INFORMATION #4 11-03-2008 - 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 axe 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 there has been increased volatility in the bond markets and 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. This may also indicate that investors prefer liquidity and will take a lower yield for short-term investments. The City has very little exposure risk to the credit difficulties the market is currently experiencing, as our portfolio currently has less than 5% (10/22) in commercial paper which would not disrupt liquidity and the Ciry ability to pay obligations. 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 decreased 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 Yield Curve 5.oo~r ~ - - -- .. _...._ __ 4.50 4.00 % - r,. 3.50 % ----.----- -------- ... 3.00 % - -- ------- t 06/30/2008 2.50 % --- --- ---- - --- 09/30/2008 2.00 % -- -__ .-,.a.; --------------- - 1.50 % -- -~-~~ ~ -- _.-_------------ ;. ,. - 0.50 % - 0.00 ~ mo 3mo 6mo 1 yr 2yr Syr Syr Tyr 1 Oyr 30yr Cities generally use a short horizon benchmark such as the 90 day Treasury Bill (09/30/2008 - 0.92%) or some similar measure. Our current portfolio yield is roughly 3.44%. 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 harder to maintain for the past couple of months because of the up-ward sloping yield curve. This means that short-term investments are receiving a slightly lesser