HomeMy WebLinkAboutFiscal Year 2011-2012 Investment Advisory Board Annual Repor Council/Agency Meeting Held: L /Y
Deferred/Continued to:
Ap ved ❑ Conditionally Approved ❑ Denied off° Clepts SigAature
Council Meeting Date: December 17, 2012 Department ID Number: CT 12-019
CITY OF HUNTINGTON BEACH
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Fred A. Wilson, City Manager
PREPARED BY: Alisa Cutchen, City Treasurer
SUBJECT: Receive and file the Investment Advisory Board Annual Report for
Fiscal Year 2011-2012
Statement of Issue: The Investment Advisory Board (IAB) was created to act in an advisory
capacity to the City Council and City Treasurer in matters pertaining to the City's investments
by the City Council in May of 1995 (Resolution #3284). Pursuant to the City of Huntington
Beach Municipal Code 2.110.040, the IAB shall have the duty to prepare an Annual Report
for the City Council. The City Treasurer, with the input of the IAB, has prepared the Annual
Report for the Fiscal Year 2011-2012.
Financial Impact: Not Applicable.
Recommended Action: Motion to: Receive and file the "City of Huntington Beach
Investment Advisory Board (IAB) Annual Report to the City Council for the Period October 1,
2011 to September 30, 2012" for the Fiscal Year 2011-2012.
Alternative Action(s): Deny or critique report.
HB -51- Item 14. - 1
REQUEST FOR COUNCIL ACTION
MEETING DATE: 12/17/2012 DEPARTMENT ID NUMBER: CT 12-019
Analysis: Pursuant to the,City of Huntington Beach Municipal Code 2.110.040; •the-IAB
shall have the duty to prepare an Annual Report for the City Council. In preparing this report,
the Board shall review the Annual Investment Policy, and any other investment information
determined by the Board to be applicable to its annual report. In the past, such final report
was presented to the City Council at a Council Study Session in the following fiscal year.
However, with the conclusion of the term of three of five existing IAB members, this report
shall be submitted in written form. It is anticipated that the report for the following year will be
presented at a Council Study Session.
Environmental Status: Not Applicable.
Strategic Plan Goal: Maintain long term financial viability and city's reserves. Improve
internal and external communication.
Attachment(s):
1. Investment Advisory Board Annual Report for Fiscal Year 2011-2012
Item 14. - 2 HB -52-
ATTACHMENT # 1
CITY OF HUNTINGTON BEACH
INVESTMENT ADVISORY BOARD (IAB)
ANNUAL REPORT TO THE CITY COUNCIL
FOR THE PERIOD OCTOBER 1 , 2011 TO SEPTEMBER 30, 2012
Item 14. - 4 HB _54_
INVESTMENT ADVISORY BOARD (IAB)
Establishment of Board
The IAB was created to act in an advisory capacity to the City Council and City Treasurer in
matters pertaining to all of the City's investments by the City Council in May, 1995 by Resolution
#3284. The Board members are appointed by a member of the City Council, and for the Fiscal
Year 2011-12 were as follows:
Name Council Member
Jerrold Clarke (chairperson) Devin Dwyer
Joe Foye Keith Bohr
Bob Glass Don Hansen
David Hatch Joe Carchio
Valerie Dickerson Matthew Harper
Angela Rainsberger Joe Shaw
Board Activities
The meetings of the Board for the Fiscal Year ended September 30, 2012 were open to the public,
as required by Government Code 54950, and were scheduled for the following dates in City Hall:
January 19, 2012
April 19, 2012
July 19, 2012
October 18, 2012
The two major activities of the Board consisted of reviewing each quarterly investment report and
reviewing the City of Huntington Beach Investment Policy annually, prior to their presentation at a
City Council meeting. As required under Huntington Beach Municipal Code 2.110.040(b), the
Board has reviewed matters pertaining to the City's investments in the following areas:
• Reviewed the annual Investment Policy Statement.
• Discussed cash management and ensured that there was sufficient liquidity to meet the next
six months' estimated expenditures.
• Reviewed risk-return analysis as it relates to Safety, Liquidity, and Yield.
• Reviewed long-term investments and the issue of matching investments to budgeted
expenditures.
• Reviewed new investment opportunities, as appropriate.
• Reviewed appropriate state and federal legislation as it may impact the City's investments.
• Reviewed any anticipated exposure to loss through the analysis of liquidity, credit & market
value of investments.
• Reviewed Quarterly Reports prior to them being presented to the City Council.
• Reviewed quarterly compliance with Investment Policy. No exceptions were identified.
Based on the information reviewed by the Board for the period October 1, 2011 to September 30,
2012, the Investment Advisory Board acknowledges that the City Treasurer has maintained
compliance with all requirements in the City's Investment Policy and the related governmental
regulations and has managed the City's investment portfolio in a suitable manner.
HB -55- Item 14. - 5
FISCAL YEAR 2011-12 INVESTMENT SUMMARY
Economic and Market Overview:
During the past year, the United States experienced a continuation of slow growth, low interest
rates and higher unemployment. Inflation remained low at 2% (excluding food and energy). On a
positive note, housing continued to maintain its slow but steady improvement. Additionally, in
September, the unemployment rate dropped to 7.8% from 8.1%, the first time the unemployment
rate has fallen below 8.0% since January of 2009.
