INFORMATION #2 07-19-2010INFORMATION
.ver MEMORANDUM
TO: Mayor and Council Members
FROM: Tim Simon, Finance Director
DATE: July 19, 2010
SUBJECT: Quarterly Investment Report (April-June, 2010)
INTRODUCTION:
The purpose of this report is to update the City Council on the status of the various
investments that the City maintains. This report is as of June 30, 2010.
BACKGROUND:
The City Council adopted the original policy on Apri128, 1998 with subsequent
modifications on February 5, 2007. The policy generally follows the Government Finance
Officers Association (GFOA) model and does comply with State Statutes.
The investment goals for the City of Elk River axe passive in nature due to the allowable
investments permitted under State Statutes. The City has four objectives for investing in
order of importance. They are safety of principal, liquidity, return on investment, and
maintaining the public trust. This means we are focused on not losing on the original
investment, having sufficient funds on hand to meet ongoing operating cash needs, getting a
market rate of return, and not purchasing speculative investments.
State Statutes limit the City's ability to invest in many risky types of investments. The City
does not purchase stocks or mutual funds. The City is generally limited to federal and state
government obligations or agencies backed by them. The City can invest in short-term
commercial paper (highly rated), Certificates of Deposit or money market accounts (with
collateralization if in excess of FDIC insurance amounts), and the rated debt of local
governments.
The City intends to hold investments until maturity, which means we will get the rate of
return fox which we invest our funds. Our goal is not to extend our maturities beyond five
years unless we are matching cash flow to a specific debt service payment.
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The Ciry makes sure we are sufficiently liquid by continually updating our forecast on the
anticipated cash flow needs over the next five year time horizon. We also build in a reserve
balance incase of unexpected expenditures, these funds are maintained in money market
accounts through the 4M Fund. We anticipate the fact that we will have two large tax
settlements each year, along with the regularly scheduled debt service payments that occur
each year.
Over the past couple of years the search for quality has been the goal, thus we have avoided
commercial paper for the last year due to concerns over the credit quality issues that have
existed. In addition, for high quality commercial paper the yield is several basis points below
a short-term CD. The markets have seen increased volatility in the bond markets and the
yield curve has remained relatively flat in the 30 day to year range, but the longer side of the
curve has showed some signs of an upward- sloping shape which has meant long-term
securities slightly exceed returns on short-term instruments. This may also indicate that
investors still prefer liquidity and will take a lower yield for short-term and secure
investments.
The City has to weigh the opportunity cost to invest in longer term investments or ride the
yield curve and reinvest at shorter maturity intervals. Most recent purchases have been
agencies with callable provisions as interest rates step-up, these are somewhat predictable of
when they will be called and are aligned with our cash flow model. Investing in shorter-term
investments has presented far fewer options since the decline in the commercial paper
market. Treasury yields are still around historical lows. Three month notes are yielding
0.18% and the ten year notes are 2.97%. See graphical illustration below:
http: / /www.ustreas.gov/offices /domestic-finance/debt-management/interest-
rate / yie Id_historical. shtml
Troasury Yiolds
5.00% ..._ __.. ._..._.. ~.~___.-._ _.__ ._._. -
4.00% - __. .. ~
3.50 % - _~____~~_.._.....,.,_.~: - .. .,.~~.....:....___~ _
3.00 % _.._..,..____._......._,;...- _ _... _ _.,......_~,_..__.__~ - - -..,-
~~ 03/31 /201 O
2.50% - - -- - - - -----.. -----_ ____. - _..___~ +06/30/2010
2.00% .._.__~._ _.----- - _. _. __ -- - .._-- -
1 .00 % ~ .. -- -- - ... ...-- - _.. __.--- ~-- -._.... -I
0.50 % - - ._ _... ~.._.~ - - - - ---- - -j
0.00% -T '--
1 mo. 3mo. 6mo. 1 y r. 2y r. 3y r. 5y r. 7y r. 1 Oy r. 30y r.
Cities generally use a short horizon benchmark such as the two year Treasury Bill (6/30 -
.61%dotyn from 1.02% at 3/31) or some similar measure. Our current portfolio yield is
roughly 1.72%. This is calculated by taking the yield times the current value for each
investment and dividing the resulting amount by the total portfolio value. As investments
purchased in earlier years mature we will be able to replace them and lock into some longer
term interest rates, but they may have to be reinvested at lower interest rates as market
conditions change. It is very typical to lag the market as interest rates change. This will lead
to more predictability in our interest earnings.
Our primary reserve account is our 4M Fund which is a money market account that various
cities pool their funds into. It currently yields .OS% with daily withdrawal privileges. We are
maintaining our regular liquidity position in order to reinvest at higher rates when the
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economy expands and the federal adjusts interest rates. The City strives to maintain a strong
diversification portfolio so liquidity and exposure risk are reduced.
The following is the summary of sector distribution, agency distribution, and interest rate
distribution as of 06/30/10.
Sector Distribution
NM
11%
CD
22%
67%