harbor city council finance committee and we have one item on our agenda which is the quarterly investment report we don't have anybody in the audience you would like to make any comments about items not on the agenda so we'll go straight to  good afternoon chair hart committee members i am julian amos and the treasury manager for the finance department and i'm here today to present the quarterly investment report for the quarter ended march st two thousand and eighteen i will be going over four areas today the first will be the interest rate environment and some economic factors that impact interest rates after that i'll be going over the city's investment strategy and approach after that we'll be covering some long term trends on interest earnings and interest rates and comparing those to some benchmarks and finally we'll be covering the city's investment performance and activity for the quarter so first of all little information on the interest rate environment as we've talked about at some previous quarterly reports the federal reserve has been increasing interest rates over the past couple years the first interest rate increase was in december two thousand and fifteen and they have increased rates six times since december two thousand and fifteen by zero twenty five percent the current federal funds rate is one  one seventy five percent the most recent increase was in march two thousand and eighteen so just last month the federal reserve gave a couple reasons for this increase one of the most significant being that they felt that there the economy is performing well it's pretty strong both in the immediate term and in looking out into the long term they felt that also the most recently enacted tax cuts and the three hundred billion of additional government spending would turn out to influence the economy and improve growth as well as increased consumer spending also the unemployment rate continues to be the lowest it has been in over a decade it's around four percent and wages are now increasing which they think will turn into additional consumer spending and lastly is the inflation rate the federal reserve has set a two percent target for inflation and it has been inflation has been increasing over the last couple years it's been hovering right around that two percent target rate sorry jumped ahead sorry about that so what does this mean for treasury yields overall they are still increasing they have increased since the last quarter but historically they're still very low when you compare them to rates prior to two thousand and nine yields are higher in march st compared to december st two thousand and seventeen the three year treasury shows the largest increase of about forty one basis points but all  yields have increased in the the double digit area anywhere from twenty to forty basis points the federal reserve at the march meeting did hint at additional plans for two additional interest rate hikes  year two thousand and eighteen they also hinted at additional rate hikes in two thousand and nineteen anywhere from two or three additional hikes and what this means in terms of treasury yields is that when the federal reserve increases rates it actually does have  impacts on treasury yields it increases treasury yields it also enables the federal reserve to cut rates in the future to help stimulate the economy as the federal reserve increased rates beyond this one percent now we're at one five to two percent this has less this is less important in the past when it was at the lower range and under one percent that was really important because they could cut rates to help stimulate the economy they could also cut rates without having to go negative like we'd seen in europe and asia i wanted to just talk a little bit about some economic factors that could impact whether whether the federal reserve will and actually do these future rate hikes what we saw in the first quarter of calendar year two thousand and eighteen is that there were actual actually declines in retail consumer spending however over the last several years we've seen that this is maybe a seasonal impact after the big spending in the holiday season we often see the first quarter takes a little dip so this could just be a seasonal variation we also are not sure what the true impact is going to be of the enacted tax cuts and the three hundred billion in additional government spending so we'll have to wait and see if that truly does translate to more consumer spending and economic growth there's also some uncertainty related to the trade tariffs we don't know what the impacts will be to us growth and consumer prices and lastly even though we're seeing inflation increase over the recent periods it really has been inconsistent meeting that two percent target the most recent march cpi inflation was two one percent but that was the first time it went over two percent know about the last six months it's really been more around one seven one point eight percent i did want to mention and we've mentioned this at the last few quarterly reports that even with these higher rates it does take several years until we see a material impact on interest earnings for the city our portfolio rate has been increasing but we tend to invest in maturities of two to five years so we have to wait until our investments mature and we can reinvest into the market so it does take time until we see a really significant impact on our interest earnings this chart is the rates from three months to thirty years including leaf it actually isn't the council agenda report as well it shows from one thousand two hundred and thirty one to three hundred and thirty one all of the different treasury rates you'll notice that they have all increased as we mentioned as i mentioned earlier the biggest increases in the three year of forty one basis points but the two and forty are just behind that at thirty eight basis points and thirty nine basis points i wanted to point out also the lafe rate we're seeing a real significant increase in the lay freight over the last twelve months just in the last quarter it's up thirty one basis points the local agency investment fund