HomeMy WebLinkAbout03-16-09 Finance Com. MinutesDUBLIN CITY CQUNCIL
Finance Committee
Monday, March 16, 2009
Minutes of Meeting
Mr. Keenan, Chair, called the meeting to order at 6:00 p.m. in Council Chambers.
Council members present were Mr. Keenan, Mr. Gerber, Vice Mayor Boring, Ms. Salay
Staff members present were Mr. Foegler, Ms. Grigsby, Mr. Thurman, Ms. Gibson, Ms.
Hoyle, and Mr. Sova.
Also present was Dennis Yacabozzi, United American Capital Corporation {UACC) the
City's investment advisor.
Ms. Grigsby stated that during the operating budget last year, discussion took place
regarding the desire for quarterly meetings of the Finance Committee to provide an update
on the City's financial position or related financial issues. One area discussed was the
City's investment portfolio, and in view of the recent events in the national economy related
to investments, staff felt it was appropriate to have an update from Mr. Yacabozzi. He will
provide info on the portfolio status as of year end 2008, and as of the end of February,
2009; the services he provides far the City; and his view on the future of the market and
how the City's investment portfolio is positioned to ensure it meets the City's needs.
Mr. Sova, Director of Auditing, works closely on the investment process with Mr. Yacabozzi
In addition, staff will present information regarding debt in view of the planned issuance
this year. In addition, general financial information far the first two months will be
presented and the update on financial status in March 2009.
Mr. Yacabozzi, UACC, invited members to ask any questions throughout his presentation.
He stated for the record that the City of Dublin investments are sound and safe; no monies
have been lost; the City owns the type of investment assets that the rest of the world wants
to own during times of crisis. He noted that the investment policy - a very important tool -
is often ignored by investment managers and City officials. In Dublin, adherence to the
investment policy is strong; the principal is the foremost consideration in the investment of
funds; the liquidity is an important issue as well. In all the years they have managed the
City's assets, there has been no occasion when the City of Dublin called them in need of
money quickly. Dublin runs a "tight ship" in terms of cash management, enabling UACC to
investment most of the funds in the bond market. With yields so law in today's market,
especially on the front end, having excess cash out front costs a lot of money. Because of
the shape of the yield curve and condition of the market, it is important that they be
allowed to invest as much as possible, and that has been the case with Dublin.
The market began to unravel nearly two years ago. They began to see indications in the
summer of 2007, where equities began their descent and fixed income assets -
particularly U.S. government securities -began to move up -especially U.S. treasuries.
They don't have U.S. treasury securities because UACC believes they are too expensive.
They are, of course, the safest investment in the world. They do have 100 percent
invested in various federal agencies, and he will review that layout tonight. It has also
been their firm's position that several months ago a recovery would be seen -but not likely
until the first half of 2010. With treasury yields so low -meaning prices are very high -
they believe there is a "bubble" in the treasury market. These types of "bubbles" occurred
in the high tech arena in the year 2000, and there was a bubble in the housing market
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March 16, 2009
Page 2
which brought about today's situation. Also key to the City's performance, not only are the
assets safe with the City owning 100 percent federal agency securities, but they manage
the duration of the portfolio. It is their responsibility to move the duration of the portfolio
out longer in anticipation of falling rates, and likewise important to mane the portfolio to a
shorter duration in anticipation of the probability of rates increasing in the future. They do
believe there will be upward pressure on interest rates going forward. In fact, interest rates
are somewhat higher today than at the end of 2008. As a result of having a longer
duration -which was put into place late 2006-early 2007 before the crisis -the City has
been able to enjoy a lot of unrealized gains that are in the portfolio, adding to the total
return. The GAASB reports have to be done, and they are pleased to report that the City
has large unrealized gains as of December 2008. However, those things change. In a
rising rate market, the market value of assets will decline. They don't perceive any credit
risk in federal agency securities and they never have. He has managed money far many,
many years, and every agency has had problems. In the past, the federal government has
indicated investors are on their own, and would not guarantee them -- until danger
increases and impacts the ability to operate as an agency. That has happened. Congress
took action, taking the implicit support of Fannie Mae and Freddie Mac and turned it into
"explicit" support. They are not guarantee by the federal government; they guarantee their
own debts. But they are essentially in conservatorship at this time. Therefore, they are as
confident in Fannie Mae and Freddie Mac today as in the past. In so doing, they still have
the responsibility to diversity the City's portfolio, and that has been done. Despite their
comfort with Fannie Mae and Freddie Mac, they have moved the City into federal home
loan bank securities and probably the City's largest position in the federal farm credit bank
assets - a very financially strong federal agency.
