CA Review AZ
Meeting Date: Sept. 10, 2024
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Zach Korach, Finance Director/Deputy City Treasurer [email protected], 442-339-2127
Subject: Annual Report of Investments for Fiscal Year 2023-24 Districts: All
Rec
ommended Action
Accept and file the Annual Report of Investments for Fiscal Year 2023-24.
E
xecutive Summary
The City Treasurer reports annually to the City Council and the community on the city’s investment portfolio as mandated by the city’s Investment Policy. The Annual Report of Investments (Exhibit 1) presents, the market environment that affects the city’s investment strategy, portfolio standings and various portfolio analyses for the fiscal year 2023-24.
The position is currently vacant, following the retirement of the previously elected City Treasurer, so the Deputy City Treasurer is presenting this report.
Explanation & Fiscal Ana lysis
The City Treasurer is tasked with overseeing cash and investment activities for the city and its agencies by managing the funds in excess of day-to-day operating needs. City investments are pooled and invested to meet the treasury’s objectives of maintaining safety of principal, maintaining liquidity to meet the operating requirements of the city, and realizing the greatest return on investment.
The foremost objective is safety, the preservation of city capital. The City Treasurer makes prudent investment decisions that are intended to protect the capital of the city for its residents. All investments are made within the scope of the city’s investment policy, and current investment details are provided monthly for full transparency and review.
The two basic measures of an investment are par value, also known as the nominal value; and the book value, the value that is entered in the city records, which is driven by the actual cost of the investment and adjustments such as amortization.
• The city’s investment portfolio increased $28.5 million in par value from the previous fiscal year.
• The book value increased $22.4 million from the previous fiscal year.
Sept. 10, 2024
Item #2 Page 1 of 40
Second to safety is liquidity. The City Treasurer employs various methods to ensure adequate liquidity of capital as defined in the city’s investment policy. One method is to maintain the portfolio below the maximum maturity limit, which requires cash and maturities equal to at least two-thirds of the approved operating budget for that fiscal year. Another method is maintaining the portfolio under the maximum modified duration, which is a measure that reflects the portfolio’s price sensitivity to changes in interest rates. Finally, all investments have a maximum maturity of 5 years from the date of purchase settlement. Utilization of these methods maintains adequate liquidity to ensure that operational needs will be met and avoids circumstances that could result in selling at a loss.
The report shows:
• During the fiscal year, the treasurer monitored and maintained an average of $319.6 million in cash and investments maturing within one year, well above the minimum of $251.5 million required.
• The modified duration was 1.59 years as of the close of the fiscal year, well below the maximum allowed duration of 2.20 years. The City Treasurer remained within the limits of the modified duration restrictions throughout the year.
• All investments maintained a maximum maturity equal or less than 5 years, with the fiscal year average portfolio maturity at 1.79 years.
Once safety and liquidity objectives have been met, the City Treasurer aims to realize a return on investments. As the report details:
• Fiscal year 2023-24 started off with a monthly portfolio yield of 2.22% and ended the year with a portfolio yield of 2.88%, for an average yield of 2.55%. • Total interest earnings were over $21.2 million for the fiscal year. • The market value of the investment portfolio increased $41.1 million over the last fiscal year.
Gains in market value are governed by judicious investment decisions focusing on current market rates and anticipated future rates.
The investment portfolio increased 3.26% in par value over the fiscal year. Available investments demonstrated increasing rates in response to the market environment, resulting in an investment strategy to purchase securities to lock in higher rates. Throughout the year, investment purchases outweighed investment maturities by $45.0 million, resulting in a net increase in investments by 5.39%. This strategy yielded an increase in interest earnings of
31.1% over the previous fiscal year, which represents over $5.0 million in additional revenue.
More detailed information can be found in the report attached as Exhibit 1.
Next Steps
The Deputy City Treasurer will continue to manage the investment program for the city and all of its agencies, including the Carlsbad Municipal Water District, and continue to produce monthly and annual reports on city investments for the City Council and the community.
Following the general ballot election in November 2024, this role and function will be transitioned to the new elected City Treasurer.
Sept. 10, 2024
Item #2 Page 2 of 40
Environmental Evaluation
This action does not require environmental review because it does not constitute a project within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 in that it has no potential to cause either a direct physical change or a reasonably foreseeable indirect physical change in the environment.
