investing in our chicago: quarterly …...2015/08/11 · source: chicago city treasurer’s office,...

INVESTING IN OUR CHICAGO:

QUARTERLY EARNINGS CALL

Presented by

City Treasurer Kurt Summers

A u g u s t 1 1 , 2 0 1 5 | 1 : 0 0 P M

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BEFORE WE GET STARTED…

WELCOME & PURPOSE OF CALL

Status Quo In the past, the Treasurer’s Office

has produced one annual and

publicly available financial report

which contained a simple overview

of the city’s investments over the

previous year.

Best Practices As the primary investment

manager for the City of

Chicago, the Treasurer seeks to

be held as accountable as any

other investment management

firm is to their investors. This

call is shaped after some

reporting done by the nation’s

largest investment managers

and public companies.

Action This second-ever Quarterly

Earnings Call for the City of

Chicago is only one step in

financial reporting and

performance tracking of the City’s

investment portfolio. The call will

provide overviews of the global

and national economies as well as

Chicago's current fiscal landscape,

balance sheet, and income

statement. A quarterly scorecard

on the Treasurer’s progress will

also be published online at

chicagocitytreasurer.com

Transparency &

Accountability During the Treasurer’s 77 visits to

Chicago’s 77 neighborhoods, the

greatest recommendation by residents

across the City was that their financial

steward provide more transparency

and accountability.

3

Agenda 01 1:00 - 1:05 Introduction, Purpose of Call, Agenda

02 1:05 - 1:08 Global Economy

05 1:14 - 1:19 Chicago Economy

1:11 - 1:14 Fixed Income Market

04

03 1:08 - 1:11 National Economy

06 1:19 - 1:24 City of Chicago Finances

07 1:24 - 1:29 CTO Investments Update

08 1:29 - 1:40 Q&A

09 1:40 - 1:45 Debrief and Closing

4

GLOBAL ECONOMY

Real GDP (Annual Growth Rate)

Country/Region Q1-15 Q2-15

United States 0.6 2.3

China 7.0 7.0

Japan -0.9 NA

Spain 2.7 3.1

Germany 1.1 NA

Brazil -1.6 NA

Mexico 2.5 NA

CPI

Country/Region Q1-15 Q2-15

United States -0.23 0.86

China -0.09 0.00

Japan 0.00 0.68

Spain -0.77 1.71

Germany 0.28 0.00

Brazil 3.83 2.26

Mexico 0.51 -0.58

Chart Source: tradingeconomics.com

• GDP ( Gross Domestic Product) is a measure of economic growth • CPI (Consumer Price Index) is a measure of price inflation

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08 1:29 - 1:40 Q&A


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• The acceleration in real GDP growth in the second quarter reflects an

upturn in exports and consumer spending

• Inflation rose over Q2 after slowing over 2014 with the plunge in energy

prices

• Job growth steadily increased in the second quarter

• Unemployment (seasonally adjusted) decreased from 5.5% to 5.3% over

Q2

NATIONAL ECONOMY

Source: BEA, BLS 7

US 2014

US 2015 YTD

Employment Growth (% change)

2.1 0.7

Average Unemployment Rate 6.2 5.5

Median Household Income (Ths. $)

53.1 55.1

Houses Prices (% Change) 4.9% 5.7 (YOY)

Single Family Permits (% Change)

2.1 6.1 (YOY)

Multifamily Permits (% change)

16.7 70.3 (YOY)

Housing Starts (avg. annualized)

1,000.5M 1,061.2M

NATIONAL ECONOMY: OTHER INDICATORS

Table sources: Bureau of Census; Bureau of Labor Statistics; Bureau of Economic Analysis; Sentier Research; Federal

Housing Finance Agency; U.S. Census Bureau

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04




08 1:29 - 1:40 Q&A


• Why is this important, as individuals, investors, and issuers?

