i'll call to order the santa barbara city council finance committee meeting for july th two thousand and seventeen is there anyone who would like to speak to any items that are not on the agenda seeing no one we will go to the regularly scheduled items which is the quarterly investment report is nima's good afternoon chair hart committee members i am julian amos treasurer manager for the city finance department today i'll appear presenting the quarterly investment report for the quarter ended june thirty two thousand and seventeen i will be going over five different areas similar to every other quarter first i'll be covering the interest rate environment second i'll be going over the city's investment strategy and approach third i'll be covering some long term trends fourth i'll be covering some benchmark comparing some of the cities and activity for the quarter versus some benchmarks and last will be the performance and activity for the quarter so first a little information on the interest rate environment  recall back in december two thousand and fifteen the federal reserve increased the interest rate by zero twenty five percent that was the first time in seven years that they had taken action to increase the interest rates since then they've done it three more times once in december two thousand and sixteen again in march two thousand and seventeen and just recently again in june two thousand and seventeen each time by zero twenty five percent they also hinted in june that there may be one more increase by the end of the calendar year but it will all depend on how the economy is doing the federal reserve did give several reasons for this increase in june a lot of them are similar to what they stated back in march when they increased first the chair did actually say she felt that the economy was increasing at a slow and steady pace they had confidence in future economic growth and they felt that that would lead to potential future increases as well the unemployment rate is the lowest it has been in over a decade since two thousand and one actually it's down to four three percent  they believe they are reaching full employment maximum employment third the labor market is strengthening it's been eighty months straight that jobs have been added to the market and inflation is the one area that they were a little sure of inflation in january was at one nine percent and the fed has a target of two percent to raise interest rates it has dropped from one point nine percent to one point four percent however the federal reserve thinks there are one time impacts they believe that discounts on pharmacy prescription prices might be impacting that discounts on cell phone service charges might be impacting inflation so they didn't want to be alarmed by it at this point they feel like there could be just a one time or a couple one time impacts causing it to fall from one a little more information on interest rate environment we continue to see treasury rates remain pretty steady they're still significantly lower than they were prior to the recession at june thirty the interest rates are similar to what they were at march  the short terms continue to show the largest increases we've seen that for several quarters they'll lay for a three month six month rates those tend to have the larger increases the longest term treasuries slightly decrease from the last quarter and that was the five ten and thirty i have a chart in about a couple more slides that will present that information as i mentioned the federal reserve is hinting at one additional interest rate increase but it all depend on how the economy does and it didn't want to point out that while higher rates impact treasury yields it also allows increasing rates also allows the fed to cut those rates and times of where the economy and they need to stimulate the economy so it gives them a little bit of a buffer in the future so what have we seen since june it's just been a little time since they did the last interest rate increase there's been factors that we've seen that both support and don't support the position to raise interest rates we continue to see low at this lower inflation in recent months we don't know yet if it's a one time if their one time impacts or it's a short term drop or if it's going to continue to be well below that two percent unemployment continues to drop its dropped every couple months for the last year we are nearing that maximum employment as we reach maximum employment there is going to start to be pressure on wages as there's less people available for jobs it'll put pressure on wages to wages for wages to increase which then can impact inflation we continue to see a lot of global uncertainty and certainty in china in europe there are still a lot of banks in europe and asia that are offering negative interest rates it all has an impact on global demand for our foreign products and we see how a lot of the uncertainty with what's going on with presidential policies is also potentially impacting foreign demand and as i just mentioned a minute ago presidential policies we do see them impact treasury yields when the senate takes action or doesn't take action when there's presidential policies that are put out there we do see impacts on the daily treasury yields and i also wanted to mention that some of these things were seen they might just be temporary and the market sometimes responds quickly and bounces back up a couple days later but i did want to mention these are some of the things we've seen over the last thirty sixty days and even even though rates are slightly higher they're higher than they were a year ago it still does take several years before the city sees a material impact on the interest income the interest rate is up for the city of the portfolio rate but it takes a lot of time as investments mature or called as we reinvest into the