Exhibits
1. Annual Report of Investments for the Fiscal Year Ending June 30, 2024 Sept. 10, 2024
Item #2 Page 3 of 40
1 Exhibit 1
Sept. 10, 2024
Item #2 Page 4 of 40
2 CITY
TRESURER
ANNUAL
REPORT OF
INVESTMENTS
FISCAL YEAR 2023-24
ZACH KORACH
FINANCE DIRECTOR/
DEPUTY CITY TREASURER
SEPT. 10, 2024
Sept. 10, 2024
Item #2 Page 5 of 40
3 TABLE OF CONTENTS
INTRODUCTION
City Treasurer letter of transmittal ......................................................................5 Fiscal year 2023-24 quick look .............................................................................6
MARKET REVIEW
Federal funds target rate .....................................................................................8 Short-term interest rates .....................................................................................10 Market yield curve ...............................................................................................11
PORTFOLIO OVERVIEW
Portfolio total assets ............................................................................................13 Sources of portfolio .............................................................................................15 Allocation of portfolio ..........................................................................................16
PORTFOLIO ANALYSIS
Portfolio yield .......................................................................................................19 Maturity & modified duration .............................................................................22 Interest income ....................................................................................................24
APPENDICES
Risk management disclosures ..............................................................................27 Data tables ...........................................................................................................30 Additional resources ............................................................................................37
Sept. 10, 2024
Item #2 Page 6 of 40
4 INTRODUCTION
Sept. 10, 2024
Item #2 Page 7 of 40
5 CITY TREASURER LETTER OF TRANSMITTAL
Fiscal Year 2023-24 Annual Report of Investments
Sept. 10, 2024
Honorable Mayor, City Council and residents of the City of Carlsbad,
I am pleased to present the Annual Report of Investments for the City of Carlsbad for the fiscal year 2023-24 which ended June 30, 2024. The report is intended to provide information as a basis for reviewing portfolio performance and making management decisions. It also provides an archival reference.
The City Treasurer is charged with the design of an effective cash management and investment program for the City of Carlsbad and all its agencies. Among other activities, this includes arranging banking services, forecasting all cash receipts and expenditures, investing inactive cash, managing investment risk exposures and reporting all investment activities.
This report summarizes and analyzes the activities of the investment portfolio over fiscal year 2023-24. This report begins with a quick overview and summary of key annual data. The second section, market review, provides an overview of the market environment affecting portfolio management decisions, and includes Federal Funds target rate and U.S. Treasury short-term interest rates data. The third section, portfolio review, looks at the composition of the portfolio including total assets and the trend regarding size of the fund, fund sources of the portfolio and the portfolio allocation. The fourth section, portfolio analysis, includes yield information and comparisons to treasury rates, unrealized gains and losses, cash income, maturity data and modified duration. The final section, appendices, provides disclosures, data tables and additional information. Future fund activity depends on the market environment for investing decisions and anticipated returns for each investment classification. These factors are monitored for trends and evaluated prior to all investing decisions.
Sincerely,
Zach Korach,
Finance Director/Deputy City Treasurer
Sept. 10, 2024
Item #2 Page 8 of 40
6 FISCAL YEAR 202 3-24 QUICK LOOK
Market review
• Federal funds target rate:
5.50%; fiscal year
increase of 0.50%
• Two-year U.S. Treasury:
4.71%; fiscal year
decrease of 0.18%
Portfolio overview
• Total portfolio value at
par value: $902,855,260
• Total portfolio fiscal year
increase: $28,505,154
• Federal Agencies
represent 38.8% of all
investments
Portfolio analysis
• Portfolio yield as of
06/30/24: 2.88%
• Portfolio interest for the
fiscal year: $21,201,394
• Average maturity as of
06/30/24: 1.85 years
0.00 2.00
4.00 6.00
Three-
month
Two- year Five- year Ten- year
Interest rate (%)
Maturity
Market yield curve
06/30/24
760
810
860
910
Par value Market value Book value
Asset value ($ millions)
Valuation
Total portfolio valuation
06/30/24
2.00%
2.50%
3.00%
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Yield
Month
Portfolio yield
Fiscal year 2023-24
Sept. 10, 2024
Item #2 Page 9 of 40
7 MARKET REVIEW
Sept. 10, 2024
Item #2 Page 10 of 40
8 FEDERAL FUNDS TARGET RATE
The federal funds target rate is considered one of the most important interest rates in the U.S. economy. It is a key money market rate that correlates with rates of other short-term credit arrangements. It is the interest rate that banks charge each other for overnight loans and influences many aspects of the U.S. economy.
The rate is represented as a range, which is set by the Federal Open Market Committee eight times per year. The Federal Open Market Committee specifies the short-term objective for the purchase and sale of securities in the open market.
The rate is adjusted in response to economic conditions and in response to factors such as inflation or recession environments. To slow the rate of inflation, the Federal Reserve began raising rates in 2022, continued through the first half of 2023, and have held steady since July 2023.
0.00 1.00
2.00 3.00
4.00 5.00
6.00 Rate (%)
Month
Federal Funds rate changes
Fiscal year 2023-24
Sept. 10, 2024
Item #2 Page 11 of 40
9 Between 2013 and 2015, rates held at 0.25% to support economic growth following the 2008 recession. As the economy continued to grow, the rate was increased to stabilize the level of growth. Rates lowered in 2020 and 2021 as a result of the COVID-19 pandemic, but with inflation on the rise since 2022, rates steadily increased, leveling out mid-2023 and remaining steady through the fiscal year.
