HomeMy WebLinkAbout2015-04-21; City Council; 21939; Annual Report of Investment Portfolio Year Ended June 30, 2014CITY OF CARLSBAD - AGENDA BILL
21.939 AB#
MTG. 4/21/15
DEPT. Treasury
ANNUAL REPORT OF INVESTMENT
PORTFOLIO
FOR YEAR ENDED JUNE 30, 2014
DEPT.DIRECTOR
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, 2014 (FY13-14).
Assets in the investment portfolio totaled $660 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 101,358,582
Special Revenue 46,591,230
Capital Projects 288,598,288
Enterprise 166,006,033
Internal Service 38,244,077
Agency & Trust Funds 19,652,122
Reconciling Adjustments (363,688)
Total Treasurer's Investment Portfolio at Amortized Cost 660,086,644
Fund equity balances are restricted for various purposes as listed above. This represents an
increase of $21.6 million from the previous fiscal year. Cash and investments comprise an
estimated 36 percent 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 1.06 percent. For the entire
fiscal year, however, the portfolio averaged 1.04 percent. Cash interest income totaled $8.1
million in FY13-14 of which approximately $1.27 million went to the General Fund. For the next
fiscal year (FY14-15), it is expected that the average return for the portfolio will approximate
1.08 percent.
FISCAL IMPACT:
None
DEPARTMENT CONTACT: Nancy Sullivan (760) 602-2473 Nancv.Sullivan@carlsbadca.qov
FOR CITf CLERKS USE ONLY
COUNCIL ACTION: APPROVED CONTINUED TO DATE SPECIFIC •
DENIED CONTINUED TO DATE UNKNOWN •
CONTINUED • RETURNED TO STAFF •
WITHDRAWN • COUNCIL RECEIVED THE •
AMENDED • REPORT/PRESENTATION
OTHER-SEE MINUTES •
Annual Report of Investment Portfolio FYE 6/30/14
April 21, 2015
Page 2
ENVIRONMENTAL IMPACT:
Pursuant to Public Resources Code section 21065, this action does not constitute a "project"
within the meaning of CEQA in that it has no potential to cause either a direct physical change
in the environment, or a reasonably foreseeable Indirect physical change in the environment,
and therefore does not require environmental review.
EXHIBITS:
1. City Treasurer's Annual Report of Investment Portfolio for the fiscal year ended
June 30, 2014.
City Treasurer's
Annual Report of Investments
Fiscal Year Ended 6/30/14
(FY 13-14)
Ccity of
Carlsbad 3
City Treasurer's
Annual Report of Investments
For Fiscal Year Ended June 30,2014
TABLE OF CONTENTS
Letter of Transmittal
Market Review FY 13-14
Portfolio Analysis
Preview FY 14-15
Appendices:
A: Risk Management and Disclosure
B: Portfolio Activity for Year Ended June 30, 2013
Page
1
2
3
7
9
12
1635 Faraday Avenue, Carlsbad, CA 92008
Website: www, carlsbadca. gov
Prepared by the Treasury Department
4^^^ CITY OF
VXARLSBAD
Office of the Treasurer www.carlsbadca.gov
March 2015
Honorable Mayor, City Council,
Residents of the City of Carlsbad
1200 Carlsbad Village Drive
Carlsbad, CA 92008
City Treasurer Letter of Transmittal
2013-2014 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, 2014 (FY 13-14). 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 provide perspective to this data a summary of observations
are provided about global and domestic markets for the fiscal year ended June 30, 2014.
Comparisons are also made with the preceding fiscal years. Finally, a statement is
offered regarding the prospects for the fiscal year 2014-2015.
Sincerely,
Craig Lindholm
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, 2014
FY13-14 MARKET REVIEW
3.00%
2.75%
2.50%
2.25%
2.00%
1.75%
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%
0.00%
Federal Funds Target Rate
FY 13-14
2.00%
1.50%
1.00%
0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
AN
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 13-14,
the Federal Reserve maintained the
federal funds rate at 0.25 percent.
Changes in short-term
market interest rates are
usually affected by the
actions of the Federal
Reserve.
