2013-10-23 Item 08D City Treasurers Investment ReportCITY OF ENCINITAS
CITY COUNCIL
AGENDA REPORT
Meeting Date: October 23, 2013
TO: City Council
VIA: Gus Vina, City Manager
Tim Nash, Finance Direct rlLity Treasurer
FROM: Jay Lembach, Investment Office;J- �
SUBJECT: City Treasurer's investment report for the fiscal year ended June 30, 2013
BACKGROUND:
Under the provisions of the City's adopted Investment Policy (City Admin Policy F019) the City
Treasurer reports on the status of investments to the Legislative Body on a quarterly basis. These reports
currently take the form of a memo to all City Councilmembers quarterly. After the end of the each fiscal
year, the Annual Investment Report is submitted to the City Council at a Public Meeting. The Annual
Report, including all attachments and detailed schedules, is then posted to the City's WebSite under the
Finance Department. Details or reports on investment activity during the fiscal year may be obtained by
contacting the Investment Officer or Finance Director/City Treasurer.
In order to separate the status and performance of City investments from the discussion of financial
markets and factors affecting municipal investments in general, the Agenda Report focuses on City
investments and Attachment C is provided as a commentary on general investment matters.
ANALYSIS:
City Pooled Investment Fund
The City's pooled investment fund (the "Pool") had an average investable balance of $88 million for the
fiscal year. Monies in the Pool represent excess funds that are being held for various purposes such as
working capital, capital projects or established reserves. The balance fluctuates during the year, primarily
because of the timing of the receipt of property tax revenues, the C4's largest revenue source.
The City invests in a variety of different investment vehicles, both as to type and final maturity date.
Examples include U.S. Treasury and U.S. Government Agency bonds, investment pools such as the
California Local Agency Investment Fund (LATE) and the California Asset Management Program (CAMP),
money market funds, and certificates of deposit. A full and detailed list of allowable investment types is
included in the City's adopted Investment Policy (Section V111.) The allocation of assets to different groups
and maturities is referred to as diversification. This practice allows for the maintenance of adequate liquidity
(the ability to pay all demands as they come due) and also lowers the Pool's overall risk profile (don't put "all
your eggs in one basket.")
Last printed 10/16/2013 8:41.00 AM
10/23/2013 Item #813 Page I
The conditions in the financial markets in which our Agency operates have changed dramatically since the
2008 financial crisis. Specifically, returns on available (suitable and safe) investments have declined from
about 5.00% to less than 0.50% (a decline in excess of 90%.) During the same time period, the risks of loss
of principal or decline in market value due to interest rate changes (interest rate risk) have increased
significantly. Overall, the exercise of municipal money management has become much more challenging,
particularly explaining why an Agency's excess resources are earning little or no interest income.
Portfolio Performance — the City's portfolio earned a return of 0.45% for the fiscal year, or $395,482. This is
slightly lower than the budget assumption of 0.50%, but well in excess of the City's performance benchmark
(the one-year Treasury bill) which averaged about 0.15%. From the above amount, charges are deducted
from each participating fund to reimburse the General Fund for the cost(s) of providing investment and
general banking services.
Investment of Bond Proceeds
The majority of the City's bond proceeds, for both governmental and enterprise fund debt, are invested in
money market mutual funds, which currently earn (virtually) no interest income. This is because there are
very restrictive covenants in the bond documents which limit the City's choices as to investment vehicles.
The funds must remain relatively liquid under the covenants, in case they are needed to pay debt service. The
City has one remaining Guaranteed Investment Contract (GIC) on the 1997 Civic Center bonds, which pays
close to 6.00% interest. All other GIC's were cancelled or nullified during the 2008 financial crisis, and no
new sources have yet become available. Money market funds are the only other viable choice under the
current circumstances.
One thing of note in the latest report is the segregation by category of Encinitas Public l 7 inancing Authority
(EPFA) debt, other City governmental -type debt, and Enterprise fund debt (San Dieguito Water District.)
These accounts are with an independent third -party trustee, and the amounts are relatively stable during the
fiscal year and over time. This factor, combined with the minimal levels of activity, is the basis for the
judgment that these accounts should be reported on an annual, rather than quarterly, basis.
FISCAL AND STAFF IlVWACTS:
Although investment earnings do positively impact fund balances, the level of contribution has declined
significantly over the past five years. Adopted (and reasonably foreseen) U.S. Government monetary and
fiscal policies indicate that the level of investment earnings for cities will remain extremely low for (at least)
several more years to come.
RECOMMENDATION:
This is an information item only; no action is required.