He then reviewed the market information contained in the materials provided.
• Yield curve comparisons. He noted that in August 2007, the curve was relatively
flat, and the same yields resulted from athree-month treasury bill as a five-year
treasury note. Then the feds began to pump billions of liquidity into the market to
begin supporting the system. That, coupled with huge buying of U.S. government
debt on a global basis, resulted in a considerable decline of interest rates and the
feds began an aggressive, frequent cutting of the federal funds rate -pushing the
yield curve down further. By September 2008, the three--month bill was .9 percent
-- down from 4.5 percent and the five-year treasury was at 2.98 percent. By the end
of 2008, the yields continued to fall, and 3-month bills were at .08. At one paint in
time, there were actually negative yields in 3-month bills -with people trying to find
a place to put their money.
• As time moved forward, with all of the spending, the stimulus monies, there has
been huge government borrowing. That in itself will be the pressure point to push
yields higher going forward. As of 2-28-09, yields have gone up a bit. They believe
this pressure will continue. As such, they intend to recommend that the City's
portfolio duration remain neutral -not shortening the duration yet due to the
expense of that step -but the present duration is yielding the City a very attractive
return. They will be cautious in the coming months not to add longer maturities, as
they believe there will be upward pressure on rates. However, inflation is not
imminent. There is much greater concern about economic growth, unemployment,
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March 16, 2009
Page 3
liquidity, and fixing the financial system. Those matters have to occur before they
can take the type of steps they would normally take in this type of environment.
• He reviewed a table outlining the structure of the City's portfolio. It contains the first
quarter 2008 through 2-28-09 to show what has occurred in the portfolio. In March
of 2008, yields were 4.43 -which were high, given the market at that time. The
City's portfolio has slowly drifted downward, but not by much, because of the move
they made to move the average duration out longer than typically the case. As of 2-
28-09, the yield of 3.10 is quite attractive, especially compared to STAR Ohio at .4
percent yield, and 3-month bills ranging from .2 to .5, 2-year notes fluctuating in the
one percent range.
• There has been a bit more money added to the portfolio, but book value in March of
2008 was $60 million versus $69.8 in February of 2009. Comparing market values
to the cost, there is a very large unrealized gain -all the assets have moved up in
value. The agency callable position has been trimmed to 49.7 percent, and they
have moved up the non-callables to 47.5 percent for two reasons. When the yield
spreads begin to vary between callables and non-callables, they will move to where
the greatest income can result. Also, when moving the portfolio duration out, it is
desirable to enhance the non-callable position to lock in that yield and minimize call
risk. Callable means a federal agency has the right to call that security before
maturity. The desire is to balance the two to provide the duration and return over
time, balancing current income with that approach.
• Back in March 2008, there was 8.2 percent in federal farm credit bank issuances
and on 2-28-09, it is up to 23.4 percent. The largest percentage investment is in
Fannie Mae, and next the Federal Hame Loan Mortgage Corporation, and third the
Federal Home Loan Bank.
He offered to respond to questions.
Mr. Keenan pointed out that UACC is charged with balancing all of the variables that he
has described in managing the portfolio. How much oversight does the City's Finance
Department have?
Ms. Grigsby responded that staff works with Mr. Yacabozzi and his staff on a regular basis.
Mr. Sova handles this function. They also use the services of UACC to help with the funds
the City manages. About 75 percent of the City's portfolio is managed by Mr. Yacabozzi's
group, and 25 percent by the City. Staff also looks to Mr. Yacabozzi for advice on its funds
and dollars invested. Anytime there is a change in direction, there is discussion with the
City.
