Investing for Small Governments

Transcription

1 Tuesday MAY, :20AM 12PM Investing for Small Governments MODERATOR SPEAKERS Al Rolek Finance Director, River Falls, WI John Grady Managing Director, Public Trust Advisors Darrel Thomas Assistant City Manager/CFO, City of Weston, FL Cory Kampf Finance & Central Services Division Manager Anoka County, MN #GFOA2017

2 Session overview Common Investments for Public Funds Best Practices for Investing Portfolio Developing an Investment Plan Market Outlook Panel Discussion Q&A

3 Common Investments for Public Funds Permitted Investments: State Laws Investment Policy Statement Risk Tolerance & Constraints Cash Flows/Liquidity Needs

4 Short Term Investments Demand Deposit Accounts Safety below 250K accounts receive FDIC insurance coverage. Low Yield minimal earnings power as an investment. Bank Certificates of Deposits Safety also FDIC insured and pay more than DDA. Less Liquidity limited investment income in rising rate cycle as banks historically only pass along roughly 33% of fed rate hikes, also limited to no secondary market.

5 Short Term Investments Money Market Funds (Prime vs. Govt) Prime May provide higher yield than bank products. Money Market Reform reduced liquidity (gates/fees) and complicated accounting. Govt Higher liquidity since fees and gates are not mandatory. Typically lower yields at roughly 60 65% of Prime yields.

6 Short Term Investments Local Government Investment Pools (Floating vs. Fixed NAV) Fixed NAV Typically high credit quality portfolios, offering daily liquidity, with earnings power of month government bonds. Most suitable funds designated for short term expenditures. Floating NAV Typically high credit quality, with earnings power of month government bonds. Most suitable for reserve or longer term funds, floating NAV funds are exposed to higher interest rate risk and thus offer less liquidity as compared to fixed NAV pools.

7 Short Term Investments Discount Notes (T bills, Agency discos) High safety and liquidity. Typically lower yields due to increased demand created via Basel III/Dodd Frank Act and Money Market Fund Reform regulations that require or promote higher holdings of these instruments.

8 Medium Long Term Investments U.S. Treasury Notes Federal Instrumentalities (FNMA, FHLMC, FFCB, FHLB) High safety and liquidity May have lower yields due to increased demand created via Basel III/Dodd Frank Act and Money Market Fund Reform regulations that require or promote higher holdings of these instruments.

9 Medium Long Term Investments Corporate Notes Typically higher yield than U.S. Treasury & Agency notes. Due to increased leverage, safety in A rated names has declined, while liquidity has been reduced as a result of Basel III/Dodd Frank Act regulations, which require higher capital allocation to hold corporate notes, causing dealers to reduce inventory levels. Asset Backed Securities Backed by asset such as autos May have lower liquidity than corporate notes.

10 Best Practices Portfolio Diversifying the Investment Portfolio investment portfolio Government Relationships with Securities Dealers relationships securities dealers

11 Developing an Investment Plan Playbook How do I manage Liquidity? How do I manage Safety? How do I manage Yield? Construction of the Portfolio

12 Portfolio Strategies Pillars of Public Funds Investing Safety Minimization of Risk Traditionally focused on credit risk. Should also consider total risk and market risk. Liquidity Cash availability Maintaining enough funds to meet ongoing operations Return Yield and Total Return Total Return = yield plus capital appreciation /depreciation. Captures reward / penalty for risk assumed. Captures current economic value. Pay attention to Book Yield easy measure.

