HomeMy WebLinkAboutFY 1994 Annual Investment Report •
T H E C I T Y O F
EULESS
Annual Investment
Report
Fiscal Year 1993/94
INTRODUCTION
This report is written and submitted in accordance with Texas State law, specifically Tex.
Rev. Civ. Stat. Ann. Art. 4413 (34C) Section 4, which states that "at least once each year,
the investment officer of a state agency or political subdivision shall prepare a written report
concerning the agency's or subdivision's local funds investment transactions for the preceding
year and describing in detail the investment position of the agency or subdivision as of the
date of the report."
The City's investment policy designates the Director of Fiscal & Human Resources as the
responsible manager for the City's investment program and as such has delegated the daily
investment procedures to the Cash & Debt Manager.
In compliance with the City's investment policy, the Cash & Debt Manager fulfills four main
objectives: compliance, safety, liquidity and yield, in that order. Compliance is maintained
through regular reporting to City management on a monthly, quarterly and annual basis.
Safety is insured by 1) investing only in those securities allowed by Art. 842(a-2, V.T.C.S.)
entitled the "Public Funds Investment Act of 1987" with revisions in 1989, 1991 and 1993;
2) using delivery vs. payment for all purchases (payment for securities is made upon
delivery); 3) protecting all non-government securities. (cash and bank certificates of deposit)
with collateral in the form of government securities which are pledged to the City of Euless
and safekept at a third party institution; 4) diversifying investment purchases into different security
markets to minimize individual market risk. Liquidity is met by matching investment terms to future
operating cash needs such as payroll, accounts payables, debt service and capital improvement
disbursements. Furthermore, investment in money market funds and local government investment
pools provides the safety and daily liquidity needs of the City. The yield or rate of return which
the City receives is measured against the average 90 day treasury bill yield as set by the
investment policy. This 'benchmark" has been extremely difficult to meet this year as the market
rate has been increased several times in a very short period.
The information contained in this report will quantitatively and graphically explain the
achievement of these City objectives for fiscal year 1993-94.
I. PORTFOLIO SUMMARY
Diversification by Instrument - The following table describes the composition of the City's
portfolio as of 9/30/94.
Instrument $ Cost %, Average Yield
C.D.s $100,000 0.4% 3.30%
Treasuries 2,541,839 11.1% 4.35%
Agencies 8,859,701 38.6% 4.62%
Money Market 2,977,841 13.0% 4.55%
Repo 8,500,000 37.0% 4.50%
22,979,382 100.0%
This table shows that the majority of City funds, approximately 39% are invested in
government agency securities which provide safety and as of the date of this report, the
highest average yield in the portfolio.
This year the City replaced the investment pool, Local Government Investment Fund for
Texas managed by Fidelity, with other instruments: Prudential Investment Liquidity Portfolio,
Financial Guaranty Insurance Company, and Local Government Investment Cooperative.
This was necessary as Fidelity closed their fund, however, this event provided an excellent
opportunity to analyze other alternatives which recently became available.
Diversification by Maturity - The table below reflects the degree of liquidity the City retains
particularly with the use of more overnight investment alternatives. This high level of
liquidity is in an attempt to "keep up" with the rapid rise in market rates.
# of days $-Cost % of Portfolio
1 - 30 $13,529,592 59%
31 - 90 4,018,460 17%
91 - 180 982,422 4%
181- 365 1,999,531 9%
Over 365 2,449.377 11%
$22,979,382 100%
City Portfolio City Portfolio
By Instrument By Maturity
(38.6%) _ ®C.D.s (58.9%) Em 1 - 30
(11.1% =Treasuries 31 - 90
(0.4%) EMAgencies EM 91 - 180
(10.7%)
13.0% —J
�z `��` Money Market
) /' .�,;;:;�.;;�,.. C] ,� 181- 365
(37.0%) Repo (17.5/0) (4.�10� ) =Over 365
3
` City of Euless
Portfolio Summary
for 09/30194
Repurchase Total By
;itv lnyestme�r is P9Q % CDs % Treasuries % Agencies % Inst�tutron °6
REPO-Landmark 8,500,000.00 37.0 0.00 0.00 0.00 8,500.00000 37.0
Western Amer. Nat'l Bk 100,000.00 0.4 0.00 0.00 100,000.00 0.41
Merrill Lynch 0.00 507,367.49 2.2 2,864,092.19 12.5 3,371,459.68 14.7
Masterson Moreland 0.00 0.00 499,843.75 499.843.75 2.2
Shearson Lehman 0.00 1,449,376.50 6.3 0.00 0.0 1,449,376.50 6.3
Southwest Securities 0.00 585,095.43 2.5 986,394.44 1,571,489.87 6.8
Prudential 0.00 0.00 4,509,370.79 19.6 4,509,370.79 19.6
PILP 2,977,841.28 13.0 0.00 0.00 0.00 2,977,841.28 13.0
Total Investment 11,477,841.28 100,000.00 2,541,839.42 8,859,701.17 22,979,381.87 100.0
49.9% 0.4% 11.1% 38.6% 100.00%
Diversification Guidelines
%of Portfolio
By Instrument: US Treasury Bills 100%
US Government Agencies 100%
Investment Pools 75%
Repurchase Agreements 25%
CD's(Commercial Banks) 100%
By Institution: "Repurchase Agreements no more than 10%
All Other no more than 33%
Investment Pools no more than$10 million
**Due to the receipt of$8,500,000 in bond proceeds the diversification guidelines have been temporaily waived until
City Council approves new investment ograms.
Reviewed by: J L%
Cash&Debt Manager " Date:
Director of Fiscal Date:
&Human Resources
II. PERFORMANCE SUMMARY
Cash and Investments Balances - Full utilization of funds and minimization of idle cash is
necessary to pursue additional interest income revenues for the City. The average % of
invested funds is 101% for FY94 fulfilling that objective. The monthly data below shows a
greater utilization of City funds through investments.
Consolidated Invested Percentage
Cash Balance Invested
Oct 92 ($66,286) $11,229,793 101%
Nov (61,111) 11,228,872 101%
Dec 435,574 11,887,349 96%
Jan 93 (154,154) 13,347,645 101%
Feb (232,979) 13,498,919 102%
Mar (2,672) 12,697,617 100%
Apr (242,840) 12,361,070 102%
May 454,348 13,288,022 97%
Jun (92,761) 13,078,456 101%
Jul (188,091) 12,242,221 102%
Aug (79,080) 12,482,476 101%
Sept (823,099) 12,224,664 107%
Average (87,763) 12,463,925 101%
Consolidated Invested Percentage
Cash Balance Invested
Oct 93 $291,963 $11,956,004 98%
Nov 130,163 12,365,269 99%
Dec 44,757 12,898,051 100%
Jan 94 (230,220) 15,871,761 101%
Feb 604,719 15,587,920 96%
Mar (134,037) 14,881,280 101%
Apr (92,556) 15,702,965 101%
May (295,414) 15,847,747 102%
Jun (433,300) 15,649,554 103%
Jul (476,494) 14,591,447 103%
Aug (16,387) 14,606,045 100%
Sept (414,103) 22,979,382 102%
Average (85,076) 15,244,785 101%
*Includes $8,500,000 Half Penny Sales Tax Revenue Bond Proceeds.
5
This graph shows how a greater portion of the City's funds continue to be invested, always in
pursuit of 100%.
110% —
105% - -
100%
95%
LL k
xkC
85%
...
80%
1989 1990 1991 1992 1993 1994
Fiscal Year
This graph shows that cash at the bank is minimized to allow for more investments.
1275 ------ --
•
�c 775
CZ
c
CU
o
r s
ca �
U 275
-225 - L-
1989 1990 1991 1992 1993 1994
Fiscal Year
The two graphs present how cash and investments are actively being managed resulting in
additional interest income revenues for the City.
Cash management performance - effectiveness of the cash management program has been
measured utilizing actual figures for FY94 as shown below:
Average City's Number Estimated
90 day Invested Days in Interest
Month TBill Yield Balance Month Earnings
Oct 93 3.07% $11,956,004 31 31,174
Nov 3.16% 12,365,269 30 32,116
Dec 3.11% 12,898,051 31 34,069
Jan 94 3.03% 15,871,761 31 40,845
Feb 3.33% 15,587,920 28 39,820
Mar 3.25% 14,881,280 31 41,076
Apr 3.60% 15,702,965 30 46,464
May 4.24% 15,847,747 31 57,069
Jun 4.33% 15,649,554 30 55,695
Jul 4.42% 14,591,447 31 54,776
Aug 4.68% 14,606,045 31 58,056
Sept 4.85% 22,979,382 30 91,603
Estimated earnings at benchmark yields: $582,762
Actual FY94 interest income (pre-audit): $688,661
Earnings over benchmark: $105,899
The table above presents an estimated amount the city would have earned for the past year
on just matching the benchmark yield which has been a very difficult task as the market rates
have risen faster than the portfolio turnover. The operational budget for Cash Management is
$49,517 for FY94. A net benefit of $56,382 for additional City revenues.
7
Key rate comparisons - an objective of the investment policy is for the City's rate of return to
consistently exceed that of the three month U.S. Treasury Bill, as stated before. Therefore,
they have been presented for comparative purposes below.
90 day City's Avg
Month T-bill yield Portfolio Yld Difference
Oct 93 3.07% 3.46% 0.39%
Nov 3.16% 3.51% 0.35%
Dec 3.11% 3.48% 0.37%
Jan 94 3.03% 3.47% 0.44%
Feb 3.33% 3.56% 0.23%
Mar 3.25% 3.53% 0.28%
Apr 3.60% 3.75% 0.15%
May 4.24% 3.90% -0.34%
Jun 4.33% 3.98% -0.35%
Jul 4.42% 4.13% -0.29%
Aug 4.68% 4.18% -0.50%
Sept 4.85% 4.52% -0.33%
Average 3.75% 3.79% 0.04%
As mentioned in the last quarterly report, this comparison illustrates the Fed's proactive
approach to the fear of inflation, dramatic increases in market rates. This has allowed for
the negative outcome in the comparison above. The cash management program provides for
full investment of City funds to maturity dates which meet liquidity requirements at the best
rates on a given day. When rapid increases in the market rates occur, it is difficult to match
those rates as the portfolio's maturity schedules do not match the Fed's movements! Euless
is not alone as other cities are obviously facing this dilemma. However, on a positive note,
Euless is not one of the several government entities facing investment losses and liquidity
problems.
III. INTEREST INCOME SUMMARY
FY92 Audit $873,288
FY93 Audit $508,975
FY94 Budget $565,481
FY94 Pre- Audit $688,661
Interest Income Received versus Budgeted: 122%
Interest income met the budgeted level for fiscal year 1994. This year experienced a very
volatile market as the Fed funds rate spiked by 175 basis points within a period of six months!
Market rate outlook - the Fed has increased rates five times this year since February. The
market is awaiting yet another hike by 50 basis points at the least. The unknown factor is
when. Chairman Greenspan believes this action will head off inflation even though it
remains relatively mild. Given this scenario, investors are keeping their portfolios very short
until the Fed takes action. Over 75% of the City's portfolio is available within 90 days.
Interest ncome By Fund
For Fiscal Year Ending 1994
Fund FY 93 FY 93 FY 94 FY 94
_# Bud et Audit Rev Budget Pre Audit Difference
1 154,000 152,815 220,000 207,625 12,375
2 111,150 126,375 170,000 181,644 11,644
4 100,002 22,628 17,000 18,770 1,770
8 5,000 12,000 11,300 12,890 1,590
9 24,587 24,000 27,563 3,563
12 1,100 3,969 4,200 4,979 779
17 5,000 2,435 12,000 16,676 4,676
18 0
20 236 0
21 7,000 4,453 7,000 7,192 192
24 652 800 1,316 516
26 10,000 10,092 10,000 10,954 954
27 0
29 16,952 9,700 11,097 1,397
30 43,306 44,994 47,981 47,981 0
39 10,000 40,954 14,000 13,980 20
40 4,234 6,500 8,837 2,337
50 11,000 36,838 25,838
90 41,598 80,319 80.319
Total 446,558 508,974 565,481 688,661 123,180
122%
Note that interest earnings is being earned by all investable City funds and most funds met
their budgeted level.
