HomeMy WebLinkAbout2021-11-16; City Council; ; Annual Report of Investments for the Fiscal Year Ended June 30, 2021CA Review CKM
Meeting Date: Nov. 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, 2021
District: All
Recommended Action
Accept and file Annual Report of Investments for the Fiscal Year Ended June 30, 2021.
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, 2021.
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. The portfolio
increased by $9.4 million from the previous fiscal year measured at 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 1.34%.
Equity balance by fund
General $156,759,954
Special revenue 32,527,856
Capital projects 381,075,481
Enterprise 187,133,655
Fiduciary and internal 55,178,995
Reconciling adjustments 924,468
Total Treasurer's Investment Portfolio $813,600,409
Book value is used to show the actual impact on the city’s balance sheet and is easy to measure
when compared to market value. Book value is the value of investments as measured by
amortized cost of securities, that is, the original cost with any premiums or discounts taken at
the time of purchase depreciated since the purchase date. Market value is the value of
securities as they would be valued if sold in a competitive market, ignoring cost and
Nov. 16, 2021 Item #1 Page 1 of 31
amortization, and is typically higher than book value. The market value of the city’s portfolio is
$821.3 million as demonstrated in the attached report. Both book and market values are used
where needed or most easily measurable in the annual report.
Next Steps
The City Treasurer will continue to track market trends to make informed, prudent and
appropriate decisions in managing the city’s investment portfolio. The Treasurer will also
continue to produce monthly reports on city investments for the City Council as well as the
Annual Report of Investments.
Environmental Evaluation
This action does not require environmental review because it 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.
Public Notification and Outreach
This item was noticed in accordance with the Ralph M. Brown Act and available for viewing at
least 72 hours prior to the meeting.
Exhibits
1. Annual Report of Investments for the Fiscal Year Ended June 30, 2021
Nov. 16, 2021 Item #1 Page 2 of 31
Exhibit 1
Nov. 16, 2021 Item #1 Page 3 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021 Nov. 16, 2021 Item #1 Page 4 of 31
CITY
TREASURER
ANNUAL
REPORT OF
INVESTMENTS
Fiscal year ended June 30, 2021
Prepared by
Craig Lindholm, City Treasurer
November 16, 2021
Nov. 16, 2021 Item #1 Page 5 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021 Nov. 16, 2021 Item #1 Page 6 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
TABLE OF CONTENTS
Letter of Transmittal
Annual Report of Investment Portfolio
Fiscal Year 2020-21 Market Review
Portfolio Analysis
Fiscal Year 2020-21 Review
Appendices to Annual Report of Investment Portfolio
Appendix A: Risk Management
Appendix B: Disclosures
Appendix C: Portfolio Activities
Nov. 16, 2021 Item #1 Page 7 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021 Nov. 16, 2021 Item #1 Page 8 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
CITY TREASURER LETTER OF TRANSMITTAL
Fiscal Year 2020-21 Annual Report of Investment Portfolio
November 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 2020-21 which ended June 30, 2021. 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
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 2020-21. 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, 2021. Comparisons are also made with the
preceding fiscal years. Finally, a statement is offered regarding the
prospects for the fiscal year 2021-22.
Sincerely,
Craig J. Lindholm,
City Treasurer
Nov. 16, 2021 Item #1 Page 9 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Nov. 16, 2021 Item #1 Page 10 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
FISCAL YEAR 2020-21 MARKET REVIEW
Federal funds target rate
The federal funds target 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 and influences many
aspects of the US economy. This rate is set by the Federal Open Market
Committee (FOMC), the policy making body of the Federal Reserve
System. The FOMC meet to discuss and set the federal funds target rate
eight times a year. Their goal is to help promote economic growth.