that's what laiv stands for and it's it's held by the state they generally invest in maturities of less really short term maturities i think their average maturity is less than two hundred days and the city can invest with lafe can transfer money it's considered liquid funds because we can pull on it same day so we consider it liquid funds because we can pull from l and use it for cash needs its invested with the state it's guaranteed by the state so it's very secure safe funds and they're considered liquid so moving on to the city's investment strategy and approach we do have three primary objectives and they're listed here in the order of priority safety is always our primary objective to preserve the principle next is liquid y we need to meet the cash needs of the city and lastly is yield trying to err earn a fair rate of return we buy into the market we don't chase the yields we don't try to predict what the markets going to do our goal is to attempt to maintain a steady maturity over a five year period we do that because we don't want to have a lot of cash on hand at any one time so that we have to invest heavily into a bad interest rate environment we'd also make sure that we have adequate liquidity over any period of time so that we can meet all of the needs of the city any project needs anything like that moving on to some long term trends and benchmark rates this graph actually shows three different rates it shows the portfolio rate which is in blue the two year treasury rate which is in red and the lafe rate and why this is important is because it's actually an indicator of the city's performance the portfolio rates should trend with both of these benchmarks which is the two year treasury and the lafe rate so this is a long term trend over about eighteen years and you'll see that the portfolio rate is trending with the two year and the lathe though there's a couple things i wanted to point out there's always going to be a timing difference as i mentioned earlier that because we do a five year maturity ladder it does take time for our investments to mature before we can invest back into a mark into the market what that means is that when there are significant increases in the interest rates we will fall slightly behind that with our rate as we invest back into the market on the opposite side of that when the interest rates fall we tend to perform better than those rates because we still are holding investments that have higher rates as the interest rates fall so what this also tells us that if we were to deviate significantly from any either of these trends from the two year or the life rate then we need to look at that then something's off and we need to investigate that further but right now the two year you'll notice has significantly increased over the last year the leaf is also increasing and the portfolio rate is increasing but not quite the same rate because there is that i like about a year ago i started adding this chart i thought it was helpful to see what treasury yields were doing right before i came to present to you just to see if we were to buy into the market this week what would we be getting f investments so this is the treasure yield as of last thursday on april th and there's a couple things i wanted to point out here at first mean that all of the yields are up since march st the second is that we call it the yield curve which is basically just the yield between the lafe rate all the way to the five year it's very flat in the past it's been a much steeper trajectory and so what that means is that from about the two year to the five year there is not a significant gain in investment yield between the two year and the five year what this means is that it may not be as advantageous or is not as advantageous to invest in a four or five year as it used to be so we might want to look more into the two to three  range because we're not gaining as many basis points as we may have in the past by going further out as we've said that we have three priorities yield is our third priority it's more important to preserve principle to meet the liquidity needs of the city we do a five year maturity ladder but that being said if we have a two year hole in our maturity ladder or a five in a five year hole we might look to fill that two year because we're not gaining a lot on the five year like we used to i thought it might be helpful to look at what the treasury yield curve was a year ago to see how that the steepness of the curve has changed so this is the yield curve a year ago april th two thousand and seventeen and you can see how it was a much deeper curve a year ago and that difference between  two year and five year was fifty seven basis points whereas this year it's only thirty three points and there was a much smaller margin last year with rates being lower and it was a much bigger difference between a two year out of five years i just wanted to show you how things have really changed in the last year five percent total interest earned during the quarter is seven hundred and forty four thousand which is up about a hundred and thirty six thousand over last quarter and that is due to reinvesting into higher earning investments the general fund portion is about one hundred and sixty five thousand the total portfolio is up about twelve million dollars since last quarter from one hundred and eighty million to one hundred and ninety two million this is pretty significant for our portfolio in the past we generally were in the hundred and sixty five two hundred and seventy five range so we do have a higher portfolio balance this year than we have in the past the big change from december to march is primarily property taxes we received a distribution of property taxes of about thirteen million in january this is a chart of our activity for the quarter we have twelve million dollars in purchases for the quarter ton of them being callable securities and two million being bullet we buy in two million increments so we had five purchases of one purchase of a bullet security we had no purchase no investments called since interest rates are going up we rarely have investments called