CITY OF LAGUNA NIGUEL
CITY CouNCIL AGENDA ITEM
To: Honorable Mayor and Council Members
FROM: Trevor Agrelius, Finance Director
DATE: November 7, 2023
SUBJECT: Annual Investment Report for Fiscal Year 2022-2023
RECOMMENDATION
Staff recommends that the City Council receive and file the City's Annual Investment Report for Fiscal Year 2022-2023.
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, 2022 through June 30, 2023. 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 27, 2023. 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.
Janasa Satanan. In Al
Tamara S. Letourneau Trevor Agrelius
City Manager Finance Director
Attachments:
A. City of Laguna Niguel Annual Investment Report for Fiscal Year 2022-2023
ATTACHMENT A
Annual Investment Report for Fiscal Year Ended June 30, 2023
CITY OF LAGUNA NIGUEL
ANNUAL INVESTMENT REPORT
SEA COUNTRI
1989
Fiscal Year Ended
June 30, 2023
Prepared by:
Trevor Agrelius
Finance Director/City Treasurer
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
VAGU
1989
Annual Investment Report - FY 22-23
PORTFOLIO PERFORMANCE AND
COMPARISON TO BENCHMARKS
The City's average weighted yield on its portfolio during FY 2022-23 (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 1.68%, an increase from the prior fiscal year's yield of 0.69%. This increase is mainly attributable to the Federal Reserve's decision to raise interest rates to combat inflationary pressures, and a concerted effort by District staff in March 2023 to take advantage of those higher rates by investing in higher yielding investments like United States Treasuries and money market mutual funds.
The average weighted yield on the City's portfolio at June 30, 2023 was 3.09%, on a cash and investment balance of $65,902,187. The portfolio had an average days-to-maturity (the sum of days left until maturity of each investment multiplied by the cost of each investment divided by the total portfolio at cost) of 525 days. The fiscal year average weighted days to maturity of the portfolio decreased from 576 days in FY 2021-22 to 513 days in FY 2022-23, reflecting a focus on shorter-term securities to take advantage of the higher yields available. A lower average weighted days-to-maturity implies a lower interest rate and credit risk.
City of Laguna Niguel's Portfolio Benchmark Comparisons Average
Weighted Average
Days to Weighted 5-Year 1-Year 6- Month
Cost/Book Value i Maturity Yield Treasury Treasury Treasury OCIP LAIF Jul-22 $ 67,302,492 503 0.98% 2.70% 2.98% 2.91% 0.79% 1.09% Aug-22 $ 65,792,937 502 1.09% 3,30% 3.50% 3.32% 0.98% 1.28% Sep-22 $ 61,556,261 552 1.39% 4.06% 4.05% 3.92% 1.26% 1.51% Oct-22 S 59,251,489 566 1.49% 4.27% 4.66% 4.57% 1.79% 1.77% Nov-22 57,929,339 570 1.57% 3.82% 4.74% 4.70% 2.35% 2.01% Dec-22 S 62,840,007 506 1.69% 3.99% 4.73% 4.76% 2.77% 2.17% Jan-23 $ 67,256,366 474 1.76% 3.63% 4.68% 4.80% 2.89% 2.43% Feb-23 $ 62,206,741 479 1.91% 4.18% 5.02% 5.17% 3.09% 2.62% Mar-23 $ 62,860,559 500 2.36% 3.60% 4.64% 4.94% 3.25% 2.83% Apr-23 $ 64,303,826 516 2.72% 3.51% 4.80% 5.06% 3.51%
5.46% 3.57% 289%
May-23 $ 67,978,575 461 3.00% 3.74% 5.18%
Jun-23 $ 65.902,187 525 3.09% 4.13% 5.40% 5.47% 3.73% 3.17% FY Average S 63.765,065 513 1.92% 3.74% 4.53% 4.59% 2.50% 2.23%
1989
Annual Investment Report - FY 22-23
PORTFOLIO PERFORMANCE AND
COMPARISON TO BENCHMARKS
The following chart compares the City's portfolio performance with monthly benchmarks including 5-year, 1-year, and 6-month treasuries, and Local Agency Investment Fund (LAIF) and Orange County Investment Pool (OCIP). The average weighted yield of the City's portfolio increased at a modest level through February 2023, and the impact because of the revised investment strategy can be seen starting in March 2023. The average yield increased by an average of 24 basis points in the months of March through May while the City was actively purchasing higher yielding securities. The annual average weighted yield on the portfolio was 1.68%, as compared to the prior year's annual average weighted yield of 0.69%.
