City Council - Regular Meeting

Okay, everybody. I'd like to call the April 1st, 2026 work session to order. And I'd like to start by introducing uh acting city manager Lee Fry. We have Dave Sworner in the room and Bill Wer Lurman here and uh with Alaska Permanent Capital Management. And uh with that, I'll turn it over to who's ever going to take the lead. Bill, would that be you?

Let's see. Well, thank you, Mr. Mayor and Council. Um the last couple times I've been in front of you guys, um it's mainly to do with the uh permanent fund and then part of that was the custody fund that APCM's been managing for the last uh two years approximately 2 years. In my remarks, I have been talking about the possibility of um recommending some changes to you uh to allow different instruments um into the portfolio. But to do that, we would need to change the IPS and uh code. Um today, I'm going to go through that slide deck with you guys. Uh talk about liquidity and things to that nature, but those are my remarks. um going to start out um and I'm doing my presentation a little bit different. Let me see um than I maybe do. And I'm just going to kind of start with my recommended changes. I'm going to give you guys my recommended changes right off the get-go. And then I'm going to walk through the next couple. Look at, you know, kind of the scope and objective of the funds. uh look at the review of the account and cash flows. Look at historical cash flows. Uh a bucketing strategy. Uh talk about uh your liquidity needs. Um probably bring in Dave about that point. Um bring David uh to talk about a couple things. Look at Rick's Rick's tolerance because at the end of the day, um you might have the willingness and the ability uh to do uh to take more risk, but there's a chart that I want to go over on that. And then what would the new strategy look like? what the recommended strategy that uh APCM is proposing to you guys under the new structure. And then at the end just kind of we are going to uh ask

uh for a change to and recommend introducing uh investment grade credit uh securities to the portfolio. You guys do own these in the uh perm fund but we are recommending a change here. And I want to kind of go through that with you so you feel comfortable with the risk that this portfolio is taken. And as I work through this, um, if you guys have any questions, please ask as as we work through. Don't wait until the end. I just kind of want want this free, uh, flowing back and forth. Um, and, uh, I think it should work out. Thank you. Go ahead and proceed.

So, in within your um your investment policy and and in in code 7.2 22030. I'm going to I'm asking to authorize uh a couple under authorized investment section. Couple things. Um one um uh looking through you guys' policy, I want we're recommending to explicitly state that securities are in US dominated securities. Uh looking through your u policy, it is not. So, I think that would be a kind of a cleanup item to just make sure that no non-denominated uh US securities get into the portfolio. Another cleanup item um within your repurchase agreements, you guys are allowed to have repurchase agreements. Uh but currently, you don't need them to be over 100% collateralized. And we're recommending best practices. what we've done with other clients that's normal um in GFOA type uh government finance officer associations best practices to have at least 102% collateralization. So that's kind of a cleanup aisle uh item. It doesn't really affect the portfolio but it does protect the funds later down the road if APCM is not managing. Uh third uh addition of investment grade corporates and municipal securities. Um that's probably going to be the biggest one. um the biggest impact on the portfolio. So we are recommending that currently you guys uh the the the investment policy does not allow investment grade securities in municipals um within the uh policy. Fourth explicit uh state uh shortdated agency mortgage back securities. You guys are the portfolio is allowed to have agency mortgage back securities. These are Fanny, Freddy and Jenny May mortgage back securities. However, the limitation on those securities is they have to be 5 years and in. Um, so there's not very

many of those out there. Um, and I'll get into the um, maturity spectrum here in a second, but it I think just stating that it is allowable in there would show clarity to um, any manager that's managing the funds for the city maturities. The second probably uh, Bill, could we uh, Miss Petty? Oh, you said you could ask question. Absolutely. You want to turn on your mic? So, thank you. Thank you. Thank you. Um on your recommendation with investment grade corporates and municipal securities. Are we currently just investing in FDIC insured?

Correct. Yeah. So, treasury uh treasury agencies or treasuries US treasuries uh agency securities agency securities are think of federal home loan bank Fanny May Freddy Mack uh government and mortgage back securities FDIC um what councilwoman Betty you just described those areas has to be 250,000 or less um and they're insured by the US government.

