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HomeMy WebLinkAbout07/25/2000 - Study Session• • CITY OF NEWPORT BEACH City Council Minutes Study Session July 25, 2000 - 5:05 p.m. ROLL CALL Present: Thomson, Glover, Adams, Ridgeway, O'Neil (arrived at 5:20 p.m.), Mayor Noyes Absent: Debay (excused) CURRENT BUSINESS 1. CLARIFICATION OF ITEMS ON THE CONSENT CALENDAR. In response to Council Member Glover's questions regarding Item No. 17 (Staff Support for the Arts Foundation), City Manager Bludau reported that he received the request from Mr. Gregory but was unable to make these types of decisions. He indicated that Council Policy A -5 provides exceptions which can only be approved by the City Council. Council Member Glover believed that the City Manager should advise any person making these types of requests to contact a Council Member in order to place the item on the agenda. Mr. Bludau stated that only the City Council and the City Manager can currently place items on the agenda. Regarding Item No. 12 (Traffic Control on Marguerite Avenue at Sandcastle Drive), Council Member Thomson stated that he spoke with residents and indicated that he will oppose any action tonight that would delay action relative to a stop sign. He indicated that he would like to proceed with a measure that combines Alternatives A and B. Mr. Bludau recommended that the item be pulled and discussed during the regular meeting. 2. REPORT FROM INVESTMENT ADVISORS. Administrative Services Director Danner stated that Council requested that the investment advisors appear before them periodically and indicated that they used to meet with the Finance Committee. He reported that Kay Chandler of Chandler Asset Management, Inc. has been one of the City's investment advisors since 1991 and Rod Olea of City National Investments was hired in 1997. Kay Chandler, Chandler Asset Management, Inc., reported that the investment report is divided into five sections. She stated that the first section stipulates the City's investment objectives which the firm has adopted for their performance objectives. She also noted that the investment objectives for any public agency are also defined in the California Government Code which limits the types of investments the City can make to very safe, high quality government and corporate securities. She reported that the goal was to achieve a return in excess of Treasury bills by a full percentage point. She indicated that the City recently adopted a standard 1 Volume 53 - Page 491 INDEX Investment Advisors (40) E City of Newport Beach Study Session Minutes July 25, 2000 INDEX to 3 year market index which is in keeping with the actual strategy that use in the portfolio. Ms. Chandler stated that Section II contains information about the market but indicated that she will not be reviewing this section since it is something that she will review with Mr. Danner and Deputy Administrative Services Director Kurth. She noted that their strategy is not overly dependent on current market conditions since they follow basic principals that create good returns in fixed income portfolios (i.e. the longer the average maturity that can be supported in the portfolio, the greater the expected return). She indicated that they try to keep the portfolio at a stable duration which is about the same as the duration of the 1 to 3 year benchmark. Ms. Chandler referenced the Compliance with Investment Policy (Section III) and emphasized that this is the document that would probably be the most valuable to the Council since it takes the City's investment policy, breaks it down, and states whether or not Chandler's management is in compliance with each element of the policy. She indicated that this document is also provided with the City's monthly statements. She reported that the Portfolio Characteristics shows some of the more important characteristics of the portfolio from June 30, 2000 and compares it to March 31, 1991. She noted that the duration is usually about 1.6 years and that the modified duration on March 31, 1991 was 1.62 years, but is now 1.55 years. She added that the average book yield of the portfolio is currently • 6.27% which represents the average yield of all the investments given what the City paid for them and the value at which they will mature. Further, the average rating is very high (AAA) and the total value of the portfolio is in excess of $16 million, which is $2 million more than it was on March 31, 1991. She reported that the City did contribute $2 million to the portfolio during that period. Ms. Chandler clarified for Council Member Ridgeway that the average book yield is gross of their fee which is about 14 basis points. Regarding Section V, Ms. Chandler reviewed the types of securities that are in the portfolio and indicated that they tend to emphasize the higher yielding sectors of the market, including the agency and corporate sectors. She reported that the City's portfolio is about 44% in securities that are issued by agencies like the Federal Home Loan Bank, Freddie Mac, and Fannie Mae, and about 24% in corporate securities rated A or higher. She pointed out that the rating is a requirement of the Government Code. In response to Council Member Ridgeway's questions regarding corporate papers, Ms. Chandler