ATTACHMENTS:
Attachment A Summary and Detailed Investment Reports
(City Pooled Investment Fund)
Attachment B Summary of the Investment of Bond Proceeds
Attachment C Investment Officer's Investment Commentary
Last printed 10/16/2013 8:41:00 AM
10/23/2013 Item #813 Page 2
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CITY OF ENCINITAS
INVESTMENT OF BOND PROCEEDS
For the Fiscal Year ended June 30, 2013
Maturity
Market
FY 2012-13
Income
Budget
GOVERNMENTAL FUNDS TRUSTEE CASH & INVESTMENTS
Yield
Date
Value
ENCINITAS PUBLIC FINANCING AUTHORTiY
1997 CERTIFICATES OF PARTICIPATION (CIVIC CENTER)
Bond Fund Blackrock Money Market Fund
0.01%
1 day
$ 1
Reserve Fund Guaranteed Investment Contract
5.97%
12/1/2016
619,500
$ 619,501
2005 LEASE REVENUE BONDS (PUBLIC LIBRARY)
Bond Fund Blackrock Money Market Fund
0.01%
1 day
$ 24
Interest Account Federated Prime Cash Money Market Fund
0.04%
1 day
Reserve Fund Federated Prime Cash Money Market Fund
0.04%
1 day
568,553
$ 568,577
2010 LEASE REVENUE BONDS (COMM PARK ACQUISITION)
Bond Fund Blackrock Money Market Fund
0.01%
1 day
$ 5
Reserve Fund Federated Prime Cash Money Market Fund
0.04%
1 day
1,411,869
$ 1,411,874
2013 LEASE REVENUE BONDS (COMM PARK DEVELOPMENT)
Bond Fund Blackrock Money Market: Fund
0.01%
1 day
$ -
Reserve Fund (not applicable)
Cost of Issuance Fund Blackrock Money Market Fund
0.01%
1 day
12,551
Project Fund Blackrock Money Market Fund
0.01%
1 day
7,996 400
$ 8,008,951
ENCINITAS PUBLIC FINANCING AUTHORITY TOTALS A $ 10,6D8,903 $ 14,0a9
$ 40,000
CITY OF ENCINITAS I ASSOCIATION OF BAY AREA GOVERNMENTS (ABAG)
2002 LEASE REVENUE BONDS (ABAG FUNDING)
Bond Fund Wells Fargo Money Market Fund 0.01% 1 day $ 217
Interest Pymt Fund Wells Fargo Money Market Fund 0.01% 1 day 30,167
Principal Pymt Fund Wells Fargo Money Market Fund 0.01% 1 day 240,000
Reserve Fund Wells Fargo Money Market Fund 0.01% 1 day 216,013
(B)
$ 486,397
$ 4,601
$ 4,000
TOTALS FOR GOVERNMENTAL FUNDS (A) + (B)
$ 11,09S,300
1 $ 18,585
$ 44,000
Maturity
Market
FY 2012-13
Income
Budget
ENTERPRISE FUNDS TRUME CASH & INVESTMENTS
Yield
Date
Value
SAN DIEGUITO WAT£R DISTRICT
2004 WATER REVENUE BONDS
Bond Fund Blackrock Money Market Fund
0.01%
1 day
$ 2
Reserve Fund Blackrock Money Market Fund
0.01%
1 day
695
Reserve Fund Federated Prime Cash Money Market Fund
0.04%
1 day
1,039,500
TOTALI
$ 1,040,197
1
$ 2,325
$
TOTALS FOR ENTERPRISE FUNDS (C)
$ 1,040,197
$ 2,325
$ 0
TOTAL TRUSTEE CASH & INVESTMENTS A + (B)+ C
$ 12,135,497
$ 21,011 $ 44,000
P '10/23/2013 Item #8D tage rWLit g
24
Attachment C
Investment Update
June 30, 2013
INTRODUCTION
As we end fiscal year 2012-2013, management of municipal funds remains extremely
challenging. The average available rate of return on investments considered safe and
prudent for municipalities has remained below 1.00% for five years, as represented by the
City performance benchmark, the one-year constant maturity U.S. Treasury bill. The
average rates for the last seven years are listed below for reference:
Table 1
Average Treasury rate by fiscal year
2007
2008
2009
2010
2011
2012
2013
5.00%
3.08%
1.05%
0.38%
0.25%
0.10%
0.15%
To provide a framework for analysis and comparison of these rates to historical
averages, the average rate on the one-year T-bill over the last 50 years (prior to 2007)
was approximately 5.50%, with higher rates prevailing in the earlier years. The City of
Encinitas portfolio earned 4.6% over the 15 years preceding 2007.
Although interest rates are certain to rise in coming years, it is also clear that the
historical norms have shifted. It is quite possible that rates will remain historically low
for several years or more, and it is uncertain when, or if, they will return to the
historical norms. Below we will discuss some of the reasons why this scenario is likely.