9
IV. COLLATERAL REVIEW
The first and most important objective of investing public funds is safety. This year has been
a very good lesson for those that made this objective a less priority. One way to insure the
City's assets is to have them fully secured with "collateral". Acceptable collateral is defined
in the City's investment policy, but generally consists of types of securities the City would
invest in. Bank balances are monitored daily to assure their full coverage. The amount of
collateral required by the depository bank varies with the expected level of deposits (typically
correlates with large receipts such as property taxes, franchise taxes and investment
maturities).
Euless ---
Collateral Analysis for
Cash & C.D. Investments
_... ... , _......_ as of 09/30/94
Pledging Safekeeping Pledged Sec. Security Market Value Inv. Value Difference
9 9 P 9 9 tY
Institution Location Description Par Value (w/FDIC Ins.) Mat'y(P & I)Over/(Under
Western Amer. Bank One U.S. Treas. $100,000 $100,000 $100,000 $0
Nat'l Bank 10/18/94
Bank One Federal Home FHLMC $0 $100,000 $21,113 $78,887
Loan Bank- $ Mkt $0
Dallas DDA $21,113
Landmark Bank Texas Indep Agency $900,000 $972,779 $514,698 $458,081
Bank-Dallas 10/02/01 Payroll $30,960
01/13/97 Operating $483,738
Prepared by
V. BROKER SELECTION PROCESS
This section of the report is to provide a brief explanation of the process undertaken to select
the brokers with which the City invests. The broker/dealer list is reviewed annually and any
changes are made during this time unless it becomes necessary to make revisions prior to
the annual process. The process is outlined below:
1. Brokers express an interest in doing business with the City's investment portfolio
2. A questionnaire is sent to the broker which requests the necessary information for Cash
Management to review including references, capital adequacy ratios, etc.
3. The Cash Manager reviews all received questionnaires, summarizes the information and
recommends the desired list of brokers with explanatory notes.
4. The recommendation is presented to the Investment Committee at the next quarterly
meeting for discussion and final approval.
5. All brokers are notified after the selection is complete.
VI. SUMMARY
The primary objectives of compliance, safety, liquidity and yield have been achieved for the
reporting period as evidenced by this report. These objectives will continue to be pursued for
the city of Euless as provided by the investment policy. This has been a very interesting year
as the Fed has taken action to prevent inflation. Thus creating a very challenging (although
successful) environment for the investment program. The City of Euless, like all other local
governments, is faced with the challenge of meeting benchmark levels triggered by the Fed's
actions. Therefore, the City's investment program will continue to seek new techniques,
instruments, etc. to enhance the return on the City's funds as well as the return of all City
funds.
The investment committee met on December 7, 1994 and reviewed the presented data for
tra mittal toity Council.
Diana G. Ortiz, Cash & Debt Manager
• 1 �1
Minutes - 10/5/94 Investment Committee Meeting
The Committee met to review the investment program for the third quarter. An overview of
all investment activity was presented by Diana Ortiz. In addition, there was a discussion of
several investment proposals, two of which were follow-ups to previously discussed items. It
was recommended to add Rauscher Pierce to the list of brokers, LOGIC investment pool as
an overnight investment alternative for the City's operating funds, FGIC money market fund
for the Half-Penny Sales tax bond fund proceeds for the monies needed in the first year,
FY95, and an investment program by Prudential for the Half-Penny Sales Tax Bond fund
proceeds for the balance of monies (not needed in the first year). It was also agreed upon
to deny a "Forward Supply Contract" proposal which does not meet the City's needs.
It was moved by Joe Hennig to approve the recommendation as presented and seconded by
Debra Forte'.
Jim Hickerson stated that approximately $5,000 in outstanding checks were written off and
that cash balances at the bank could be reduced by that amount.
Joe Hennig requested that a portfolio summary be included in future quarterly reports, and, that
the broker review process be included in this year's annual report to Council.
The meeting was adjourned.
APPENDIX
c
City of&less
Sdhec le of Purdhesas
Fa July,1994
Investment Type Institution
CD Cart.of Dep. FNMA Fed.Nall Mart.Asso. FHLB Fed.Home Loan Baric MERRILL Merrill Lynch BK ONE Baric One MMS&W Masterson Moreland
TBILL Treasury BO FFCB Fed.Farm Credit Baric FHLMC Fed.Home Loan Mort. PRUD Prudential Securices WAN Western Amer.Nall LM Landmark Baric
REPO Repurchase Agreement TNOTE Treasury Note SHEAR Shearson Lehman LGIF Local Govt Ina Fund SWSEC Southwest Seances
Cost Accrued Total P+I
Inv. Ira.I . Purchase Term Maturity Rice Par Book Value Interest Total Yield To Capon Interest Seller Maty Net of Total Cost
Type Number Date On days) Date Per$100 Value (Pnn.Orly) @ maty Prin+Irt Maturity Rate Rrchased Inst. Discount Premium Fund Prem&Int Pur. of Investment
FFCB 313318AZ0 072194 376 08/01/95 99.9688 500,000.00 499,843.75 27,994.79 527,838.54 5.40% 5.38% Prudential 156.25 50 527,994.79 499,843.75
FFCB 313318AZ0 072194 376 0810195 99.9688 500,000.00 499,843.75 27,994.79 527,838.54 5.40% 5,38% Prudential 156.25 2 527,994.79 499,843.75
PILP 072694 1000000 500,000.00 500,000.00 0.00 500,000.00 4.04% Pruderti al 2 500,000.00 500,000.00
FFCB 313390ry4 072894 365 072895 99.9688 500,000.00 499,843.75 27,550.00 527,393.75 5.54% 5.51% Masterson 156.25 1 527,550.00 499,843.75
Totals. 2,000,000.00 1,999,531.25 83,539.58 2,083,070.83 468.75 2,083,539.58 1,999,531.25
Schedule of Investments Sold
For JUy,1994
Cost Accrued Total P+I
Ira, Inv.I . Purchase Term Sell Rice Par Book Value Interest Total Yield To Capon Interest Seller Maty Net of Total Cost
Type Number Date (in days) Date Per$100 Value (Pnn.Orly) maty Prin+Irt Maturity Rate Purchased Inst, Discount Premurn Fund Prem&Int Pur. of Imestmert
FNMA 313589h63 062994 072194 99.1406 500,000.00 495,702.78 4,297.22 500,000.00 4.52% Pruderti al 50 500,000.00 495,702.78
FNMA 313589r21 05/1794 072294 98.2979 500,000.00 491,489.58 8,510.42 500,000.00 4.90% Prudent/al 1 500,000.00 491,489.58
Tota0s: 1,000,000.00 987,192.36 12,807.64 1,000,000.00 1,000,000.00 987,192.36
City of Euless
Schedule of Madrities
For JUy,1994
Investment Type Institution
CD Cert.of Dep. FNMA Fed.Nall Mart.Asso. FHLB Fed Home Loan Bark MERRILL Merrill Lynch BK ONE Bank One DEAN Dean Witter
TBILL Treasuny BII FFCB Fed.Farm Credit Bark FHLMC Fed,Home Loan Mort. PRUD Prudential Securities WAN WesternAmer.Nall LM Landmark Baric
REPO Repurchase Agreement TNOTE Treasuy Note SHEAR Shearson Lehman LGIF Local Govt Ina Ford LISRTY Liberty Capital
Cost Accrued Total P+I
Ina, Irv.I . Rrchase Term Maturity Price Par Book Value Interest Total Prin.+ Yield To Capon Interest Seller Maty Net of Total Cost
Type Number Date (in days) Dale Per5100 Value (Rin.Criy) maty It.@ Maty Maturity Rate Purchased Inst. Dscout Premum Fund Prem&Int Pur. of Investment
PILP 07/1494 1000000 300,000.00 300,000.00 0.00 300,000.00 3.88% Prudential 2 300,000.00 300,000.00
FNMA 313589ZM8 12/0293 216 07/1894 98.0140 600,000.00 588,084.00 11,916.00 600,000.00 3.41% MERRILL 2,29 600,000.00 588,084.00
PILP 072194 1000000 300,000.00 300,000.00 0.00 300,000.00 4.13% Prudential 1,21 300,000.00 300,000.00
PILP 072894 100.0000 400,000.00 400,000.00 0.00 400,000.00 4.12% PruderYi al 8,12,40 400,000.00 400,000.00
FNMA 313589zw6 02/0294 175 072794 98.4542 500.000.00 492,270.83 7,729.17 500,000.00 3.27% MERRILL 1 500,000.00 492,270.83
TOTAL. 2,100,000.00 2.080,354.83 19,645.17 2,100,000,00 0.00 0.00 0.00 0.00 2,100,000.00 2,080,354.83
City of EUess
Schedde of Pcrchases
For Atgst,1994
Investment Type Inti don
CD Cerb.of Dep. FNMA Fed.Nall Mort.Asso. FHLB Fed.Home Loan Baric MERRILL Merrill Lynch BK ONE Bark One MMS&W Masterson Moreland
TBILL Treasuy SO FFCB Fed.Farm Credit Baric FHLMC Fed.Home Loan Mort. PRUD Pudertial Seanties WAN Western Amer.Nall LM Landmark Baric
REPO Reperchase Ageemert TNOTE Treasuy Note SHEAR Shearson Lehman LGIF Local Govt Iry FW SWSEC SoWrwest Seatlbes
cost Accrued Total P+I @
Irv. Irw I.D. Prdlase Term Maty Pnce Par Book Value Interest Total Yield To Cocpon Interest Seller Maty Net of Total Cost
Type Number Date (n days) Dale Per$100 Value (Pin.Orly) @ maty Prin+IN Mattlity Rate Pvchased Isl. Discovt PremiLrn Fend Prem&Irt Ptr. of Investment
PILP 08/02/94 100.0000 600,000.00 600,000.00 0.00 600,000.00 4.16% Prudertiel 2,4,24,29 600,000.00 600,000.00
PILP 08105/94 100.0000 700,000.00 700,000.00 0.00 700,000.00 4.08% Prudertial 9 700,000.00 700,000.00
FNMA 313589x39 08/05/94 116 1129A94 98.5339 500,000.00 492,669.44 7,330.56 500,000.00 4.68% Southwest Van ous 500,000.00 492,669.44
REPO 08108194 100.0000 1,000,000.00 1,000,000.00 0.00 1,000,000.00 4.13% Landmark 2,9 1,000,000.00 1,000,000.00
PILP 08/10/94 100.0000 400,000.00 400,000.00 0.00 400,000.00 4.05% Pudertial 4,12,40 400,000.00 400,000.00
REPO 0826194 100.0000 500,000.00 500,000.00 0.00 500,000.00 4.30% Landmark 1 500,000.00 500,000.00
PILP 0829/94 100.0000 1,000.000.00 1,000,000.00 0.00 1,000,000.00 4.24% Prudertlal 2,9 1,000,000.00 1,000,000.00
Totals: 4,700,000.00 4,692,669.44 7,330.56 4,700,000.00 4,700,000.00 4,692,669.44
{
City of Wass
Schede of Makrltles
For Auyat,1994 '
Investment Type Insbtitian
CD Cerci.of Dep. FNMA Fed.Nall Mort.Asso, FHLB Fed,Horne Loan Bank MERRILL Merrill Lynch BK ONE Banc Oro DEAN Dean Witter
TBILL Treasuy BIII FFCB Fed Famr Credt Baric FHLMC Fed.Home Loan Mort. PRUD Pnderlial Se"fies WAN Western Amer,Nall LM Landmark Bank
REPO Reperchase Agreement TNOTE Treasuy Note SHEAR Shearson Lehman LGIF Local Gov't Iry Fuid LIBRTY Liberty Capital
Cost Accrued Total P+I @
Irv. Irv,I.D. Pcrchase Term Mahxty Price Par Book Value Interest Total Prin.+ Yield To Cotpon Interest Seller Maty Net of Total Cost