Perfect. Uh probably the second uh uh largest impact that we're recommending is to increase security maturities right now it's right at five years but push that out to 10 years. So we are pushing to be more of a reserve type fund. Uh we don't we believe this is a little less operative more reserve type funds um in there. Uh but as you increase maturity, your duration um increases. So we put in here after talking with staff trying to limit risk within the portfolio. And if I can just take a pause here and kind of explain the difference between let's say a 10ear maturity and duration. Duration is the impact the sensitivity to interest rates. So as interest rates are moving up and down the market value of the bonds are going up and down. If interest rates are moving up, your the value of your bonds are going down and vice versa. When interest rates come down, the price of the bonds go up. There's an inverse relationship there. So, what we're trying to do here is limit the impact of interest rates on the portfolio. If we don't allow if we don't have that uh maturity range in or the portfolio portfolio duration may not exceed 5 years basically I would be able to come in and buy 100% of the portfolio in 10ear securities within this portfolio as long as there's uh cash sitting in your bank account that puts more you know interest rate risk within the portfolio. So how do we decrease that risk? Well, we we just say, hey, you can't have the portfolio duration when we take a weighted average of all the durations of the securities can't be greater than five. And so that mimics or that limits the upside sensitivity to interest rates. So, it's

just a risk control within that uh uh framework. So, it basically puts that an investment manager can't come in and buy 100% 10-year bonds and have the greatest interest rate risk in the portfolio. So we're trying to give some flexibility by increasing the ability to invest in longerdated securities but also have some risk controls in place to interest rates. Any questions on uh the maturities the difference between maturities and duration. Um the next is in the liquidity and diversification uh recommending securities maturing in one year and less uh must be 10%. This is down from 20%. How do we get to 10%. Um, we have there's about $40 million within the portfolios between your bank account, your government investment pool, and the custody account about 40 million. If you take 10% of that, that's about $4 million. If we think about the budget, uh, 20 the general fund budget of 23 million. Is that correct? So 23 million, you guys would have about two full months of expenses set aside. If no revenue came in, you still have two full months of money is just sitting there in securities one year and less in cash. So we think that's a um pretty good um um number to use right there. But we still want to maintain some diversification. Um because of that uh we're recommending if we add up all the cash cash equivalents these are um these would be um treasury bills and shortdated agencies US government securities must be at least 40% of the portfolio basically making sure that the manager can't go in by 100% investment grade corporates. So we're limiting ourselves, right? We want we we think that we can add additional return over a market cycle in the

portfolio, but we don't want to take excess risk. And so we're putting ourselves in and trying to put guard rails because at the end of the day, if APCM's here not to manage your guys' funds, there's guards already in place for the next manager or an internal person to to manage that count. So we're trying to put those guard roles in place. Um if we have 40% in government securities then what about corporates and agencies? Uh we put here uh no more than 40% can't be in greater than 40% in corporate bonds and also in a uh agency mortgage back securities can't exceed 30% of the portfolio. Again limiting the risk that this portfolio can take. So these set up both limiting the credit risk that we can take, mortgage risk that we can take and interest rate risk that we can take. So on your agency mortgage uh based securities

um do y'all are those investment grade and do you um consider the insurance on those mortgage back securities also and um do you consider a double AAA because I know back in ' 08 and 07 and '08 Even some of those insured mortgage back securities were of no value. Yeah.

The the agency mortgage backs are backed and and guaranteed by the US government. So the coming out of that the US government did guarantee those mortgages after the fact of of as we went through the global financial crisis. Um, so those would be part of that. Thank you, sir.

So, I threw a lot at you, but I wanted to get it in front of you guys while you guys were fresh and and we'll kind of walk through. And I thought walking through that, taking a minute to walk through that will allow you to uh have a little bit more idea once I'm kind of getting into some of these graphs and what it what it will look like. But first, at you know, 7.22, 22. Uh, anytime an organization is making changes to its investment policy, we should take a step back. What are the objectives of the policy? And this is stated in 7.2201. Um, your guys's investment objectives for this portfolio was a safety of principle. Second, maintain sufficient liquidity to meet the city's cash flow. And then then third, achieving a reasonable uh yield market average rate of return or yield on the portfolio. So anytime we make changes, we want to go back to those three objectives from a fiduciary responsibility. We have a fiduciary responsibility for managing the funds. You guys have fiduciary responsibility being the council. So I always go back and yes, all of the changes that we are recommending maintain your guys's investment objectives and meet those three requirements. All right, the fun stuff. All right, we got three buckets of of instruments here um that you guys have. Um these numbers are at the end of February. We have in your bank account is 1.1 million, 1.2 million in your AML account. That's your government investment pool. That's like think about that um a money market fund. And that's kind of the next bucket of layer of risk. That's 4.2 million. And then the custody account that APCM manages 35.3 million. And when we add that up, we got that 40.8 million. So we we can think about those three buckets. And I'm going to keep coming back to that. So when you