Comparison to Benchmarks - FY 2022-23
6.00%
5.50%
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 — City Portfolio 5-Year Treasury 1-Year Treasury 6-Month Treasury CIP LAIF
1989
Annual Investment Report - FY 22-23
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 2018-19 through fiscal year 2022-23 compared to a 5-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.
City & LAIF Portfolio Yields - 5 Year History
4.00%
3.50%
1.50%
1.00%
0.50%
0.00%
01|02/03|24 01/02/03 24 21/22 03/24 01/02/03 24 0122/03/04 17-18 18-19 19-20 20-21 21-22
— City —LAIF —oCP
1989
Annual Investment Report - FY 22-23
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 typically reflects steady decreases until November/December when the City receives significant property tax allocations. The City's portfolio spiked in December/January and April/May because of significant property tax allocations and Property Tax in Lieu of VLF remittances. Additionally, the City made a total of $4.8 million in additional million in the Section 115 Pension Trust in November. The Section 115 Pension Trust 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, 2023 was $2,004,472. 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
70,000,000
68,000,000
66,000,000
64,000,000
62,000,000
60,000,000
58,000,000
56,000,000
54,000,000
52,000,000
DJuly MAug OSept COct •Nov EDec Jan OFeb Mar Apr OMay •June
1989
Annual Investment Report - FY 22-23
REVIEW OF TRENDS REGARDING THE SIZE OF
THE PORTFOLIO
The City ended the fiscal year with a lower cash and investment balance compared to the revious fiscal year. This is mostly due to the combined $5.8 million used to address th Citv's unfunded nension liability, discussed in the previous section. As can be seen in th chart, the decrease from 2016 through 2020 was mainly due to the construction of 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 Act. American Rescue Plan Act funds are required to be encumbered by December 31, 2024.
Size of Portfolio - 10 Year Historical Trend
95,000,000
85,000,000
75,000,000
65,000,000
55,000,000
45,000,000
35,000,000
June 30
02014 M2015 02016 2017 2018 M2019 2020 O2021 @2022 2023
1989
Annual Investment Report - FY 22-23
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 pertain 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.
1989
Annual Investment Report - FY 22-23
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. nestores the security before maturity, part of the principal may be lost. The City reduces market risk by matching investments and maturities with cash flow The City had no occurrences during FY 2022-23 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 purchasing a combination of shorter-term and longer-term investments, and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. The City employs a disciplined investment strategy with the goal of holding all securities until maturity.
The City's portfolio reflected an average weighted maturity of 513 days during the fiscal year, representing a significant decrease from 576 days in Fiscal Year 2021-22. This decrease in weighted average is the result of focusing on shorter-term investments starting in March 2023, while also maintaining balances in the high-yield money market mutual funds. In general, as interest rates decline, the City's portfolio is exposed to minimal interest rate risk. When interest rates are rising, the City's exposure increases as can be seen on pages 2 and 3 of this report.
1989
Annual Investment Report - FY 22-23
INVESTMENT RISK IN THE PORTFOLIO
Liquidity Risk
Liquidity risk involves the ability to sell an investment before maturity. Some short-term investments are fairly illiquid. For example, a non-negotiable certificate of deposit is an illiquid asset that carries an interest penalty for early redemption. The City minimizes liquidity risk by maintaining a significant portion of its portfolio in very liquid instruments, such as money market mutual funds, LAIF, and OCIP, where funds are immediately available.
1989
Annual Investment Report - FY 22-23
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; OCIP; and LAIF.
The City's portfolio only included those investments authorized in the Investment Policy in FY 2022-23.
