur, and once again inflation did not materialize. Unemployment rates were historically low in the U.S., but with increased productivity and low-priced imported goods, domestic wage rates and prices remained well within the range of non-inflationary growth. The Federal Reserve, in fact, took action to ensure higher imports of low-price goods. At the request of the Bank of Japan, the Federal Reserve bought U.S. dollars, while at the same time, the Bank of Japan sold yen. These actions together made the U.S. dollar more expensive relative to the Japanese yen. The result was a growing trade deficit fueled by cheap imported products. On the national level, the leading indicators of higher domestic interest rates will be a further reduction in the unemployment rate (from the current 4.2 percent), or a stable unemployment rate coupled with a reduction in the growth of productivity (from 2.8 percent). On the international level, the leading indicator of higher 8 domestic interest rates will be stronger economies of our major trading partners and a weaker U.S. dollar. The increase of 2.8 percent in domestic productivity may be difficult to sustain. Should the gains in productivity slow, higher labor rates caused by low unemployment will ultimately show in higher prices. It appears that the economies of our major trading partners will start to grow in the next fiscal year, or at least stop declining. This will relieve the Federal Reserve from taking actions to strengthen the dollar in order to help foreign economies. Prices of imported goods will consequently rise, and this will increase inflationary pressures. These forces on the national and international levels will likely cause higher domestic market interest rates in FY 99-00. Total assets in the investment portfolio stood at approximately $300 million at the end of FY98-99. This should increase to approximately $350 million by the end of FY99-00. Assessed property values are forecast to increase by about 20%, while sales tax revenues and transient occupancy tax revenues are expected to increase by 8% and 9%, respectively. Several revenue streams have yet reached their potential, specifically the Lego theme park, Carlsbad Stores, and Carlsbad Ranch. Revenues will be greater from these sources. In dollar terms these increases alone will be close to $4 million in FY99-00. Additionally, interest revenue earned from portfolio investments in FY99-00 will be over $15 million. Approximately $70 million of investments with fixed maturity dates will mature in FY99-00. Most,of these investments have yields that are expected to be slightly lower than the market interest rates that will exist at the time of their maturity. Proceeds from these maturing investments will be reinvested at slightly higher rates. Additional cash received into the portfolio will also be invested at slightly higher rates, and finally, yields on our LAIF investments are expected to be higher. At the end of FY98-99, the total portfolio had a yield of 5.6%. This should start to increase in early FY99-00. The yield for the total portfolio should average approximately 5.7% for the fiscal year ending June 30,200O.