HomeMy WebLinkAbout2021-02-16; City Council; ; Annual Report of Investments for the Fiscal Year Ended June 30, 2020CA Review CKM
Meeting Date: Feb. 16, 2021
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Craig Lindholm, City Treasurer
craig.lindholm@carlsbadca.gov, 760-602-2473
Subject: Annual Report of Investments for the Fiscal Year Ended June 30, 2020
Districts: All
Recommended Action
Accept and file Annual Report of Investments for the Fiscal Year Ended June 30, 2020.
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, 2020.
Discussion & Fiscal Analysis
All city investments are pooled and invested with a priority on safety, liquidity, and return on
investment. Pooled investments are restricted by fund, as broken out below. City investments
increased by $19 million from the previous fiscal year in book value. The increase is driven by
interest earned, loan payments received, and revenues in excess of expenses. For the entire
fiscal year, the portfolio averaged a return of 2.08%.
Equity balance by fund
General 135,632,969.00$
Special Revenue 37,734,258.00
Capital Projects 371,990,805.00
Enterprise 197,933,867.00
Internal Service 52,882,155.00
Agency & Trust Funds 22,583,641.00
Reconciling Adjustments (5,908,978.00)
Total Treasurer's Investment Portfolio 812,848,717.00$
Feb. 16, 2021 Item #1 Page 1 of 32
Next Steps
The Annual Report of Investments for the fiscal year is produced once a year by the city
treasurer.
Environmental Evaluation (CEQA)
This action does not constitute a “project” within the meaning of the California Environmental
Quality Act under California Public Resources Code Section 21065 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. Therefore, it does not require environmental review.
Public Notification and Outreach
Public notice of this item was posted in accordance with the Ralph M. Brown Act and it was
available for public viewing and review at least 72 hours prior to the scheduled meeting date.
Exhibits
1.Annual Report of Investments for the Fiscal Year Ended June 30, 2020
Feb. 16, 2021 Item #1 Page 2 of 32
Exhibit 1
Feb. 16, 2021 Item #1 Page 3 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Feb. 16, 2021 Item #1 Page 4 of 32
CITY
TREASURER
ANNUAL
REPORT OF
INVESTMENTS
Fiscal Year Ended June 30, 2020
Prepared by
Craig Lindholm, City Treasurer
February 16, 2021
Feb. 16, 2021 Item #1 Page 5 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
TABLE OF CONTENTS
Letter of Transmittal
Annual Report of Investment Portfolio
Fiscal Year 2018-19 Market Review
Portfolio Analysis
Fiscal Year 2018-19 Review
Appendices to Annual Report of Investment Portfolio
Appendix A: Risk Management
Appendix B: Disclosures
Appendix C: Portfolio Activities
Feb. 16, 2021 Item #1 Page 7 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
CITY TREASURER LETTER OF TRANSMITTAL
Fiscal Year 2019-20 Annual Report of Investment Portfolio
February 16, 2021
Honorable Mayor, City Council and residents of the City of Carlsbad,
I am pleased to present the Annual Report of Investments for the City of
Carlsbad for the fiscal year 2019-20 which ended June 30, 2020. 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 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 over fiscal year 2019-20. 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, 2020. Comparisons are also made with the
preceding fiscal years. Finally, a statement is offered regarding the
prospects for the fiscal year 2020-21.
Sincerely,
Craig J. Lindholm,
City Treasurer
Feb. 16, 2021 Item #1 Page 9 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
FISCAL YEAR 2019-20 MARKET REVIEW
Federal Funds Target Rate
The 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 2019-20, the
Federal Reserve ultimately decreased the federal funds by 1.75%.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Target Rate (%)Federal Funds Target Rate
History
Feb. 16, 2021 Item #1 Page 11 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Short-Term Interest Rates
Changes in short-term market interest rates are usually affected by the
actions of the Federal Reserve.
Short-term interest rates in the five year, two year, and six month
markets decreased in fiscal year 2019-20.