Mr. Keenan noted that UACC does not make any major changes in the mix or percentage
without a discussion with the Finance Department.
Mr. Yacabozzi responded that at a minimum, they would advise the City that the changes
have been made. Oftentimes, they must move to make the changes quickly. Mr. Sova
discusses the changes with UACC staff.
Mr. Sova added that the City receives faxes daily on every proposed trade that UACC staff
wants to make. The City also receives confirmation of those trades from independent,
third party safekeeping banks where the securities are maintained. Mr. Yacabozzi handles
the City's funds on a delivery versus payment basis.
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March 16, 2009
Page 4
Mr. Keenan noted that this is goad information for the record. The important paint to
emphasize is that the City has a lot of checks and balances in place.
Mr. Sova added that in his capacity, he reconciles the UACC reports against the safe
keeper reports to ensure they are consistent.
Ms. Grigsby stated there is a separate custodian account where funds flow in and out, and
it is easy to track and verify the activity as well as trace the notices from UACC.
Mr. Keenan noted that STAR Ohio was the fund established for public entities around the
state of Ohio to make investments. That fund was set up by the state treasurer's office
and has operated for many years. But the City of Dublin yields are much higher than
those STAR Ohio is experiencing.
Mr. Yacabozzi noted that STAR Ohio yields are at .4 percent. Excluding the City's capital
gains, the City has a three percent yield to maturity, sa the return is actually higher. They
don't calculate the gains in that
Ms. Grigsby added that the City does use STAR Ohio, as it has a higher rate of return
versus a bank checking account and is very liquid.
Mr. Keenan stated that it is somewhat unfair to compare STAR Ohio yields with Dublin's
portfolio due to STAR Ohio's liquidity. Many municipalities need liquidity to meet
expenses.
Mr. Yacabozzi focused on checks and balances in Dublin. Among the population of public
entities, Dublin is the exception and not the rule. All of his clients use the same
methodology in place far the City of Dublin. From the outset, there was an independent
third party custody institution, which has a contract with the City -not with the investment
advisor. When an investment decision is made by UACC, there is a flow of data directly to
the Finance Department of Dublin and simultaneously to the financial institution, which
gives them the authority to receive the bonds versus payment. Those securities must be
delivered to the City's custody account or payment will not be made. Because it is a third
party institution, that custodian's statement comes directly to the City's Finance
Department and UACC receives a copy of it. Delivery versus payment is the key. There
are many public entities that let broker/dealers hold the assets purchased or sold on behalf
of the public entity. They do not permit that. When problems occur, having these types of
systems in place is advisable.
In the report for the 4th quarter of 2408, Tab 1, it provides a precise list of what the City
awns, when it was purchased, what the price paid was, the yield to maturity, the book
value, any accrued interest at purchase, etc. The report indicates that at the end of
December 2008, the City had $69 million purchased for these assets; $70,334,531 in
market value; 799 days was the average weighted days to maturity fora 3.37 yield to
maturity.
Tab 2 also shows what occurred during the quarter -types of assets purchased; amount
of money expended for the purchases. The next report shows whether or not bonds were
called; if so, the income generated from those called bonds; bond swaps on behalf of the
City when appropriate. He noted that that purchase/sale information flows to the Finance
Department when that occurs.
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March 16, 2009
Page 5
The next report shows what bonds have matured and how much money was allocated and
credited. He noted that every activity of these assets appears in the third party custody
statement the City has and is used as a reconciliation item. Under cash basis accounting
in the state of Ohia, income is recognized when it is received. The Federal Reserve is the
paying agent for the federal agencies. They will receive all the income, and the Finance
Department along with UACC reconciles the report each month.
Tab 3 provides interest history for every type of security. Any negative amounts in the
right-hand column reflect any amortization of purchased accrued. When a security is
purchased, they pay purchased accrued; they receive an interest payment later, and the
portion paid is amoritized off -consistent with proper investment accounting.
