INFORMATION #4 11-03-2008INFORMATION
Ver MEMORANDUM
TO: Mayor and Council Members
FROM: Tim Simon, Finance Director
DATE: November 3, 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 September 30, 2008.
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 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 axe 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 months there has been increased volatility in the bond markets and
the yield curve has started to show 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 prefer liquidity and will take a lower yield for short-term investments. The City has
very little exposure risk to the credit difficulties the market is currently experiencing, as our
portfolio currently has less than 5% (10/22) in commercial paper which would not disrupt
liquidity and the Ciry ability to pay obligations.
The City has to weight the opportunity cost to invest in longer term investments or ride the
yield curve and reinvest at shorter maturity intervals. As the chart indicates the yields have
decreased in every time horizon in the past 3 months. This current yield curve provides
some additional 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
5.oo~r ~ - - -- .. _...._ __
4.50
4.00 % -
r,.
3.50 % ----.----- -------- ...
3.00 % - -- -------
t 06/30/2008
2.50 % --- --- ---- - ---
09/30/2008
2.00 % -- -__ .-,.a.; --------------- -
1.50 % -- -~-~~ ~ -- _.-_------------ ;.
,. -
0.50 % -
0.00
~ mo 3mo 6mo 1 yr 2yr Syr Syr Tyr 1 Oyr 30yr
Cities generally use a short horizon benchmark such as the 90 day Treasury Bill (09/30/2008 -
0.92%) or some similar measure. Our current portfolio yield is roughly 3.44%. 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 harder to maintain for the past couple of months because of the up-ward
sloping yield curve. This means that short-term investments are receiving a slightly lesser
INFORMATION
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 more 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
2.17% with daily withdrawal privileges. This compares well with 2.92% yields that are
available when two year non-callable agencies investment options are considered. The City
strives to maintain a strong diversification portfolio so liquidity and exposure risk axe
reduced.
The following is the summary of sector distribution, agency distribution, and interest rate
distribution as of 09/30/08.
Sector Distribution
Agency Distribution
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