• Highly rated, short term municipal bonds continued to underperform their benchmark

• The Fed rate hike, as addressed by Janet Yellen and Dennis Lockhart, is expected to be a

measured and gradual increase with a possible initial tightening in September:

• “My own preference would be to be able to proceed to tighten in a prudent and gradual

manner.” – Janet Yellen, Chairwoman of the Federal Reserve

• “I remain very disposed to September being a possible date for a liftoff decision.” – Dennis

Lockhart, Atlanta Fed President

• Rising interest rates can cause unrealized losses in fixed income portfolios

• Holdings with longer durations will see larger losses; a gradual increase in rates will allow

portfolio managers to adjust to a rising rate environment

FIXED INCOME MARKET: OVERVIEW

Source: Chicago City Treasurer’s Office, The Wall Street Journal,

CNBC 10

FIXED INCOME MARKET

Treasury Curve

Chart Source: Bloomberg Finance L.P. 11





04


06 1:19 - 1:24 City of Chicago Balance Sheet


08 1:29 - 1:40 Q&A


12

Chicago Bond Ratings (7/15/15)

Moody’s S&P Fitch Kroll City GO Bonds

CPS GO Bonds

CPD GO Bonds

Inve

stm

en

t G

rad

e

Aaa AAA AAA AAA

Aa1 AA+ AA+ AA+ S&P

Aa2 AA AA AA Kroll

Aa3 AA- AA- AA- Fitch

A1 A+ A+ A+

A2 A A A

A3 A- A- A- Kroll

Baa1 BBB+ BBB+ BBB+ Fitch/S&P Kroll

Baa2 BBB BBB BBB S&P

Baa3 BBB- BBB- BBB-

Jun

k Ba1 BB+ BB+ BB+ Moody’s Fitch Moody’s

Ba2 BB BB BB

Ba3 BB- BB- BB- Moody’s

B1 B+ B+ B+

B2 B B B

B3 B- B- B-

Caa1 CCC+ CCC+ CCC+

Caa2 CCC CCC CCC

Caa3 CCC- CCC- CCC-

Ca CC CC+ CC

- C CC C

- - CC- -

D D DDD D

• Moody’s downgraded its ratings of Chicago and sister agencies’ bonds due to concerns about unfunded pension liabilities

• Through prudent management of City investments and day-to-day finances, CTO can help support the City’s financial health

CREDIT RATINGS

TODAY

13

• Chicago’s strong, diversified economy continues to grow across sectors,

demonstrating that the City remains a global economic powerhouse

• Among Chicago’s recent successes:

- Job growth and creation

- Strong real estate market

- Increased tourism

- Major business expansions

Source: World Business Chicago

CHICAGO ECONOMY: OVERVIEW

14

Only 22 countries have a larger GDP than Chicago

Chicago has the U.S.’s most diverse economy. No single sector employs more

than 14% of the workforce

CHICAGO’S GLOBAL AND DIVERSE ECONOMY

15

Source: World Business Chicago, City of Chicago 2014 CAFR

CHICAGO ECONOMY: UNEMPLOYMENT

The number of employed residents in

the City increased by an estimated

2.1% over Q2 2015.

Unemployment Rate

June 2014 June 2015 Year/Year

National 6.3% 5.5% -0.8

Chicago 7.9% 6.9% -1.0

Chart Sources: Bureau of Labor Statistics, World Business Chicago

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan

-08

Sep

-08

May

-09

Jan

-10

Sep

-10

May

-11

Jan

-12

Sep

-12

May

-13

Jan

-14

Sep

-14

May

-15

Un

em

plo

yme

nt

Rat

e

*Not Seasonally Adjusted

National vs. Chicago Unemployment Rate

National

City of Chicago

16


CHICAGO ECONOMY: SELECTED INDICATORS

Indicator Date Most Recent Year Earlier Yr-On-Yr Chg

Employed Residents (1,000) - City May-15 1,275.0 1,259.1 1.3%

Air cargo tonnage (ORD & MDW) May-15 143,977 131,765 9.3%

Major business expansions - MSA Jun-15 YTD 202 - -

Home sales -City May-15 2,700 2,453 10.1%

Median home sales price ($) - City May-15 287,500 269,250 6.8%

Office vacancy rate - downtown Q1 2015 12.7 13.7 -1.0%

Annual visitors (millions) - City May-15 50.17 48.48 3.5%

Air passengers (millions) - ORD & MDW May-15 8.83 8.18 7.9%

17

• Private Sector Employment increased by ~16,700 jobs in Q2, which

includes:

