May 18, 2004

SUBJECT: Approval to Amend the Redevelopment Agency’s Investment and Cash Management Policy to Increase the Amount Allowed to be Invested in the State of California’s Local Agency Investment Fund (LAIF)

Staff is requesting that the Redevelopment Agency approve an amendment to the Redevelopment Agency’s Investment and Cash Management Policy in order to increase the maximum percentage allowed to be invested in the State of California’s pooled investment, known as the Local Agency Investment Fund (LAIF) from 10% to 20% of the portfolio balance.

LAIF, a voluntary program created by statute, has operated since 1977 as an investment alternative for California’s local governments and special districts. It offers local agencies the opportunity to participate in a major portfolio managed by the State of California’s Treasurer’s Office. Many small agencies invest their entire portfolio in LAIF.

Each year, the Redevelopment Agency adopts its Investment and Cash Management Policy. This usually occurs in August of every year. Rather than wait until August to request this approval, staff is requesting approval to implement this change now in order to immediately increase the interest earnings on the portfolio. Interest rates continue to remain low and LAIF provides a better return than other investment vehicles with overnight liquidity. Withdrawals from LAIF by 10:00 a.m. receive same day credit to our bank account.

The Agency adopted the existing Investment and Cash Management Policy for Fiscal Year 2003/2004 on August 12, 2003. The current policy allows a maximum of 10% of the portfolio to be invested in LAIF. The Investment and Cash Management Policy is adopted by the Redevelopment Agency on an annual basis. An annual report of investment performance for the previous fiscal year is provided to the Agency at the same time. The Investment Policy and Cash Management Policy for FY 2004/2005 and annual report will be rendered to the Redevelopment Agency in August.

Interest rates started to drop in early 2001 and have continued to decline. Currently, interest rates continue to remain low but market indicators have recently shown some improvement, indicating that rates will probably rise in the foreseeable future.

When rates do rise, investments existing in the portfolio with longer maturities that were purchased when rates were low will experience a decrease in their market value because the interest rate on those securities is less than the current market’s interest rate. Therefore, the City’s current investment strategy is to keep investments short since interest rates are expected to rise. When rates do rise, staff will be able to withdraw money from LAIF (since it is liquid) and invest funds in higher yielding securities.

In order to maximize cash flow to meet daily expenditures, funds are invested in overnight Repurchase Agreements with our Bank, Union Bank. Repurchase Agreements are transactions in which a holder of securities sells those securities to an investor with an agreement to repurchase those securities for a fixed price at an agreed upon date. The current rate on Repurchase Agreements has averaged .35%. Although this investment vehicle is very liquid since it is a one day investment, it can not compete with the rate earned on LAIF. LAIF yielded 1.48% during the same period and has similar liquidity. Withdrawals from LAIF by 10:00 a.m. receive same day credit.

LAIF allows each agency to deposit $40,000,000 per agency. Staff believes that increasing the maximum allowable limit from 10% to 20% is safe and prudent. The City currently has a total portfolio balance of approximately $200 million with 10% of that balance ($20,000,000) invested in LAIF. Staff would like to increase the limit to 20% of our portfolio balance. This would allow Treasury staff flexibility to place funds in overnight Repurchase Agreements or LAIF depending upon circumstances.

Over the last six accounting periods, the City had an average of approximately $16,000,000 invested in Repurchase Agreements that could be invested in LAIF. Increasing our investment in LAIF by $16,000,000 will generate approximately $180,800 in interest income on an annual basis at today’s rates.

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.

1. Adopt approval to amend the Redevelopment Agency’s Investment and Cash Management Policy to increase the amount allowed to be invested in the State of California’s Local Agency Investment Fund (LAIF).

2. Do not adopt approval to amend the Redevelopment Agency’s Investment and Cash Management Policy to increase the amount allowed to be invested in the State of California’s Local Agency Investment Fund (LAIF).

3. Adopt a different percentage to be invested in LAIF, resulting in an amount not to exceed the $40,000,000 per agency allowed by LAIF.

Staff recommends Alternative #1.

Prepared by:

Therese B. Balbo
Finance Manager

Reviewed by:

Mary J. Bradley
Agency Treasurer

Approved by:


Amy Chan
Executive Director