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Investment Report - MARCH 2011 - Joint Consideration
LTA CITY OF PALM DESERT FINANCE DEPARTMENT INTEROFFICE MEMORANDUM TO: RACHELLE KLASSEN, CITY CLERK r FROM: NIAMH ORTEGA, RECORDING SECRETARY DATE: MAY 12, 2011 SUBJECT: COMPLIANCE ANALYSIS AND INVESTMENT REPORTS Please find attached the Compliance Analysis and Investment Reports which were presented and approved at the recent meetings of the Audit, Investment and Finance Committee for the month of March 2011. Please include the report on the upcoming agenda for review and acceptance by City Council. Also included are the Minutes of the March 2011 meeting for acceptance by the City Council. Please feel free to contact me at Ext. 382 if you have any questions. Thank you. nmo Attachment (as noted) BYRDA ON Original �::� file with City Clarks Of`�iC01 CITY COUNCIL ACTION AFTROVED DENIED RECIAVED q-F J e OTIIER ]MEETING DATE AN'ES:rjhrii �� r'OC(1Ci�. Tc NOES:L-A(f ABSENT: A 04 e ------ ABSTAIN: VERIFIED BY: — Original on File with City Clerk's Office G:\FINANCE\NIAMH ORTEGA\INVESTMENT COMM ITTEE\MEMOS\RKLASSENINVREPORT.WPD City of Palm Desert City and Redevelopment Agency Portfolios COMPLIANCE ANALYSIS AND INVESTMENT REPORT March 31, 2011 Paul S. Gibson, C.C.M.T., Treasurer Thomas W. Jeffrey, J.D., M.B.A., Deputy City Treasurer Treasurer's Commentary The Federal Open Market Committee (FOMC) will meet next on April 26-27. Recent FOMC minutes indicate that a majority of committee members favor keeping short-term interest rates at record low levels beyond 2011. Chairman Bernanke continues to dismiss the idea that soaring commodities prices will lead to broader U.S. inflation. Futures traders, however, have assigned a 76% probability to the Federal Funds Rate being raised to 0.5% by February 2012. If the Consumer Price Index (CPI) is calculated as it was in 1980, then the current level of U.S. inflation is 10% (www.shadowstats.com). The major news in April was that Standard & Poor's (S&P) revised the U.S. Government's credit rating to "AAA" (Negative Outlook). There is now a 33% chance that S&P will lower that rating to "AA" in 2013 if the U.S. Government does not significantly reduce the federal deficit over the next two years. A credit downgrade would trigger higher U.S. interest rates, and would seriously damage the U.S. Dollar as the international reserve currency. PIMCO, the world's largest bond fund ($1.2 trillion in assets), recently sold all of the U.S. Treasuries in its main bond fund, and allocated 3% of its portfolio to "shorting" U.S. Treasuries. Bill Gross, PIMCO's co-founder, believes that unless entitlements are reformed, the U.S. will default on its debt, not in conventional terms, but through inflation, currency devaluation, and low -to -negative real interest rates. On April 12, the City Treasurer's Office invested $80 million in the Riverside County Treasurer's Pooled Investment Fund. Pis C. C.". r. City Treasurer PORTFOLIO STATISTICS Dollars in Thousands MAR-11 FEB-11 JAN-11 DEC-10 NOV-10 OCT-10 CITY Month -End Book Value*** $ 199,348 $ 195,436 $ 191,620 $ 186,911 $ 190,254 $ 192,696 Month -End Market Value*** $ 199,495 $ 195,618 $ 191,842 $ 187,160 $ 190,546 $ 193,077 Paper Gain (Loss) $ 147 $ 182 $ 222 $ 249 $ 292 $ 381 Prior Year Book Variance $ 1,396 $ (4,688) $ (26,474) $ (15,318) $ (11,127) $ (46,511) Interest Earnings 91 96 115 130 112 136 Yield -To -Maturity 0.54% 0.56% 0.66% 0.72% 0.75% 0.78% Weighted Maturity (Days) 96 105 131 146 217 255 Effective Duration 0.05 0.06 0.07 0.09 0.10 0.13 RDA Month -End Book Value *** $ 245,817 $ 256,731 $ 270,539 $ 230,513 $ 233,601 $ 242,873 Month -End Market Value *** $ 246,074 $ 257,025 $ 270,899 $ 230,876 $ 234,003 $ 243,401 Paper Gain (Loss) $ 257 $ 294 $ 360 $ 363 $ 402 $ 528 Prior Year Book Variance $ (49,590) $ (47,490) $ (16,704) $ (25,758) $ (28,133) $ 16,866 Interest Earnings 136 142 135 116 98 116 Yield -To -Maturity 0.61 % 0.71 % 0.68% 0.60% 0.59% 0,60% Weighted Maturity (Days) 235 267 253 297 293 305 Effective Duration 0.38 0.37 0.36 0.45 0.47 0.47 *** Omits SLGSs. City of Palm Desert -- Portfolio Characteristics March 31, 2011 Dollars in Thousands Ageing Interval Market Value < 1 M $ 180,325 < 2M - < 3M - < 6M 10,989 < 1 YR 3,056 < 2YR 3,023 < 