HomeMy WebLinkAbout2024-09-10; City Council; ; Annual Report of Investments for Fiscal Year 2023-24CA Review AZ
Meeting Date: Sept. 10, 2024
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Zach Korach, Finance Director/Deputy City Treasurer
zach.korach@carlsbadca.gov, 442-339-2127
Subject: Annual Report of Investments for Fiscal Year 2023-24
Districts: All
Recommended Action
Accept and file the Annual Report of Investments for Fiscal Year 2023-24.
Executive Summary
The City Treasurer reports annually to the City Council and the community on the city’s
investment portfolio as mandated by the city’s Investment Policy. The Annual Report of
Investments (Exhibit 1) presents, the market environment that affects the city’s investment
strategy, portfolio standings and various portfolio analyses for the fiscal year 2023-24.
The position is currently vacant, following the retirement of the previously elected City
Treasurer, so the Deputy City Treasurer is presenting this report.
Explanation & Fiscal Analysis
The City Treasurer is tasked with overseeing cash and investment activities for the city and its
agencies by managing the funds in excess of day-to-day operating needs. City investments are
pooled and invested to meet the treasury’s objectives of maintaining safety of principal,
maintaining liquidity to meet the operating requirements of the city, and realizing the greatest
return on investment.
The foremost objective is safety, the preservation of city capital. The City Treasurer makes
prudent investment decisions that are intended to protect the capital of the city for its
residents. All investments are made within the scope of the city’s investment policy, and
current investment details are provided monthly for full transparency and review.
The two basic measures of an investment are par value, also known as the nominal value; and
the book value, the value that is entered in the city records, which is driven by the actual cost of
the investment and adjustments such as amortization.
•The city’s investment portfolio increased $28.5 million in par value from the previous
fiscal year.
•The book value increased $22.4 million from the previous fiscal year.
Sept. 10, 2024 Item #2 Page 1 of 40
Second to safety is liquidity. The City Treasurer employs various methods to ensure adequate
liquidity of capital as defined in the city’s investment policy. One method is to maintain the
portfolio below the maximum maturity limit, which requires cash and maturities equal to at
least two-thirds of the approved operating budget for that fiscal year. Another method is
maintaining the portfolio under the maximum modified duration, which is a measure that
reflects the portfolio’s price sensitivity to changes in interest rates. Finally, all investments have
a maximum maturity of 5 years from the date of purchase settlement. Utilization of these
methods maintains adequate liquidity to ensure that operational needs will be met and avoids
circumstances that could result in selling at a loss.
The report shows:
• During the fiscal year, the treasurer monitored and maintained an average of
$319.6 million in cash and investments maturing within one year, well above the
minimum of $251.5 million required.
• The modified duration was 1.59 years as of the close of the fiscal year, well
below the maximum allowed duration of 2.20 years. The City Treasurer
remained within the limits of the modified duration restrictions throughout the
year.
• All investments maintained a maximum maturity equal or less than 5 years, with
the fiscal year average portfolio maturity at 1.79 years.
Once safety and liquidity objectives have been met, the City Treasurer aims to realize a return
on investments. As the report details:
• Fiscal year 2023-24 started off with a monthly portfolio yield of 2.22% and ended
the year with a portfolio yield of 2.88%, for an average yield of 2.55%.
• Total interest earnings were over $21.2 million for the fiscal year.
• The market value of the investment portfolio increased $41.1 million over the
last fiscal year.
Gains in market value are governed by judicious investment decisions focusing on current
market rates and anticipated future rates.
The investment portfolio increased 3.26% in par value over the fiscal year. Available
investments demonstrated increasing rates in response to the market environment, resulting in
an investment strategy to purchase securities to lock in higher rates. Throughout the year,
investment purchases outweighed investment maturities by $45.0 million, resulting in a net
increase in investments by 5.39%. This strategy yielded an increase in interest earnings of
31.1% over the previous fiscal year, which represents over $5.0 million in additional revenue.
More detailed information can be found in the report attached as Exhibit 1.
Next Steps
The Deputy City Treasurer will continue to manage the investment program for the city and all
of its agencies, including the Carlsbad Municipal Water District, and continue to produce
monthly and annual reports on city investments for the City Council and the community.
Following the general ballot election in November 2024, this role and function will be
transitioned to the new elected City Treasurer.
Sept. 10, 2024 Item #2 Page 2 of 40
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 or a reasonably foreseeable indirect physical change in the environment.
