COMPREHENSIVE ANNUAL FINANCIAL REPORT

Transcription

1 2 018 COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2018 SAN DI EG O CO U NT Y I NVE STM E NT P OO L A N I N V E S T M E N T T R U S T F U N D O F T H E CO U N T Y O F SA N D I E G O, C A ISSUED BY DAN M c ALLISTER, SAN DIEGO COUNTY TREASURER-TAX COLLECTOR

2 2018 COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2018 ISSUED BY DAN MCALLISTER, SAN DIEGO COUNTY TREASURER-TAX COLLECTOR SAN DIEGO COUNTY INVESTMENT POOL AN INVESTMENT TRUST FUND OF THE COUNTY OF SAN DIEGO, CA

3 TABLE OF CONTENTS INTRODUCTORY SECTION 2 Letter of Transmittal from the Treasurer 3 GFOA Certificate of Achievement 9 Treasury Oversight Committee 10 Treasurer-Tax Collector Organization Chart 11 Treasury and Investments Division 12 FINANCIAL SECTION 13 Independent Auditor s Report 14 Management s Discussion and Analysis 15 Basic Financial Statements: Statement of Net Position 19 Statement of Changes in Net Position 20 Notes to the Basic Financial Statements 21 OTHER INDEPENDENT AUDITOR S REPORTS 30 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 31 Independent Auditor s Report on Compliance with California Government Code Sections 27134, 53601, and INVESTMENT SECTION 33 Administrative Overview 34 Outline of the Investment Policy 34 Investment Results 35 Weighted Average Effective Yields 36 Income Allocation 36 Risk Profile 38 Investment Pool Participants List and Chart 39 Investment Statistics 41 Schedule of Top Ten Fixed-Income Securities 42 Schedule of Investment Expenses by Category 43 STATISTICAL SECTION 44 Introduction 45 Objectives 45 Schedule of Additions, Deductions of Pool Investments and Changes in Net Position 46 Schedule of Earnings, Returns, Expenses, Apportionment Rate, Average Daily Balances (ADB) and Ratio of Fees/ADB 47 Schedule of Expenses (Investment and Administrative Costs) 48 Asset Allocation at Fair Value 49 Net Position by Major Participant 50 1

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5 TREASURER-TAX COLLECTOR COUNTY OF SAN DIEGO County Administration Center 1600 Pacific Highway, Room 112 San Diego, California fax LETTER OF TRANSMITTAL FROM THE TREASURER NOVEMBER 13, 2018 BOARD OF SUPERVISORS AND TREASURY OVERSIGHT COMMITTEE County of San Diego San Diego County Administration Center San Diego, California I am pleased to submit the Comprehensive Annual Financial Report (CAFR) of the San Diego County Investment Pool (Investment Pool) for the fiscal year ended June 30, This report and the annual audit are presented to demonstrate compliance with the San Diego County Treasurer s Pooled Money Fund Investment Policy (Investment Policy) dated January 1, Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the management of the Treasurer s Office. A framework of internal controls has been established by management for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. To the best of our knowledge and belief, the enclosed data are accurate in all material respects, and are reported in a manner designed to present fairly the financial position and changes in financial position of the Investment Pool in conformity with accounting principles generally accepted in the United States of America (GAAP) and audited in accordance with auditing standards generally accepted in the United States of America by a firm of licensed certified public accountants. All disclosures necessary to enable the reader to gain an understanding of the Investment Pool s financial activities have been included. INTRODUCTORY SECTION 3

6 The Investment Pool s financial statements have been audited by Brown Armstrong Accountancy Corporation, a firm of licensed certified public accountants. The goal of the independent audit is to provide reasonable assurance that the Investment Pool financial statements as of and for the fiscal year ended June 30, 2018, are fairly stated in accordance with generally accepted accounting principles. The independent audit involves performing procedures to obtain evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Based upon the audit, the independent auditors concluded that there was a reasonable basis for rendering an unmodified opinion that the Investment Pool s financial statements as of and for the fiscal year ended June 30, 2018, are fairly presented in accordance with GAAP. The independent auditor s report is presented as the first component of the Financial Section of this report. Management provides a narrative introduction, overview and analysis to accompany the basic financial statements in the form of Management s Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The Investment Pool s MD&A can be found after the independent auditor s report. PROFILE OF THE SAN DIEGO COUNTY INVESTMENT POOL The Investment Pool was created when the State Legislature established the five-member San Diego County (County) Board of Supervisors in It is a local government pool with $10.0 billion in assets as of June 30, The Investment Pool is headed by the San Diego County Treasurer-Tax Collector, an elected official who is responsible for tax collection, banking, investment, disbursement and accountability of public funds. The Investment Pool is managed by the Treasurer s Office on behalf of the Investment Pool participants. The County portion of the Investment Pool assets as of June 30, 2018 is $3.8 billion while the external, non-county portion is $6.2 billion. Depositors in the Investment Pool include both mandatory and voluntary participants located within the County. Mandatory participants include the County, K-12 school districts, certain special districts and accounts controlled by the County Board of Supervisors. Mandatory participants are defined as those agencies required by law to deposit their funds with the County Treasurer s Office. Mandatory participants comprise the majority of the Investment Pool s assets, approximately 92.1% as of June 30, Voluntary participants are those agencies that are not required to place their funds in the Investment Pool, and do so only as an investment option. Voluntary participants include cities, some fire districts, certain special districts, and other municipal entities. As of June 30, 2018, voluntary participants accounted for approximately 7.9% of the Investment Pool. Community colleges have characteristics of both mandatory and voluntary participants. While they have limited authority to invest funds outside of the Investment Pool, community colleges receive banking, checking, and investment services from the County Treasurer s Office. In this financial report, they are categorized as mandatory participants. INTRODUCTORY SECTION 4

