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2011-08-23; City Council; 20661; ANNUAL REPORT INVESTMENT PORTFOLIO FY10
CITY OF CARLSBAD - AGENDA BILL 13 AB# MTG. DEPT. 20,661 8/23/11 Treasury ANNUAL REPORT OF INVESTMENT PORTFOLIO FOR YEAR ENDED JUNE 30, 2010 DEPT.DIRECTOR O~o CITY ATTY. ^i^ CITY MGR. (/A 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, 2010 (FY 09-10). Assets in the investment portfolio totaled $571.4 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 Equity in Pooled Investments Cash Balance by Fund: General Special Revenue Capital Projects Enterprise Internal Service Agency Funds Reconciling Adjustments Total Treasurer's Investment Portfolio at Amortized Cost 74,985,965 49,792,998 280,885,041 125,173,447 28,871,203 16,191,526 (4,494,652) 571,405,528 Fund equity balances are restricted for various purposes as listed above. This represents an increase of $3.7 million from the previous fiscal year. Cash and investments comprise an estimated 33% of the total assets reported by the City and its agencies. For the last month of the fiscal year, the portfolio had a return of 2.2%. For the entire fiscal year, however, the portfolio averaged 2.5%. Cash interest income totaled $18.3 million in FY09-10 of which approximately $1.7 million went to the General fund. For the next fiscal year (FY10-11), it is expected that the average return for the portfolio will approximate 2.0%. EXHIBITS: 1. City Treasurer's Annual Report of Investment Portfolio for the fiscal year ended June 30, 2010. DEPARTMENT CONTACT: Nancy Sullivan (760) 602-2473 Nancy.Sullivan@carlsbadca.gov FOR CITY CLERKS USE ONL Y. ., COUNCIL ACTION: APPROVED JSq DENIED D WITHDRAWN D AMENDED D CONTINUED TO DATE SPECIFIC D CONTINUED TO DATE UNKNOWN D RETURNED TO STAFF D COUNCIL RECEIVED THE D REPORT/PRESENTATION OTHER-SEE MINUTES D TREASURER'S •ANNUAL '"OF INVESTMENTS' f •*»! A -'W> • Fiscal Year Ended 6/30/10 (FY 09-10)CITY OF CARLSBAD City Treasurer's Annual Report of Investments For Fiscal Year Ended June 30, 2010 TABLE OF CONTENTS Page Letter of Transmittal 1 Market Review FY 09-10 2 Portfolio Analysis 3 Preview FY 10-11 7 Appendices: A: Risk Management and Disclosure 9 B: Portfolio Activities for Year Ended June 30, 2010 12 1635 Faraday Avenue, Carlsbad, CA 92008 Website: www. carlsbadca. gov Prepared by the Treasury Department CITY °F CARLSBAD Office of the Treasurer www.carlsbadca.gov June 2011 Honorable Mayor, City Council, And Residents of the City of Carlsbad 1200 Carlsbad Village Drive Carlsbad, CA 92008 City Treasurer Letter of Transmittal 2009-2010 Annual Report of Investments I am pleased to present the Annual Report of Investments for the City of Carlsbad for the fiscal year ended June 30, 2010 (FY 09-10). The report is intended to provide reliable information as a basis for reviewing portfolio performance and making management decisions. It also provides an archival reference. The City Treasurer is charged with the design of an effective cash management and investment program for the City of Carlsbad and all of its agencies. Among other activities, this includes arranging for banking services; forecasting all cash receipts and expenditures; investing all inactive cash; managing investment risk exposures; and reporting all investment activities. This report summarizes and analyzes the activities of the investment portfolio for the fiscal year. Total portfolio assets, investment portfolio relative to total city assets, source of portfolio assets, asset allocations, yield achieved, unrealized gains and losses, and cash revenues are presented. To give perspectives to these measurements, a summary of movements in global and U.S. economic, as well as market interest rates are provided for the fiscal year ended June 30, 2010. Comparisons are also made with the preceding fiscal years. Finally, a statement is offered regarding the prospects for the fiscal year 2010- 2011. Jim Comstock City Treasurer 1635 Faraday Avenue, Carlsbad, CA 92008-7314 T 760-602-2473 F 760-602-8556 © CITY TREASURER ANNUAL REPORT OF INVESTMENT PORTFOLIO FOR THE FISCAL YEAR ENDED JUNE 30, 2010 FY09-10 MARKET REVIEW Federal Funds Target Rate FY 09-10 3.00% -i 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% 2.00% J 1.50% 1.00% 0.25% 0.25% 0.25% vftft^* ,19^* ,\^°* ^* ^*•fjP ^ JP Q&V* QfeV* Federal funds rate is a 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. In fiscal year 