In fiscal year 2020-21, the FOMC has kept the rate unchanged from the
rate that was set March 16, 2020. The low rate that has remained since
the onset of the Coronavirus pandemic is intended to help keep banks
commercial lending rates low and encourage borrowing.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Jun 08Nov 08Apr 09Sep 09Feb 10Jul 10Dec 10May 11Oct 11Mar 12Aug 12Jan 13Jun 13Nov 13Apr 14Sep 14Feb 15Jul 15Dec 15May 16Oct 16Mar 17Aug 17Jan 18Jun 18Nov 18Apr 19Sep 19Feb 20Jul 20Dec 20May 21Target rate (%)Federal funds target rate
Nov. 16, 2021 Item #1 Page 11 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Short-term interest rates
The rates for US Treasury bonds are important to all investors, but
especially to bond investors. These bonds are issued by the Department
of the Treasury and are a good look at how the US government predicts
inflation and the overall economy to move. Changes in short-term
market interest rates are usually affected by the actions of the Federal
Reserve.
Short-term interest rates in the two-year market and six-month market
have remained mostly flat throughout the fiscal year; however, each
saw a small uptick from May to June. Five-year bonds have seen steady
increases throughout the fiscal year, demonstrating that the US
government expects a higher yield landscape in five years.
0.000.100.200.300.400.500.600.700.800.901.00
July August Sept Oct Nov Dec Jan Feb March April May June
Five year 0.21 0.28 0.28 0.38 0.36 0.36 0.45 0.75 0.92 0.86 0.79 0.87
Two year 0.11 0.14 0.13 0.14 0.16 0.13 0.11 0.14 0.16 0.16 0.14 0.25
Six month 0.10 0.13 0.11 0.11 0.09 0.09 0.07 0.05 0.05 0.03 0.03 0.06Interest rates (%)Short-term investment rates
US Treasury instruments
Nov. 16, 2021 Item #1 Page 12 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
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 is 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.
Short-term rates remained low in the fiscal year; however, the upward
slope shows that the US Treasury expects expansion within the next five
to ten years.
0.00
0.50
1.00
1.50
2.00
2.50
Three month Two year Five year Ten yearYield (%)Market yield curve
6/30/2019 6/30/2020 6/30/2021
Nov. 16, 2021 Item #1 Page 13 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
PORTFOLIO ANALYSIS
Portfolio assets
Total assets in the investment portfolio, based on market value, stood at
$821.3 million at the end of the fiscal year; an $8.5 million increase. This
increase includes interest earned, loan payments received, and
revenues in excess of expenses.
These assets are invested by the City Treasurer with the objectives of
maintaining safety of principal, maintaining liquidity to meet the
operating requirements of the city, and realizing the best return on
investment. Safety of principal is the foremost objective of all
investments made by the City Treasurer.
By pooling assets and investing a laddered portfolio the city is able to
ensure funds are available as required by obligations while earning the
highest possible amount of interest.
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21Assets ($ millions)Investment portfolio
total market value of assets
Nov. 16, 2021 Item #1 Page 14 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Total city assets
The city publishes an Annual Comprehensive Financial Report 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 Annual Comprehensive Financial Report
presents a statement of net position showing the total assets owned by
the city and all its agencies. At the end of fiscal year 2020-21, cash and
investments managed by the City Treasurer represented 39.1% of all
assets reported by the city and its agencies.
615 622 649 686 699 703 729 777 806 821
1,191 1,192 1,178 1,182 1,210 1,222 1,225 1,213 1,219 1,279
$1,806 $1,814 $1,827 $1,868 $1,909 $1,925 $1,954 $1,990 $2,025 $2,100
0
500
1,000
1,500
2,000
2,500
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21Assets ($ millions)Cash & investments relative to total assets
Fair market value
Cash & investments Other assets
Nov. 16, 2021 Item #1 Page 15 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
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 book value
are: capital project funds at 46.9%; enterprise funds at 23.0%; and the
general fund at 17.9%. Together, these three fund types account for
87.8% 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 consist of the Carlsbad
Municipal Water District, wastewater, solid waste, storm water, and golf
course funds.
