Brent X. Thurmond, C.P.A. Wakulla Clerk of Courts 3056 Crawfordville Highway Crawfordville, Fl Phone (850) Facsimile (850)

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1 Brent X. Thurmond, C.P.A. Wakulla Clerk of Courts 3056 Crawfordville Highway Crawfordville, Fl Phone (850) Facsimile (850) WAKULLA COUNTY 9 th Annual Investment Report For Fiscal Year Ended September 30, 2017 I. INTRODUCTION The Clerk s Office is tasked with the responsibility of being the clerk and accountant to the Board of County Commissioners and custodian of County funds, among many other duties, as outlined in Florida Constitution Article VIII 1(d) and Florida Statute As part of being the custodian of County funds, we have the responsibility to invest the County s excess or surplus funds. Surplus funds are those funds that are on hand at any point in time that are above and beyond the funds needed to pay current obligations of the County. For example, the County collects most of its ad valorem taxes in the months of December February, but most of these funds will not be needed until July September. All things being equal, some years have less surplus funds than others due to the number of or size of the capital projects ongoing during the fiscal year. These surplus funds are invested until they are needed. Wakulla County uses F.S as its Investment Policy. II. INVESTMENT OBJECTIVES There are three (3) investment objectives of the Clerk s Office, listed in order of importance: safety, liquidity and return on investment. The order of these objectives is intended to minimize the risks inherent to any investment of funds. The risks to the safety of County funds are minimized by limiting the types of investment instruments to those approved by F.S and only using qualified public depositories (QPD s) as defined in F.S The risks to the liquidity of County funds are minimized by measuring and monitoring the County s short-term cash needed to meet its obligations and the weighted average maturity of its investments. The risks to the return on investment of County funds are managed by monitoring market and economic conditions (i.e. fixed versus variable rates and length of maturity). There are five components of investment risk: custodian credit risk, interest rate risk, credit risk, concentration risk and foreign currency risk. The Clerk s Office limits the County s exposure to these risks by following the sound investment policies established in F.S The safety and liquidity of principle is more important than interest income. With these objectives in this order, the Clerk s Office has met its objectives if 1) no principle is ever lost, 2) surplus funds are available when needed to meet current obligations, and 3) if the County s surplus funds earned a reasonable level of interest income. If interest income were the first priority, the Clerk could certainly invest the County s surplus funds in much riskier investments but if those investments failed then the objectives of safety and liquidity of the surplus funds would be forever lost. The Clerk s Office must be careful not to get caught up in chasing more and more interest income and lose sight of our primary objectives.

2 III. AUTHORIZED INVESTMENT INSTRUMENTS Florida Statutes and various bond covenants authorize investment in the following types of instruments: certificates of deposit, money market accounts, savings accounts, repurchase agreements, The Local Government Surplus Trust Fund, Florida Local Government Investment Trust Fund, obligations by the Florida State Board of Administration, obligations of the U.S. Government, obligations of government agencies unconditionally guaranteed by the U.S. Government, obligations of the Federal Farm Credit Banks, obligations of the Federal Home Loan Mortgage Corporation, including Federal Home Loan Mortgage Corporation participation certificates, obligations of the Federal Home Loan Bank, obligations of the Government National Mortgage Association, Obligations of the Federal National Mortgage Association and securities of any management type investment company or investment trust registered under the Investment Company Act of 1940, 15 U.S.C. ss.80a-1 et seq., provided the portfolio is limited to U.S. Government obligations and to repurchase agreements fully collateralized by U.S. Government obligations. The County invested in only these authorized types of instruments during the fiscal year. IV. CASH & INVESTMENT PORTFOLIO BALANCES AT SEPTEMBER 30, 2017 Cash and investments held by the County consist of sixteen (16) bank accounts. These included three (3) investment accounts, two (2) restricted savings accounts, two (2) debt service accounts, seven (7) operating accounts and two (2) payroll or clearing accounts. At September 30, 2017, cash and investments amounted to $11,940, compared to $9,739, at September 30, 2016, an increase of $2,201, Comparative Investment Report For Fiscal Year Ending September 30, /30/2017 9/30/2016 Change Portfolio Balance 11,940, ,739, ,201, Portfolio Blended Avg. Yield % % % Fiscal Year Interest Income 87, , , Please note that in 2015 we began including all cash balances regardless of the purpose of the funds or the type of account in the Portfolio Balance. As further described under the Portfolio Growth section, there is a distinction between the cash balances at fiscal year-end (shown in chart above) and average daily cash balances throughout the year. For example, the average daily cash balance available for all of FY16/17 was $13,161,979 as compared to $11,816,348 in FY15/16 but the year-end cash balances as of September 30 for FY16/17 totaled $11,940,821 as compared to $9,739,443 in FY15/16. So, this fiscal year ended with $2,201,378 more in cash than the previous fiscal year and the County averaged $1,345,631 more in excess cash available for investment throughout the year. The County s cash balances typically are at their highest in December and January of the fiscal year after most of the County s ad valorem taxes are collected with the highest balance reaching $15,730,201 in March 2017 (last year the highest was $14,532,398 in February 2016). The County s cash balances are typically at their lowest in October and November of the fiscal year just before the collection of these taxes with the lowest balance reaching $8,377,531 in October 2016 (it was $7,497,129 in November 2015). The following is a summary and chart of the County s cash and investment balances as of September 30, 2017: Portfolio Breakdown as of September 30, 2017 Account / Investment Type Number of Accounts Book Value Portfolio Composition Blended Interest Rate Investment Accounts 3 6,965, % 0.95% Restricted Savings Accounts 2 1,536, % 0.63% Debt Service Accounts 2 371, % 0.53% Operating / Trust Accounts 7 3,039, % 0.18% Payroll / Clearing Accounts 2 27, % 0.28% Total 16 11,940, % 0.39% * The Blended Interest Rate is the average of all the interest rates of all the accounts held by the County.

