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HomeMy WebLinkAbout17 - Revenue & Investment UpdateCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. 17 October 28, 2008 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Administrative Services Department Dennis Danner, Director 949 - 644 -3123, ddanner @city.newport- beach.ca.us SUBJECT: REVENUE AND INVESTMENT UPDATE PURPOSE: In light of the instability of the current economic situation, staff has been asked to provide an update on the status of the City's Investment Portfolio. Staff will also take this opportunity to review the status of our General Fund revenues. RECOMMENDATION: Receive and file. DISCUSSION: This staff report covers two different aspects of the City's financial posture. They are both addressed in the same report because the near -term potential impact of recent economic developments would probably be first noticed in these areas. 1. Revenue Projections. A review of the City's revenue forecasts, especially in key areas, is clearly prudent in light of recent developments in the financial markets and the economy. However, this early in the fiscal year, any projected changes need to be based more on general conditions than on actual trends in specific revenue categories. Only a small fraction of the total revenue, especially from the primary sources, has been received to date. So, apparent variations from the historical norm are, at best, too tentative at this point to be reliable. Attached to this report are numerical tables and graphs on which the quantitative sections of this portion of the report are based. While the City has over 600 revenue accounts, the City's three largest revenue sources are Property Tax (the largest component of which, by far, is Secured Property Tax), Sales Tax and Uniform Transient Occupancy Tax (UTOT). Also of particular interest in Revenue and Investment Update October 28, 2008 Page 2 these circumstances is a fourth category, Business License Tax. Each one will be addressed in the paragraphs below. a. Secured Property Tax. In 2007 -08, Secured Property Tax collections of $53.1 million represented an 8.6% increase over the prior year actual collections of $48.9 million. It was also $1.6 million (3.1 %) above the budgeted estimate of $51.5 million. For 2008 -09, the City's assessed valuation increased by 6.5 %. This could result in secured property tax collections of $56.6 million, which would be nearly $2.5 million over the current budget estimate of $54.1 million. We have not yet received our first secured property tax apportionment from the County, so we are unable to comment on collection activity thus far. However, the City typically realizes at least 98% of its secured property tax levy. Since we were conservative in our original budget estimates, we should be in good shape by the end of the fiscal year. b. Uniform Transient Occupancy Tax (UTOT). UTOT collections through September compare favorably to the prior year. Hotel occupancy has remained relatively high for this fiscal year. If the collection trend continues, the 2008 -09 collections should readily exceed the 2007 -08 actual of $11.3 million and the 2008 -09 budget estimate $11.6 million. On the negative side, general economic conditions would intuitively seem to indicate a decrease in occupancy and /or room rates. Either of these would adversely impact UTOT. But on the positive side, The Resort at Pelican Hill is scheduled to open November 26 with an additional 334 rooms and villas. Both of these assumptions were considered, at the time the budget estimates were originally prepared nine months ago, but the magnitude of their relative impacts may well vary from that projection. At this point our best estimate for UTOT collections for the current fiscal year is that we will receive at least the current year budget estimate and more than likely will exceed it by several hundred thousand dollars. c. Business License Tax. Business License Tax collections through September also compare favorably to prior year collections. Fiscal Year 2007 -08 collections were $4.1 million as compared to the current year budget estimate of $4.0 million. However, a number of different factors may impact the collection rate. Of particular relevance in this regard will be policy decisions regarding the business tax ordinance made by the City Council in coming months. At this point, the budgeted estimate of $4.0 million appears to be readily attainable. d. Sales Tax. Sales tax generation within Newport Beach is diverse and less reliant on particular market segments or tax payers than is the case for most cities. This is illustrated by the chart on the following page. Revenue and Investment Update October 28, 2008 Page 3 d. Sales Tax. Sales tax generation within Newport Beach is diverse and less reliant on particular market segments or tax payers than is the case for most cities. This is illustrated by the chart on the following page. Sales Taxes by Business Segment 16% 20% 3% 3% 4% 5% ® 19% 6% 7% 9 8% % M New Auto Sales - 10 ❑ Leasing - 51 ■ Miscellaneous Retail - 790 ■ Service Stations - 17 ■ Funiture / Appliance - 289 E3 Other - 1020 ■ Restaurants - 336 0 Department Stores - 33 ■Apparel Stores - 185 O Food Markets - 36 ■ Misc. Vehicle Sales - 47 Although Sales Tax generation is diverse, it is not immune to the impact of a decline in consumer confidence. Sales Tax advances thus far initially appear to be disappointing when compared to the prior year (down 30 %). However, the prior year (2007 -08) may be the anomaly. When we compare the current advances (2008 -09) to Fiscal Year 2006 -07, the Sales Tax advances are down only 10 %. We are concerned more about this revenue source than any of the above three but, again, it is really too early to draw any overall conclusions. In addition to regular fluctuations with consumer sentiment, it is difficult to decipher the difference between actual State Board of Equalization collections and Sales Tax advances to the City. We are hopeful that the more encouraging trends in Property Tax, UTOT and Business Tax collections will offset the volatility we may realize in Sales Tax Collections. 