Interest earnings on Yorba Linda investments increase under private-sector management

A seven-month-old agreement with a private-sector asset management company appears to be paying off big for Yorba Linda in the form of higher interest earnings on a major portion of the city's investment portfolio – jumping 40 percent so far on an annualized basis.

City Council members were advised of the growth earlier this month in a report from Finance Director Scott Catlett, who put the total amount of the initial annualized increase at $224,000.

According to Catlett, the portfolio was earning an average interest rate of 0.8 percent at the end of February, before the PFM firm, hired in December, assumed management on March 2. By March 31 the average rate was up to 1.44 percent and by April 30 up to 1.47 percent.

Preliminary figures for the end of May indicate an increase to 1.49 percent. About $40 million was under PFM's management in March and April and close to $45 million by the end of May.

“The focus of the city's investment strategy remains on the safety of the city's funds, but with more active management there is a significant potential for increased interest revenue to the city,” Catlett stated.

The city had a bit more than $101 million in cash and investments on April 30: $19.6 million in cash and money market funds, $17.6 million in the state's Local Agency Investment Fund, $24.6 million in Redevelopment Agency bonds and $40 million in PFM-managed investments.

The PFM-managed investments were earning from 1.36 percent to 1.96 percent interest and include stakes in U.S. Treasury bonds and notes, U.S. government securities, corporate notes, commercial paper and certificates of deposit for the April average of 1.47 percent.

The non-PFM managed holdings earned from 0.39 percent to 0.82 percent in April. Excluding the bond funds the city holds as the successor to the former Redevelopment Agency, the city's average portfolio for investing has ranged from $71 million to $77 million since February.

Catlett noted that with a portfolio balance of some $70 million and an average interest rate of 0.8 percent, the city could expect $560,000 in annual earnings “in an environment with static interest rates.”

But with an overall average of 1.12 percent for the city's portion of the portfolio and the PFM-managed portion, the annualized interest earnings would be $784,000, or 40 percent higher.

And “average interest earnings are anticipated to continue to rise in the future,” Catlett stated.

Expertise provided by PFM comes at a cost, but as Catlett noted, the city's interest earnings have already increased by considerably more than the $41,000 annual cost of servicing $45 million in assets.

City securities are not held by PFM but are in “an investment safekeeping account at Bank of New York Mellon,” Catlett stated. PFM has trading authority, but the securities remain in the city's name and under city control, with earnings deposited directly to a city account.