indicated that the papers are nothing like junk bonds but are issued by major corporations that have achieved a rating of at least an A. She added that these could either be secured or unsecured, but they mostly purchase unsecured papers that are based on the full faith and credit of the issuing corporation. She stated that the average corporate bond in the 5 year area would yield around 7 3/4% if purchased today and that they can • buy corporate bonds up to the 5 year maximum duration. She noted that 5 years is the maximum maturity allowed in the City's portfolio. She reported that there are corporate bonds that are issued for 2 years and Volume 53 - Page 492 City of Newport Beach Study Session Minutes July 25, 2000 • above, and that they can also buy them on the secondary market after they have been issued for any maturity. She stated that their target is an average duration of 1.5 or 1.6 years. Ms. Chandler indicated that the next page shows the duration distribution which is similar to a maturity distribution. She reported that the City's portfolio is currently evenly distributed with about 40% of the portfolio being under a year and the rest being allocated between 1 year and 5 years. Regarding the Investment Performance (Section IV), Ms. Chandler reported that the performance differs in that it shows the actual change in the value of the portfolio as a result of their management, not the City's contributions and withdrawals to the fund. This also includes the interest earned and changes in market value. She noted that the City's portfolio had a return of 1.79% for the quarter and compares favorably to the 1 to 3 year Treasury bond which had a return of 1.72 %. She reported that the portfolio had a return of 5.17% for the latest 12 months compared to the 1 to 3 year benchmark of 4.91 %. She indicated that there was a period of rising interest rates during most of the 12 month period. Ms. Chandler reported that, since inception in 1991, the return on the City's portfolio has been 6.19% on an annual basis, which is very similar to the 1 to 3 year Treasury benchmark. She stated that the City should expect a similar return as the market since it is a high quality portfolio and the City is taking about the same level of risk as the market. If the return were far in excess of the benchmark, she stated that the City would wonder what risk it was taking to achieve the greater • return. Regarding short term securities, Council Member Thomson asked if she has generated a projection or graph of what type of yield would have been achieved if Chandler had not met the 1 to 3 year securities to term. Ms. Chandler indicated that she does not have a specific answer but stated that it is not their strategy to do a lot of buying and selling of securities. She reported that they tend to hold onto the security until they find a better opportunity. If a security is sold, she stated that it is not because they think there is going to be an advantageous short term change but rather because they can sell one bond and buy another that will have a higher yield and provide a clear economic benefit to the portfolio. She indicated that the turnover rate is about 30% a year. She further clarified that their fee is not based on transactions but on the asset. In response to Council Member Ridgeway's statements, Ms. Chandler stated that they try to look for securities that have more value. She noted that, since Treasury bonds are getting more expensive, it has been their strategy to sell Treasuries and buy higher yielding, cheaper securities like agency and corporate bonds. However, every security they buy, they buy because it is the best security in the market at that time. She further explained the relationship between the bond value increasing and the yield decreasing. Rod Olea, City National Investments, stated that they do look at the market and try to find value, given changes in interest rates or anticipation of • changes in the interest rates, while not applying too much risk to the portfolio. He believed that they effectively manage risks well and adhere to the investment policy. Volume 53 - Page 493 INDEX City of Newport Beach Study Session Minutes July 25, 2000 • Mr. Olea reported that the Economic/Market Overview (Section I) includes two charts that show what is happening with the economy. He stated that the economy is doing well and the Federal government has raised rates six times since last June to hopefully slow down the economy and curb the perception of future inflation. He reported that inflation has not shown up in large numbers yet, but the headline inflationary numbers (i.e. consumer price index) are growing at about 4 %. He indicated that the economy is growing mainly because unemployment is at a 30 year low which is causing the Federal government some alarm. He indicated that the FOMC will meet on August 22 to determine if they will be raising rates 25 basis points, adding that they believe the Federal government is near their interest rate hike cycle. He added that City National has added value by being relatively conservative in the rise and interest rate environment. Mr. Olea stated that Page 1 of Section I1 contains the City's investment policy and some investment parameters, and Page 2 contains