good afternoon we'll call this session of the finance committee into session st two thousand and eighteen so for the presentation today i will be looking at current the current interest rate environment including economic factors that could impact interest rate s the city's investment strategy and approach we'll also be looking at some charts that go over the long to some of the long term trends and some benchmarks that we use in comparison of the city portfolio and then  be looking at the quarterly investment performance and activity but big picture what's the purpose of the investment report why we're presenting this to you we want to be able to show you what the performance is on the portfolio what we purchased what matured the interest rate environment and the balances at the end of the quarter so federal monetary policy drives interest rates and in turn interest revenue to the city so the federal reserve sets or controls the overnight interest rate which is the rate that they charge to banks in the federal reserve system that  charge to businesses for borrowing purposes the current federal funds rate is two and a half to two and a quarter to two and a quarter to two and a half percent  in december two thousand and fifteen the federal reserve began increasing about twenty five basis points they've now increased that nine times the most recent increase being december two thousand and eighteen  they increase or decrease interest rates to control inflation and spending so if the economy is doing you know performing strong they may increase the rates if the economy looks weak they may lower them  they they have different factors that they look at when they're determining whether they're going to raise those rates or not or or lower those one of the you know for example they look at the economic outlook one of the indicators with that is gross domestic product i have some slides this was kind of an interesting process for me being this is my first time presenting this and i wanted to make sure that i understood what i was talking about when i'm presenting this to you so i went back and looked at some slides that show some some of the historical trends and i think they kind of helped put some perspective to what we're looking at today so gdp back in june was one of the highest that we've seen in recent years at about four point two percent fast forward to fourth quarter now we're looking at two point six percent so i should back up and say in two thousand and eighteen the federal reserve  increased rates four times they had originally anticipated that they would also be raising them for additional times and four more times in two thousand and nineteen in recent months they're now taking a more cautious approach to that and these factors some of these factors are why so they're looking at gdp they're looking at the unemployment rate the unemployment rate is the lowest it's been in a decade and december it was like three point seven percent january that's inching back up to four percent so the economy is looking it's moderately you know growing but they're just taking a little bit more cautious approach as to how but how that's going to manifest over the next few quarters and years they also look at the impact of the tariffs and the economic stimulus of the tax cut so there's uncertainty there is that going to increase overall growth and stimulate more you spending of us dollars so because of all of these factors they're still looking at that that there could potentially be growth but they're just taking a more cautious approach i put some slides in here to put some perspective of that to that so even though interest rates or the overnight federal funds rate is is higher this a look back at the history of the last sixty years so we see here in two thousand and eight to two thousand and ten we see the recession the great recession and then it was almost zero for several years and now it's been increasing but two and a half percent in the you know looking back over history it's still pretty low it just helps put some context to that this next slide is a five year trend for the unemployment rate and this is again compared to two thousand and fourteen to december ended that at that three seven but we see at the very end the very right portion of the table or the chart it's inching back up again so again just uncertainty is that going to stay low is it going to go back up and i should say that the national average over the last several years is ranged about five point seven six percent so this next slide is a five year trend for gdp this is the percent change from the preceding quarter since two thousand and fourteen and really what i wanted to show with this is when we look at two thousand and eighteen that second quarter that's where we saw that four point two percent growth it dropped to about three point four percent in third quarter and what this table doesn't show is fourth quarter which was about two  percent so again stronger than in recent years but there's you know it's not as strong as it was two quarters ago and then this last table this is the annual inflation rates for  look back about ten years and so this is another indicator used by the federal reserve the reserve targets approximately two percent to hit that to hit what they call  neutral meaning a sustainable economy so if they increase their rates you know we want to avoid a bust or a boom so what could the increase in interest rates due to inflation so these are all factors that they look at gonna switch gears now to treasury yields so we know that treasury yields are increased compared to where they are even where they were a year ago but again in the you know historically they're still very low we're also seeing some mixed results comparing december to where we