There is a graphic illustration of where the City's money is invested, and the graph reflects
that at the end of 2008, the City a roughly 55/43 percent callable versus non-callable
position. It has since been turned around as described tonight. To the far right, it shows
the monies in those asset classes. The maturity analysis graph shows where the bulk of
the assets mature. They are currently out beyond two years with the bulk, which is the
best place to be at this time -resulting in the most yield but with lesser market risk. They
intend to stay out there. The current strategy is to remain with longer duration, but no
additional steps taken to move the duration out further. In the future, they will recommend
the duration be shortened in anticipation of what they believe will be slowly rising interest
rates going forward. For 2009, they are projecting a difficult year for the markets. Dublin's
duration will remain where it presently is situated. There is a portfolio as of 2-28-09 which
reflects any changes which have occurred since the end of 2008.
Finally, there is a table which provides comparable yields throughout 2008. Dublin had an
average yield of over 4 percent for the year, versus 1.39 for bills versus 2.53 for STAR and
2 percent for the two-year note. Over time, they have records to show that even though
there will be periods of negative spreads as feds raise rates, that by being invested in the
bond market the City has a significant positive yield spread over all its comparable
benchmark securities.
Ms. Grigsby added that the City's investment policy has been set up based upon three
considerations: safety, liquidity and yield. Safety is the first and primary focus to ensure
there are no City dollars lost. Liquidity provides the ability to take advantage of
opportunities in terms of investing for the longer term. The City invests a portion of its
portfolio to provide for the liquidity needed to meet various obligations. For yield, the goal
is to obtain a good yield on the City's investments. In 2008, the City received over $4
million in interest income. Based upon receipts to date this year, the receipts will still
exceed budget assumptions for revenue. From the standpoint of the investment policy, it
has served the City well. Mr. Yacabozzi has done a nice job of helping the City focus on
what it needs to -protecting the City's money while still receiving a good return on
investment.
Mr. Keenan noted for the record that Mr. Yacabozzi is paid a fee for service -not based on
transactions processed.
Ms. Grigsby confirmed that is correct. He is paid a monthly fee.
Mr. Keenan thanked Mr. Yacabozzi for providing this update to Council tonight.
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March 16, 2069
Page 6
Vice Mayor Boring asked about the rules of Ohio regarding municipal investments.
Ms. Grigsby responded that because Dublin is a charter city, it has the ability to have its
own investment policy. Dublin's policy differs somewhat from the ORC, yet it is still
conservative. While the City is allowed to invest in items such as commercial paper, the
City has chosen not to da so because of the additional risk. The additional return obtained
does not warrant the additional risk.
Mr. Keenan asked Mr. Yacabozzi to comment about the California statutes.
Mr. Yacabozzi noted that they are much more liberal than those of Ohio. Dublin's
ordinances permit an even greater expansion into other instruments -not only commercial
paper, but corporate bonds. There has been a strong effort and opinion on their part to
avoid all credit risks for the last two years. There are several California cities that own
Lehman Brothers commercial paper and fixed income securities. There are derivative
issues across the country. The State of Florida investment pool is many billions below
what it was two years ago because of the investments they have made in mortgage-
backed products. Public and private pension funds also made investments in these, based
on the hope of obtaining high yields. There is adecision-making process that needs to be
adhered to. Protection of principal is the first consideration; maintaining liquidity is second;
and yield is third. Safety is the paramount consideration in times such as these.
Dublin's investment policy has elected to spell out what is an authorized investment. The
policy specifically refers to the fact that Dublin is also adhering to many sections of
Chapter 135.14 of the ORC.
Mr. Keenan asked if there are specified percentages in the ORC.
Mr. Yacabozzi responded that they are 25 percent commercial paper and bankers'
acceptances of banks insured by the FDIC as part of the average portfolio.