Type Nu,mer Date (in days) Date Per 9100 Value (Prin.Only) @ maty Irl.@ Maty Maty Rate Pcrchased Inst. Discocrt Premlun FVid Prem&Int Pcr, of Investment
PILP 08/0854 100.0000 1,000,000.00 1,000,000.00 0.00 1,000,000.00 4.05% Pnderti al 2,9 1,000,000.00 1,000,000.00
FFCB 3133115x7 0810253 365 08/0154 100.0000 500,000.00 500,000.00 9,100.00 509,100.00 3.64% 3.64% MERRILL 2,4,39,17 509,100.00 500,000.00
FNMA 313589x78 05/0254 92 08/0554 98.9207 1,000,000.00 989,206.94 10,793.06 1,000,000.00 4.19% Pnrderti at Various 1,000,000.00 989,206.94
FNMA 313589b36 05/0454 97 08/0954 98.8683 500,000.00 494,341.67 5,658.34 500,000.00 4.31% Prtdential 4,9,40 500,000,00 494,341.67
PILP 0823/94 100.0000 200,000.00 200,000.00 0.00 200,000.00 4.25% Pnderti al 2 200,000.00 200,000.00
REPO 082954 100.0000 1,000,000.00 1,000,000.00 836.11 1,000.836.11 4.25% Landmark 2,9 1,000,836.11 1,000,000.00
FHLB 313389cz9 022653 546 082654 100.0000 500,000.00 500,000.00 9,725.00 509,725.00 3.89% 3.89% Shearson 1 509,725.00 500.000.00y�
TOTAL 4,700,000.00 4,683,548.61 36,112.50 4,719,661.11 0.00 0.00 4,719,661.11 4,683,548.61 `�
City of Edess
Schedle of Maturitles
For September,1994
Investment Type IrstlhLon
CD Cert.of Dep. FNMA Fed.Nall Mat.Asso. FHLB Fed.Home Loan Baric RAUSCHER Rausdxr Place BK ONE Bark One MMS&W Masterson Moreland
TRILL Treasury BY FFCB Fed.Fane Credit Bak FHLMC Fed.Home Loan MM. PRUD Prudertial Semritles WAN Western Amer.Nall LM Landmark Bark
REPO Reprdrase Ageemat TNOTE Treasury Note FGIC Fill Gueany Ire Co. PILP Prud Inv Uqy PtIYo SWSEC SoLtl est Seantles
Cost Accrued Total P+I
Irrv. M.I . Pt chase Term Matuity Price Par Book Value lrtaest Total Prin.+ ',laid To Coupon Invest Salla Maty Net of Total Cost
Type Nulla Date (in days) Date Per$100 Value (Prin.Orty) @ maty hl.a Maty Maturity Rate Purchased list. Diseprt Premlun Fund Prem s et Pr. Of Investment
PILP 09/0254 100.0000 500,000.00 500,000.00 0.00 500,000.00 4.31% Pnderti at 2 500,000.00 500,000.00
PILP 09MS4 100.0000 200,000.00 200,000.00 0.00 200,000.00 4.32% Pruderti at 2,9 200,000.00 200,000.00
PILP 09/1854 100.0000 500,000.00 500,000.00 0.00 500,000.00 4.48% Ptudenli at 9 500,000.00 500,000.00
REPO 09/1454 7 09/1154 100.0000 8,500,000.00 8,500,000.00 7,272.22 8,507,272.22 4.40% Ladmark 50 8,507,272.22 8,500,000.00
REPO 092154 7 09/2854 100.0000 8,500,000.00 8,500,000.00 7,437.50 8,507,437.50 4.50% Landmark 50 8507,437.50 8,500.000.00
REPO 082654 7 09/0254 100.0000 500000.00 500,000.00 432.64 500,432.64 4.45% Ladmark 1 500,432.64 500,000.00
FNMA 313589849 06/1754 94 09/1754 98.8589 500,000.00 494,294.72 5,705,28 500,000.00 4.48% RuderEal 50 500,000.00 494,294.72
FNMA 313589h48 02/0254 237 092754 97.8604 500,000.00 489,302.08 10,697.93 500,000.00 3.35% MERRILL 1 500,000.00 489,302.08
FNMA 313589872 10/1853 339 092254 96.9584 455,000.00 441,160.80 13,839.20 455,000.00 3.35% MERRILL 2 455,000.00 441,160.80
FNMA 313589872 12/0253 294 092254 97.2070 400,000.00 388,828.00 11,172.00 400,000.00 3.54% MERRILL 1,17 400,000.00 388,828.00
FNMA 313589980 01/1154 255 092354 97.6838 500,000.00 488,418.75 11,581.25 500,000.00 3.38% MERRILL 1,4,9 500,000.00 488,418.75
TOTAL. 21,055,000.00 21,002,004.35 68,138.01 21,070,142.36 0.00 0.00 21,070,142.36 21,002,004.35
OW 00
City of Euless
Sdnedrie of Pirchases
For September,1994
Mestmat Type IrstbAon
CO Ceti.of Dep. FNMA Fed.Neil Mort.Asso. FHLB Fed.Home Loan Baric RAUSCHER Rauscher Pierce BK ONE Bane One MMS&W Masterson Morel"
TBILL Treasey 84 FFCB Fed.Farm Credit Baric FHLMC Fed.Home Loan Mort. PRUD Pnderbal Semites WAN Western Amer.Nati LM Landmark Baric
REPO Repurchase Agreement TNOTE Treasury Note FGIC AM Guaranty Ins Co. PILP Rvd Irw Uqy PtNo SWSEC Sm trwest Se"lies
Cost Accred Total P-I Q
Inv, Ctep Purchase Term MahAty Price Per Book Value Interest Total yield To Cm4. Irterest Seller Maly Net of Total Cost
Type Nhrnber Dale (in days) Date per$100 Value (Prin.Orly) maty Prin+" McWtty Rete Pirchased Inst. DSCOIrt Premien Find Prem&Irl Pcrof kwestnwt
REPO 09/1454 7 092154 100.0000 8,500,000.00 8,500,000.00 7,272.22 8,507,272.22 4.40% Landmark 50 8,507,272.22 8,500,000.00
PILP 09/2054 100.0000 500,000.00 500,000.00 0.00 500,000.00 4.40% Prtdenh at 9 500,000.00 500,000.00
REPO 092154 7 092654 100.0000 8,500,000.00 8,500,000.00 7,437.50 8,507,437.50 4.50% Landmark 50 8,507,437.50 8,500,000.00
PILP 092254 100.0000 855,000.00 855,000.00 0.00 855,000.00 4.50% Pndertlal 2,9 655,000.00 855,000.00
FNMA 31358"2 092754 93 12/2954 98.7032 525,000.00 518,191.63 6,808.37 525,000.00 5.16% Pndertiat 2 525,000.00 518,191.63
PILP 092754 100.0000 500,000.00 500,000.00 0.00 500,000.00 4.44% Pndert at 9 500,000.00 500,000.00
REPO 092854 7 10/0554 100.0000 8,500,000.00 8,500,000.00 7,354.86 8,507,354.86 4.45% Landmark 50 8,507,354.66 8.500,000.00 /�,
FFMC 313397u74 0928/94 90 122754 98.7450 500,000.00 493,725.00 6,275.00 500000.00 5.15% SoLmmest 9 500,000.00 493,725.00 1
FHLB 31339011 09A2/94 1800 0&0259 100.0000 1,000,000.00 1,000,000.00 388,000.00 1,388,000.00 7.05% 7.76% Southwest 18,19 1,388,000.00 1,000,000.00
Totals. 29,380,000.00 29,366,916.63 423,147.96 29,790,064.58 29,790,064.58 29,366,916.63
INVESTMENT COMMITTEE MEETING
October 5, 1994
• Third Quarter Review, FY94
Portfolio Summary
Collateral Review
Interest Income Projection
Discuss Investment Proposals
Follow-up to Rauscher Pierce
Follow-up to LOGIC
FGIC Public Trust
Prudential Securities
Rauscher Pierce
Forward Supply Contract"
• Interest Rate Environment & Outlook
• Investment Articles Regarding Losses
• General Discussion or Questions
PORTFOLIO SUMMARY
The City's investment portfolio at the end of the third quarter, June 30,
1994, is summarized by instrument and by maturity as shown below.
Distribution by Instrument
Instrument Type % of Portfolio Average Yield
C.D.s: .6% 3.30%
Agencies: 74.8 3.94
Treasuries: 16.2 4.35
REPO: 0.0 N/A
PILP: 8.4 3.88
100.0%
Usually, agencies represent higher earning investments than treasuries;
however, this table shows that treasuries are earning a higher average yield.
That is because the City "locked into" a long-term (5 year) Treasury Note
which accordingly carries a higher interest rate, 5.50%.
Distribution by Maturity
# of Days Cost % of Portfolio
1- 30 $ 2,385,588 15.2
31- 90 5,279,841 33.7
91- 180 5,052,327 32.3
181- 365 1 ,482,422 9.5
*Over 365 1,449,376 9.3
Total $15,649,554 100.0%
This information depicts the degree of liquidity in the City's portfolio
with the ability to access 15% of the portfolio within 30 days of which 8% is
accessible daily. The average monthly liquidity equates to approximately
$1 ,200,000 which suffices our average monthly needs along with daily deposits.
Over half of the portfolio matures within six months. This position allows us
to reinvest at the projected rising market rates as analysts project the Fed
to tighten at least once more this year with Chairman Greenspan pursuing the
containment of inflation.
By Instrument By Maturity
PILP Over 365 days 181-365 days
9% 10%
Treasuries 1% 1-30 days
16% 15%
\� 91-180 days
Agencies
75% 31-90 days
34%
June, 1994 June, 1994
2
Cash Management Activity
Average 90 day Average City Basis Point ,
T-Bill Yield Portfolio Yield Difference
April 3.60% 3.75% 15
May 4.24 3.90 (34)
June 4.33 3.98 (35)
The chart shows how the Fed has taken a proactive approach to the fear of
inflation--dramatic increases in market rates, 75 basis points in this quarter
alone! The Fed has increased the Fed funds rate a total of 125 basis points
so far this year! That type of rapid action makes it extremely difficult to
keep a portfolio that exceeds a constantly rising benchmark, we are not alone
as other cities are obviously facing this dilemma.
% Invested Invested Balance
April 101% $ 15,702,964.61
May 102 15,847,746.96
June 103 15.649.554.30
Average 102% $ 15,733,421.95
However, the City pursues maximum interest income revenues through active cash
management activities including:
- cashflow forecasting to meet estimated disbursements,
- planning to identify available funds and time them with market rate
movements,
- maximizing investments with safe but competitive securities,
- maximum use of available cash at the bank,
- immediately depositing City cash.
The chart below represents the use of City funds through cash management,
specifically, invested funds as a percent of cash and investments.
City Invested Funds
As %
Peroent
110% t.
90%
70%
6016 .�
JF�MUJABO DJFMWJASC DJFAMUJASC DJFMIW JA8CNQJFWV"JA8CWJFhMUJA8
B81 8B Bo 1 61 1 82 1 09 1 04
Fiscal Years
3
COLLATERAL REVIEW
The first and most important objective of investing public funds is safety.
One way to insure the City's assets is to have them fully secured with
"collateral" . Acceptable collateral is defined in the City's investment
policy, but generally consists of types of securities the City is allowed to
purchase. Bank balances are monitored daily to assure their full coverage.
The amount of collateral required by the bank varies with the expected level
of deposits (typically correlates with property tax receipts and large
franchise tax receipts.
City of Euless
Collateral Analysis for
Cash & C.D. Investments
as of 06/30/94
Pledging Safekeeping Pledged Sec. Security Market Value Inv.Value Difference
Institution Location Description Par Value (w/FDIC-Ins.) @ MatyP&l) Over/jUnder)
Western Amer. Bank One U.S. Treas. $100,000 $100,000 $100,000 $0
:Nat'l Bank 10/18/94
Bank One Federal Home FHLMC $0 $100,000 $21,113 $78,887 1
Loan Bank- $ Mkt $0
Dallas DDA $21,113
Landmark Bank Texas Indep Agency $1,000,000 $1,054,530 $420,601 $633,929
Bank-Dallas 05/13/98 Payroll $39,390
03/23/99 Operating $381,211
I � i
Prepared by: A C_
4
INTEREST INCOME
FY92-93 Budget $ 446,558 FY93-94 Budget $ 523,981
FY91-92 Actual 474,727 FY93-94 Y-T-D 333,079
FY93-94 Projected 574,045 (110%)
The FY93-94 projected interest income amount is comprised of interest income
received year-to-date, coupon payments and interest to be received on existing
investments, interest that will accrue through the end of the fiscal year but
not received until afterwards, less interest accrued for prior year. Interest
continues to be earned and distributed to the various funds which are able to
invest, the newest of which is the Half Penny Sales Tax Fund.