anymore we had two maturities a federal agency security and a corporate term note was matured so in total we had eight million dollars net activity and basically what that means is we pulled eight million dollars from our liquid balance to actually make investment purchases in the quarter this next chart is a summary of our investment portfolio at march st two thousand eighteen as i mentioned before we have about one hundred and ninety two million dollars in our portfolio we have what we call our liquid balance is our checking account and our life balance in total about seventy four million dollars compared to december it is up about four million dollars and we have about twenty million dollars in lafe right now we have set aside to make a calpers prepayment that we make every july it goes up a little bit every year last year the payment was eighteen million it's going to be about around twenty million this year so that's why we have sixty million dollars sitting it with lafe right now we have in our federal agency issues those securities are up about ten million compared to prior quarter and our corporates are down two million so that's that represents the changes in our purchases of maturities for the quarter and has offered us a discount in order to do that last year we were offered a six hundred and fifty thousand dollars discount to make a eighteen million dollar prepayment and it was we would only have achieved about two hundred and fifty thousand dollars in interest earnings so it was a significant savings to make the prepayment this year the prepayment is about twenty million dollars and i believe the discount is a little over seven hundred thousand and we will not be able to earn that in interest earning so we are making the prepayment that's why we set it aside in life to make that prepayment in july this is the same information as i just presented on the prior slide it's just in a pie chart format so this is our portfolio as of march st two thousand and eighteen we have fifty four percent of our portfolio in agency securities and those are comprised of different types of agency securities and then we have it thirty nine percent in what we call our liquid balance eight percent in our checking account thirty one percent in life that will go down as of july first when we make that twenty million dollar calpers payment and then we have one percent in cds one percent treasuries three percent in corporates we have three corporates right now and two percent in our airport note and i did want to mention we have already made two purchases since the end of march we have purchased a corporate note and we've also made another agency purchase we had one maturity so we reinvested that maturity and then we use some of checking account funds to make the corporate purchase and so i'll be going over those at the next report i just wanted to mention we have made some additional purchases so this just shows how we're diversify so it's not just the types of investments but also within those categories we're also diversified and so lastly i'm just looking to ask that we are recommending  two percent airport and then another two percent cds or treasuries so we have thirty nine ninety ninety three percent percent or government agency or short term investments i think it raises the question of  whether or not we need to continue to do finance committee quarterly investment report presentations and i know that there are other members of the committee that might be interested in shrinking that time commitment and having just just a council perhaps so a nine out of those twelve months he goes on a consent item to council so we used to do the same with our our interim financial statements we always have to do something monthly to counsel but on a quarterly basis we've come to find its committee we've shifted to a only twice a year with that we do a media report to finance committee and council and then a year end report we could consider something like that you know these it's pretty performa what we do you know everything we do you know we don't deviate from much from what you hear every quarter we think it's important that the committee hear what we're doing it's really a sort of a check and balance you know we used to do a lot more number years ago we used to have an investment advisor that twice a year continue on the same path or less than that it's up to you anybody else have any thoughts casper no i think i think once or twice a year at a less granular level it's good to have these granular details and maybe you can combine these in an annual report but maybe give us more of a big picture how we're doing compared to other agencies you know giving a summary of any any changes in you know our policy towards which corporate notes were looking at so because we will look at it if it's in the regular council agenda and we can pull it at that meeting if there's something that we're concerned about or there's any red flags but i think in terms of this granular detail it's fine probably if it's just in the consent report and then giving us more of a big picture what's changed year to year is probably something that finance committee would be pleased to look at and discuss know i support going to is twice a year the i agree with what councilmember dominguez said the one caveat would be when we have a new councilmember that comes on it is helpful this is the first time i've gone through this so  it is helpful just that first time so other than that i think what councilmember dominguez proposes is is fine so do we want a motion to that effect or just direction well and for  so every quarter the agenda report is more detailed we could continue to do on a quarterly basis a more detailed narrative in the agenda report but still make it a consent item so lisa we have some that discussion and on the economic outlook and all that so we can continue doing that  then come here in february mid year and the end of year yeah i think that's really helpful and the reports are very dense and valuable and interesting but i don't know if we need to have the presentation here at the finance committee in addition to that right okay