INFORMATION #1 01-19-2010INFORMATION
City of
Elk -..-.
River
MEMORANDUM
T ~ uc~ ors
T: Ju~,~
~T iTCTIC~N;
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, 2009,
A.C IJI~;
The City Council adopted the original policy on Apri12S,199S with subsequent
modifications on February 5, 2007. The policy generally follours the Govern~a~ent Finance
officers Association ~GFQA} 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 lifriit the City's ability to invest in many risky types of investments. The City
does not purchase stocl~s or mutual funds. The City is generally li~n.ited to federal and state
government obligations or agencies backed by them. The City can invest j.n 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. fur goal is not to extend our maturities beyond five
years unless we are matching cash flow to a specific debt service payment,
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The City males 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 marl~et
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 years the search for quality has been the goal, thus we have avoided
commercial paper for the last year 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 secu~•ities
slightly exceed returns on short-term instruments, This may also indicate that investors still
prefer liquidity and will tale a lower yield for short-term and secure investments.
The City has to weigh the opportunity cost to invest in longex 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 one to three 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. ~Ve carefully consider these issues in our cash flow analysis model.
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, Three month
notes are yielding 0.06% and the ten year notes are 3,$5%, see ~raphlcal Illustration below:
http://www.ust~.~eas.~ov/offices/do~nestic~~inance/debt~rnanagemcnt/inte~~est~
~•ate /yield_historical.sl~tml
Treasury Yield Curve
Cities generally use a short horizon benchm,arl~ such as the two year Treasury Bill12/31--
1.14% up slightly from .95% at 9/30} or some similar measure. fur current portfolio yield
is roughly 1.$1q/o. 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 earliet• 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,
fur primary reserve account is our 4M Fund which is a money market account that various
cities pool their funds into. It currently yields .2~% with daily withdrawal privileges. ~we are
maintaining a higher liquidity position in order to reinvest at higher rates when the economy
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expands and the federal adjusts interest rates. The City strives to maintain a strong
diversification portfolio so liquidity and exposure risk are reduced.
The following is the su~ninary of sector distribution, agency distribution, and interest rate
distribution as of 12/31 /09.
Sector Distribution