Six-month and two year
market rates remained
relatively flat over the
course of the fiscal year.
The five year market rate
increased from 1.40 percent
in fiscal year 12-13 to 1.60
percent to end fiscal year
13-14.
SHORT-TERM INTEREST RATES
Percent
2.50
2.00
1.50
1.00
0.50
0.00 ^
U.S. Treasury Instruments
Fiscal Year 2013 - 2014
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
•Five Year
• Two Year
-6 Month
JUL AUG SEP OCT NOV DEC ]AN FEB MAR APR MAY iUN
1.38 1.64 1.38 1.33 1.37 1.74 1.49 1.50 1.75 1.68 1.54 1.63
.31 .40 .32 .31 .28 .38 .33 .32 .45 .41 .38 .46
.07 .05 .03 .08 .10 .09 .05 .07 .06 .04 .05 .06
YIELD CURVE
7/01/13,12/30/13, 6/30/14
Market Rates
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.
-^7/1/2013
— 12/31/2013
—6/30/2014
2 Yr 5 Yr
3 Mth 2Yr 5 Yr 10 Yr
0.038 0.311 1.379 2.577
0.068 0.382 1.743 3.029
0.023 0.459 1.631 2.531
10 Yr
PORTFOLIO ANALYSIS
$700.0
$650.0
$600.0
$550.0
$500.0
$450.0
$400.0
$350.0
$300.0
$250.0
$200.0
$150.0
$100.0
INVESTMENT PORTFOLIO
Dollar Amount of Assets (Fiscal Year End)
Millions
$641.9 $663.3
FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13 FY13-14
Total assets in the
investment portfolio, based
on cost, stood at $663.3
million at the end of the
fiscal year; a $21.4 million
increase. This increase
includes interest earned,
loan proceeds, and
revenues in excess of
expenses.
'7
CASH & INVESTMENTS RELATIVE TO
TOTAL ASSETS OF CITY AND ITS AGENCIES^=
$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$600
$400
$200
S Millions
$1,712 $1,755 $1,777 J 51,80 3 $1 fl14 $ .827
,$573
1
.$579 $599 $615 $622 ,$573
1
.$579 $599 $615 $622 ,$573
1
.$579 $599 $615 $622 ,$573
1
.$579 $599 $615 $622 ,$573
1
.$579 $599 $615 $622 ,$573
1
.$579 $599 $615 $622 $649
y
,$573
1 1 1 1 1
$649
y
,$573
1 1 1 1 1
$649
y
,$573
1 1 1 1 1
$649
FY08-09 FY09-10 FYlO-11 FYll-12 FY12-13 FY13-14
I Cash/Investments • Total Assets
•Source: Comprehensive Annual Financial Report.
The city publishes a
Comprehensive Annual
Financial Report (CAFR) at
the end of each fiscal year.
Among other information,
the CAFR presents a
balance sheet showing the
total assets owned by the
city and all its agencies. At
the end of FY 13-14, cash
and investments managed
by the City Treasurer
represent 36 percent of all
assets reported by the city
and its agencies.
SOURCE OF POOL ASSETS
(Dollar Amounts in IVIillions)
6/3 0/1 3 6/30/1 4
General
$94.
$54.0
.Agency S.L Inl^mal
Special & Other
$43.0
Enterprise
$1
General
$101.0
55
Capital 5 57 5
292.0 Agency & Interi^
Enterprise
$166.0
Special & Other
$ 46.5
Capital
$289.0
Total Investments - $638 Million Total Investments - $660 IVIillion
The portfolio is an internal investment pool that invests the available cash from various funds of
all city agencies, including the city and the water district. The top three sources of portfolio assets
calculated at amortized costs are the Capital Projects Fund 44 percent, the Enterprise Fund 25
percent, and the General Fund 15 percent. Together, these three funds account for 84 percent of
total portfolio assets.
ASSET ALLOCATION
(Dollar Amounts in Millions)
6/30/13 6/30/14
CORPORATE
LAIF/CASH
$126.4
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.
