INFORMATION #1 07-20-2009INFORMATION
MEMORANDUM
TO: Mayor and Council Members
FROM: Tim Simon, Finance Director
DATE: July 20, 2009
SUBJECT: Quarterly Investment Report (April-June, 2009)
INTRODUCTION:
The purpose of this report is to update the Ciry Council on the status of the various
investments that the city maintains. This report is as of June 30, 2009.
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 Ciry 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.
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 couple of months the search for quality has been the goal, thus we have
avoided commercial paper for the last six months due to concerns over the credit quality
issues that have existed. The markets have seen 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 slighdy exceed returns on short-term instruments. 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 weight 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
Certificates of deposits which have a maturity of three to five years with reasonable interest
rates. In addition, some callable bonds that could be called anywhere from three months to
two years have been purchased, but if inflation starts and bond rates rise we may have to
hold until maturity. We carefully consider these issues in our cash flow analysis model.
Investing in shorter-term investments has presented far fewer options since the decline in
commercial paper market. Treasury yields are still around historical lows and only a few
basis points away from year-end yields. Three month notes are yielding 0.19% and the ten
year notes is 3.53%. See graphical illustration below: http://www.ustreas.gov/offices/domestic-
finance /debt-management/interest-rate /yield historical. shtml
TreasuryYield Curve
5.00% __ _ _ _
-- ---7
-~
4.50 % _ _ - _ __ -----._ ~:_ _ - -------------- ---
4.00°/ _.~ -- - - -
3.50 % __ - - -- --- _ _ _
3.00 % _ ._._._-
-- ----- -
2.50% - --- - '~ t 03/31 /2009
- ___ -- -
_ , __ __ -- T 06/30/2009
2.00 % --- - -
1 .50 % -- -- --~ -~ ---------- -
1 .00% --- __ _ - - ----- r
~~=--+'
0.50% - ..~.~ ~-~~_._--_-._.~""~'~-..~ -- --- ----
0.00% a-
1 m o. 3 m o. 6 m o. 1 yr. 2 yr. 3 yr. 5 yr. 7 yr. 1 Oyr. 30yr.
Cities generally use a short horizon benchmark such as the two year Treasury Bill (6/30 -
1.11% up slightly from 0.81% at 3/31) or some similar measure. Our current portfolio yield
is roughly 2.23%. 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.
INFORMATION
Our primary reserve account is our 4M Fund which is a money market account that various
cities pool their funds into. It currently yields .33% with daily withdrawal privileges. We are
maintaining a higher liquidity position in order to reinvest at higher rates when the economy
expands. 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 6/30/09.
Sector Distribution
Interest Rate Distribution