–Professional and Business Services (+7,000)

–Leisure and Hospitality (+6,300)

–Financial Activities (+4,400)


CHICAGO ECONOMY:

PRIVATE SECTOR EMPLOYMENT

18

• There are nearly 300 venture capital and seed stage investment firms in

Chicago; between 2010 and 2014, Chicago startups received more than $3

billion in VC funding, with over $1.6 billion in 2014 alone

• In 2014, more than 600 major business expansions were announced,

representing $6.8+ billion in economic development and over 20,000 new

jobs

• Between 2010 and 2013, tech jobs in Chicago grew by 25.8%, edging out

Silicon Valley and all but two peer cities

• In 2015, over a dozen tech companies will add 1,000 jobs in Chicago

CHICAGO ECONOMY:

INNOVATION, INVESTMENT & EXPANSION

19

Sources: City of Chicago press release, City of Chicago 2014

CAFR





04




08 1:29 - 1:40 Q&A


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CITY OF CHICAGO: CORPORATE FUND REVENUES

Chart Sources: Chicago Office of Budget Management 21

Corporate Fund - Revenue 2014 2014 2015 Projected 2015 Year-End 2016

$ MILLIONS Year-End Est.* Actual** * Estimate*** Projected***

Tax Revenue

Utility Taxes and Fees $464.5 $447.3 $449.4 $441.0

Transaction Taxes $297.4 $309.2 $345.4 $338.9

Transportation Taxes $182.6 $185.0 $191.1 $191.8

Recreation Taxes $184.3 $187.6 $214.5 $217.0

Business Taxes $100.0 $100.0 $111.8 $113.9

Sales and Use Taxes $609.4 $630.9 $651.3 $676.4

Income Tax, PPRT & Other Intergovernmental $294.0 $304.0 $447.0 $441.9

Total Tax Revenue $2,132.2 $2,164.0 $2,410.5 $2,420.9

Non-Tax Revenue

Licenses and Permits $125.0 $126.0 $129.3 $137.1

Fines, Forefeitures and Penalties $360.7 $354.5 $338.7 $330.1

Charges for Services $121.7 $123.6 $122.3 $112.6

Municipal Parking $6.4 $6.4 $7.0 $6.6

Leases, Rentals and Sales $20.3 $20.8 $25.0 $31.2

Reimbursement, Interest & Other $378.3 $397.0 $460.3 $390.7

Total Non-Tax Revenue $1,012.4 $1,021.6 $1,082.6 $1,008.3

Proceeds and Transfers In $57.3 $32.8 $41.6 $33.3

Total Revenue to the Corporate Fund $3,201.9 $3,218.4 $3,534.7 $3,462.5

Appropriated Prior Year Fund Balance $53.4 - $0.0 $0.0

Total Corporate Fund Resources $3,255.3 $3,261.3 $3,218.4 $3,534.7 $3,462.5

*Per City of Chicago 2014 Annual Financial Analysis **Per City of Chicago 2014 CAFR ***Per City of Chicago 2015 Annual Financial Analysis

