Title
Village Investment Portfolio Overview and Direction
History
The Village currently holds its cash in a number of institutions for a variety of purposes. The focus of this report is the Village’s own cash and investments. This does not include funds for the Police Pension, E-911 Fund, or Stellwagen Foundation.
BMO Harris
Our daily operating bank is BMO Harris (BMO). We have a number of different accounts, many of which are required by law or for operational efficiency. With this banking arrangement, we receive a small credit (currently just under 1%) for funds on hand that is used to offset bank fees, but we do not earn interest.
Illinois Funds
This investment pool is used to accept certain online credit card payments (Illinois E-Pay) and some payments from the State of Illinois. Funds held in this account earn a competitive varying interest rate. For December, 2023, the average daily yield was 5.462%.
Hammond Investment Management, LLC
A portion of the Village’s investment portfolio is held at Hammond Investment Management, LLC (Hammond). We currently have about $8.7M invested in various US Treasury Bills and Notes, and various US Government Agencies. These are fixed income instruments that are very safe and secure. When these investments mature, Hammond reinvests the funds.
PMA Financial Network
The majority of our investment portfolio is held at PMA Financial Network (PMA). There are three types of investments at PMA: ISC (similar to a liquid money market account), LTD (Long Term investment with a short lead time to liquidate funds), and fixed income holdings, such as CDs and government agencies (like Hammond).
We also invest our bond proceeds with PMA, which is necessary for tracking and arbitrage purposes.
Up until a few years ago, we were earning a higher earnings credit with BMO, which fully offset our banking fees. In recent years, the earnings credit rate has declined. In 2023, the rates of return for other investments has increased from less than 1% to over 5%, which changed our approach to cash and investment management. The amount of funds that are being held at BMO has dropped significantly (by design), and the amount that we have invested has increased.
In late 2022, in consultation with Trustee Healy, we started to reestablish our investment latter with PMA. We invested in 4 collateralized CDs at BMO of $7.5M each, maturing 6 months apart (mid 2023, January 1, 2024, June 28, 2024, and December 31, 2024). We also currently hold two other CDs valued below $250,000, which is based on FDIC Insurance limits.
With the recent maturity of $7.5M on January 2, 2024, it was determined that this would be a good opportunity to update the Village Board on the overall investment portfolio and to seek direction on investment strategy.
Current Investment Portfolio (excluding bond proceeds)
As of the most recent statements available, the Village has an investment portfolio of $82.1M as follows:
BMO: $6.9M [8.4% of the portfolio]
Illinois Funds: $0.3M [0.3%]
Hammond: $8.7M [10.7%]
PMA: $66.2M [80.7%]
The breakdown of investment types is currently as follows:
BMO operating funds: $6.9M (not earning interest income, but earning about 1% rate credit.) [8.4%]
Illinois Funds: $0.3M (earning about 5.5%) [0.3%]
Hammond: $8.7M in US Government securities and agencies, laddered fixed income portfolio) [10.7%]
PMA Money Market: $48.6M ($41.1M, plus $7.5M maturity for January 2, 2024) earning about 5.3%, [59.2%]
PMA Long Term Investment: $2.1M (increased in value by 4.82% from December 2022 to December 2023) [2.5%]
PMA Fixed Income Portfolio: $15.5M [18.9%], with the following maturities:
• June 28, 2024, $7,500,000, 4.64%
• August 1, 2024, $234,000, 3.201%
• August 12, 2024, $249,709.90, 3.203%
• December 31, 2024, $7,500,000, 4.212%
Investment Income Performance
Historical investment income for the last 10 years is listed below. Investment income is a function of investable cash on hand and interest rates. Over this period, the Village peaked in 2022 due in large part to significant bond proceeds on hand in a rising interest rate environment.
|
|
|
Annual Investment Income |
|
2014 |
Actual |
$ 1,855,355 |
|
2015 |
Actual |
$ 1,827,725 |
|
2016 |
Actual |
$ 1,874,055 |
|
2017 |
Actual |
$ 1,257,647 |
|
2018 |
Actual |
$ 824,613 |
|
2019 |
Actual |
$ 1,393,945 |
|
2020 |
Actual |
$ 1,148,042 |
|
2021 |
Actual |
$ 183,614 |
|
2022 |
Unaudited |
$ 3,027,148 |
|
2023 |
Unaudited |
$ 2,678,485 |
This information is presented in graph format in the Investment Income History attachment.
