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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED DECEMBER 31, 2017
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended December 31, 2017.
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Summary
Pursuant to California Government Code section 53646 and the City’s Investment Policy (Policy No. 17.01.030), the City Treasurer (Chief Financial Officer) is required to provide a quarterly report and certification to the City Council, City Manager, and City Auditor. The Quarterly Investment Report shall include a complete description of the portfolio, the type of investments, the issuers, maturity dates, par value and dollar amounts invested in all securities. The certification must provide assurances that investments were made consistent with the City’s Investment Policy and that the City will meet its expenditure obligations for the next six months.
The Quarterly Investment Report and Certification for the quarter ending December 31, 2017, are provided as required (Attachments A and B). The report has also been posted to the City’s website and may be accessed at:
<http://www.stocktongov.com/government/departments/adminServices/finInv.html>
This report is presented as required and will bring the City current on its reporting requirements.
The City’s total investment portfolio (market value) was $484.8 million as of December 31, 2017. Unrealized losses for the most recent quarter were (-$787,898) or -0.17% percent. This total is comprised of the City’s investment management portfolio (reserve) losses of (-$988,924), which include changes in fair market value (unrealized gains/losses), (Attachment A, page 15) and the City’s liquid portfolio earnings of $201,026. The sharp increase in interest rates during the quarter ended December 31, 2017, resulted in negative total return performance for most fixed-income sectors as unrealized market value losses offset realized earnings.
DISCUSSION
Background
To comply with state law and city policy, the City is required to present quarterly investment reports detailing the City’s investment portfolio to the City Council, City Manager, and City Auditor. The City also posts monthly transaction reports to the City’s website. The authority of the Council to invest or to reinvest funds, or to sell or exchange securities, is delegated to the City’s Chief Financial Officer, who also serves as City Treasurer (Resolution #2017-06-20-1501). Pursuant to the Investment Policy, the City Treasurer may and does delegate some of his/her fiduciary responsibility to an outside investment management firm. An investment manager’s fiduciary responsibility is a legal requirement related to registration with the Securities and Exchange Commission under the Investment Advisor Act of 1940.
Due to the specialized services and expertise required to assist the City in the varied investment options available, the City contracts with an experienced investment manager, PFM Asset Management LLC (PFM).
Present Situation
The attached report details the activities of the quarter ended December 31, 2017, and includes detailed information on the holdings of the City’s portfolio on that date. It includes a certification that the holdings comply with the requirements of State law and City policy and that there is sufficient liquidity to cover the subsequent six months of budgeted activities.
The attached quarterly investment report has been published online along with monthly reports on the City’s website:
<http://www.stocktongov.com/government/departments/adminServices/finInv.html>
Portfolio Balances and Performance
The City’s investment portfolio (market value) totaled $484.8 million as of December 31, 2017. The portfolio reported a total of $459 million in the prior quarter as presented to Council in November. The City transferred approximately $25 million of excess liquidity into the portfolio during the second quarter.
The City divides its investment portfolio into Liquid and Reserve portions. The Reserve portion represents the long-term assets managed by PFM through December 31, 2017. The Liquid portion represents funds invested in the State of California’s Local Agency Investment Fund and funds held in the City’s main account at Bank of the West that are swept in and out of money market fund accounts each night to optimize returns. Total unrealized losses on the consolidated portfolio for the second quarter of the fiscal year were (-$787,898) or -0.17%, which is comprised of Reserve unrealized losses of (-$988,924), which includes changes in fair market value (unrealized gains/losses), (Attachment A, page 15) and Liquid portfolio earnings of $201,026. The quarterly return valuation includes funds from all activities, restricted and unrestricted, and includes changes in fair market value (unrealized gains/losses), but is not netted with the expenses of the pool.
Total consolidated portfolio returns over the past 12 months are in line with the past benchmark, but consolidated returns are not available due to the investment manager transition July 1, 2017. The performance of the Reserve portion of the portfolio managed by PFM through December 31, 2017, is now benchmarked against the Bank of America Merrill Lynch index of 1-5 year government and U.S.-issued corporate securities rated A- or better. The benchmark was changed to reflect the portfolio’s strategy and composition better. City staff works closely with PFM to monitor the status of the City’s investment portfolio and its returns. Over the last quarter, the Reserve portion of the City's portfolio outperformed that benchmark by 0.08%. The result was a quarterly loss of -0.26% versus the -0.34% achieved by the benchmark (Attachment A, page 13).
The City’s investment portfolio complies with California Government Code 53601 and is invested solely in fixed-income securities (no stock holdings), that while earning certain rates of interest, gain in market value when interest rates fall and lose market value when interest rates rise. The sharp increase in interest rates during the quarter ended December 31, 2017, resulted in negative total return performance for most fixed-income sectors as unrealized market value losses ate into realized earnings. Both the City's Reserve portfolio and its benchmark produced negative total returns for the quarter. However, the City’s Reserve portfolio outperformed the benchmark by 0.08%. While the portfolio’s earnings on a market value basis were negative, reflecting unrealized market value losses, the portfolio is earning a yield of 1.79% (Attachment A, page 14) and realized $1,520,128 of earnings during the quarter (Attachment A, page 15), on an amortized cost basis.
Although rising interest rates have a temporary negative impact on the market values of a portfolio’s current holdings, going forward, realized earnings should continue to increase as the City adds new securities to the portfolio at higher interest rates. During the quarter, PFM analyzed relative value between the portfolio’s current holdings and the value in both government and credit securities available in the market. PFM sold select holdings for higher-yielding U.S. Treasuries and federal agencies. PFM also sought value in the credit sector and increased allocations to corporate notes, asset-backed securities and certificates of deposit, to safely increase the portfolio’s earnings and return potential. At all times, safety remains the top priority.
FINANCIAL SUMMARY
There is no financial impact associated with the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter ended December 31, 2017
Attachment B - Certification of Quarterly Investment Report for Quarter ended December 31, 2017