know most of the uh operating cash comes out of that bank account once a month, you guys uh Dave goes and draws on the Amlip and money comes in, money comes out. There's some cyclical flows uh um to your guys' cash flows. In the summertime, expenses are up a little bit more because you capital projects. Winter months, not so much. So, in in general, um um staff has a good idea when when he's going to be taking money in and out of of of the account. And so, that's the bank account, but let's just think about AML for a second. And this is the top right hand uh graph. And we went back to February 2020 and um did a monthly market value. And I want that green line. That's $2 million in your AMLIP account. Since August of 2023, your AmalIP account has not dipped below 2 million. Meaning your bank account gets drawn on, Amlip gets drawn on, but there's still a minimum balance of 2 million in your AmLip, which if we go to the bottom left hand corner, we can see that the custody account, the account that APCM manages continues to grow and there's very little draws on that. And so that's kind of telling me right off the get-go, can we take do we need a significant amount of our portfolio, the custody portfolio, 20% in cash securities one year and under that that's currently being asked of it? Probably not. If it if if it's not going to be drawn on, we can use that invested out the investment curve, introduce some investment grade credit risk and try to produce uh additional income. So I think that's some observations. Um couple other um you know there's a rhythm to you guys' cash flow. There's payroll for

you know 415 to 430,000 every two weeks. Um again there's an abundance of liquidity. So, we did I I did work with staff kind of look through, you know, how much is these accounts being tapped and right now your the cash needs of the city are being taken care of between your bank account and Amlip and within your Amlip, it's still not getting drawn down all the way. So, pause there. Quick question. The uh the custody portfolio, does that does that include the airport? That does not. That does not.

Yep. Does not. Think about the airport as your permanent fund. That's the um asset allocations. Um long-term um you guys have seen the portfolio has equity, things to that nature. That's a whole separate Yep. Good question. I'm going to take a second on liquidity. There's two two two ways to think about liquidity. um maturities in your portfolio, waiting for maturities, but also thinking about how quickly can uh the ability for me to raise cash by selling securities in this portfolio and providing a a cash uh basis. And when we think about the different ways and we just think about maturity currently, you know, about 15 million or 42% is in securities one year and less. And remember this this portfolio hasn't been touched for multiple years. So we have a lot of cash and securities within. But the second piece is things that are readable to sell. If if staff call and said, "Bill, we need to raise $20 million," we'd be able to do that in one day. We'd be able to go out into the market, sell the securities, raise that cash, and the next day that cash would be ready for to be uh withdrawn. So when we think about that uh cash and US treasuries and agency securities, they make up about 83% of the portfolio. These are all securities that electronically I go click click and I could have the transaction done in about 10 seconds and would be able to raise that cash for you. There's about 17% of securities they do settle the next day. These are FDIC uh CDs and securitized um assets. These are agency mortgage back securities that are in the portfolio. those take a little bit longer. They're a little less liquid um they're not as electronic um to be able to sell. So, I

just kind of put those in two different buckets. But again, this you know 83% of this portfolio can be liquidated within pretty short time uh without any uh market impact to to the securities. thinking about risk tolerance. Um, and I really like this graph to the uh to the left and I I think just taking a minute. I I've used this with a lot of um government entities across the state. There's kind of there's the required return. Um this is in in the objectives reasonable market average rate of return. There's the ability to take risk. That's you know minimal need for liquidity within this portfolio. So you can there the ability of this portfolio is a little bit greater but also the willingness making sure that there's the safety of principle and this is how you guys feel in the willingness to take that additional risk. If we came to you and said, "Hey, we want to, you know, put 100% in equity as you seen the perm fund. There's a lot of volatility." You probably say, "Bill, that might be a little bit too risk. You're not willing to take that much more risk." But at the same time, if we say, "Well, we want to put it all in cash. Maybe that's a little less. Maybe we want to take a little bit more risk." So between those three, we it's it's it's kind of a good graph for as you guys work through this to feel comfortable the risk that's being taken in this portfolio that we're recommending and kind of using all three of those all three of those blends together to find the optimal portfolio. And that's going to change over time because the IPS that you guys that was in place did its job when the portfolio was much smaller and the that thought the the perm fund was much smaller and you guys have grown these assets and now you're able to take more risk. So there was nothing wrong

with that portfol beforehand. It's just modernizing it and your guys's uh willingness, ability, and requiredments have changed over time. In seven or eight years, I might be back in front of you guys and say, "Hey, we've grown the portfolio. You guys have done a great job. Maybe we do want to add more asset classes." But right now, we think this is a good transition as as we uh work out. There's kind of in fixed income there's kind of three ways to uh strategies to enhance yield. I I just kind of keep beating this uh drum. You can add credit risk. You can add increase the maturity portfolio as if you invest in a 5year security you should get paid more than a two-year security. If you invest in a 10-year security, you should get paid in normal uh rate environments. And then third is securized assets. These are asset backs, commercial mortgage backs, agency uh mortgage backs, but we're not recommending asset backs and commercial mortgage backs right now. We're just uh recommending um agency mortgage backs um in a little bit broader terms. So those are the three.