Exhibits
1. Annual Report of Investments for the Fiscal Year Ending June 30, 2024
Sept. 10, 2024 Item #2 Page 3 of 40
1
Exhibit 1
Sept. 10, 2024 Item #2 Page 4 of 40
2
CITY
TRESURER
ANNUAL
REPORT OF
INVESTMENTS
FISCAL YEAR 2023-24
ZACH KORACH
FINANCE DIRECTOR/
DEPUTY CITY TREASURER
SEPT. 10, 2024
Sept. 10, 2024 Item #2 Page 5 of 40
3
TABLE OF CONTENTS
INTRODUCTION
City Treasurer letter of transmittal ......................................................................5
Fiscal year 2023-24 quick look .............................................................................6
MARKET REVIEW
Federal funds target rate .....................................................................................8
Short-term interest rates .....................................................................................10
Market yield curve ...............................................................................................11
PORTFOLIO OVERVIEW
Portfolio total assets ............................................................................................13 Sources of portfolio .............................................................................................15 Allocation of portfolio ..........................................................................................16
PORTFOLIO ANALYSIS
Portfolio yield .......................................................................................................19
Maturity & modified duration .............................................................................22
Interest income ....................................................................................................24
APPENDICES
Risk management disclosures ..............................................................................27
Data tables ...........................................................................................................30
Additional resources ............................................................................................37
Sept. 10, 2024 Item #2 Page 6 of 40
4
INTRODUCTION
Sept. 10, 2024 Item #2 Page 7 of 40
5
CITY TREASURER LETTER OF TRANSMITTAL
Fiscal Year 2023-24 Annual Report of Investments
Sept. 10, 2024
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 2023-24 which ended June 30, 2024. The report is intended to provide 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
2023-24. This report begins with a quick overview and summary of key annual data. The second
section, market review, provides an overview of the market environment affecting portfolio
management decisions, and includes Federal Funds target rate and U.S. Treasury short-term
interest rates data. The third section, portfolio review, looks at the composition of the portfolio
including total assets and the trend regarding size of the fund, fund sources of the portfolio and
the portfolio allocation. The fourth section, portfolio analysis, includes yield information and
comparisons to treasury rates, unrealized gains and losses, cash income, maturity data and
modified duration. The final section, appendices, provides disclosures, data tables and
additional information. Future fund activity depends on the market environment for investing
decisions and anticipated returns for each investment classification. These factors are
monitored for trends and evaluated prior to all investing decisions.
Sincerely,
Zach Korach,
Finance Director/Deputy City Treasurer
Sept. 10, 2024 Item #2 Page 8 of 40
6
FISCAL YEAR 2023-24 QUICK LOOK
Market review
• Federal funds target rate:
5.50%; fiscal year
increase of 0.50%
• Two-year U.S. Treasury:
4.71%; fiscal year
decrease of 0.18%
Portfolio overview
• Total portfolio value at
par value: $902,855,260
• Total portfolio fiscal year
increase: $28,505,154
• Federal Agencies
represent 38.8% of all
investments
Portfolio analysis
• Portfolio yield as of
06/30/24: 2.88%
• Portfolio interest for the
fiscal year: $21,201,394
• Average maturity as of
06/30/24: 1.85 years
0.00
2.00
4.00
6.00
Three-
month
Two- year Five- year Ten- yearIn
t
e
r
e
s
t
r
a
t
e
(
%
)
Maturity
Market yield curve
06/30/24
760
810
860
910
Par value Market value Book valueAs
s
e
t
v
a
l
u
e
(
$
m
i
l
l
i
o
n
s
)
Valuation
Total portfolio valuation
06/30/24
2.00%
2.50%
3.00%
Ju
l
Au
g
Se
p
Oc
t
No
v
De
c
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Yi
e
l
d
Month
Portfolio yield
Fiscal year 2023-24
Sept. 10, 2024 Item #2 Page 9 of 40
7
MARKET REVIEW
Sept. 10, 2024 Item #2 Page 10 of 40
8
FEDERAL FUNDS TARGET RATE
The federal funds target rate is considered one of the most important interest rates in the U.S.
economy. It 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 U.S. economy.
The rate is represented as a range, which is set by the Federal Open Market Committee eight
times per year. The Federal Open Market Committee specifies the short-term objective for the
purchase and sale of securities in the open market.
