Semi-annual investment update

1:42:07Um Madam Chair and Fellow Commissioners. Uh we have here uh Manny Long, my Director of Finance, and Scott Stitcher with PFM. PFM is our financial advisor. They're here to give us our semi-annual investment update.

1:42:24Okay, good morning Chairman Starkey and Commissioners. Uh Mandy Long, uh finance director for the Pasco County Clerk and Controller's Office, uh 142366th Street, Dade City, 33525. And I think I'm gonna go to probably uh Slide number four, when you get a chance here. The last time we were here, we spoke a lot about the interest rates at an all-time low. Well, look what's happened over the last week. Uh right, uh the Fed actually raised uh interest rates by three-quarters of a percentage point, 75 basis

1:42:54points. And this was kind of the largest hike we've seen since 1994. We're moving money as securities mature into some of these higher interest rates and shorter term durations. And I'll go uh let me do one one more page there and let we'll talk a little bit about our portfolio. The total unrestricted uh portfolio is one point one billion dollars. The short term investments that you

1:43:24can see here um Are distributed with the Florida Trust uh day to day fund in the amount of sixty-five point five million dollars. $428.5 million in the SBA Florida Prime and another $10.6 million in Florida Class. When we look at the unrestricted long-term investments, we have $380 million with uh PFM. And $252 million within the Florida Trust Short-term

1:43:55bond fund. And we also have another $10.8 million in CDs that'll be maturing next month. And those were the our one point seven percents that were getting us our highest yields there for a while since we were at either zero or no interest for a lot of our investments. And if I can Uh talk about our restricted portfolio. The restricted portfolio is right at $523 million. Again, that uh directly relates to specific projects. So the

1:44:25bond issuance of the library, fire station, parks and rec detention center, general those are the general obligation bonds. Um solid waste, landfill, water sewer, Starkey District Park, and the Unlink project. So those are all of our restricted portfolio at $523 million. And if we can go next slide. We can take a look at our sector allocation uh analytics. Uh when you take a look at that bottom one there, the SBA Florida Prime, uh we had four hundred and twenty-eight

1:44:55million dollars in there. You can kind of see we were out of compliance for a few days. Um the maximum we can have in there is twenty-five percent. Uh we actually were uh twelve point three percent over that or about ten point six million dollars over our maximum allocation uh for this prime account according to our investment poly. And again, this was timing. We were moving money from SBA in some of our mature uh securities that had matured. We moved into SBA um

1:45:26to set up um in Florida Prime. Some fixed term investments. Uh the first one we moved in was uh fifty million dollars for a one-year three hundred sixty-five uh million uh the three hundred and sixty-five days uh at two point five five percent, which relates to one point two seven five eight million. dollars that we'll receive. in one year. Um and as I mentioned earlier, you know, we're looking to take advantage of some of these rising interest rates uh in the short term. And

1:45:56when you look at the US yield curve, when you look at the sweet spot between the one year and the two year. It kind of dips back down to the 10 year and then creeps back up to the 30 year back to the two year um U.S. Treasury yield curve. But again, we've made um some other money moves for 90 days. Uh we've got 180 days and another 365 days that we're seeing some uh higher returns on our money. I know Uh it doesn't really help us a lot this year. Next year we're gonna

1:46:26see some tremendous uh increase in in revenue for interest income coming in. And I'm gonna turn it over to Scott Stitcher from PFM to talk a little bit about the the economic Environment. Thank you, Scott.

1:46:39Appreciate it. Good morning, Madam Chair, Madam Clerk and the other County commissioners. Uh Manny, I just wanted to note too that uh It is footnoted on that page the steps that the Uh clerk's office took to bring that allocation back within the policy guidelines. Uh so I d do want to point you to that. Uh down below. So again, my name is Scott Stitcher with PFM Asset Management. Our firm has been entrusted to manage. investment portfolios

1:47:10for the clerk and the Board of County Commissioners for Pasco County. Uh we do so within the parameters set forth in uh Florida State statute two eighteen point four one five as well as the investment policy. of the board. If I could just uh provide a a brief economic backdrop, expound a little bit upon what Manny shared with you earlier. Uh that way when we get to performance, uh it'll make a little more sense on why performance is the way that it is. So the