Issuance of Debt
Ms. Grigsby reported that as part of the capital improvement programming process last
summer, staff indicated that it was anticipated the City would be in a position in 2669 to
issue some long-term bonds as it relates to some transportation projects. Periodically, the
City looks at its existing debt to see if there is any opportunity to refinance it. Last year,
the underwriter reviewed this, but because the City was not issuing any new debt, it did not
make sense to do refinancing of existing debt. However, this year, in view of interest rates
in the market and the City's AAA rating, there are many people who are looking to invest
funds. There is an opportunity this year to refinance existing debt from the 1998 and 2666
issues. The most recent numbers from the underwriter indicate that it makes sense, as it
will bring a six percent savings on the present value. Staff is looking at rolling that into a
new issue for some of the COIC improvements already paid for -acquisition and design -
aswell as some additional funds needed for projects, depending on whether or not
stimulus funds are obtained. In addition, the City anticipates issuing $2 million for the
water tower currently under construction, and some issuance related to the sanitary sewer
projects -specifically, the relining of the sanitary lines. On the existing debt, the reissue
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March 16, 2009
Page 7
will save $1.4 to $1.6 million over an 11-year period. There is an existing state
infrastructure loan debt issued for the Avery Road/Muirfield interchange project several
years ago. The plan is to issue new bonds for that, as it is permissible to repay that debt.
It was set up with the interest rate changing every five years. For the last 10 years, the
City paid a higher interest rate. It would make sense to now issue new debt and prepay
that loan. The City received a call from ODOT a couple of weeks ago, indicating they
planned to adjust the interest rate. There will be significant savings from this ODOT action
alone, resulting in a savings of $800,000 over the next 12 years. Staff will still evaluate the
issuance of new debt to prepay to see if it makes sense. As discussed tonight, the yield
curves reflect that the interest rates will increase, so that will impact the City on the debt
side. However, from ten years to 0, the interest rate is considerably less than the City is
paying on debt issued ten years ago. The City is now in the last ten years of that issue
where we are paying the highest interest rate. Therefore, refinancing will still bring
significant savings, especially when rolled into a new issuance and spreading the issuance
costs over all of that debt. It seems to make sense.
Mr. Keenan stated that with a new issuance, the balance the City receives will be
reinvested.
Ms. Grigsby responded that is correct. On the transportation side, there will be a
repayment of an advance made from the General Fund to acquire right-of-way an the
interchange project. That money will be turned around and reinvested.
Mr. Keenan asked if the City is in a situation where the return could be better than the cost.
He noted that may not be allowable.
Ms. Grigsby stated that it is, as long ascertain spend down dates are met. The City has
the ability not to issue debt too soon, and can advance funds needed. When the debt is
issued, the City generally knows exactly what amount is needed and the timeframe within
which it can be spent down. The City has not had issues of arbitrage for that reason.
Currently, the City is targeting a May timeframe for issuance of new debt as well as
refinancing.
Update on City's Financial Position in General
Ms. Grigsby noted that in view of the global economy downturn, she felt if appropriate to
update Council on the status of the City's position. There was a recap provided in a recent
packet that included income tax revenue information, property tax information, service
payments, and general fund balance. For income tax revenues 2008, information was
provided for each quarter. In 2009, January and February, the revenues were fairly flat,
which was expected. The budget assumptions for 2009 included the fact that Cardinal
Health expansion would come on-line in the spring of this year and some other economic
development projects would come on-line during the year as well. As far as January-
Februarytimeframe, the withholding dollars are up about 2.5 percent. Approximately 80
percent of income tax revenues are generated by withholdings. The net profits are dawn.
For the month of March, income tax revenues are currently down. The first half of the
month there were significant drops, but the last few days have brought some significant
increases over last year. Through the month, however, the revenues are down. The next
few days are key indicators, as the second large monthly payment comes in. That will
provide a better indication of the City's position in March. Staff will continue to closely
monitor income tax revenues, so that if decreases occur, adjustments can be made to
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March 16, 2009
Page 8
spending as necessary. For property tax revenue, the City has received its first half
distribution. The concern with property tax this year was whether the City would feel any
significant impact from foreclosures or from people not being able to pay their property
taxes. The first half distribution was up compared with last year by three percent. The
majority of the increase was in Franklin County, the largest portion of Dublin. Service
payments related to TIF districts were up, partly due to some new TIF districts that came
on line. For all of the TIF districts, the City has received the service payments from all the
property owners, with the exception of a few small properties within the larger TIF districts.