0.00 1.00
2.00 3.00
4.00 5.00
6.00 Rate (%)
Fiscal year
Federal Funds rate
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024
Item #2 Page 12 of 40
10 SHORT -TERM INTEREST RATES
The rates for U.S. Treasury bonds are important to all investors, but especially to bond investors. These bonds are issued by the Department of the Treasury and are an indicator as to how the U.S. government predicts inflation and the overall economy will change. Changes in short-term market interest rates are usually affected by the actions of the Federal Reserve.
Short-term interest rates in the three exhibited trends of five-year market, two-year market, and six-month market had minimal changes during the fiscal year, measured from July 1, 2023, to June 30, 2024:
• Six-month: decrease of 0.20%, from 5.53% to 5.33%
• Two-year: decrease of 0.17%, from 4.88% to 4.71%
• Five-year: increase of 0.15%, from 4.18% to 4.33%
0.00 1.00
2.00 3.00
4.00 5.00
6.00 Rate (%)
Month
Short term interest rates of U.S. Treasuries
Fiscal year 2023-24
Six-month Two-year Five-year
Sept. 10, 2024
Item #2 Page 13 of 40
11 MARKET YIELD CURVE
The yield curve is a graphic presentation of the difference between short-term and longer-term interest rates of U.S. Treasury instruments on a given day. Financial analysts use it to, among other things, assess likely changes in inflation levels as well as the likelihood of entering into an economic recession.
Yield curves:
• Normal: implies economic expansion
• Inverted: implies economic reduction
• Flat: implies transition in the economic environment
The current fiscal year continues to show an inverted yield curve, expressing that yield increases as maturity decreases. In other words, short-term investments are offering higher yields. This may be an indication of movement from short-term to long-term investments, implying an effort to hedge against fear of an economic recession.
The City Treasurer maintains a mixture of liquid assets and longer-term investments which allows benefits of higher short-term interest rates and security against economic uncertainty. -
1.00 2.00
3.00 4.00
5.00 6.00
Three-month Two-year Five-year Ten-year
Rate (%)
Term
Market yield curve
Fiscal year end 2023-24 and two prior fiscal year ends
Jun 2022 Jun 2023 Jun 2024
Sept. 10, 2024
Item #2 Page 14 of 40
12 PORTFOLIO REVIEW
Sept. 10, 2024
Item #2 Page 15 of 40
13 PORTFOLIO TOTAL ASSETS
Assets are invested by the City Treasurer with the objectives of maintaining safety of principal, maintaining liquidity to meet the operating requirements of the city, and realizing the best return on investment. Safety of principal is the foremost objective of all investments made by the City Treasurer.
By pooling assets and investing a laddered portfolio, the city can ensure funds are available to meet obligations while earning the highest possible amount of interest.
Total assets in the investment portfolio
• Par value: $902,855,206, increase of 3.26% over prior year. • Market value: $871,929,110, increase of 4.95% over prior year. • Book value: $897,056,042, increase of 2.56% over prior year.
The portfolio is constantly fluctuating. Safety of capital is the first and foremost investing principal, but small increases and decreases are normal and expected. These fluctuations occur as a normal part of operations.
Causes of portfolio increases:
• Interest earned
• Revenues in excess of expenses
Causes of portfolio decreases:
• Interest incurred
• Expenses in excess of revenues
780
800
820
840
860
880
900
920
Par Value Market Value Book Value
Asset value ($ millions)
Valuation
Portfolio ending balance comparison by valuation method Fiscal year 2023-24 and prior year
Current year Prior year
Sept. 10, 2024
Item #2 Page 16 of 40
14 Key portfolio changes at par value during fiscal year 2023-24:
• Maturities: $163,893,595
• Calls: $6,500,000
• Buys: $208,847,364
The City Treasurer is responsible for maintaining the city’s operational cash flow needs while ensuring that excess funds are being invested in the safest and most effective manner year after year.
Total portfolio value has increased year after year. The last ten years have seen an increase of
28.50%. This represents a cash value of $198,960,987. This total increase is a result of thoughtful and prudent investment decisions. All funds in excess of expenses are reinvested while maintaining the liquidity required for city operations, present and future.
-
100
200
300
400
500
600
700
800
900
1,000Asset value ($ millions)
Fiscal year
Total portfolio value at amortized cost
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024
Item #2 Page 17 of 40
15 SOURCES OF PORTFOLIO
The portfolio is an internal investment pool that invests the available cash from various funds of all city agencies, city owned and fiduciary assets.
The capital project fund includes funds for the general capital construction, traffic impact fees, public facilities fees, park development, certain taxes, drainage fees, special districts, infrastructure replacement, and gas tax funds. Enterprise funds consist of the Carlsbad Municipal Water District, wastewater, solid waste, storm water, and golf course funds.
General,
$189,968,625
Capital projects,
$385,624,688
Enterprise,
$211,961,039
Fiduciary &
Internal,
$78,541,383
Special & Other,
$30,960,307
Source of funds as of June 30, 2024
Amortized cost
Sept. 10, 2024
Item #2 Page 18 of 40
16 ALLOCATION OF PORTFOLIO
Investments are made in financial instruments as authorized by the City of Carlsbad Investment Policy and the California Government Code. Apart from bank deposits, deposits in the California state Local Agency Investment Fund (LAIF) and California Asset Management Program (CAMP), all investments are in fixed-income instruments with known maturity dates.