FACTORS INFLUENCING THE FINANCIAL MARKETS
Continuing Weak U.S, Economy
The U.S. Economy suffered the worst recession in 2008-2009 since the Great
Depression of the 1530's. Unemployment went to over 10% compared to the norm of
about 4% to 5%. The Recession was also accompanied by a financial crisis, mainly
driven by what is now being referred to as the "housing bubble." The so-called recovery
from the Recession has been quite weak compared to other historical events, with
growth averaging below 2% and unemployment remaining above 7%. Conditions for
small businesses have been particularly difficult.
It is a natural occurrence for interest rates to decline during an economic downturn,
primarily because demand for credit goes down from both businesses and individuals,
forcing rates lower.
10/23/2013 Item #813 Page 25
U. S. Federal Reserve Monetary Policy
It is the job of the U.S. Federal Reserve (the "Fed") to set fiscal and monetary policies
which will: (1) maintain employment at acceptable levels and (2) maintain inflation
within stated goals. But, they are also concerned about the financial health of the
banking system, and indeed, all facets of our financing system.
To combat the negative effects of the 2008 financial crisis and the ensuing recession,
the Fed lowered its target gate for short-term interest rates (via the system where
banks borrow from each other overnight) dramatically. This rate eventually dropped to
0.00% to 0.25%. This move was unprecedented in scope, and in the past this type of
move caused the U.S. economy to pick up speed quickly and return to a very healthy
growth rate of d% to 5% GDP within a reasonable period. Not so this time around. The
economy pulled out of the recession (negative GDP for two consecutive quarters) but its
return to growth remains disappointing.
The U.S. Government tried several different approaches, including the fiscal stimulus
package of about $900 million in 2009-2010 and several congressional bills to create
new jobs. None of these efforts had any measurable effect in improving the economy.
The Fed next turned to a new program referred to as "quantitative easing," which is
technically defined as the Fed buying U.S. Treasury and Agency securities on the open
market, thus increasing the money in private hands. In reality, it amounts, to printing
money, the purpose being to increase consumer spending. Consumer spending now
makes up over 70% of U.S. economic activity, as the United States has slowly shifted
from a manufacturing to a service -oriented economy. There have been three (3) rounds
of quantitative easing thus far, totaling over $3 trillion. Again, there has been no
measurable effect on economic growth from any of these efforts.
There are, of course, many other factors that affect the economy and the prevailing
levels of interest rates. But, based on the above factors, and their failure to stimulate a
healthy level of economic activity, it is likely that interest rates will remain historically
low for the next several years. We also know that the U.S. Government wants rates to
remain low, since U.S. borrowing has bit record levels. The National Debt has gone
from about $9 trillion in 2008 to close to $16 trillion today. Any increase in interest
rates will increase the interest payments the US has to make on its accumulated debt,
causing larger budget deficits.
Eventually, we know that interest rates will rise because of the return of inflation. By
definition, inflation is a situation where a larger supply of currency (in this case,
dollars) is chasing the same pool of goods and services. The Fed has set a target of 2%
per year for inflation (although their methods of measuring and evaluating price levels
are questioned by many experts.) By creating an inflation rate of 2% per year, the U.S
Treasury is able to repay its debts in "cheaper dollars." In fact, the average borrowing
rate on US debt today is just a bit above 2%, so the Treasury is essentially borrowing
money at no net cost. This situation cannot continue indefinitely.
10/23/2013 Item #813 Page 26
SHORT AND LONGER -TERM OUTLOOK
The macroeconomic outlook for the next three to six months is for a continuation of
current Fed policies. The appointment of Janet Yellen as the new Fed Chairman, to
replace Ben Bernacke who is retiring, pretty much assures that there will not be any
major shifts in Policy in the short-term. However, Ms. Yellen has indicated that she
supports a continuation of the accommodative monetary policies now in place, and
perhaps further steps to stimulate the economy. This expectation makes it more likely
than not that interest rates will remain low for the foreseeable future.
However, other events could intrude on this somewhat "rosy" scenario. In particular, if
the U.S. Federal Government were to remain shutdown for more than just a temporary
period, the economic impacts could be quite dramatic and scenarios could change very
quickly and significantly. In addition, any default by the U.S. Government on its
sovereign debt commitments (even a technical default) would likely result in serious
ramifications for all financial markets, even on a global basis. While the experts judge
this event to be highly unlikely, the possibility does exist, and even the anticipation of
such an event could cause serious disruptions to financial markets.
We are keeping a close watch on all events that could have an impact on the
Investment Program, and stand ready to make adjustments as necessary to protect the
public's monies.
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