..... . Iknt���5t Ircatne By F>f�ntl
„ �ls flf f:f4
Fund FY93 FY93 FY94 FY94 Cpns & Proj Proj Less PY
# Budget Audit Budget YTD Exist Inv Accrual Reinv Accrual Total Diff
1 (2
1 $154,000 $152,815 $220,000 $121,180 $71,564 $55,207 $10,438 $41,969 $216,420 $3,580
2 111,150 126,375 170,000 88,764 39,441 56,241 10,935 23,461 $171,920 $1,920
4 100,002 22,628 30,000 9,848 7,487 1,512 1,203 $17,644 ($_1_2,356'
8 5,000 12,000 10,000 6,484 1,079 5,884 717 2,129 $12,035 $2)03,r-
9
2)03`.
9 24,587 20,011 7,694 239 4,169 $23,774 $23,774-
12
23,77412 1,100 3,969 4,000 2,502 0 1,905 770 197 $4,979 $979
17 5,000 2,435 5,000 7,273 6,752 1,197 1,414 2,356 $14,279 $9,279
18 0 $0 $0
20 236 0 $0 $0
21 7,000 4,453 5,000 5,028 3,810 3 1,650 $7,190 $2,190
24 652 795 237 $1,032 $1,032
26 10,000 10,092 10,000 4,929 2,159 3,810 708 651 $10,954 $954
27 $0 $0
29 16,952 12,000 4,482 3,644 2,522 945 922 $10,671 $1,329
30 43,306 44,994 47,981 41,132 6,849 $47,981 $0
39 10,000 40,954 10,000 16,475 2,730 0 4,788 $14,417 $4,417
40 4,234 4,178 2,320 1,033 $7,531 $7,531
50 0 0 0 0 11,417 5,794 $17,211 $17,211
90 41,598 3993 ($3,993 ($3,993
$446,558 508,975 523,981 333,079 163,135 130,575 34,744 87,488 574,045 50,064
1.) Projected Accrual = based on currently held investments that mature after FY94.
2). Projected reinvestments = Net cash flow assumed invested in PILP at gradually
rising market rates.
3.) Total projected Interest Income represents a conservative amount. Depending on
on the fluctuation of the market, this amount could rise.
. 5
Investment Proposals
Summary
• Financial Guaranty Insurance Company
U.S. Treasury Money Market Fund
• Rauscher Pierce Refsnes - additional broker,
previously reviewed
• LOGIC (investment pool)
comparative rates & client list attached
previously reviewed
4L • Prudential Investment Management Program
to manage sales tax bond proceeds
• Rauscher Pierce Refsnes
Forward Supply Contract-instrument used to
invest sales tax bond proceeds to meet
debt service requirements.
• Background Information
Current list of brokers/dealers:
Prudential Securities
Merrill Lynch
Southwest Securities
Masterson, Moreland
• Overnight instruments:
Prudential Institutional Liquidity Portfolio
Repurchase Agreement - 7-day
i
6
Rauscher Pierce Ref snes
Follow - Up
• Sue Ann Breckenridge has an excellent
reputation in the investment industry
• Rauscher Pierce Refsnes is one of the
better regional firms in the industry
• Sue Ann has increased her customer base
since our last review of brokers and
dealers
• Her references include the following:
City of Garland - Very competitive, very
responsive (quick), very aggressive on
agencies (good prices on bids/quotes)
City of Hurst - Very good (competitive),
frequently utilize her services, excellent!
City of San Antonio - competitive and timely
rate quotes, great source of general infor-
mation, considered one of the City's top
broker on their list.
i
. 7
LOGIC "Liquid Asset Portfolio" Follow-Up
Texas Local Government Investment Cooperative
• (LOGIC) is the investment pool administered by Trust Co.
of Texas which has been previously reviewed.
• Client list is attached.
• Yields are very competitive. See rate history sheet.
Higher income provided through active investment
management style/strategy--referred to as incremental
income.
• Recap of characteristics:
- Primary goal is to fulfill specific safety and
liquidity objectives.
- Portfolio of U.S. Treasuries or its agencies, fully
r.. collateralized repurchase agreements having a defined
termination date & secured by same obligations.
- Maintains $1 net asset value per share
- Daily liquidity, 180-day (or less) weighted average
maturity.
- Management & operation fee is at less than 20 basis
points.
- 5 member Board of Directors made up from city, county,
school district and other government officials in public
finance.
- 24 member advisory board maintains goal and verifies
status.
Comparison of Interest Rates for Various Investment Funds
5
4.9
4.8
4.7
4.6 '
4.5 — -
N �
4.4
4.3
Ej
4.1
El
4 - - E
3.9 0
0
i
3.8
3.7
Jul 1 Jul 15 Jul 22 Jul 29 Aug 5 Aug 12 Aug 19 Aug 26 Sep 2 Sep 10 Sep 16
p PILP p LOGIC * TXPOOL * 3 mo.TBILL o FGIC
9
LOGIC Client Summary 9/16/94
Entity Contact Phone/Fax
Arlington I.S.D. Phil Roberson 817-459-7330
Bexar Metro Water District Julia M. Miller 210-922-9941
Burnet County Katy Gilmore 210-756-5497
City of Carrollton Erin Hagey 214-466-3110
City of Cleburne Greg Wilmore 817-645-0911
City of Huntsville Patricia Allen 409-291-5440
City of Midland Roily Hughes 915-685-7211
City of Wichita Falls Fred Werner 817-761-7462
Clay County Sue Brock 817-538-5911
Crosby I.S.D. Ronald M. Wilson 713-328-9202
Fort Bend County Kathy Hynson 713-341-3750
Fort Worth I.S.D. Chris Moad 817-871-2173
Hood County Reva Hendrix 817-579-3209
N. Central Tx. Cnc'I of Gov't Troy Elliott 817-695-9123
Northeast I.S.D. Thomas O' Daniel 210-804-7118
Town of Higland Park Bill Pollock 214-521-4161
10
OVERNIGHT INVESTMENT ALTERNATIVES -5/25/94
PURPOSE
To analyze different options for overnight investments as allowed in the
City's investment policy while seeking to maximize yield.
BACKGROUND
Since the Local Government Institutional Fund for Texas ceased operations on
April 29, 1994, the portion of City funds invested in that pool have been
invested in Repurchase Agreements via the depository bank. This investment
vehicle is a 7-day investment which meets all of the City's investment policy
parameters. However, the cash management program utilizes investment vehicles
which provide overnight liquidity; thus this review of various funds. Several
excellent investment vehicles were considered (shown in detail on the
following pages); therefore, the City's funds will be safely invested
whichever fund is chosen.
OPTIONS
Texpool
Currently undergoing much political change and redirection by Martha
Whitehead, State Treasurer. Investment Manager left along with some staff and
created awn private money market pool. This investment manager was the
"backbone" of this pool. (See Trust Company of Texas)
Merrill Lynch
CChange in contact person. Not as service oriented.
Fidelity
High management fees, high balance requirements.
Trust Company of Texas
Newest fund in Texas, recently created through a partnership of Linda
Patterson and Company and Southwest Securities. Linda Patterson is former
Investment Manager of State of Texas' TexPool. Very competent, highly
respected in this field of government.
Prudential
al
High service oriented. Receive same day credit for funds received for
investment.
RECOMMENDATION
All funds/pools serve the City's purpose: overnight investment which provide
safety, liquidity and competitive rates of return. Almost every feature of
each fund is identical and meet the City's investment policy guidelines.
However, in consideration of the points outlined in the "Options" section, it
is recommended that the City continue use of the current 7-day Repurchase
Agreement; select Prudential Institutional Liquidity Portfolio and continue to
monitor Trust Company of Texas as it grows for future consideration.
. 11
Investment Proposal
by Financial Guaranty Insurance Company (FGIC)
• Consider utilization of a FGIC product:
U.S. Treasury Money Market Fund
• Charateristics/Benefits:
- Portfolio of 100% direct U.S. government obligations
- Daily liquidity (90 day weighted average maturity)
- late day investment services, purchases by 3:00 p.m.
and/ or redemptions by 12:30 p.m.
- meets or exceeds regulatory guidelines of many states
(regulated by rating agencies)
- no sales charge or fees (50 basis points admin. fee)
- AAAm rating by SSCP and Aaa by Moody's (highest quality)
- $100,000 minimum initial investment
- $1.00 Net Asset Value per share
- includes arbitrage calculations of invested funds
• Note: Compares to or is very similar to an investment
vehicle currently in the City's portfolio, PILP.
• Clients: City of Hartford, Conn.
City of Bridgeport, Conn.
City of Cromwell
Florida Housing Authority
Wisconsin Housing Authority
other individuals
(no Texas clients as of 10/3/94)
12
Investment Management Proposal
by Prudential Securities
• Proposal to manage approximately $8,000,000 bond
proceeds from Sales Tax Revenue Bond Sale
• Cost: relative to amount managed.
• Benefits:
- daily management of bond proceeds within our specified
investment guidelines
- provide calculations necessary to monitor compliance
with federal arbitrage regulations at no additional cost
- additional income earned through the dedicated
professional management that supplements City staff
- take co-fiduciary responsibility, so if an investment
policy is violated, they would take on any related costs
- investments through delivery vs. payment to bank of our
choice so the City takes possession of securities
- quarterly status reports
- annual arbitrage status reports
- option of discontinuing service if not satisfied
- City maintains control (decision-making aspect) prior to
investment purchases
• Disadvantages:
- n/a
• Requirements
- Drawdown schedule for investment terms
- Approval by Investment committee
13
4P
Investment Proposal
by RPR `Forward Supply Contract "
• Must take bids from at least 3 vendors.
• Process:
City enters into a contract with a financial
institution. Contract is for the City to receive a
guaranteed rate of return on debt fund which
calculates into present value dollars based on
a "forward yield curve", a projected curve.
• This guaranteed rate is provided in the form of
an up-front, lump sum payment.
• The vendor assures delivery of Treasury obligations
to City to meet debt service needs on or before due date.
• In return, the City agrees to give up the right
to the yields actually earned on the delivered
Treasury obligations for the debt service fund.
• Disadvantages:
City loses access to debt service funds as they
are locked into a contractual agreement.
• In this rising interest rate market, the city will
probably lose interest earnings as the contract
locks a guaranteed rate.
• If the bond funds are refunded and the City does
not transfer the contract, the contract is
cancelled by reimbursing the provider for the
present value of future earnings on the remaining
balance in the debt service fund plus any cost
to the provider for breaking the investment.
14
Investment Recommendation
✓ Need to diversify available institutions due to the
addition of bond proceeds. Portfolio increased from
$12 to $20 million or 67%.
,/ Add RPR to broker/dealer list. Contact person has
extensive experience & is very competent in public
investments.
,/ Delete Merrill Lynch from the broker/dealer list.
Contact person has changed and the new person does
not have any public investment references nor has
he been effective since the change.
,/ Add LOGIC investment pool. Safely enhances the
overnight investment options with greater yields.
,/ Decline RPR "Forward Supply Contract". Locks the City
into a contract decreasing the City's flexibility, and,
not a prudent option in a rising interest rate market.
,/ Utilize Prudential Investment Management Program on a
trial basis for bond proceeds not required in the
first CIP year. Enhances yield as the portfolio is
actively managed while the City maintains control
over all investment decisions. It is also a flexible
program in the cash flow drawdown requirements. Also
provides arbitrage calculations included in their fee.
,/ Add FGIC money market fund. Has greater flexibility
with trade deadlines. Utilizing FGIC ajr bona pfcceeds
for short term projects. Also provides arbitrage
calculations included in their fee.
15
•
Economic Environment and
Interest Rate Outlook
• The Fed tightened policy again this year
twice for a total of 75 basis points.
• They also increased the discount rate by
50 basis points to 3.5%, the first time
in five years that it had been raised.
• The Fed's action totals 125 basis points
for the year!
• This rate is projected to rise to 4.5% in
this year.
• Inflation remains low and the rate is
likely to remain around 3% for all of 1994.
• Growth is projected to be at 3% by year end
and under 3% in 1995.
• Market rate expectations include 8% level
for the prime rate and 5% for the Fed Funds
rate by year end.