1:47:40economic backdrop has been persistent high inflation. Uh elevated energy and commodity prices, which you all were speaking to a little bit earlier. Uh the Fed kicking off a shift to tighter monetary policy. Uh rapidly rising interest rates. As a matter of fact, rates continue to rise along the curve. that's most applicable to our client base. So it's basically anywhere from five years and under We've seen interest rates rise

1:48:10dramatically. The last time I was here was December seventh. Since that time the two year has risen about two point four percent two year treasury that is. Five year Treasury is up over two percent, two point zero three percent to be exact. Why do I share that? Well as interest rates rise, bond prices go down. All right. So that's the negative side to fixed income investments in a rising rate environment. Uh the positive side is again, Manny sort of

1:48:40touched on this that as you have new money That comes into the portfolio, you have interest received, you have maturities, pay downs, that new money is being put to work. in a higher interest rate environment. I'll share some numbers with you on what that really means here. In a second. Manny touched on the fact that the Fed raised rates by 75 basis points, the first time they've done so since 1994. I we think that you're likely to see another 75 basis point move at the July

1:49:11meeting. And then September, there's no telling. 50, 75 basis points. It really depends on where the inflation numbers stand at that time. Thanks, Manny. So I I'm gonna take a little deeper dive on the the portfolio and the unrestricted assets that we are responsible for. We ended March 31st at $380,867,000. The duration on the portfolio, which serves as a measure of interest rate sensitivity. is 1.74 years.

1:49:41You'll note the benchmark duration directly below that. We are short relative to the benchmark, meaning we're not as willing to take on interest rate risk or uh interest rate sensitivity uh on in this portfolio at the time. Uh the yield at cost is a good indication of what you are earning on the assets in the portfolio. That stands at point seven six percent at the end of March. Fast forward to today, the portfolio is now earning a

1:50:11little over one percent. I think it's one point Uh 08% to be exact. And that drives home the point we're making earlier about new investments, interest uh uh received, maturities that are occurring being reinvested at higher yields. You're going to continue to see that yield at cost. increase with time. Uh a high credit quality portfolio double A. And then a fully diversified portfolio with the

1:50:41majority of the assets. in Treasury Agency and Supranationals, which are Treasury-like securities, over fifty percent for the safety and the liquidity that those sectors offer. So let's uh Tear off the band aid here. and uh look at performance for the most recent quarter And um the trailing twelve months. I was asking Manny if maybe we could put up the picture of the the baby shower again, so These numbers

1:51:11looked uh Don't look as painful. Um so again, I mentioned earlier that when interest rates rise, bond prices go down. And you can see that reflected in the performance over the last three months and 12 months. Uh point you down to the bottom in that blue, shaded blue section. You see the portfolio down to negative 2.25% for the trailing three months versus the benchmark at 2.34%, which by the way is the worst performance we've seen in that benchmark since it was tracked back

1:51:41in 1978, just to put things into perspective. For the trailing 12 months, the portfolio was down to negative 2.66%. Uh versus the benchmark at negative two point eight four percent. So I'm happy to say that your portfolio gave up less than the benchmark. And that's important because that's again what we're trying to accomplish in Downmark is to give up less than the market, trying to protect principle. The other thing I want to note about this performance uh We've

1:52:12had a lot of our clients over the past five, seven, ten years take a lot of grief for being in high quality fixed income portfolios when Uh people are seeing the S P up twenty and twenty-five and twenty-seven percent. Uh Today. The S P is down over twenty-two percent. So it's periods like this when you s realize the importance of being in a high quality fixed income portfolio when

1:52:42it's only giving up about two percent. when the broader equity market is giving up over twenty percent. So again that the that's the the reasoning and the thought process process behind the safety and then liquidity and then yield in in this particular portfolio. Uh I'll end by stating that since inception the portfolio was returned. uh a little over fourteen million dollars in income. Uh point you there because we're going to see income continue to increase

1:53:12going forward. That income does serve as an insurance policy to price fluctuations in the portfolio. So again I think Uh there's some near term pain, but in the long term you you should expect greater income and a little more insurance in movements. Uh given the uncertainty in in the direction of interest rates going forward. Let me stop there and see if there are any questions for me or or for Manny.