2. Investment Portfolio. In short, the management of the City's investment portfolio thus far is good. The City has no direct exposure to any of the defaulting firms that have been in the news. Two of the City's investment advisors will be making presentations at the City Council Meeting of October 28th. Copies of the handouts they will be using are attached to this report. Revenue and Investment Update October 28, 2008 Page 4 In preparation for their presentations, the following is background information on how the overall investment portfolio is managed. City investments are governed by State Law and Council Policy F -1 (which is also attached to this report). Collectively, these documents establish a rather narrow range of qualifying investment options available to the City. The Council Policy is reviewed annually and updated as dictated by the advent of new investment instruments, programs available in the market, and /or as required by State regulations. Beginning in 1991, the City of Newport Beach has engaged the services of professional firms to assist in the management of our investments. Specifically, the City has contractual relationships with five investment advisors and five custodial service firms. In two cases, the investment advisory service and custodial service are provided by different divisions of the same financial institution. For the other three investment advisors, custodial services are provided by an independent firm. In each case, the third party custodian is under contract to the City, not the investment advisor. A one page summary of the investment portfolio is presented to the City Council once per month in the Newsletter. The Newsletter of October 171h contained more comprehensive information, including the actual reports from the investment advisors. In the analysis of which City functions to perform by staff and which to perform by outside "vendors," this one falls in the blended category. In general, cities with larger investment portfolios than Newport Beach tend to handle a much broader range of portfolio management tasks by in -house staff, and those with smaller portfolios tend to do more through external sources. In the latter case, this frequently involves a much simpler program that relies almost exclusively on the State's Local Agency Investment Fund (tAIF). While it is a bit cumbersome at times, we have found that using five different advisors, rather than just one or two, is worth the effort. Although the parameters of our Investment Policy preclude much variation or innovation in how these firms manage City assets, there is still enough leeway that they achieve different results at different times. We also benefit by getting more diverse expertise - different perspectives from each of them. By way of background, we started with three advisors and added two more as the size of the portfolio increased over time. We have replaced an advisor on three occasions, but the most recent was several years ago. Our original intent was to regularly replace the 'weakest" performer, all other things being equal. But there are not a lot of firms specializing in the management of public sector funds, and we believe we have a good mix of the best ones at this time. No one of them consistently outperforms, or underperforms, the others. Our contracts with them are re- negotiated individually and at different times. Each of the advisors now manages 16% to 19% of the portfolio. The Revenue and Investment Update October 28, 2008 Page 5 Each of the advisors has provided information and updates to the City Council or Finance Committee in the past, and they are all available to do so as requested. In the interest of avoiding overkill and /or burnout by City Council members, we have normally scheduled one or two to present at any one meeting. For the meeting of October 28th, the two who will be presenting are Rod Olea of City National Bank; and Marty Cassell of Chandler Asset Management. We selected these two for this particular meeting for several reasons. The City has been with both firms for a long time. City National is also our primary bank for checking and other cash management services. Chandler, on the other hand, is one of the three firms we employ that specializes exclusively in the area of investing government funds. They are among the foremost firms with expertise in this area and they are first investment advisor with which we contracted. In addition to portfolio management, we are in contact with the advisors regularly regarding routine cash flow needs and any special requirements. They also keep us posted on changes in law, new investment vehicles, changing conventions in the market, and even the constantly evolving jargon of the industry. Their participation in the process of updating the City's Investment Policy is also invaluable. In keeping with our custom of maintaining independent relationships with each, and to avoid distortions along the lines of "media bias," the content of their presentations has not been coordinated. We gave them a time frame and suggested some general direction, but beyond that, they are on their own. So any differences or similarities that turn up in their opinions (or conjectures) are not pre - planned. They will also be available for questions, of course. Submitted by: Dennis Danner Administrative Services Director Attachments: A. Quantitative and graphical trend information regarding City Revenues B. Council Policy F -1 C. Presentation handouts prepared by City National Bank D. Presentation handouts prepared by Chandler Asset Management Revenue and Investment Update October 28, 2008 Page 6 B. Council Policy F -1 C. Presentation handouts prepared by City National Bank D. Presentation handouts prepared by Chandler Asset Management 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Sep Oct Nov Dec Jan Feb Mar Apr May Jun Secured Property Tax Collection Trend Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2009 Trend 2009 Trend by 2006 Actual 2007Artual 200R Rudnet 9nnR Ar i,nl As MAnatorl AV r:�h Collection Trend 2006 2007 200R. 3Yr Trend Mptiian Rnraad 4,687,051 5,801,360 5,423,967 5,001,180 5,697,905 5,960,174 19,437,816 20,899,553 23,742,382 28,036,536 24,941,492 26,089,525 25,822,417 27,638,819 29,049,269 29,669,307 30,516,404 31,921,044 25,822,417 27,638,819 29,049,887 29,671,222 30,517,053 31,921,723 28,249.097 30,636,477 31,965,945 32,600.817 33,580,386 35,126,058 39,741,373 47,943,899 48,370,818 51,128,343 50,813,788 53,152,697 44,918,035 48,408,589 50,906,385 52,411,807 53,477.415 55.938,927 45,371,305 48,905,823 51,480,000 63,116,666 54,080,000 56,569,249 Collection Trend 2006 2007 200R. 3Yr Trend Mptiian Rnraad 10.33% 11.86% 9.42% 1034% 10.33% -0.21% 42.84% 42.73% 52.78% 46.12%0 42.84% -3.28% 56.91% 56.51% 55.86% 56.43% 56.51% 0.09% 56.91% 56.51% 55.86% 56.43% 56.51% 0.08% 62.26% 62.64% 61.38% 62.09% 62.26% 0.17% 87.59% 98.03% 96.26% 93.96% 96.26% 2.30 °h 99.00% 98.98 °k 98.67% 98.89% 98.98% 0.10% 100.00%1 100.00%1 100.00%1 100.00%1 100.00%1 0.0001. 