Could I ask one more question? Yeah, absolutely. Um, how did y'all determine the um the length of dur the length of to 10 years instead of maybe 15 at a a smaller portion of it? Um, how was that determined? Yeah. Was that even considered?

No, it was. And if we could Great segue into this next slide. Perfect. So when we think about your guys's uh we think about the fund types and we think about your operating cash the this is was your bank account and your AMLP uh government pool that's that kind of and and there's exposures um I'll kind of put it up there and that's the green but then we have the permanent fund as as the mayor u mentioned earlier you guys have that but there's this middle section that yellow that we're trying to fill that gap between your permanent fund and then your cash uh alternatives. And we call this your guys's investment sleeve because in theory you can move money in between these accounts, your bank account, your Amlip account, and and this next um some entities have even one more bucket um that's even longer than uh this and then I think that's what you're getting at then those are securities out to 30 years. you do have this bucket in your permanent fund. But I think for operating cash um to kind of work out the risk spectrum, as I mentioned just a second ago, maybe in seven years there might be another carved out bucket and say, "Hey, we haven't used any of this. Why don't we carve 10 million of this and put it into even even longer assets of of reserve funds?" So maybe you have short-term reserve funds and long-term reserve funds. So, uh we have experience in managing this intermediate um I kind of bucket of of cash um instruments. Um and so when we looked at this and we think this is a good second and third step of your guys's investment sleeve without going into 30-year securities and creating a whole another portfolio. So going from 5 years to 10 years and then maximizing I wouldn't say maximizing

increasing the ability and the percentage of the portfolio we think is a prudent step in the risk management up to 10 years. All right. So historically, you know, I I I talked about increasing in interest rate risk, uh, maturity, um, increasing credit risk, introducing more securitized assets, but you well, Bill, what does that really show in output of return? And this is what uh, a chart our team put together. and and I took four or five different years or um data different time periods here in four of the five tell us the same thing um and I'm going to kind of just focus on the November 2024 so since we've kind of been managing this account um and kind of walk through this and what those kind of numbers but you get the same output in December 2015 through 18 03 through 07 94 through97 7. And the way we pick that is if you're increasing uh interest rate risk and as I mentioned, if interest rates move up, bond prices fall. So, we want I wanted to make sure that we pick time periods that show stressful areas that investment uh or that could be stressful for um investment grade bonds and longer duration bonds. So, currently your index is the one to three gov credit. These are instruments between one and three years. Um it produced a 49 4.92% return uh just last 18 two years. If we move out the yield curve to one in five, we would think that we want to increase our return and get compensated

for that. And and that's that number one going it returned 5.36. So moving into little longerdated securities, you know, produced uh what's it 40 44 basis points more. So you you're getting paid for that. Now to go even further out to 1 to 10, the intermediate, and that's what we're recommending in majority, you get paid the returns been a little bit greater than there by another 40 basis points. But if we take the 1 to 10 index that has all governments and now we're going to introduce credit risk to that we should get paid for to to to be able to buy and what did that well over at 6.04%. So another 30 basis points 33 basis points as you introduce credit risk. So as you work as you're increasing your m uh maturities in your portfolio you're getting paid for that you're getting an additional return and also when you introduce credit risk you get another 33 basis points. So I'm just trying to show you historically over different time periods you do get additional income um from from uh increasing the risk in the portfolio. And the last one on number four going from a 1 to 10 gov credit. Now we're gonna do the exact same thing, but now we're going to introduce mortgage back securities, agency mortgage back securities, and that's another 34 basis points. So, seems every time you go from 1 to 3 to 15 to 1 to 10, you get an additional return. You add uh credit risk, additional return, and then if you add mortgages, another return. So, I wanted to just kind of walk through that. I'm going to pause there if anybody has questions on kind of the historical returns of what we're recommending. Any questions from anyone? Looks like we're you're good to go.