This indicates that the businesses within those TIF districts are making their property tax
payments as well.
In regard to the general fund balance, the City watches this closely. As of the end of
February, the balance is down @$200,000 from the end of 2008. In 2008, the general
fund balance was 59 percent of the general fund expenditures. Therefore, the City was
exceeding its general fund target balance as of December of 2008. In 2009, there were
additional payments made in January and February that brought the fund balance down
slightly. The target fund balance is being maintained.
Mr. Keenan noted that a recent newspaper article indicated that Dublin's fund balance is
very high as a percentage compared to some other public entities in the area.
Ms. Grigsby responded that Dublin is fortunate to be able to do this. Once the target is
achieved, it is just a matter of maintenance of the reserves. The target fund balance is 50
percent -the general fund balance of the general fund expenditures.
Mr. Keenan noted that some entities are satisfied with a 25 percent balance.
Ms. Grigsby noted that several years ago, when this policy was first implemented, Dublin
was a young community in need of many infrastructure investments. This allowed the City
to be in a position to take advantage of opportunities that arose. It also provides the City
with a cushion in the face of any extended downturn in income tax revenues or revenues in
general -allowing time for adjustments in either the revenue or expenditure side. In
regard to expenditures, there was discussion at the budget hearing in the fall about staffing
and reviewing positions budgeted. Staff has implemented a policy of not filling any full-
time positions until they are reviewed and evaluated to make sure they are necessary.
For some vacancies this year, the positions have not been filled. Some of this relates to
workload in the area or ways the workload can be adjusted within the organization.
Mr. Keenan agreed that Council felt very strong about this at the budget review -even to
the point of having some Council oversight over positions being filled or added. But with
the staff approach as described, Council believes this is being adequately monitored.
Every entity is looking carefully at staffing levels.
Mr. Gerber added that many of his clients are looking at various scenarios related to
revenues of less than projected - 10-30 percent cuts.
Ms. Grigsby responded that Mr. Foegler has discussed at recent meetings the need to
identify what could be done to reduce expenditures if necessary, as well as any new
programs and whether to move forward with them. Staff is also looking at such areas as
travel and training expense. The message has been sent strongly that staff needs to
closely watch revenues as well as be mindful of expenditures.
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March 16, 2069
Page 9
Vice Mayor Baring noted concern with the fund balance discussion -that if the City
continues to see an increase in revenues, that the City continue providing services as it
has in the past.
Ms. Grigsby stated that staff is cognizant of this and the desire not to cut back services
that are very important to Dublin. There are opportunities to continually evaluate how the
City does business, and there is always room for improvement.
Mr. Keenan noted that in Columbus, they talked of eliminating recycling. But that will serve
only to increase their tipping fees. There is a push/pull in many service areas.
Vice Mayor Boring added that evaluating the workload is a critical factor.
Ms. Salay noted that the City should not be in a reactive mode and overreact to the market
conditions at this point. Dublin remains strong and fiscally healthy. It is a balancing act of
continuing the City's conservative policies.
Mr. Foegler stressed that staff s goal is preparedness should unexpected negative trends
accelerate. Staff will work to identify those areas, issues and programs, and Council can
then make decisions about any needed programming cuts or delays in programming.
There are a variety of administrative actions to be taken to reduce expenditures -such as
travel and training; the rate of hiring because of reduced development activity. Staff will
continue to keep Council informed of the status.
Mr. Gerber noted that he is curious to see what March and April will bring in terms of
additional revenues. He asked that a report be included in the Council packet after that
information is finalized.
Mr. Keenan thanked everyone for attending and participating in tonight's review session.
This review was suggested by Mr. Gerber earlier in the year and has proven to be useful.
The Committee plans to continue with quarterly reviews using this format.
Mr. Gerber thanked staff for their time and their efforts.
The meeting was adjourned at 6:56 p.m.
Clerk of Council