0.00
0.50
1.00
1.50
2.00
2.50
Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun
Five Year 1.68 1.34 1.49 1.60 1.65 1.67 1.37 0.89 0.36 0.36 0.30 0.31
Two Year 1.73 1.46 1.54 1.59 1.62 1.58 1.36 0.86 0.25 0.20 0.16 0.16
6 Month 2.03 1.85 1.79 1.55 1.60 1.56 1.54 1.11 0.13 0.11 0.18 0.15Interest Rates (%)Short-Term Investment Rates
US Treasury Instruments
Fiscal Year 2019-20
Feb. 16, 2021 Item #1 Page 12 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Market Yield Curve
The yield curve is a graphic presentation of the difference between
short-term and longer-term interest rates of US 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 mostly flat
with a small upward slope, with short-term rates lower than longer-term
rates. A normal yield curve occurs when short-term market rates are
less than longer-term market rates. Normal yield curves point toward
economic expansion.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Three Month Two Year Five Year Ten YearYield (%)Market Yield Curve
Three Year History
6/30/2018 6/30/2019 6/30/2020
Feb. 16, 2021 Item #1 Page 13 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
PORTFOLIO ANALYSIS
Portfolio Assets
Total assets in the investment portfolio, based on book value, stood at
$812.8 million at the end of the fiscal year; a $19 million increase. This
increase includes interest earned, loan payments received, and
revenues in excess of expenses.
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20Assets ($ Millions)Fiscal Year
Investment Portfolio
Total Book Value of Assets
Feb. 16, 2021 Item #1 Page 14 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Total City Assets
The city publishes a Comprehensive Annual Financial Report (CAFR) at
the end of each fiscal year as required by California state law and in
conformity with General Accepted Accounting Principles and
requirements prescribed by the Governmental Accounting Standards
Board.
Among other information, the CAFR presents a statement of net
position showing the total assets owned by the city and all its agencies.
At the end of fiscal year 2019-20, cash and investments managed by the
city treasurer represented 39.8% of all assets reported by the city and its
agencies.
599 615 622 649 686 699 703 729 777 806
1,177 1,191 1,192 1,178 1,182 1,210 1,222 1,225 1,213 1,219
$1,777 $1,806 $1,814 $1,827 $1,868 $1,909 $1,925 $1,954 $1,990 $2,025
$0
$500
$1,000
$1,500
$2,000
$2,500
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20Assets ($ Millions)Cash & Investments Relative to Total Assets
Fair Market Value
Cash & Investments Other Assets
Feb. 16, 2021 Item #1 Page 15 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Sources of Assets
The portfolio is an internal investment pool that invests the available
cash from various funds of all city agencies, city owned and fiduciary
assets. The top three sources of portfolio assets calculated at market
value are: Capital Project Funds at 44.7%; Enterprise Funds at 24.2%;
and the General Fund at 16.7%. Together, these three funds account for
85.6% of total portfolio assets.
The Capital Project Fund includes funds for the General Capital
Construction, Traffic Impact Fees, Public Facilities Fees, Park
Development, TransNet Taxes, Drainage Fees, Special Districts,
Infrastructure Replacement, and Gas Tax funds. Enterprise Funds are the
Carlsbad Municipal Water District, Sewer, Solid Waste, Storm Water,
and Golf Course funds.
General
$136 Capital Projects$372
Enterprise$198
Agency & Internal$75
Special & Other
$38
Fiscal Year 2019-20
By Fund Type, in Millions
At Fair Market Value
General
$128 Capital Projects
$354
Enterprise$204
Agency & Internal$71
Special & Other
$36
Fiscal Year 2018-19
By Fund Type, in Millions
At Fair Market Value
Source of Pooled Assets
Feb. 16, 2021 Item #1 Page 16 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Allocation of Assets
Investments are made in financial instruments as authorized by the City
of Carlsbad Investment Policy and the California 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, 2020, 29.6% of portfolio assets were invested in federal
agencies, 28.5% in corporate notes, 10.0% in US Treasuries, 2.3% in
certificates of deposit and 23.8% in cash and cash equivelents. During
the past fiscal year, the dollar allocation of portfolio assets to federal
agencies, corporate notes, LAIF, cash, and certificates of deposit
increased while the allocation to US Treasuries decreased from the
previous year.