So, what would a new portfolio look like? and we did a simulation and and we we kind of on the lefth hand side is your guys' current portfolio that in gray um your cash agencies um in in this particular this is these are securities u the portfolio of just a the APCM the custody account that APCM matches this does not take into your bank account or your uh AML account so this is just APCM uh the custody account. Um, currently, you know, um, 500,000 in cash, agencies, 5 million, treasuries, and so forth, uh, kind of working down. So, uh, the custody counts about 35.3 million. That's one way to look at it. Uh, what we're looking to do is move, uh, to the right um, and more into that green um, section.

Oh, thank you. There you go.

Uh, more in that green. Um, so what would that look like? um we'd have about 3% in one year and less treasuries. Um intermediate government that's 1 to 10 year treasuries. We use the index. We we not to pick individuals. We want to just pick an index um and get a replic a representation of what a portfolio would look like. Um that's 47% of treasury and agencies and then credits um 30% in intermediate credit. We broke it out. We said 15% in sing uh single A rated instruments 15% in tripleB again in investment grade triple B and above. Um and then we increased the agency mortgage back uh exposure out to 20%. um and with it being having longerdated uh securities um and we felt comfortable with that portfolio. What does that all look like? Um the the new yield on the portfolio would be 3.94. So we're basically by introducing longerdated securities and some of these others, we're able to increase the yield of maturity on the portfolio by about 32 basis points. And I'll put in that dollar format here in a second. But I said you know from a liquidity there's another way to look at it. What is the breakdown of u uh maturities and we can kind of see that uh today um there's about 40 42 uh% of the portfolio in cash in zero one years 35% in securities 1 to three and about 22% in securities maturing between 3 and 5 years. And what does that new portfolio look like? the model portfolio uh we can see that we're introducing about 17% in securities to 7 to 10 years uh 5 to 7 about another 17% and so forth. So just

moving some of that portfolio out and I think the um the takeaway here is in that 5 to 10 year range that 5 to 7 17% yield 4.0 uh four uh uh 4.07% 07% securities 7 to 10 currently interest rates have moved up that's uh yielding 4.35 both of those above four when we think about your portfolio currently there's no securities that are yielding more than 4% in your portfolio currently um if we look at the green yield worse um 3.56 in cash 3.71 3.51 and 3.62 62. So by allowing longerdated securities, we're able to get some additional yield in the portfolio. Before you move on, Bill, sorry. Um, quick question. Like I'm not an investor type, so this is going to sound very rudimentary and this might be a combination between Bill and Dave to help answer this. Looking at this p page here, my understanding of the portfolio has always been more of a short term. was what was created and what you're proposing more long-term which makes sense. I guess my question is uh say worst case scenario help we need to liquidate this. What does that even look like? Could you have to wait until the very end to do that or are you penalized or just walk me through that scenario? Worst case scenario if we had to.

Great question.

It has a life of its own. So, um, great question. It goes back to, uh, you know, earlier I said 83% of the portfolio could be liquidated the next day. All these securities that we're talking about could be liquidated the next day. Um, and in fact, all of them if if I got a call at 6:00 a.m., I could have the whole portfolio liquidated by 8 8:00 in the morning. Now, however, we know that if we try to jam like investment grade bonds out there, we still have to get buyers and sellers and and so they're a little less liquid on on that. But when we think about this portfolio, uh the intermediate government uh if and the um 01, you have over 50% of this portfolio that I could liquidate right off the get-go. So, if we get in a situation like COVID and and um and I did have this I had a community call me and said, "Hey, we need to liquidate our portfolio right away. We um the the assembly wanted to raise funds." The mayor, they they didn't know how much money they're going to need and and so we went in and started liquidating funds and we were able to do that. So, I feel very comfortable that um if you guys needed $17 million right away, 50% of your portfolio, I'd be able to liquidate it right off the get-go.

Even in this new proposed format. Yes. Mhm. And that and that that kind of goes back up to the uh the zero one-year Treasury that 3% there's a million dollars in there that could be liquidated right away. The intermediate government, those all treasury and agency securities, all those could be liquidated. So, that's that 17.6. And I feel comfortable that we can do the agency C uh AB uh MBS and also the uh investment grade credit too. Those would be a little bit harder, but we'd still be able to do that pretty quickly.

Could we go back up there to um the ratings um the A- rated versus the AA rated? And I I know that there's a different default rate between corporate tripleBs and and municipal tripleBs. So where would the triple B's be in? Would they be in corporates or would they be in municipals?

Thank you. Uh we in this particular case we do not have any municipalities municipals in this um in this. So it all be corporate. Yes. in this particular one. Yes. Um the municiples right now are not when you go out into the market, we can get more yield in an investment grade bond than we can in investment grade miple. Thank you.