1:53:42That's an interesting graph there.

1:53:46Okay. This is not my world. I only spend the money. Um I have a question. Is this is from Is this growth an unexpected earnings that we weren't counting on? This is a good idea. From the

1:54:06No, no. From

1:54:06zero to fifteen?

1:54:08No, the goal is definitely for for appreciation in in in the portfolio and a lot of that appreciation is driven by income. So it's definitely part of the plan and this portfolio being a longer term portfolio to see uh greater return versus some of your shorter duration or overnight type investments. So definitely planned.

1:54:29Well, You thought that that rise was gonna go up like that?

1:54:33That well that's our goal is again for the for the income to that rise is really represents the income or the ear total earnings in the in the portfolio. So that that's our goal at the end of the day.

1:54:44I don't think my F R S looks like that. What?

1:54:48Did that? Say state it again. That that's that that's showing your total earnings over time. That's not showing in in reality, you know, what you're thinking of, okay, l you you mentioned your F R S statement, it's showing, you know, your ups and downs. The opposite. Right? No. This is showing total overtime.

1:55:09Correct.

1:55:09Correct.

1:55:10Thank you.

1:55:11I was getting ready to spend that money.

1:55:13Yeah. It's not showing how well the quote investment's doing on a monthly, daily per cr basis. Correct. Yeah. Ups and downs. Yeah. Speaks of values.

1:55:23Okay. I thought we had more money to spend. Can you go back to slide two

1:55:28I think it was two?

1:55:33Actually, it was slides seven and eight.

1:55:39I know we looked at this last time when Commissioner Moore had brought up a couple of concerns on the triple A rates on our what we were investing in in our prov portfolio. So I just wanted to see an update on it. Thank

1:55:51you. Oh, the New Jersey turnpike. It's still there. I just wanted to see.

1:55:57I wanted to see the rate of return. I did send a letter um to the board um I don't know, a month ago or so in regards to the New Jersey Turnpike. And um Scott, you can probably state it better. Um, but they can't invest in vehicles in which they participated in creating and the turnpikes in Florida. Uh they've created you can probably say it much better than I can.

1:56:24Well historically what has happened is uh we had an another arm in our business called uh FAs or financial advisory and where they were involved in assisting the underwriting of of securities. We couldn't buy those securities. uh and in Florida they participated in in the assistance of underwriting a a large part of those securities. So we were very l limited and handcuffed in the Florida names that we could buy. On top of that, you also have to look at

1:56:56lying security and and the maturity and the credit quality and the relative value that it uh it it has uh within the parameters of your investment policy. So just because it's issued in Florida doesn't mean you can go out and buy it. So some of the names in the Northeast are are serial issuers, there's more supply. Uh there's strong credits. Uh we're able to get an allocation which is another problem with is supply. And getting an allocation when these names come to

1:57:26the market. So we've had some success in getting names in the Northeast. Um yeah, at the time last time I was here, I think I provided some information on why we own the New Jer New Jersey Turnpike. And the fact that they are raising tolls, they have are focused on revenues, meeting their expenses, uh their positive outlook if you look at the rating agencies that follow them. Um they they do have a positive outlook. So it's again a name that we're comfortable in in owning. I'll also point out the fact that

1:57:57We only own point one percent in munis in the in the whole portfolio, so about three point nine million of the three hundred and eighty million dollar

1:58:04portfolio. And I see it's double A and two single A's. I'm more concerned I wanted to look at the comparisons to the other Investments, for example, the California Earthquake Authority that's not rated. It has two not N Rs and an A.

1:58:18Right, right. So it's not rated by the names that are are on that particular report, if you bear with me.

1:58:26Are there other investments we could make that would be a better investment than California Earthquake Authority?

1:58:35Did not pay to have you know S P or Moody's rate them. They did get Fitch

1:58:40A single A.

1:58:42That's exactly what I think. Well it's still a good investment, but they have um Fitch, they applied and paid for their them to give them an analysis on their investment portfolio.