Federal agencies make up 38.82% of the total investment portfolio. Provided below is the breakout of issuers within the federal agency category as of June 30, 2024:
Federal agency breakdown by percentage of total portfolio at par value Federal Farm Credit Bank 8.79%
Federal Home Loan Bank 16.30%
Federal Home Loan Mortgage Corporation 7.08%
Federal National Mortgage Association 3.98%
Federal Agricultural Mortgage Corporation 2.56%
Tennessee Valley Authority 0.11%
Total 38.82%
Federal agencies,
$350,525,000
Supra-nationals,
$21,890,000
U.S. Treasury,
$55,250,000
Coporate notes,
$122,990,000
Cert. of deposit,
$22,480,000
Mortgage-backed,
$77,147,892
Municipal bonds,
$101,745,000
Cash & pooled,
$150,827,368
Allocation of investments as of June 30, 2024
Par value
Sept. 10, 2024
Item #2 Page 19 of 40
17 Fiscal year 2023-24 net changes
Changes in investments are a result of multiple factors including maturities, calls and new investments. The data is represented at par value and does not reflect fluctuations of the market value because in conjunction with the liquidity principal, the city maintains a ‘buy and hold’ perspective. This means that the city does not sell investments in the normal course of operations and instead, holds the investments to maturity. The benefit of this policy is that investments will not be sold at a loss and the full par value will be returned.
Certain investment types are restricted by the City of Carlsbad Investment Policy for the purpose of balanced allocation. All investments are well under the policy limitations allowing for continued purchases of the best-fit investments.
-40.00
-20.00
0.00 20.00
40.00 60.00
80.00 100.00
120.00
140.00
Federal
agencies
Supra-
nationals
U.S.
Treasury
Coporate
notes
Cert. of
deposit
Mortgage
-backed
Municipal
bonds
% Change 5.70 12.60 (30.06) (21.66) 5.66 116.31 46.28
Change (%)
Percent value change by investment class
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00
Supranational
Corporate notes
Cert. of deposit
Municipal bonds
Percentage of portfolio
Policy Limits and Portfolio Allocation as of June 30, 2024 Policy Portfolio
Sept. 10, 2024
Item #2 Page 20 of 40
18 PORTFOLIO ANALYSIS
Sept. 10, 2024
Item #2 Page 21 of 40
19 PORTFOLIO YIELD
The average return of the portfolio increased 66 percentage points during the current fiscal year from 2.22% for fiscal year 2022-23 to 2.88% for fiscal year 2023-24.
0.00 0.50
1.00 1.50
2.00 2.50
3.00 3.50
Portfolio yield (%)
Month
Portfolio yield
Fiscal year 2023-24
0.00 0.50
1.00 1.50
2.00 2.50
3.00 3.50
Portfolio yield (%)
Fiscal year
Portfolio yield
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024
Item #2 Page 22 of 40
20 The current year has shown a portfolio yield increase of 0.66%, and a ten-year increase of
1.84%. By keeping a vigilant watch on the current market trends, the City Treasurer makes the most opportune investment decisions to first and foremost protect the city’s assets, and then to maximize the return on capital.
As compared to U.S. Treasury rates, the portfolio yield shows stabilization. The portfolio yield is influenced by changes in market interest rates. By investing in a variety of maturity dates, a variety of investment types and following a buy and hold policy, the effect of the sometimes dramatic changes in market rates has a less dramatic effect on the city’s portfolio.
0.00 1.00
2.00 3.00
4.00 5.00
6.00 Interest rate (%)
Portfolio rate with to six-month, two-year, and five-year U.S. Treasury rates
Fiscal year 2023-24 and prior nine years
U.S. Treasury 6-month U.S. Treasury 2-year U.S. Treasury 5-year Portfolio Sept. 10, 2024
Item #2 Page 23 of 40
21 Investments experience market value gains and losses subsequent to purchase because of changes in market interest rates. When market interest rates decrease, investments made previously at higher rates will gain value. The reverse is true when market interest rates increase. These changes in value are referred to as unrealized gains and unrealized losses.
Changes in value due to changes in market interest rates are normal and are to be expected.
Reporting requires that the city recognizes the market value of investments on an annual basis, however, the city’s buy and hold policy safeguards against market volatility.
-7.00
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00 1.00
2.00 3.00
Change at amortized cost (%)
Fiscal year end
Historical unrealized gains and losses
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024
Item #2 Page 24 of 40
22 MATURITY & MODIFIED DURATION
The second objective in the City Treasurer’s investing strategy is liquidity. The purpose of liquidity is ensuring adequate cash is available to fund city operations. In order to maintain liquidity, the measurement of modified duration is used.
The maximum term for investments is five years. This graph shows how maturity is distributed as of June 30, 2024. 37.75% of the portfolio is maturing within 12 months and includes overnight pooled cash accounts. Policy dictates that a minimum of two-thirds the operating budget be maturing within 12 months. As of June 30, 2024, 87.24% of the fiscal year 2023-24 budget is maturing within 12 months.