The rate is adjusted in response to economic conditions and in response to factors such as
inflation or recession environments. To slow the rate of inflation, the Federal Reserve began
raising rates in 2022, continued through the first half of 2023, and have held steady since July
2023.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Ra
t
e
(
%
)
Month
Federal Funds rate changes
Fiscal year 2023-24
Sept. 10, 2024 Item #2 Page 11 of 40
9
Between 2013 and 2015, rates held at 0.25% to support economic growth following the 2008
recession. As the economy continued to grow, the rate was increased to stabilize the level of
growth. Rates lowered in 2020 and 2021 as a result of the COVID-19 pandemic, but with
inflation on the rise since 2022, rates steadily increased, leveling out mid-2023 and remaining
steady through the fiscal year.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Ra
t
e
(
%
)
Fiscal year
Federal Funds rate
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024 Item #2 Page 12 of 40
10
SHORT-TERM INTEREST RATES
The rates for U.S. Treasury bonds are important to all investors, but especially to bond
investors. These bonds are issued by the Department of the Treasury and are an indicator as to
how the U.S. government predicts inflation and the overall economy will change. Changes in
short-term market interest rates are usually affected by the actions of the Federal Reserve.
Short-term interest rates in the three exhibited trends of five-year market, two-year market,
and six-month market had minimal changes during the fiscal year, measured from July 1, 2023,
to June 30, 2024:
• Six-month: decrease of 0.20%, from 5.53% to 5.33%
• Two-year: decrease of 0.17%, from 4.88% to 4.71%
• Five-year: increase of 0.15%, from 4.18% to 4.33%
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Ra
t
e
(
%
)
Month
Short term interest rates of U.S. Treasuries
Fiscal year 2023-24
Six-month Two-year Five-year
Sept. 10, 2024 Item #2 Page 13 of 40
11
MARKET YIELD CURVE
The yield curve is a graphic presentation of the difference between short-term and longer-term
interest rates of U.S. Treasury instruments on a given day. Financial analysts use it to, among
other things, assess likely changes in inflation levels as well as the likelihood of entering into an
economic recession.
Yield curves:
• Normal: implies economic expansion
• Inverted: implies economic reduction
• Flat: implies transition in the economic environment
The current fiscal year continues to show an inverted yield curve, expressing that yield
increases as maturity decreases. In other words, short-term investments are offering higher
yields. This may be an indication of movement from short-term to long-term investments,
implying an effort to hedge against fear of an economic recession.
The City Treasurer maintains a mixture of liquid assets and longer-term investments which
allows benefits of higher short-term interest rates and security against economic uncertainty.
-
1.00
2.00
3.00
4.00
5.00
6.00
Three-month Two-year Five-year Ten-year
Ra
t
e
(
%
)
Term
Market yield curve
Fiscal year end 2023-24 and two prior fiscal year ends
Jun 2022 Jun 2023 Jun 2024
Sept. 10, 2024 Item #2 Page 14 of 40
12
PORTFOLIO REVIEW
Sept. 10, 2024 Item #2 Page 15 of 40
13
PORTFOLIO TOTAL ASSETS
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 can ensure funds are available to
meet obligations while earning the highest possible amount of interest.
Total assets in the investment portfolio
• Par value: $902,855,206, increase of 3.26% over prior year.
• Market value: $871,929,110, increase of 4.95% over prior year.
• Book value: $897,056,042, increase of 2.56% over prior year.
The portfolio is constantly fluctuating. Safety of capital is the first and foremost investing
principal, but small increases and decreases are normal and expected. These fluctuations occur
as a normal part of operations.
Causes of portfolio increases:
• Interest earned
• Revenues in excess of expenses
Causes of portfolio decreases:
• Interest incurred
• Expenses in excess of revenues
780
800
820
840
860
880
900
920
Par Value Market Value Book Value
As
s
e
t
v
a
l
u
e
(
$
m
i
l
l
i
o
n
s
)
Valuation
Portfolio ending balance comparison by valuation method
Fiscal year 2023-24 and prior year
Current year Prior year
Sept. 10, 2024 Item #2 Page 16 of 40
14
Key portfolio changes at par value during fiscal year 2023-24:
• Maturities: $163,893,595
• Calls: $6,500,000
• Buys: $208,847,364
The City Treasurer is responsible for maintaining the city’s operational cash flow needs while
ensuring that excess funds are being invested in the safest and most effective manner year
after year.
Total portfolio value has increased year after year. The last ten years have seen an increase of
28.50%. This represents a cash value of $198,960,987. This total increase is a result of
thoughtful and prudent investment decisions. All funds in excess of expenses are reinvested
while maintaining the liquidity required for city operations, present and future.
