City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: November 18, 2024
Report #:2410-3596
TITLE
Investment Activity Report for the First Quarter, Fiscal Year 2025
RECOMMENDATION
This is an informational report and no City Council action is required.
EXECUTIVE SUMMARY
The City’s Investment Policy1 (Policy) requires that staff report to Council quarterly on the City’s portfolio composition and performance compared to the Council-adopted Policy; discuss overall compliance with the City’s Investment Policy; and provide recommendations, if any, for Policy changes. In addition, staff provides a detailed list of all securities and reports on the City’s ability to meet expenditure requirements over the next six months. This report is to inform Council of the City’s investment portfolio performance as of the first quarter ending September 30, 2024 and to disclose staff’s cash flow projections for the next six months. Staff expect that the City will have sufficient funds or liquidity to meet expenditure requirements for the next six months. The portfolio details, activities, and performance are discussed below, and additional information is provided in the attachments. During the first quarter staff complied with all aspects of the Investment Policy and no significantly notable activity or changes in value occurred in this reporting period.
ANALYSIS
The City’s investment portfolio is summarized in Graph 1 and detailed in the Investments by Fund Report (Attachment B). The Investments by Fund Report groups the portfolio’s securities by investment type and includes details of the investment issuer, date of maturity, current market value, the book and face (par) value, and the weighted average maturity of each type of investment and of the entire portfolio.
1 City of Palo Alto website, Administrative Services Department, Money Management & Treasury:
https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/investment-policies/adopted- investment-policy-1-39-asd.pdf
The par value of the City’s portfolio is $595.6 million; in comparison, last quarter it was $640.9 million. The $45.3 million portfolio decline since the last quarter results from timing of cash flows, from the prepayment of the City’s Fiscal Year 2025 Unfunded Accrued Liability (UAL) pension cost for active employees to the Public Employers’ Retirement System (PERS) totaling $47.2 million, major revenue receipt due to seasonality timing, and delayed reimbursement of State Revolving Fund (SRF) loans for Wastewater Treatment capital projects. Property taxes and related receipts begin the second, third, and fourth quarters and major revenues such tax as sales, transient occupancy and utility user’s taxes are historically higher in the fourth quarter of FY 2024.
The portfolio consists of $56.1 million in liquid accounts and $539.5 million in various investment types as detailed in the following Table 1. The Investment Policy requires that at least $50 million be maintained in securities maturing in less than two years. The portfolio includes $232.2 million in investments maturing in less than two years, comprising 39.0% of the City’s investment portfolio. In addition, the Investment Policy allows up to 30% of the portfolio to be invested in securities with maturities beyond five years; actual at the end of the first quarter is 24.6% of the portfolio.
U.S. Treasury0.8%
U.S. Agency30.0%
U.S. Municipal/State39.6%
Negotiable CD7.1%
U.S. Corporate4.9%
Supranational8.2%
Liquid Accts.9.4%
Graph 1: Investments by Type -$595.6 Million (Par Value) The current market value of the portfolio is 96.0% of the book value. The market value of securities fluctuates, depending on how interest rates perform.
As interest rates decrease, the market value of the City’s portfolio will likely increase, and vice versa. There are inherent principal risks when actively buying and selling securities; reporting on market values a reporting requirement that informs staff of the portfolio’s overall position.
The market valuation is provided by U.S. Bank, the City’s safekeeping agent. The average life to maturity of the investment portfolio is 2.94 years compared to 3.11 years last quarter.
To minimize investment principal risk of loss due to lower market values, the City’s investment practice is to buy and hold investments to maturity. In the instances where there is a need to sell securities for contingency cash flow planning, the City’s practice is to sell securities that are at or above the market value.
Investments Made During the First Quarter
During the first quarter, $42.1 million of securities with an average yield of 3.9% matured. During the same period, per the following Table 2, securities totaling $6.0 million with an average yield of 4.0% were purchased. Though interest rates slightly rose on new investments, the City’s portfolio’s average yield has begun to gradually decline. The City’s short-term money market and pool account decreased by $9.2 million compared to the fourth quarter of FY 2024. Staff continually monitors the City’s short-term cash flow needs and adjusts liquid funds to meet them.