7 In addition to investment management, the Treasurer s Office also provides banking services to all mandatory participants. These services include, but are not limited to, warrant redemption, electronic fund transfers, acceptance of deposits, and fund accounting. INVESTMENT POLICIES AND PRACTICES The primary objectives of the Investment Pool, as set forth in the Investment Policy, in order of importance, are safety, liquidity, and yield. The following goals have been set for fiscal year 2019: Promote fiscal stability by maintaining a AAAf/S1 rating from Fitch Ratings; Enhance investment returns by continuing development of additional portfolio analytics tools; Improve constituent outreach by increasing public awareness of services offered by the Investment Division; and Obtain a certificate of achievement for excellence in financial reporting by the Government Finance Officers Association. The Treasurer s Office prepares the Investment Policy on an annual basis to ensure the integrity of the Investment Pool and to provide guidelines for its operation. Upon completion of the Investment Policy by the Treasurer s Office, it is presented for review to the Treasury Oversight Committee, and then to the County Board of Supervisors for their approval at a public meeting. The maturity distribution of the Investment Pool is limited by the Investment Policy, which places restrictions on the securities that may be purchased. Cash temporarily idle during the year was invested in negotiable certificates of deposit, obligations of the U.S. Treasury, U.S. government agencies, supranationals, commercial paper, pass-through securities, money market mutual funds and collateralized (non-negotiable) certificates of deposit. The maturities of the investments range from one day to five years, with an average weighted maturity of 343 days. The weighted average effective yield (annualized) on investments as of June 30, 2018 was 1.94%. To safeguard the investments, a custodian is employed to safekeep, settle, and accept interest payments on investments held by the Investment Pool. To facilitate internal security and safeguards, the Investment Policy requires an annual audit and the establishment and maintenance of internal controls and procedures. For fiscal year 2018, investments provided a 1.51% apportionment rate, which is the rate used in allocating the net earnings to the participants. The Investment Pool s average apportionment rate over the last three and five fiscal years was 1.04% and 0.77%, respectively. The Treasurer s Office has implemented a system of internal controls designed to ensure the reliability of reported investment information. The Treasurer s Office provides monthly investment reports for the Treasury Oversight Committee, which monitors the management of funds and reviews the Investment Policy. Please refer to the Investment Section of this CAFR for additional information on investments. INTRODUCTORY SECTION 5

8 SIGNIFICANT EVENTS During fiscal year 2018, significant events included: (1) The Investment Pool s rating was affirmed at AAAf/S1 by Fitch Ratings, Inc. AAAf is the top rating possible for a local government investment pool and indicates the Investment Pool s portfolio contains securities of the highest underlying credit quality. The S1 volatility rating signifies the Investment Pool possesses very low sensitivity to market risk, given its conservative investment policies. Rating considerations include: High quality credit portfolio; Liquidity management as a key objective; Oversight that decreases operational risk; and Stable investor base; Low sensitivity to market risk; Industry standard administration and systems. (2) The Federal Reserve (Fed) raised the benchmark Fed funds rate three times, in December 2017 and both March and June The target range finished fiscal year 2018 at 1.75% to 2.00%, resulting in sharply higher rates for short-term securities and contributing to significant improvement in the Investment Pool s yield. Short-term rates could climb more if the Fed moves rates again during fiscal year 2019, which would help the Investment Pool s yield rise further. The Investment Pool yield to maturity increased by 65 basis points in fiscal year 2018, even as the weighted average maturity for investments held decreased from 419 days to 343 days. (3) The Investment Pool reached an all-time record high balance of $11.6 billion in April Growth in assets under management is due to higher assessed values and improved tax collections, bond issuance by schools and other local agencies, the addition of new voluntary participants, and increased confidence in the Investment Pool as an investment option. (4) Despite ongoing modest improvement in economic conditions worldwide, the Investment Pool continues to be managed conservatively with the following measures: Investing primarily in U.S. Treasury, Government Agency, AAA-rated Supranationals, and AAA-rated passthrough securities for maturities beyond a year; Selective purchase of corporate securities using a maturity tiering strategy; and Choosing only top-tier corporate securities when investing for maturities between 90 days and one year. NATIONAL ECONOMIC ENVIRONMENT During fiscal year 2018, the U.S. economy continued to improve. After remaining relatively modest for much of the year, Gross Domestic Product (GDP) growth accelerated in the spring of 2018 due to the effects of the federal tax cuts and improved consumer and business confidence. Nominal and real gross domestic product grew by 7.6% and 4.2%, respectively, during the second quarter of 2018, which was the fastest pace since Annual inflation metrics were weak at the beginning of the fiscal year, but also improved in fiscal year 2018 and rose well above the Fed s INTRODUCTORY SECTION 6