On June 30, 2014, 53.5 percent
of portfolio assets were
invested in federal agencies,
24.5 percent in corporate
notes, 0.7 percent in US
Treasuries, 2.2 percent
certificates of deposit and 19.1
percent in LAIF and cash. The
allocation of assets to federal
agencies and treasuries
increased while the allocation
to CD's, LAIF and cash and
corporate notes decreased
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*, the
Federal Farm Credit Bank, and Federal Agricultural Mortgage Corporation constituted .75, 20, 9,
14, 9 and 2 percent of the total portfolio, respectively. Federal agencies are creations of the U. S.
Congress and include agencies and government-sponsored enterprises.
LAIF/CASH
$156.1
CD
$17.3 .
US
TREASURY
$2.1
FEDERAL
AGENCY
$296.8
CORPORATE
$162.5
FEDERAL
AGENCY
$354.9
Total $641,918,632 Total $663,340,405
PORTFOLIO YIELDS
With 6 Month T-Bill Yields
FY08-09 FY09-10 FY10-11 FY11-12 FY12-13 FY13-14
-^Portfolio
-*-T-Bill
FY08-09 FY09-10 FYlO-11 FYll-12 FY12-13 FY13-14
i.ll 2.52 2.06 1.65 1.14 L04
.75 .20 .16 .09 .11 .06
The average return of the portfolio
decreased to 1.04 percent from
1.14 percent the year before. The
portfolio yield is heavily
influenced by changes in short-
term market interest rates since 21
percent of total investments were
required to mature within one year.
The average interest rate for six-
month U.S. Treasury Bills
decreased to 0.06 percent from
0.11 percent the previous year.
9
This graph shows the percent change in value of the portfolio over the last several years.
Investments gain and lose market value subsequent to purchase because of changes in market
interest rates. When market interest rates decrease, investments made previously 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
due to changes in market interest rates are normal and are expected.
Historical Unrealized Gains/Losses
as Percent of Amortized Cost
July 2005-June 2014
-1.50%
-2.00%
-2.50%
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 0.20 percent on June 30, 2014. If interest rates
remain stable, unrealized gains and losses will remain near the zero percent. However, this
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.
10
Cash income from portfolio
investments represents an
annual stream of revenues
from the Treasury. This
annual stream totaled $8.1
million, a decrease of $1.5
million from the previous
fiscal year. Of the total cash
interest revenues earned by the
portfolio, approximately $1.27
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
portfolio holdings.
ANNUITY STREAM FROM TREASURY
(Cash Interest Revenue)
, , For Fiscal Years Indicated
Millidiis
FY07-08 FY08-09 FY09-10 FYIO-U FYll-12 FY12-13 FY13-14
FY 14-15 PREVIEW
National and international economic forces and events have a direct influence on the United States
equity and fixed income markets.
Global Economy
The global economy continues to search for any sign of growth. Weak demand from developed
markets has slowed China's exports. In response to this weakened export demand, a variety of
strategies have been implemented in an effort to stimulate domestic consumption. So far, the
results of these efforts are mixed. The European Central Bank (ECB) has proposed a program of
quantitative easing, modeled after similar strategies implemented by our Federal Reserve. The
ECB announced that as of mid-2014 the EuroZone inflation rate was 0.30 percent with an
annualized rate of 0.90 percent. Genuine concern is building as to whether deflation may be
forming, making growth even more elusive. Germany continues to produce over 50 percent of the
total EuroZone GDP. Japan is feeling the effects of a consumption tax increase implemented April
1. Real disposable income is down 6 percent over this past year and prices are rising due to
depreciation in the Japanese yen. GDP is projected to be down 1.6 percent this year after hitting a
historical high six years ago. In summary, global economic conditions remain fragile.