13 Portfolio Strategies Myth We should keep our cash safe and Return On Investment (ROI) is of distant secondary importance Fact We need to Forecast / maintain appropriate liquid cash and prudently invest residual

14 Portfolio Strategies Define your Portfolios: Liquidity Portfolio (Tax Receipts / emergency reserve) Operational Portfolio (needed for day to day operations) Core Reserves (generally never needed)

15 Example of Asset Tiers PL - Liquidity Tier (1 90 Days, WAM) SL - Enhanced Cash Tier (90 Days 1 Year) Short-Term Tier (1 5 Years) - Operational Slide 15 of 55

16 Example of Asset Tiers Portfolio Balances $1,200 $1,000 $800 Millions $600 $400 Cash/MMA $200 $0 Slide 16 of 55

17 Portfolio Construction Total Investment Portfolio Liquidity Portfolio Income Portfolio Primary Liquidity (PL) Secondary Liquidity (SL) Operational Core Reserves

18 The Cash Equation Understand Your Liquidity Review your Historical cash balances Determine your comfort level manage liquidity spikes Awareness of projects and their timing Determine your operating cash needs Communicate with your departments

19 The Cash Equation Managing Liquidity is first priority!!! Cash Flow Forecasting a must (keep it up to date) Develop a Liquidity Formula and follow it Moving from Intuition to informed Decision Making

20 Example of Cash Flow Analysis Revenue Expenses Date Beginning Balance Additions Subractions Net Operations Net Investments Ending Balance Difference Sep #VALUE! Aug Jul-15 12,580, ,712, (6,549,047.33) 2,163, ,744, ,744, Jun-15 8,172, ,102, (6,693,884.58) (3,591,326.65) 8,000, ,580, May-15 13,042, ,274, (8,145,399.47) (4,870,683.91) 8,172, Apr-15 7,191, ,653, (6,801,669.05) (1,148,360.62) 7,000, ,042, Mar-15 13,951, ,259, (12,019,672.98) (6,759,883.86) 7,191, Feb-15 15,853, ,942, (6,845,176.88) (1,902,618.23) 13,951, Jan-15 48,508, ,778, (7,433,757.48) 345, (33,000,000.00) 15,853, Dec-14 9,867, ,936, (7,294,957.58) 38,641, ,508, Nov-14 8,671, ,376, (6,180,978.92) 1,195, ,867, Oct-14 6,835, ,036, (11,200,226.65) (7,164,028.69) 9,000, ,671, Sep-14 7,469, ,846, (6,581,395.23) (3,734,551.34) 3,100, ,835, Aug-14 10,281, ,143, (5,955,797.27) (2,812,207.91) 7,469, Jul-14 6,411, ,174, (7,303,646.55) (4,129,241.52) 8,000, ,281, Jun-14 10,612, ,330, (6,531,688.61) (4,201,539.91) 6,411, May-14 12,839, ,431, (14,108,532.41) (9,677,175.07) 7,450, ,612, Apr-14 6,463, ,958, (6,582,323.43) (1,623,866.80) 8,000, ,839, Mar-14 9,712, ,331, (6,580,695.40) (3,249,007.82) 6,463, Feb-14 10,768, ,212, (5,267,795.25) (1,055,540.32) 9,712, Jan-14 50,457, ,448, (10,837,271.72) (7,388,948.91) (32,300,000.00) 10,768, Dec-13 9,548, ,417, (5,508,775.40) 40,908, ,457, Nov-13 17,469, ,628, (14,548,828.29) (7,920,406.36) 9,548, Oct-13 7,887, ,855, (6,274,066.00) (3,418,642.03) 13,000, ,469, Sep-13 11,046, ,183, (7,341,417.93) (3,158,390.19) 7,887, Aug-13 13,255, ,667, (4,876,257.24) (2,209,044.59) 11,046, Jul-13 15,484, ,797, (6,026,457.44) (2,229,088.80) 13,255, Slide 20 of 55

21 Slide 21 of 55 Monthly Cash Receipts 5,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, Oct 09 Dec 09 Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15

22 (2,000,000.00) (4,000,000.00) (6,000,000.00) (8,000,000.00) (10,000,000.00) (12,000,000.00) (14,000,000.00) (16,000,000.00) Monthly Cash Disbursements Slide 22 of 55 Oct 09 Dec 09 Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15

23 Cumulative Net Cash Flow Dec 09 Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Oct 09 50,000, ,000, ,000, ,000, ,000, (10,000,000.00) (20,000,000.00) Slide 23 of 55

24 Monthly Net Cash Flow Dec 09 Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Oct 09 50,000, ,000, ,000, ,000, ,000, (10,000,000.00) (20,000,000.00) Slide 24 of 55

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26 Determining Liquidity Data Gathering: Your lowest monthly bank balance over the last 12 months. Monthly disbursements over past 12 months ( exclude nonrecurring). Revenues received over last 12 months (excluded nonrecurring).

