HomeMy WebLinkAbout2019-05-07; City Council; ; Approve Annual Report of Investment Portfolio as of June 30, 2018� CITY COUNCIL� Staff Report
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May 7, 2019
Mayor and Council Members
Scott Chadwick, City Manager
Craig Lindholm, City Treasurer; Laura Rocha, Administrative Services
Director Laura.Rocha@carlsbadca.gov or 760-602-2415
Approve Annual Report of Investment Portfolio as of June 30, 2018
Recommended Action
Accept and file report.
Executive Summary
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, 2018.
Discussion
Fund equity balances are restricted for various purposes as listed below. This represents an
increase of $38.4 million from the previous fiscal year. This increase includes interest earned,
loan proceeds, and revenues in excess of expenses. Cash and investments comprise an
estimated 37 percent of the total assets reported by the city and its agencies.
Fund Equity in Pooled Investments
Cash Balance by Fund:
General 124,740,123
Special Revenue 32,778,373
Capital Projects 346,585,829
Enterprise 191,935,608
Internal Service 46,991,589
Agency & Trust Funds 16,055,349
Reconciling Adjustments 3,761,174
Total Treasurer's Investment Portfolio at Amortized Cost 762,848,045
For the last month of the fiscal year, the portfolio had a return of 1.57 percent. For the entire
fiscal year, however, the portfolio averaged 1.81 percent. Cash interest income totaled $11.2
million in FY17-18 of which approximately $2.9 million went to the General Fund. For the next
fiscal year (FY18-19), it is expected that the average return for the portfolio will be
approximately 2.0 percent.
May 7, 2019 Item #1 Page 1 of 17
Fiscal Analysis
None
Next Steps
The Annual Report of Investment Portfolio is produced once a year by the City Treasurer.
Environmental Evaluation (CEQA)
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.
Public Notification
This report was noticed in accordance with the Ralph M. Brown Act and was available for
viewing at least 72 hours prior to the posting of the agenda.
Exhibits
1. Annual Report of Investment Portfolio for Year Ended June 30, 2018.
May 7, 2019 Item #1 Page 2 of 17
April 9, 2019
Honorable Mayor, City Council,
Residents of the City of Carlsbad
1200 Carlsbad Village Drive
Carlsbad, CA 92008
City Treasurer Letter of Transmittal
2017-2018 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, 2018 (FY 17-18). 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 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 is provided about
global and domestic markets for the fiscal year ended June 30, 2018. Comparisons are also
made with the preceding fiscal years. Finally, a statement is offered regarding the prospects for
the fiscal year 2018-2019.
Sincerely,
CRAIG J. LINDHOLM
City Treasurer
1 May 7, 2019 Item #1 Page 4 of 17
The US trade deficit is shrinking slightly, due to ongoing negotiations that have resulted in
pending new trade agreements with South Korea, Canada and Mexico. It looks promising;
however, Congress still must complete its review and final authorization. China is currently
selling $534 Billion in goods to the US. Pressure on China is increasing, in the form of new
tariffs both real and pending by President Trump. When forming new Chinese enterprises,
theft of intellectual property and forced business partnerships are also key topics in these
ongoing negotiations.
Another interesting development from China is its "Belt and Road initiative," resulting in the
targeting of China's expertise and resources into infrastructure projects within strategic
markets around the globe. Recipients of these projects have in several instances been forced to
transfer control of these infrastructure projects over to China due to their inability to fund the
completed projects. The Mombasa Harbor, Kenya's largest seaport, is a recent example of this
new influence strategy. It was used as collateral for a $2.3 Billion infrastructure project, the
Kenya Railways Corporation (KRC). In this instance, China will end up with a controlling interest
if KRC defaults on its obligation to its Chinese contractors.
On the other side of the globe, the pending exit of the United Kingdom from the European
Union (Brexit) continues to generate great controversy on both sides of the discussion. Prime
Minister Theresa Mays has encountered significant resistance to the "deal" she brokered with
the EU . It remains unclear whether she will have the opportunity or audience to re-open
certain elements of this deal to make it more palatable. As the exit date approaches, all sides
to this debate have stepped up their forecasts of the impact of moving forward with the
decision to leave the EU that voters selected just over 2 years ago. Since this action was not
anticipated when the EU was formed, uncertainty abounds.
Domestic Observations
How do these global events potentially affect the City of Carlsbad? The answer to that question
depends on where one is positioned. If your company is involved with international trade and
working to develop a greater market share external to the US, a strong dollar makes your
products more expensive. Tariffs affect the rate of sales growth external to the US. One benefit
of the increasing interest rate environment flows directly into our invested funds. This past
year we have experienced a steadily increasing portfolio rate of return. The result of this rising
interest rate environment is an increase in the amount of interest income available for
reinvestment into the City of Carlsbad's pooled investment account.