-
100
200
300
400
500
600
700
800
900
1,000
As
s
e
t
v
a
l
u
e
(
$
m
i
l
l
i
o
n
s
)
Fiscal year
Total portfolio value at amortized cost
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024 Item #2 Page 17 of 40
15
SOURCES OF PORTFOLIO
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 capital project fund includes funds for the general capital construction, traffic impact fees,
public facilities fees, park development, certain 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,
$189,968,625
Capital projects,
$385,624,688
Enterprise,
$211,961,039
Fiduciary &
Internal,
$78,541,383
Special & Other,
$30,960,307
Source of funds as of June 30, 2024
Amortized cost
Sept. 10, 2024 Item #2 Page 18 of 40
16
ALLOCATION OF PORTFOLIO
Investments are made in financial instruments as authorized by the City of Carlsbad Investment
Policy and the California Government Code. Apart from 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 agencies make up 38.82% of the total investment portfolio. Provided below is the
breakout of issuers within the federal agency category as of June 30, 2024:
Federal agency breakdown by percentage of total portfolio at par value
Federal Farm Credit Bank 8.79%
Federal Home Loan Bank 16.30%
Federal Home Loan Mortgage Corporation 7.08%
Federal National Mortgage Association 3.98%
Federal Agricultural Mortgage Corporation 2.56%
Tennessee Valley Authority 0.11%
Total 38.82%
Federal agencies,
$350,525,000
Supra-nationals,
$21,890,000
U.S. Treasury,
$55,250,000Coporate notes,
$122,990,000
Cert. of deposit,
$22,480,000
Mortgage-backed,
$77,147,892
Municipal bonds,
$101,745,000
Cash & pooled,
$150,827,368
Allocation of investments as of June 30, 2024
Par value
Sept. 10, 2024 Item #2 Page 19 of 40
17
Fiscal year 2023-24 net changes
Changes in investments are a result of multiple factors including maturities, calls and new
investments. The data is represented at par value and does not reflect fluctuations of the
market value because in conjunction with the liquidity principal, the city maintains a ‘buy and
hold’ perspective. This means that the city does not sell investments in the normal course of
operations and instead, holds the investments to maturity. The benefit of this policy is that
investments will not be sold at a loss and the full par value will be returned.
Certain investment types are restricted by the City of Carlsbad Investment Policy for the
purpose of balanced allocation. All investments are well under the policy limitations allowing
for continued purchases of the best-fit investments.
-40.00
-20.00
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
Federal
agencies
Supra-
nationals
U.S.
Treasury
Coporate
notes
Cert. of
deposit
Mortgage
-backed
Municipal
bonds
% Change 5.70 12.60 (30.06)(21.66)5.66 116.31 46.28
Ch
a
n
g
e
(
%
)
Percent value change by investment class
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00
Supranational
Corporate notes
Cert. of deposit
Municipal bonds
Percentage of portfolio
Policy Limits and Portfolio Allocation as of June 30, 2024
Policy Portfolio
Sept. 10, 2024 Item #2 Page 20 of 40
18
PORTFOLIO ANALYSIS
Sept. 10, 2024 Item #2 Page 21 of 40
19
PORTFOLIO YIELD
The average return of the portfolio increased 66 percentage points during the current fiscal
year from 2.22% for fiscal year 2022-23 to 2.88% for fiscal year 2023-24.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Po
r
t
f
o
l
i
o
y
i
e
l
d
(
%
)
Month
Portfolio yield
Fiscal year 2023-24
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Po
r
t
f
o
l
i
o
y
i
e
l
d
(
%
)
Fiscal year
Portfolio yield
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024 Item #2 Page 22 of 40
20
The current year has shown a portfolio yield increase of 0.66%, and a ten-year increase of
1.84%. By keeping a vigilant watch on the current market trends, the City Treasurer makes the
most opportune investment decisions to first and foremost protect the city’s assets, and then
to maximize the return on capital.
As compared to U.S. Treasury rates, the portfolio yield shows stabilization. The portfolio yield is
influenced by changes in market interest rates. By investing in a variety of maturity dates, a
variety of investment types and following a buy and hold policy, the effect of the sometimes
dramatic changes in market rates has a less dramatic effect on the city’s portfolio.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
In
t
e
r
e
s
t
r
a
t
e
(
%
)
Portfolio rate with to six-month, two-year, and five-year
U.S. Treasury rates
Fiscal year 2023-24 and prior nine years
U.S. Treasury 6-month U.S. Treasury 2-year U.S. Treasury 5-year Portfolio
Sept. 10, 2024 Item #2 Page 23 of 40
21
Investments experience market value gains and losses 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.
