INFORMATION 08-04-2014 } Information
City of Memorandum
Elk
RiV6wr
TO: Mayor and City Council
From: Tim Simon, Finance Director
Date: August 4, 2014
Subject: Quarterly Investment Report (April—June, 2014)
Introduction
The purpose of this report is to update the City Council on the status of the various
investments the city maintains. This report is as of June 30, 2014.
Background
The City Council adopted the original investment policy on April 28, 1998,with subsequent
modifications on February 5, 2007, &April 7, 2014. 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 10
years unless we are matching cash flow to a specific debt service payment. While the intent
is to hold to maturity the bonds are subject to interest rate risk as yields change in opposite
direction of the bond price. While we record at year-end unrealized gains and losses we hold
P 0 W I R I 1 8Y
N:\Public Bodies\Agenda Packets\08-04-2014\Final\xlnforml sr lnvestmentReport.docx INAf-- URE]
the investments to maturity and don't realize any gains or losses. Interest income is the
revenue source we budget,but yet knowing prices of bonds are always changing.
The finance staff makes sure the city is 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 we will have two large tax settlements each year,
along with the regularly-scheduled debt service payments.
Over the past couple of years,the search for quality has been the goal. We have avoided
commercial paper for close to three years due to concerns over the credit quality issues. In
addition, for high quality commercial paper,the yield is several basis points below a short-
term CD. The yield curve has remained relatively flat in the 30-day to 1-year range,but the
longer side has decreased significantly from March 31, 2014. This may also indicate that
investors still have a preference for liquidity and will take a lower yield for short-term secure
investments but it appears that outlook maybe starting to change.
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
credit quality municipals (Mums) and certificates of deposits (CDs). Munis and CDs have
been several basis points over agencies with call features. 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 but the longer end of the yield curve
has decreased since the beginning of the year. Three-month notes are yielding 0.04% and
the 10-year notes are 2.53%. See the graphical illustration below:
Treasury Yield Curve
4.00%
3.50% —
3.00
2.50%
2.00% 03/31/2014
1.50% 06/30/2014
1.00%
0.50%
0.00%
1mo. 3 mo. 6 mo. 1yr. 2yr. 3yr. 5yr. 7yr. 10yr. 30yr.
Cities generally use a short-horizon benchmark such as the two-year Treasury Bill (6/30—
0.47% a slight increase from 0.44% as of 06/30) or some similar measure. Our current
portfolio yield is roughly 1.50%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. 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 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 where many
cities pool their funds. It currently yields .02%with daily withdrawal privileges. The city
strives to maintain a strong diversification portfolio so liquidity and exposure risk are
reduced.
Attachments
■ Investment summary
Prepared for City of Elk River
RP 38694•City of Elk River•Business Service Account
Risk profile: Conservative
Return Objective: Current Income
Bondsummary Includes all fixed-rate securities in the selected porfolio.Average yields and durations exclude Structured Product,Pass Through,Perpetual Preferred,and Foreign securities.
as of June 30, 2014
Bond overview Investment type allocation
Total quantity 30,400,000
Total market value $30,005,538.15 %of
Total accrued interest $107,092.22 Tax-exempt/ bond
Total market value plus accrued interest $30,112,630.37 Investment type Taxable($) deferred($) Total($) port.
Total estimated annual bond interest $447,887.20 Certificates of deposit 6,033,399.67 0.00 6,033,399.67 20.04
Average coupon 1.51% Municipals 6,287,670.79 530,918.24 6,818,589.03 22.64
Average current yield 1.49% U.S.federal agencies 17,260,641.67 0.00 17,260,641.67 57.32
Average yield to maturity 1.69%
Average yield to worst 1.47% Total $29,581,712.13 $530,918.24 $30,112,630.37 100%
Average effective maturity 6.21
Credit quality of bond holdings Bond maturity schedule
Value on %of $Millions
Effective credit rating Issues 06/30/2014($) port.
A Aaa/AAA/AAA 37 20,019,965.04 66.47 F 6
16.8%
B Aa/AA/AA 10 4,059,265.66 13.46 5
C A/A/A 0 0.00 0.00 6 4 12.7% 12}%
D Baa/BBBBBB 0 0.00 0.00 n 20.5%
E Non-investment grade 0 0.00 0.00 3 9s% d9.1% 1&4W.F Certificate of deposit 27 6,033,399.67 2007 2 _
G Not rated 0 0.00 0.00 3.6% as% A4.5%
Total 74 $30,112,630.37 100% 1 .9%
0
0.0% 0.0%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2025+Other
E Effective maturity schedule
Cash,mutual funds and some preferred securities are not included.
Report created on:July 21,2014