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 8 th Annual Investment Report For Fiscal Year Ended September 30, 2016 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 funds. Excess 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 excess funds than others due to the number of or size of the capital projects ongoing during the fiscal year. These excess 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. III. 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 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.

2 The County invested in only these authorized types of instruments during the fiscal year. IV. CASH & INVESTMENT PORTFOLIO BALANCES AT SEPTEMBER 30, 2016 Cash and investments held by the County consist of fifteen (15) bank accounts. These included one (1) money market account (NOW), two (2) restricted savings accounts, three (3) debt service accounts, five (5) payroll or clearing accounts and four (4) operating accounts. At September 30, 2016, cash and investments amounted to $9,739, compared to $10,238, at September 30, 2015, a decrease of $498, Comparative Investment Report For Fiscal Year Ending September 30, /30/2016 9/30/2015 Change Portfolio Balance 9,739, ,238, (498,889.97) Portfolio Blended Avg. Yield % % % Fiscal Year Interest Income 67, , , Please note that in reports prior to 2015, this portfolio did not include every bank account of the County. In those years, the operating accounts, debt service fund accounts and payroll and clearing accounts with balances that are used to meet the on-going obligations of the County were not included. In those years, this portfolio only included those funds deemed excess funds available for investment per F.S Last year, in 2015, we began including all cash balances regardless of the purpose of the funds or the type of account. All balances for previous years have been restated to present a consistent comparison. These balances include all cash balances of the Supervisor of Elections and the Clerk of Court. As further described under the Portfolio Growth section, there is a distinction between the cash balances at fiscal year-end and average daily cash balances throughout the year. For example, the average daily cash balance available for all of FY 15/16 was $11,816,348 (it was $11,732,429 for FY 14/15) but the year-end cash balances for FY 15/16 totaled $9,739,443 (it was $10,238,333 for FY 14/15). So, while the year ended with $498,890 less in cash, the County averaged $83,919 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 $14,532,398 in January 2016 (last year the highest was $14,139,460 in January 2015). 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 $7,497,129 in November 2015 (it was $6,677,547 in October 2014). The following is a summary and chart of the County s cash and investment balances as of September 30, 2016: Portfolio Breakdown as of September 30, 2016 Account / Investment Type Number of Accounts Book Value Portfolio Composition Blended Interest Rate NOW Accounts 1 6,286, % 0.70% Restricted Savings Accounts 2 1,256, % 0.63% Debt Service Accounts 3 381, % 0.53% Operating / Trust Accounts 4 1,786, % 0.08% Payroll / Clearing Accounts 5 27, % 0.24% Total 15 9,739, % 0.39% * The Blended Interest Rate is the average of all the interest rates of all the accounts held by the County. 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.

3 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 15/16 FY 14/15. NOW Accounts 64.55% $6,286, % $5,375,466 Operating Accounts 18.34% $1,786, % $3,000,126 Restricted Savings Accounts 12.91% $1,256, % $980,479 Debt Service Accounts 3.92% $381, % $872,875 Payroll & Clearing Accounts 0.28% $27, % $9,387 V. MATURITY DISTRIBUTION OF PORTFOLIO The maturity of investments affects the liquidity of the funds invested. As of September 30, 2016, all of the County s funds were held in instruments that were 100% liquid with all balances available on a daily basis. As such, there is no weighted average maturity of investments as of September 30, 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. Investment Account: 9/30/2016 9/30/2015 9/30/2014 9/30/2013 Ameris Bank NOW $ 6,286, $ 5,375, $ 4,534, $ 4,515, Ameris Savings 1,137, , , Ameris Bank Debt Service Accounts 381, , , , Ameris Bank Operating Accounts 1,531, ,664, ,144, ,271, Capital City Operating Account , Capital City Debt Service Accounts , Centennial Bank 401, , , , SBA SBA Fund B , Total $ 9,739, $ 10,238, $ 7,504, $ 7,927,661.87

4 A brief description of these accounts follows: The Ameris NOW account represents the actual excess funds available for investment. The Ameris Savings account represents 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, Oyster Bay Sewer and Courthouse loans. The Ameris Bank operating accounts are the accounts used to pay the daily bills of the County, Supervisor of Elections and Clerk of Court. The Centennial Bank accounts are the accounts used to process payroll, other similar clearing accounts and the agency funds of the Clerk of Court. VII. MARKET, ECONOMIC & INVESTMENT CONDITIONS Federal Funds Rate The Federal Reserve s Open Market Committee (FOMC), the rate setting body of the Federal Reserve, has raised the federal reserve rate only two times since In December 2015 the rate was raised from.25% to.50%, the only rate change during the County s fiscal year of October 2015 September Subsequent to this fiscal year, in December 2016 the rate was increased from.50% to.75%. HISTORICAL TREND OF FEDERAL RESERVE RATES Between December 2007 and December 2016 Source: Federal Reserve Board 2017 What is the Federal Funds Rate? Essentially, it is the interest rate at which banks lend money to one another bank 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. Future Rate Estimates The Federal Funds Rate currently sits at.50% to.75%. Where will it be at the end of 2017? That depends on who you ask. Like in 2016, there is some disagreement as to how many times the Fed Rate will rise in 2017 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. The FOMC meets eight times a year with each meeting about six weeks apart. If there are going to be four rate hikes per year (the average number needed to meet the long-term goals of the FOMC), one would expect the