9 2% target. By June 2018, annual Consumer Price Index (CPI) growth reached 2.9%, which was the highest reading since The unemployment rate fell further from 4.3% to 4.0% during fiscal year 2018, a level considered by many economists to indicate full employment. This positive trend was somewhat offset, however, by the continued stagnation in the labor force participation rate, which remained near its all-time low of 62.9% at period s end. Annual real wage growth improved somewhat to a still modest 2.8% during the period, but the most recent month registered only a 0.1% increase. Housing prices continued to rise, with the S&P/Case-Shiller 20-City Index recording 6.40% year-over-year growth in June 2018 and hitting an all-time high. Home sales data did show some weakness, however, toward the end of fiscal year 2018, perhaps due to the higher prices and rising interest rates. The Federal Reserve raised the Fed funds target rate three times during fiscal year 2018, ultimately pushing it to a range of 1.75% %, and additional increases are expected. The Federal Open Market Committee (FOMC) has communicated its preference for a series of gradual rate increases that the market interprets will occur quarterly for the foreseeable future. This would result in two additional rate hikes in 2018, with more expected in The Fed s dot plot projects 2-3 hikes next year, though market participants are not yet pricing in the full effect of such moves. The FOMC has grown more comfortable with the generally stronger economic data in recent months, including an uptick in inflation toward its 2% target, and expects the economy will continue to expand at a healthy pace. Additional tightening is occurring as the Fed gradually reduces government bond holdings on its balance sheet, a process first announced in September By October 2018, the Fed expects to unwind its balance sheet at a pace of $50 billion per month. The 10-year US Treasury yield declined during the first two months of fiscal year 2018, however, has since increased fairly consistently due to Fed actions and improved economic and inflation data. The yield closed on June 30, 2017 at 2.86%, or 55 bps higher than the prior year. U.S. equity markets were again strong, with the S&P 500 index gaining 12.17% and the NASDAQ soaring 22.31% during fiscal year World indices were mixed, however, with the EURO STOXX 50 Index falling 1.34% and the NIKKEI gaining 11.34%. SAN DIEGO COUNTY ECONOMIC CONDITION Economic recovery in the San Diego region continued during fiscal year 2018 at a moderate pace. The unemployment rate within the County dropped from 4.2% to 3.7% during fiscal year 2018, slightly outpacing the improvement in the nationwide rate. The University of San Diego Index of Leading Economic Indicators hit an all-time high in March 2018 after jumping 0.5% and has not declined for 17 consecutive months. This forward-looking composite index, which includes local building permits, initial jobless claims, stock prices, consumer confidence, help-wanted ads, and the national economic outlook, has been a reasonably good indicator for the local economy. The housing market in San Diego continues to rebound strongly as indicated by the 6.9% rise in the S&P/ Case-Shiller San Diego home price index between June 2017 and June The County has maintained fiscal stability within the discipline of the General Management System (GMS) that establishes strong fiscal management practices. The GMS is the County s business model that guides operations and service delivery to residents, businesses, and visitors throughout fiscal year This fiscal discipline has allowed the County to commit to maintaining a portion of Unassigned Fund Balance as a reserve that equals a minimum of two months (16.7%) of audited General Fund expenses. This Reserve will protect the County against expenditure and revenue volatility, natural disasters, economic downturns, or other unforeseen emergencies. Appropriation of the Reserve minimum balance requires a 4/5th vote of the Board INTRODUCTORY SECTION 7