Federal Agency
$241
Corporate
$235
LAIF & Cash
$192 US Treasury
$81
CD
$18
Agency backed
securities
$7
Fiscal Year 2019-20
Invested, in MillionsAt Book Value
Federal Agency$410
Corporate
$162
LAIF & Cash
$123
US Treasury
$80 CD$19
Fiscal Year 2018-19
Invested, in MillionsAt Book Value
AssetAllocation
Federal Agency Breakdown by Percentage of Total Portfolio
Federal Farm Credit Bank 12.28%Federal Agricultural Mortgage Corporation 1.98%
Federal Home Loan Bank 9.70%Tennessee Valley Authority 0.49%
Federal Home Loan Mortgage Corporation 9.41%RFCO Strip Principal 0.49%
Supranational 6.45%Private Export Funding Corporation 0.41%
Federal National Mortgage Association 4.13%
Feb. 16, 2021 Item #1 Page 17 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Yields
The average return of the portfolio decreased from 1.96% to 1.69%. The
portfolio yield is heavily influenced by changes in short-term market
interest rates. The average interest rate for six-month US Treasury Bills
decreased to 0.18% from 2.38% the previous year. This graph shows the
change in percentage 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 to be expected.
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.
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Portfolio 1.14 1.05 1.09 1.16 1.25 1.57 1.96 1.69
Treasury Bills 0.11 0.06 0.07 0.34 0.71 1.61 2.38 0.18
0.00
0.50
1.00
1.50
2.00
2.50
Yield (%)Portfolio Yields
Compared to Six Month Treasury Yields
Feb. 16, 2021 Item #1 Page 18 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
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 portfolio investments are within
acceptable interest rate risk standards identified in the city’s investment
policy. The total portfolio had an unrealized gain of 1.812% on June 30,
2020. If going forward, we begin to see moderation occur, with respect
to future interest rate increases, unrealized gains and losses should
remain at or near zero percent. This is due to the average maturity of
the overall portfolio positioned at just under two years.
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11Jan 12Apr 12Jul 12Oct 12Jan 13Apr 13Jul 13Oct 13Jan 14Apr 14Jul 14Oct 14Jan 15Apr 15Jul 15Oct 15Jan 16Apr 16Jul 16Oct 16Jan 17Apr 17Jul 17Oct 17Jan 18Apr 18Jul 18Oct 18Jan 19Apr 19Jul 19Oct 19Jan 20Apr 20Percentage of Amortized Cost (%)Historical Unrealized Gains & Losses
Feb. 16, 2021 Item #1 Page 19 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
Annuity Stream
Interest income from portfolio investments represents an annual stream
of revenues. This annual stream totaled $17.03 million, an increase of
$2.19 million from the previous fiscal year. This increase can be
attributed to early higher yields earned by the portfolio prior to the
Covid-19 pandemic and an overall larger pool of investments. Of the
total cash interest revenues earned by the portfolio, approximately $3.4
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 interest payment schedules of the portfolio holdings.
$9.57
$8.10 $7.90 $8.70 $9.30
$11.25
$14.84
$17.03
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20Interest Revenue ($ Millions)Fiscal Year
Annuity Stream From Treasury
Cash Interest Revenue
Feb. 16, 2021 Item #1 Page 20 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
FISCAL YEAR 2019-20 REVIEW
Global & Domestic Observations
Whatever projections were originally made for 2020 have been
increasingly revised downward. As of June 2020 global economic growth
was projected to come in at 5.4%. This represents a reduction of 6.5%
from earlier projections in January of 2020. The relentless spread of
Covid-19 has changed everything. As businesses weave their response to
this pandemic, they face multiple headwinds. Immediate investments
have been concentrated in workplace protection construction, personal
safety devices, masks, and physical shielding. Retail spaces have been
reconfigured with reduced capacity and restaurants have experienced
significant cuts to their dining seating. Restaurants have been especially
impacted by tough Covid-19 guidelines. This environment, in certain
markets, has resulted in the closure of 40% of small businesses. On the
consumer side, globally and domestically, lockdowns have resulted in
reduced demand for goods and services. Savings rates for those still
working have soared due to concern over the potential elimination of
their employment. One projection estimated that between the last
quarter of 2019 and the first quarter of 2020 lost hours of work were
the equivalent of 180 million jobs. The decisions to inject fiscal stimulus
and other forms of benefits and support by governments around the
world have helped mitigate the damage to households and individuals
throughout the pandemic. The result of this financial support and
accommodative fiscal policies has created huge deficits around the
world. Several estimates project these expenditures at just under $13
trillion. Energy costs in the fossil fuels sector hit historically low levels,
especially in April of 2020. Since that low, oil has traded in a stable range
helping to keep inflation in check.