1:58:54I'll just also point out that uh that's not the key driver for why we purchase a name, but it's definitely something we look at. So it's not just because it's single A or it's investment grade. We buy it. Um but it again it it definitely is something we have to look at because it it it is outlined in the in the parameters set forth in the policy, so it it definitely something we have to look at. There are many other factors that go into the decision to to purchase a name like that.

1:59:24Thank you. Yeah. Is there a chart that shows you the investment, the percentage of investment, as well as the rate of return on each individual one?

1:59:33We do not provide uh an attribution. analysis at that level. Um I could look in to see if it's something our strategies group could could produce. But our our reporting package does not have that level of detail today.

1:59:51I mean I know it's hard to break down a whole bunch of different ones, but when I'm looking at these municipal ones, I would think you'd know the rate of return. And I don't know why we wouldn't be able to see it clearly and easily. I can request it.

2:00:03Madam Chair. Yeah. It's going back to that. I mean, you

2:00:05know,

2:00:05I understand community bonds are less than one percent of your total investment. I I get that. There was just some concerns obviously what we were investing in as a as a county in the state of Florida, um, obviously supporting um other states and and uh and um turnpike authorities and um sometimes um I'm be I'm gonna be very careful what I say here, um the ways and how some of them possibly do business within the

2:00:36states they're located in. Some Making the news. EJ the New Jersey Turnpike Authority. Um So maybe You know Taking a look and you know some of the Since we did bring it up before, we had concerns. So we see no changes here. If it's less than one percent, okay, look at some other Mini bonds you might be able to invest in and uh Bring it back to us.

2:01:06Yep. So I'm am I hearing you say you your preference would be to sell out of some of these these names then?

2:01:13When there's there's I mean, you know, why what other you know obviously you your team Yeah, uh what are the other options, you know, what look at the what's the you know, again like the m uh Commissioner Oakley and Fitzpatrick mentioned a second ago, you know, where the what's the ROI been over the last, you know, year, six months, three months. We know those things are changing now. It's gonna be totally different. But um there were concerns by some of us about some of these investments in other states. I mean it's great to see what the Florida Board of admin and but um What else is in Florida?

2:01:43What else is available? What's the rate of returns been? Um, do we able to keep some of these things within the state?

2:01:51Follow me?

2:01:54Yeah.

2:01:54Yeah.

2:01:54And can you go to the second page next page, please?

2:01:57What does Georgia have, for example? I don't know.

2:02:02I'm not a big fan of vesting in California either.

2:02:05No. Um yeah, so

2:02:09War Jersey.

2:02:11Yeah.

2:02:14Okay.

2:02:16Madam Chairman Mari Just a a question as well. Um and not that I won't invest in some of these because they're really hurting our citizens here, but there's some utility companies, water utility companies around the state that have rates of returns that are really high. They guaranteed seven, eight, nine percent. Um how come we don't invest in any type of things like that?

2:02:36Uh I think it gets back to and I d I don't know the answer specifically. I'm I'm speculating that their debt is not available for purchase or is not available in the size that we would need to participate in in owning. Uh again the the bond deal needs to be of a size where we could participate in in owning Not just on your behalf, but on behalf of our of our clients where we have a discretionary authority

2:03:07in their portfolio.

2:03:12Um Um Can we go into development um Wait. Capital funds?

2:03:24Um Like priv private equity? Yes. Type type stuff. It's not.

2:03:30Because they use institutional money. Are we considered institutional money?

2:03:33Definitely a a a qualified investor. There's no doubt about that. Um As far as private equity, uh you're gonna quickly come up against the state statute though.

2:03:54Does that meet the the safety of principle and the liquidity? Uh hurdle, you know, with private equity, you don't just go and sell overnight to raise those funds. So You have to keep those sorts of things in mind.

2:04:12The guardrails that were put in place after two thousand and nine uh with the state's investments are

2:04:20I remember that

2:04:21are one of the reasons that you have these guardra guardrails.

2:04:24During that crazy time I got the call to save the the state's money. Yeah. And Pasco had to make the call whether we pulled out or stayed in. And I made the call to stay in, save save the state.

2:04:37Yeah.

2:04:38Okay. Thank you very much. Thank you.

2:04:41Thank you.