Loading...
HomeMy WebLinkAbout2001-08-07; City Council; 16334; Annual Report of Investment PortfolioAB# $334 MTG. 8/7/O 1 DEPT. TRS A------ 0 b li !’ CITY OF CARLSBAD -AGENDA BILL TITLE: DEPT. HD: ANNUAL REPORT OF INVESTMENT PORTFOLIO CITY ATTY: CITY MGR: RECOMMENDED ACTION: 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, 2001 (FYOO-01). Assets in the investment portfolio totaled $367 million at the end of the fiscal year. The equity portion of the various funds at the amortized value of the total portfolio is summarized below: Fund Eauitv in Pooled Investments 1 Cash Balance bv Fund: I I General 61,781,982 Special Revenue 24,545,943 Debt Service 1 a713.369 \ Capital Projects 14619761283 Enterprise 108,549,669 Internal Service 12,875,903 Agency Funds 10,830,589 Reconciling Adjustments (765,991) Total Treasurer’s Investment Portfolio at Amortized Cost 366,507,748 Fund equity balances are restricted for various purposes as listed above. This is the highest amount ever for the portfolio and represents an increase of $44 million from the previous fiscal year. Cash and investments now comprise an estimated 53% of the total assets reported by the City and its agencies. It is estimated that the investment portfolio will increase to $390 million by the end of FYOI-02. For the last month of the fiscal year, the portfolio had a return of 5.98%. For the entire fiscal year, however, the portfolio averaged 6.18%. Cash interest income totaled $20 million in FYOO-01 of which approximately $3 million went to the General fund. For the next fiscal year (FYOI-02) it is expected that the average return for the portfolio will approximate 5.75%. EXHIBITS: 1. City Treasurer’s Annual Report of Investment Portfolio for the fiscal year ended June 30,200l. EXHIBIT 1 CITY TREASURER ANNUAL REPORT OF INVESTMENT PORTFOLIO FOR THE FISCAL YEAR ENDED JUNE 30,200l 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 the bank enters them. 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, 2001 (FYOO-01). 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, 2001. FYOO-01 MARKET REVIEW Federal Funds Target Rate Adjustments Made in F’Y 99-00 and F’YOO-01 6.76?/ - 6.6% 6.6% 6.2% key money market rate that correlates with rates of other short-term credit arrangements. It is the interest rate that banks charge each other for overnight loans. To give a sense 6.6% - 4.76% - 4.6% - 4.26?h - 4.6% - 3.76% - 3.6% of the economic cycle, changes in the federal funds rate are shown for 3.7%( the past two fiscal years, FY99-00 and FYOO-0 1. After increasing the federal I funds rate by 150 basis points (1.5%) in the Federal funds rate is a prior fiscal year ended June 30, 2000, the Federal Reserve reversed course in FYOO-01. At the beginning of FYOO-01, July I, 2000, the federal funds rate was 6.50%. During FYOO-01 the Federal Reserve decreased the federal funds rate 275 basis points (2.75%) and ended the fiscal year at 3.75%. Short-term interest rates decreased during the fiscal year ended June 30, 2001, reflecting the actions of the Federal Reserve. The yield curve steepened as one-year market rates decreased more than tWO- and five-year market rates. SHORT-TERM INTEREST RATES U.S. Treasury Instruments Fiscal Year 2000 - 2001 ~ 3.75 ~ 3.25 .* s - I JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT V DE N FEB MAR APR MA ~ piq &Five - A- One year year 6.14 5.96 5.84 5.81 5.43 4.97 6.15 6.21 6.08 5.97 6.17 5.92 “,o,, 5.91 5.36 5.0: 4.77 4.65 t7 4.58 4.39 4.46 4.60 4.88 4.91 4.95 6.28 6.05 4.21 4.09 4.27 3.91 ,.,: 3.56 : 3.63 2 3 YIELDCURVE 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. Financial analysts use it to assess the market’s expectation of recession or inflation. The normal shape of the yield curve is an upward slope, with short-term rates lower than longer- term rates. At the beginning of the fiscal year, July 1, 2000, the yield curve was level to partially inverted. An inverted yield curve occurs when short-term rates are higher than longer-term rates. At the beginning of the fiscal year, the market was undecided whether a recession or inflation was expected. By the middle of the fiscal year, December 31, 2000, however, the yield curve became inverted, indicating that the market was expecting a recession. The prediction of the market proved to be correct. Economic activity slowed and the Federal Reserve started to decrease the federal funds rate, with the first reduction on January 3, 2001. By the end of the fiscal year, June 30, 2001, the yield curve was approaching its more normal upward slope. The market was indicating that it started to be concerned with incipient inflation. When and to what degree remains to be seen. 6/30/00,12/31/00,6/30/01 lTGlq 6.50 6.oo or..““-*--““--* . . . ..