market to see a significant impact this is the chart i referred to a little while ago that shows all of the different rates from three hundred and thirty one all the way through six thirty and you'll notice the lower two the shorter term are the ones that saw the largest growth the three month had a twenty seven basis point growth whereas the thirty year shot saw the biggest decline at eighteen points down the mid range is generally where we invest the one to five year and that the rates at six thirty from one to five year range from one point to four to one point eight nine and all of them saw increases or were level except for the five year which actually did see a decline of about four basis points i wanted to point out one thing i'll go back for a second the lay freight which is we invest with the state we continue to see that performed very well and continues to increase every quarter it's now at zero point nine two percent i believe it's i'll i have a  yield from yesterday i'll show you in a few minutes i think it's might even be at one percent now so it continues to perform very well i just wanted to point that out so moving on to the city's investment strategy and approach should all be very familiar but we our primary objectives are safety first then liquidity and then yield preservation of principle is our primary goal then we look to meet the liquidity needs of the city and then we earn look to earn a fair rate of is to buy into the market we don't chase heald's we don't try to predict what the market will do we attempt to maintain a steady maturity ladder over a five year period this is really important especially when we have large projects and make sure that we have  the funds necessary to do any large projects it ensures we have adequate liquidity at all times it also prevents us from investing too heavily in a bad interest rate environment this first chart graph is it's a comparison to our benchmarks it's the portfolio rate versus the two year treasury the five year treasury in the life rate we've showed this every quarter it really shows how much interest rates have been impacted  generally this is a good benchmark as it shows the city's portfolio rates should go along with the five year the two year if there's a big deviation we would it would cause some concern we'd want to look into it if the portfolio rate was doing substantially better than any of those rates it would we'd want to question whether we were being too risky there is always a time lag you'll notice that the portfolio portfolio rate will fall slower than the other rates or rise slower than the other rates and that's because it takes time as things are called and retired for us to get back into the market as of june thirty we are the city is below the five year and just about even with the two year about one basis point below the two year and that's due to the recent rise of all the rates but we're as we invest more we'll pick up a little bit on the city's portfolio rate and the other reason for that is we are holding a lot of cash right now so we hold more cash we have in our checking account and are in the life life with the state and both of those are below the two year and the five year and that will pull our portfolio right down and in a couple slides i'll go into why we are holding so much cash right  now this is what i mentioned a few slides ago i wanted to show you the treasury yield as of yesterday i was like to present this slide because it gives you an idea if we were to invest today what could we get for all of our one to five treasuries and you'll notice that the one to five is about one point two two to one point eight to four the one to five treasuries also life is at one point zero four as of yesterday so it has breached the one percent barrier the one thing that that was very strange about this chart and i looked into it further as the three month has a higher yield than the six month that is very strange we don't normally see that a longer term should give us a higher yield and i wanted to point this out because the reason for that is that the currently that three month treasuries will mature around the same time that the treasury is expected to run out of money unless congress boosts the limit on federal borrowing so there's a slight risk that they're giving to the three month which boosts the yield and that will change pretty quickly once they disarm that treasury  the federal government boosts that limit but all i did want to point out all of the rates from one to five years are lower than six thirty as of yesterday but the lafe and the three month have both increased so we are continuing to see that trend or the shorter terms up show the largest growth and the longer terms are don't show the same growth moving on to the performance for the quarter for our portfolio we saw the yield go up it went from one point three three seven at three at march st to one point three seven two percent at six thirty our interest earned for the quarter increased to five hundred eighty nine thousand which is about eighty three thousand dollars more than last quarter the general fund portion is a hundred and sixty four thousand i did want to mention i just looked at the year as a whole and in total our interest for fy seventeen was one nine million but the budget was one point six seven so we did exceed our budget and a lot of that was just due to rates being higher and being able to invest into better yields and so we had about two hundred twenty four thousand dollar earning above budget and total portfolio is up about eighteen million dollars over the last quarter we have one hundred and eighty six one hundred and eighty seven million in cash investments at six thirty it is a very large balance it's bigger than we normally have we had quite a bit in srf state revolving loan funds come in reimbursements come in in the last