CITY OF CHICAGO: CORPORATE FUND

EXPENDITURES

Chart Sources: Chicago Office of Budget Management 22

Corporate Fund - Expenditures 2014 2014 2015 Proposed 2015 Year-End 2016

$ MILLIONS Year-End Est.* Actual** Budget* Estimate*** Projected***

Salaries and Wages $2,320.1 $2,443.1 $2,436.5 $2,517.4

Healthcare Benefits $377.8 $404.2 $379.0 $413.7

Worker's Compensation $63.1 $66.6 $66.8 $66.1

Contractual Services $358.1 $365.0 $360.1 $382.6

Commodities and Materials $23.9 $24.4 $27.2 $30.0

Utilities $16.1 $16.6 $17.2 $16.7

Motor Fuel $27.1 $29.0 $26.9 $24.8

Claims, Refunds, Judgments, and Legal Fees $32.1 $57.2 $43.8 $63.0

Miscellaneous $26.9 $31.7 $26.0 $30.6

Transfers Out $10.1 $10.0 $10.8 $10.1

Pension Contribution - $67.9 $140.2 $140.2

Total Expenditures $3,255.3 $3,261.3 $3,515.7 $3,534.5 $3,695.2

*Per City of Chicago 2014 Annual Financial Analysis **Per City of Chicago 2014 CAFR ***Per City of Chicago 2015 Annual Financial Analysis

23

CITY OF CHICAGO

2014 Comprehensive Annual Financial Report

Chart Source: City of Chicago CAFR 2014

In Thousands of USD FY 2014

Assets

Current Assets 5,514.4

Restricted Assets 4,474.3

Noncurrent Assets 602.4

Total Capital Assets 22,103.7

Total Assets 32,694.8

Liabilities

Current Liabilities 3,512.7

Long Term Liabilities 32,496.9

Total Liabilities 36,009.6

Net Assets

Total Net Assets -3,314.8

Total Liabilities & Net Assets 32,694.8

• The combined actuarial value funded ratio of Chicago-area pension funds has fallen from 69.7%in FY2004 to 47.3% in FY2013.

• Combined unfunded liabilities for the same eleven funds grew from $14.4 B in FY2004 to $39 B in FY2013.

CHICAGO’S PENSION FUNDING

24 Chart Sources: Civic Federation

• Chicago’s 11 local pension funds have over $35B in assets and pay $144M in fees annually. Each plan has its own process of contracting with investment managers, resulting in plans using the same managers with different fee schedules.

• CTO seeks to lower pension funds’ costs by creating a clearinghouse to allow funds to share investment and management fee information.

• Currently, 5 of the 11 local funds have adopted a resolution to participate in the clearinghouse.

• Funds can use shared information to renegotiate fee pricing, potentially saving more than $1 billion in fees over the plans’ lifetimes.

FEE SAVINGS INITIATIVE

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08 1:29 - 1:40 Q&A


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CTO INVESTMENTS: PORTFOLIO ALLOCATION

AS OF 6/30/15

Chart Source: Chicago City Treasurer’s Office

Investment Amount Q2 2015 Q2 2014 Certificate of

Deposit $ 5,209,528 0.09% 0.24%

Commercial

Paper $ 345,661,128 6.02% 4.02%

Corporate

Bonds $ 411,380,396 7.16% 5.36%

Money Market $ 504,225,254 8.78% 6.59%

Municipal

Bonds $ 494,822,221 8.61% 8.37%

Treasuries $ 93,452,746 1.63% 0.00%

U.S. Agency

Bonds $ 3,377,758,973 58.80% 66.07%

Cash $ 511,745,221 8.91% 9.35%

Total $ 5,744,255,467 100% 100%

Certificate of Deposit 0.09%

Commercial Paper 6.02%

Corporate Bonds 7.16%

Money Market 8.78%

Municipal Bonds 8.61%

Treasuries 1.63%

U.S. Agency 58.80%

Cash 8.91%

27

2015 Q1 Q2

CTO Investment

Purchases $ 1,302,340,622.50 $ 2,189,004,884.58

CTO INVESTMENTS:

PORTFOLIO STATISTICS


Portfolio Statistics

Average Coupon 0.90%

Yield to Maturity 0.90%

Yield to Call 0.91%

WAM

1.90

Effective Duration 1.54

Average Rating AA+

Q2 CTO Effective Yield 0.90%

BAML 1-5 Year US Agency Index Effective Yield 0.87%

28

$0 $500 $1,000 $1,500 $2,000

Cash

Money Market

0 - 3 months

3 - 6 months

6 - 9 months

9 - 12 months

1 - 2 years

2 - 3 years

3 - 5 years

5 - 10 years

10+ years

MATURITY SCHEDULE IN MILLIONS

CTO INVESTMENTS:

