INFORMATION #2 05-07-2012INFORMATION
MEMORANDUM
TO: Mayor and Council Members
FROM: Tim Simon, Finance Director
DATE: May 7, 2012
SUBJECT: Quarterly Investment Report Qanuary-March, 2012)
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 March 30, 2012.
BACKGROUND:
The City Council adopted the original investment policy on April 28, 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 are 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 for 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.
PAMERER RI'
i~A~'UR~
INFORMATION
The city 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 in case of unexpected expenditures, these funds are maintained in money market
accounts. 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 close to two years 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 ashort-term CD. The yield curve has remained relatively flat in the 30 day to year
range, but the longer side has started to increase slightly from December 31, 2011. 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
0.07% and the ten year notes are 2.23%. See graphical illustration below:
http: / /www.ustreas.gov/offices/ domestic-finance /debt-management/interest-
rate/yield_historical.shtml
Treasury Yield Curve
4.00% -- -------- - -- ----- -
3.00%
2.00
1.00%
0.00%
Imo. 3mo. 6mo. 1yr. 2yr. Syr. Syr. Tyr. 10yr. 30yr
~-12/31/2011 --Ri-03/30/2012
Cities generally use a short horizon benchmark such as the two year Treasury Bill (3/30 -
.33% up from .25% at 12/31) or some similar measure. Our current portfolio yield is
roughly 1.11% which is several basis points over the treasury yield benchmark. This is
calculated by taking the yield times the current value for each investment and dividing the
resulting amount by the total portfolio value. rs 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 .02% with daily withdrawal privileges. We are
currently maintaining an average liquidity position. This will position the city well when
P I ~ E R E/ 1 1
~A~'URE
INFORMATION
interest rates start to rise. 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 March 30, 2012.
Sector Distribution
Muni
M M 30~
mot
$16,000, 000
$14,000, 000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
FFC
f
^
1
1
FHLB
FHLMC
Interest Rate Distribution
35,000,000.00
30,000,000.00
25,000,000.00
20,000,000.00
15,000,000.00
10,000,000.00
5,000,000.00
0.00
PRNERER RC
I~A~'UR~
0.00-1.99 2.00-2.99 3.00-3.99