27 First Liquidity Check Average Bank Balance (last 12 months) Average Revenue Collected (last 12 months) Average Liquidity Scenario in Past 12 months Average Disbursements (last 12 months) Don t include special circumstance or one-time dollars and disbursements in this Check. Represents Operating Need.

28 Worst Case Liquidity Check Lowest Bank Balance (last 12 months) Lowest Revenue Collected (last 12 months) Worst case Liquidity Scenario in Past 12 months Highest Disbursements (last 12 months) Repeat for 24 months and compare. These represent the Perfect Storm you may face

29 Liquidity Needs Analysis Highest disbursement total in any single month in last 24 months 14,548, "Minus" Lowest receipt total in any single month in last 24 months (2,330,148.70) "Equals" Worst scenario liquidity 12,218, Maximum Cash Need 2x Highest single operating cash disbursement 5,626, Minimum Cash Need Slide 29 of 55

30 Net Investment Transfers Slide 30 of 55

31 Develop Liquidity Multiple Estimate PL & SL Multiple = X times lowest CF Balance (last 12 months). X = Judgment call by your comfort level. PL = Same day (MM / LGIP) investments SL = 2 days to 12 months (MM, CP, Term, CD s, Treasuries).

32 Anoka Example Liquidity Multiple X = 2 times Primary Liquidity using lowest Bank Balance = $11.9 million x 2 = $23.8 Million Secondary Liquidity (X = 1) $11.9 million x 1 = $11.9 Million

33 PL & SL Portfolios Liquidity Portfolio: Leverage cash flow opportunities (tax receipts etc ) Keep it short (Same day for PL, less than 1yr for SL) Money Market or LGIP Term Notes Commercial Paper (credit awareness) Short CD s

34 Portfolio Construction Total Investment Portfolio Liquidity Portfolio Income Portfolio Primary Liquidity (PL) Secondary Liquidity (SL) Operational Core Reserves

35 Income Portfolio Strategy Why Develop a Strategy: Lost opportunity cost of not having one Network with brokers/ bankers understand marketplace Use portfolio analytics quarterly (at least annually). Subscribe to receive online communications: Weekly market updates (yield curve, rate tables) Economic updates (fed actions, market conditions) Bloomberg Terminal (?) weigh cost vs benefit

36 Income Portfolio Strategy Keep the Following in Mind: Generally hold to maturity Determine your risk tolerance Keep Best Practices in mind (GFOA): Having an Investment Policy Managing Risk in Investment Portfolios Diversifying the Investment Portfolio Spreading risk (multiple institutions)

37 Operational Portfolio Strategies Some successful approaches include: Matching maturities w/ disbursements Bar Bell Approach (less often) Ladder Using External Money Managers

38 Operational Portfolio Strategies Operational Portfolio: Multi year Laddered Strategy Define time frame (Example years 2 5 duration) Design maturities around Cash Flow Needs: Payroll A/P Debt Service Capital Projects

39 External Money Managers Determine type of use (Core vs Operational) Consider RFP (define scope / amount / benchmark) Should meet at least twice annually for review Define reporting (Monthly / Quarterly) Consider using a Trust Account setup Best Practice: Selection and review of Investment Advisors and review investment advisors

40 Market Outlook What is the Fed Doing? How de we deal with all this uncertainty? How does that affect my Portfolio strategy?

41 Panel Discussion Q&A What are your greatest challenges? How do you see your investment strategy? Do you feel you are as fully invested as you can be? What about that Investment Policy? How do I know what types of Investments are best? Callables? Bullets? Step ups? Swaps? Trading? What keeps us awake at night regarding Investing?