quarter both from water and wastewater that boosted our balance also this time of year we always see a larger balance because it's when property taxes our last property tax payments come in so we expect to see from third quarter to six quarter to see it go up but it went up more substantially due to so the next couple slides will actually be information both on the activity and a snapshot of the portfolio this first one is the activity in the last quarter we purchased eight million dollars in callable securities that have a call feature that can be called by the owner we also purchased eight million in what we call bullitt securities they do they do not have a call feature so they go all the way to the term to the maturity date with those replaced six million in federal agency securities that did have a call feature and that were called and also two million that in federal agency securities that actually matured so they went all the way to the maturity date as well as one hundred and forty nine thousand dollars in a semi annual principal payment on the airport promissory note in total seven point eight five million dollars was taken out of our account to make investment i did just want to note that sometimes this comes up so i wanted to provide you with the information that the airport note does have a current balance of four point four eight billion moving on to the snapshot whereas the other one was activity for the quarter this is really just a picture of what is in our portfolio at six thirty so as i mentioned we have about one hundred and eighty seven million dollars in the portfolio this is a breakdown of all the different types of investments we have the first two are what we call our liquid balance it's the checking account and our life balance we have about seventy eight million dollars in life in checking which is a very high balance i'll go into that in a moment why that's the case compared to three hundred and thirty one we have ten million dollars more in our liquid balance we also have about eight million dollars more in the federal agency issues line you'll see the eighty five million that has increased eight million dollars due to the purchases we made this quarter that's what makes a difference between six thirty and three hundred and thirty one now i can give you some more information about why we're holding so much cash so for fiscal year eighteen calpers we normally make monthly monthly contributions to calpers for the three retirement plans police fire and miscellaneous they have offered to us for the first time to make a prepayment prepayment on part of those contributions the monthly amounts to eighteen point four million but if we prepay it we pay seventeen point seven million it's a savings of six hundred and fifty thousand dollars as a discount they're providing to us if we pay the one year in july versus every month for the fiscal year so we did some analysis and we looked at well can we earn more interest than what we would receive on the discount and it's not close even if we looked at putting in a five year note which wouldn't make the cash available for us to make the monthly payments but we would look to all the way out that would only get us about three hundred fifty thousand dollars in earnings so the discount of six hundred fifty thousand was definitely worth it it kept more money at the city so we are pre paying that actually this week so we needed to keep eighteen million dollars in life which we can draw the same day and we've already drawn eighteen and million of that from leaf yesterday and today to make that payment so that's why that balance is so high no its of what we call like an ach draw this is the same information i just provided but in a chart a graphical representation so you'll notice that most of our money is  agency securities about forty six percent we also have five percent in corporates we have five different corporates we have the two percent note one percent in treasuries four percent in cds and the remainder is what we call our cash our liquid liquid balance the seven percent in the checking account in the thirty five percent in life once we make that seventeen point seven million dollar payment to calpers that will drop to thirty six percent which is more in line with generally how much cash we keep we also have it's is still a little bit high we have about ten million ten to fifteen million dollars also in our life balance for any d cell costs through summer and once that is all that is complete and finished being paid we will reduce that life balance we generally keep thirty to forty five million dollars in life and that brings me to our request our of our recommended action that finance committee recommended council to accept and approve the fourth quarter investment  night also i can answer any questions you may have are there any questions for misty mist councilmember dominguez so the the total amount of cash in investments is a hundred and eighty six million and i was thinking about that in terms of  how that relates to our our budget and our reserves so i know our general fund budget and this is this is a general fund and enterprise fund cash and investments but i know compared to our budget it's much bigger than our budget so is  this the ballpark figure we normally have at the end of the year council member dominguez so this does represent all of the cash investments for the city as a whole it's all funds this is higher than what i've seen  i know mister mario mentioned this is a higher balance than what he normally sees as our reserves go up and as revenues go up and our budget goes up i would expect to see our cash balance go up we recently received some rather large reimbursements on srf loans and that boosted the balance but last year at this time i believe we were in the s so it is about twenty million dollars higher than it was last year we