were in september so where we're seeing the short term the securities less a year or the shorter term up to a year are still increasing compared to september however the one to thirty year treasuries are actually starting to decline again and the most impacted was the five year treasury which showed the largest decrease of about forty three basis points so this next table is a year or i'm sorry a monthly comparison comparing from the end of third quarter shorter term still increasing but the two to thirty you know now on declining from third quarter i did want to also point out that life has increased about twenty four basis point but as a city we we typically invest in the one to five year range and so as of december that range was anywhere from two point four six to about two point six three or about  seventeen basis point spread and for the first time we're starting to see what economists have been referring to with that inverted yield curve so with if you look at the one the one year at two point six three percent it's actually higher than the two to five year and i the next slides going to elaborate on that a little bit more so to put some context to this i took a snapshot in time being december th for the last three years and the blue line being december two thousand and sixteen and so this is where you'd see that more traditional yield curve with the higher interest rate as the securities but you know the longer you're investing the higher the interest rate and but in total all securities were trading at less than one percent when we fast forward to the orange line in december two thousand and seventeen and we see in total they're averaging between one and a half and two and a half and still that traditional and increase in the longer term then we get to two thousand and eighteen and we're starting to see a flattening of that line and actually a slight inversion when you look at the one year compared to the five year so economists you know some say that this is a sign of recession coming you know you just have to wait and see but i will look at this again on some of the other slides but again we're still seeing that interest rates are up you know two and a half percent compared to the previous years so interest rates are still higher so the investment strategy and approach for the city we have three primary objectives first as safety then liquidity and then yield so what does that mean first off the primary objective is safety to protect the principle next is the city is liquidity and basically that's to ensure that the city has enough cash to pay our bills that we're able to meet our operating expenses and then lastly is yield or to obtain a fair a fair rate of return so we buy into the market we wear a passive we're passive investors so we're not chasing yields we're not trying to predict what the market is going to do and to try to you know capture those gains and losses we hold until maturity and in an attempt to do that we also look at we have a five year ladder we look at staggering our mature our securities to mature at different times so that we have a steady cash flow this ensures adequate liquidity and it also prevents us from investing too heavily and bad interest rates if we had you know all of our interest our investments mature at one time and the markets you know not it's not a good market rate this allows  that out so this next slide this is a comparison of the city's portfolio compared to the two year treasury and and lafe so the blue line is the city's portfolio the red line is the two year treasury and the green line is life so this is a twenty year look back and this benchmark serves as an indicator of the city's performance as long as the cit tracking close to these benchmarks it's an indicator that the investments are appropriate not too risky there is a little bit of lag lafe tends to track closer to the two year treasury because they deal in more short term treasuries they're usually about a six month whereas the city our target is you know two two and a half years so it takes time for those securities to mature and then we purchase those into the market rate so there is a lag but what this does show is that over time we're tracking appropriately so this takes us back to looking at that yield curve when we put this powerpoint together it was a few weeks back and so we took a snapshot in time to show that flattening yield curve as compared to what it was a year ago and i did so if you were to look you know look at those it's just it's it's very interesting i did also add another slide just to put what it was last friday it's now a month later and we're still seeing that same in the inverted rate from the one year to the out to the five year so next we're going to look at quarterly performance so the portfolio the yield increased this quarter compared to last quarter by about five basis points in actual dollars that translates to about nine hundred thousand dollars that we  received an interest revenue this year of that about a hundred and twenty six thousand of that to the general fund total cash ended the quarter about a little over two hundred million dollars this is about a sixteen million dollar increase from last quarter and the main reason for that is a large property tax payments that we received so it's the timing of that cash the activity for the quarter we had ten million dollars in purchases eight million in agency securities two million in corporate and corporate note we had two million called in agency securities and eight million matured so of those investments that were called and matured were basically it's a net zero effect we reinvested that this is this next slide is the breakdown of our investment portfolio and if you were to look at this compared to september it didn't change