Average maturity is required to be three years or less, and as of June 30, 2024, is 1.85 years.
The increasing average maturity is indicative of reinvestment of maturities to hold higher interest rates over longer periods of time.
0 5
10 15
20 25
30 35
40 0-12 13-24 25-36 37-48 49-60
Porfolio (%)
Months until maturity
Portfolio liquidity
June 30, 2024
1.60 1.70
1.80 1.90
2.00 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Average maturity (years)
Month
Average maturity
Fiscal year 2023-24
Sept. 10, 2024
Item #2 Page 25 of 40
23 Modified duration is a measure of an investment’s price sensitivity to interest rate changes. The maximum modified duration established by the city’s Investment Policy is 2.2. As of June 30, 2024, the modified duration was 1.59.
1.40 1.50
1.60 1.70
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Modified duration
Month
Modified duration
Fiscal year 2023-24
Sept. 10, 2024
Item #2 Page 26 of 40
24 PORTFOLIO INTEREST INCOME
After safety and liquidity, return on investments is the third principal of investments. Cash income is a function of assets in the portfolio, the market interest rates at the time of the investments and interest payment schedules of the portfolio holdings.
Interest for the fiscal year totaled $21,201,394, a 31.13% increase, or $5,033,244 increase, from the prior fiscal year. Interest revenue is allocated to city funds based on their value.
Interest income is influenced by a variety of factors such as market rate, investment type and amount invested. As these factors are constantly changing, investment income fluctuates year to year.
-
500
1,000
1,500
2,000
2,500
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Interest income ($ thousands)
Month
Portfolio interest income
Fiscal year 2023-24
-
5.0 10.0
15.0 20.0
25.0 Interest income ($ millions)
Fiscal year
Portfolio interest income
Fiscal year 2023-24 and prior nine years
Sept. 10, 2024
Item #2 Page 27 of 40
25 With an investment strategy of continued moderate-term investments, the City Treasurer has also allocated funds to short-term and overnight accounts in the latter part of the year to take advantage of the steeply increased short-term rates.
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Interest income ($ thousands)
Investment type
Interest income by investment classification
Fiscal year 2023-24
Sept. 10, 2024
Item #2 Page 28 of 40
26 APPENDICIES
Sept. 10, 2024
Item #2 Page 29 of 40
27 RISK MANAGEMENT DISCLOSURES
All investments are exposed to risk of some type. The objective of risk management is to identify the risks involved and establish acceptable levels of risks that are consistent with the city’s investment objectives. Risk management includes managing, measuring, monitoring and reporting the various risks to which portfolio investments are exposed.
Portfolio investments are exposed to the following types of risks:
• Credit risk
- Custodial credit risk
• Investments
• Deposits
- Default credit risk
- Concentration credit risk
• Interest rate risk
• Event risk
Custodial credit risk (investments)
The city uses a third-party custody and safekeeping service for its investment securities.
Principal Custody Solutions is under contract to provide these custodial services. Custodial credit risk is the risk that the city will not be able to recover the value of its investments in the event of a Principal Custody Solutions failure. All city investments held in custody and safekeeping by Principal Custody Solutions are held in the name of the city and are segregated from securities owned by the firm. This is the lowest level of custodial credit risk exposure.
Custodial credit risk (deposits)
The city maintains cash accounts at Wells Fargo Bank. At the conclusion of each business day, balances in these accounts are “swept” into overnight investments. These overnight investments are pooled and collateralized with either U.S. government securities or U.S. agency securities. The California Code authorizes this type of investment. A small amount of cash is not swept from the Wells Fargo Bank checking accounts to cover checks that may be presented for payment. Amounts up to $250,000 are FDIC insured.
Default credit risk
Default credit risk is the risk that the issuer of the security does not pay either the interest or the principal when due. The debts of most U.S. agencies are not backed by the full faith and credit of the federal government; however, because the agencies are U.S. Government- sponsored, they carry an AA credit rating. The default credit risk of these investments is minimal.
Unless otherwise exempted, California Government Code limits investments, at the time of purchase, to the top three credit ratings: AAA, AA, and A. It is the city’s policy, however, to limit investments, at the time of purchase, to the top two credit ratings (AAA and AA). As of June 30, Sept. 10, 2024
Item #2 Page 30 of 40
28 2024, one investment in corporate notes had a credit rating below the AA limit. These investments were made when the credit ratings were either AAA or AA and a subsequent change in rating has occurred. California Government Code and the city’s Investment Policy allow the City Treasurer to determine the course of action to correct exceptions to the policy. It is the intent of the City Treasurer to hold these investments in the portfolio until maturity unless events indicate a sale should be made.
The default credit risk for corporate notes with a credit rating of single A (A) is considered by the City Treasurer to be within acceptable limits for purposes of holding to maturity and is within the California Government Code limitations.