10 of Supervisors. For fiscal year 2019, the General Fund Reserve totals $586.1 million. Many local municipalities, including school districts, continue to take advantage of the low interest rate environment to issue bonds for a variety of purposes. As a result of the influx of bond proceeds, tax receipts, and voluntary deposits, the Investment Pool was able to take advantage of higher interest rates overall following the Fed s three benchmark rate increases during the fiscal year The Investment Pool s yield to maturity has increased from 1.29% as of June 30, 2017 to 1.94% as of June 30, AWARDS AND ACKNOWLEDGMENT The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Investment Pool for its Comprehensive Annual Financial Report (CAFR) for fiscal year This was the twentieth consecutive year that the Investment Pool has achieved this prestigious award. To be awarded a Certificate of Achievement, the Treasurer s Office must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both GAAP and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe this CAFR continues to meet the Certificate of Achievement Program s requirements and will be submitted to the GFOA to determine its eligibility for another certificate. The preparation of this report would not have been possible without the efficient and dedicated services of many individuals in the Treasurer s Office. It is intended to provide complete and reliable information as a basis for making management decisions, as a means of determining compliance with legal provisions and determining responsible stewardship of the funds in the Investment Pool. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the Investment Pool s activities during fiscal year Questions concerning any of the information provided in this report or requests for additional financial information, including a complete list of the Investment Pool s current holdings, should be addressed to the Office of San Diego County Treasurer-Tax Collector, 1600 Pacific Highway, Room 152, San Diego, California Copies of the comprehensive annual financial report as well as the monthly investment pool results are also available at Respectfully, Dan McAllister SAN DIEGO COUNTY TREASURER-TAX COLLECTOR INTRODUCTORY SECTION 8

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12 TREASURY OVERSIGHT COMMITTEE Dan McAllister Treasurer-Tax Collector County of San Diego Tracy Sandoval Deputy Chief Administrative Officer Finance and General Government/Auditor and Controller County of San Diego Don Steuer Assistant Chief Administrative Officer County of San Diego Michael Simonson Asst. Superintendent for Business Services San Diego County Office of Education Gregory Ottinger, Ed.D. Chief Business Officer San Diego Unified School District Andre Douzdjian Special District Representative Non-voting Member Herb Johnson Public Member Colleen Harvey Public Member Charlie Ng Public Member Maria Kachadoorian Public Member Mark Fisher Public Member INTRODUCTORY SECTION 10

13 SAN DIEGO COUNTY TREASURER-TAX COLLECTOR ORGANIZATION CHART* TREASURER-TAX COLLECTOR ASSISTANT TREASURER-TAX COLLECTOR CHIEF DEPUTY TREASURER CHIEF INVESTMENT OFFICER ACCOUNTING MANAGER INVESTMENT OFFICER ASSISTANT ACCOUNTING MANAGER INVESTMENT OFFICER TREASURY OPERATIONS INVESTMENT OFFICER RECONCILIATIONS BANKING AND TREASURY * As of June 30, INTRODUCTORY SECTION 11

14 TREASURY AND INVESTMENTS DIVISION* TOM PAOLICELLI Chief Deputy Treasurer VACANT Accounting Manager KEVIN FOLEY, CFA Investment Officer CAMERON URQUHART, CFA Investment Officer MIRIAM BARRERA, CPA Supervisor of Reconciliations GREGG ROSNER Supervisor of Banking and Treasury Services HANK KIM Chief Investment Officer ZINDA JIMENEZ Assistant Accounting Manager R.C. KINZLY Investment Officer BOBBY BACASEN Treasury Analysis and Special Projects ANN DUONG Supervisor of Treasury Operations * As of June 30, INTRODUCTORY SECTION 12

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16 INDEPENDENT AUDITOR S REPORT To the County of San Diego Audit Committee and Treasury Oversight Committee San Diego, California Report on the Financial Statements We have audited the accompanying financial statements of the San Diego County Investment Pool (the Investment Pool) of the County of San Diego (the County), California, as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the Investment Pool s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the basic financial statements referred to above present fairly, in all material respects, the net position of the Investment Pool, as of June 30, 2018, and the changes in net position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Investment Pool s basic financial statements. The introductory, investment, and statistical sections are presented for purposes of additional analysis and are not a required part of the basic financial statements. The introductory, investment, and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 13, 2018, on our consideration of the County Treasurer-Tax Collector s (TTC) internal control over financial reporting relating to the Investment Pool and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the TTC s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the TTC s internal control over financial reporting and compliance relating to the Investment Pool. BROWN ARMSTRONG ACCOUNTANCY CORPORATION Bakersfield, California November 13, 2018 FINANCIAL SECTION 14

17 San Diego County Investment Pool MANAGEMENT S DISCUSSION AND ANALYSIS For the Fiscal Year Ended June 30, 2018 (Unaudited) As management of the San Diego County Investment Pool (Investment Pool), we offer readers of the financial statements this narrative overview and analysis of the financial activities of the Investment Pool for fiscal year The following analysis primarily focuses on the Investment Pool s current year results in comparison with the prior year. Please read this analysis in conjunction with the letter of transmittal in the Introductory Section and financial statements that follow. FINANCIAL HIGHLIGHTS The assets of the Investment Pool exceeded its liabilities at the close of fiscal year 2018 by $10.0 billion (net position). The Investment Pool s total net position increased by $1 billion in fiscal year This represents a net increase of 11.3% compared to fiscal year The net investment income of the Investment Pool, which includes the change in fair value from the prior year, increased from a net investment income of $51.8 million in fiscal year 2017 to a net investment income of $112.3 million in fiscal year During fiscal year 2018, the Investment Pool distributed earnings of $140.2 million to participants compared to the previous year s distribution of $86.4 million. This represents an increase of $53.8 million, or 62.2%, from fiscal year The Investment Pool s expense ratio was 0.073% of the average daily balance for fiscal year 2018 and 0.084% for fiscal year The fair value of the Investment Pool showed an undistributed and net unrealized loss of $64.8 million (0.65% of portfolio fair value) at June 30, 2018 compared to an undistributed and net unrealized loss of $30.4 million (0.34% of portfolio fair value) at June 30, FINANCIAL SECTION 15