General
$157 Capital Projects
$381
Enterprise
$187
Fiduciary & Internal
$55
Special & Other
$33
Fiscal year 2020-21
General
$136 Capital Projects
$372
Enterprise
$198
Agency & Internal
$75
Special & Other
$38
Fiscal year 2019-20
Source of pooled assets by fund type, in millions, at book value
Nov. 16, 2021 Item #1 Page 16 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
The city implemented Government Accounting Standards Board
Statement No. 84, Fiduciary Activities during fiscal year 2020-21. This
statement required the city to move cash held for developer and other
miscellaneous deposits from Agency Funds to the General Fund. This
resulted in a cash transfer of $11 million from the Agency Funds to the
General Fund in fiscal year 2020-21. Statement No. 84 also reclassified
the remaining custodial funds in the Agency Funds to a new group of
funds called Fiduciary Funds.
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,deposits in the California state
Local Agency Investment Fund (LAIF), and California Asset Management
Program (CAMP) all investments are in fixed-income instruments with
known maturity dates.
Federal
Agency
$308 Corporate
$197
LAIF & Cash$151 US Treasury
$71
CD
$21
Agency
backed
securities
$16
Municipal
$26
Fiscal year 2020-21
Federal
Agency
$241 Corporate
$235
LAIF &
Cash
$192 US Treasury
$81
CD
$18
Agency backed
securities$7
Fiscal year 2019-20
Asset allocation, in millions, at book value
Nov. 16, 2021 Item #1 Page 17 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Federal agency breakdown by percentage of total portfolio
Federal Farm Credit Bank 10.52%
Federal Home Loan Bank 10.68%
Federal Home Loan Mortgage Corporation 8.83%
Supranational 3.96%
Federal National Mortgage Association 6.47%
Federal Agricultural Mortgage Corporation 2.13%
Tennessee Valley Authority 0.13%
Private Export Funding Corporation 0.32%
On June 30, 2021, 37.7% of portfolio assets were invested in federal
agency bonds, 23.7% in corporate notes, 8.8% in US Treasuries, 3.9% in
supranational bonds, 3.1% in municipal bonds, 2.6% in certificates of
deposit, 1.9% in mortgage backed securities, and 18.3% in cash and cash
equivalents.
Nov. 16, 2021 Item #1 Page 18 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Yield
The average return of the portfolio decreased from 1.69% during the
prior fiscal year to 1.17% during the current fiscal year. 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 0.06% from 0.18% in the previous fiscal year. This graph
shows the change in percentage of the portfolio over the last several
fiscal 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. These changes
in value are referred to as unrealized gains and unrealized losses
(commonly referred to as paper gains and paper losses). The gain or 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
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Portfolio 1.14 1.05 1.09 1.16 1.25 1.57 1.96 1.69 1.17
Treasury Bills 0.11 0.06 0.07 0.34 0.71 1.61 2.38 0.18 0.06
0.00
0.50
1.00
1.50
2.00
2.50
Yield (%)Portfolio yields
Compared to six month treasury yields
Nov. 16, 2021 Item #1 Page 19 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
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 portfolio
investments are within acceptable interest rate risk standards identified
in the city’s investment policy. The total portfolio had an unrealized gain
of 0.709% in market value based on amortized cost on June 30, 2021. If
going forward, we begin to see moderation occur, with respect to future
interest rate increases, unrealized gains and losses should settle 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
Jun 10Dec 10Jun 11Dec 11Jun 12Dec 12Jun 13Dec 13Jun 14Dec 14Jun 15Dec 15Jun 16Dec 16Jun 17Dec 17Jun 18Dec 18Jun 19Dec 19Jun 20Dec 20Jun 21Percentage of amortized cost (%)Historical unrealized gains & losses
Nov. 16, 2021 Item #1 Page 20 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Annuity stream
Interest income from portfolio investments represents an annual stream
of revenues. This annual stream totaled $14 million, a decrease of $3
million from the previous fiscal year. This decrease can be attributed to
investments being called, or bought back, by the issuer early throughout
the last two years with reinvestment in lower interest securities. Of the
total cash interest revenues earned by the portfolio, approximately $2.5
million was credited to the general fund. The rest of the interest
revenue is allocated to other city funds based on their value. 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.