much the only big difference is the lafe account we can hold a maximum of sixty five million i think in september we are at about forty nine million so that's that property tax money we know that in the upcoming months we're going to be paying our annual unfunded liability to calpers and we each year we look at that to determine if it's beneficial to hold the money and invest it on our own or to pay it up front and get the savings and it it's given the interest rates it's still in advantageous to the city to pay that upfront i think it saves us somewhere about four or five hundred thousand dollars each year by paying that upfront netted against the lost interest income i have a question so you mentioned that there were two million dollars in corporate note purchases yes what were the corporate notes i believe that was hathaway we did have one corporate note it was with general electric they were downgraded last quarter but that did mature in january and we repurchased that in january we purchased an apple corporate note with apple okay and these are following our new guidelines yes they are great thank you i have one more slide for you this is the composition of our portfolio at december st so you see fifty two percent is agency securities thirty two percent is lafe five percent corporate notes that with that that ends my presentation and staff recommend that the committee accept and approved the second quarter investment report and fiscal agent report for fiscal year two thousand and nineteen and i'd be happy to answer any questions any questions is there a motion from either  fund and and some of the drivers that go into it so there are generally three drivers that we need to cover an increase cost for this year the first is our annual increas compensation to marburg for collection services per their contract and the second is the increase in the county tipping fees per our materials agreement with them delivery agreement around the collection costs for services we have an exclusive contract agreement with marburg for collection and hauling in this agreement it calls out for an annual increase in our compass their compensation which is seventy percent of the  monthly through our invoicing system around the increased of the tipping fee as you all are well aware we are in a twenty two year agreement material delivery agreement with the county for the te gross resource recovery project and over the past three years we have been escalating the tipping fee to them in anticipation of the project going forward so in fiscal year eighteen the tipping fee at the te kohe site was raised to ninety nine dollars per ton across all materials given the time that the project was under a delay we were directed to use the solid waste fund reserves as opposed to putting that portion of the rate increase into the rates that year last year the tipping fee was raised to a hundred and two dollars per ton across the board for all materials and for this coming year the tipping fee will be one hundred and fifty dollars per ton and the purpose of the stepped up tipping fee was twofold the first was to strengthen the count the county's bond offering which was successful they got all of their financing in place in november and have broken ground on the project in early december and the second was to create a jurisdictional rate stabilization fund so with the idea that as the project moves forward that there would be this reserve in place that would help stabilize any for any unanticipated costs for the project collectively so in looking at our overall revenue requirements for the system going forward for this fiscal year we are looking at at around a sixteen point three percent rate increase overall and this table shows you the breakdown of how that translates and into the key components of of our revenue requirements and rates and the first line item is the cpi increased for marburg and that's about almost two point three percent the county tip fee increase which is eleven point six percent and then we have a couple of smaller ticket items that we call out in our rates every year one is for our public container fees and the other is for our abandoned waste program then the last line item is as part of the fund reserve recovery of two four percent we're proposing that we rebuild the reserve use which was one three million over the next two fiscal years to get us back to our previous amounts and then also as just a brief reminder we came in november to discuss including in this year's rate process some restructuring of of our rates and the goals of this was to is to increase the the equity amongst rate pairs in custom all our customer classes improve our revenue predictability with a more straightforward rate structure aligned with state legislation and then also to ensure smooth billing system integration that is moving forward in this coming fiscal year to reach these goals we have already started our outreach to in our impacted customers right now as you may recall the discussion was around about a third of our customers in both the apartment building sector and also the building sector i'm sorry the business sector are going to be impacted at least slightly and so through a combination of direct visits to the customers at their sites and then also some additional direct mails to explain to them how the rates are changing we'll be rolling all of that out over the next couple of months and then in addition we'll be including information as part of our  noticing which will start going out any in april and then finally in anticipation of customers causing questions we will be training both the marburg and the city's customer service stuff so that everyone has a basic understanding of what's happening with the rate increase and then how to refer the