Changes in value due to changes in market interest rates are normal and are to be expected.
Reporting requires that the city recognizes the market value of investments on an annual basis,
however, the city’s buy and hold policy safeguards against market volatility.
-7.00
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
Ch
a
n
g
e
a
t
a
m
o
r
t
i
z
e
d
c
o
s
t
(
%
)
Fiscal year end
Historical unrealized gains and losses
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024 Item #2 Page 24 of 40
22
MATURITY & MODIFIED DURATION
The second objective in the City Treasurer’s investing strategy is liquidity. The purpose of
liquidity is ensuring adequate cash is available to fund city operations. In order to maintain
liquidity, the measurement of modified duration is used.
The maximum term for investments is five years. This graph shows how maturity is distributed
as of June 30, 2024. 37.75% of the portfolio is maturing within 12 months and includes
overnight pooled cash accounts. Policy dictates that a minimum of two-thirds the operating
budget be maturing within 12 months. As of June 30, 2024, 87.24% of the fiscal year 2023-24
budget is maturing within 12 months.
Average maturity is required to be three years or less, and as of June 30, 2024, is 1.85 years.
The increasing average maturity is indicative of reinvestment of maturities to hold higher
interest rates over longer periods of time.
0
5
10
15
20
25
30
35
40
0-12 13-24 25-36 37-48 49-60
Po
r
f
o
l
i
o
(
%
)
Months until maturity
Portfolio liquidity
June 30, 2024
1.60
1.70
1.80
1.90
2.00
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May JunAv
e
r
a
g
e
m
a
t
u
r
i
t
y
(
y
e
a
r
s
)
Month
Average maturity
Fiscal year 2023-24
Sept. 10, 2024 Item #2 Page 25 of 40
23
Modified duration is a measure of an investment’s price sensitivity to interest rate changes. The
maximum modified duration established by the city’s Investment Policy is 2.2. As of June 30,
2024, the modified duration was 1.59.
1.40
1.50
1.60
1.70
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Mo
d
i
f
i
e
d
d
u
r
a
t
i
o
n
Month
Modified duration
Fiscal year 2023-24
Sept. 10, 2024 Item #2 Page 26 of 40
24
PORTFOLIO INTEREST INCOME
After safety and liquidity, return on investments is the third principal of investments. 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.
Interest for the fiscal year totaled $21,201,394, a 31.13% increase, or $5,033,244 increase, from
the prior fiscal year. Interest revenue is allocated to city funds based on their value.
Interest income is influenced by a variety of factors such as market rate, investment type and
amount invested. As these factors are constantly changing, investment income fluctuates year
to year.
-
500
1,000
1,500
2,000
2,500
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
In
t
e
r
e
s
t
i
n
c
o
m
e
(
$
t
h
o
u
s
a
n
d
s
)
Month
Portfolio interest income
Fiscal year 2023-24
-
5.0
10.0
15.0
20.0
25.0
In
t
e
r
e
s
t
i
n
c
o
m
e
(
$
m
i
l
l
i
o
n
s
)
Fiscal year
Portfolio interest income
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024 Item #2 Page 27 of 40
25
With an investment strategy of continued moderate-term investments, the City Treasurer has
also allocated funds to short-term and overnight accounts in the latter part of the year to take
advantage of the steeply increased short-term rates.
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
In
t
e
r
e
s
t
i
n
c
o
m
e
(
$
t
h
o
u
s
a
n
d
s
)
Investment type
Interest income by investment classification
Fiscal year 2023-24
Sept. 10, 2024 Item #2 Page 28 of 40
26
APPENDICIES
Sept. 10, 2024 Item #2 Page 29 of 40
27
RISK MANAGEMENT DISCLOSURES
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
Custodial credit risk (investments)
The city uses a third-party custody and safekeeping service for its investment securities.
Principal Custody Solutions 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 Principal Custody Solutions failure. All city investments held in custody and
safekeeping by Principal Custody Solutions are held in the name of the city and are segregated
from securities owned by the firm. 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 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 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 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 an AA credit rating. The default credit risk of these investments is
minimal.
Unless otherwise exempted, 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
investments, at the time of purchase, to the top two credit ratings (AAA and AA). As of June 30,
Sept. 10, 2024 Item #2 Page 30 of 40
28
2024, one investment 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 occurred. 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. 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) requires that total investments in medium-term
corporate notes of all issuers not exceed 30% of the portfolio. As of June 30, 2024,
approximately 13.55% of the city’s total portfolio investments were in medium-term corporate
notes.