Not saying that's always the case, but for right now that's the case. Another nice segue. Oh. Oh, I forgot this one. Okay. Um, I'm going to get to some default rates when we're managing credit risk here in a second. Um, kind of going back to so what's that 32 basis points mean in dollar amounts for you for the for the city and you guys's current portfolio has 3.62% um yield to maturity. The duration on that portfolio is 1.38 years. So our new portfolio that we're recommending um you maturity is that 32 basis points extra 3.94. We are taking more duration risk of 3.9. So well below that 5% max. 32 basis points on a $38 million portfolio. That's going to be an additional $112,000 over an annual basis in the portfolio. So, just kind of putting I've been throwing duration and yields and what was that in dollars terms at least within this portfolio. Um 32 basis points $112,000 would be um on an annual basis. My last main slide here and and I think this is kind of put in perspective investment grade uh corporates um kind of looking at what the default rates are. These are one-year defaults rates. These are taken from S&P one or the global uh credit rating agencies. Um this is in the top lefthand corner. Investment grade corporates are defined investment grade securities are defined at AAA, double A, single A and triple B. So if you've heard me say triple B and above that we can think of that

investment grade. When we get into double B's, B and triple C's, we think high yield junk bonds. So those um and so when we think about the default rates, uh we are able to grab default rates from 81 to uh 2025 and those are in the blue. Everything to the left of that line. Um the max default rate at say in triple B's is 1%. Um but the long-term weighted average is 13 basis points. So very low and that's and that's not and if we think and to go take another step you even if a bond defaults a corporate bond you still get money back because you're you're debt holder. So you're re you might in in typical years it would be 70 to 75 cents on the dollar to get you know if it went from triple B and default right away. So if we think about it's only a few basis points if you own the whole universe and what your actual dollar loss is. So very low in the investment grade space. The most likely if we get in a very stressed environment um would be that a tripleB would get downgraded to double B to single B and so forth and then as they get downgraded we would sell those bonds out because they're no longer investment grade. Um so the the default rate would be very slow. the in my 25 years the defaults of these securities were Enron Worldcom where you had just fraudulent audit no investor is going to be able to figure that part out. Um, so those have been the the the biggest ones in my career that went from investment grade to zero was Enron and World Comp and things of that nature. And even when we got into the global financial crisis, um, even the banking sector, which was the most stressed, didn't see these these defaults because they got bought

out by other companies and things to that nature. In the B top right, this is just a quick graph. I just wanted to put this in front. Um, these are spreads. This is what the average um trip um triple B A and triple B index um looks like above treasuries. Um we're currently they're about 85 basis points for for a similar like treasury. If we think about if we're going out and buying a tripleB single A bond that index it's about 85 basis points. So a little less than 1% greater than a treasury. So going back you guys own all treasuries. we should get compensated by buying that in um buying that credit instrument. What are we getting compensated for? About 80 basis points over over the index. So um our returns in the bottom right hand corner, we went back uh to December 20 owning uh 1 to 10 year tripleB corporate bonds. What's the excess return on a quarterly basis? It's about 38 basis points. So again you are um getting additional if we think about an annualized that's on a quarterly basis over a full year about 165 bas basis points 1.65% 65% overtime on an annual basis points. And you know what is our outlook at APCM on credit? Um credit is in the news for sure. Private debt um um a lot of uh software companies and so there is some um stress in the market. Um yields have um spreads have widened out a little bit but balance sheets we still think are very um very strong in the US banks coming out of the global financial crisis. they are much more stout than they were beforehand. Um uh even though that syndicate loans and credit uh private credit there's concern but the banking in instrument we would own financials in this you know I think

JP Morgan, Bank of America things to that nature those would be type of credit names that we'd buy for this portfolio. Um industrial credit balance sheets look good um they're strong uh free cash flow. So we have a matrix that we use of seven or eight um ratios that we use and one of them is strong cash free cash flow for for the securities that we buy. So the the investment grade securities that we're putting in here are have strong balance sheets. Before I finalize and could get back to the beginning of the presentation on our recommendations. Um any questions, thoughts? Um, the credit rating of tripleB's has me concerned because you've got a 15% in investment grade A versus 15% in uh, credit risk tripleB and the default rate on that is quite substantially higher with the triple B. Um, could we as a council make a different recommendation on those percentages that you've got there? Okay, great. Thank you. It must have turned off as soon as you guys speak. Is that automatic?

Evidently, that's what happens.