calls back to our division to handle anything that's more complicated terms of impact of the rate increases i put in front of you in the presentation a few examples of our typical rate classes and service levels so on this first table this is both our single family residential service which the default being the sixty five gallon trash service level is changing from the current rate of forty one dollars forty two cents to forty eight dollars and three cents generally and then two typical multi unit classes of of rates the first is for cart and can service changing from two seventy seven point seventy one to three hundred twenty two dollars and fourteen cents and the other being a very typical dumpster service at once a week service for four yards of trash a can see those are from four hundred and eighteen dollars and forty six cents up to four hundred and eighty five dollars the next chart again similarly is to demonstrate the the changes in our typical business customer class  services the first is for an example of a cart can service and the second is for twice a week dumpster service and then in terms of noticing and general rate adoption our proposition two hundred and eighteen notices will be sent out with direct mail to all of our customers and we do this general in conjunction with the wastewater and water rates noticing as well we'll have our hearing in front of council in june of this year of two thousand and nineteen we won't be doing tonight travel and i don't think and  that's usually the second week of june and the rates will take effect again july st two thousand and nineteen so and with that i'd be happy to take questions so no questions i will ask a few the stepped up tipping fees to create a stabilization fund and you mentioned that's dominguez we are in regular meetings with with county staff over the whole host of services that are provided i'm in addition to the trrp so we  will continue to be engaged you know in those meetings with them and getting updates on the progress of the project as it moves along in addition internally we are working on our own control and and review of both like the methodology based on the financing part of the agreement and then being able to have review with the county to go over all of the the finances and any major or proposed operational changes at the facility and you're satisfied with that level of interaction and cooperation that's kind of an industry best practices at least in the municipal arena it is yester i'm for it yes for a project of this size yes i don't want to do that the contract puts a restriction on the county county's ability to raise fees in any given year to seven a half percent a cap if there are extraordinary costs or extraordinary losses of revenues and they need to go higher than that and there's a committee made up of all the participation agencies excuse me and we all have to agree by majority that it would be appropriate to raise them beyond seven and a half percent so that's kind of the cap contractually so i think that provides  protections and then there's also the limitations in terms of when extraordinary costs occur you having to kind of meet with us and make sure we're aware those and support those but the general restrictions in the contract i think are pretty good for us of the specific concerns i have is the there was the unexpected issue we had in the past and it cost several million dollars and the last time we spoke with county they didn't have a process to go back and do an after event analysis and figure out what had happened and they said that they were gonna eventually do it do you know if they've done that thank you chair i would need to go back and check up on that it's not to my knowledge it's been communicated back to me that  seems like an industry best practice that if we can get that to take place it could save us money down the line so that's something that i'd be be happy if we can look into maybe bring back to the council what you find out what ended up being the the bond rate they secured in november mister chair i don't know what that actual rating was it's fairly high it's a little higher than ours as my understanding because they're a larger organization and they  frequently but it's the double a you're probably category but i'm sorry about that like the percentage that the bond interest rate oh sorry i don't know the actual interest rate that they ended up with i think they're estimating in a three and a half to four percent range but i can find that out i don't remember what the actual interest rate was that's a good question okay that'd be great to find out the the two point four percent reserves recovery and program enhancement and that's you're looking at that's a two year increase is there a way to make that flatter to help reduce some of the more immediate rate increases because the way understand it that goes into a fund that's kind of an insurance fund anyways and i know later in the program once it's up and operating we're gonna receive back revenue that might help offset that or also go into the reserve yeah i think they'll be fine if we want her to go spread over three years i wouldn't want to do more than three years because the whole reason we have reserves are for uncertainties and you know when you don't have much reserves to deal with that then you're you can't be in a problem but spread over three years would not be unreasonable in my opinion if that were the desire of the committee and council and you know given the amount here it's not going to have a huge impact but it's something that we can explain to our customers that we're doing to try to to blunt the impact of a big increase this is sixteen percent i mean that's big by any standards so anything we can do to try to spread that burden out i know