In addition, per California Government Code Section 53607, the Administrative Services Department is providing a monthly report of transactions (investments, reinvestment, sold, and exchanged securities) to Council. Though not required by this code, included in this report are security maturities and cash movement activity in the City’s two liquid operating cash pool Table 1: Up to 1 Year 1 to 2 Years 2 to 3 Years 3 to 5 Years Over 5 Years Portfolio Total * % of Portfolio U.S. Treasury -$ 4.5$ -$ -$ -$ 4.5$ 0.8%U.S. Agency Bonds 41.8 26.5 15.0 14.6 80.9 178.8 30.0%U.S. Municipal/ State Bonds 32.9 55.6 38.0 45.3 64.1 235.9 39.6%Negotiable Certificates of Deposits (NCD) 12.2 7.2 8.2 13.2 1.5 42.3 7.1%U.S. Corporate Bonds 9.7 7.8 10.5 1.0 - 29.0 4.9%Supranational Organizations Bonds 1.0 33.0 6.0 9.0 - 49.0 8.2%Liquid Accounts (LAIF & Fidelity) 56.1 - - - - 56.1 9.4% Grand Total 153.7$ 134.6$ 77.7$ 83.1$ 146.5$ 595.6$ 100% % of Portfolio 25.8% 22.6% 13.0% 14.0% 24.6% 100.0%* $124.4 million or 19.8% are in investments that support Environmental, Social, and Governace (ESG) Activities(aka "Green", local banks, and Supranational Bonds) Investment Type
FY 2025 Q1 Maturities - Par Value (millions)
accounts (Local Agency Investment Fund and Fidelity accounts). Monthly and quarterly investment reports, along with the City’s Investment Policy, can be found on the City’s website2.
Availability of Funds for the Next Six Months
Staff expects that the City will have sufficient funds or liquidity to meet expenditure requirements for the next six months.
Projections indicate that for the City’s cashflow, an overall growth in the portfolio of $34.2 million is expected over the coming six months due to routine business activities. This reflects expected receipts of $365.5 million and expenditures of $331.3 million over the next six months.
As of September 30, 2024, the City had $56.1 million deposited in the Local Agency Investment Fund (LAIF) and a money market account. In addition, investments totaling $20.7 million will mature between October 1, 2024 and March 31, 2025.
Compliance with City Investment Policy
During the first quarter, staff complied with all aspects of the Investment Policy. Attachment C lists the major restrictions in the City’s Investment Policy compared with the portfolio’s actual performance.
Investment Yields
Interest income on an accrual basis, for the General Fund, for the first quarter was $3.4 million; compared to the prior year’s fourth quarter of $4.1 million, or $0.5 million lower than the same quarter of prior year due to declining yield investment environment. As of September 30, 2024, the yield to maturity of the City’s portfolio was 2.46%; in the prior quarter it was 2.59%. In the first quarter, LAIF’s average yield was 4.56% while the average yield on the two-year and five- year Treasury bonds was approximately 4.03% and 3.79%, respectively. In comparison, in the prior quarter LAIF had 4.36% yield and the two-year and five-year Treasury bonds yields were higher at 4.82% and lower at 4.46%.
2 City of Palo Alto, Administrative Services, Financial Reporting, City Investment Reports and Policy:
www.cityofpaloalto.org/investmentreporting
Table 2:
Up to 1 Year 1 to 2 Years 2 to 3 Years 3 to 5 Years Over 5 Years Portfolio Total * % of Purchase U.S. Agency Bonds -$ -$ -$ $ - 1.0$ 1.0$ 16.7%Negotiable Certificates of Deposits (NCD) - 0.2 - 1.0 0.3 1.5 25.0%U.S. Corporate Bonds - - - 1.0 - 1.0 16.7%Supranational Organizations Bonds - - - 2.5 - 2.5 41.7% Grand Total -$ 0.2$ -$ 4.5$ 1.3$ 6.0$ 100%% of Purchase 0.0% 3.3% 0.0% 75.0% 21.7% 100.0% * $2.5 million or 41.7% are in investments that support Environmental, Social, and Governace (ESG) Activities(aka "Green", local banks, and Supranational Bonds) Investment Type
FY 2025 Q1 Security Purchases - Par Value (millions)
The City’s portfolio yield is lower than the two-year and five-year Treasury bond due to the declining but still high interest rates environment. It is expected that as the City’s investments mature in the next few years, funds will continue to be reinvested and will follow the economic patterns. Graph 2 shows the City’s yields and interest earnings for the past 22+ years.