LAIF is an investment pool managed by the California State Treasurer. Its investments are short- term and follow the investment requirements of the state. The state treasurer is not required to contract for a credit rating to be assessed for LAIF. California Government Code Section 16429.3 excludes LAIF deposits from being transferred, loaned, impounded, or seized by any state agency or official.
Concentration credit risk
Concentration credit risk is the heightened risk of potential loss when investments are concentrated in one issuer. The California Government Code does not identify a specific percentage that indicates when concentration risk is present for any one issuer.
California Government Code Section 53601(k) requires that total investments in medium-term corporate notes of all issuers not exceed 30% of the portfolio. As of June 30, 2024, approximately 13.55% of the city’s total portfolio investments were in medium-term corporate notes.
California Government Code Section 53601(o) requires that non-agency mortgage-backed securities shall not exceed 20% of the portfolio. As of June 30, 2024, all city-held mortgage- backed securities are backed by Federal Agencies.
For concentration of investments in any one issuer, the city’s Investment Policy requires that no more than 5% of investments in corporate notes, non-agency mortgage-backed securities, and municipal bonds be in any one issuer. There is no similar requirement in either the California Government Code or the city’s investment policy for U.S. agencies. As of June 30, 2024, no investments in any one of the aforementioned securities has an issuer that exceeded 5% of total portfolio investments.
Interest rate risk
Interest rate risk is the risk that investments will lose market value because of increases in market interest rates. A rise in market interest rates will cause the market value of investments made earlier at lower interest rates to lose value. The reverse will cause a gain in market value.
Sept. 10, 2024
Item #2 Page 31 of 40
29 As of June 30, 2024, the portfolio had a 2.80% unrealized loss in market value based on amortized cost.
The city’s Investment Policy has adopted two means of limiting its exposure to market value losses caused by rising market interest rates: (1) limiting total portfolio investments to a maximum modified duration of 2.2, and (2) requiring maturing investments within one year to be equal to an amount that is not less than two thirds of the current year operating budget of $377,263,607. As of June 30, 2024, the modified duration of the portfolio was 1.59, within the required maximum of 2.2. Investments maturing within one year were $329,119,127, exceeding the required minimum of $251,509,071. The city’s exposure to interest rate risk is within acceptable limits.
Event risk
Event risks include the chance that something unexpected will impede the ability of an issuer of a security to meet its obligations. These types of risks are usually short in duration but can impair the city’s ability to communicate with or use banking services. Such an event could cause a delay in collecting securities which have matured. Security risks are also within this category.
Sept. 10, 2024
Item #2 Page 32 of 40
30 DATA TABLES
Data tables provided for additional details for graphs throughout the report.
Federal target rate detail, fiscal year 2023-24
Period Range limit
Jul 2023 5.25 - 5.50%
Sep 2023 5.25 - 5.50%
Nov 2023 5.25 - 5.50%
Dec 2023 5.25 - 5.50%
Jan 2024 5.25 - 5.50%
Mar 2024 5.25 - 5.50%
May 2024 5.25 - 5.50%
Jun 2024 5.25 - 5.50%
Short-term interest U.S. Treasury rate detail, fiscal year 2023-24
Period Six-month Two-year Five-year
Jul 2023 5.53% 4.88% 4.18%
Aug 2023 5.48% 4.85% 4.23%
Sep 2023 5.53% 5.03% 4.60%
Oct 2023 5.54% 5.07% 4.82%
Nov 2023 5.38% 4.73% 4.31%
Dec 2023 5.26% 4.23% 3.84%
Jan 2024 5.18% 4.27% 3.91%
Feb 2024 5.30% 4.64% 4.26%
Mar 2024 5.38% 4.59% 4.21%
Apr 2024 5.44% 5.04% 4.72%
May 2024 5.42% 4.89% 4.52%
Jun 2024 5.33% 4.71% 4.33%
Market yield curve, fiscal year 2023-24 and prior two years
FY end date Three-month Two-year Five-year Ten-year
06/30/22 1.72% 2.92% 3.01% 2.98% 06/30/23 5.43% 4.87% 4.13% 3.81% 06/30/24 5.48% 4.71% 4.33% 4.36%
Sept. 10, 2024
Item #2 Page 33 of 40
31 Valuation table, fiscal year 2023-24
Different values are presented throughout the report. This data table presents varying valuation types, listed by class as of June 30, 2024.