California Government Code Section 53601(o) requires that non-agency mortgage-backed
securities shall not exceed 20% of the portfolio. As of June 30, 2024, all city-held mortgage-
backed securities are backed by Federal Agencies.
For concentration of investments in any one issuer, the city’s Investment Policy requires that no
more than 5% of investments in corporate notes, non-agency mortgage-backed 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 U.S. agencies. As of June 30, 2024, 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.
Sept. 10, 2024 Item #2 Page 31 of 40
29
As of June 30, 2024, the portfolio had a 2.80% unrealized loss 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, 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
$377,263,607. As of June 30, 2024, the modified duration of the portfolio was 1.59, within the
required maximum of 2.2. Investments maturing within one year were $329,119,127, exceeding
the required minimum of $251,509,071. 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.
Sept. 10, 2024 Item #2 Page 32 of 40
30
DATA TABLES
Data tables provided for additional details for graphs throughout the report.
Federal target rate detail, fiscal year 2023-24
Period Range limit
Jul 2023 5.25 - 5.50%
Sep 2023 5.25 - 5.50%
Nov 2023 5.25 - 5.50%
Dec 2023 5.25 - 5.50%
Jan 2024 5.25 - 5.50%
Mar 2024 5.25 - 5.50%
May 2024 5.25 - 5.50%
Jun 2024 5.25 - 5.50%
Short-term interest U.S. Treasury rate detail, fiscal year 2023-24
Period Six-month Two-year Five-year
Jul 2023 5.53% 4.88% 4.18%
Aug 2023 5.48% 4.85% 4.23%
Sep 2023 5.53% 5.03% 4.60%
Oct 2023 5.54% 5.07% 4.82%
Nov 2023 5.38% 4.73% 4.31%
Dec 2023 5.26% 4.23% 3.84%
Jan 2024 5.18% 4.27% 3.91%
Feb 2024 5.30% 4.64% 4.26%
Mar 2024 5.38% 4.59% 4.21%
Apr 2024 5.44% 5.04% 4.72%
May 2024 5.42% 4.89% 4.52%
Jun 2024 5.33% 4.71% 4.33%
Market yield curve, fiscal year 2023-24 and prior two years
FY end date Three-month Two-year Five-year Ten-year
06/30/22 1.72% 2.92% 3.01% 2.98%
06/30/23 5.43% 4.87% 4.13% 3.81%
06/30/24 5.48% 4.71% 4.33% 4.36%
Sept. 10, 2024 Item #2 Page 33 of 40
31
Valuation table, fiscal year 2023-24
Different values are presented throughout the report. This data table presents varying
valuation types, listed by class as of June 30, 2024.
Class Par value Market value Book value
Certificate of Deposit $ 22,480,000 $ 21,681,219 $ 22,476,968
Corporate Notes $ 122,990,000 $ 118,114,447 $ 123,020,978
Federal Agency $ 350,525,000 $ 336,219,140 $ 348,658,055
U.S. Treasury $ 55,250,000 $ 53,401,850 $ 54,830,175
Supranational $ 21,890,000 $ 21,264,562 $ 21,899,869
Municipal Bonds $ 101,745,000 $ 95,882,867 $ 98,786,634
Pass Through Securities $ 77,147,892 $ 74,537,657 $ 76,555,995
Cash & Pooled $ 150,827,368 $ 150,827,368 $ 150,827,368
Total $ 902,855,260 $ 871,929,110 $ 897,056,042
Portfolio assets valuation, fiscal year 2023-24 and prior nine years
Fiscal year Par value Market value Book value
2014-15 $ 696,923,770 $ 698,918,091 $ 698,095,055
2015-16 $ 715,837,393 $ 721,730,358 $ 717,721,310
2016-17 $ 720,912,625 $ 720,280,916 $ 722,577,923
2017-18 $ 761,973,309 $ 750,805,057 $ 761,499,745
2018-19 $ 794,156,136 $ 796,915,076 $ 793,677,467
2019-20 $ 807,311,873 $ 827,577,140 $ 812,848,717
2020-21 $ 813,600,409 $ 827,094,051 $ 821,268,939
2021-22 $ 846,773,333 $ 821,428,843 $ 852,168,180
2022-23 $ 874,350,106 $ 830,832,607 $ 874,704,150
2023-24 $ 902,855,260 $ 871,929,110 $ 897,056,042
Sources of portfolio at amortized cost, fiscal year 2023-24
Fund type 2022-23 2023-24
General $ 185,166,409 $ 189,968,625
Capital projects $ 375,873,203 $ 385,624,688
Enterprise $ 204,198,973 $ 211,961,039
Fiduciary & Internal service $ 75,097,927 $ 78,541,383
Special & other $ 34,367,638 $ 30,960,307
Total $ 874,704,150 $ 897,056,042
Sept. 10, 2024 Item #2 Page 34 of 40
32
Portfolio allocation at book value, June 30, 2024
Policy limitations are not limited for federal agency issuers.