City’s portfolio duration is 2.94 years.
Yield Trends
The Federal Open Market Committee (FOMC), since March 2020, has raised the federal funds rate 11 times totaling 5.25% with the first occurring on March 16, 2022. Then beginning July 31, 2024, they decreased the rate twice totaling 0.75%.
In September 2024, the FOMC lowered interest rates by 50 basis points, targeting a range of
4.75-5%. This decision to ease monetary policy is likely to support growth and stabilize a slowing national labor market. The Feds indicated that it may lower interest rates further over the coming year.
Funds Held by the City or Managed Under Contract
Attachment A is a consolidated report of all City investment funds, including those not held directly in the investment portfolio. These include cash in the City’s regular bank account with US Bank and Wells Fargo. A description of the City’s banking relationships can be found in City
5.88%
5.00%
4.17% 4.54%
City of Palo Alto
2.71% 1.80%1.93% 1.66% 2.46%
3.65%
1.41%
0.81% 0.25%
2 Yr. Treasury 4.39% 4.03%
4.43%4.39%
4.98%
1.10%
5-Yr. Treasury
2.88%
2.47%
0.27%
3.23%
4.00%
3.79%
4.47%
1.44%
5.25%
0.23%
LAIF
1.29%
2.63%
4.56%
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%6.0%
Int. Earnings (Millions)Yields
Fiscal Year Quarters
Graph 2: Yields and Interest Earnings
Council Staff Report ID # 2404-2845 3.The bond proceeds, reserves, and debt service payments being held by the City’s fiscal agents are subject to the requirements of the underlying debt indenture. The trustees for the bond funds are U.S. Bank and California Asset Management Program (CAMP). Bond funds with U.S. Bank are invested in federal agency and money market mutual funds that consist exclusively of U.S. Treasury securities. Bond funds in CAMP are invested in banker’s acceptance notes, certificates of deposit, commercial paper, federal agency securities, and repurchase agreements. The most recent data on funds held by the fiscal agent is as of September 30, 2024.
In January 2017, the City established a Section 115 Irrevocable Trust (Public Agencies Post- Employment Benefits Trust) administered by Public Agency Retirement Services (PARS). This fund is governed by the City’s Retiree Benefit Policy as opposed to the Investment Policy; however, it is discussed in this report to present the full picture of the City’s investments. It is the City’s intent to prefund pension costs and began to address the Net Pension Liabilities (NPL) as calculated by Governmental Accounting Standards Board Pronouncement No. 68 (GASB 68). The Section 115 Trust offered by PARS has five portfolios from which to choose in making investments of City funds. In February 2023, the City Council revised the City’s portfolio selection from “Moderately Conservative” to “Moderate”, shifting from the second most conservative to third.
Additional information on the establishment of this trust can be found in City Council Staff Report ID # 7553 4. Through June 30, 2024, principal investment contributions of $73.3 million made over time since May 2017, has increased to $90.2 million and the net return for one and five years has been 22.9% and 4.6% respectively. Since inception, $17.7 million net earnings have been realized with $0.8 million in administrative expenses.
FISCAL/RESOURCE IMPACT
This is an information report.
STAKEHOLDER ENGAGEMENT
Staff works internally and with external parties (U.S. Bank’s custodial, U.S. Bank’s bonds, Wells Fargo and U.S. Bank’s banking, California Asset Management Program (CAMP), and Public Agency Retirement Services (PARS)) statements to prepare this report.
ENVIRONMENTAL REVIEW
This Council informational report is not a project under California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or reasonably foreseeable indirect physical change in the environment. 3 City Council, June 17, 2024, https://portal.laserfiche.com/Portal/DocView.aspx?id=73964&repo=r-704298fc 4 City Council, January 23, 2017 Item #5, CMR 7553: https://www.cityofpaloalto.org/files/assets/public/agendas- minutes-reports/reports/city-manager-reports-cmrs/year-archive/2017/7553.pdf
ATTACHMENTS
Attachment A: Consolidated Report of Cash Management
Attachment B: Investment Portfolio
Attachment C: Investment Policy Compliance
APPROVED BY:
Lauren Lai, Administrative Services Director