INVESTMENT ARTICLES
REGARDING LOSSES
J
i.r• v v •- /�rv./arc`
KB 0016426-7 9529 C01
M`MUNIGIPALSETREASURES ASSOC
1-:1229 19TH STREET NW
!;WASHINGTON DC 20036-2413
Ht"brand fax transmittal memo 7671 nor pages i,
From /
co. '
0 f f „ New York,N.Y.
Phone n,7
fax a.
7 Lawsuit
sof Spending initiative Seeks to Regain /
Funds I nve-sued
onel heard arguments on whether the case 7z"-.
1 should first be heard at the trial court In Derivatives e_7
c- level and then work its way through
;ar appeals to the high court, By Lynn Stevens Hume
F The justices indicated they would
not issue an opinion on that procedur- WASHINGTON—Charles CountyA -
Id al issue undI after.they hear oral argu- Md,, is trying to recover millions of
d ments covering substantive issues re- dollars from nine securities firms that
s- lated to the initiative's constitutionali- sold the county's former deputy trea-
ty. surer derivatives and other riiky long-
Legal wrangling over Initiative 601 term investments that were prohibited
began in February,when a lawsuit was under a state-enacted.local law.
filed with the high court on behalf of The county sued the firrns in a U.S.
several citizens and two legislators. District Court earlier tlus month to re-
That suit asked the court to block cover almost$30 million---its entire
It enforcement of the initiative, and the portfolio—that had been invested in
o Suit also requested that the initiative taxable inverse floaters,collateralized
is be declared unconstitutional because mortgage obligations, and other nledi-
it "infringes on the sovereign taxing um- and long-term derivatives and S
and appropriation power of the legis- structured notes.
Plcosc turn to WASHINGTON page 5 Five of the Timis have since agreed ,
to settle the dispute by repaying the
county about $10 million to S15 mil-
e to Terms on Bill lion in exchange for the derivatives j
and structured notes, Howard Gold-
olving Water Funds berg, the county's lawyer, said yester-
day.
Goldberg, a partner with the law ?!
Icon would go td"help finange state firm of Smith, Somerville & Case in
wastewater treatment plants and$700 Baltimore, would not name the firms r.
million would go to a proposed re- involved in the settlements, =
volving fund for drinking water facil- Three other firms, lie said, have
ities. agreed to allow the county's financial i
A final vote on the spending bill is consultant, A. Webster Dougherty & ^ !
not expected in the-House and the Sen- Co. in Baltimore, to sell the obliga- f
ate until after Labor Day because the tions they sold the county, with the t
` conference rgport is not expected to be county getting the proceeds but re-
printed until Sept. 2, a House staff twining its right to litigate over any re- ;
member said. maining losses,he said.
Meanwhile,Congress is working on Goldberg also declined to identify 1.
two separate bills to reauthorize the these firms, but sources said one of ).
wastewater and drinking water pro- them is Liberty Capital Markets of
grams. Funding for both bills expires at Irvine, Calif., which sold the county
t the end of this fiscal year on Sept. 30. almost two-thirds of the risky invest-
One bill is a six-year reauthorize- meets in its portfolio. Officials from
tion of both federal standards for Liberty Cnpital did not ret—ri hone I:
wastewater and the revolving loan calls.
�. funds that many states use to stretch Goldberg and county officials hope
Please turn to WATER page 4 Please turn to LAWSUIT a e 28
!', Ps PR
�t
lir
'Finder a so-called public local count~will settle all of the dispu
Lawsuit The securities firms named in the law — a local law enacted by the County officials say they do not
Continued from front page suit,in addition to Liberty Capital, Maryland General Assembly — know why Johnson, who had an-
the settlements will prevent Stan- are Prudential Securities Inc.;Don- Charles County can invest only in nounced he would be a candidate
lard and Poor's Corp. from lower- aldson, Lufkin & Jenrette Securi- short-term U.S.government oblig- for cc,unty treasurer, invested in
ing its AA-minus rating on the ties Corp.; Smith Barney Inc.; ations. Short-term generally means medium- and long-tear derivatives
county's outstanding 57b million Lehman Government Securities 270 days or less, county officials and structured notes.
of unenhanced general obligation Inc.; Ernst&Co.; Meridian Capital said. Johnson took respoitsibility for
bonds. Markets; Mabon Securities Corp_; The derivatives and structured the ecunty's investments and pur-
The rating agency placed the and Murchison Investment notes purchased by Johnson were chased these obligation,after Thel-
bonds on CreditWatch with "neg- Bankers. not government securities and had ma Bowie,then treasurer,suffered
ative implications" last week after The county's troubles began in maturities up to 24 years, Ketter- a series of health problems starting
becoming conc.:rwd that the coup- el-iriy July when former deputy tr-ea- man and others said. in 1991.
ty would not be able to rrxxt cash- surer Stephen 12 Johnson reported The county filed its lawsuit on Jolt--tson was fired as deputy ttea-
tlow needs and debt service re- a $1.3 million loss from the coon- Aug.5 against the nine out-of-state sumer->n July 12,after county offt-
Cuirements because its invc-stincnt ty's iavcsuttent portfolio for the fis- securities firms that had Sold these cials ljarned about the investments.
portfolio was tied up in derivative~ cal year ending on June 30. obligations to the county through When contacted ear•lie-this week,
and structured notes. County auditors and officials be- Johnson. Johnson refused to coninent on the
But Goldberg said yesterd:ry that gan investigating and discovered The suit;which was filed in controversy or on his previously
the money corning in from the sc t- the Johnson,over an 18-month pe- the U.S. District Court of the announced plans w.run for county
demerits should alleviate:the rating riod,had invested the county's en- District of Maryland in Balti- treasurer.
agency's concerns. tire investment portfolio in risky more, sought an immediate re- Aslr� whether the county plans
"The county's immediate finan- medium- and long-term derivatives turn of the county's money from to laic:any action agai ist Johnson
cial problem is over. The money and structured notes. the transactions- over the investment controversy,
has already started flowing back The obligations included inverse The county contended in the suit Fink said,"We're continuing to in-
into its treasury,"he,said- floaters,two-tiered index notes,and that since the transactions violated vestigsate every possibility in order
Meanwhile, the county is plan- collateralized mortgage obligations a state-enacted local law, they to recover the moneJ and eom-
ning to amend its lawsuit to it-cov- issued by government-sponsored should be rendered void and the pletely make the county whole_"
cr millions of additional dollars in agencies such as the Federal Na- county should be, repaid County sources said this week
county funds that lite deputy Ire. [tonal Mortgage Association or the "The county did not have au- that nate attorneys are also inves-
surer used for similar past transac- Federal Home Loan Mortgage thority to enter into them," Roger ligating the county in stmenis.
tions in which the derivatives and Corp. These instruments are ex- Fink, a county attomey, said this But deputy state attorney Frank -
structured notes were either sold or tremely sensitive to changes in in- week-. "Our legal position has been Jones said he could no-confirm or
redeemed, Goldberg said. terest rates and produced losses that we don't own them, so all of deny .he existence of any investi-
That amount of money could ex- when interest rates rose. the transactions are void." gatiort.
ceed the funds being sought in the "They were well beyond what Although the county asked the Bowie formally resigned as
current complaint, sources saidwould be a prudent investment for court to take immediate action,sev- county treasurer on Aug. 17 for
The county is determined to con- a municipality," said Samuel Ket- eral of the scheduled court hearings heaftlh reasons.County officials im-
tinue to"vigorously pursue" legal- terman, a senior vice president at have been postponed,including one mediately appointed Harry H.
ly any firms that do not fully repay A. Webster Dougherty. "The coun- set for today, as the county contin- Foxw al to replace her.Foxw•ell m-
the county funds that were tied up ty had no liquidity whatsoever"as lies to world�gwarde�t� i�� s;. t_irc 4 from the Navy is July atter
in these transactions, said a-result of these investments, he putes with thb secitfitits Miiis" ' 's>rt�Jirg 30 years with the U.S. Of-
d. Goldberg said tie is hopeful the free or Naval Intclligeoce. Q
yesterday. sal
• �5 + T1• GF11'I �l i rT�r t;Hy I UWrI
?,41 v F a
Znves ment. crisis siva
. mks Odessa College
By. 'l ee Hancock''' Millions of dollars tied u source of pride in this rough-edged
SL-JtWHsrolThe DdW?lOril!j4 oilfield town.
odeaa�i'Colloge was to St�u�ti� 1C can't sell Ching the troubled investments,
Like'a gambldr oa a hot streak the college has raised tuition 20 per.
When'fiscal.dfficer,Roger Coolner think spine of the things that hap- cent; cut its budget s2 million and
invested School' money', faculty pened,probably,dQ all should have dL=antled its ��� and men's
me#abera recall'' hits,saying, he ten' track teams.The colle;e district al
couldrz't`w=to'iose„•, What b'appenod wns what a jug so hes proposed raising property
"cue'Skid, 'very?tstikly, every. nior college nssoclatl'on official razes by 7Z percent
thing;i.',�oBched`ttlme ;io gold,'" calls the Norat iave$tment.related College president Phil Speegle,
taid^Siia8lsir ' crisis ever-to hit an stili supported by his board, hes
r tiirvpaiett of the ' 9 Texas SO
bu'afnesiled.MiWs;tC titin: depart• public junior colleges!,; �,yven-UP his $122,9.58 aalnry for a
inent,"6'OiL tdugtWd,,6p¢ai"s corm- Odessa ColIe�e ofPlei�ls sav the token payment of�i a;e=r.
rents to the)Kaculq�Scriete in lay', crisis, involving exotic securicles "To be real�'hoaest with you, I
',`Then .when the,crash'•comes, called mortgage-backed derivatives, feel'ths college'would be more hurt
you. dan'1 believe'!t, sato said. "I has shaken an institutio& lone a• please esaBECXTFJMon Page 14A.
0
' ll-ege'
* 11
sloss' e �tal ions,
recuo"rds , indicate' '
y
A
ODESSA COLLEGE
CRISIS Idlend Abilene
_ .T I I - ddetaea pn Angelo TEXAS
Location: Odessa Sa '
Year founded: 1873,when the 10 AuBti
Permian Jum!cr Gc!les9 syctern nae N
spiit.into Odessa College and Midland Antonlc 35
College .
Enrolltttentit 5,000
0$6,88 million In trading losses since August
1883, 5; puy
■A proposed 7,2 percent tax Increase for the
college district,Which InCludeb actor County.
■A 58.24 million bond Issue and a$5,2 million
bank loan to finance college debts from the crisis
and provide operating expenses for the next two years.
■$2 million in budget Cuts for fiscal 1994-95, Including; men's track
Program;tennis team*; faculty travel;22 voluntary early retirements,
Including president Phll Speegte;reduction of operating budget=for
academic departments;ellminating plannod equipment purchases, L
Derivatives are based on,or"derived"from, the value of assets such vi Z
as stocks,bonds or•mongeges,Generally,as the risk of any
investment Increaade,so does the potoMlal return or po4siblo loss. (;j�� C ,� J
The risk involved with the mortgage-backed derivatives bought by
Odessa College rides on Intereot rata shift.
Mortgage-backed derivatlwi are created when the Federal Koro
Loan Mortgage,Corp,and'Fedeml National Mortgage Corp. resell
mortgages Is3ued to hundreds vi home buyers.When the two
government-Created mortgage firms resell mortgages to Investom, the
ICUs are broken apart and sold In plecos--hcmeorvrers'princ!pal and
interest ropayments.
These pieces—or dedvativec—can varyon the ba3is of when the
undertying Individual mortgages maturo and what Interest rate they
pay. Each place carries its own degree of risk and what OCessa
College bought is among the rlskloet,
It interest rates stay low or fall, home owners refinance their loans or
buy new homes, paying off their old mortgogos more quickly. When
that happens,the derivativae pay high mums and quickly return an
investor's prinolpal,(.