3YR - < 4YR - < 5YR - > 5YR - Total: $ 197,393 Ratings * Market Value AAA $ 100,659 AA 4,073 A 3,859 Unrated '* 88,802 Total: $ 197,393 Sector Market Value MMF $ 4,296 Agencies 12,089 MTNs 7,933 CAMP 84,273 LAIF 50,000 RDA Loan 13,555 LAIF/Bond Proceeds 25,247 Total: $ 197,393 Month City Yield LAW Yield Variance Apr10 1.41 0.59 0.83 May 1.25 0.56 0.69 Jun 1.16 0.53 0.63 Jul 1.12 0.53 0.59 Aug 0.93 0.51 0.41 Sep 0.96 0.50 0.46 Oct 0.78 0.48 0.30 Nov 0.75 0.45 0.30 Dec 0.72 0.46 0.26 Jan11 0.66 0.54 0.12 Feb 0.56 0.51 0.05 Mar 0.54 0.50 0.04 General Fund Ageing 100 80 c 60 0 V 40 i 0 20 0 0 6 2 2 0 0 0 01 0 <1M <2M <3M <6M<1YR<2YR<3YR<4YR<5YR>5YR Credit Quality AAA 51% AA Unrated " 2% 45% A 2% i Asset Allocation CAMP LAI F 43% 25% MTNs 4% Agencies RDA Loan 6% MMF LAIF/Bond 7% 2% Proceeds 13% Performance 1.5 1.0 a d >' 0.5 0.0 Apr10May Jun Jul Aug Sep Oct Nov DecJanll Feb Mar 0 0 Standard and Poors LAIF, and City Loan to RDA Page 2 Palm Desert Redevelopment Agency -- Portfolio Characteristics March 31, 2011 Dollars in Thousands Ageing Interval Market Value < 1 M $ 197,153 < 2M - < 3M 3,039 < 6M - < 1 YR 15,126 < 2YR 26,358 < 3YR - < 4YR - < 5YR - > 5YR 3,151 Total: $ 244,827 ualit Market Value AAA $ 55,782 AA 9,796 A - Unrated ** 179,249 Total: $ 244,827 Sector Market Value MMF $ 16,099 Agencies 34,662 MTNs 9,796 CAMP 5,021 LAIF 45,711 EIP 3,151 LAIF/Bond Proceeds 130,387 Total: $ 244,827 Month RDA Yield LAIF Yield Variance Aprl0 0.74 0.59 0.15 May 0.69 0.56 0.13 Jun 0.78 0.53 0.25 Jul 0.76 0.53 0.23 Aug 0.79 0.51 0.28 Sep 0.59 0.50 0.09 Oct 0.60 0.48 0.12 Nov 0.59 0.45 0.14 Dec 0.60 0.46 0.14 Jan11 0.68 0.54 0.14 Feb 0.71 0.51 0.20 Mar 0.61 0.50 0.11 Portfolio Ageing w/o SLGSs 100 -81 80 60 0 0 40 IL 11 20 0 1 0 6 0 0 0 1 1 0 <1M <2M <31vl <6M <1YR<2YR<3YR<4YR<5YR>5YR i Credit Quality AA 4% Unrated ** 73% AAA 23% DA 0% r, Asset Allocation CAMP LAIF 90/19/o EIP MTN 4% Agencies 14% MMF 7% 0.8 '0 0.4 m i= 0.0 Apr10May Jun Jul Aug Sep Oct Nov DecJanl l Feb Mar ©LAIFYield ORDAYfeld LAIF/Bond Proceeds 53% * Standard and Poors ** LAIF Page 3 STATEMENT OF COMPLIANCE The investment portfolios of the City of Palm Desert ("City") and the Palm Desert Redevelopment Agency ("RDA") are governed by federal, state, and local law. The City Treasurer's "Statement of Investment Policy" is more restrictive than the California Government Code. The Palm Desert Audit, Investment, and Finance Committee and the Palm Desert City Council review the Statement of Investment Policy annually. For the month ended March 31, 2011, the City and the RDA investment portfolios were in compliance with all applicable federal, state, and local laws and regulations. The City Treasury continued to pursue conservative and prudent investment strategies, based upon the stated objectives of safety, liquidity, and yield (in order of priority). Barring unforeseen events, the City Treasury should have sufficient cash to finance the operations of the City of Palm Desert and the Palm Desert Redevelopment Agency over the next six months. In addition, portions of either the City or the RDA portfolio could be liquidated in order to meet any significant, unexpected cash requirements. Interactive Data Corporation provided the data that was used to calculate the market value of all securities in the City and the RDA investment portfolios. State and Local Government Series securities are held in escrow accounts, and are therefore not included in this report as assets. All balances are bank balances. Respectfully Submitted on April 26, 2011, Paa4S. 4 i6bjv , C C. Al. T. City Treasurer SUMMARY OF AUTHORIZED INVESTMENTS California Government Code City Investment Policy CA Govt Maximum Maximum Quality Maximum Maximum Quality % of City % of RDA Code Investment Category Maturity Limit S&P/Mdys Maturity Limit S&P/Mdys Portfolio Portfolio 53601(a) Palm Desert Bonds 5 Years No Limit - 1.3% 53632(c) Savings Accounts No Limit No Limit No Limit No Limit - - 53601 b U.S. Treasuries 5 Years No Limit 5 Years No Limit - - 53601(c) CA State Debt 5 Years No Limit Not Authorized 53601(d) CA Local Agency Debt 5 Years No Limit Not Authorized 53601(e) Federal Agencies 5 Years No Limit 5 Years 30% 6% 6.1 % 14.1 % 53601 Bankers's Acceptances 180 Days 40% 180 Days 40% A-1 & P-1 - - 53601() Commercial Paper 