5 FOMC to raise the rate every other meeting (every 12 weeks or once a quarter). To get the rate to the expected rate of 1.4% by year end, the FOMC will need to raise the rate about.23% to.25% every quarter. The longer term projection for the rate in 2017 was 2.4% and 3.3% for Since no increase has happened in 2017, this would require rates increasing about.37% in every quarter for the next 7 quarters. That is unlikely. Instead, the FOMC has reduced its projections or has, at least, pushed them further out. The goal for 2018 is now about 2.25% - 2.4% for 2018, a much more manageable objective but one that will still require the FOMC to increase the rate by.25% every quarter for the next 7 quarters. Again, this is unlikely given recent history of one rate hike per year. On February 14, 2017, Chair Janet Yellen testified before the Senate Committing on Banking, Housing and Urban Affairs. At that meeting she stated that she expects the economy to continue to expand at a moderate pace with the job market strengthening somewhat further and inflation gradually rising to 2%. She stated the FOMC expects the evolution of the economy to warrant further gradual increases in the federal reserve rate to achieve and maintain its employment and inflation objectives. She further stated the FOMC must strike a balance in the timing of rate increases with growth in the economy in order to avoid causing a recession. Economic Conditions The key to understanding the changes (actual or proposed) in the Fed rate is recognizing the relationships of the variables that make up our economy. In preparing this portion of the report, we reviewed two articles written immediately after the presidential election and two articles written just prior to and after President Trump took office. The two articles written immediately after the election are: Donald Trump s Election has Wall Street Questioning the Future of the Federal Reserve by Bob Bryan, dated November 9, 2016 and published in Business Insider ( Will the Next President Impact the Federal Reserve s Interest Rate Hikes? by Andrew Soergel, dated November 8, 2016 and published in U.S. News ( Both articles highlight the fact that the FOMC is supposed to be independent from political changes and tides but the President has voiced concern about how the FOMC makes its decisions. For good reason the President can t directly impact the decisions of the FOMC and can t fire Chair Janet Yellen but the President and Republican led Congress can indirectly impact the FOMC by appointing new members as the term of current members expire, restructuring the Federal Reserve and by focusing on the Federal Reserve Transparency Act. The FOMC is supposed to be governed by the objectives laid out by Congress and there are simply two objectives maintain or control inflation (2% is the current objective) and ensure unemployment rates are adequate (4-5% is the current objective). But both articles highlight that the FOMC can t ignore market volatility and, as usual analysts are split on what the FOMC will do. Some were convinced Trump s election would create chaos on Wall Street (think trade wars with China and Mexico) hindering the FOMC from raising rates in December Some believed the market would lose 10 to 20% between November s election and January s inauguration. Others believed the FOMC would ignore the market regardless of its performance and hold to their monetary policies and raise rates in December We now know the latter was true. There was no chaos on Wall Street and the FOMC raised the rates by.25% in December In fact, in the first 30 days of his presidency the market increased about 4% giving President Trump the 6 th highest ranking of all presidents before him. The two articles written just prior to and after President Trump took office are: The Future of the Federal Reserve Under the Trump Administration by Deena Zaidi dated January 5, 2017 and published in The Street ( Fed Might Raise Rates Relatively Soon by Joana Taborda dated February 14, 2017 and published in Trading Economics ( In both of these articles the actions taken by the FOMC in December 2016 in raising the Federal Reserve Rate to.75% is the result of more expansionary fiscal policy in the aftermath of U.S. elections. In its minutes from the December meeting, the FOMC members stated as with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty. In its February 2017 minutes the members stated there is noted improvement in business and consumer confidence and the rise in consumer prices (inflation) and the near-term risks to the economic outlook appear roughly balanced. In short, the economy is looking better.

6 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 four years in a row and is not expected to exceed 2% until The FOMC expects the PCE rate to increase to 2% 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 by % in Unemployment Rate The FOMC expects the unemployment rate in 2017 to range between 4.8% and 5.1% which, in market terms, is nearing full employment. An important aspect of analyzing the unemployment rate is looking at which markets or sectors of the economy have rising or falling unemployment. 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. Fiscal Year: 9/30/2016 9/30/2015 9/30/2014 9/30/2013 Investment Income: $ 67, $ 54, $ 12, $ 37, One time SBA final payout of interest - $ 12, $ 67, $ 67, * 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. Below you will find a comparison of the average monthly interest rates earned by the County as compared to some of the rates on the open market.

7 As the chart above shows, Wakulla s blended average interest rate (the red line) out-performed the Fed Funds rate and the 3 Month Treasury Bill rate for the entire year. All long-term investment options out-performed the blended yield rate. There is one account, Wakulla s Investment account (the yellow line), which, while maintaining daily liquidity, still out-performed the 1 Year Treasury Note for the entire year. The 2 Year Treasury Note did outperform the investment account but the County is not willing to tie up cash for that length of time. In summary, Wakulla County has been able to obtain higher 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 FY15-16 was $6, which was offset by a 0.40% earning credit totaling $5, resulting in a net cost of $ Taking these fees into consideration, the County s effective average yield of.568% drops to.562%, or total costs were.006%. 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, 2016 as required by Chapter 280, Florida Statutes. All of the County s bank accounts were in qualified public depositories. 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