INFORMATION #1 07-16-2012INFORMATION
V~r MEMORANDUM
TO: Mayor and Council Members
FROM: Tim Simon, Finance Director
DATE: July 16, 2012
SUBJECT: Quarterly Investment Report (April-June, 2012)
INTRODUCTION:
The purpose of this report is to update the City Council on the st<Zt«s of the ~~Zrious
in~-estments that the cit<r maintains. This report is as of June 30, 2012.
BACKGROUND:
The Cit< Council adopted the original in~-eshnent polio on April 28, 1998, with subsequent
modifications on Febn~ai-~r ~, 2007. The polio generally tollo«-s the Go~Ternment Finance
Officers association (GFO ~) model and does complywith state statl~tes.
The ii~~estinent goals for the Cit<- of Elk Rimier are passi~-e in nat«re due to the aIlowable
investments permitted under State Statl~tes. The cit< has tour objecti~-es for ii~~-esting. hi
order of importance, they are safefi of principal, liquidity, ret«in on in~-estment, and
maintaining the public tn~st. This means we are focused on not losing on the original
in~Testment, ha~Ting sufficient funds on hand to meet ongoing operating cash needs, getting a
market rate of return, and not purchasing speculati~Te in~Testments.
State statutes limit the cit~-'s abilit<- to in~-est in mangy- risk- tt-pes of in~-estments. The cit<-
does not purchase stocks or mutual funds. The cifi is generall~r limited to federal and state
go~Ternment obligations or agencies backed b~~ them. The city can in~-est in short-term
commercial paper (highhr rated), Certificates of Deposit or moneir market accounts (with
collateralization if in ezcess of FDIC insurance amounts), and the rated debt of local
goVetnments.
The cit<r intends to hold in~-estments until mat«rit~, which means we will get the rate of
return for which we ingest our funds. Our goal is not to extend our matl~rities beyond fire
years unless we are matching cash flow to a specific debt service payment.
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INFORMATION
The city makes sure we are sufticientl~ liquid b~ continuaIlp updating our forecast on the
anticipated cash flow needs o~Ter the nett fl~-e-dear time horizon. ire also build in a reser~-e
balance in case of unexpected expenditures, these funds are maintained in moneir market
accounts. l~'e anticipate we will ha~re two large t~~~ settlements each ~~ear, along with the
regularh scheduled debt sei-~Tice payments.
O~rer the past couple of ~ ears, the search for qualit<r has been the goal. l~'e ha~re a~ oided
commercial paper for close to t<vo wears due to concerns o~-er the credit quality issues. In
addition, for high quality commerci~~l paper, the Meld is several basis points below ashort-
term CD. The Meld cui~re has remained relati~-e1~ flat in the 30-dam to 2-wear range, but the
longer side has decreased slighd~T from March 30, 2012. This mar also indicate that in~-estors
still prefer liquidity and will take a lower Meld for short-term and secure in~Testments.
The city has to weigh the opporn~nity cost to in~Test in longer term in~restments or ride the
Meld curse and rein~Test at shorter matui7ty intervals. Most recent purchases ha~Te been
agencies with callable pro~-isions as interest rates step up, these are somewhat predictable as
to when theme will be called and are aligned with our cashflow model Investing in shorter-
term in~-estments has presented tar fewer options since the decline in the commercial paper
market. Treasury Melds are still around historical lows. Three-month notes are Melding
O.09°'o and the 10-wear notes are 1.67"'0. See graphical illustration below:
Treasury Yield Curve
4.00% ~
3.00%
2.00%
1.00%
0.00% ,
03/30/2012
06/30/2012
Cities generalhT use ashort-horizon benchmark such as the t<yo-wear Treasut~- Bill (6/30 -
.33°%o the same as of 330) or some similar measure. Our current portfolio eield is roughl~~
.9:i"~o which is several basis points over the treasury ~rield benchmark. This is calculated b~
taking the ~rield times the current ~Talue for each in~-estment and di~-iding the resulting
amount b~ the total portfolio ~Talue. ~s in~-estments purchased in earlier gears mature, we
will be able to replace them and lock into some longer term interest rates, but thei ma~~ hati e
to be rein rested at lower interest rates as market conditions change. It is t5rpical to lag the
market as interest rates change. This will lead to more predictability in our interest eanungs.
Our primary resei-~ e account is our -ICI Fund which is a money market account where mangy
cities pool their funds. It currently Melds .O2°jo «-ith daihrwithdrawal pri~rileges. ~'e are
currently maintaining a higher liquidity position as we just received 7O"'o of our first halt t~L~
settlement This will position the cit<~ well when interest rates start to rise. The city strives to
maintain a strong di~Tersification portfolio so liquidity and e_~posure risk are reduced.
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Imo. 3mo. 6mo. 1yr. 2yr. Syr. Syr. Tyr. 10yr. 30yr.
INFORMATION
The following is the suintnai~ of sector distribution, agenc~r distribution, and interest rate
distribution as of June 30, 2012.
Muni
4% _
Sector Distribution
M M ! 2°/
16%
AGY
68%
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
$40,000,000 -
$30,000,000
$20,000,000
$10,000,000
I $-
Agency Distribution
PUwERER R9
A~~~
FFC FNMA FHLB FHLMC
Interest Rate Disbribution
0.00-1.99 2.00-2.99 3.00-3.99