18 OVERVIEW OF THE INVESTMENT POOL FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the basic financial statements. The Investment Pool s basic financial statements consist of two components: 1) Statement of Net Position and Statement of Changes in Net Position 2) Notes to the Basic Financial Statements NET POSITION The Statement of Net Position presents information on the Investment Pool s assets and liabilities, with the difference between the two reported as net position. The Investment Pool s net position increased by $1.0 billion (11.3%) in fiscal year A large portion of this increase can be attributed to bond issuances from the San Diego Unified School District, Southwestern Community College District, San Marcos Unified School District, and MiraCosta Community College District. Property tax collections were also higher due to increasing assessed values. A summary of the Investment Pool s net position is presented below. San Diego County Investment Pool CONDENSED STATEMENT OF NET POSITION (Amounts expressed in thousands, except percentages) ASSETS AS OF JUNE 30, VARIANCE 2018 VS AMOUNT PERCENTAGE Investments at Fair value $ 9,949,342 $ 8,904,574 $ 1,044, % Cash, Non-negotiable CDs and Receivables 61,120 73,951 (12,831) -17.4% TOTAL ASSETS 10,010,462 8,978,525 1,031, % LIABILITIES Distributions Payable and Accrued Expenses 49,598 29,911 19, % NET POSITION HELD IN TRUST FOR POOL PARTICIPANTS $ 9,960,864 $ 8,948,614 $ 1,012, % FINANCIAL SECTION 16

19 CHANGES IN NET POSITION The Statement of Changes in Net Position presents information on how the Investment Pool s net position changed during fiscal year The increases include additions to investments, investment earnings and changes in fair value of investments. Unrealized gains or losses of securities are determined by taking the difference between amortized cost and the fair value of investments. The deductions consist of deductions from investment pool participant investments, distributions to the Investment Pool s participants and administrative expenses. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, additions and deductions are reported in this statement for some items that will result in cash flows in future fiscal periods. A summary of the changes in the Investment Pool s net position is presented below. San Diego County Investment Pool CONDENSED STATEMENT OF CHANGES IN NET POSITION (amounts expressed in thousands, except percentages) ADDITIONS FOR THE FISCAL YEAR ENDED JUNE 30, VARIANCE 2018 VS AMOUNT PERCENTAGE Additions to Pooled Investments $ 17,620,889 $ 16,270,794 $ 1,350, % Net Investment Income 112,270 51,843 60, % TOTAL ADDITIONS 17,733,159 16,322,637 1,410, % DEDUCTIONS Deductions from Pooled Investments 16,575,184 15,989, , % Distributions to Participants 140,155 86,384 53, % Administrative Expenses 5,570 5,816 (246) -4.2% TOTAL DEDUCTIONS 16,720,909 16,082, , % Changes in Net Position 1,012, , , % Net Position Beginning of Year 8,948,614 8,707, , % NET POSITION END OF YEAR $ 9,960,864 $ 8,948,614 $ 1,012, % FINANCIAL SECTION 17

20 Additions to pooled investments increased by $1.4 billion, or 8.3%, from fiscal year Deductions from pooled investments increased by $585 million, or 3.7%, from fiscal year During fiscal year 2018, there was a net inflow primarily related to higher assessed property values and improved tax collections, bond issuances by schools and other local agencies, and the addition of new voluntary participants. The proceeds are currently invested in the Investment Pool and are expected to be spent down over the next two to three years. In fiscal year 2018 the Investment Pool s Investment Earnings totaled $147.8 million. This represents an increase of $53.8 million in Investment Earnings as compared to fiscal year During this same period, the change in the Fair Value of Investments increased by $6.5 million. The offset of these figures, including investment pool expenses, resulted in a Net Investment Income totaling $112.2 million. Overall, net investment income increased by $60.4 million from the prior fiscal year. The increase in investment earnings is due to a rising interest rate environment as well as an overall increase in pooled investments. The Investment Pool is managed for the sole benefit of the participants. All income is accrued quarterly after deducting investment and administrative costs. The distributions to participants reflect only the actual interest income received during the fiscal year and may differ from the amounts accrued. The Investment Pool, in practice, holds most investments to maturity, based on a detailed cash flow analysis. Therefore, any undistributed gains or losses as a result of fair value fluctuations are not reflected in the distributions to participants. Distributions to participants increased by $53.8 million, or 62.2%, in fiscal year 2018 over fiscal year 2017 due to the increase in interest rates as well as the overall increase in pooled investments. FINANCIAL SECTION 18