Um, yeah, you guys, um, have the ability to, we came with our best recommendations and going back to that willingness to take risk. You guys got to feel comfortable with that risk. So, um, you know, please, you know, speak through that and make those recommendations. And, um, yeah, we have no no problem with that. And this is a, uh, a more symbiotic relationship. I, I, I, I, I, I, I, I, I, I, I don't view this as APCM coming in saying, you guys need to do this. We're making the recommendation. This is what we see. This is what we see in your portfolio. This is what we feel comfortable. Um, some councils add more, some have less. Um I I I just think that this is a uh the process we're working through and taking incremental more risk. What is that next step of risk? Um well you know what you guys feel comfortable with for sure and then in six seven years and we'll see where it lies and then we'll take that next step. Yeah. Absolutely. Bill, if I could kind of it might be best for the for the very end, but it's kind of where we're we're at right now. Just kind of a philosophical question. You know, business, you usually stick with what works and what you've been doing. And you know, um is something changed now from maybe five years ago um that we didn't do this this earlier? Uh and your mic went off before you say anything. Um, is it now more advantage advantageous than it was five years ago or are we just now doing this? And I'm just not curious.

Yeah.

Well, I I think couple of different things. Um, I think the if we look back 5 years ago, APCM wasn't managing um this portfolio. Um, it was managed by internal staff, which um the policy was geared to treasury agencies and not taking credit risk. with APC and managing it, we have the ability and we have a full team that looks at credit on a daily basis. So, our resources are greater than um and so as we've taken this portfolio and with our professional staff now we're able to introduce that risk and not have to, you know, an internal person candidate, they're doing their finance job and things to that nature. they're not looking at credit on an everyday basis and and looking at quarterly statements of all these portfolies. So that's probably the number biggest change is the introduction of APC and managing this account and being able to to do that.

Um did I understand you to say or maybe I misunderstood are y'all utilizing all indexes in these opportunities? No. Um the we would be buying individual bonds for this account. The representation of those indexes that we showed was more so we can show um the indexes. And the reason why I that I I feel that's important is if we are trying to introduce more risk, we want to show what that return is going to be. I didn't want to just go in and cherrypick 10 bonds and say, "Hey, if I cherrypick these 10 bonds, I can get you X." The index is a big broad base. Um, as you guys well know, and I I just want to show you guys what the representation of an increase in 30% credit and things to that nature going out the curve. What What is a realistic increase in in yield and not just sit here and just say, "Hey, I can get you 60." And then in one year from now, you guys like you only got 20. So,

so y'all would actually be utilizing individual bonds for this portfolio, not indexes. Is that correct? That is correct. Thank you. Mhm.

And we already do that on the bond side of the um permanent fund. We buy individual credit bonds in that portfolio and mortgage back securities. Um, so I kind of laid the come back and took our recommendations and just put them in here and more for to the reasons why we are doing these and just document the reasons why they are in here so you can see them and and and feel comfortable with them. Um, the only one I've kind of walked through all of them. the one that it wasn't on the very first page was the very first the performance benchmark. Um you guys hold us to a one to three government index. Um and I would make the recommendation if you guys move forward that we move the performance index to be more conducive to what we're trying to do uh and make that the Bloomberg Intermediate Government um index. Um this just kind of mirrors the duration increases that were taken. Um and so we don't have a mismatch between the portfolio duration and the index duration. So you can see ultimately how is how is the portfolio doing on a performance basis. Very similar to the perm fund we have the benchmarks you know how is APCM outperforming or underperforming and we want to make sure that if we're introducing risk it kind of it mirrors that. So that's um that's one uh difference in the guideline recommendation changes. The rest of them um I I've spoken to some of them are cleanup items. Some of them are the two main um the two main changes are the introduction of investment grade bonds and then also allowing out to 10 years um um fix uh maturity ranges outside agency MBS.

Um on that one um for our investments to be in US dollar uh denominations. Has there ever been any time when our investment opportunities were not in US denominations? Did we did we invest in currencies of outside countries? No. Okay.

But it doesn't Um but I I reading through the IPS if someone and there's nothing that precludes us to go and buy you know buy securities UK securities guilts or pranks or so this would be a preventative type correct. Thank you.

Yes. It's more um Yep. that that I threw a lot at you guys. Um but um I'm happy to continue taking questions on anything. Um I know it's I want to yield back the time to you guys.

