CITY COUNCIL: Policy Direction Regarding Changes to City's Investment Portfolio

Meeting Date: April 7, 2009
Prepared by: Joyce Giuffre, Admin. Services Director

City Council
Agenda Item Summary

Name: Receive report and provide policy direction regarding changes to the City’s
investment portfolio.

Description: The City Treasurer and Administrative Services Director request policy direction from City Council regarding changes to the City’s investment portfolio. The recent turmoil in the financial markets has prompted the City Treasurer and the City’s the City’s investment advisor, Doug Robinson of RCM Robinson Capital Management LLC, to review the City’s investment portfolio.

Currently, the City maintains most of its investments with the Local Agency
Investment Fund (LAIF), which is managed by the State Treasurer’s office. The
portfolio could be further diversified with a goal of protecting against principal
losses due to unstable financial markets. The city’s principal balances may be
protected; however, a drop in investment revenues could occur, depending on the
type of securities purchased.

Overall Cost:
City Funds: Potential loss of investment revenues, depending on the type of securities purchased.
Grant Funds: N/A

Staff Recommendation: Provide policy direction regarding changes to the City’s investment portfolio.

Decision Record: The City Council annually reviews the City’s investment policy in
conjunction with the fiscal budget approval process.

Reviewed by:


Rich Guillen, City Administrator Date


CITY OF CARMEL-BY-THE-SEA
STAFF REPORT
TO: MAYOR McCLOUD AND COUNCIL MEMBERS
FROM: JOYCE GIUFFRE, ADMIN. SERVICES DIRECTOR
DATE: APRIL 7, 2009
SUBJECT: REVIEW AND PROVIDE POLICY DIRECTION REGARDING CHANGES TO THE CITY’S INVESTMENT PORTFOLIO

BACKGROUND
The City’s investment policy is directed to the goals of safety, liquidity and yield, with the primary objective of safety of principal. The policy allows for certain authorized investments, including Local Agency Investment Funds (LAIF), U.S. Treasury bills, Federal agency coupon securities (such as Federal Home Loan Bank and Federal National Mortgage Association), bank time deposits, and certificates of deposit.

The City historically has maintained most of its investments with the Local Agency Investment Fund (LAIF). LAIF is a program started in 1977 by the State of California and it is managed by the State Treasurer’s office. All securities are purchased under the authority of Government Code Sections 16430 and 16480.4. LAIF is part of the Pooled Money Investment Account (PMIA) with a portfolio currently valued at approximately $60 billion.

The major reasons why the City has invested in LAIF are:
• LAIF funds are highly liquid. Money can be transferred to the City’s checking account the same day as requested.

• LAIF has maintained a relatively high rate of return, as compared to other investments authorized under the City’s Investment Policy.

• The PMIA investment policy provides for investing in high-quality securities spread over different investment types and different issuers with various maturities. The City is able to participate in this major portfolio with minimal risk.

STAFF REVIEW
In light of the recent turmoil in the financial markets, staff asked the City’s investment advisor, Doug Robinson of RCM Robinson Capital Management LLC, to review the City’s investments and make recommendations on further portfolio diversification. The goal would be to protect principal from potential losses that may result from the financial markets instability.

One approach is to decrease the amount of the City’s LAIF investment and instead purchase U.S. Treasury bills and Federal agency coupon securities. The Treasury bills and Federal agency coupon securities could be purchased using a laddered method to allow for better liquidity. Doug Robinson provided an example of what the City’s portfolio would look like using this approach (see Exhibit
“A”).

If the City were to further diversify its investment portfolio, the City’s principal balances may be better protected from unforeseen losses. There are considerations to keep in mind, however, such as:

• Less liquidity for the funds moved out of LAIF and invested in longer-term instruments

• Potential loss of interest income for those investments earning less than LAIF

• Potential losses on investments of U.S. treasury or Federal agency coupon securities, if the investments are sold prior to maturity.

• Additional staff time needed to process and maintain a more diversified portfolio
With this information in mind, staff requests that the City Council provide policy direction on making changes to the City’s current investment portfolio.

FISCAL IMPACT
There is also a potential loss of interest income for funds invested in instruments that are currently earning less than LAIF. For example, the six-month U.S. Treasury bill rate as of March 13, 2009, is .42% as compared to the current LAIF rate of 1.8% (4th quarter FY 08/09 estimated to be 1.4%).

There also is a potential loss on long-term investments if sold prior to maturity. For example, if the City purchases a 2-year U.S. Treasury note and sells it before the maturity date, the value of the security at the time of sale may be less than the original purchase price.

SUMMARY
The City’s current investment portfolio complies with the City’s Investment Policy. However, in light of the recent turmoil in the financial markets, it is prudent to review the City’s current portfolio and consider possible changes.