21 San Diego County Investment Pool STATEMENT OF NET POSITION As of June 30, 2018 (amounts expressed in thousands) ASSETS Investments at Fair Value: Commercial Paper $ 2,994,041 Negotiable Certificates of Deposit 2,794,513 U.S. Government Agencies 2,458,821 Supranationals 668,215 U.S. Treasury Notes 474,142 Money Market Mutual Funds 348,802 Pass-Through Securities 210,808 TOTAL INVESTMENTS AT FAIR VALUE 9,949,342 Other Assets: Receivables and Other 54,251 Cash on Hand and in Banks 6,869 TOTAL ASSETS 10,010,462 LIABILITIES Distributions Payable 47,872 Accrued Expenses 1,726 TOTAL LIABILITIES 49,598 NET POSITION HELD IN TRUST FOR POOL PARTICIPANTS $ 9,960,864 The notes to financial statements are an integral part of this statement. FINANCIAL SECTION 19

22 San Diego County Investment Pool STATEMENT OF CHANGES IN NET POSITION For the fiscal year ended June 30, 2018 (amounts expressed in thousands) ADDITIONS Additions to Pooled Investments $ 17,620,889 Investment Income: Investment Earnings 147,837 Net Decrease in Fair Value of Investments (34,326) Expenses (1,241) Net Investment Income 112,270 TOTAL ADDITIONS 17,733,159 DEDUCTIONS Deductions From Pooled Investments 16,575,184 Distributions To Participants 140,155 Administrative Expenses 5,570 TOTAL DEDUCTIONS 16,720,909 Change in Net Position 1,012,250 Net Position Held in Trust for Pool Participants: Beginning of Year 8,948,614 END OF YEAR $ 9,960,864 The notes to financial statements are an integral part of this statement. FINANCIAL SECTION 20

23 San Diego County Investment Pool NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Financial Reporting Entity. The Investment Pool is a part of the County of San Diego (County) and is responsible for approximately $10.0 billion in assets as of June 30, The Investment Pool is administered by the Treasurer-Tax Collector, an elected office that is responsible for tax collection, banking, investment, disbursement and accountability of public funds. The Investment Pool is managed by the County Treasurer s Office on behalf of the Investment Pool participants. The Investment Pool participants include the County, local school districts, local community colleges and other districts. The school districts are required by State statutes to deposit their funds with the County Treasurer. Mandatory participants in the Investment Pool comprise the majority of the Investment Pool s assets, at 92.1%. All participants comply with the same requirements per the Investment Policy. The State of California gives the County Board of Supervisors the ability to delegate the investment authority to the County Treasurer s Office in accordance with Section of the California Government Code (Code). The Investment Pool s investment objectives are to safeguard principal, meet the liquidity needs of the participants, and return an acceptable yield within the parameters of prudent risk management. Pursuant to Sections of the California Government Code, the County Board of Supervisors has established the Treasury Oversight Committee (TOC) which monitors and reviews the Investment Policy (Policy). The TOC consists of members appointed from the districts or offices that they represent, and up to five members of the public, having expertise or an academic background in public finance. The TOC requires a financial audit to be conducted annually on a fiscal year basis, which includes limited tests of compliance with laws and regulations. The Investment Pool is not registered with the Securities and Exchange Commission (SEC) as an investment company. The Investment Pool does not have any legally binding guarantees of share values. Measurement Focus, Basis of Accounting and Financial Statement Presentation. The accompanying financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Earnings on investments are recognized as revenue in the period in which they are earned, and administrative costs are recognized as expenses when incurred, regardless of the timing of the related cash flows. Investment Pool participants cash balances and withdrawals are based on the cost on the trade-date, while investments are reported at fair value. FINANCIAL SECTION 21

24 New Accounting Pronouncements. There were no new accounting pronouncements that affected the Investment Pool for fiscal year Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 2. CASH AND INVESTMENTS Deposits. Deposits consist of cash in banks. At June 30, 2018, the carrying amount of the Investment Pool s deposits was $6,869,026, and the bank balance at June 30, 2018 was $6,619,089, which consisted of demand deposits with various financial institutions. The difference between the carrying amount and the bank balance includes temporary reconciling items such as outstanding checks and deposits in transit. Of the bank balance, $250,000 was covered by federal deposit insurance, and $6,369,089 was collateralized with securities held by a depository agent on behalf of the Investment Pool as required by Code Section The Code requires that a financial institution secure deposits made by state or local government units by pledging securities in an undivided collateral pool held by a depository regulated under state law. The fair value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. Also, a financial institution may, in accordance with the Code, secure local agency deposits using first trust deed mortgages; however, the fair value of the first trust deed mortgages collateral must be at least 150% of the total amount deposited. Custodial Credit Risk (Deposits). Custodial credit risk is the risk of loss associated with the counterparty s failure. For sweep (deposit) accounts, the Investment Pool utilizes national or state chartered banks where amounts exceeding the FDIC insurance level are invested in repurchase agreements that are collateralized by U.S. Treasury and Federal Agency securities equal to or greater than the deposit amount in accordance with Code. FINANCIAL SECTION 22