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
Another global development is the growing interest in and acceptance
of cryptocurrencies. Bitcoin is the largest cryptocurrency at this time.
Financial institutions and individuals are seeking alternative investments
as defensive strategies in the face of weakening currencies. While still
far from mainstream, interest in these new forms of currency is
strengthening. As a point of comparison, the US dollar represents 62%
of the worlds reserve currency. We receive numerous benefits from our
currency holding this acknowledgment of being the world’s largest
reserve currency.
As of June 30, 2020, there were 10.2 million cases of Covid-19 confirmed
with more than 500,000 reported deaths worldwide. It was noted at the
time that the pandemic was speeding up. As a result of these grim
statistics, economic forecasts were being revised everywhere, placing
extraordinary pressure on corporate leadership and governments
everywhere to revise their approach. Multiple approaches to potential
vaccines were launched. As of June 2020, roughly 20 million Americans
had lost their jobs.
One of the many changes that the American workforce faced as the
pandemic spread across the United States was the shift to work from
home. To further complicate matters, K through 12 students found
themselves thrust into a remote learning environment with parents
assuming responsibility of their child and their participation in this grand
experiment. Colleges and universities were already trending into remote
learning options, the pandemic only helped accelerate the shift distance
learning.
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
Corporations with large corporate offices suddenly found themselves
with significant excess office space. Minimal staffing for required
support functions continue to work in their traditional environment. The
majority however, found that working from home was a plus, giving
time and providing greater family connections if they could make it
work. Employee productivity was an initial concern, but as the pandemic
has progressed most businesses are reporting satisfactory results. Many
businesses have identified new protocols to their existing business
model that are a direct result of this new environment. Customer
service is being reinvented on a daily basis as businesses look for ways
to protect their employees and customers as everyone adapts to this
“new normal”.
Another economic impact has been trending in the housing market.
Extended periods of lockdown have identified needs for more space for
work at home families and a desire to have a yard to enjoy the outdoors.
This has sparked a trend termed deurbanization. The appeal of living in a
downtown city space seems to be fading as the ability to work remotely
has opened up the option of living elsewhere. This coupled with a
shortage of new and existing housing inventory has pushed up housing
prices to historically high levels. In addition to the lack of inventory, the
Federal Reserve’s 0% highly accommodative interest rate policy has
moved mortgage financing rates to all-time lows, putting further
pressure on housing prices.
Financial returns in the period ending June 30, 2020 were surprisingly
positive. There was a strong rebound from the March 2020 lows,
primarily in response to the huge infusion of fiscal and monetary
stimulus provided by the federal government to prop up the economy as
the impact of the pandemic affects more businesses and individuals
throughout the economy. Technology stocks have been the primary
leaders during this period.
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
At the end of fiscal year 2019-20, LAIF investments had a yield of 1.15%,
and all other investments had a yield of 1.88%. Revenues from the
investment portfolio are projected to decrease over the coming year
due to the effects that the Covid-19 pandemic has had on yields.
For the month of June 2020, the yield of the total portfolio averaged
1.69%. Total assets in the investment portfolio stood at $828 million as
measured at fair market value at the close of fiscal year 2019-20.