Portfolio Diversification
It is the policy of the City to diversify its investment portfolio. Invested funds shall be diversified to minimize the risk of loss resulting from over concentration of assets in a 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. seg. The following table identifies the investment types that are authorized by the California Government Code, or the City's investment policy, where more restrictive.
Maximum Maximum
Maximum Percentage Investments in
Authorized Investment Type Maturity Allowed One Issuer
U.S. Treasury Obligations 5 Years None None
Federal Agency Securities or U.S. Government
Sponsored Enterprise Securities 5 Years 60% 25%
State Local Agency Investment Fund (LAIF) N/A 55% $40 million Insured Certificates of Deposits 5 Years 30% $250,000
Insured Money Market Accounts N/A None None
Money Market Mutual Funds N/A 20% 10%
Orange County Investment Pool (OCIP) N/A 55% $40 million Section 115 Pension Trust N/A 20% None
A COUNT
1989
Annual Investment Report - FY 22-23
COMPOSITION OF THE PORTFOLIO
Portfolio Diversification
This chart provides the portfolio distribution across the investments permissible under the City's Investment Policy and provides the Fiscal Year average for each security type.
U.S. FHLB FFCB FNMA FHIMC Total Agency
Treasury Agency Agency Agency Agency LAIF OCTP Certificatesos Money Marker Securities Deposit
Bills/Notes Securities Securities Securities Securities Maximum No Limit 25% 25% 25% 25% 60% 55% 55% 30% 20%
July 0% 12% 6% 13% 8% 39% 46% 12% 0% 0%
August 0% 13% 6% 13% 8% 40% 45% 12% 0% 0%
September 0% 20% 6% 14% 8% 49% 46% 2% 0% 0%
October 0% 21% 7% 15% 51% 43% 2% 0% 0%
November 0% 21% 7% 15% 52% 40% 2% 0% 0%
December 0% 20% 6% 14% 8% 48% 45% 2% 0% 0%
January 0% 18% 6% 13% 8% 45% 45% 2% 0% 0%
February 0% 20% 6% 14% 8% 48% 45% 2% 0% 0%
March 0% 20% 6% 14% 8% 48% 29% 2% 0% 2%
April 25% 19% 6% 13% 8% 47% 14% 2% 0% 9%
May 38% 18% 6% 13% 8% 44% 2% 2% 0% 8%
June 36% 22% 6% 13% 8% 49% 0% 0% 0% 14%
FY Average 8% 19% 6% 14% 8% 47% 33% 3% 0% 3%
*If the City's porfolio diversification falls out of compliance, the City has 90 days to correct it. The California Government Code states that the "section (thal] specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase.
1989
Annual Investment Report - FY 22-23
INVESTMENT INCOME
Investment income in FY 2022-23 amounted to $1,104,565 compared to $351,028 in FY 2021-22, an increase of $753,537. This increase is mainly attributable to an increase in interest rates, as dictated by the Federal Reserve, to combat inflation in the economy, and a concerted effort to take advantage of those higher rates. In March 2023, City staff identified an investment strategy that maintained the top two priorities of 1) safety and 2) liquidity from the Investment Policy, while earning a significantly higher interest rate.
The strategy focused on moving funds from the lower earning investments in LAIF and OCIP to higher earning US Treasuries and money market funds that strictly invest in US Treasuries. That strategy proved to be successful, as the City's weighted average investment return increased from 1.247% in February 2023, to 3.09%, at the end of June 2023, representing a 147% increase. Investment income includes interest earned and realized gains and losses on all demand deposit accounts and investments.
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).
Annual Investment Report - FY 22-23
INVESTMENT POLICY COMPLIANCE CERTIFICATION
Is City Manager and Finance Director/City Treasurer of the City of Laguna Niguel, we ertif that we have complied with the annual Investment Policy adopted by the Cit Council effective July 19, 2022.
Samass 8 Betousneau 9/18/232
Tamara S. Letourneau Date
City Manager
Tu Ain 9/18/2023
Trevor Agrelius Date
Finance Director/City Treasurer