Class % Total Policy limits
Supranational 2.44% 10%
Municipal Bonds 11.00% 15%
Corporate Notes 13.55% 30%
Certificate of Deposit 2.49% 30%
U.S. Treasury 6.12% N/A
Mortgage-backed (Agency) 8.55% N/A
Federal Investments 38.56% N/A
Cash & Pooled Cash 17.30% N/A
Totals 100.00%
Investment changes by class, fiscal year 2023-24
This table presents the detail of investment changes, excluding cash and pooled cash, listed by
class.
Class 6/30/2023 6/30/2024 Dollar change Change
Certificate of Deposit $ 21,276,000 $ 22,480,000 $ 1,204,000 5.66%
Corporate Notes $ 157,005,000 $ 122,990,000 $(34,015,000) -21.66%
Federal Agency $ 331,633,000 $ 350,525,000 $ 18,892,000 5.70%
U.S. Treasury $ 79,000,000 $ 55,250,000 $(23,750,000) -30.06%
Supranational $ 19,440,000 $ 21,890,000 $ 2,450,000 12.60%
Municipal Bonds $ 69,555,000 $ 101,745,000 $ 32,190,000 46.28%
Mortgage-Backed (Agency) $ 35,665,124 $ 77,147,892 $ 41,482,768 116.31%
Total $ 748,595,716 $ 752,027,892 $ 38,453,768 5.39%
Class Maturities Calls Buys
Certificate of Deposit $ 2,958,000 - $ 4,162,000
Corporate Notes $ 54,065,000 $ 4,000,000 $ 24,050,000
Federal Agency $ 57,253,000 $ 2,500,000 $ 78,645,000
U.S. Treasury $ 35,250,000 - $ 11,500,000
Supranational $ 5,000,000 - $ 7,450,000
Municipal Bonds $ 3,750,000 - $ 35,940,000
Pass Through Securities $ 5,617,595 - $ 47,100,364
Total $ 163,893,595 $ 6,500,000 $ 208,847,364
Sept. 10, 2024 Item #2 Page 35 of 40
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Portfolio yields, fiscal year 2023-24 and prior nine years
Treasury, 06/30
Month
ending
Portfolio
yield Fiscal
year
Portfolio
yield
Six-
month
Two-
year
Five-
year
07/31/23 2.23% 2014-15 1.09% 0.11% 0.64% 1.63%
08/31/23 2.39% 2015-16 1.16% 0.36% 0.58% 1.01%
09/30/23 2.33% 2016-17 1.25% 1.14% 1.38% 1.89%
10/31/23 2.35% 2017-18 1.57% 2.11% 2.52% 2.73%
11/30/23 2.44% 2018-19 1.96% 2.09% 1.75% 1.76%
12/31/23 2.49% 2019-20 1.69% 0.18% 0.16% 0.29%
01/31/24 2.58% 2020-21 1.17% 0.06% 0.25% 0.87%
02/28/24 2.63% 2021-22 1.28% 2.51% 2.92% 3.01%
03/31/24 2.65% 2022-23 2.22% 5.47% 4.87% 4.13%
04/30/24 2.77% 2023-24 2.88% 5.33% 4.71% 4.33%
05/31/24 2.83% 06/30/24 2.88%
Unrealized gain or loss, fiscal year 2023-24
Unrealized gain or loss is calculated by subtracting the market value from the book value. All
calculations are performed at the end of each month.