-. (l-r _- -- 3 !5.50 ---+ 5.00 &I ---c- 4.50 400 3.50 ‘I I I I 3Mth 1 Yr 2Yr 5Yr IOYr 1 Yr 2Yr 5 Yr 10 Yr 6.062 6.358 6.179 6.023 - - 12/31/2oaI 5.361 5.091 4.914 5.110 3.628 4.238 4.949 5.410 . On a broader perspective, average short-term interest rates decreased in the last fiscal year. This reversed the increase in the previous fiscal year. COMPARATIVE INTEREST RATES * One, Two & Five-Year Rates 8 I Perccn1 J 7 , 8 3 [ t FY98-97 FY97-98 FY98-99 FY99-00 FYOO-03 FY96-97 FY97-98 FY98-99 FY99-00 FY OO-OL *Fiscal Year Averages 3 FYOO-01 PORTFOLIO ANALYSIS INVESTMENT PORTFOLIO Dollar Amount of Assets (Fiscal Year End) $350.0 $300.0 $260.0 $200.0 $150.0 $100.0 $50.0 $0.0 FY95-96 FY96.97 FY97.95 FY95.99 FYWOO FYOO.01 1 Total assets in the investment portfolio stood at $366.8 million at the end of the fiscal yew an increase of 13%. The $366.8 million is again a record amount for the portfolio. Over the past several years, the total value of the portfolio had been increasing at a decreasing rate. FYOO- I 01 reversed that trend. Commencing with FY9596, year-over-year percentage increases have been 32%, 26%, 19%, 8%, and 13%. The City publishes a Comprehensive Annual CASH/INVESTMENTS RELATIVE TO Financial Report (CAFR) at TOTAL ASSETS OF CITY AND ITS the end of each fiscal year. I AGENCIES* Among other information, this $800, r 100% report presents a balance $700 80% sheet showing the total $600 $500 assets owned by the City and 60% $400 all its agencies. The cash $300 4on and investments managed by $200 20% the City Treasurer now $100 represent 53% of all assets $0 OX PY95-96 PY96-97 PY97-98 PY98-99 PY99-00 FYOO-01 reported by the City and its -Total Assets UCashlinvestments +Y, of Total Assets - agencies. It should be noted vnm.: C..,~~.lr~*“..lr.-~l~...n. .N*e: ~~*ul..,C”I.~,“*~r*.~“~ll~lulCTYUI. that infrastructure assets such as streets, streetlights, sidewalks, curbs, gutters, trees, and medians are not reported in the CAFR. This is expected to change, however. An accounting rule-making body called the 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 that time, it is expected that cash and investments will comprise a lower percentage of total assets owned. 4 SOURCE OF POOL ASSETS (Dollar Amounts in Millions) 6/30/00 6/30/01 $ 128.2 147.0 Total Assets - $323.3 Million Total Assets - $366.5 Million q General q Capital Projects ISpactal Revenue :Agy;trcy Funds q Entsrprire q internal Service 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 ($147.0 million), followed by the Enterprise fund ($108.5 million), and the General fund ($61.8 million). While total portfolio assets increased by 13%, pool assets from the General fund increased by 34%. PORTFOLIO YIELDS * With One Year T-Bill Yields 6.6 _ pziq the year before. The portfolio yield is influenced by changes 4 in short-term market 3.6 5 ! interest rates since FYBB-87 FY 97.98 FY98.SD FY 99.00 FYOO-01 approximately 32% of the total investments were required to mature within one year. While the average interest rate for one-year U.S. Treasury Bills decreased to 5.00% from 5.81% the year previous, most of this decrease did not occur until the last half of the fiscal year. The full effects of these lower short-term market rates will not be reflected in the average return of the portfolio until the next fiscal year. The average return of the portfolio for the fiscal year increased to 6.18% from 5.81% 5 Return on investments is shown in two categories: (1) LAIF deposits and (2) all other investments. LAIF is an acronym for Local Agency Investment Fund. LAIF is an investment pool managed by the California State Treasurer. The LAIF investment pool is very liquid with average investments maturing in six to seven months. City deposits in LAIF provide a desired measure of liquidity at attractive short-term rates, and typically comprise 5% to 15% of the total portfolio, depending on market interest rates at the time. In many respects, City deposits in LAIF are comparable to having a checking account that earns interest similar to U. S Treasury instruments maturing in one to five years. Return on Investments PORTFOLIO EX-LAIF and LAIF JULY 1996 - JUNE 2001 6 5.6 5.6 5.4 4.6 !,,,,,,I,,,,,,,,,I,,,,,,I,,,,,,,I,,,,,,,,,,,,,,,,,,,,,,,,,,,I Jun-99 Dee-96 Jun-97 Dec.97 Jun-99 Dee-99 Jun-99 Dec.99 Jun.00 Dee-00 Jut141 km% Da% J-97 Dee97 Jm98 Dec98 .Jm99Dtc99hOODecOOJw1Ol Compared to LAIF deposits, other City investments typically earn 20 to 50 basis points more. When market interest rates rise or fall rapidly, however, as was the case in FY99-00 and FYOO-01, the difference between earnings on LAIF deposits and earnings on all other investments will widen. LAIF deposits will earn more when there is a rapid increase in short-term market interest rates. The reverse is true when market interest rates fall rapidly. LAIF turns over its investments in one-third the time and responds to changes in market interest rates much quicker. At the conclusion of FYOO-01, June 30, 2001, earnings on investments other than LAIF exceeded earnings on LAIF deposits by approximately 80 basis points. This will narrow as maturing investments are reinvested at lower market interest rates. a Historical Unrealized Gains/Losses as Percent of Am ortized Cost July 1996 - June 2001 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% 1 Jul- Ott- Jan- Apr- Jul- Ott- Jan- Apr. Jul. Ott- Jan- Apr- Jul- Ott- Jan- Apr. Jul- Ott- Jan- Apr- 9s 98 97 97 97 97 99 99 99 99 99 99 99 99 00 00 00 00 01 01 This graph shows the percent change in value of the portfolio over the last several years. Investments gain and lose value after they are made because of changes in market interest rates. When market interest rates decrease, investments made earlier at higher rates will gain value. The reverse is true when market interest rates increase. Accountants refer to these changes in value as unrealized gains and losses; they are normal and are expected. 