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Fiscal Year Ended June 30, 2020
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Fiscal Year Ended June 30, 2020
CITY TREASURER
ANNUAL REPORT
OF INVESTEMENTS
APPENDICES
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Fiscal Year Ended June 30, 2020 Feb. 16, 2021 Item #1 Page 27 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
APPENDIX A: RISK MANAGEMENT
Risk Management
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:
• Credit risk
- Custodial credit risk
• Investments
• Deposits
- Default credit risk
- Concentration credit risk
• Interest rate risk
• Event risk
As of June 30, 2020, the portfolio had the following investments and
cash in its internal investment pool. The amounts shows do not include
$3.5 million in interest receivable.
Investment Maturities Market Value Gain (Loss)*
US agencies July 2020 – June 2025 368,065,333$ 130,577,062$
Agency-backed MBS November 2022 – May 2025 7,227,112 61,217
Corporate notes July 2020 – June 2025 240,987,959 6,851,312
Certificates of deposit July 2020 – June 2025 18,956,503 626,362
CAMP 1,004,415 -
LAIF 185,227,581 -
Cash accounts 6,857,307 -
828,326,210$ 138,115,953$
*Market value less amortized cost.
Feb. 16, 2021 Item #1 Page 28 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
APPENDIX B: DISCLOSURES
Custodial Credit Risk (Investments)
The city uses a third-party custody and safekeeping service for its
investment securities. Wells Fargo Bank 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
Wells Fargo Bank failure. All city investments held in custody and
safekeeping by Wells Fargo Bank 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. 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 US government securities or US agency
securities. The California Code authorizes this type of investment. A
small amount of cash is not swept from the Wells Fargo Bank 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 US
agencies are not backed by the full faith and credit of the federal
government; however, because the agencies are US Government-
sponsored, they carry double A (AA) credit ratings. The default credit
risk of these investments is minimal.
Unless otherwise exempted, California Government 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
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Annual Report of Investments
Fiscal Year Ended June 30, 2020
credit ratings (AAA and AA). As of June 30, 2020, five 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
and a subsequent change in rating has occured. California Government
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
(A)is considered by the city treasurer to be within acceptable limits for
purposes of holding to maturity and is within the California Government
Code limitations.
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, 2020, the average maturity of the LAIF
investments was 180 days. The state treasurer is not required to
contract for a credit rating to be assessed for LAIF. California
Government 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 Government
Code does not identify a specific percentage that indicates when
concentration risk is present for any one issuer. California Government
Code Section 53601(k) does, however, require that total investments in
medium-term corporate notes of all issuers not exceed 30% of the
portfolio. As of June 30, 2020, approximately 28.5% of the city’s total
portfolio investments were in medium-term corporate notes.
Feb. 16, 2021 Item #1 Page 30 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
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
California Government Code or the city’s investment policy for US
agencies. As of June 30, 2020, 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, 2020, the portfolio had a 1.81% gain 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 to be
equal to an amount that is not less than two thirds of the current year
operating budget of $297,048,458 (fiscal year 2019-20). As of June 30,
2020, the modified duration of the portfolio was 1.77, within the
required maximum of 2.2. Investments maturing within one year were
$313,065,467, exceeding the required minimum of $297,048,458. 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.
Feb. 16, 2021 Item #1 Page 31 of 32
Annual Report of Investments
Fiscal Year Ended June 30, 2020
APPENDIX C: PORTFOLIO ACTIVITIES - FISCAL YEAR
2019-20
The city’s portfolio balance increased 2.4% from $793.8 million to
$812.8 million based on book value in fiscal year 2019-20. The increase
of $19 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 $1.6 billion of cash inflows and cash
outflows which prompted investment decisions during fiscal year.
Cash Inflows and Outflows
Bond calls $ 200,000,000
Bond maturities 149,000,000
Bond purchases 291,000,000
Interest income 1,700,000
LAIF investments 305,300,000
LAIF withdrawals 237,600,000
Sweep investments 213,200,000
Sweep withdrawals 223,600,000
$ 1,621,400,000
Feb. 16, 2021 Item #1 Page 32 of 32