Q2-15 YIELD & DURATION


Q2-15 YIELD

29

Treasurer'sOffice

BAML 1-5 YearUS Agency Index

US 90 DayTreasury Bill

Effective Yield 0.90% 0.87% 0.01%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

Per

cen

t Yi

eld

Treasurer's OfficeBAML 1-5 Year US

Agency IndexUS 90 Day

Treasury Bill

Effective Duration 1.54 2.06 0.25

0.00

0.50

1.00

1.50

2.00

2.50

Effe

ctiv

e D

ura

tio

n

Q2-15 DURATION

CTO Advantage

• To manage money for our Sister Agencies utilizing our expertise for investment access, economy of scale,

reduction of internal Agency costs and increased return on investment. • To afford our Sister Agencies the freedom to utilize their management and core assets directly on

fulfilling their stated missions. • CTO can manage the day-to-day operations of a Sister Agency’s management portfolio while allowing the

Sister Agency to maintain ultimate decision-making power over their investments.

• In the case of the Chicago Park District, this achieved a greater net return on investments when compared to prior in-house management and third party managers.

• On July 29, 2015, Chicago City Council approved the IGA between the Public Building Commission (PBC) and the Office of the City Treasurer (CTO). Implementation is now in process to on-board the portfolio and effect change to investments and earnings for PBC.

30

CTO Advantage: Park District Case Study

• CTO-recommended investments to the Chicago Park District (CPD) have met cash

flow requirements and earned CPD over $411,000.00 since implementation of CTO

portfolio management.

.

31

Municipal Depository Ordinance

• Introduced on June 17 by Mayor Emanuel and sponsored by Aldermen Tunney and Sawyer; likely to be

voted on by the Finance Committee and City Council early this fall.

• Municipal depositories will reapply for their status on a triennial basis.

• Recent ratings downgrades have shrunk the capacity of banks to provide credit support to the city; it is more critical than ever that we maintain and expand relationships with banks.

• This streamlined process paves the way to attract more banks as municipal depositories as well as to protect future credit availability. The ordinance also temporarily authorizes successor entities that have undergone consolidation.

• The ordinance will require all municipal depository banks to provide reports on their local commercial, mortgage, and other lending as required by the HMDA and CRA.

32

Investment Policy Update

33

On July 29, Mayor Emanuel introduced proposed changes to the City of Chicago’s current Investment Policy that would improve the security, credit and investment quality of the City’s investment portfolio while also ensuring greater accountability to Chicago’s taxpayers. Changes to the policy are broken down into three categories and were introduced to Chicago’s City Council in July: • Protecting Taxpayers

Limiting holdings in securities that have exhibited increased volatility or whose limited sector coverage impedes the transparent flow of information, enhances the risk profile of the portfolio and secures the preservation of principal.

• Increasing Transparency and Accountability Mandating the Treasurer’s Office to report to City Council and the public on a regular basis in order to collect important

feedback regarding the City’s investment strategy, ensure timely review of policies given current market conditions and keep better track of the performance of the City’s portfolio over time.

• Improving Investment Quality

New improvements to provide the Treasurer’s Office with opportunities to pursue further diversification and enhanced earnings while securing the credit quality of the City’s investment portfolio.





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Q&A

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DEBRIEF & CLOSING

Twitter: @kurtasummers

Facebook: /summerschicago

www.chicagocitytreasurer.com

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Thank You For Joining

38

DISCLAIMER

39

PLEASE NOTE:

This presentation has not been prepared to give information for making decisions on buying or selling securities and should not be relied upon by

investors in making investment decisions.

With respect to any bonds, notes, or other debt issued by the City of Chicago, please refer for information only to the City’s disclosure documents

and continuing disclosure filings for such bonds, notes, or other debt obligations.

investing in our chicago: quarterly …...2015/08/11 · source: chicago city treasurer’s office,...

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