$12.40
$9.57
$8.10 $7.90 $8.70 $9.30
$11.25
$14.84
$17.03
$14.03
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21Interest revenue ($ millions)Annuity stream from treasury
Cash interest revenue
Nov. 16, 2021 Item #1 Page 21 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
FISCAL YEAR 2020-21 REVIEW
Global and domestic observations
The global economy continues to battle the detrimental effects of
COVID-19 and its variants. Millions of individuals have died and
economies around the globe have slumped into recession. Maintaining
historically low interest rates has been the primary tool deployed by the
European Central Bank, Japan and South Korea. Some indication of
initiating tapering back from these low interest rates has been
referenced by the Federal Reserve Chairman Jerome Powell. Core
inflation measures have been climbing running over 2.0% higher than
targeted. Secretary of the Treasury Janet Yellen is on the record stating
that she believes these inflationary pressures are transitory and will
recede as our domestic economy continues to climb out of our
pandemic decline. Supply chains have dominated the news with huge
backlogs in our primary ports of entry into the United States. There are
currently 87 cargo container ships floating off the southern California
coast, waiting to unload. There are currently in excess of 1,000,000
containers awaiting processing. This backlog is attributed to a shortage
of truck drivers to facilitate the transfer of goods in addition to
eliminating operational constraints.
China is flexing its military muscle and has demonstrated its willingness
to invest in more sophisticated military weapon systems, both
defensively and offensively. Pressure on Taiwan has increased with
more messaging about its future. This has affected global supply chains
throughout the world as companies start to re-examine their
manufacturing commitments to Chinese based factories. Domestic US
producers are in some instances re-patriating production to better
protect their customer base from potential interruptions.
This past fiscal year has been challenging in so many ways. The constant
backdrop of the growing COVID-19 pandemic impacted
Nov. 16, 2021 Item #1 Page 22 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
everyone’s life. Working remotely became the norm for millions of
employees. Parents became teachers virtually overnight while
attempting to balance their work responsibilities as well. Protocols
continued to evolve as more was learned about the virus. Millions of
small businesses have reduced their hours of operations, some failing to
survive and closing. The Small Business Association developed a
program called the Payroll Protection Act. This approach targeted small
businesses while Federal programs to support a major portion of the
population were quickly implemented with the objective of providing
confidence at the household level, through a very uncertain period.
Looking back, many of the three rounds of financial support from the
Treasury were used to increase household saving and reduce debt,
strengthening household balance sheets.
The November 2020 elections resulted in a change of control in the
House of Representatives, Senate and Presidency. A more progressive
agenda has been shaped that appears to be dividing the Democratic
response. The hope of a vaccine to fight the COVID-19 virus turned into
a reality during the first quarter of 2021. Multiple vaccines began to be
administered in the March timeframe forward. Early results look
promising even against COVID-19 variants that have emerged.
The Federal Reserve continues to support historically low interest rates
hovering around 0% for short term bonds; however, long term rates
have begun to rise. In June 2021 the short-term rates were 0.05% while
the 10-year treasury note had a yield of 1.45%.
This benchmark rate translates into extremely attractive mortgage
financing rates which, in turn, push the price of housing to new levels.
The median price of a home in the US increased over 20% during the
fiscal year and is anticipated to increase an additional 16% in 2022. With
this additional demand and a shortage of available home inventory for
sale, prices will continue to climb. Encouraging affordable housing
Nov. 16, 2021 Item #1 Page 23 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
options is high on the list of most municipalities. Reviewing existing
zoning guidelines is one strategy that may be helpful.
