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HomeMy WebLinkAbout2019-05-07; City Council; ; Approve Annual Report of Investment Portfolio as of June 30, 2018� CITY COUNCIL� Staff Report Meeting Date To: From: CA Review WV Staff Contact: Subject 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