25 Pool Investments. The Investment Pool operates under the prudent person standard. Specifically, Code Sections , , and authorize the Treasurer to invest funds in permissible types of investment or financial instruments. These include: U.S. Treasuries, U.S. Federal agencies, local agency obligations, bankers acceptances, commercial paper, corporate medium-term notes, negotiable certificates of deposit, repurchase and reverse repurchase agreements, pass-through securities, supranationals, money market mutual funds, local agency investment funds and bond funds. Table 1: San Diego County Investment Pool POLICY RESTRICTIONS VERSUS CALIFORNIA GOVERNMENT CODE SECTION REQUIREMENTS INVESTMENT TYPE MAXIMUM MATURITY GOV. CODE POOL POLICY MAXIMUM % OF PORTFOLIO GOV. CODE POOL POLICY MAXIMUM % WITH ONE ISSUER GOV. CODE POOL POLICY MINIMUM RATING GOV. CODE POOL POLICY U.S. Treasury Obligations 5 years 5 years None None None None None None U.S. Agency Obligations 5 years 5 years None None None 35% None None Local Agency Obligations 5 years 5 years None 30% None 10% None A Bankers Acceptances 180 days 180 days 40% 40% 30% 5% None A-1 Commercial Paper days 270 days 40% 40% 10% 10% A-1 A-1 Negotiable Certificates of Deposit 5 years 5 years 30% 30% 30% 10% None A Repurchase Agreements 1 year 1 year None 40% None Note (2) None None Reverse Repurchase Agreements 92 days 92 days 20% 20% 20% 10% None None Corporate Medium-Term Notes 5 years 5 years 30% 30% 30% 5% A A Collaterized Certificates of Deposit N/A 13 months None 5% None 5% None None Money Market Mutual Funds N/A N/A 20% 20% 10% 10% AAAm AAAm CalTRUST N/A N/A None 2.5% None 2.5% None AAAm Pass-Through Securities 3 5 years 5 years 20% 20% 20% 5% A/AA A/AA Supranationals 4 5 years 5 years 30% 30% 30% 10% AA AA (1) Government Code Section 53635(a)(1-2) specifies percentage limitations for this security type for county investment pools. (2) Maximum exposure per issue - The maximum exposure to a single Repurchase Agreement (RP) issue shall be 10% of the portfolio value for RP s with maturities greater than 5 days, and 15% of the portfolio for RP s maturing in 5 days or less. The maximum exposure to a single broker/dealer of Repurchase Agreements shall be 10% of the portfolio value for maturities greater than 5 days, and 15% of the portfolio value for maturities of 5 days or less. (3) Rating of A required for issuer, if rated, and rating of AA required for issue. (4) The following institutions are considered Supranationals : International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), Inter-American Development Bank (IADB). FINANCIAL SECTION 23

26 Fair Value Hierarchy. The Investment Pool categorizes its fair value measurements within the fair value hierarchy established by Governmental Accounting Standards Board (GASB) Statement No. 72. The hierarchy is based on the valuation inputs used to measure the fair value of assets, as follows: Level 1: Investments reflect prices quoted in active markets; Level 2: Investments reflect prices that are based on a similar observable asset either directly or indirectly, which may include inputs in markets that are not considered to be active; and Level 3: Investments reflect prices based upon unobservable sources. The Investment Pool does not value any of its investments using Level 1 and Level 3 inputs. Money market mutual funds are not subject to the Fair Value Hierarchy. The Investment Pool uses the market approach as a valuation technique in the application of GASB Statement No. 72. This method uses prices and other relevant information generated by market transactions involving identical or comparable assets or groups of assets. The following is a summary of the fair value hierarchy of investments for the Investment Pool as of June 30, 2018: (amounts expressed in thousands) INVESTMENTS BY FAIR VALUE 6/30/18 QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) Commercial Paper $ 2,994,041 $ 2,994,041 Negotiable Certificates of Deposit 2,794,513 2,794,513 U.S. Government Agencies 2,458,821 2,458,821 Supranationals 668, ,215 U.S. Treasury Notes 474, ,142 Pass-Through Securities $ 210,808 $ 210,808 SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) TOTAL BY FAIR VALUE LEVEL $ 9,600,540 $ - $ 9,600,540 $ - Money Market Accounts 348,802 TOTAL BY FAIR VALUE $ 9,949,342 FINANCIAL SECTION 24