Just a little followup. Um I'm not I'm not an expert in investing like Miss Petty over here. I really appreciate all Miss Petty's questions. I'm learning a lot tonight. Um, I guess the short version is this. What I'm gathering here is like the biggest I shouldn't say risk negative. It seems like to me is we're taking on a little bit more risk to take on to have more time to for our investments to mature. I guess I'm trying to figure out where the downside is if we're why we wouldn't want to change from what we're doing now. That's maybe sum it up like that. the the downside, the biggest risk um in in this portfolio would be if we buy longerdated securities, interest rates went up 300 basis points. So the four year 10ear 10-year Treasury went from 4% up to 7%. 300 basis points. The value of this portfolio would go down. So we would have unrealized losses in the portfolio. However, all the bonds mature at par. So we would hold those and over time those unrealized losses would evaporate and then you get your money back at par. So the risk is two couple folds. cryp low probability of default of bond going to zero which is very very low in this particular case and but that intermediate risk as the bonds are moving towards their maturity interest rates move up the bond prices would go down and when we think about duration that duration number let me this is a good question and I'm going to take a second here so your current portfolio here. Um, and I I get really excited about this, so just

bear with me. Uh, the aspect of yield to maturity 3 point uh 3.62 um we would get that income for one year. All right, every year we'd yield about 3.62. That duration number as I mentioned interest rate to sensitivity. So if interest rates moved up a 100 basis points in this particular case inflation and the whole curve moved up the portfolio back of the envelope would lose market value of 1.38. So we gain 3.62 we lose market value of 1.3. So what's the total return on this portfolio? It'd be about 2 what is that 2 uh 24 in in return on the portfolio. Okay, let's go to the new portfolio. The yield on the maturity is now 3.94. So, we're going to get that return over one year, but we're we're introducing more uh duration risk. So, if interest rates moved up a 100 basis points across, you know, the one-year bond went up, 10-year bond, everything went up, the bond prices fall by how much? 3.9%. because we're introducing more duration risk, we would expect um larger losses. So, this portfolio would basically net out at zero. We wouldn't take losses. And there's other factors to this, but I'm just from the back. I think that's a great question for you. And I'm just trying to get you guys to understand the math behind return coming in in and coupon income. And then also, you have this price change. And the biggest risk is interest rates move all the way up. We'd have a hyperinflation. Interest rates move up. You'd be better off in a shorter term portfolio like I

on the lefth hand side versus the right hand side. Thank you. Good question. That was that was good. I really appreciate that. And on the flip side, if we stick on our shorter term here, we just don't if things go as planned or well, we wouldn't have that potential for that additional income. Correct. So, absolutely. Yeah, there's the trade-off, right? That's it. The trade-off. I wish there was a free lunch and you can take more risk without more return. I was trying to find that apparently today, but no, I appreciate that. Yeah. No, absolutely. Go ahead. Do you have any more? I I'm my my comments are I'm right at 1 hour.

I have one other followup if you don't mind. Thank you. And this might be for Dave in the back. Do we put more money into this fund or are we just going off the investment income if that makes sense?

Yeah, at this um great question there, Councilman MDaniel. Um at this point, we're not putting additional funds. It's what it's what the fund is earning. um as he referred to earlier, the Amlip account is where our our cash flow. That's where um what we primarily see in there is our taxes that we're collecting from the burrow and that's what we transfer into our cash account and and operate off of to where we haven't touched this investment account and it wouldn't but it you know but if we found ourselves in a situation where we had an excessive amount of cash, we could always put more into this account as well. It just it you know we just kind of watch and monitor the needs um as we look at you know major capital projects or something or say like you know if we're buying a a fire apparatus that's well over a million dollars that's where you know we might be looking at um looking at what we would utilize but as he mentioned you know we haven't fallen below 2 million in the AML account so I don't know even if we were doing that that we would have a need to tap into this account at all at that Thank you.

And uh Mr. Sworner, since since we got you online there, um administration is recommending this. That's why we're we're here, but I was wondering if you might have um couple of things, any anything to add to it and what the next steps are and what we can expect to see. Well, what you'll see in about an hour is that we'll be introducing some of the changes um are are on tonight's agenda. Um we did want to have Bill present this beforehand. um be able to put this on the agenda. But then also this gives us time if um if there's any recommendations from council to make any changes to that that we have time to prepare amendments so that when it does um come before public comment and and for um council to vote on it that we we can make those changes at that at that point in time.

Any further questions from council? Thank you very much. Thank you. And you'll make you'll be making a presentation tonight at the council meeting. Is that correct? I was not. Okay. Okay. Excuse me. Want to move down the agenda while you're sitting there. Uh I want to see if there there's any public comments. Marian just walked in. Anybody online? Okay, that brings us to adjournment. With no further discussion, we're adjourned.