Internationally, the eurozone's slide into recession led to slower growth in emerging market nations
such as China. A number of European countries continued their austerity programs, as their debt
crises remain unresolved. This has resulted in a continuation of the stalled global economic
outlook.
The U.S. Federal Reserve continued its quantitative easing program (QE), aimed at maintaining
low interest rates through 2014. The result has been returns on investments falling to historically
low rates, and remaining so over an extended period of time. These low rates directly affect the
City's investment opportunities (see Portfolio Earnings for more information).
The chart below depicts the 10-year treasury over the past two years. Within this timeframe, the
high point for the 10-year treasury was 3.73% in February 2011, with a current rate of 1.62% as of
November 2012.
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Item 14. - 6 HB -56-
The 2-year treasury is important is it is used as a proxy for investment returns available to a
municipal portfolio such as the City of Huntington Beach maintains.
In July of 2012, the 2-year and 10-year treasuries reached historic lows of 0.212% and 1.394%,
respectively.
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Overall during 2012, the markets appeared to be event-driven. For the third quarter of 2012, all
three major equity market indices traded higher. The Dow Jones Industrial Average increased by
4.3%, the S&P 500 rose by 5.8%, and the NASDAQ rose by 6.2%. However, following the
November election, the equity markets have retreated.
HB -57- Item 14. - 7
Portfolio Overview:
As of 9/30/12:
% of YTM
Investment Type Market Value Book Value Portfolio 365_day Policy Limit
Federal Agency Issues 135,566,530 1351168,939 82% 1.06 None
Local Agency Investment Fund (LAIF) 18,107,875 18,107,875 11% 0.348 $60 million
Medium Term Notes - Corporate 11,032,844 10,950,900 7% 1.558 20%
Totals $164,707,249 $164,227,714 100% 1.014
As of September 30, 2012, the market value of the investment portfolio was $164.7 million with a
book value of $164.2 million. Additionally, there was a balance of approximately $16 million in the
City's operating bank account. The portfolio is invested in only those investments allowable by
State regulations and the City's Investment Policy. Such investments are purchased to meet the
portfolio objectives of preservation of principal, maintenance of sufficient operating liquidity, and to
attain a market rate of return throughout budgetary and economic cycles, in that order of absolute
priority.
7% Medium
/Term Notes
I% LAIF
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82% Federal
Agencies
Currently, City funds are invested in Federal Agency Securities, Medium Term Corporate Notes
and the State of California's Local Agency Investment Fund (LAIF). The four federal government
sponsored entities that the City purchases the securities of are Federal Home Loan Bank (FHLB),
Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac), Federal National Mortgage
Association (FNMA/Fannie Mae) and Federal Farm Credit Bank (FFCB/Farm Credit). All corporate
notes are "A" rated or its equivalent or better, per the City's Investment Policy.
Portfolio Earnings:
For the Fiscal Year 2011-12, as of September 30, 2012, total investment earnings were
$1,785,371. These earnings are available to provide for ongoing government operations including
administrative costs, new and continued obligations and public services.
Item 14. - 8 HB -58-
The objectives of the Investment Policy Statement continue to be met, with .maintenance of
investment principal as the paramount objective. Over the past year there have been no losses in
the portfolio. The principal has been maintained and liquidity for operations has been readily
available.
Book Value History
$ in Millions
$200 175.1 182.1 183.1 180.1 177.1
$180 175.1
163.7 162.3 164.2
$160 158.1
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$140
$120 °
$100
$80
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Within the context of straining economic conditions, the portfolio yield overall continues to decline
as expected, due to the historically low interest rates. Higher yielding bonds that mature or are
"called" are causing retired funds to be invested in the current low interest rate environment.
Certain securities have "call" options, which means the issuer may return the funds to the buyer at
a specified time. It is anticipated that the portfolio yield will remain at these low levels and that it
will take some time for portfolio yields to increase, even as interest rates begin to move upward, as
existing securities will continue to remain in the portfolio until maturity, unless they are sold.
HB -59- Item 14. - 9
As shown in the box below, the effect of the low interest rates directly affects the investment
returns available for the City's portfolio:
Examples of Current Allowable Investments:
Liquid Investments as of 9/30/12:
Money Market Funds 0.01%
LAIF 0.348%
Treasury Bills/Notes as of 11/30/12:
1 Year T-Bill 0.16%
2 Year T-Note 0.25%
3 Year T-Note 0.33%
5 Year T-Note 0.64%
Agency Securities as of 11/30/12:
Agency bullet 3-year 0.34%
Agency bullet 5-year 0.76%
Agency callable 3-year 0.43%
Agency callable 5-year 0.90%
Corporate bonds as of 11/30/12:
Berkshire Hathaway AA+ rated 3-year bond 0.495%
Johnson and Johnson AAA rated 5-year bond 0.641%
Portfolio Compliance:
The portfolio remains in conformity with all State laws and the Investment Policy Statement filed
with the City Council on November 5, 2012.
Item 14. - 10 xB -60-