Class Par value Market value Book value
Certificate of Deposit $ 22,480,000 $ 21,681,219 $ 22,476,968 Corporate Notes $ 122,990,000 $ 118,114,447 $ 123,020,978 Federal Agency $ 350,525,000 $ 336,219,140 $ 348,658,055 U.S. Treasury $ 55,250,000 $ 53,401,850 $ 54,830,175 Supranational $ 21,890,000 $ 21,264,562 $ 21,899,869 Municipal Bonds $ 101,745,000 $ 95,882,867 $ 98,786,634 Pass Through Securities $ 77,147,892 $ 74,537,657 $ 76,555,995 Cash & Pooled $ 150,827,368 $ 150,827,368 $ 150,827,368 Total $ 902,855,260 $ 871,929,110 $ 897,056,042
Portfolio assets valuation, fiscal year 2023-24 and prior nine years
Fiscal year Par value Market value Book value
2014-15 $ 696,923,770 $ 698,918,091 $ 698,095,055 2015-16 $ 715,837,393 $ 721,730,358 $ 717,721,310 2016-17 $ 720,912,625 $ 720,280,916 $ 722,577,923 2017-18 $ 761,973,309 $ 750,805,057 $ 761,499,745 2018-19 $ 794,156,136 $ 796,915,076 $ 793,677,467 2019-20 $ 807,311,873 $ 827,577,140 $ 812,848,717 2020-21 $ 813,600,409 $ 827,094,051 $ 821,268,939 2021-22 $ 846,773,333 $ 821,428,843 $ 852,168,180 2022-23 $ 874,350,106 $ 830,832,607 $ 874,704,150 2023-24 $ 902,855,260 $ 871,929,110 $ 897,056,042
Sources of portfolio at amortized cost, fiscal year 2023-24
Fund type 2022-23 2023-24
General $ 185,166,409 $ 189,968,625
Capital projects $ 375,873,203 $ 385,624,688 Enterprise $ 204,198,973 $ 211,961,039 Fiduciary & Internal service $ 75,097,927 $ 78,541,383 Special & other $ 34,367,638 $ 30,960,307 Total $ 874,704,150 $ 897,056,042
Sept. 10, 2024
Item #2 Page 34 of 40
32 Portfolio allocation at book value, June 30, 2024
Policy limitations are not limited for federal agency issuers.
Class % Total Policy limits
Supranational 2.44% 10%
Municipal Bonds 11.00% 15%
Corporate Notes 13.55% 30%
Certificate of Deposit 2.49% 30%
U.S. Treasury 6.12% N/A
Mortgage-backed (Agency) 8.55% N/A
Federal Investments 38.56% N/A
Cash & Pooled Cash 17.30% N/A
Totals 100.00%
Investment changes by class, fiscal year 2023-24
This table presents the detail of investment changes, excluding cash and pooled cash, listed by class.
Class 6/30/2023 6/30/2024 Dollar change Change
Certificate of Deposit $ 21,276,000 $ 22,480,000 $ 1,204,000 5.66% Corporate Notes $ 157,005,000 $ 122,990,000 $(34,015,000) -21.66% Federal Agency $ 331,633,000 $ 350,525,000 $ 18,892,000 5.70% U.S. Treasury $ 79,000,000 $ 55,250,000 $(23,750,000) -30.06% Supranational $ 19,440,000 $ 21,890,000 $ 2,450,000 12.60% Municipal Bonds $ 69,555,000 $ 101,745,000 $ 32,190,000 46.28% Mortgage-Backed (Agency) $ 35,665,124 $ 77,147,892 $ 41,482,768 116.31% Total $ 748,595,716 $ 752,027,892 $ 38,453,768 5.39%
Class Maturities Calls Buys
Certificate of Deposit $ 2,958,000 - $ 4,162,000 Corporate Notes $ 54,065,000 $ 4,000,000 $ 24,050,000 Federal Agency $ 57,253,000 $ 2,500,000 $ 78,645,000 U.S. Treasury $ 35,250,000 - $ 11,500,000 Supranational $ 5,000,000 - $ 7,450,000 Municipal Bonds $ 3,750,000 - $ 35,940,000 Pass Through Securities $ 5,617,595 - $ 47,100,364 Total $ 163,893,595 $ 6,500,000 $ 208,847,364
Sept. 10, 2024
Item #2 Page 35 of 40
33 Portfolio yields, fiscal year 2023-24 and prior nine years
Treasury, 06/30
Month
ending
Portfolio
yield
Fiscal
year
Portfolio
yield
Six-
month
Two-
year
Five-
year
07/31/23 2.23% 2014-15 1.09% 0.11% 0.64% 1.63%
08/31/23 2.39% 2015-16 1.16% 0.36% 0.58% 1.01%
09/30/23 2.33% 2016-17 1.25% 1.14% 1.38% 1.89%
10/31/23 2.35% 2017-18 1.57% 2.11% 2.52% 2.73%
11/30/23 2.44% 2018-19 1.96% 2.09% 1.75% 1.76%
12/31/23 2.49% 2019-20 1.69% 0.18% 0.16% 0.29%
01/31/24 2.58% 2020-21 1.17% 0.06% 0.25% 0.87%
02/28/24 2.63% 2021-22 1.28% 2.51% 2.92% 3.01%
03/31/24 2.65% 2022-23 2.22% 5.47% 4.87% 4.13%
04/30/24 2.77% 2023-24 2.88% 5.33% 4.71% 4.33%
05/31/24 2.83%
06/30/24 2.88%
Unrealized gain or loss, fiscal year 2023-24
Unrealized gain or loss is calculated by subtracting the market value from the book value. All calculations are performed at the end of each month.