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June UTOT Collection Trend --*--2006 Actual 'f-2007Actual 2008 Budget -11- -2008 Actual -- *-2009 Trend --0-2009 As Budgeted Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June 2006 Actual 2007Actual 2008 RllfinP..t 9nnR Anti ml 9nOQ Trpnri 9nnQ Ac Ri vinptprt 1,808,743 2,491,597 2,291,466 2,680,855 2,989,961 2,620,652 2,451,204 3,073,510 2,831,141 3,454,358 3,858,533 3,381,942 3,076,951 4,170,378 3,835,404 4,663,536 5,099,028 4,469,216 3,857,308 4,957,569 4,455,191 4,997,740 5,949,270 5,214,439 4,277,447 5,740,929 5,279,804 6,136,471 6,929,477 6,073,575 4,949,440 6,476,828 5,956,594 6,903,203 7,873,147 6,900,686 5,754,202 7,329,552 6,740,826 7,801,686 8,983,894 7,874,238 6,472,111 1 8,065,047 1 7,475,288 1 8,686,882 1 9,997,338 1 8,762,506 7,253,752 9,172,516 8,435,759 9,585,816 11,200,109 9,816,715 7,999,107 9,945,578 9,238,969 10,603,002 12,294,647 10,776,060 8,694,941 10,919,757 10,042,657 11,326,992 13,330,696 11,684,140 Collection Trend 2nOR 9nn7 9noR Wr TrpnA RA.Ai�. c,-A 20.8% 22.8% 23.7% 22.4% 22.8% 0.4% 28.2% 28.1% 30.5% 28.9% 28.2% -0.8% 35.4% 38.2% 41.2% 38.3% 38.2% -0.1% 44.4% 45.4% 44.1% 44.6% 44.4% -0.3% 49.2% 52.6% 54.2% 52.0% 52.6% 0.6% 56.9% 59.3% 60.9% 59.1% 59.3% 0.3% 66.2% 67.1% 68.97/0 67.4% 67.1% -0.3% 74.4% 73.9%l 76.7% 75.0% 74.4% -0.6% 83.4% 84.0% 84.6% 84.0% 84.0% 0.0% 92.0% 91.1% 93.6% 92.2% 92.0% -0.2% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% Business License Collection Trend c nnn Ann Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June 2006 Actual 2007Aetual 2008 8udeet 2008 Actual 2009 Trend 2009 Ac Rt AneteA 830,909 877,728 774,028 912,128 1,088,035 884,309 1,100,426 1,191,750 1,029,583 1,191,963 1,447,264 1,176,275 1,325,337 1,455,404 1,247,207 1,439,294 1,753,173 1,424,904 1,639,533 1,748, 008 1, 507,507 1,711,631 2,119,072 1,722,291 2,099,769 2,220,592 1,916,187 2,160,188 2,693,544 2,189,198 2,530,086 2,573,442 2,290,708 2,649,766 3,220,001 2,617,080 2,864,207 2,932,362 2,594,464 2,983,297 3,646,984 2,964,113 3,069,827 1 3,170,019 1 2,829,270 1 3,340,962 1 3,977,046 1 3,232,374 3,430,745 3,469,170 3,139,039 3,710,709 4,412,482 3,586,278 3,663,967 3,775,518 3,465,0001 4,120,5861 4,880,1131 3,958,680 3,848,381 1 3,770,1721 3,463,586 1 4,119,173 1 4,870,678 1 3,958,680 Collection Trend 2006 2n07 7008 3Vr Trcnrl MoAian Rnrnari 21.6% 23.3% 22.1% 22.3% 22.1% -0.2% 28.6% 31.6% 28.9% 29.7% 28.9% -0.8% 34A% 38.6% 34.9% 36.0% 34.9% -1.1% 42.6% 46.4% 41.6% 43.5% 42.6% -0.9% 54.6% 58.9% 52.4% 55.3% 54.6% -0.7% 65.7% 68.3% 64.3% 66.1% 65.7% -0.4% 74.4% 77.8% 72.4% 74.9% 74.4% -0.5% 79.8% 84.1% 81.1% 81.7%1 81.1% -0.5% 89.1% 92.5% 90.1% 90.6% 90.1% -0.5% 100.4% 100.1% 100.0% 100.2% 100.1% 0.1% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0 "/0 25,000,000 20,000,000 15.000,000 10,000.000 5,000,000 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June Sales Tax Collection Trend -2006 Actual - 2007ACtlia1 2008 Bud ®et -11--200e Actual �2009 Trend - 2009 As Budgeted Sep Oct Nov Dec Jan Feb Mar Apr May Jun Final June 2006 Actual 2007ACtual 200A Rnrinet 9110R AMi ial 9nno T,.M 9nno A. RudnutM 2,136,208 1,764,688 2,192,810 2,399,418 1,669.969 2,236,667 3,457.855 3,142,323 3,656,036 3,905,192 2,817,659 3,729,159 5,122,304 5,014,323 5,603,972 5,966,892 4,318,905 5,716,051 7,793,151 7,376,293 7,364,270 5,966,892 5,690,956 7,531,955 9,164,572 8,927,993 9,777,301 9,984,808 7,535,232 9,972,847 11,011,472 10.973,553 11,906,643 12,210,508 9.176,288 12,144,776 13,030.715 12,959, 506 13,778,739 13, 557,059 10,619,087 14, 054, 314 14,255,572 14.225,523 15,116,413 14,907,218 11,650,014 15,418,742 15,907,572 15,947,923 16, 930,652 16,742,518 13,048,223 17,269265 18,003.156 18.302,247 19, 239,022 18,97 4,994 14,827.253 19,623,803 21,465,557 21,662,440 22,877,127 22,535,765 17,631,090 23,334,670 Collection Trend 2006 2007 9nnR aVr Tf .H Manua AnmaA 10.0% 8.1% 10.6% 9.6% 10.0% 0.4 % 16.1% 14.5% 17.3% 16.0% 16.1% 0.1% 23.9% 23.1% 26.5% 24.5% 23.9% -016% 36.3% 34.1% 26.5% 32.3% 34.1% 1.8% 42.7% 41.2% 44.3% 42.7% 42.7% 0.0% 51.3% 50.7% 54.2% 52.0% 51.3% -0.7% 60.7% 59.8% 60.2% 60.2% 60.2% -0.1% 66.4% 65.7% 66.1% 66.1% 66.1% 0.1% 74.1% 73.6% 74.3Y° 74.0% 74.1% 0.1% 83.9% 84.5% 83.9Y° 64.1Yo 83.9% -0.2Yo 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 100.0%1 100.0%1 00.0% 100.0%1 100.0% O.OY° STATEMENT OF INVESTMENT POLICY PURPOSE F -1 To set forth the City's policy concerning the investment of temporarily idle funds. It is the policy of the City to invest funds not required for immediate expenditures. Investments will be in compliance with governing provisions of law and the policy contained herein. Primary investment goals are security of principal, adequate liquidity maintenance, and yield, in that order. Investments shall be placed only in securities as outlined below. The balance between various investment instruments may change in order to provide the City with the best combination of yield, liquidity, and a consideration for other factors, such as placement of an appropriate percentage of available investment funds locally. It shall be the main responsibility of the City Council, in adopting this policy and reviewing the investment holdings on a monthly basis, to preserve the investment principal. INVESTMENT AUTHORITY Under the direction of the City Manager, the investment authority has been delegated to the Director of Administrative Services, who is responsible for administration of the City's investment program, and who shall thereafter provide a monthly report regarding the status and changes in the City's investment portfolio to the City Council. This authority shall be renewed annually as part of the review and update of this Policy. In addition to the monthly investment report that is submitted to the City Council, the Administrative Services Director shall provide more detailed investment information to the City Council as requested. The City Council shall be briefed directly by the City's investment advisors on a quarterly basis whenever possible. Sections 53600 -53601 of the California Government Code provide basic investment limits and guidelines for government entities. In the event an apparent discrepancy is found between this policy and Sections 53600 -53601, the more restrictive parameters will take precedence. FINANCIAL INSTITUTIONS The City shall not deposit funds with any financial institution not receiving a minimum overall satisfactory rating for meeting the credit needs of California Communities in its most recent evaluation ( §53635.2). 