CITY OF LAGUNA NIGUEL
CITY COUNCIL AGENDA ITEM
To: Honorable Mayor and Council Members
FROM: Eric Hendrickson, Finance Director
DATE: October 18, 2022
SUBJECT: Annual Investment Report for Fiscal Year 2021-2022
RECOMMENDATION
Staff recommends that the City Council receive and file the City's Annual Investment Report for Fiscal Year 2021-2022.
BACKGROUND
The City of Laguna Niguel prepares an annual investment report at the conclusion of every fiscal year. The report (Attachment A) details investment activity from July 1, 2021 through June 30, 2022. This report includes:
- Portfolio performance and comparison to benchmarks
- Review of trends regarding the size of the portfolio
- Investment risk in the portfolio
- Composition of the portfolio
- Investment income
Investment policy compliance certification
The Investment, Banking, and Audit Committee reviewed the contents of the report on September 28, 2022. After completion of its review, the Committee unanimously recommended approving the Annual Investment Report with no revisions.
FISCAL REVIEW
There is no fiscal impact resulting from this recommendation.
LEGAL REVIEW
No legal review is required for this report.
Samasa S Retowneau En Pendibu
Tamara S. Letourneau Eric Hendrickson
City Manager Finance Director
Attachments:
A. City of Laguna Niguel Annual Investment Report for Fiscal Year 2021-2022
ATTACHMENT A
Annual Investment Report for Fiscal Year Ended June 30, 2022
CITY OF LAGUNA NIGUEL
ANNUAL INVESTMENT REPORT
NIGUEL
SHA COUNTR
1989
Fiscal Year Ended
June 30, 2022
Prepared by:
Eric Hendrickson
Finance Director/City Treasurer
COUN
1989
Annual Investment Report
Table of Contents
Portfolio Performance and Comparison to Benchmarks 1-3
Review of Trends Regarding the Size of the Portfolio 4-5 Investment Risk in the Portfolio 6-8
Composition of the Portfolio 9-10
Investment Income 11
Investment Policy Compliance Certification 12
Annual Investment Report - FY 21-22
PORTFOLIO PERFORMANCE AND
COMPARISON TO BENCHMARKS
The City's average weighted yield on its portfolio during FY 2021-22 (calculated by summing the total investment earnings divided by the total portfolio at cost, excluding cash in bank, for each period and dividing by 12) was 0.69%, an increase from the prior fiscal year's yield of 0.60%. This slight increase is mainly attributable to the Federal Reserve's decision to raise interest rates on bond yields late in the fiscal year to combat inflationary pressures.
The average weighted yield on the City's portfolio at June 30, 2022 was 1.03%, on a cash and investment balance of $68,522,135, with an average days-to-maturity (calculated as the sum of days left until maturity of each individual investment multiplied by the cost of each individual investment divided by the total portfolio at cost, excluding cash in bank of 507 days. The fiscal year average weighted days to maturity of the portfolio increase from 396 days in FY 2020-21 to 576 days in FY 2021-22, reflecting investments made in longer-term bonds during FY 2021-22.
Cin of Laguna Nignet's Portfolio Benchmark Comparisons
Average
Heighted average
Don's to eighted 5-Tean 1-Tem 6- Monris
Cost/Book Palue Maturin: Ileid Treasion Treasum Treasing: OCIP LAIF Jul-21 57.706,834 741 0.58% 0.69% 0.07% 0.05% 0.54% 0.22% Aug-21 $ 55,522,208 477 0.56% 0.77% 0.07% 0.06% 0.52% 0.22% Sep-21 53,413,330 491 0.57% 0.98% 0.09%% 0.05% 0.50% 0.21% Ocr-21 50,663,466 746 0.64% 1.18% 0.15% 0.07% 0.46% 0.20% Nor-21 52,348.283 642 0.68% 1.14% 0.24% 0.01% 0.46% 0.20% Der-21 55,081,189 584 0.60% 1.26% 0.39% 0.02% 0.34% 0.21% Jan-22 59.113,228 530 0.58% 1.62% 0.78% 0.49% 0.34% 0.23% Feb-22 58,149,113 528 0.61% 1.71% 1.01% 0.69% 0.38% 0.28% Mar-22 57,634,710 521 0.65% 2.42% 1.63% 1.06% 0.40% 0.37% Apr-22 60.920,942 608 0.86% 2.92% 2.10% 1.41% 0.49%%° 0.52% Mar-22 $ 66,402,158 537 0.91% 2.81% 2.08% 1.64% 0.62% 0.68% Jun-22 $ 68,522,135 507 1.03% 3.01% 2.80% 2.51% 0.74% 0.86% Fiscal Year S 57,956.466 576 0.69% 1.71% 0.95% 0.67% 0.48% 0.35%
SCOURES
Annual Investment Report - FY 21-22
PORTFOLIO PERFORMANCE AND
COMPARISON TO BENCHMARKS
The following chart compares the City's portfolio performance with monthly benchmarks investment pools.