270 Days 25% A-1+ or P-1 270 Days 25% A-1+ or P-1 - - 53601(h) Negotiable CDs 5 Years 30% 5 Years 30% AA- or Aa3 - - 53601(i) Repos 1 Year No Limit 30 Days 20% AAA & Aaa - - 53601(I) Reverse Repos 92 Days 20% Not Authorized 536010) Medium -Term Notes 5 Years 30% A 5 Years 30% 1 A 1 4.0% 4.0% 53601(k) Mutual Funds 90 Days 20% AAA & Aaa 90 Days 20% (2) 1 AAA & Aaa 1 2.2% 6.6% 53601(I) Trust Indenture Debt Not Authorized 53601(m) Secured Bank Deposits 5 Years No Limit Not Authorized 53601(k) Local Government Investment Pools 90 Days 20% AAA & Aaa or Advisor 90 Days 20% (2) AAA & Aaa or Advisor 1 42.7% 2.1 % 53601(n) Mortgage -Backed Securities 5 Years 20% A (Issuer) & AA (Security i Not Authorized 16429.1(b) LAIF No Limit No Limit 38.2% 72.0% (1) The City loan to RDA, which is not a bond, has been approved by the Palm Desert City Council. 93.1% 100.0% (2) The City Energy Independence Program has been approved by the Palm Desert City Council. 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M N 00 V N O 0 0 M 0 0 N O o o P'J O N n N V N 0 0 O c 0 0r0 ro CM F LU vi H N w m w d d ro A Im 2 d d LL O a Q � c 9 c U A A O � C9 a O y a W U Z W M � o Z 77 W 77 IL 13 o 2 w C4 O It 7 W 0 0 W N LO ¢n.0 IL ° o ai U 0 0 0 0 o a M o o b a 0 0 �U A � a v g Z .p m N m (D O y � (D O A N v 1 Y M D V 01 C m m O co It p �Mp V N O n 7 (D M (�D O Y m O A c0 O O V C-4 Z w' y W d Q r V r 7 (D O N co C4 CcH CM> N IT M W r (Q d M O t�0 C 4) C.)a. m v V G dam p c o 2 J — — O O LU W O O N O O / Q Y C N N W a o 0 rn (mi o Na m c 0.2 c Go > m N 0 N Z U N (~n W 0 2 � U I- S S m c y Q Q c � A pmF toZ Z '� N > > 0 c O 2 0 v > c m t at A c U m � N (D F > C N N o 0 c � m Z n co g n W N N U v U)i U)i Page 1 of 4 Return to Investment Outlook Print PDF Audio Share Subscribe l ni+estIllent Outlook William H. Gross I April 2011 Skunked Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising. Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden. Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates. That adorable skunk, Pepe Le Pew, is one of my wife Sue's favorite cartoon characters. There's something affable, even romantic about him as he seeks to woo his female companions with a French accent and promises of a skunk bungalow and bedrooms full of little Pepes in future years. It's easy to love a skunk — but only on the silver screen, and if in real life — at a considerable distance. I think of Congress that way. Every two or six years, they dress up in full makeup, pretending to be the change, vowing to correct what hasn't been corrected, promising discipline as opposed to profligate overspending and undertaxation, and striving to balance the budget when all others have failed. Oooh Pepe — Mon Cheri! But don't believe them — hold your nose instead! Oh, I kid the Congress. Perhaps they don't have black and white stripes with bushy tails. Perhaps there's just a stink bomb that the Congressional sergeant -at -arms sets off every time they convene and the gavel falls to signify the beginning of the "people's business." Perhaps. But, in all cases, citizens of America — hold your noses. You ain't smelled nothin' yet. I speak, of course, to the budget deficit and Washington's inability to recognize the intractable: 75% of the budget is non -discretionary and entitlement based. Without attacking entitlements — Medicare, Medicaid and Social Security — we are smelling $1 trillion deficits as far as the nose can sniff. Once dominated by defense spending, these three categories now account for 44% of total Federal spending and are steadily rising. As Chart 1 points out, after defense and interest payments on the national debt are excluded, remaining discretionary expenses for education, infrastructure, agriculture and housing constitute at most 25% of the 2011 fiscal year federal spending budget of $4 trillion. You could eliminate it all and still wind up with a deficit of nearly $700 billion! So come on you stinkers; enough of the Pepe Le Pew romance and promises. Entitlement spending is where the money is and you need to reform it. http://www.pimco.com/Paizes/Skunked.asux AlAIN)i 1 Page 2 of 4 Lack of Discretion Federal Spending by Category Share of Total Expenses 2011 40-Yr Average Entitlement Expenses 440/6 42% Defense 24% 24% Non -Defense Discretionary 25% 23% Net Interest Payments 7% 11% Total Federal Expenses 100% 100% Normal Source: White House Office of Management & Budget, USA Inc. Chart 1 Even then, the situation is almost beyond repair. Check out the Treasury's and Health and Human Services' own data for the net present value of entitlement liabilities shown in Chart 2. Pee-U USA Balance Sheet Liabilities unMedicaid Unfunded Medicare 35.3T Federal Social 22.8T Debt Security GIAT 7.