INFORMATION #2 01-22-2008INFORMATION
MEMORANDUM
TO: Mayor and Council Members
FROM: Tim Simon, Finance Director
DATE: January 16, 2008
SUBJECT: Quarterly Investment Report
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 December 31, 2007.
BACKGROUD:
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 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 Minnesota
cities.
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.
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 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 year the yield curve has maintained an inverted shape which meant short-term
securities exceed returns on long-term instruments. Our current portfolio has anticipated a
shift to more intermediate maturity range to attract higher interest rates. As the chart
indicates below the yields have decreased in every time horizon in the past 3 months. This
current yield curve provides very little yield for the additional market risk inherent in longer
term maturities within our time horizon. Therefore, we will continue to monitor the yield
curve and, if market dictates, start shifting more from short-term/intermediate into longer
term investments. See graphical illustration below: http://www.ustreas.gov/offices/domestic-
finance /debt-management/ interest-rate /yield_historical.shtml
Treasury Yield Curve
4.75% ~
4.50% _i~~
4.25% ~ ~+Y~
4.00% /~ --- t-"- ~-~-~~
3.75% _ --
3.25% -~-12/31 /2007
3.00% - -- - -- - ~- 9/30/2007
_
2.75% i
2.50% -- -------
2.25% ___ _ --
2.00% -- - --LL---._..
1.75%
1.50% ~~ ~ -
Imo 3mo 6mo 1yr 2yr Syr Syr Tyr 10yr
Cities generally use a short horizon benchmark such as the 90 day Treasury Bill (12/31/2007 -
3.36%) or some similar measure. Our current portfolio yield is roughly 4.68%. 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.
Liquidity has been easy to maintain for the past year because of the inverted yield curve.
This means that short-term investments are receiving a greater return than long-term
investments within the City's investment time horizon. As the curve shifts over the next
couple of months or even becomes upward sloping we will monitor the rates and invest
accordingly. Our primary reserve account is our 4M Fund which is a money market account
that various cities pool their funds into. It currently yields 4.51% with daily withdrawal
privileges. This compares extremely well with 2.99% yields that are available when two year
non-callable agencies investment options are considered.
INFORMATION
The following is the summary of sector distribution, agency distribution, and interest rate
distribution as of 12/31 /07.
Sector Distribution
Agency Distribution
12, 000, 000 ~
10,000,000
m
~
8,000,000
#
®FFCB
~
~
6, 000, 000 _
j ^FHLMC
3 ^ FNMA
~ 4,000,000 ^FHLB
i
2,000,000
r
0
FFCB FHLMC FNMA FHLB