Tax cuts were another big event of this past year. The reduction in taxes is projected to equal
approximately $1.5 Trillion over the next 10 years. The projected first year budget deficit that
will result from these tax cuts is projected to be $1.0 Trillion, up from $666 Billion in Fiscal Year
2017. The maximum US Corporate tax rate has been reduced from 35 percent down to 21
percent. This new tax law also encourages corporations with large offshore capital accounts to
repatriate an estimated $3.1 Trillion. Through September of 2018, approximately $465 Billion
had been repatriated.
9 May 7, 2019 Item #1 Page 12 of 17
The coming year promises to be filled with challenges from a number of sources. Steady,
measured investment decisions are the key to managing our financial resources most
effectively.
At the end of FY 17-18, LAIF investments had a yield of 1.81 percent, and all other investments
had a yield of 1.81 percent. Revenues from the investment portfolio are projected to increase
slightly over the coming year due to a likely moderation in future rate increases.
On June 30, 2018, the yield of the total portfolio averaged 1.57 percent. Total assets in the
investment portfolio stood at $762.8 million as measured on a cost basis at the close of FY 17-
18.
10 May 7, 2019 Item #1 Page 13 of 17
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, 2018, the portfolio had the following investments and cash in its internal
investment pool.
Investment
U. S. agencies
Corporate Notes
Certif. of Deposit
LAIF
Sweep accounts
Cash accounts
Total
Maturities
July 2018 -June 2023
July 2018-May 2023
Aug 2018 -June 2023
*Market Value less Amortized cost.
11
Market Value
$486,472,000
156,038,000
15,041,000
85,606,000
7,315,000
172,000
$750,644,000
Market Value
Gain (Loss)*
$ (7,893,000)
(2,540,000)
(262,000)
(161,000)
$(10,856,000)
May 7, 2019 Item #1 Page 14 of 17
DISCLOSURES
Custodial Credit Risk (Investments). The city uses a third-party custody and safekeeping service
for its investment securities. Wells Fargo Bank (WFB) 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 WFB failure. All city investments held in custody and
safekeeping by WFB 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).
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 a double A (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, 2018, 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
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, 2018, the average maturity of the LAIF investments was 193 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.
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, 2018, approximately 20.9 percent
of the city's total portfolio investments were in medium-term corporate notes.
12 May 7, 2019 Item #1 Page 15 of 17
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, 2018, 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, 2018, the portfolio had a 1.79 percent loss in market value
based on cost.
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 two thirds of the current operating budget
$257,648,000. As of June 30, 2018, the modified duration of the portfolio was 1.911, within the
required maximum of 2.2. Investments maturing within one year were $233,344,000,
exceeding the required minimum of $171,800,000. 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.
13 May 7, 2019 Item #1 Page 16 of 17
APPENDIX B: PORTFOLIO ACTIVITIES FOR FISCAL YEAR ENDED JUNE 30, 2018
The city's portfolio balance increased 5.3 percent from $724.4 million to $762.8 million based
on cost in fiscal year 2017-18. The increase of $38.4 million does little to show the volume of
cash that flows in and out of the portfolio during 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 2017-18.
Cash Flows:
Bond Maturities
Bond Calls
LAIF Withdrawals
Sweep Withdrawals
Interest Income
Bond Purchases
LAIF Investments
Sweep Investments
Total
$ 129,717,000
13,650,000
165,109,500
739,741,000
11,249,000
193,091,000
155,196,000
738,704,000
$2,146,457,500
14 May 7, 2019 Item #1 Page 17 of 17
To the members of the:
CITY COUNCIL
Date5/7 /1q CA _{_CC v
CM v COO JI_ DCM (3) £
May 7, 2019
To:
From:
uncil Memorandum
Re: Responses to Questi rom May 6 City Council Briefings
{city of
Carlsbad
Agenda Item No. 1-Annual Report of Investments Portfolio as of June 30, 2018
Question 1: What is the financial performance of supranational investments since acquisition?
Answer: Our pooled portfolio prese ntly holds ten (10) discrete Supranational positions of
varying maturities, totaling $17,600,000. The current yield on these investments is
2.5402%. The Supranational investments represent 2.310% of our total investment portfolio as
of April 30, 2019. Supranational investments earned the second highest rate of return within
our portfolio as of April 30, 2019.
cc: Celia Brewer, City Attorney
Elaine Lu key, Chief Operations Officer
City Manager's Office ·
City Hall 1200 Carlsbad Village Drive I Carlsbad, CA 92008 I 760-434-2820 t