09- 10, the Federal Reserve maintained the federal funds rate at .25%. Changes in short-term market interest rates are usually affected by the actions of the Federal Reserve. Six-month, two year, and five year market rates decreased over the course of the fiscal year. SHORT-TERM INTEREST RATES U.S. Treasury Instruments i-g^n Fiscal Year 2009 -20 10 — " 1 -^ • i*****^^^^^^*^*9 + .50 o.oo + T + r ^ 4 T 1 — JUL AUG SEP OCT NOV DEC JAN FEB MAR ^. mi Aiir, SFP orr MOV r>Fr IAN FFR MAR•^l IVU »Ujr 2J| 2J9 23l 23| 2a) 26g 2J? 230 2 54 — "-TwoYear i M 097 0.95 0.89 066 I 14 085 081 102 -*-$ Month °25 °22 ° l7 ° l6 ° ls ° l9 ° l5 ° l8 °23 ^^^^» "~t -•- •.. m APR MAY JUN APR MAY 1IIN 2 42 2.09 1 77 096 0.77 060 0.23 0 22 0 22 YIELD CURVE 7/01/09, 12/31/09, 6/30/10 I Market Rates I 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 has a moderately upward slope, with short-term rates lower than longer- term rates. If the upward slope steepens, the financial markets believe inflation may occur. An inverted yield curve is when short-term market rates are greater than longer-term market rates. An inverted curve indicates that the financial markets expect a slower economy, if not a recession. At fiscal year end the yield curve showed a relatively moderate upward slope. PORTFOLIO ANALYSIS 3 Mth 2Yr3 Mth 2Yr 5Yr 5Yr10 Yr lOYr -•-07/01/2009 -f 12/31/200 9 -»-06/30/2010 .175 .048 .170 1.111 1.135 .601 2.514 2.679 1.773 3.480 3.837 2.931 INVESTMENT PORTFOLIO Dollar Amount of Assets (Fiscal Year End) $600.0 $550.0 $500.0 $450.0 $400.0 $350.0 $300.0 $250.0 $200.0 $150.0 $100.0 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 Total assets in the investment portfolio, based on cost, stood at $574.6 million at the end of the fiscal year; a $4.4 million increase. This increase includes interest earned, loan proceeds, and revenues in excess of expenses. CASH & INVESTMENTS RELATIVE TO TOTAL ASSETS OF CITY AND ITS AGENCIES* •Source: Comprehensive Annual Financial Report The City publishes a Comprehensive Annual Financial Report (CAFR) at the end of each fiscal year. Among other information, CAFR presents a balance sheet showing the total assets owned by the City and all its agencies. At the end of FY 09-10, cash and investments managed by the City Treasurer represent 33% of all assets reported by the City and its agencies. SOURCE OF POOL ASSETS (Dollar Amounts in Millions) 6/3O/O9 General $46.2 Agency & Int Special & Other $46.4 6/3O/1 O General Special & Other$73.4 ^^\ $ 49.0 Enterpris $124. Capital $ 44 277 Agency & Interi Enterprise $125 apital $28O Total Investments - $567.7 Million Total Investments - $571.4 Million The portfolio is an internal investment pool calculated that uses the inactive cash from the various funds of all City agencies, including the City, the Water District, and the Redevelopment Agency. The top three sources of portfolio assets calculated at amortized costs are the Capital Projects fund 49%, the Enterprise fund 22%, and the General fund 13%. Together, these three funds account for 84% of total portfolio assets. Investments are made in financial instruments authorized by the City's Investment Policy and the California State Government Code. With the exception of bank deposits and deposits in the California State Local Agency Investment Fund (LAIF), all investments are in fixed-income instruments with known maturity dates. ASSET ALLOCATION (Dollar Amounts in Millions) 6/30/09 LA.F/CASH CORPORATELAIF/CASH c,, $54.6 "H 6/30/10 SS81 7 LAIF/CASH S81>9 'FEDERAL AGENCY $317.6 $86.6 FEDERAL AGENCY $307.5 On June 30, 2010, 54% of portfolio assets were invested in federal agencies, 17% in corporate notes, 15% in US Treasuries and 14% in LAIF and cash. The allocation of assets to federal agencies and corporate notes decreased while the allocation to US Treasuries and LAIF increased from the previous year. Within the asset category of federal treasuries and agencies, investments in Treasuries, Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation*, the Federal National Mortgage Association*, and the Federal Farm Credit Bank, constituted 15%, 24%, 7%, 8%, and 10% of the total, respectively. Federal agencies are creations of the U. S. Congress and include agencies and government-sponsored enterprises. * (in conservatorship by Federal Housing Financing Agency) Total $570,194,074 [Total $574,649,669 ] PORTFOLIO YIELDS With 6 Month T-Bill Yields FY04-05 