Month
Unrealized
gain or loss
Jul 2023 -4.97%
Aug 2023 -4.77%
Sep 2023 -4.99%
Oct 2023 -4.89%
Nov 2023 -4.05%
Dec 2023 -3.23%
Jan 2024 -2.95%
Feb 2024 -3.25%
Mar 2024 -3.16%
Apr 2024 -3.51%
May 2024 -3.07%
Jun 2024 -2.80%
Sept. 10, 2024 Item #2 Page 36 of 40
34
Modified duration, fiscal year 2023-24
Month Modified duration
Jul 2023 1.56
Aug 2023 1.52
Sep 2023 1.55
Oct 2023 1.54
Nov 2023 1.58
Dec 2023 1.58
Jan 2024 1.58
Feb 2024 1.60
Mar 2024 1.63
Apr 2024 1.56
May 2024 1.57
Jun 2024 1.59
Revenue from investments monthly, fiscal year 2023-24
Month Income
Jul 2023 $ 1,589,456
Aug 2023 $ 1,631,044
Sep 2023 $ 1,737,767
Oct 2023 $ 1,999,700
Nov 2023 $ 1,627,671
Dec 2023 $ 1,538,391
Jan 2024 $ 1,972,108
Feb 2024 $ 1,915,023
Mar 2024 $ 1,712,817
Apr 2024 $ 2,117,256
May 2024 $ 1,574,890
Jun 2024 $ 1,785,272
Total $ 21,201,394
Sept. 10, 2024 Item #2 Page 37 of 40
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Revenue from investments by class and totals, fiscal year 2023-24 and prior nine
years
Investment class Cash income Fiscal year Cash income
Federal Agency $ 4,577,797 2014-15 $ 7,864,801
Supranational $ 395,736 2015-16 $ 8,678,630
Treasury $ 899,595 2016-17 $ 9,286,187
Corporate Notes $ 3,860,367 2017-18 $ 11,248,807
Certificate of Deposit $ 402,199 2018-19 $ 14,837,963
MBS (agency) $ 1,474,944 2019-20 $ 17,031,603
Municipal $ 1,883,436 2020-21 $ 14,026,325
Cash & Pooled Cash $ 7,707,320 2021-22 $ 12,047,464
Fiscal Year 2023-24 Total $ 21,201,394 2022-23 $ 16,168,150
2023-24 $ 21,201,394
Liquidity by maturity period
Period, in months Maturity value Percentage
0-12 $ 329,119,127 37.75%
13-24 $ 175,006,096 20.07%
25-36 $ 139,230,541 15.97%
37-48 $ 107,936,095 12.38%
49-60 $ 120,637,251 13.84%
Total $ 871,929,110 100.00%
Average maturity, fiscal year 2023-24
Month Average maturity (years)
Jul 2023 1.74
Aug 2023 1.71
Sep 2023 1.75
Oct 2023 1.73
Nov 2023 1.77
Dec 2023 1.75
Jan 2024 1.78
Feb 2024 1.82
Mar 2024 1.90
Apr 2024 1.83
May 2024 1.83
Jun 2024 1.85
Sept. 10, 2024 Item #2 Page 38 of 40
36
Cash inflows and outflows, fiscal year 2023-24
The city’s portfolio balance increased 2.56% from $875 million to $897 million in book value
over the fiscal year. The increase of $22 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 $1.40 billion of cash inflows and cash outflows which prompted
investment decisions during fiscal year.
Cash inflows and outflows
Investment calls $ 6,500,000
Investment maturities $ 163,893,595
Investment purchases $ 208,847,364
Interest income $ 7,707,320
CAMP investments $ 134,000,000
CAMP withdrawals $ 149,800,000
Overnight investments $ 369,710,612
Overnight withdrawals $ 363,497,612
Sept. 10, 2024 Item #2 Page 39 of 40
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ADDITIONAL RESOURCES
The Annual Report of Investments is a stand-alone report; however, additional documents are
available for interested parties:
Investment Policy
The Investment Policy is approved by City Council and governs investment management.
Included are topics such as:
• Investing objectives
• Authorized investments
• Limitations
• Review and reporting
The Investment Policy can be found on the City of Carlsbad City Treasurer website at:
https://www.carlsbadca.gov/city-hall/other-elected-officials/city-treasurer
Monthly investment reports
Monthly investment reports are presented to City Council and provide an in-depth status on
the full portfolio on a routine basis. These reports include aspects such as:
• Current period maturities, calls, and purchases
• Detail listing of investments
• Investment ratings and outlooks
• Portfolio allocation by issuer
The monthly investment reports can be found on the City of Carlsbad City Treasurer website at:
https://www.carlsbadca.gov/city-hall/other-elected-officials/city-treasurer
Contacts
We are available for questions or comments on any Treasurer report or function:
• Zach Korach, Finance Director/Deputy City Treasurer
treasury@carlsbadca.gov
• Katie Schroeder, Senior Accountant, Treasury Department
Katie.schroeder@carlsbadca.gov
Sept. 10, 2024 Item #2 Page 40 of 40