3 Many of these accounts exist due to external requirements put upon the County by lenders and grant agencies or internal requirements established through resolution or ordinance of the BOCC. The composition of the County s portfolio changed over the course of the fiscal year. The distribution of funds as compared to the prior fiscal year is: Distribution At Year End: Type of Account: FY 16/17 FY 15/16. Investment Accounts 58.33% $6,965, % $6,286,928 Operating Accounts 25.45% $3,039, % $1,786,498 Restricted Savings Accounts 12.87% $1,536, % $1,256,990 Debt Service Accounts 3.11% $371, % $381,672 Payroll & Clearing Accounts 0.23% $27, % $27,355 Total % $11,940, % $9,739,443 V. MATURITY DISTRIBUTION OF PORTFOLIO The maturity of investments affects the liquidity of the funds invested. As of September 30, 2017, all of the County s funds were held in instruments that were 100% liquid with all balances available on a daily or next day basis. As such, there is no weighted average maturity of investments as of September 30, This is important to note when comparing the interest rates the County is getting with the interest rates of other optional investment instruments that would require the surplus funds to be locked up for a period of time. VI. PORTFOLIO GROWTH The funds available for investment are directly related to the health of the County s fund balances. As fund balance improves, more funds are available for investment. At the same time, funds held and built up for the purpose of capital projects, for the purchase of vehicles and various equipment, or for infrastructure improvements will deplete funds available for investment when they are spent. The following is a multi-year comparison of the County s cash and investment portfolio at the date indicated.