FY05-06 FY06-07 FY07-08 '*••—-„ FY08-09 FY09-10 -•-Portfolio -••T-Bill FY04-OS FY05-06 FY06-07 FY07-08 3.55 3.98 4.37 4.45 2.59 4.45 5.06 2.93 FY08-09 FY09-IO 3.72 2.52 .75 .20 The average return of the portfolio decreased to 2.52% from 3.72% the year before. The portfolio yield is heavily influenced by changes in short- term market interest rates since 22% of total investments were required to mature within one year. The average interest rate for six-month U.S. Treasury Bills decreased to .20% from .75% the previous year. This graph shows the percent change in value of the portfolio over the last several years. Investments gain and lose value subsequent to purchase 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 unrealized losses; commonly referred to as paper gains and paper losses. The gain/loss is not recognized until the investment is sold. Changes in value caused by changes in market interest rates are normal and are expected. 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% Historical Unrealized Gains/Losses as Percent of Amortized Cost July 2004 - June 2010 With a buy and hold policy, an objective of the City's Investment Policy is to achieve an average market rate of return over the economic cycle. The success in achieving this objective can be approximated with having unrealized gains and losses that are relatively equal over time. Tracking and measuring unrealized gains and losses could also reveal any presence of high-risk investments in the portfolio. The changes in asset values shown in the graph indicate that portfolio investments are within the acceptable interest rate risk identified in the City's Investment Policy. The total portfolio had a slight unrealized gain of 1.8% on June 30, 2010. If interest rates remain stable, unrealized gains and losses will remain near the 0.00%. However, a downward trend will continue if rates increase or when current investments with higher interest rates are called and reinvested at today's significantly lower market rates. Cash income from portfolio investments represents an annuity stream of revenues from the Treasury. This annuity stream totaled $18.3 million, a decrease of $5.5 million from the previous fiscal year. Of the total cash interest revenues earned by the portfolio, approximately $1.7 million was credited 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. ANNUITY STREAM FROM TREASURY (Cash Interest Revenue) For Fiscal Years Indicated 426^4- FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 PREVIEW National and international economic forces are the primary influences on U.S. market interest rates. Global Economy The global economy is moving toward slower austerity measures forced upon their sovereign the overall economy. Bloomberg surveyed 54 economy will continue to contract in 2011. majority of the developing countries are close developing countries are only a small piece growing economy, is moving to tame inflation or failure will affect the global economy. U.S. Economy growth. European countries struggle to manage counties due to massive debt that puts a drag on economists. Their consensus is that the global One bright spot is developing countries. The to regaining full capacity levels. However, the of the global economic pie. China, the fastest by slowing growth. The impact of their success The U.S. showed signs of recovery in 2010; however the forecast is for flat growth in 2010-11. Unemployment, housing and debt levels continue to hold growth in check preventing the U.S. economy from growing. There are lingering fears of a double dip recession coupled with persistent declines in spending. Inflation, which is a rise in the general level of the price of goods and services in an economy over a period of time, climbed 1.1 %. Core inflation is a measure of inflation that excludes certain items that face volatile price movements, notably food and energy is currently at .8%. The core annual inflation rate declined to the lowest point in nearly five decades, raising worries of deflation. City of Carlsbad Approximately $157 million of investments with fixed maturity dates will mature in FY 10-11. An additional $65 million will likely be called due to current low interest rates. Available proceeds from these investments will be reinvested at market rates lower than the maturing and called investments resulting in less revenue to the City. Revenue from LAIF investments will decline as LAIF's yields decline. At the end of FY 09-10, LAIF investments had a yield of .68%, and all other investments had a yield of 2.2%. Revenues on all investments will decrease due to the low interest rate environment. On June 30, 2010 the yield of the total portfolio averaged 2.5%. Total assets in the investment portfolio stood at $574 million at the end of FY 09-10. 