1 F -1 LIQUIDITY Sufficient funding to accommodate at least two- week's projected cash outflow is to be maintained in immediately available investments, such as the State Local Agency Investment Fund, maturing certificates of deposit, or similar liquid instruments. An analysis of cash flow must be conducted at least weekly to serve as the basis for determining appropriate maturities for investments. At no time shall the liquid cash on hand be less than 5 percent of the City's total investment portfolio. For purposes of this policy, cash on hand includes all cash and investments accessible within 48 hours. ACCEPTABLE INVESTMENT INSTRUMENTS The following are types of investments made by the City and the guidelines for investing in each. In all cases, investments shall be made in the context of the "Prudent Investor Standard," spelled out in the California Government Code, Section 53600.3 as follows: "When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investment may be acquired as authorized by law." In this light, the City of Newport Beach does not purchase or sell securities on margin. Additionally, any institution, which holds either the collateral or the investment instruments themselves in safekeeping for the City, must maintain at least one billion dollars ($1,000,000,000) in assets. A. Certificates of Deposit Only fully collateralized certificates of deposit with FDIC insured institutions will be utilized in investment of City funds. Government securities having a market value of 110 percent of the total amount of investment are acceptable as 2 F -1 collateral. Noncollateralized CD investments may be made in amounts less than $100,000 so long as they are fully insured by the FDIC. Not more than 10 percent of the City's investment portfolio shall be invested in certificates of deposit with any one institution. CD's will not be placed for a period of longer than one year. Further, an institution must meet the following criteria to be considered by the City: 1. The institution must maintain at least $1 billion in assets ($100 million for fully insured CD's of $100,000 or less). 2. The institution must have been in business at least three years. 3. The institution must have a net worth to asset ratio of at least 6 percent. 4. The institution must place and maintain on file with the City an audited financial statement not more than one year old. 5. Interest shall be paid to the City on a monthly basis. B. Negotiable Certificates of Deposit As a matter of policy, the City invests in Negotiable Certificates of Deposit only with US. Banks whose underlying securities are rated A -1 or P -1 by one of the top two rating agencies and having assets in excess of $10 billion, so as to insure security and a large, well-established secondary market. Ease of subsequent marketability is further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than 10 percent of the portfolio, and maturity shall not exceed one year. The California Government Code Section 53601 limits investment in negotiable certificates of deposit to 30 percent of the portfolio. C. Bankers Acceptances The City may invest only in Bankers Acceptances issued by the lil0 largest banks in the world, which are eligible for purchase by the Federal Reserve System, the short term paper of which is rated at the highest category by Moody's and Standard & Pooi's. In the case of foreign banks, the Bankers Acceptances must 3 F -1 be written by their US. branches. Maximum maturity shall be 180 days. No more than 30 percent of the City's overall investment portfolio shall be placed in Bankers Acceptances, with no more than 10 percent of the City's portfolio invested in the banker's acceptances of any one commercial bank. D. US. Treasury Issues The City may invest in treasury notes, bills and bonds. Maximum maturity of any US. Treasury issue shall be five years. E. Federal Agency or United States Government - Sponsored Enterprise Obligations Securities of this type that are acceptable for the City's investments are Federal National Mortgage Association, Federal Home Loan Bank notes, Federal National Mortgage Association notes, Federal Farm Credit Bank notes, Federal Home Loan Mortgage Corporation notes, or any other U. S. Government Agency security. F. Commercial Paper The City may only invest in commercial paper of "prime" quality with the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical- rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2). 1. The entity meets the following criteria: (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated "A" or higher by a nationally recognized statistical- rating organization. 