it won't change it in the long run this won't be something that we're paying interest rates on to do so that might help i know we made a decision in terms of our repayment plan where it's end loaded and so that's gonna have a pretty big impact on rates so this might be something that that helps mediate that so something to look at if you can and and i'm glad that we're doing face to face outreach and direct mail outreach to customers regarding these this news you know won't be good news so that's it's good this is the least we can do you know i've shared with some people my story part of the reason i got involved in city government is my mom worked for a city in la when they went to individual trash bills and it was just a nightmare the way it was rolled out and she took all the abuse from the residents and as a kid i remember that distinctly and so it's great that we're doing that the one set of customers that i don't know if we're reaching out to these customers who aren't being billed directly so renters you know our city's two thirds renters and so if the property owner is paying these bills the renter never sees the impact and i know it's not directly impactful to them in  sense they don't see it and see the impact but if the landlord raises the bill i think it's that they know that's part of the reason maybe the landlord or property owner explains it maybe not hopefully they don't raise the bill but i think it's important that people know that actions have consequences that trash is expensive that if we can figure out ways to recycle compost more down the line or even reduce the amount of trash that gets generated that that can have an impact on their economy so to the extent there's a way economically to to let non build customers know what's happening even if it's through our city website through other communications i think that's important is there anything we're doing along those those lines thank i actually we are i think it's a good point that there they are the users even if not necessarily the the direct ratepayers and as part of our outreach to the apartment buildings we will and have in the past like included direct information educational information to them so this could be a part of that as well great thank you any other questions or comments  just on on the spreading over three years versus two since it's not that big of you i'm just wondering it was in our staff report but the following this one year is the big jump and then after that its gradual we're kind of more cost of living increases plus a couple of those if we spread it out over three years how would it affect those are we talking two percent per year right now it's two percent per year for the two years so we'd be talking to another percent and a half and so we'd have an extra percent and a half three years down the line rather than not have it yeah um chairman freeman it would be taking about four and half percent spreading it out over two years versus three or three versus two so it'd be about one eight percent per year roughly over three years versus two two per year and about what's the dollar cost on on a one percent right now yeah hmm oh if i'm looking at a forty dollars per month customer a one percent would be about forty cents i'm fine either way i'll leave it to you i my preference would would be to just build the reserve and and just have that because this is actually making up for past actions but if it's if we don't have to incur any interest or anything else that would be paying for by getting it done i'll leave it up to you to do the analysis and come back to us and what we'll do is we'll notice it in april for the full two points some percent but then when we present this to the full council in may as part of a budget hearing we can always implement something lower than that bullet but make sure that there there was a discussion at the comm about whether it spread it over with two or three years and see what the council says in that regard and we can adjust again in terms of what we actually implement and those are the next two stops that counsel there will be is there a hearing at council in april to do the noticing so what will happen is the notices will go out in april direct mailing has mister farley indicated we every department will be presenting their budget in may may when we present our solid waste budget will make the council aware of the proposed rate increases and a plan for how we're going to spread over those the reserve we capture over two years and let council give us direction as to whether we should implement something different than that but the year rate increase plan so that's really in place so they don't need to do that again but solid waste and wastewater will so that's sort of a third opportunity for the folks to kind of alpine on that so i'm a little hesitant to wait that long to discuss this issue i'd love to give the department more time to deal with it if council has a different idea or wants to be more aggressive or less aggressive so i'm wondering if my colleagues see any wisdom and having this come to coun earlier so i could make a motion to have it brought to the full council earlier or if either of you have a different solution i'm not an agreement with you that there's a problem i like the staff has laid it out so i'm i'm not supportive of another or an earlier exposure to the council thank you okay mister friedman i think the staff plan is the way to go right okay so at this point then is there any action that staff requests this is just oh just information formational okay great any other business any public comment doesn't seem like there's anyone in the audience so unless there's anything else i'll go ahead and adjourn the meeting thank you thank you very much for the presentations music