But when intereat rates rias—as has happened several tlmos since
February--homa reeaies•and refinancings fall off.Thero ir.less
demand for moR9agos,and their value to Investors declines,
When Odessa College faced a major Incronse In interest rates
earlier this year, it confronted a triple whammy,The return on its
irmvactment evaporated,the value of its cerivativee tell amid diminlshed
Investor demand end,t?ecause homeowners kopi'their old mortgagos
longer,the school may be unable to recover Ito principal for decades,
b�� (M- 3NOW WOScy 31SUW WdWSIHM �3(ld5 CWU70NOW rNOstl1i�i�HW ei"11aT .T r tic
AUG 19 '94 11:51-PN CITY OF EAYTOkIN p ?;4
14 A Ci rpalla>f jfl'ornir+p relu,a Friday, August, S, 1994 A
Securities investment 'crisis ,
�as . essa College - in tur'mo i
:ontinued from Nee IA,•
14 left than if I atay," he said, HgBV t011 At the time, Dr. Speegle said,
:.,,Dr,Speegle said he feels reapon• y ttustees discussed the fact that
Able for the crisis,adding, "I thiak The college's Wall Srreet binge ;their investment lneovic might
that all of us feel that collectively has taken a heavy,toll across the drop if interest rates shifted,But he
and individually we made at er. campus, a sprawl of, nondescript, ;said no one mentioned that such'a
Cor." I modem bride biilldiagz in west i ihift would make the securities
. pr, Cooifsr,, 48, recently re* 0¢6378, , 'Bard to sell, :
signed his job of I: yesra and hes Faculty.travel has been viMU&IIY ' Said board member Jim Gilli•
ieclired.an inter viaw, bau�ed,and ase of air:and?tioailag land,vice president of lzvestmenu
Some students, faculty and resi- has bees curtailed,Equipment Pur" for the Odessa office of Ddllas-based
lents say they remain puzzled over chases have been canceled in many William Rigg&Co.,a real estate and
tow the college got into this mess. departments, and summer hours at insurance firm; "I was told I that
. "We lust get bits and pieces," the fitness center Were reduced there was no risk,"
Said track coach Cue McMaster, !rota six days a week to four, AlMO91 It;amediately,Dr.Coomer,
who is trying to find his track stars' Twenty-two of the college's 350 the fiscal officer, put the school's
scholarship' offers from other employees havi taken early retire• dntire tavestment fund into derive,
schools."It's been real,real tough." Ment,and officials say Dr.Coomer'o fives, at times moving millions of
What is clear is that Odessa Col, S94,000•a-year job will remain .va.' 4ollars in and out of securities
lase has$22 million stuck in invest,, tet• within a few hours,records show.
tents that it gams afford to sell -- I The cuts have come when many. 1'Tn the year ending in AU9Uk
securities.so volatile that federally students and professors, are Away 1993;for example,the college used a
(wuXed bat.%S ery barred from buy for the summer, some faculty raid, moi] mltllon investment pool — ev NOW
[ng them.The portfolio include4 all so the impact Is not ?ti1lY under• Q'iit.h ng freta booster club money
of:.the college's' investment funds stood, - to tuition and even funds borrowed
lad eome of its $75 million aaaual "It basalt suak in," said govern- by Issuing bonds.— to rack up a
)perating revenues, college offs• ment professor Bill Rutherford. total of $107 million In derivatives
rials said. Oa top of that,the school Pete Anchando,41,a student gov. ' tirades, records indicate. That year,
:as lost milliono more in the last erument'officer, said students will .it earned 54 million and,ae in previ-
leap from its securities trades. reel the tuition, increase, "but I ous years, put most of the profits
Odessa College had to borrow don't think. anybody's aware of i.1. t back into derivatiYev, said
;S:2 million from a local bank to what's going on, I don't think the Virginia Chieum,the school's direc•
zzoi June debt payment9 and other for of business systems. .
sxpenser,it Is gettiag additional op> college her really dope a good job Those earnings—an average re-
iranng honey through a 66,24 mil. exPhdMItg,this at all." turn of 21.1 percent in 1991-92 and
ion bond issue, Perhaps most embittered are almost 2S pascent in 1993.94,accord.
The problems stem from securl- members of the colleges nationally ing to Ms. Chisum— wowed other
fes now consldered so risky and ranked track team, Which took Texas junior ootleges,
lolatile that they are known In third in the 1994 junior college na• "Anytime someone is earning
some Wall Street circles As "toxic tional Indoor track cbempionehipsr twice, three times the interest
veste." "They haven't given, us any ; you're earning,you're certainly en-
-"The reason; If you.touch 'em choices.We're all trying to fired an. vious," said Ralph Hall, vice preei-
md they blow up on you, you're other school, and• no schools are dent of administratiga at Collin
tilled. You're dead. That's why giving out say scholazahipa We ars County Comr0uhiry College.
hey're very hard to sell," said right now sort of in a bind," said, "To be frank, anYdme they talk
Momas M.Poor,managing director Johnny McDaufel, 20, of Tallahas- about that kind of interest, there is
It Scudder,Stevens&Clark,a mute, isle, Fla,, a aatlolully ranked triple a hell of a risk involved, and if
�i-futid manager in Boston. "The) ijymper."I really don't think people 'you're smart, you're goiag to back
Vere big bete on the direction of luAderctand about the situation.1, off a minute, and say, 'Is this too
aterest rates," f Mat happened at Odessa Col• aood to be true?'" said Mr,Hall.
Large-scale speculation in deriv,, i1ggs seaters on esoteric mortgage, ]Because of such concerns, only
itives has received national atten• fteked derivatives with sautes like, five of the state's 49 other junior
Ion this year because of a market ,"support inverae floaters"and'sup• colleges have even dabbled in mort•
4t has left mutual funds,corpora 11port principal-only strips," gage-backed derivatives, their offi-
S'cns and other major investors I ; Derivatives are financial corp, cers said.None of the five is in the
yith billion-dollar losses. ;tracts based on underlying mets Dallas Fort Worth area,
•' Mr,Poor and other experts quer ;ouch as stocks or bonds, In late 1992,Dr.Coomer finished
ion how such a large,high-risk in•. Y,Tha. college's derivatives are a doctoral dissertation at Texas
'estment could have been appropri• lbaoed on home mortgagee ltnt Tech University in Lubbock outlin.-
te for a S,000-student junior ,t4rough the Federal Home Loan it:� slits Stivrsimeiit �ttnte he Wfl9
allege. ;biortgage Corp.pad Federal Nation. as'ng at Odessa College.l�eluded
"They shouldn't have been in !al Mortgaao Cory. Their complex Wyat proved to be a prophetic warn-
�ls. It's taut simple," said Jamas 1 :structu"dictates that an investor's ,ing about mortgage-backed derive•
lidanek, a Califotztiia-based wort- overall profit moves in the opposite eves; If market C4nditioas soured,
aae•backed securide94sset manag• ;d;irectica from interest rates, he wrote, "an investor could be
r who reviewed the school's port, When interact rates rise -- as Stuck with a long-term investment
elle for The Daises horning News. °alas happentd several ti=ez since that huno cash flow."
ft's outrageous.". !February — their return evapo: Perlodic updates
Dr.6peegle and some of the bine rates,their price fails and Investors
rusteas acknowledge authorizing may not recover,their principal for Odessa College board members
he investments about four years decades,' said they got periodic oral updatts
go. Sat the prc9ident and trustees Tho "sUpport class" derivative9 on the college's. investments but
Bid they did 4ot understand the i purchased by the college are riskier neithor coked for—nor got--writ-
ntential risks — even though the !and :all even harder when interest ten monthly reports.
ollege's records include a 22-page ;rates shift upward, ,It was something that (Dr.
ocument explicitly detailing the1990 was 'key year Coomer) knew well, and no one re,
sks of what it called "speculative" ; The college's foray into deriva• guy had any reteoa to doubt tont he
:curities. At a broker's request, 'rives bel an in Berl 1 Was capable ot'doltg it, said board
cth Dr. Speogle anal Dr. Coomer: g Y 490, when the president Bob Clark, a licensed se.
.gDed the doc=ent in Yebruary i board passed a brief resolution au• curities broker.with Dean Witter
3, ihorizing Dr. Coomer and Dr. Reynolds Inc. ,,Hindsight is 10.20:'
$peegle to trade such securities.
'•c - rT�JH-l;NnW Mn5;?i7I e-,HW �"UWSIHM =,'iH5 (INH7IZ�CW NOSN315U^.J WHrT :TT 7T C)nH
�' �a 1 1 -=•Hi I ._I Tr' OF
EA'r
Dr. Speegle•sald he got sporadic The brokerage firms' profits The first public announce=et:t
'iarormal"recaps from Dr. Coomer from the hundred# of millions of came three days before three trust•
adad no idea" that operating dollars in trades is unclear. College ees stood for re-election on hfay,7.
it:. were going into the laves;• officials'esy they have no records of evQQ though Mr. Speegle said he
Mens. "I simply wasn't Involved," the profits,which are built into the first learned of the investment jtes•
he said, rices of the derivatives. At least co oa March 21—three days before
In July 1993,Dr.Coomer told the one of the firma earned profits of up the election-filing deadline.
board's finonc9 committee.that he to 4 percent—well obove industry Mr. Clark, the board president,
was pulling out of derivatives be- standards —.in similar trades with said the problem was made pubhe
cause he feared the market was soft- several Ohio counties, according to as soon as possible after the imine.
eniag. Mr. Clark said he and other- Roger Cox, a Dayton securities ane• diate financial crista was addressed.
committee members agreed, asked lyst who Studied those transactions. Making aometbing-like that public
no more questions and did not meet wasn't one of our prlorlties,'-,.;he
again until March. Weeks after learning of the di- said.
But records show that Dr, Coom• saster, Dr. Speegle called a May 3 . Mr, Martin also noted that,-the
er continued buying the securities nowsconference. A statement re- school's planned 7,2 percent tax
heavily that fall, leased at the time said notbing rate increase — which would rare
By December, Dr. Speegle said, about derivatives but stated that the average Ector County bopa�
Dr, Coomer appeared increasingly the college had "cashhow difficul• owner's taxes S733 a year fails
stressed and told him that "the ties" due to problems with "very just below the 8 percent threshold
bond market is lousy, the market is eerure ... high-yield securities." tent would c1low a tax rollback elec-
Just awful," Even so, Dr, Speegle Then and now, Dr. Speegle and tion,
said, he asked nothing about the other college officials have charac- "1 think it's a pattern," said
college's portfolio, terized their $22 million portfolio's Martin,,who has peppered the:rol•
By January, Dr. Coomer was woO)as"paper losses"and said they lege with questions to Iearn• whet
avoiding any discussion of invest• eventually will get the money back went wrong, "They seem to be bop-
ments that he bad once bragged by holding the securities until they ing they cau stall and not andwcr
about, said Jay Box, a physical edu- mature in 2021 or 2023. questions aad eventually write this
cation professor who worked with Securities experts say, however, off quietly and have people 14kye
Dr, Coomer every Friday from $ep• that tying up money-for decades them alone."
tsmber to May as part of an adminis• meads it real loss,
"ve internsillp, "This college may well have
knew we were doing poorly," bought a loan which returns noth•
M , x said, Ing In the way of interest and loses
Later, Mr, BoX said, the flseal money to inflation, said Mr, poor,
officer acknowledged that "he the securities expert."If they stick,
would have trouble going to sleep around, they'll get their money
at night and would wonder if thin is back.They just won't have much to
going to turn around. He just kept show for it,
hoping it would and when it didn't, They also inay have trouble ob•
he finally had to go intone Dr, raining new financing,said an Ana.
SpQsgle." lyn with.Moody's Investors Service.
On March 21, Dr. Speegle said, The bond-rating service recently
Dr. Coomer tgld him bow bad the aanounud it is re-evalusiing the
situation was. college's current Above-average
The portfolio had becolns worth debt rating btcause of the crisis,
a,fraction of what the college paid "It's pretty serious," said Moody's
for it, Based on recent estimates, it vice president Anita Russell.