Month
Unrealized
gain or loss
Jul 2023 -4.97%
Aug 2023 -4.77%
Sep 2023 -4.99%
Oct 2023 -4.89%
Nov 2023 -4.05%
Dec 2023 -3.23%
Jan 2024 -2.95%
Feb 2024 -3.25%
Mar 2024 -3.16%
Apr 2024 -3.51%
May 2024 -3.07%
Jun 2024 -2.80%
Sept. 10, 2024
Item #2 Page 36 of 40
34 Modified duration, fiscal year 2023-24
Month Modified duration
Jul 2023 1.56
Aug 2023 1.52
Sep 2023 1.55
Oct 2023 1.54
Nov 2023 1.58
Dec 2023 1.58
Jan 2024 1.58
Feb 2024 1.60
Mar 2024 1.63
Apr 2024 1.56
May 2024 1.57
Jun 2024 1.59
Revenue from investments monthly, fiscal year 2023-24
Month Income
Jul 2023 $ 1,589,456
Aug 2023 $ 1,631,044
Sep 2023 $ 1,737,767
Oct 2023 $ 1,999,700
Nov 2023 $ 1,627,671
Dec 2023 $ 1,538,391
Jan 2024 $ 1,972,108
Feb 2024 $ 1,915,023
Mar 2024 $ 1,712,817
Apr 2024 $ 2,117,256
May 2024 $ 1,574,890
Jun 2024 $ 1,785,272
Total $ 21,201,394
Sept. 10, 2024
Item #2 Page 37 of 40
35 Revenue from investments by class and totals, fiscal year 2023-24 and prior nine years
Investment class Cash income Fiscal year Cash income
Federal Agency $ 4,577,797 2014-15 $ 7,864,801 Supranational $ 395,736 2015-16 $ 8,678,630 Treasury $ 899,595 2016-17 $ 9,286,187 Corporate Notes $ 3,860,367 2017-18 $ 11,248,807 Certificate of Deposit $ 402,199 2018-19 $ 14,837,963 MBS (agency) $ 1,474,944 2019-20 $ 17,031,603 Municipal $ 1,883,436 2020-21 $ 14,026,325 Cash & Pooled Cash $ 7,707,320 2021-22 $ 12,047,464 Fiscal Year 2023-24 Total $ 21,201,394 2022-23 $ 16,168,150 2023-24 $ 21,201,394
Liquidity by maturity period
Period, in months Maturity value Percentage
0-12 $ 329,119,127 37.75%
13-24 $ 175,006,096 20.07%
25-36 $ 139,230,541 15.97%
37-48 $ 107,936,095 12.38%
49-60 $ 120,637,251 13.84%
Total $ 871,929,110 100.00%
Average maturity, fiscal year 2023-24
Month Average maturity (years)
Jul 2023 1.74
Aug 2023 1.71
Sep 2023 1.75
Oct 2023 1.73
Nov 2023 1.77
Dec 2023 1.75
Jan 2024 1.78
Feb 2024 1.82
Mar 2024 1.90
Apr 2024 1.83
May 2024 1.83
Jun 2024 1.85
Sept. 10, 2024
Item #2 Page 38 of 40
36 Cash inflows and outflows, fiscal year 2023-24
The city’s portfolio balance increased 2.56% from $875 million to $897 million in book value over the fiscal year. The increase of $22 million does little to show the volume of cash that flows in and out of the portfolio during one fiscal year. The following table illustrates that the City Treasurer managed over $1.40 billion of cash inflows and cash outflows which prompted investment decisions during fiscal year.
Cash inflows and outflows
Investment calls $ 6,500,000
Investment maturities $ 163,893,595
Investment purchases $ 208,847,364
Interest income $ 7,707,320
CAMP investments $ 134,000,000
CAMP withdrawals $ 149,800,000
Overnight investments $ 369,710,612
Overnight withdrawals $ 363,497,612
Sept. 10, 2024
Item #2 Page 39 of 40
37 ADDITIONAL RESOURCES
The Annual Report of Investments is a stand-alone report; however, additional documents are available for interested parties:
Investment Policy
The Investment Policy is approved by City Council and governs investment management.
Included are topics such as:
• Investing objectives
• Authorized investments
• Limitations
• Review and reporting
The Investment Policy can be found on the City of Carlsbad City Treasurer website at:
https://www.carlsbadca.gov/city-hall/other-elected-officials/city-treasurer
Monthly investment reports
Monthly investment reports are presented to City Council and provide an in-depth status on the full portfolio on a routine basis. These reports include aspects such as:
• Current period maturities, calls, and purchases
• Detail listing of investments
• Investment ratings and outlooks
• Portfolio allocation by issuer
The monthly investment reports can be found on the City of Carlsbad City Treasurer website at:
https://www.carlsbadca.gov/city-hall/other-elected-officials/city-treasurer
Contacts
We are available for questions or comments on any Treasurer report or function:
• Zach Korach, Finance Director/Deputy City Treasurer
[email protected]
• Katie Schroeder, Senior Accountant, Treasury Department [email protected]
Sept. 10, 2024
Item #2 Page 40 of 40