2. The entity meets the following criteria: (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has program wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond. (C) Has commercial paper that is rated "A -1" or higher, or the equivalent, by a nationally recognized statistical- rating organization 4 F -1 Commercial paper shall be used solely as a short -term investment not to exceed 270 days. No more than 25 percent of the City's portfolio may be invested in commercial paper. Investment in commercial paper of any one issuer shall not exceed 10 percent of the portfolio. G. Repurchase Agreements ( Repos) and Reverse Repurchase Agreements Repos and reverse repos shall be used solely as a short -term investment not to exceed 30 days. The institution from which the City purchases a Repo must deliver adequate collateral to the City's safekeeping account (either directly or through a third party safekeeping agent), consisting of U.S. Treasury or Agency securities at the rate of 102 percent of the face value of the repo. The amount of this collateral must be sufficient to compensate for fluctuating market conditions. Repos will only be purchased from Primary Dealers. The City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than 10 percent of the portfolio can be involved in reverse repos. H. Passbook Savings Accounts Savings accounts may be used as a repository for customer deposits, or for similar purposes. Consistent with the requirements for CD investments, funds deposited in savings accounts must either be FDIC insured or collateralized. I. Local Agency Investment Fund (LATE) (State of California) State Regulation of LAW is set forth in California Government Code Section 16429.1. The current limits on any one City investment in this fund is $40 million, and the number of transactions (deposits or withdrawals) is limited to 15 per month. The City's participation in LAIF shall conform to State Regulation. In general, it is the City's intention to use investment in LAIF as a temporary repository for short -term funds needed for liquidity purposes. The Administrative Services Director shall maintain on file appropriate information concerning LAIF's current investment policies, practices and performance; as well as its requirements for participation, including, but not limited to, limitations on deposits or withdrawals and the composition of the portfolio. 5 F -1 J. County Investment Funds Los Angeles County provides a service similar to LAW for municipal and other government entities. This Fund is available to certain cities outside of Los Angeles County, including Newport Beach. Investment in this pool is intended to be used as a temporary repository for short -term funds used for liquidity purposes. At no time shall more than 5 percent of the City's total investment portfolio be placed in this Pool. The Administrative Services Director shall maintain on file appropriate information concerning the county pool's current investment policies, practices and performance; as well as its requirements for participation, including, but not limited to, limitations on deposits or withdrawals and the composition of the portfolio. The City shall not invest funds with the Orange County Pool. K_ Medium Term Corporate Bonds /Notes Investments of this type will only be in corporations rated A or better by nationally recognized rating services. Maximum term to maturity for individual securities shall not exceed four years. No more than 30 percent of the City's investment funds shall be placed in securities of this type. L. Mortgage - backed Securities and Asset - backed Securities Investments in securities of this type are limited to mortgage - backed pass - through securities issued by a US government agency; or consumer receivable pass - through certificates or bonds. Securities eligible for investment under this subdivision shall be issued by an issuer having an "A" or higher rating for the issuer's debt as provided by Moody's Investor Services and S&P. The security itself shall be rated in a rating category of "AAA" or its equivalent or better by Moody's Investor Services and S&P. The maximum final stated maturity of any security of this type shall be five years. No more than 20% of the City's investment funds shall be placed in securities of this type. M. Municipal Bonds Municipal bonds rated AAA, or AA and insured, are acceptable investments for the City. Investments of this type are limited to obligations of the State of 6 F -1 California and local agencies within the State. Not more than 15 percent of the portfolio shall be in investments of this type. N. Money Market Funds The City may invest in Money Market Funds subject to the following constraints. Investment in these funds is primarily intended for short -term "sweep account" purposes, not for longer -term investments. 1. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a -1.) 2. The company shall have met either of the following criteria: a. Attained the highest ranking or the highest letter and numerical rating provided by not less than two nationally recognized statistical rating organizations. b. Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than ten years' experience managing money market mutual funds with assets under management in excess of one billion dollars ($1,000,000,000). 3. The purchase price of shares of beneficial interest purchased shall not include any commission that the companies may charge. 4. No more than 20 percent of the City's investment portfolio shall be invested in money market funds. 5. The City shall invest only in Money Market Funds that have a policy of maintaining a constant daily net asset value per share of $1.00. 7 F4 N ku \�� Consistent with California Government Code 53601.6, inverse floaters, range notes, mortgage derived interest -only strips, or any security that could result in zero interest accrual if held to maturity are specifically prohibited, except to the extent that they are shares of diversified management companies registered under the Investment Company Act of 1940. The City shall not purchase any security rated Al and or A+ or below if that security has been placed on "credit watch" for a possible downgrade by either Moody's Investor Services or Standard and Poor's. Investments not specifically approved by this policy are prohibited. ASSET /INVESTMENT MANAGEMENT AGREEMENTS The City may employ the services of asset/ investment management companies. Such companies must have a history of producing no losses and relatively high net returns. They must also be well established and exceptionally reputable. Members of the staffs of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. They must contractually agree to conform to all provisions of governing law and the collateralization and other requirements contained herein. At no time shall more than 30 percent of the City's total investment portfolio be placed in any one investment management account. In order to implement this requirement, the City's portfolio assets will be reallocated annually among its investment managers. SAFEKEEPING /THIRD PARTY CUSTODIANS All cash and securities in the City's portfolio, including those that are being managed by private sector asset/ investment management companies, shall be held in