Some faculty members, .upset at
is worth leas than ball of its pur- the events,said they believe college
ehase price, and. the value of one officials knew more about the in.
holding has dropped 90 perce'nt, , vestmenn than they now aclmowl•
Dr.Speegle,seed Dr. Coomer also edge,
revealed that he had already sold "If (Dr, Coomer) was gambling,
some investments at a loss and had. we feel like thmy knew he was doing
borrowed$4 million with securities it," said htr. Box, president of the
as collateral to make erlde meet. Faculty Senate,
On March 22, said Mr. GLllSland, sox said Dr. Costner felt
the trustee, the college had to un pressured by the board's reluctance
load 56.25 million iu derivatives at a to raise taxes or tuition. ,
S2,7 million 16ss to meet Irs payroll. "Vere needed more tnoney'in,cur
'7q scary, absolutely," he',said. opersting budget to be able to make
sat single day's loss is only part it through. The way to do it was to
e 56.58 mlllioa in trading losses put some of the operating budget in
the college has had since last Au• these favestaaents," Mr. Box said,
gust, recorQs Judicate. '
In April, college officials hired ".We were living beyond Qtr
Dallas lawyer.kay Hutchison and a means."
battery of other lawyers to sort out Dr. Speegle said he has heaed
the .mess and help get short-term that Dr.Coomer felt pressure."Rog,
er is a good max, he said. He made
flnt:nc.ng to keep the college run• a tni,iaae„
ting. By tnld4une, the college had Some Odessa residents say they
more tlwz$105,040 in legal
billy are troubled by•the college's has-
In the aftermath, Dr, Speegle dung of the crisis, which school
said, one lawyer has found no evi• officials say hes exacerbated al.
dance of criminal wrongdoingg by ready chronic fiscal woes fror-4,,
college officials and is uow saucing #lining oil tax revenues,
with firms that sold the'derivatives. Fred Martin, a local accountant
The lawyer declined to comment. and contributor to the college sakth-
''fficials at the firms declined to lents, said he is concerned abqut
.neat. They include five Hous. the wily the school divuleed its
AW
tone companies—MGSI, Westcap Se•' problems. :'r�
curitics, Arbour Financial Corp.,
Coastal Securities Ltd. and Govern.
ment Securitiu Corp. of Texas —
plus Gruntal & Co. in Florida..
DUNCAN E.BOECKMAN
DENISE VOIGT CMWFORO ��/ >•
SECUMTIES COMMISSIONER 'W "I`yyCHAIRMAN
JOHN R.MORGAN T.DEON WARNER
DEPUTY SECURfTIES COMMISSIONER MEMBER
Mute �eruritiesoura
• MAIL:P.O.BOX 13187 DAN R.WALIER
AUSTIN,TEXAS 78711.3187 MEMBER
200 E. 10th Street,6th Floor
Austin,Texas 78701
Phone(612) 306-8300
FAX(612) 306-8310
Re: Investments in Derivatives
Dear Government Finance Officer:
Lately, there has been some publicity about the substantial losses
sustained by governmental organizations in Louisiana, Minnesota and
Ohio from their investments in derivative financial products.
As a government financial officer, you may be approached to invest
public money in derivative products. Derivatives may be purchased
directly or indirectly (by investing in an investment company, for
example) . A derivative may also be created by entering into a
contractual arrangement to exchange cash flows with another party
(a "swap" agreement) . Derivatives can be enticing as they may
initially show promise of high rates of return. But realize that
in investing, the potential for a higher return is accompanied by
a higher level of risk. The risks include suffering a partial or
even total loss of the investment. The risks of derivatives, as
Louisiana, Minnesota and Ohio have discovered, can be fiscally
devastating.
Businesses have used derivatives for years as hedges against
adverse business conditions. Still, even businesses are not immune
from the risks of these products as recent losses reported in the
financial press have shown. Investment in derivatives requires
that each party understand completely the details of the product,
be able to manage the risk associated with the product and maintain
a constant analysis of its position in the derivatives markets.
With swiftness unusual in traditional equity and debt markets,
losses in the derivative markets may come quickly and unexpectedly.
We believe that it is important for government financial officers
to have a fundamental understanding of investing in derivatives,
including the higher risks associated with purchasing non-
'Derivative products (derivatives) may be a security or
contract (including options, futures, options on futures, swap
agreements, collateralized mortgage obligations, caps, collars,
floors, to name a few) which derives its value from another
security, currency, commodity or index.
i
traditional investments. Most derivatives are not subject to -o''
review by the State Securities Board (Agency) . Even those
derivatives which are reviewed by this Agency may not be
appropriate investments in all instances.
In addition, you should be aware that this Agency can act as a
resource by providing information on registered securities firms
and agents who may be engaged in selling derivatives. We maintain
a public record on each Texas registered brokerage firm and its
agents which includes any disciplinary history. You may contact
the Agency at (512) 305-8300 to request a copy of these records.
If you believe that a person has sold or offered to sell you a
security in violation of the Texas Securities Act, or if a person
has sold you a derivative product which you believe was an
unsuitable investment, you may contact the Agency's Enforcement=
Division directly at (512) 305-8392 .
It is always best to investigate before you invest.
Very truly yours,
4
DENISE VOIGT CRAWFORD
Securities Commissioner
AUG 8
{
O1 Eule AUGUST 5, 1994
rr
n .-
A MONTHLY SUBSCRIPTION NEWSLETTER OF THE GOVERNMENT FINANCE OFFICERS ASSOCIATION VOLUME 13,NUMBER 8
Mutual funds for public funds investment Congress turns up the heat on derivatives
by Leon J. Karvelis, Jr. by Betsy Dotson
Currently, there is a movement taking place in After returning from a brief recess, both the
legislatures across the country to permit local House and Senate are now actively engaged in
governmental entities to invest in Securities and the oversight of derivatives activities. A stepped-
Exchange Commission (SEC)-registered mutual up hearings schedule and new legislation is
funds. States.which have recently adopted such keeping all industry participants busy as Con-
legislation include Connecticut and New Jersey; gress seems increasingly serious about tighten-
and legislation is pending in other states, such as ing the rules for these complex products.
New York and Massachusetts. In the House, subcommittees with oversight
Providing additional investment options for responsibilities for financial institutions and
fiscally hard-pressed local governments and finance held hearings on the use of derivatives.
school districts can represent a good thing. From The Subcommittee on Financial Institutions
a competitive point of view, the more options Supervision, Regulation and Deposit Insurance,
available to the public cash manager the better. chaired by Representative Steve Neal (D-NC),
Many states already allow the use of some forms held a hearing on H.R. 4503, the Derivatives
of mutual funds for public funds investment and Safety and Soundness Supervision Act of 1994.
have done so for years. The panel heard testimony from federal
Investing in mutual funds is not necessarily a regulators and investment bankers regarding the
no brainer." Safeguards and caveats must be legislation, which seeks to improve interagency
observed. cooperation among the regulators in setting
Mutual fund differences. In states where capital standards, suitability rules, risk manage-
such legislation is now proposed, it is important ment and other derivatives-related regulations.
to draw a distinction between the proposal to The bill also would prohibit financial institution
allow the use of "mutual funds" for investment proprietary trading unless it has been approved
purposes and the use of appropriately structured by the board of directors.
"money market mutual funds." The differences The House Subcommittee on Telecom-
between these forms of mutual investment are munications and Finance, chaired by Represen-
considerable. tative Edward Markey (D-MA), heard from a
"Mutual funds," per se, can consist of pooled panel of so-called derivatives "rocket scientists,"
investments in many types of underlying individuals who create and sell the models upon
securities, such as domestic or foreign stock, which derivatives trades are carried out. This was
fixed-income securities of all types and credit the fourth in a series of hearings held by this sub-
qualities, unrated, or so-called "junk" bonds, committee. Chairman Markey announced during
commodities and many other forms of invest- the hearing that he has introduced the
ment. Derivatives Dealers Act of 1994 (H.R. 4745)
Moreover, in terms of constant market value which would close gaps in the regulation of the
benchmarks, liquidity and collateralization, many derivatives market by establishing controls over
types of "mutual funds" are simply not suitable currently unregulated derivatives dealers. The bill
for the investment of public funds under most ex- would:
isting protective state laws and ordinances. - require currently unregulated derivatives
Legislators deciding upon the permitted use dealers, such as those affiliated with securities
of mutual funds would be well-advised to avoid or insurance firms, to register with the
the investment eligibility of the catch-all category Securities and Exchange Commission (SEC);
of "mutual funds" and, instead, focus upon pro- • authorize the SEC to set capital standards for,
perly structured "money market mutual funds." In conduct inspections or examinations or, and
fact, GFOA's Model Investment Legislation receive financial reports from such dealers;
(continued on page 5) (continued on page 4)
i
Moving averages Derivatives (continued from page 1)
6-month Treasury bill discount yield • grant authority for writing sales practice rules,
including suitability rules, for such dealers;
5.2% • enhance the SEC's anti-fraud and anti-
manipulation authority; and
5.01 • define equity derivatives as securities.
5.0% 493 In the Senate, Committee on Banking, Hous-
4.9% %1. -4.91 ing and Urban Affairs Chairman Donald W.
4�0
4.8% 4.80 Riegle, Jr. (D-MI), has introduced the Derivatives
a.80�.�4.84 4.84 Supervision Act of 1994 (S. 2291). Because the
4.7%-- - -'72 0 Senate banking committee has jurisdiction over
4.6% both financial institutions and broker/dealers,
Chairman Riegle's regulatory legislation is
u,y 27 1-3 10 17 24 .,, t 15 22 29 somewhat broader in scope than that introduced
in the House. The Senate bill would:
• separate certain derivative activities from the
insured deposits of insured depository institu-
2-year Treasury note yield to maturity tions;
• require regulatory coordination among financial
6.3% institution regulators with regard to capital, ac-
6.2% 817counting, disclosure, suitability and other
6.14 s.,a
609 regulatory actions;
'-6.12'6`' • require that insured depository institutions and
6.0% x,.8.03 6.02 major dealers disclose certain specified quan-
5.9% `\ ,� 5.95 5.96 titative information with respect to their
derivative instruments, provided separately for
5.8% exchange-traded and over-the-counter in-
struments;
5.6% • require that the above institutions prepare a
management plan that sets forth the purpose of
5.5% the derivatives holdings; how the holdings are
consistent with a risk management plan; how
wy 27 1,,.3 10 17 24 my 1 8 15 22 29 the institution acquires its derivatives; include a
description of accounting methods; and require
that derivative activities be conducted with
30-year Treasury bond yield to maturity direct oversight by senior executives;
• require that any major dealer not currently sub-
7.81/4 ject to regulatory by a financial institution or
7.7
7.69 other regulator be subject to SEC regulation;
7.61 7.597.60 • provide for international coordination among
7'6`° Y U.S. regulators and institutions in outer coun-
�.7s7 ��sa
zs°r 7� 7� tries toward standardization; and
74% 747 • require that regulations be implemented that
7.38
reduce the risk associated with potential
7.3% systemic financial market failure.
7.2°/ 0 The SEC and six major dealers are working
on voluntary standards related to derivatives
m.y 27 3 10 17 24 ady1 8 15 22 29 trading. The SEC is interested in setting stan-
dards dealing with suitability, capital re-
quirements and additional disclosure about the
derivatives operations of securities firms.
Public Investor's four-week moving averages are calculated as the simple Throughout the remainder of this Congress,
average of Friday closing yield quotations for the most recently offered six- additional Scrutiny is sure to be applied to the
month Treasury bill(discount basis),two-year Treasury note and 30-year derivatives activities of both dealers and end
Treasury bond.Moving averages are used by analysts to monitor trends and
trend changes.Generally,interest rates are increasing(prices falling)when users. Public investors may expect further
the moving average yield is rising and the current rate exceeds the moving legislative and regulatory initiatives.
average.Conversely,current yields below a declining moving average are
associated with lower interest rates(higher prices on fixed-income securities).
Some market timers buy(or sell)longer maturities when current market yields Betsy Dotson is assistant director of GFCA's Federal
fall below(or penetrate above)their moving averages. Liaison Center.