the asset allocation breakdown. He reported that the City is 71% invested in fixed income bonds and about 29% invested in cash and cash equivalents. Further, the asset value is $14.118 million. He indicated that Page 3 describes the fixed income characteristics. He noted that the yield and maturity of the portfolio is about 7.12% for the bonds and the average maturity of the portfolio is 2 years; however, the average maturity is about 1.5 years when the cash and cash equivalents are taken into consideration. He reported that they are looking to extend the average maturity close to the • August meeting or late summer /early fall since most of the damage of the rising interest rates and the short end of the yield curve will have been in affect to buy higher yielding, lower priced bonds. In response to Council Member Ridgeway's questions, Mr. Olea stated that their fee is at 17 basis points. Mr. Danner noted that all of the investment fees are relatively similar. He reported that City National acts as a bank and a custodian, and that their fee includes both the management fee and custodial fee. Council Member Ridgeway noted that the City earns money with custodial fees, believing that their fees should not be .17% since City National is a bank and the City has a compensating account at their bank. Mr. Danner reported that the City has to have a separate custodian and cannot allow the investment advisors to have access to the funds. This is a separate division of the bank, similar to how the City uses Wells Fargo as the investment advisor and a trustee. He stated that the City also hires Bank of America to do the management for Chandler Asset Management and Bank of New York to do the management for PFM since they are private companies. He clarified that the custodian account is more of a trustee account. Mr. Olea explained that a custody arrangement makes sure that the accounting statements show up in the portfolio. He stated that, aside from the portfolio, they maintain the receipts of all the cash flow (i.e. bonds paying income, wires going in and out) and they also account for all the money. He stated that those services do cost money for the companies. He noted that any money invested in bonds does earn a money market yield which is currently at 6% or higher, and trust companies or custody • companies charge 3 basis points a year for transactions and holdings. He reported that their 17 basis point fee includes the management and custody, which is equal to Bank of America and Bank of New York. Mr. Olea clarified Volume 53 - Page 494 INDEX City of Newport Beach Study Session Minutes July 25, 2000 • for Council Member Ridgeway that the extra .03% fee is based on the total portfolio value because the portfolio is custodied at City National. Council Member Ridgeway stated that the custody amount at any time is no more than $2 million and asked why they do not charge .03% on just a custody account. Mr. Danner added that the City does not get charged for wires because it is included in the custodial fee. Further, the bank does not have any of the City's money since it is placed with the trustee. In response to Council Member Thomson's questions, Mr. Olea reported that the total balance on the City's account is $14.118 million. He stated that the portfolio last year was around 3.89% and, for the year to date, the portfolio which includes the income levels, plus appreciation and less depreciation, earned 2.92 %. He reported that they compared the 3.89% against Lehman Brothers 1 to 3 year treasury last year and noted that the City's portfolio outperformed by about 100 basis points. He explained that they were able to retain most of the market value due to a conservative structure and a rise in the interest environment. Council Member Thomson asked why the City would settle for 3% when it could be getting 5 %. Mr. Danner explained that, on a day to day basis, they need certain liquidity to manage the City's finances and that they estimate what that number should be. He stated that the reason the portfolio has been so high around June 30 is because that is the high point in the receipt cycle. He added that the City will not be receiving its first property tax is payment until about December 10. He pointed out that the portfolio will be reduced significantly as the City meets its cash flow needs. He stated that they let the advisors know how much they will need to withdraw, but that the funds are returned starting in December. Council Member Thomson expressed concern that the City is getting less than a money market yield on the money used to pay the City's bills. Mr. Olea stated that a cash account versus a 5 year security is an inverted yield curve. He explained that it is a short term anomaly because the Federal government has been raising rates to slow down the economy (175 basis points since last June). He stated that the only thing this affects are overnight rates. The rest of the market reacts due to the perception for future inflation. He explained that the 3 year treasury yield is currently low because there really is no fear that there will be future inflation. He stated that the Federal government can really only change the short term interest rates which are currently very high and slows the growth