Issues
Keeping in mind our investment objectives (1. Safety, 2. Liquidity, and 3. Yield), we would like Village Board direction on overall investment strategy and approach. Here are some issues that could impact our approach to the investment portfolio.
Concentration Risk. If we have too much of our investment portfolio with a single investment vehicle or institution, we increase our concentration risk. If there are problems or issues with that particular investment, then a significant amount of our portfolio remains at risk. Our investments are secured by various methods, including FDIC insurance and collateral. However, recovery of assets is not necessarily immediate.
Interest Rate Projections. While the current interest rate environment is very favorable for fixed rate investments, that could change gradually or dramatically over the next year. Generally, the rate of the investment returns reflects the Federal Open Market Committee (FOMC, often referred to as the Fed Rate). If the Fed Rate increases, our investment rates of return (and borrowing costs) increases. If the Fed Rate decreases, our investment rates of return (and borrowing costs) decreases.
Duration. Our investment portfolio is currently a very short duration, meaning we have much of our portfolio in money market type accounts where rates can fluctuate daily (IL Funds and PMA). This means that we have a small portion of our portfolio locked in to current rates for the foreseeable future. This is beneficial in rising interest rate environments, but detrimental in decreasing rate environments.
Timing the Market. We do not make investment decisions based on short term market fluctuations. It is safer and more secure to think longer term and make decisions based on general directions.
Options
Among others, the following options may be considered.
Option #1: Stay with short term duration (i.e. cash or money market investments). If we continue to stay with the money market investment vehicles, we will likely earn more in investment income in the short term. However, this will change if the interest rate environment declines as rates are not locked in for any period of time.
Option #2: Reestablish a laddered portfolio. In order to lock in current rates, it may be prudent to lock in current rates and reestablish the laddered portfolio. The ladder could include maturities every three or six months, and could extend over two or three years.
Option #3: Diversify the portfolio. To address concentration risk, we can consider adding additional investment options and reallocating where our portfolio is invested. We have begun preparing an RFP to add an additional local bank as an additional investment option, where we could park a portion of the Village’s portfolio.
Recommendations
Staff recommends the following in order to reduce our concentration risk and to lock in current rates:
1. The Village reestablish a three-year laddered portfolio, resulting in approximately $5M maturities every 6 months, which will then be reinvested unless and until the funds are needed.
2. Increase long term investment at PMA from $2M to $5M.
3. Increase investments with Hammond to $10M.
4. Target $20M in liquid money market funds at PMA for immediate cash flow needs.
5. Target cash balances between $5M and $10M at BMO for daily operating activity.
6. Invest $5M with a new banking institution to be selected by RFP. When the existing $7.5M maturities mature in June and December 2024, $5M will be reinvested into the ladder, and $2.5M will be invested with a new banking institution.
Current Portfolio Allocation
BMO $6,859,168 8.4%
IL Funds $264,126 0.3%
Hammond* $8,744,798 10.7%
PMA Liquid $48,617,775 59.2%
PMA Long Term $2,090,400 2.5%
PMA Ladder $15,483,710 18.9%
Total $82,059,977
*November statement balance
Recommended Portfolio Allocation
BMO $10,000,000 12.2%
IL Funds $1,000,000 1.2%
Hammond $10,000,000 12.2%
PMA Liquid $20,000,000 24.4%
PMA Long Term $5,000,000 6.1%
PMA Ladder $30,000,000 36.6%
New Investment $5,000,000 6.1%
Misc. Cash $1,059,977 1.3%
Total $82,059,977
Change
BMO +$3,140,832 45.8%
IL Funds +$735,874 278.6%
Hammond +$1,255,202 14.4%
PMA Liquid -$28,617,775 -58.9%
PMA Long Term +$2,909,600 139.2%
PMA Ladder +$14,516,290 93.8%
New Investment +$5,000,000 100%
+Misc. Cash $1,059,977 100%
Recommended Action/Motion
I move to recommend to the Village Board to approve rebalancing the Village’s investment portfolio as follows: Reestablish a three year laddered portfolio with PMA with $5,000,000 maturing every six months, increase the long term investment at PMA to $5,000,000, increase investments with Hammond Investments to $10,000,000, invest $5,000,000 with a new banking institution to be selected by RFP, target cash balances at BMO between $5,000,000 and $10,000,000, and target PMA money market of $20,000,000, to be reviewed and rebalanced every six months.