CITY COUNCIL STAFF REPORT
January 16, 2024 {{section.number}}d
RECEIVE THE TREASURER’S REPORT ON THE OVERVIEW OF CASH AND INVESTMENTS, AND REVIEW AND APPROVE THE CITY OF CORONADO’S INVESTMENT POLICY RECOMMENDATION:
Review and receive the report on the overview of cash and investments, and review and approve the City of Coronado’s investment policy.
BACKGROUND:
The City receives funds from several sources and invests according to the City of Coronado Investment Policy, see Attachment 1. As of June 30, 2023, the book value of the City’s investment portfolio is approximately $205 million.
All investments are made with the primary objectives of safety, liquidity and return on investment, in that order. The City’s investment policy establishes the framework for these investment activities. The investment policy specifies all permissible investments by type and requirements for diversification and credit quality. The policy also discusses reporting requirements, safekeeping and custody, and internal controls.
The authority to manage the City's investment program is derived from California Government Code Section 53607. Management responsibility for the operation of the investment program is delegated to the City Treasurer and subject to review and renewal each year pursuant to this section. Therefore, review and approval of the City’s investment policy would be inclusive of renewal of delegated authority for a period of one-year.
The City also participates in a multi-employer trust in accordance with Section 115 of the Internal Revenue Code. The trust was established as an irrevocable, exclusive benefit trust to fund pension and retiree health care benefits (Other Post-Employment Benefits-OPEB). Assets held in this trust are administered by the Public Agency Retirement Services (PARS) and allow for a greater range of investment options, similar to that of CalPERS.
AUTHORIZED INVESTMENTS
The City of Coronado is empowered by California Government Code Section 53601 et seq. to generally invest in the following types of securities:
• United States Treasury Bills, Bonds, Notes, and Certificates of Indebtedness • Federal Agency or United States Government-sponsored Enterprise Obligations, Participations, or other Instruments
• Registered Treasury Notes or Bonds of any of the other 50 states. • Bonds, notes, warrants, Negotiable Certificates of Deposit (NCDs) Time Deposits, Medium-Term Notes, Commercial Paper, Bankers’ Acceptances, Repurchase Agreements, Local Government Investment Pool (LGIP), Money Market Funds. • Local Agency Investment Fund (LAIF).
• County of San Diego Treasury (County Pool).
PROHIBITED INVESTMENTS
Under the provisions of Government Code Sections 53601.6, the City of Coronado shall not invest any funds covered by its Investment Policy:
• Inverse floaters, range notes, interest-only strips derived from mortgage pools, or any investment that may result in a zero-interest accrual if held to maturity • Any security having an interest rate derived from an index, commodity price or other variable; i.e., securities commonly known as derivatives • Stocks, speculate, deal in futures or options, or buy on the margin ANALYSIS:
As of June 30, 2023, City’s cash, investments, and percentage of totals are as follows:
Local Agency Investment Fund (LAIF) and San Diego County Treasurer’s Pooled Investment Fund (SD County Fund) is primarily comprised of treasury instruments, agency instruments, certificates of deposits, bank notes, time deposits, and commercial paper, among others.
Accordingly, these funds provide diversified exposure to many of the authorized investment types allowed under the City’s investment policy.
HISTORICAL RETURN ON INVESTMENT
The table below summarizes interest and investment earnings for Coronado’s investment, annual yields for LAIF and SD County Funds, and PARS pension stabilization fund for comparison purposes. Coronado’s earnings generally align with LAIF and SD County Funds due to their concentration in the two funds. PARS, in contrast, shows higher volatility in its earnings, which is expected based on the objective of this investment and corresponding asset allocation, including significant exposure to stock equities.
Book Value
% of Total
Investments
Investments:
Local Agency Investment Fund $ 74,856,236 32.96%
San Diego County Treasurer's Pooled Investment Fund 98,254,695 43.27% US Bank Loan Repayment Fund* 16,242,243 7.15%
Certificates of Deposit with San Diego Private Bank 250,000 0.11% OPEB and Pension Trust Investment Portfolio with PARS** 15,433,000 6.80% Sub-Total Investments 205,036,174 90.28%
Demand Deposit Accounts:
US Bank Operating Account 21,459,943 9.45%
US Bank HRA Account 46,232 0.02%
US Bank FSA Account 84,621 0.04%
CalPrivate Bank Money Market Account 472,628 0.21%
Sub-Total Demand Deposit Accounts 22,063,424 9.72%
Total All Investments $ 227,099,598
* Resctricted for public use capital improvements
** Restricted for Other Post Employment Benefits (OPEB) and Pension stablization PARS Market Value as ofJune 30, 2023 totaled $18,099,362 FISCAL YEAR CORONADO* LAIF SD County
Funds PARS
FY 16/17 0.96% 0.75% 0.99% 12.36%
FY 17/18 1.91% 1.38% 1.56% 7.92%
FY 18/19 1.62% 2.27% 2.27% -0.53%
FY 19/20 1.83% 1.93% 2.06% 4.03%
FY 20/21 0.69% 0.50% 1.02% 26.43%
FY 21/22 0.41% 0.37% 0.77% -13.77%
FY 22/23 2.21% 2.17% 2.71% 9.22%
Nov-23 N/A 3.84% 3.70% 7.20%
*Per Quarterly Treasurer’s Reports for quarters ending on June 30, excluding PARS and Loan Repayment Fund.
OPTIONS AND ANALYSIS
After nearly a decade of a historically low-interest rate environment, the Federal Reserve has gone through more than eleven rate increases since early 2022, reaching 5.5% as of July 2023.
Accordingly, the yield rates of the City’s two primary investment funds, LAIF and SD County Fund, have both steadily increased to 3.84% and 3.70%, respectively, as of November 2023.
Staff reviewed the City’s current investments and evaluated alternate asset allocation and strategies. As a result, the City implemented and plans to make the following changes to the current investment allocation. Actual implementation may change subject to market conditions:
• Allocate $20M towards higher yield 6- and 12-month Certificate of Deposits with a local financial institution, yielding an annual interest rate of 4.75%-5.15%. This has been placed as of December 28, 2023.
• Reduce the LAIF and SD County Fund balances to a combined total of $90M, approximating the Fiscal Year 2023-24 approved budget. This balance will ensure sufficient liquidity for the cash’s operating expenditures. • Allocate all or part of the remaining excess cash towards 3- and 6-month US Treasury Bills, yielding a blended interest rate of 5.25%*
• Conduct quarterly investment review for adjustments based on liquidity needs, interest rate changes, and other relevant factors.
*Rates as of January 2, 2024
Staff currently provide quarterly Treasurer’s report on investment, including asset balance, allocation, and year-to-date average investment return. Starting with the Treasurer’s report for the quarter ending December 31, 2023, staff will include any adjustments made from the quarterly investment review.
FISCAL IMPACT:
There is no fiscal impact associated with the overview of City’s cash, investment, and related policy for the City of Coronado. However, recently implemented and planned changes projects to positively impact the City’s actual investment earnings for the Fiscal Year 2023-24, depending on the various assets' actual yields and interest rate changes.
ALTERNATIVE:
City Council may not receive the report and/or direct amendments to the City of Coronado’s Investment Policy.
CALIFORNIA ENVIRONMENTAL QUALITY ACT:
Not Applicable.
PUBLIC NOTICE:
No notice required.
ATTACHMENTS:
1. City of Coronado Statement of Investment Policy
Submitted By: Administrative Services Department / John Kim