Comparison to Benchmarks - FY 2021-22
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Jul21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 — City Portfolio — - 5-Year Treasury -— 1-Year Treasury —— 6- Month Treasury — - OCIP - —LAIF
Annual Investment Report - FY 21-22
PORTFOLIO PERFORMANCE AND
COMPARISON TO BENCHMARKS
The following chart provides a 5-year history of the City's average weighted yield on its portfolio from fiscal year 2017-18 through fiscal year 2021-22 compared to a S-year history of OCIP's and LAIF's yields. As demonstrated with this historical view, the City's average weighted yield on its portfolio has consistently performed on par with OCIP and LAIF during the past five years.
Cửy & LAIF Portfolio Yields - 5 Year History
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.009
@leze3@1@x/020310181020318101020310101|02/03104
17-18 18-19 1920 20-21 21-22
- City — LAIF OCIP
1989
Annual Investment Report - FY 21-22
REVIEW OF TRENDS REGARDING THE SIZE OF
THE PORTFOLIO
The size of the City's portfolio fluctuates over the course of the fiscal year due to timing differences between cash receipts and disbursements. The City's portfolio balance ypically reflects steady decreases until October/November, before the City receives ignificant property tax allocations. The City's portfolio spiked in December/January anc April/May as a result of significant property tax allocations and Property Tax in Lieu of VLF remittances. Also, in June 2022, the City received its second allocation of American Rescue Plan funds totaling approximately $4.4 million.
Starting in 2020, the City opened a Section 115 Pension Trust. These funds are restricted in their usage and are intended to be long-term assets to offset the City's pension liability.
The balance at June 30, 2022 was $916,958. Due to the nature of these funds, they have not been included in the graphs and charts in this report.
Size of Portfolio - Monthly Trend
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0 Jal Aug @Sept Oct Nor Dec Jan Feb Mar BApr QMay @June
Annual Investment Report - FY 21-22
REVIEW OF TRENDS REGARDING THE SIZE OF
THE PORTFOLIO
The City ended the fiscal year with a higher cash and investment balance compared to the previous two years. The decrease between 2016 through 2020 is mainly due to the cash outlay for constructing the Crown Valley Park Community Center. Between 2020 through 2022, the significant increase in cash and investment balance was due to strict adherence to balanced budgets. along with one-time federal funding through the CARES Act and the American Rescue Plan.
Size of Portfolio - 10 Year Historical Trend
95,000,000
85,000,000
75,000,000
65,000,000
55,000,000
15,000,000
35,000,000
June 30
02013 2014 2015 2016 32017 2018 2019 2020 S2021 •2022
Annual Investment Report - FY 21-22
INVESTMENT RISK IN THE PORTFOLIO
Although all investments contain an element of risk, the City's Investment Policy, procedures, and investment strategies are designed to limit exposure to risk. The different types of risk are discussed below, as they perlain to the portfolio.
Credit Risk
Credit risk is defined as the risk to an investor that an issuer will default in the payment of interest and/or principal on a security. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. It is the policy of the City of Laguna Niguel to invest public funds in a manner which will provide the maximum security of principal consistent with a market rate of return while meeting the cash flow needs of the City and conforming to all applicable State and City statutes governing the investment of public funds. The City's Investment Policy limits credit risk by:
> Limiting investments to the safest types of securities and highest quality issuers. • Specifically excluding investments in equities, corporate bonds, derivatives, reverse re-purchase agreements and financial futures or options. • Pre-qualifying financial institutions and broker/dealers for competitive bidding of investments.
> Diversifying investments so that potential losses on individual securities can be minimized.
> Monitoring the pooled investments of the Local Agency Investment Fund and Orange County Investment Pool each month.
• Safekeeping investments by separate agreement with US Bank's Trust Department.
Annual Investment Report - FY 21-22
INVESTMENT RISK IN THE PORTFOLIO
Market Risk
Market risk is defined as the risk that the value of a security may fall as a result of changes in the financial markets, such as increases in interest rates. In periods of rapidly rising interest rates, the market value of a security can fall below the amount of principal invested. If an investor sells the security before maturity, part of the principal may be lost. The City reduces market risk by matching investments and maturities with cash flow needs so that investments will not need to be sold prematurely.
The City had no occurrences during FY 2021-22 where investments needed to be sold prior to maturity in order to meet cash flow needs.
