S-1185 - 02/27/2007 - INVESTMENT POLICY - Ordinances Supporting DocumentsITEM 10.11.11)
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AGENDA ITEM
Regular Board of Trustees Meeting
of
February 27, 2007
SUBJECT: Village Investment Policy
FROM: Darrell Langlois
BUDGET SOURCE /BUDGET IMPACT: N/A
RECOMMENDED MOTION: f move that the Village Board adopt Ordinance 5 -1185, An
Ordinance Amending the Investment Policy for the Village of Oak Brook, Illinois.
Background/History:
The investment of Village funds is controlled by a formal Investment Policy that was first
adopted in 1995 and was last revised in 1999. The types of fixed income investments that are
allowed for non -home rule communities under state statutes are included within the investment
policy. Also included within the Investment Policy is the performance standard that is used to
evaluate the effectiveness of the investment program. The Policy states that the investment
portfolio should be designed to obtain a rate of return "equal to 50 basis points greater than the
90 Day US Treasury -Bill rate ". The investment performance is reported on a monthly basis to
the Village Board on the Treasurer's Report.
When the performance standard was established in 1995 it was admittedly a lofty standard. The
manner in which we were able to exceed the 90 day T -bill rate by 50 basis points was to lengthen
the average maturity of the portfolio to the 1 to 2 year range. Also, some increase in yield was
found by investing in US agency securities or certificates of deposit instead of direct US treasury
obligations.
Over the last four or five years the fixed income investment markets have changed significantly
making it very difficult to achieve the performance results spelled out in the investment policy.
First, the interest rate spread between non - callable US agency securities and US Treasury
securities has significantly narrowed. Secondly, a large number of increases and decreases in
short-tem interest rates established by the Federal Reserve have led to volatility in the Village's
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marked to market investments (IMET and Illinois Funds primarily). Third and most importantly,
there has been a significant flattening and in some cases even an inverted yield curve has
developed. Thus, there is no incentive to lengthening out the portfolio as you are not paid for
investing further out on the yield curve.
As of this writing the yield on the 90 day T -Bill is 5.02 %, the yield on the two -year Treasury
Note is 4.83 %, the yield on the ten -year Treasury Note is 4.69 %, and the yield on the thirty -year
Treasury Note is 4.79 %. By the performance measure established in the investment policy, the
investment portfolio would be expected to earn 5 52 %. Based on the investment restrictions and
low risk characteristics established in the investment policy and by law, it is not possible to
consistently earn a rate of return that is 50 basis points greater than the 90 -day T -Bill rate due to
the flat and in fact inverted yield curve that has existed over the last year or two.
Most investment forecasts that I have seen do not project a significant "steepening" of the yield
curve in the near future, which would make the current performance measure more attainable
Due to all of these factors it is my recommendation that the performance measure in the
investment policy be changed to eliminating the 50 basis point spread, resulting in the new
standard being to meet or exceed the 90 -day T -Bill rate. This change will result in a more
meaningful and realistic expectation of investment performance in today's marketplace.
Recommendation:
I recommend approval of the attached ordinance revising the Investment Policy for the Village of
Oak Brook.
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