The city of Lakeland’s pooled investment fund earned $18.8 million in 2021, a 3.26% return that fell $2.2 million below the previous year but was still “well above the average earning index” for municipal governments, city Treasurer Jeff Stearns told commissioners today during an update on the city investment performance and policies.
“These are good numbers but not the best we ever had,” said Stearns, the city’s investment manager, attributing the performance to “a function of the interest rate environment. What is being anticipated in the market right now is interest rates going up. There’s a lot of speculation about when the Federal Reserve will raise interest rates. Earnings will continue to be impacted by the challenging rate environment.”
View Stearns’ investment report here or at the end of this article.
Lakeland has four investment funds managed by the city’s Finance Department. “All have different characteristics and are governed in different ways,” he said. They are:
- Pension fund: At $1.271 billion, this deferred compensation fund for city employee, police and fire departments is the largest of the four and managed conservatively in compliance with state law, Stearns said, noting this fund is not regarded as “city assets.”
- Public Improvement Endowment Fund: There is $228 million in this fund, which received $215 million in last year from an amended lease agreement with Lakeland Regional Health.
Rather than make annual lease payments to city of about $14 million, under the agreement approved by commissioners last year, LRH made a one-time upfront payment of $215 million to satisfy lease obligations through Fiscal Year 2040. After that, LRMC will pay $10 a year in perpetuity.
The city plans to utilize interest earnings from the fund’s principle the fund to support capital projects. The commission has created a separate board to manage the fund.
- Miscellaneous: $19 million spread across long-term investments for the city’s cemetery, survivors’ benefit and health-care trust funds, among other assorted funds.
- Pooled investment fund: As of Sept. 30, the last day of the fiscal year, there was $565 million in this account, which is managed by the city’s Finance Department under a 2018 investment policy adopted by the commission.
Stearns said the fund includes “237 positions” or individual investments averaging $1.9 million each with $10 million being the largest. More than $453.7 million is invested in various bonds, he said.
“We are not taking a risk with big investments,” he said, describing the city’s portfolio as “a lot of small investments” that have performed consistently with the fund, which this year ranged day-to-day between $518 million and $656 million with a daily average of $576 million and Sept. 30 balance of $565 million.
“There are variations in the course of the year but as you can see, (balance range) is tightly banded,” Stearns said.
He said this is the fund most actively managed under the commission’s investment policy, which emphasizes three priorities — in order, they are safety of principal, liquidity and investment return — and produced the $18.8 million, 3.26% return last year.
Right now, 23% of the fund is invested in asset-backed bonds and 22% in corporate stocks and bonds. The remaining breakdown: 16% in federal agency bonds; 9% in commercial mortgage-backed securities; 8% in U.S. government-guaranteed bonds and 3% in municipal bonds.
About 17% of the fund is invested in “cash equivalents,” which are assets that are cash or can be converted into cash immediately, including petty cash, demand deposits and certificates of deposit. The remaining 2% is classified as “other.”
That 17% equals about $96 million and the amount of cash and cash equivalents the city maintained on hand was much larger in the months after the pandemic emerged in March 2020 — often between 40% and 50% — than it normally is, Stearns said.
“We kept a lot of money in cash. We didn’t know what was going to happen in terms of revenues,” he said. “As things have come back to a steady state” that percentage of cash equivalents in the city’s portfolio “will change slowly over time” to the ideal 20%.
Stearns said Lakeland is well-positioned to adjust its portfolio if — or when — the U.S. Federal Reserve raises interest rates as expected in the coming months and in moving bond investments around to avoid the biggest inflationary impacts.
Mayor Bill Mutz praised Stearns for his ”active management” of the pooled investment fund and said it was a “wise investment” by the commission to authorize such management.
Stearns is “responsible for at least $4 to $5 million” of the $18.8 million return on investment the city earned last year, Mutz said, even if it was $2 million below last year’s performance.
Stearns said he would not have shifted so much of the city’s portfolio into cash equivalencies if he was managing a private investment fund.
“If I was a speculative investment hedge fund manager, I would have not have done that,” he said, but because it is public money, “Better for (less return on investment) to happen than to do risky things” with the city’s money.
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