8 APPENDICES TO ANNUAL REPORT OF INVESTMENT PORTFOLIO APPENDIX A: RISK MANAGEMENT AND DISCLOSURE All investments are exposed to risk of some type. The objective of risk management is to identify the risks involved and establish acceptable levels of risks that are consistent with the City's investment objectives. Risk management includes managing, measuring, monitoring, and reporting the various risks to which portfolio investments are exposed. Portfolio investments are exposed to the following types of risks: A. Credit risk. a. Custodial credit risk. a) Investments. b) Deposits. b. Default credit risk. c. Concentration credit risk. B. Interest rate risk. C. Event Risk. As of June 30, 2010, the portfolio had the following investments and cash in its internal investment pool. Market Value Investment Maturities Market Value Gain (Loss) U.S. agencies July 2010-April 2015 $397,817,000 $3,682,000 Corporate Notes July 2010-June 2014 100,665,000 2,081,000 Certif. of Deposit LAIF 78,136,000 128,000 Sweep accounts 3,295,000 Cash accounts 629,000 - Total $580,542,000 $5,891,000 Disclosures Custodial Credit Risk (Investments). The City uses a third party custody and safekeeping service for its investment securities. The Union Bank of California (UBC) is under contract to provide these custodial services. Custodial credit risk is the risk that the City will not be able to recover the value of its investments in the event of a UBC failure. All City investments held in custody and safekeeping by UBC are held in the name of the City and are segregated from securities owned by the bank. This is the lowest level of custodial credit risk exposure. Custodial Credit Risk (Deposits). The City maintains cash accounts at Wells Fargo Bank (WFB) and UBC. At the conclusion of each business day, balances in these accounts are "swept" into overnight investments. These overnight investments are pooled and collateralized with either U. S. government securities or U. S. agency securities. The California Code authorizes this type of investment. A small amount of cash is not swept from the WFB checking accounts to cover checks that may be presented for payment. Amounts up to $250,000 are FDIC insured. Default Credit Risk. Default credit risk is the risk that the issuer of the security does not pay either the interest or the principal when due. The debts of most U. S. agencies are not backed by the full faith and credit of the federal government; however, because the agencies are U. S. Government-sponsored, they carry AAA credit ratings. The default credit risk of these investments is minimal. Unless otherwise exempted, California state code limits investments to the top three credit ratings (AAA, AA, and A). It is the City's policy, however, to limit investments to the top two credit ratings (AAA and AA). As of June 30, 2010, eight investments in corporate notes had a credit rating below the AA limit. These investments were made when the credit rating were either AAA or AA. California state code and the City's Investment Policy allow the City Treasurer to determine the course of action to correct exceptions to the Policy. It is the intent of the City Treasurer to hold these investments in the portfolio until maturity unless events indicate a sale should be made. The default credit risk for corporate notes with a credit rating of single A is higher than U.S. Treasuries, federal agencies or LAIF, but is considered by the City Treasurer to be within acceptable limits for purposes of holding to maturity. The Local Agency Investment Fund (LAIF) is an investment pool managed by the California State Treasurer. Its investments are short-term and follow the investment requirements of the State. As of June 30, 2010, the average maturity of the LAIF investments was 204 days. The State Treasurer is not required to contract for a credit rating to be assessed for LAIF. California state code section 16429.3 excludes LAIF deposits from being transferred, loaned, impounded or seized by any state agency or official. 