4 Type of Account: 9/30/2017 9/30/2016 9/30/2015 9/30/2014 Ameris Bank NOW $ 2,912, $ 6,286, $ 5,375, $ 4,534, Ameris Restricted Savings 1,536, ,137, , , Ameris Bank Debt Service Accounts 371, , , , Ameris Bank Operating Accounts 2,584, ,531, ,664, ,144, Ameris Payroll / Clearing Accounts 9, Centennial Bank - 401, , , SBA Investment Account Prime Meridian Money Market Account 4,002, Prime Meridian Operating Accounts 454, Prime Meridian Payroll / Clearing Accounts 17, Florida Local Government Investment Trust 50, Total $ 11,940, $ 9,739, $ 10,238, $ 7,504, A brief description of these accounts follows: The Ameris NOW account, the Prime Meridian Money Market account and the Florida Local Government Investment Trust account (FLGIT) represent the actual surplus funds available for investment. The Ameris Restricted Savings accounts represent the Housing Prisoners monies held for the Sheriff s Office and a small savings account for the Clerk of Court. The Ameris Debt Service accounts represent monies held to pay the annual payments of the Landfill and Courthouse loans. The Ameris Bank and Prime Meridian Bank operating accounts are the accounts used to pay the daily bills of the County, Supervisor of Elections and Clerk of Court. The Ameris Bank and Prime Meridian Bank Payroll / Clearing accounts are the accounts used to process payroll and other similar clearing accounts for the Board of County Commissioners, the Clerk of Court and the Supervisor of Elections. VII. MARKET, ECONOMIC & INVESTMENT CONDITIONS Federal Funds Rate The Federal Reserve s Open Market Committee (FOMC), the rate setting body of the Federal Reserve, meets eight times per year. It executes monetary policy for the Federal Reserve System, the central bank of the United States. Each time it meets, the FOMC reviews the economic conditions of the US and decides whether or not to use expansionary or contractionary monetary policy. The FOMC issues forecasts at 4 of the 8 meetings. As of September 30, 2017, the FOMC had raised the Federal Reserve rate only four times since In December 2015 the rate was raised from.25% to.50%, in December 2016 the rate was increased from.50% to.75%. In March 2017, the rate was raised from.75% to 1.00% and in June 2017 the rate was raised from 1.00% to 1.25%. What is the Federal Funds Rate? Essentially, it is the interest rate at which banks lend money to one another overnight to meet loan reserve requirements. The federal funds rate is a tool used by the Federal Reserve to control the supply of available money and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which helps keep inflation in check. Lowering the rate has the opposite effect. If the Fed Funds Rate is increased, you can expect slower economic growth (to slow inflation) and if they lower the rate, you can expect an increase in economic growth. Future Rate Estimates As of the publish date of this report (May 2018), the Federal Funds Rate currently sits at 1.75% with increases occurring in December 2017 of.25% and March 2018 of.25%. Where will it be at the end of 2018, 2019? That depends on who you ask. Like in 2017, there is some disagreement as to how many times the Fed Rate will rise in 2018 and 2019 but all analysts agree it will rise if current global and domestic economic conditions continue. The Federal Reserve indicated there would be four or five hikes in the rate in 2016 but in hindsight, there was only one. In 2017, the FOMC had indicated its goal was to hike the rate to 2.00% (their target rate for inflation) and the Fed Funds rate ended at 1.5% at the close of 2017.

5 In 2016, the longer term projection for the rate in 2017 was 2.4% and 3.3% for The FOMC has since adjusted those estimates to 2.0% in 2018 and the market is expecting two more rate hikes in In March 2018, the FOMC issued its projections on a number of economic variables, one of which was the Fed Fund Rate. Their projection for the rate in 2018, 2019 and 2020 was %, %, and %, respectively. Economic Conditions The key to understanding the changes (actual or proposed) in the Fed Funds Rate is recognizing the relationships of the variables that make up our economy. In January 2018 the FOMC issued its Statement on Longer-Run Goals and Monetary Policy Strategy. In it the FOMC highlighted 3 variables: inflation, employment and monetary policy. The FOMC reaffirmed its goal of 2% inflation, spoke of maximum employment being reached with an unemployment rate of 4.6% and reaffirmed a balanced approach to its monetary policy. Part of the FOMC s monetary policy as outlined in its June 2017 meeting is to begin reducing the $4.5 Trillion in securities (think reversing Quantitative Easing) held by the Federal Government by allowing $6 Billion of Treasuries to mature each month without replacing them. In January 2018 the FOMC outlined it will allow $12 Billion of Treasuries to mature each month without replacing them and another $8 Billion of mortgaged-backed securities to mature without replacing them. There are many variables in the U.S. economy and understanding their relationships and effect on each other can get complicated so this report only examines three: the inflation rate; the economic growth rate (GDP); and the unemployment rate. Inflation Rate Congress has mandated that the Federal Reserve maintain the inflation rate at around 2%. Inflation is measured in several different rates or indexes. For example, most people look at the CPI, the Consumer Price Index, to get a picture of rising costs and prices. The FOMC measures inflation using the PCE, the Personal Consumption Expenditure Index. The PCE rate has remained below the targeted 2% for five years in a row and is not expected to exceed 2% until The FOMC expects the PCE rate to increase to % in 2018, % in 2019, and % in Economic Growth Rate Economic growth is also measured in a variety of ways but the GDP, the gross domestic product, is a good, broad indicator of our economy s growth. There are many factors that affect GDP as well such as domestic spending, net U.S. exports, the strength of the U.S. dollar, and the strength of foreign markets, just to name a few. The FOMC expects the GDP to rise to % in 2018, % in 2019 and % in Note the declining nature of this projection. Unemployment Rate The FOMC expects the unemployment rate in 2018 to range between 3.6%-3.8%, in %, and in %, which, in market terms, is nearing full or maximum employment. An important aspect of analyzing the unemployment rate is looking at which markets or sectors of the economy have rising or falling unemployment. Overall, despite fears of trade wars the U.S. economy is growing with nearly 80% of S&P 500 companies exceeding earnings expectations in the first quarter of 2018, the tax reform package impact is clearly visible to most employees, GDP increased 2.3% beating market expectations and almost all economic factors and sentiments point to the strengths of the U.S. economy. VIII. INVESTMENT INCOME From 2012 to 2014, despite increases in available funds for investment, the County s total investment income declined due to the continual fall of short-term rates to historic lows of less than 1% and, for a good portion of the time, almost zero. In FY14-15, Wakulla s interest income finally started to grow due to record highs in fund balance and better than average daily rates from our local banks. Investment income continued to increase in FY15/16 with a $12, increase over the previous fiscal year, or a 23% increase, which does not take into account the SBA one-time final payout of interest in the previous year. In the current year, , interest income was $87,481.51, an increase of $20,347.26, or a 31% increase over the prior fiscal year.