were we were a lot lower last year than we normally were but we generally in the last couple years that i've seen we're generally in the one hundred and sixty to one hundred and seventy range at this time of year so since i've taken office same pure coincidence the and then related to reserve so are these considered part of our reserve are these the same book of funds or is it a separate this is purely just the cash on hand that we have this the reserves are a different calculation and our reserve searches our general fund reserves this is the cash for every single fund so some of these investments let's just say a disaster struck and we couldn't redeem some of these investments we still have a reserve that's independent of this cash or the snow there the reserves are in a portion of this that's correct what percentage of our reserves are invested in in these various  instruments is it proportional to the slide thirteen so we pull what we do is it's a pool so we take all of our cash for the city as a whole and we bring it into a pool and we invest it all together so there is an apportion that is allocated to the general fund or to an enterprise fund it's the pool in general it's the city as a whole okay maybe yeah just to clarify a little bit so the cash is one asset in all of the funds that make up most of what we measure as reserves but it's a different calculation so reserves is really the difference between all the assets we have in any twos will be measure as reserves so that difference is made up primarily a proportionally mostly of cash which we invest in the same proportions just for the entire organization but it's got other components to it so i wouldn't say the reserves is represented by our cash it's component of it the primary component but it's not they're not equal because we don't have one hundred and eighty six million dollars in reserves because you'd have to reduce it by any liabilities against those assets that makes sense assuming you planned on paying the liability or what we do of course right yeah and is that because is that the difference between an accrual and cash based or is our reserves under cruel yes edge eteri constant yeah we don't we don't count for all our activities on a cash basis we do accrual or what's called modified accrual fers for our governmental funds but we still we still include on a balance sheet for example or all the assets we have cash receivables and free enterprise funds fixed assets like equipment and infrastructure and then we also wreak lewd debt so typically you know lulaia bidders related to just our typical vendor payments also for vendors for large projects we have liabilities related to bonds that are correct okay great thank you very much i don't follow up a little bit on that what are they doing what's what's the purpose of that discount i mean yeah good question  white so what they do is you've you've so you get it back up and recognize that they assume that whatever money we give them they're gonna invest and earn seven and a half percent today you know it's gonna be lowered over time but as they're reducing the discount rate but they're right now targeting their investments to get a return of seven and a half percent what they tell us is if you were to prepay that money in july versus throughout the year we will give you credit to equal to approximately six percent of that so is the reason why we could only earn a couple hundred thousand dollars on those monies if we kept it versus what they're gonna give us is because they invest in things we can't we would earn one or two percent they're gonna hopefully earn seven a half percent they give us six percent credit for that and so they're kind of assuming and banking on the on the difference that they can earn above six percent and that just kind of goes towards the you know overall assets that they have so it's a little bit of plain in the arbitrage but they're gonna take that money and they can apply to our employees and to our employer portion of the of the all the you know the normal cost and unfunded liabilities they're just giving us a little bit of a benefit by pre painted because they know they can earn earn more than six percent but they're giving us credit for six and we know we're not going to be a little earn nearly six percent so it's a about you know how they yes they'll they can they have the ability to invest at a higher rate in different instruments than we do and i appreciate that point and two i heard on the radios of or whatever that's worth  that they actually earned more than their stated in seven and half percent this last year that was it was the first up in time in several years that they had actually exceeded their target this last year i believe it was betting that they can make more than six percent so let's say they only make three percent the market stays really flat so they're gonna be kind of in the hole a little bit are there and liabilities will increase relative to what they need so we're gonna end up covering that bet anyways or at least maybe then it's spread over the entire state yes that is absolutely true it helps us this year from a budgetary perspective cuz it says it's about six hundred seven thousand dollars which is do you know a lot of money yeah ultimately it's gonna come down to us because if they earn three percent like you said that's part of the then we have to make it up in the future through you know nominal increases to rates but but because we're paying it versus if we're gonna pay it anyway that same eighteen million dollars they're giving us a bit of a credit and a bit of a you know a reduction in that payments so it helps us budgetarily this next year and we think we know it's a good year to use that take that opportunity because we're as you know we're dealing with slight deficits any other questions is there any public comments on this item