10 Concentration Credit Risk. Concentration credit risk is the heightened risk of potential loss when investments are concentrated in one issuer. The California state code does not identify a specific percentage that indicates when concentration risk is present for any one issuer. The state code does, however, require that total investments in medium-term corporate notes of all issuers not exceed 30% of the portfolio. As of June 3'0, 2010, approximately 17% of the City's total portfolio investments were in medium-term corporate notes. For concentration of investments in any one issuer, the City's Investment Policy requires that no more than 5% of investments in corporate notes be in any one issuer. There is no similar requirement in either the state code or the City's Investment Policy for U. S. agencies. As of June 30, 2010, no investments in any one corporate issuer exceeded 5% of total portfolio investments. Interest Rate Risk. Interest rate risk is the risk that investments will lose market value because of increases in market interest rates. A rise in market interest rates will cause the market value of investments made earlier at lower interest rates to lose value. The reverse will cause a gain in market value. As of June 30, 2010, the portfolio had a 1.0% gain in market value. The City's investment policy has adopted two means of limiting its exposure to market value losses caused by rising market interest rates: (1) Limiting total portfolio investments to a maximum modified duration of 2.2, and (2) requiring maturing investments within one year be equal to an amount that is not less than 2/3 of the current operating budget ($190,416,000). As of June 30, 2010, the modified duration of the portfolio was 1.401, within the required maximum of 2.2. Investments maturing within one year were $240,018,000, exceeding the required minimum of $126,950,000. The City's exposure to interest rate risk is within acceptable limits. Event Risk. Event risks include the chance that something unexpected will impede the ability of an issuer of a security to meet its obligations. These types of risks are usually short in duration, but can impair the city's ability to communicate with or use banking services. Such an event could cause a delay in collecting securities which have matured. Security risks are also within this category. 11 APPENDIX B: PORTFOLIO ACTIVITIES FOR FISCAL YEAR ENDED JUNE 30, 2010 The City's portfolio balance increased .08% from $570.2 million to $574.6 million in fiscal year 2009-10. The increase of $4.4 million does little to show the volume of cash that flows in and out of the portfolio in the course of one fiscal year. The following table illustrates that the City Treasurer managed over two billion dollars of cash inflows and cash outflows which prompted investment decisions during fiscal year 2009-10. Cash Flows: Bond Maturities $ 217,916,000 Bond Calls 113,000,000 Bond Sales LAIF Withdrawals 297,998,000 Sweep Withdrawals 501,150,000 Interest Income 18,322,000 Bond Purchases 307,921,000 LAIF Investments 323,975,000 Sweep Investments 499,822,000 Cash Investments (net) ( 67,000) Total $2.280.037.000 12 Lisa Hildabrand All Receive-Agenda Item # 1 For the Information of the: From: Sent: To: Cc: Subject: Charles McBride Monday, August 22, 2011 3:07 PM Lisa Hildabrand; Nancy Sullivan Tammy McMinn RE: Agenda item #13 Dete_Sl2l?City Manager Lisa, Conferred with Nancy on this. In the monthly reports, an explanatory footnote in Exhibit 8 explains the difference: The Reconciling Adjustments consist of differences between the General Ledger which is prepared on an accrual basis and the Treasurer's report which is prepared on the cash basis. Accrued interest, amortized premium or discounts and outstanding checks and deposits in transit are not included in the Treasurer's summary. Differences between the time journal entries are posted and the time this report is produced may also be a component of the adjustment. Let me know if this explanation does not suffice. Thanks, Chuck From: Lisa Hildabrand Sent: Monday, August 22, 2011 11:32 AM To: Charles McBride; Nancy Sullivan Cc: Tammy McMinn Subject: Agenda item #13 Chuck/Nancy- Could one of you provide me an explanation of what makes up the "reconciling adjustments" in the table on the front page of this agenda item? Thanks. Lisa Date: Distribution: City Clerk AssfcrGftyGtoifc Deputy Clerk Book ILL