$T Source: A Basic Summary of America's Financial Statements, USA Inc_, Mary Meeker Chart 2 The above four multi -trillion -dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not http://www.pimco.com/Pages/Skunked.aspx 4/4/2011 Page 3 of 4 some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly — it is much higher than the annual CPI + 1 % used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as "sweet nothings," believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next -to - tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It's really just a large asteroid. Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a "lockbox," much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1 % that was used to produce the above discounted present value in the first place. Actually, that's not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual "lockbox" tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepe, you've got a stinker of a problem. Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden. Perhaps we could, if it was only $9.1 trillion, as shown in Chart 2. That would be 65% of GDP and well within reasonable ranges for sovereign debt burdens. But that is not the reality. As others, such as Pete Peterson of the Blackstone Group and Mary Meeker, have shown much better and for far longer than I, the true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 trillion more! This country appears to have an off - balance -sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader. If so, and if the USA were a corporation, then it would probably have a negative net worth of $35-40 trillion once our "assets" were properly accounted for, as pointed out by Mary Meeker and endorsed by luminaries such as Paul Volcker and Michael Bloomberg in a recent piece titled "USA Inc." However approximate and subjective that number is, no lender would lend to such a corporation. Because if that company had a printing press much like the U.S. with an official "reserve currency" seal of approval affixed to every dollar bill, that lender/saver would have to know that the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation — surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation — likely but not significant in its impact, 3) deceptively via a declining dollar— currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels — paying savers less on their money and hoping they won't complain. If I were sitting before Congress — at a safe olfactory distance — and giving testimony on our current debt crisis, I would pithily say something like this: http://www.pimco.com/Pages/Skunked.asl)x aiai?ni i Page 4 of 4 "I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies — inflation, currency devaluation and low to negative real interest rates. Our clients, who represent unions, cities, U.S. and global pension funds, foundations, as well as Main Street citizens, do not want to be shortchanged or have their pockets picked. It is incumbent, therefore, in order to preserve the integrity of the U.S. Treasury market along with its favorable global interest rates, and to promote a stable U.S. economy, that entitlement spending be reduced, and that future liabilities be addressed in terms of healthcare and Social Security cost containment. You must attack entitlements and make `debt' a four-letter word." Thank you, and like Pepe Le Pew, why don't you try changing your stripes or at least pretend you're a French-speaking cat. The odor in these chambers is all too familiar and a skunk needs all the help it can get. Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Pacific Investment Management Company LLC. 02011, PIMCO. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2011, PIMCO. • Le,,al Disclaimer • Private Policy • Market Data Information httn://www.Dimco.com/Pages/Skunked.aspx 4/4/2011