safekeeping in the City's name by a third party bank trust department, acting as agent for the City under the terms of a custody agreement executed by the bank and the City . The City will contract separately with major banks or other well-established, reputable financial institutions, which provide custodial services to maintain custody of cash and securities in the City's portfolio. In the case of a major financial institution, the City may have an asset/ investment management relationship, and a custodial relationship, with the same entity. However, the services must be provided by separately managed 8 F -1 departments within that entity, and the City's assets must be held in the City's name completely separate and distinct from the assets of the institution and from all other portfolios managed by the institution. All securities will be received and delivered using standard delivery versus payment (DVP) procedures, the City's safekeeping agent will only release payment for a security after the security has been properly delivered. The only exception to the foregoing shall be depository accounts and securities purchases made with: (i) local government investment pools; and, (ii) money market mutual funds, since the purchased securities are not deliverable. BOND PROCEEDS The investment of bond proceeds will be made in accordance with applicable bond indentures. RATING AGENCY CHANGES In the event a security held by the City is the subject of a rate drop which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the Administrative Services Director or Deputy Director of that fact. The course of action to be followed will then be decided on a case by case basis, considering such factors as the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action by e-mail or fax. REPORTING REQUIREMENTS In addition to the Monthly Investment Report, the City Council and City Manager shall receive a detailed quarterly listing of all investments in the City portfolio. The report must show the type of investment, issuer, date of maturity, par and dollar amount of deposit/ investment, and rate of interest. Quarterly reports from outside investment managers must also include market valuation of assets under their management and the source of that valuation, and shall also include a statement of compliance with investment policy. Current ratings of non - government securities, either Moody's or Standard & Poor s, will be included. F -1 In his report to Council, the Director of Administrative Services shall include a statement denoting the ability of the City to meet its expenditures for the next six months, and shall also include a statement of compliance with investment policy for assets under his direct management. In addition, the City Council shall be notified whenever 5 percent or more of the total portfolio is invested, withdrawn, or moved from one Investment Advisor or Pool to another. Adopted - April 6,1959 Amended - November 9,1970 Amended - February 11, 1974 Amended - February 9,1981 Amended - October 27,1986 Rewritten - October 22,1990 Amended - January 28,1991 Amended - January 24,1994 Amended - January 9,1995 Amended - April 2Z, 1996 Corrected - January 27,1997 Amended - February 24,1997 Amended - May 26,1998 Reaffirmed - March 2Z, 1999 Reaffirmed - March 14, 2000 Amended & Reaffirmed - May 8, 2001 Amended & Reaffirmed - April 23, 2002 Amended & Reaffirmed - April 8, 2003 Amended & Reaffirmed - April 13, 2004 Amended & Reaffirmed - September 13, 2005 10 CITY {NATIONAL BANK The way up.• City of Newport Beach Portfolio Review October 22, 2008 Rod Olea Director of Fixed Income Table of Contents Section 1 Economic & Market Outlook 2008 Section 2 City of Newport Beach CITY NATIONAL BANK The way up.• Economic and Market Outlook 2008 • • • TIME LINE OF EVENTS In the nest 1 1/2 years, many events have lead up to credit crisis we are now in. 1,600 — 1.500 7.00 1,400 1,300 6.00 AIG rescued by Fed New Century Find. 1,200 Files Chapter 11 4.00 Apr. 2 1,100 Bank Bailout 1,000 900 800 0.00 Jan -07 Apr -07 -S &P 500 (Is) — Federal Funds (rs) Home price Y Jt/U't BofA buys G�untrywide fall yo -y � r � Jun.1 Ameriquest goes ou of business Aug. OPM 6ys bsc Fed cuts Fed annou fed funds -Term Auction Ofitr rate first Oec. 12 time in Fed cuts Discount 4 -Years Surprise . FNMA/FHLMC placed into Rate Sep. 18 Intermeetini Conservatorship Aug. 17 Rate Cut f Sep. 7 i i. Jul -07 Oct -07 Jan -08 Apr -08 Jul -08 Page I of 15 ■`—acq NII acquired by BofA 8.00 L 14 7.00 Lehman files Chapter 11 Sep. 15 6.00 AIG rescued by Fed Sep. 16 5.00 TARP Approved 4.00 International 3.00 Bank Bailout 2.00 1.00 0.00 Oct -08 Jan -09 CM'NATKMALBA"K The way .p VOLATILITY 70 60 50 40 30 20 10 0 Jan -00 Jan -02 Source: CBOE, CNAM Volatility of the S &P 500 - VIX Index Volatility of the Bond Market - MOVE Index 250,00 225.00 200.00 175.00 150.00 125.00 100.00 75.00 50.00 25.00 0.00 Jan -00 Jan -02 Jan -04 Source: Merrill Lynch, CNAM Jan -04 Jan -06 Jan -08 Jan -06 Jan -08 CITY NATIONAL BANK n,r war up. • Pag115 • • 0 • THEECONOMY Outlook for economic growth is being marked down significantly to reflect a much more difficult financing environment. While TARP is likely to help, credit conditions are not expected to improve dramatically anytime soon. 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 2.0 Mar -00 Mar -02 Mar -04 Source: BEA. BLOOMBERG, CNAM Real GDP (% chg, annualized) Y -0.Y Forecast Mar -06 Mar -08 Mar -10 Contribution to GDP (% chg) 4.0 3.0 2.0 nwir 1.0 Euwrts 0.0 — -1.0 -z.o - -- GDP Government Investment Consumption Net Exports Source: BEA, CNAM Page 3 of 15 CITY NATIONAL BANK I rbe way us. EMPLOYMENT September's NFP decrease of 159,000, is the largest decline since 2003. There has been nine consecutive months of job losses, totaling 983,000 jobs. The 6.1 % unemployment rate, which is up from 5.0% in April, is at the highest in five years. 12 10 8 6 4 2 0 Jan -70 Jan -80 Source: BLS, CNAM Unemployment Rate (%) Jan -90 Jan -00 • Pag 05 600 500 400 300 200 100 0 -100 -200 -300 -400 Jan -00 Jan -02 Source: BLS, CNAM Change in Non Farm Payrolls ('000) Jan -04 Jan-06 Jan -08 Cmr NATIONAL BAuK The way up' • . • • WHAT DETERMINES A RECESSION The business cycle is determined the Business Cycle Dating Committee of the National Bureau of Economic Research. It is defined as significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale - retail sales. 