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 increase and decrease, and as investments are made when cash becomes available. It is useful to measure changes in value because it could indicate the presence of high-risk investments in the portfolio. The changes in value shown above are within the acceptable risk identified in the City’s Investment Policy. The rapid decreases in market interest rates in the last half of the past fiscal year caused earnings of the City’s portfolio to decrease from a high of 6.27% on January 31, 2001 to 5.98% on June 30, 2001. These same lower market rates, however, caused investments that had been made earlier at higher rates to gain value. Cash income from j portfolio investments was approximately PORTFOLIO CASH INCOME* $20 million in FYOO- 01. Of this, over $3 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 pit) For Fiscal Years Indicated $21.0 > 19.88 $18.0 $15.0 $12.0 $9.0 $6.0 $3.0 SO.0 FY95-96 FY96-97 FY97-98 FY98-99 FY99-00 FYOO-01 *Commencing with FY97-98, cash income was reduced by purchrsed accrued interm. Had thil change not occurwd, cash income would have been reported BS $13.6 million in FY W-91. 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. FYOI -02 PREVIEW National and international economic forces, as well as domestic political considerations, influence market interest rates. On the international level, there remains a considerable amount of unused capacity, and the dollar remains strong relative to the currencies of our major trading countries. Considerable domestic demand will continue to be met by low-priced imports, subduing inflationary pressures. Growth in retail sales, consumption, and the stock market are leading indicators of future Federal Reserve action regarding interest rates. Retail sales have been relatively flat and the stock market has been waiting for good earnings reports. At the same time, unemployment has increased with almost all of the job loss in the manufacturing sector. It takes about six to ten months for the economy to show the effects of lower interest rates. The federal funds rate was reduced 275 basis points (2.75%) over a 12-month period. From July 1, 2001, it will take another ten months for the economy to show the full effects the lower federal funds rate. The income tax rebate, however, will be a more immediate stimulant to the economy. All rebates will be received by the end of September 2001, and most will probably be spent shortly after receipt. On balance, these national and international forces will likely cause the Federal Reserve to lower the federal funds rate an additional 25 to 50 basis points in the first half of FYOI-02. Short-term interest rates will be lower and the yield curve will become steeper. There is a good possibility that the federal funds rate will be increased before the end of FYOI-02. Total assets in the investment portfolio stood at approximately $367 million at the end of FYOO-01. This should increase to approximately $390 million by the end of FYOI-02. Assessed property values are forecasted to increase by about 14%, while sales tax revenues and transient occupancy tax revenues are expected to increase by 5.1% and 5.3%, respectively. Additionally, interest revenue earned from portfolio investments in FYOI-02 should approximate $21 million. With the start of the new fiscal year on July 1, 2001, the required minimum amount of investments maturing within one year increased from $117 million to $136 million. This conforms to the City’s Investment Policy requiring investments maturing within one year to be no less than the approved operating budget. This requirement will cause more short-term investments to be made. Approximately $71 million of investments with fixed maturity dates will mature in FYOI-02. An additional $70 million may be called. Proceeds from these investments will be reinvested at market rates that will most likely be lower. Additional cash received into the portfolio will also be invested at slightly lower rates, and finally, yields on our LAIF investments are expected to be lower. At the end of FYOO-01, the total portfolio had a yield of 5.98%, with an average of 6.18% for the entire fiscal year. The average yield for the entire fiscal year ending June 30, 2002 should approximate 5.75%.