INFORMATION #2 08-04-2008 - Laserfiche WebLink

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INFORMATION The City makes sure we are sufficiently liquid by continually updating our forecast on the anticipated cash flow needs over the next five year time horizon. We also build in a reserve balance incase of unexpected expenditures, these funds are maintained in money market accounts through the 4M Fund. We anticipate the fact that we will have two large tax settlements each year, along with the regularly scheduled debt service payments that occur each year. Over the past couple of months the yield curve has started to show signs of an upward- sloping shape which has meant long-term securities slightly exceed returns on short-term instruments. The City has to weight the opportunity cost to invest in longer term investments or ride the yield curve and reinvest at shorter maturity intervals. As the chart indicates the yields have increased in every time horizon in the past 3 months. This current yield curve provides some additional yield for the additional market risk inherent in longer term maturities within our time horizon. Therefore, we will continue to monitor the yield curve and, if market dictates, start shifting more from short-term/intermediate into longer term investments. See graphical illustration below: http://www.ustreas.gov/offices/domestic- finance /debt-management/interest-rate/yield_historical.shtml Treasury veld Curve 5.00% _ _ 4.50% _ _ _ __ _ , 4.00%' ,~ . 3.50% :.., j 3.00% ~ _ . ~ -3/31/2008 2.50% ~ .___-. _ _. / - 6/30/2008 2.00% _ 1.50% -, 1.00% ; 0.50% 0.00% -- -- _ _ _ __ _ _ _. 1rra 3mo 6mo 1yr Tyr Syr Syr Tyr 10yr 30yr Cities generally use a short horizon benchmark such as the 90 day Treasury Bill (06/30/2008 - 1.90%) or some similar measure. Our current portfolio yield is roughly 3.43%. This is calculated by taking the yield times the current value for each investment and dividing the resulting amount by the total portfolio value. As investments purchased in earlier years mature we will be able to replace them and lock into some longer term interest rates, but they may have to be reinvested at lower interest rates as market conditions change. It is very typical to lag the market as interest rates change. This will lead to more predictability in our interest earnings. Liquidity has been easy to maintain for the past year because of the inverted yield curve. Over the last six months more leveling out has taken place on the yields. This means that short-term investments are receiving a slightly lesser return than long-term investments within the City's investment time horizon. As the curve shifts over the next couple of months or even becomes more upward sloping we will monitor the rates and invest accordingly. Our primary reserve account is our 4M Fund which is a money market account that various cities pool their funds into. It currently yields 2.39% with daily withdrawal