Background
In 2002, Yolo County participated in the Pooled Tobacco Securitization Program administered by the California Statewide Financing Authority. In accordance with U. S. Treasury regulations, all investments held in connection with the bonds are restricted by the universal cap, which essentially requires that the value of investments equals at least the value of outstanding bonds. After each semi-annual debt service payment (May and November), the bonds and investment holdings are revalued and any excess of investment value over bond value is de-allocated, that is, released back to the County for unrestricted use. In 2003 the Board of Supervisors approved an investment strategy for tobacco settlement receipts securitized in 2002 and directed the Chief Financial Officer (in role of Auditor-Controller) to make an annual report on the status of the endowment fund (Demeter) and annuity fund (Pomona) and recommend necessary adjustments to the investment strategy.
Investment Strategy
In 2013, upon the Department of Financial Services' recommendation, based on revised long-term projections for the funds, the Board adjusted the investment strategy and the distribution of de-allocated funds (Att. B: Board Reso. 13-93 Deallocated Funds Flow). In brief, the adjusted strategy called for annual transfers of $300,000 of de-allocated monies to the Pomona Fund and to make $330,000 available from the Pomona Fund for appropriations to fund various programs as determined by the Board. The balance of de-allocated monies is directed toward the continued buildup of the Demeter Fund so that it can generate a perpetual annuity of $400,000 from the year 2023.
De-allocations in the past few years have been below the estimates projected by Public Financial Management, the County's outside investment advisor, based on certain assumptions of market factors that affect bond values. These assumptions did not hold true, due to declining consumption of tobacco products, and as a result, de-allocation has been lower than predicted. As a result of this, the Department of Financial Services presented three alternative scenarios of adjusting the investment strategy to improve sustainability of the Ceres funding at the February 20, 2018 board meeting. These options were discussed in more detail at the Board Governance session on April 10, 2018.
The proposed investment strategy for approval is illustrated in Att. C (Flow of Funds - 2018). It is consistent with prior meetings, is proposed to be implemented in 2018-19, and is in line with the County Adopted Budget. The strategy includes:
1. Out of monies de-allocated from the Ceres Endowment, transfer $225,000 annually to the Pomona Fund and the balance to the Demeter Fund.
2. Continue to invest balances in the Demeter Fund in long-term maturities to generate $300,000 from 2043 (or debt payoff) into perpetuity.
3. Make $225,000 available for appropriation from Pomona annually, until 2043 (or debt payoff) and then $300,000 thereafter.
4. Update the projections annually and report on the status of these funds to the Board of Supervisors.
As discussed at the Board Governance session on July 17, 2018, beginning in 2019-20 the Pomona fund will be used to establish an annual health and human services contingency that is available for allocation by the Board at any time throughout the fiscal year.
Report on Ceres, Demeter, and Ponoma Funds for June 30, 2018
For the fiscal year ended June 30, 2018, the de-allocated funds totaled $196,567, which after investment fees only resulted in $181,067 available to Pomona. There was not adequate funding to move any funds to the Demeter fund. Therefore in order to balance the Pomona fund, its fund balances were utilized, as well as a transfer of $126,529 from the General Fund, to fund programmatic expenditures.
As a result of this and the prior years de-allocations, Department of Financial Services' staff presented the option above to adjust the investment strategy in order to align with future financial projects. A financial summary of transactions for the Ceres Fund, Pomona Fund and Demeter Fund, for the fiscal year ending June 30, 2018, is presented in Att. A (Report on Tobacco Funds). |