of the economy. If a recession does occur, the rates will go down and the price of the bonds will increase to attract the economy to go faster. Further, when the rates go down, the asset prices of the bonds increase. He stated that the City will then see the 6 and 7% that it has seen in previous years. Council Member Thomson suggested going into short term rates since they trade everyday. Mr. Olea stated that they are looking at a more long term point of view. He noted that bond rates have dropped 10 to 20 basis points in yield in the last week. He stated that no one knows how the market is going • to react and that they have to make educated guesses and manage interest rate risk. He reported that they take gradual steps and become defensive as rates increase in order to have higher returns to get a longer average Volume 53 - Page 495 INDEX • City of Newport Beach Study Session Minutes July 25, 2000 INDEX maturity, higher yields, and appreciation potential so that the City receives the higher total return that was reflected in previous years. Mr. Olea reported that they manage over $5 billion of assets in his investment advisory division of City National Bank, and custody and manage over $15 billion as a bank. He noted that fixed income securities is probably 2/3 of the money. He reported that he oversees the fixed income units ($900 million in individual accounts and $2.5 billion in fixed income or money market mutual funds), but he has many managers helping him in the process. Regarding the performance summary, Mr. Olea reported that they are about equal to the indices of the Lehman Brothers 1 to 3 year index (2.9% for the year) and that the following pages contain the City's asset holdings. He stated that they agree with the Chandler strategy relative to the government agency market since many of them have safe credits and high yielding assets. In response to Mayor Noyes' question, Mr. Olea indicated that they believe that the Federal government will raise rates about 25 basis points in August and probably have some surprises relative to inflation since the economy is not slowing down. Mr. Danner pointed out that the City has different advisors with different • styles, and that the City has changed advisors over the years. He indicated that it was their intention when they first started doing this that they would see how the advisors were doing and possibly make changes. However, they found that different advisors do better at different times of the year. He stated that they are very happy with the diversity and believed that the City may need a fifth advisor if the portfolio continues to grow. Council Member Glover commended Mr. Danner and Mr. Kurth, reporting that she sits on the governing board of the Air Quality Management District (AQMD) which looked at six different institutions /cities. She stated that they found that Newport Beach was getting the most return and that the City was the only one taking this type of approach. She expressed the opinion that this has worked very well. Mr. Danner confirmed for Council Member Glover that the City was still keeping some money in the Local Agency Investment Fund (LAIF) for daily purposes. He reported that the City's policy allows them to keep up to 10% of the portfolio in LAIF and that they were near 10% through June and currently is around 7 to 8 %. He added that the City is earning 6% from the LAIF. He reported that the City also has a money market account with City National Bank that is also used for daily liquidity. He stated that they try to predict which checks will clear that evening when they come into work in the morning and, if there are excess funds, they wire the funds out. However, if they need money, they will wire funds in. He reported that, with the custodian fees and other fees, the City is only paying $50,000 to $60,000 a • year in management fees. He pointed out that this is probably a bargain compared to having another staff member who is well versed in investing. Volume 53 - Page 496 City of Newport Beach Study Session Minutes July 25, 2000 • PUBLIC COMMENTS - None. Motion by Mayor Noyes to add an item to the Closed Session agenda to give direction to the City Manager regarding the price and terms of payment for the possible purchase of the property at 416, 418, 420, 422, and 424 32nd Street. He added that negotiations regarding the purchase shall be conducted with the owner or owners of those properties and any person or firm the owner may designate. He announced that his motion includes the finding that the need to take action arose after the agenda was posted in that the information that these properties were for sale came to light after the agenda was posted. Further, his motion also includes the finding that there is a need to take immediate action. The motion carried by the following roll call vote Ayes: Thomson, Glover, Adams, Ridgeway, O'Neil, Mayor Noyes Noes: None Abstain: None Absent: Debay ADJOURNMENT - 5:50 p.m + + + + + + + + + + + + + + + + + + + + + + + + + + + + + ++ • The agenda for the Study Session was posted on July 19, 2000, at 3:15 p.m on the City Hall Bulletin Board located outside of the City of Newport Beach Administration Building. d (%� M . ddb City Clerk Recording Secretary Volume 53 - Page 497 INDEX