8 6 4 2 0 -2 Dec -00 Dec -02 Source: BEA. CNAM Real Disposable Income (% change, yoy) 3.0 2.0 1.0 0.0 -1.0 -2.0 - -- Dec-00 Dec-02 Source: BEA. CNAM Dec -04 Dee-08 Dec-08 Total Payrolls (% change, troy) 77777 ___1 Dec -04 Dec 06 Dec -08 Industrial Production (% change. y4 y) 6 — 4 2 0 _2 -6 -- Deooa Dec -02 Source: FRB, CNAM Deo-04 Dec-o8 Deo08 Retail Sales (% change, yoy) 12.0 - 10.0 Y�y —Trend 8.0 6.0 4.0 2.0 0.0 -2.0 — Dee -00 Dec -02 Dec -04 Source: U.S. Census Bureau, CNAM Page 5 of 15 Dec -O6 Dec -08 CrFYNATIONALBAlmK Thr wuy up V THE FED Fed officials are apt to react to economic weakness by cutting interest rates. The stabilization of short-term financing markets is a high priority for the Fed. 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan -00 Jan -02 Source: FRB, CNAM Federal Funds Rate and Risk Assessment In�Groyb �Weaknass balanced `Deflation 111111=11DIslnflation Date Depandentinflabon Watch -Risk to Gran JrMOownside Rusk IIIIIIIIIIIIIIIIIIIIIntermeeting saaaaaki Funds Jan -04 Jan -06 Jan -08 • Page65 20.0 16.0 12.0 8.0 4.0 Federal Funds Rate ( %) Penn Square Masico/BtarlWenezuela Default Franklin National bank F jis Continental nlings Fails 56l Crislsrtieal K/ Estate Mehlonn Tisch woes � �-/ Aslarttuseie/� M / A 0.0 1 Jan -70 Jan -80 Source: FRB, CNAM Stock Market `J Crash Orange County/ MeaicolkUdder Peabody Jan -90 Jan -00 CttrNATIONALBANK The way ap. • 0 SELECTED INTEREST RATES The Fed has towered the funds rate by 375 basis points, from 5.25% to 1.50 %. Due to the credit crises, corporate funding and mortgage rates have increased. 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Jun -07 Sep -07 Dec-07 Mar -08 Source. Bloomberg, Bankrate.com, CNAM Selected Interest Rates t %) Fed Funds Target Rate —10•yr Treasury Rate ALB Corporate Index —30-yr FR Conv. Mort. X30 -yr FR Jumbo Mort. Jun -08 Sep-08 Page 7 of 15 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00 Change in Interest Rates Since June 2007 3.13 1.27 0.25 3.75 Fed Funds 10 -yr Treasury LB Corporate 30 -yr FR 30 -yr FR Target Rate Rate Index Conv. Mort. Jumbo Mort. Source: Stoomberm Bankrate.00m. CNAM QwKATmmALBANK the way up � ,I FOREIGN EXCHANGE POLICY & THE DOLLAR The recent rally in the US dollar has been part of an unexpected transformation in the currency and capital markets. The greenback is on the cusp of breaking a six -year downtrend against the world currencies. Recent gains in the dollar, however, are less a reflection of US strength and more indicative of weakness abroad. 130.00 — 120.00 110.00 ON 100.00 90.00 80.00 70.00 Jan -00 Dollar Index `m 0 9 m` m c N Jan -02 Jan -04 Jan -06 Jan -08 • Pag05 US Dollar vs Major Currencies —Euro (Is) —Pound (Is) Canadian (Is) —Yen (rs) 2.5000 — 2.0000 1.5000 1.0000 0.5000 0.0000 Jan-07 Jul -07 Jan-08 Jul -08 Jan -09 140 .00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 C17Y NATIONAL BANK V 1 he war �rt� C I ENERGY Although oil prices have retreated from record highs, gasoline prices are still well above levels of 12- months ago. Oil -WTI ($ per barrel) 180.00 140.00 120.00 - 100.00 Sept. 2007 80.00 60.00 40.00 20.00 0.00 Jan -95 Jan -98 Jan -01 Jan -04 Jan -07 Source: Bloomberg, CNAM Gasoline ($ per gallon) 4.50 4.00 3.50 3.00 Pt. 2.50 2.00 1.50 1.00 0.50 0.00 Jan -95 Jan -98 Jar-01 Jan -04 Jan -07 Source: DOE, Page 9 of 15 Natural Gas ($ per MMBtu) 16.00 14.00 12.00 10.00 8.00 6.00 S�pt. 4.00 2.00 0.00 Jan -95 Jan -98 Jan -01 Jan -04 Jan -07 Source: Bloomberg, CNAM Cm NAT#oNAL BANK Th. way gyp- I CONSUMER CONFIDENCE It has fallen to the lowest level since February 1992, down 50% since the recent peak of last July. The expectations component is the gloomiest on record. This is a lagging index, hitting the low point at the end of a recession or slightly afterwards. Consumer Confidence 150 -- -_-- 125 100 75 50 25 0 Jan -70 Jan -80 Jan -90 Source: Conference Board, CNAM Jan -00 Consumer Confidence in Previous Crisis Periods 1 140 -- Asian Cnsa LCTM1Ru 130 Begma .'W T 12 Cram L/J rape SJEprime Credit cgimpae spuee:e MaXIrp10 110 ange Nalnne etteslon County Enron 100 9111 Wmy Oom 90 Oesen Sn1eM 80 Iraq I 70 Iraq We 11 cu 1 50 RBfArtl Pn so _ 40 DU Jul Aug Jan opc JJI Sep Mar Sep Jan Sep Mar Aug Jan Jul Jul Sep 1987 1990 1990 1991 1994 1997 1998 2001 2001 2002 2002 2003 2005 2007 8007 2008 2008 OTY NATiomALBANKVI • Pa90 15 • • • • CONSUMPTION Weakness is widespread, as vehicles, furniture, clothing and electronics all showed sales decline. Robust income can no longer offset the steep rise in energy prices. With gasoline prices continuing to hit new records, high energy costs will continue to restrain discretionary spending. 14 12 10 8 6 4 2 0 -2 -4 Jan -94 Jan -96 Jan -98 Jan -00 Jan -02 Jan -04 Jan -06 Jan -08 Source: U.S. Census Bureau, CNAM Retail Sales (% chg, y-o -y) Consumer Credit (% chg, y-o-y) —Non Revolving — Revolving Page 11 of 15 -09 CmrNwnom^LBANK The waY �P' RFF��� INFLATION The September data (0.0 %) finallystarted to show significant evidence of price relief in response to waning consumer demand The predominant factor weighing on inflation is the decline in energy prices since July. 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan -00 Jan -02 Source: BLS, CNAM Inflation Reports (% change, yo-y) Jan -04 Jan -06 Jan -06 Selected Components of CPI (% change, yo-y) 45.0 35.0 31 7 25.0 15.0 6.0 5.0 3.2 -5.0 3.1 -15.0 Gasoline Food& Bev. Medical Used Cars Source: BLS, CNAM CITY NATIONAL BANK I' 0 Pa* 15 • • • 0 FEDERAL BUDGET 300 200 100 0 -100 -200 -300 -400 -500 -600 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: U.S. Treasury, CBO, CNAM Federal Budget Actual (is) . of GDP (rs) 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -0.0% -5.0% -6.0% Page 13 of 15 3,000 2,500 2,000 1,500 1,000 500 0 Mar -70 Mar -80 Source: U.S. Treasury, CNAM Federal Receipts and Outlays (Trailing 12- month, $bil.) Net Receipts —Net Outlays Mar -90 Mar -00 CITY NATIONAL BANK f Th. INTEREST RATES 8 — 7 6 5 4 3 2 1 0 Jan -00 Interest Rates ( %) —Fed Funds —2-yr — 5 -yr 10-yr 30-yr Jan -02 Jan -04 Jan -06 Jan -08 • Pageg15 4 3 2 1 0 -1 -2 -3 -4 Jan -55 Slope of Yield Curve (10 -yr minus 1•yr) ( %) Jan -65 Jan -75 Jan -85 Jan -95 Jan -05 CITY NATIONAL BANKI • LIQUIDITY MANAGEMENT 7 6 5 4 3 2 1 0 Jan -00 Selected Money Market