27 Investments in the Investment Pool are stated at fair value in accordance with GASB Statement No. 72. Securities, which are traded on a national exchange, are valued at the last reported sales price at current exchange rates. The Investment Pool uses the market approach as a valuation technique in the application of GASB Statement No. 72. This method uses prices and other relevant information generated by market transactions involving identical or comparable assets or group of assets. Institutional money market mutual funds are carried at portfolio book value (carrying cost). All purchases of investments are accounted for on a trade-date basis. Unrealized gains or losses of securities are determined by taking the difference between amortized cost and the fair value of investments. The calculation of realized gains and losses is independent of the calculation of the net change in the fair value of investments. Realized gains and losses on investments that were held in more than one fiscal year and sold in the current year were included as a change in the fair value of investments reported in the prior year(s) and the current year. Table 2 on the following page presents the maturity levels and credit ratings by investment type as of June 30, The balances are reported using the weighted average days to maturity (WAM) method. FINANCIAL SECTION 25

28 Table 2: San Diego County Investment Pool INVESTMENT CREDIT RATINGS AND MATURITIES As of June 30, 2018 (amounts expressed in thousands, except percentages and days) INVESTMENT TYPE FITCH RATING INTEREST RATE RANGE % MATURITY DATE RANGE PAR VALUE BOOK VALUE FAIR VALUE YIELD TO MATURITY WEIGHTED AVERAGE MATURITY (IN DAYS) Commercial Paper Discount Negotiable Certificates of Deposit F1 - F1+ F1 - F /02/ /08/ /02/ /14/2019 $ 3,003,000 $ 2,994,416 $ 2,994, % 46 2,795,900 2,795,900 2,794, % 144 Federal Agencies: Federal Farm Credit Bank (FFCB) Federal Home Loan Bank (FHLB) Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) AAA AAA AAA AAA Supranationals AAA U.S. Treasury Notes Money Market Mutual Funds Pass-Through Securities AAA AAA AAA, F /07/ /27/ /14/ /26/ /27/ /28/ /20/ /27/ /19/ /29/ /30/ /30/ , , , % , , , % , , , % , , , % , , , % , , , % 575 N/A 348, , , % 26 03/15/ /17/2022 $ 211,546 $ 211,337 $ 210, % 854 TOTAL INVESTMENTS $ 10,023,136 $ 10,014,106 $ 9,949, % 343 FINANCIAL SECTION 26

29 Credit Risk. Credit risk exists when there is the possibility that the issuer or other counterparty to an investment may be unable to fulfill its obligations. To mitigate this risk, the Investment Pool s Investment Policy, which is more restrictive than the Government Code, places a minimum standard on the ratings of investments held in the Investment Pool. Investments in securities other than those guaranteed by the U.S. Treasury or Government Sponsored Enterprises must have a credit rating of no less than A for long-term or F1 for short-term. Non-rated securities include sweep accounts and repurchase agreements. Sweep accounts and collateralized certificates of deposit must be FDIC insured and collateralized with securities held by a named agent of the depository. Repurchase agreements are collateralized by securities, authorized by the Code Section 53601, having a fair value of at least 102% of the amount of the repurchase agreement. The Investment Pool did not have any repurchase agreements in its portfolio as of June 30, Concentration of Credit Risk. This is the risk of loss attributed to the magnitude of a government s investment in a single issuer. To mitigate this risk, the Investment Policy limits the amount of exposure to any one single issuer to the percentages listed in Table 1. As noted in Table 1, the Investment Policy is more restrictive, in most cases, than the Code. As of June 30, 2018, all investments are in compliance with State law and with the Investment Policy. In accordance with GASB Statement No. 40, disclosure is required for securities in any one issuer that represent 5% or more of the Investment Pool holdings, excluding securities explicitly guaranteed by the United States government, and investments in mutual funds, external investment pools and other pooled investments. The Investment Pool s holdings of the securities of the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) are issued by agencies that remain under conservatorship by the Director of the Federal Housing Agency. The U.S. Government does not guarantee, directly or indirectly, the securities of the Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), Federal National Mortgage Association (FNMA), or Federal Home Loan Mortgage Corporation (FHLMC). The Investment Pool s investment in FHLB, FFCB, FNMA, and FHLMC securities as for June 30, 2018 comprised 4.7%, 4.6%, 5.8% and 9.7% of the fair value of investments, respectively. In addition, the following investment holdings/issuers also exceed the 5% threshold: JP Morgan Securities LLC (7.5%), Bank of Montreal Chicago (5.9%) and MUFG Bank LTD/NY (5.7%). Custodial Credit Risk (Investments). Custodial credit risk for investments exists when, in the event of a failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. Securities purchased by the Investment Pool are held by a third-party custodian, Citibank, in its trust department to mitigate custodial credit risk. Foreign Currency Risk. The Investment Pool does not have any foreign currency risk as all investments in the Investment Pool are in U.S. dollar-denominated assets. Interest Rate Risk. Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, investments of longer maturities are more sensitive to changes in market interest rates. FINANCIAL SECTION 27