Going forward in this new fiscal year we face continued headwinds of
various types. Labor shortages, international trade tensions, soaring
energy costs all contribute to market volatility and continued downward
pressure on interest rates.
For the month of June, the yield of the total portfolio averaged 1.17%.
Total assets in the investment portfolio stood at $829.7 million as
measured at fair market value at the close of fiscal year 2020-21.
Nov. 16, 2021 Item #1 Page 24 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
CITY TREASURER
ANNUAL REPORT
OF INVESTEMENTS
APPENDICES
Nov. 16, 2021 Item #1 Page 25 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
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, 2021, the portfolio had the following investments and
cash in its internal investment pool. The amounts shown do not include
$2.88 million in interest receivable.
Investment Maturities Market value Gain (Loss)*
US agencies July 2021 - June 2026 $ 379,497,986 $ 2,901,986
Agency-backed MBS Nov. 2022 - April 2026 16,273,298 739,218
Municipal bonds March 2023 - June 2026 26,040,598 995,598
Corporate notes Nov. 2021 - June 2026 235,099,787 11,043,787
Certificates of deposit Sept. 2021 - March 2026 21,538,503 449,503
CAMP 1,006,349 -
LAIF 140,235,814 11,634
Cash accounts 10,049,801 -
$ 829,742,135 $ 16,141,726
*Market value less amortized cost.
Nov. 16, 2021 Item #1 Page 26 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
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, the California Government Code limits
investments, at the time of purchase, to the top three credit ratings:
AAA, AA, and A. It is the city’s policy, however, to limit
Nov. 16, 2021 Item #1 Page 27 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
investments, at the time of purchase, to the top two credit ratings (AAA
and AA). As of June 30, 2021, 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. The 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
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, 2021, the average maturity of the LAIF
investments was 291 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.
CAMP is a pooled investment program that considered a short-term
cash reserve portfolio and cash management vehicle authorized under
California Government Code Section 53601(p). It is managed to maintain
a dollar-weighted average portfolio maturity of 60 days or less and seeks
to maintain a constant net asset value per share of $1 and it has an S&P
rating of AAA.
Concentration credit risk
Concentration credit risk is the heightened risk of potential loss when
investments are concentrated in one issuer. The California Government
Nov. 16, 2021 Item #1 Page 28 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
Code does not identify a specific percentage that indicates when
concentration risk is present for any one issuer.
California Government Code Section 53601(k) requires that total
investments in medium-term corporate notes of all issuers not exceed
30% of the portfolio. As of June 30, 2021, approximately 23.7% of the
city’s total portfolio investments were in medium-term corporate notes.
California Government Code Section 53601(o) requires that mortgage
passthrough securities shall not exceed 20% of of the portfolio. As of
June 30, 2021, approximately 1.92% of the city’s total portfolio
investments were in mortgage passthrough securities.
For concentration of investments in any one issuer, the city’s investment
policy requires that no more than 5% of investments in corporate notes,
mortgage passthrough securities, and municipal bonds 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, 2021, no investments in any one of the aforementioned
securities has an issuer that 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, 2021, the portfolio had a 0.709% gain in market
value based on amortized 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
Nov. 16, 2021 Item #1 Page 29 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
(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 $292,643,525
As of June 30, 2021, the modified duration of the portfolio was 2.11,
within the required maximum of 2.2. Investments maturing within one
year were $270,917,736, exceeding the required minimum of
$195,096,000. 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.
Nov. 16, 2021 Item #1 Page 30 of 31
Annual Report of Investments
Fiscal Year Ended June 30, 2021
APPENDIX C: PORTFOLIO ACTIVITIES - FISCAL YEAR
2020-21
The city’s portfolio balance increased 1.04% from $812.8 million to
$821.3 million based on book value in fiscal year 2020-21. The increase
of $8.5 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 2020-
21.
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
Nov. 16, 2021 Item #1 Page 31 of 31