Rates ( %) —Target Fed Funds —3 -mo. T bill —3 -mo. LIBOR Jan -02 Jan -04 Jan -06 Jan -08 • 0 Page 15 of 15 4.0 3.0 2.0 1.0 0.0 Jan -00 TED Spread ( %) Jan -02 Jan -04 Jan -06 Jan -08 CITY NATIONAL BANK I The-.,., CITY NATIONAL BANK The way up. , tl City of Newport Beach 0 0 0 • • 0 City of Newport Beach — 471630021 Summary . Key objective has been safety and liquidity. . Invested most assets in high quality corporate issues with higher accrual than treasuries. . Treasury rates plummeted when credit crunch moved to credit crisis. City of Newport Beach — 471630021 Asset Allocation as of 10/17/08 Fixed Income 53% Cash & Equivalents 47% E MARKET VALUE: COST: IND INCOME: YLD (%) ON: (000) $ $ (000) $ % $ % MKT COST CASH & EQUIVALENTS 12,956 47 12,956 47 194,343 22 1.49 1.49 FIXED INCOME 14,554 53 14,568 53 704,900 78 4.84 4.83 --------- TOTAL 27,510 --- --------- 100 27,524 --- 100 -- - -- -- 899,243 --- 100 ----- ----- 3.26 3.26 E • • • City of Newport Beach — 471630021 Portfolio Characteristics as of 10/17/08 Maturity Schedule 100% ■ 0 -3 Years Quality Ratings (Moody's) 5% 5% 7% 83% Treasury ■ Agency ■ AAA AA City of Newport Beach — 471630021 Performance Summary as of 9/30/08 Portfolio Merrill Lynch 1 -3 Year Treasury Index Yield to Maturity: 3.21% 2.376% Coupon Rate: 4.98% - - -- Duration: 1.29 years 1.595 years Total Return (1/1/08 — 9/30/08): 2.19% n/a Fixed Income Return (1/1/08 — 9/30/08): 2.68% 3.82% Total Return (1/1/97 — 9/30/08) *: 5.00% n/a Fixed Income Return (1/1/97 — 9/30/08) *: 5.13% 5.04% *Since Inception. Return is annualized. is is • 0 • • Investment Report City of Newport Beach Period Ending September 30, 2008 9255 Towne Centre Drive I Suite 350 1 San Diego. CA 92121 -3039 1 Phone 800 317.4747 1 Fax 858.546.3741 1 www.chandlerassec.com �►,J ECONOMIC UPDATE ■ The financial markets are suffering a severe crisis related to the housing market's correction and its impact upon global financial institutions' capital and liquidity. There is concern that financial market conditions may result in slower economic growth in the months ahead. • The Federal Reserve lowered the federal funds rate to 1.50% in an inter - meeting move on October 6th. The Fed acted in conjunction with the European Central Bank, the Bank of England, and other global central banks. In a joint statement, the central banks said "the recent intensification of the financial crisis has augmented the downside risks to growth and thus diminished further the upside risks to price stability." The rate cuts represented the latest efforts by policy makers to counteract the ongoing credit and liquidity crisis. The next regularly scheduled FOMC meeting is October 29, 2008. ■ The yield curve retains a normal, positive slope; that is, longer -term securities yield more than shorter -term ones. • 9255 Towne Centre Drive 1 Suite 350 1 San Diego, 421.3039 1 Phone 800.317.4747 1 Fax 858.546.3741 1 www.chandlerasset.cd 2 ,► I EMPLOYMENT and HOUSING Non -farm Payroll (000's) 250 200 150 100 0 50 0 o p 50 - 100 200 The September non -farm payroll employment report showed a decrease of 159,000 jobs and the unemployment rate remained at 6.1 %. The payroll data reflected the ninth consecutive month of negative job growth. September's employment report reinforces the recent financial market concern about a slowing economy impacting the labor markets. Starts -Single Family 1,600 1,400 1,200 1,000 $ 800 0 600 400 200 0 100i e e e e e e e e Soume: Bloomberg Single- family housing starts declined by 12.9% in September, to a 544,000 annual pace, the lowest since January 1991. This follows August's reading of 618,000. The fall in housing starts is supporting the financial market concern that the decline in the housing market has not yet run its course. j®11 INTEREST RATES Yield on the Two -Year Note September 2006 through September 2008 5.50% -- — — — 5.00 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% m co r-- r` r` r` n r` co 00 ro to co 0 0 0 0 0 0 0 0 0 0 0 0 0 N O cC6 @ (0 O Q 0 to (q T 5 Q c4 Z In Z t� 2 5 1 (n Source. Bloomberg The yield on the two -year Treasury note declined sharply in September as market participants sought safety amidst the financial market volatility. • 9255 Towne Centre Drive I Suite 350 1 San Diego, 9121 -3039 1 Phone 800.317.4747 1 Fax 858.546.3741 1 www.chandlerasset16 4 chi Agency 46.0% • ACCOUNT PROFILE City of Newport Beach, California * 1 -3 yr Treasury September 30, 2008 Sector Distribution rporate 4% Commercial Paper 5.1% Money Market Fund FI 0.4% i Treasury 24.1% September 30, 2007 i Corporate 21.0% Commercial Paper 5.7% Money Market Fund FI 0.1% IS Treasury 18.3% 9/3012008 9/30/2007 Benchmark* Portfolio Portfolio Average Maturity (yrs) 1.70 1.78 1.74 Modified Duration 1.63 1.66 1.60 Average Book Yield 4.02% 4.48% Average Market Yield 1.92% 4.06% 4.67% Average Quality AAA AAA AAA Total Market Value $31,385,926 $27,953,448 * 1 -3 yr Treasury September 30, 2008 Sector Distribution rporate 4% Commercial Paper 5.1% Money Market Fund FI 0.4% i Treasury 24.1% September 30, 2007 i Corporate 21.0% Commercial Paper 5.7% Money Market Fund FI 0.1% IS Treasury 18.3% C &I DURATION DISTRIBUTION and PERFORMANCE City of Newport Beach, California Portfolio Compared to the Benchmark as of September 30, 2008 80.0% 70.0% 80.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% T.0% 150% 5.0% 4.0% 3.0% 2.0% 0% City of Newport Beach, California Period Ending September 30, 2008 Total Rate of Return Anniallmd Since hcephon March 31.1991 1 -3 yr Treasury Total rate of return: A measure of a portfolio's performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains and losses in the portfolio. C b w 12 MOrMS 2Yaars 9YeeR SYean1 10 Yews Since l,aW4on C • Fbrdolo • Bancltnerk ■C3y of tAraport Beach, CalttaNe N 1 yr Treasury Annualized Annualized Mnuallzed Mnualized Annualized 0.0.25 0.25 -0.5 0.5 -1 1 -2 2-3 34 45 5+ Latest: 3Mordhs 12MOntha 2Ysara 3Yom 6Years "Yaars 51nce lreap0on Portfolio 8.2% 7.9% 14.8% 24.5% 38.3% 6.4% 0.0% 0.0% City of Newport Beach, Califomiz 8.59% 5.05% 5.27% 4.90% 3.55% 471% 5.55% Benchmark' 0.00% 0.0% 2.4% 74.9% 22.7% 0.0% 0.0% 0.0% 14 yr Treasury 169% 5.27% 6.03% 5.25% 3.54% 452% 5.44% 1 -3 yr Treasury Total rate of return: A measure of a portfolio's performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains and losses in the portfolio.