Interest Rate Risk
Interest rate risk is defined as the risk that an investor will under-perform the market, as a result of holding investments with lower yields than the current market rate. Generally, the longer the maturity of an investment, the greater is its sensitivity to changes in interest rates. One of the ways that the City manages its exposure to interest rate risk is by The City's portfolio reflected an average weighted maturily of 576 days during the fiscal year. This weighted average is the result of being invested in OCIP and LAIF, which are fairly liquid pools, along with longer term Federal Agency securities. When interest rates are declining, the City's portfolio is exposed 1o minimal interest rate risk. When interest rates are rising, the City's exposure is increased.
Annual Investment Report - FY 21-22
INVESTMENT RISK IN THE PORTFOLIO
Liquidity Risk
Liquidity risk involves the ability to sell an investment before maturity. Some short-term
SA COUNT
1989
Annual Investment Report - FY 21-22
COMPOSITION OF THE PORTFOLIO
Authorized Investments
The City's Investment Policy lists the types of securities allowable for investment.
Subject to stipulated restrictions, these include United States Treasury Bills, Notes, and Bonds; Federal Agency Securities; collateralized or insured money market accounts and demand deposits with City's primary banks; insured certificates of deposit; money market mutual funds; the Orange County Investment Pool (OCIP); and the State of California Local Agency Investment Fund (LAIF).
The City's portfolio only included those investments authorized in the Investment Policy in FY 2021-22.
Portfolio Diversification
It is the policy of the City to diversify its investment portfolio. Invested funds shall be specific maturity, specific user, specific financial institution, or specific class of securities. Investment of City funds shall be governed by Government Code Sections 53600 and 53630 et. seq. During FY 2021-22, the City's portfolio was limited in LAIF to a maximum of $40 million or 55% of the City's total investment portfolio, whichever portfolio, whichever is less. All other investments or deposits of the City were further limited to the following authorized investments:
• U.S. Treasury Bills, Notes, and Bonds - No limit
• Collateralized or Insured Money Market or Demand Deposits - No limit • Federal Agency Securities - Maximum portfolio limitation of 60%; Maximum issuer limitation of 25%
• Insured Certificates of Deposit - Maximum portfolio limitation of 30%; Maximum maturity value per institution limitation of $250,000 or the lesser of the current FDIC insured limit • Money Market Mutual Funds limited to U.S. Treasury Securities - Maximum portfoli limitation of 20%; maximum per instrument limitation of 10%
1989
Annual Investment Report - FY 21-22
COMPOSITION OF THE PORTFOLIO
Portfolio Diversification
E.S. FALB FFCB FRIMC
Treasury Toral Agency OCIP Certificates of
Agency Agency Agency Agency LAIF
BIls. Notes Securities Securiries Securities Deposit
Securisies Securities
Marinan No Limit 25%0 250% 25% 25%% 60% • • 30%%
FT Average 0% 12% 2% 15% 9% 38% 9% 49%% 0%%
July 3%0 0% 15°% 9% 27% 9% 54%% 0%%
August 7% 0%% 57%% 0%%
September 0%%
October 0%%
November 0%%
December 0%%
Jamary 0°%
February 090
March 0%%
April 7%0
0% 13% 6%% 39°0
June 0° 12% 600 130% 8% 38°% 45% 13% 0°=
• LALF and OCIP have a maximum of S0 million or 55°, of the City's total investmen portfolio. Ií portfolio diversification becomes our of compliance, the City has 90 days to correct it.
Annual Investment Report - FY 21-22
INVESTMENT INCOME
Investment income in FY 2021-22 amounted to $351,028 compared to $283,954 in FY 2020-21, an increase of $67,074. This increase is mainly attributable to a larger cash balance than the prior year and rising interest rates, as dictated by the Federal Reserve, to combat inflation in the economy. These investment income figures include interest earned and realized gains and losses on all pooled assets. It does not include gains or losses in the PARS 115 trust.
The Governmental Accounting Standards Board Statement 31, "Accounting and Financial Reporting for Certain Investments and for External Investment Pools", establishes rules for reporting investment valuation. The Statement generally requires governmental entities to report investments at fair value in the City's external financial statements and to reflect the related unrealized gains and losses as a component on investment income. Investments reported in the Annual Investment Report are reported at cost and therefore, investment income for this report does not include unrealized gains and losses; however, unrealized gains and losses are included in the City's Annual Comprehensive Financial Report (ACFR) in compliance with United States Generally Accepted Accounting Principles (GAAP).
1989
Annual Investment Report - FY 21-22
INVESTMENT POLICY COMPLIANCE CERTIFICATION
As City Manager and Finance Director/City Treasurer of the City of Laguna Niguel, we certify that we have complied with the annual Investment Policy adopted by the City Council effective July 20, 2021.
9/28/2022
amara S. Letournear Date
City Manager
Ere Hendribera 9/19/2022
Eric Hendrickson Date
Finance Director/City Treasurer