6 Fiscal Year: 9/30/2017 9/30/2016 9/30/2015 9/30/2014 Investment Income: $ 87, $ 67, $ 54, $ 35, One time SBA final payout of interest , $ 87, $ 67, $ 67, $ 35, * The SBA final payout of interest will be discussed below. INVESTMENT INCOME COMPARISON Since Wakulla s fund balances are the strongest they have been in recent history, if not ever, liquidity or cashflowing daily operations is no longer a serious challenge (as discussed on the first page, liquidity is always a concern). As such, investing the County s excess funds in longer term maturities in order to achieve a higher interest rate is now a viable option. The Clerk s office routinely examines the market rates of 3 month, 6 month, 1 year and 2 year maturities and other investment pool options offered by various entities in the State of Florida. The current sentiment among management is to not lock up these funds for any amount of time and, instead, to make use of the many investment pools that offer higher interest rates with daily liquidity. Below you will find a comparison of the average monthly interest rates earned by the County as compared to some of the more secure rates on the open market. An analysis of the above chart shows: Wakulla s blended average interest rate (the red line) is no longer out-performing any of the rates as it has in years past. This is due to the increase in the Fed Funds Rate while the County s entire account portfolio contains numerous operating and payroll accounts that earn very little interest and, in the case of one account, earns nothing due to the restrictions placed on the funds. The County s investment accounts (the orange line), while maintaining daily liquidity, still out-performed the 3 Month Treasury for the first seven months of the year and out-performed it in average over the course of the year. We find that the Clerk s Office strategy of investing surplus funds in local banks for purposes of safety and liquidity stopped out-performing the market in the last half of the year. The Clerk s Office has discussed this shift with management and has adjusted its investment strategy beginning in September 2017 and on into FY to diversify its investments into the various statutorily approved local government investment pools.

7 Both the 1 Year and 2 Year Treasuries out-performed the County s investment accounts but the County is not willing to tie up cash for that length of time. In summary, Wakulla County has been able to obtain strong interest rates, resulting in higher investment income and has been able to do so with overnight deposits thus safeguarding principal safety and liquidity which is a higher priority than yield. Investment fees should also be taken into consideration and yields should be reported net of costs. No investment fees were incurred in FY since all of the County s funds were in overnight deposits. The County s operating account does incur bank fees on a monthly basis. The total cost in bank fees for the Ameris Bank operating account for FY16-17 was $4, as compared to $6, in FY These costs are offset by a 0.40% earning credit totaling $6, in FY16-17 as compared to $5, in FY15-16, resulting in a net gain in FY16-17 of $1, as compared to a net cost of $ in FY The improvement seen in FY16-17 is the result of re-bidding the banking services agreement and getting better rates and lower fees. IX. DISCLAIMER, DISCLOSURES & NOTES 1. The Public Depositor Annual Report to the Chief Financial Officer was provided to the Department of Financial Services for the period ending September 30, 2017 as required by Chapter 280, Florida Statutes. All of the County s bank accounts were either in qualified public depositories or in statutorily approved investment pools. For more information on what this means or to obtain this report, please contact the Finance Department of the Clerk of Court. 2. The information provided in this report is believed to be accurate and correct but this report has not been audited. Future outcomes are not based on historical results and none of the information provided herein should be used to make personal financial or investment decisions. Although, pursuant to Chapter 119, Florida Statutes, this report is a public record and its distribution is not limited, this report is intended solely for the use of Wakulla County, Florida s management and is not intended to be and should not be used by any other party. 3. Some of the information and data provided within this report may be found at these sites: Florida Statutes Federal Reserve Historical Interest Rates - END OF REPORT