-4-
APPENDIX
4
City of EJess
SchetlUe of Rrchases
For Jute,1994
•
Investment Type InstiAti on
CD Certi.of Dep. FNMA Fed,Nall Mort,Asso. FHLB Fed.Home Loan Berk MERRILL Memh Lynch BK ONE Banc One MMSBW Masterson Moreland
TBILL Treasuy&II FFCB Fed.Farm Credt Banc FHLMC Fed.Home Loan Mort. PRUD Prudertiel Secuities WAN Western Amer.Nati LM Landmark Baric
REPO Rwchese Agreement TNOTE Treasuy Note SHEAR Shearson Lehman LGIF Local Gov't Inv Fuid SWSEC SoWwest Secanties
Cost Accrued Total P-I @
hrv. Inti.I.D. Puchese Term Matuity Price Par Book Vakre Interest Total Yield To CoLvon Interest Seller Maty Net of Total Cost
Type Number Date (in days) Dale Per$100 Value (Pnn.Orly) @ maty Rin-In M"ty Rete Ptrchased Inst. Di scout Premum Fend Rem&In Pu. of Investmert
REPO 06103/94 100.0000 500,000.00 500,000.00 0.00 500,000.00 4.00% Landmark Van ass 500,000.00 500,000.00
PILP 06/07/94 100.0000 500,000.00 500,000.00 0.00 500.000.00 3.76% Pruderd at Van ous 500,000.00 500,000.00
PILP 06/10/94 100.0000 1,000,000.00 1,000.000.00 0.00 1.000.000.00 3.77% Prudential Van ous 1,000,000.00 1,000,000.00
FNMA 46165 06/17/94 94 09/19/94 98.8589 500,000.00 494,294.72 5,705.26 500,000.10 4.48% Pruderad 50 500,000.00 494,294.72
PILP 0623/94 100.0000 500,000.00 500,000.00 0.00 500,000.00 3.85% Prudential Venous 500,000.00 500,000.00
FNMA 062954 092954 98.8577 500,000,00 494,288.33 5,711.67 500,000.00 4.58% Pruderti al 50 500,000.00 494,288.33
0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00
Totals 3,500,000.00 3,488,583.06 11,416.94 3,500,000.00 0.00 0.00 0.00 3500,000.00 3,488,583.06
City of Euless
Schedule of Maatibes
For Jure,1994
Investment Type Institution
CD Certi.of Dep. FNMA Fed,Nall Mort.Asso. FHLB Fed.Home Loan Banc MERRILL Merrill Lynch BK ONE Bark One DEAN Dew Wtter
TRILL Treasury&11 FFCB Fed.Farm Credit Banc FHLMC Fed.Home Loan Mort. PRUD Prudential Seabees WAN Western Amer.Nett LM Landmark Bark
REPO Repurchase Agreement TNOTE Treasury Note SHEAR Shearson Lehman LGIF Local Govt Inv Fund LIBRTY Liberty Capital
Cost Accrued Total P+I @
Im Im I . Purchase Tenn Maturity Price Par Book Vakx Interest Total Pnn.+ Yield To Coupon Interest Seller Maty Net of Total Cost
Type Number Date (n days) Date Per$100 Value (Prin.Only) @ maty Int.@ Maty Maturity Rate Purchased Inst. Discount Premum FW Prem&In Pur. of Investment
PILP 06/01/94 100.0000 200,000.00 200.000.00 0.00 200,000.00 3.76% Prudential various 200,000.00 200,000.00
FFCB 40345 12/02/93 186 06/06/94 98.3002 500,000.00 491,500.83 8,499.17 500,000.00 3.39% MERRILL 1,8,39 500,000.00 491.500.83
REPO 06/1054 100.0000 500,000.00 500.000.00 778.08 500,778.08 4.00% Landmark venous 500,778.08 500,000.00
PILP 0611554 100.0000 500,000.00 500.000.00 0.00 500,000.00 3.84% Prudert al 2 500,000.00 500,000.00
PILP 06/1754 100.0000 500,000.00 500.000.00 0.00 500,000.00 3.86% Prudert at 9,17 500,000.00 500,000.00
TVA 16081 0623193 360 062354 100.0000 500.000.00 500,000.00 17,450.00 517,450.00 3.49% 3.49% MERRILL 2,8,39 517,450.00 500,000.00
PILP 062554 100.0000 500,000.00 500.000.00 0.00 500,000.00 3.88% Prudential 50 500,000.00 500,000.00
Totals 3,000.000.00 2,991,500.83 26,72725 3,018,228.08 0.00 0.00 3,018,228.08 2,991,500.83
Ofte
City of Euess
Schedule of Pucnases
For May,1994
Investment Type irsbUon
CD Cerb of Dep. FNMA Fed.Natl Mort.Asso. FHLB Fed.Home Loan Baric MERRILL Merrill Lynch BK ONE Bank One MMS&W Masterson Moreland
TBILL Trea%ry&u FFCB Fed.Farm Credit Bark FHLMC Fed.Home Loan Mort. PRUD Prudential Secuifies WAN Western Amer.Nall LM Landmark Bank
REPO Repuchase Agreement TNOTE Treasuy Note SHEAR Shearson Lehman LGIF Local Govt Ina Fund SWSEC Socfhwest Sec rtes
Cost Acm*d Total P+I Q
Inv. Ina.I.D. Puchase Term Mti Rice Par Book Value Interest Total Yield To Coupon Irterest Seller Maty Net of Total Cost
Type Number Date (in days) Date Per$100 Value IPnn.Orly) maty Rin+Int Matuity Rate Puchased Inst. Discoul Premum Fund Prem&Irt Pr. of Investment
REPO 05/13/94 100.0000 1,200,000.00 1,200,000.00 0.00 1,200,000.00 3.65% Landmark Van ous 1,200,000.00 1,200,000.00
FNMA 44934 05/02/94 95 08/05/94 98.9207 1,000,000.00 989,206.94 10,793.06 1,000,000.00 4.19% Prudert al Vanous 1,000,000.00 989,206.94
FNMA 44976 05/04/94 97 08/09/94 98.8683 500.000.00 494,341.67 5,658.33 500,000.00 4.31% Pudert al 4,9,40 500.000.00 494,341.67
FNMA 05/17/94 195 112854 97.3404 500,000.00 486.702.08 13,297.92 500,000.00 5.11% Prudent al 1 500,000.00 486.702.08
PILP 052754 100.0000 1,000.000.00 1,000,000.00 0.00 1,000,000,00 3.66% Prudert at Van ous 1,000,000.00 1,000,000.00
0.00 0.00 0.00 0.00 0.00
0.00 0,00 0.00 0.00 0.00
Totals 4,200.000.00 4,170,250.69 29,749.31 4,200,000.00 0.00 0.00 0.00 4,200,000.00 4,170,250.69
City of EJess
SchecUe of Mahsibes
For May,1994
Investment Type Institution
CD Card.of Dep. FNMA Fed.Nall Mort.Asso. FHLB Fed.Home Loan Baric MERRILL Merrill Lynch BK ONE Bene One DEAN Dean Witter
TBILL Treasuy Bill FFCB Fed.Farm Credt Banc FHLMC Fed.Home Loan Mai. PRUD Prudential Securities WAN Western Amer.Nell LM Landmark Banc
REPO Repurchase Ageement TNOTE Treasury Note SHEAR Shearson Lelnren LGIF Local Govt Irn Fund LIBRTY Liberty Capital
Cost Accrued Total P-IQ
In✓. Irv.I.D. Prchase Tenn Maturity Price Par Book Value Interest Total Prin.+• Yfald To Coupon Interest Seller Maty Net of Total Cost
Type Number Date (in days) Date Per$100 Value (Pin.Ony) a maty In.G Maty Maturity Rate Purchased Inst. Discount Premum Fend Prem a Int Pu. of kveVnwt
FNMA 5944 092953 215 05/0254 98.1128 665,000.00 652,449.97 12,550.03 665,000.00 3.26% MERRILL 2,4,9 665,000.00 652,449.97
CD 7610 1110353 180 05/02/94 100.0000 200,000.00 200,000.00 2,958.90 202,958.90 3.00% WANB 2 202,958.90 200,000.00
FNMA 7130 052153 347 0510354 99.8906 500,000.00 499,453.00 16,250.00 516,250.00 3.37% 3.25% 767.36 MERRILL 547.00 1,2 516,029.64 500,220.36
FFCB 39553 11/0953 177 05/0554 98.3972 500,000.00 491,985.83 8,014.17 500,000.00 3.36% MERRILL 1,2 500,000.00 491,985.83
REPO 100.0000 700,000.00 700,000.00 0.00 700,000.00 4.15% Landnerk Various 700,000.00 700,000.00
Totals 2,565,000.00 2,543,888.80 39,773.10 2,584,208.90 547.00 0.00 2,583,968.54 2,544,656.16
• • f"
City of Euless
Schedule of Purchases
For April,1994
Investment Type Institution
CD Cert.of Dep. FNMA Fed.Nall Mort.Asso. FHLB Fed.Home Loan Baric MERRILL Merrill Lynch SK ONE Bank One MMS&W Masterson Moreland
TRILL Treasury Bill FFCB Fed.Farm Credt Bane FHLMC Fed.Home Loan Mat. PRUD Prudertlal Securities WAN Western Amer.Nall LM Landmark Bank
LGIFT investment Pod TNOTE Treasury Note SHEAR Shearson Lehman LGIF Local GOVt Imr Furx) SWSEC Southwest Securities
Cost Accrued Total P•I @
Irv. Irv.I D. Purchase Term Maturity Price Par Book Value Interest Total Yield To Capon Interest Seller Maty Not of Total Cost
Type Nenber Date (in days) Date Per$100 Value (Priv.Oriy) @ maty Prin+Int Maturity Rate Purchased Inst. Discount Premien Fend Prem&Int Put. of Investment
LGIF 0410794 100.0000 200,000.00 200,000.00 0.00 200.000.00 3.43% LGIF 26 200,000.00 200,000.00
FNMA 04/12194 227 112594 97.3391 500,000.00 466,695.28 13,304.72 500.000.00 4.38% Prudential 2 500.000.00 486,695.28
FFCB 44736 042594 177 10/1994 97.8662 500,000.00 489,330.83 10,669.17 500,000.00 4.50% MERRILL 12,21.26 500.000.00 489,330.83
FNMA 042994 210 112594 97.3925 515,000.00 501,571.36 13,428.63 515,000.00 4.64% Prudential 2 515,000.00 501,571.38
FHLB 042694 239 1212394 96.9859 430,000.00 417,039.56 12,960.44 430,000.00 4.72% MERRILL 8.29 430,000.00 417,039.56
TNOTE 042994 246 1215194 99.9531 500,000.00 499,765.63 234.38 500,000.00 4.69% 4.63% 7601.86 MERRILL 234.38 1,2 507,367.49 507,367.49
0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00
Totals 2,645,000.00 2,594,402.67 50,597.33 2,645,000.00 7,601.86 0.00 234.38 2,652,367.49 2,602,004.54
City of Euless
Schedule of McWibes
For April,1994
Investmerl Type "Lion
CD Cera.of Dep. FNMA Fed.Nall Mort.Asso. FHLB Fed.Home Loan Bank MERRILL Merrill Lynch BK ONE Baric One DEAN Dean Witter
TBILL Treasry 611 FFCB Fed.Fane CredI Bal FHLMC Fed.Home Loan Mort. PRUD Prudertal Searibes WAN Westem Amer.Nat'l LM Landmark Bark
LGIF Investmert Pod TNOTE Treasury Note SHEAR Shearson Lehman LGIF Local Gott Irw Fund LIBRTY Liberty Capital
Cost Accrued Total P+I
IM, Inv,I.D. P.rchase Term Mattrity Price Per Book Valu Irterest Total Prin.+ Yield To CoWon Irterest Seller Maty Net of Total Cost
Type N rber Date (in days) Date Pa 9100 Velu (Prin.Orly) @ maty Ft.@ Maty Maturity Rate Purchased Inst. Di start Premium FW Prem&Int Pur. of kwestmert
LGIF 04/05/94 100.0000 200,000.00 200,000.00 0.00 200,000.00 3.361/6 LGIF 1,40 200,000.00 200,000.00
LGIF 04/12/94 100.0000 200,000.00 200,000.00 0.00 200,000.00 3.39% LGIF 9 200,000.00 200,000.00
LGIF 04/19/94 100.0000 300,000.00 300,000.00 0.00 300,000.00 3.50% LGIF 9 300,000.00 300.000.00
LGIF 0420/94 100.0000 100,000.00 100,000.00 0.00 100,000.00 3.58% LGIF 9 100,000.00 100,000.00
FNMA 41410 11/11/93 104 0425/94 99.1131 500,000.00 495,565.56 4,434.44 500,000.00 3.14% MERRILL 1 500,000.00 495,565.56
FNMA 39553 08/31193 241 042954 97.8779 500,000.00 489,389.31 10,610.69 500,000.00 3.27% PRUDENTIAL 2 500,000.00 489,389.31
Totals 1,800,000.00 1,784,954.87 15,045.13 1,800,000.00 0.00 0.00 1,800,000.00 1,784,954.87