//
U.S. Economy
The first round of Quantitative Easing was initiated in 2008 and continues today. The primary
effect of this extraordinary commitment to both issue and repurchase $85 billion monthly of US
debt instruments has been to suppress interest rates to historical low levels. In mid-2014, the
Federal Reserve stated it was likely to wind down this program by October. It is widely
acknowledged that this multiyear monetary policy has supported a substantial increase in stock
market valuations. The current bull market started over five years ago. Corporate balance sheets
are strong with historical levels of cash on hand. Individuals and corporations have benefited from
the historical low interest rates. Significant deleveraging has occurred through refinancing and
consolidation of existing debt. Corporations have not announced expansion or other strategies that
would deploy some of the accumulated capital. Uncertainty is one reason that is often referenced
by corporations for holding back. Capacity utilization figures suggests further growth can be
supported in most areas of the economy.
As individuals and families focus on debt reduction, it positions them for improving consumer
sentiment. At some point, we can expect to see a return of the consumer and consumption in many
areas of the economy. One extraordinary area of growth is that of new automobile sales. After a
prolonged period of low interest rates and with the average age of automobiles on the road greater
than 10 years, sales have rebounded. End of year sales projections call for approximately 17million
new cars and trucks to be sold. Contributing to this growth is the very accommodating interest rate
environment to finance or lease these new vehicles.
Overall, job growth remains subpar when contrasted against previous recoveries. The
unemployment figure stood at 6.1 percent in the month of June. US Gross Domestic Product (GDP)
is projected to come in at just under 2 percent by end of year, much of this back-loaded into the
second half of the year. Inflation is showing no sign of becoming a problem within the broader
economy. Energy discovery and production continues to benefit our economy. Incomprehensible
only 10 years ago, we are on track to free ourselves of imported oil to fuel our economy. Previously
importing approximately 60 percent of our energy requirements, we have the potential to become
the world's largest exporter of oil natural gas and refined products. Housing valuations continue
to show improvement year-over-year. Greatest strength has been evidenced in multi-family
construction. Young individuals and families are looking for apartments to establish their
households. Existing home sales have shown some improvement. Inventory is very constrained
for new housing construction but data is suggesting a modest increase as demonstrated by
construction permits issued.
At the end of FY 13-14, LAIF investments had a yield of 0.23 percent, and all other investments
had a yield of 1.06 percent. Revenues on all investments will decrease due to the low interest rate
environment.
On June 30, 2014 the yield of the total portfolio averaged 1.04 percent. Total assets in the
investment portfolio stood at $663 million at the end of FY 13-14.
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, 2014, 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 2014 -June 2019 $359,087,000 $ (197,000)
Corporate Notes Sept 2014-•Nov 2018 161,068,000 1,236,000
Certif. of Deposit Aug 2014-Apr 2018 14,579,000 12,000
LAIF 122,473,000 37,000
Sweep accounts 3,474,000 —
Cash accounts 493000 —
Total $661,174,000 $1,088,000
/3
Disc/osures
Custodial Credit Risk (Investments). The city uses a third party custody and safekeeping
service for its investment securities. The Mitsubishi UFJ Financial Group Union Bank, N.A.
(MUFGUB) 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 MUFGUB 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 MUFGUB. 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 AA 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, 2014, three investments in corporate notes had a credit
rating below the AA limit. These investments were made when the credit ratings 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 30,2014, the average maturity of the LAIF investments was 232 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 percent of the portfolio. As of June 30, 2014, approximately 24.5 percent 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 percent 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, 2014, no investments in any one corporate issuer exceeded 5 percent 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, 2014, the portfolio had a 0.412 percent 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 ($211,172,000). As of June 30,
2014, the modified duration of the portfolio was 2.08, within the required maximum of 2.2.
Investments maturing within one year were $193,311,000, exceeding the required minimum of
$140,781,000. 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, 2014
The city's portfolio balance increased 3.3 percent from $641.9 million to $663.3 million based on
cost in fiscal year 2013-14. The increase of $21.4 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 2013-14.
Cash Flows:
Bond Maturities $ 56,430,000
Bond Calls 52,150,000
LAIF Withdrawals 181,643,000
Sweep Withdrawals 835,964,000
Interest Income 8,106,000
Bond Purchases 161,922,000
LAIF Investments 155,266,000
Sweep Investments 861,280,000
Cash Investments (net) (155.000)
Total $2.312.606.000
12