This is a follow up to the presentation made to the Board on 09/26/2017 on the status of Ceres, Demeter, and Pomona funds. At that meeting, the board requested staff to bring back a plan to address the declining amount of de-allocations.
Background:
In 2002, Yolo County participated in the Pooled Tobacco Securitization Program administered by the California Statewide Financing Authority (the 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 Auditor-Controller (presently Chief Financial Officer) 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.
In approving the sale of the bonds in 2002, the Board of Supervisors securitized the County's portion of the Tobacco Settlement Revenues (TSR) to create an endowment from which the County may, from time to time, finance one or more projects, including projects to finance various health, education and governmental purposes of the County. The intention was that by securitizing the TSR and creating an endowment, this funding would create a long-lasting asset that would benefit the County in perpetuity.
In 2013, based on revised long-term projections for the funds, the Board adjusted the investment strategy and the distribution of de-allocated funds (Att. D - Board Reso. 13-93 Deallocated Funds Flow). In brief, the 2013 adjusted strategy called for annually transferring $300,000 of de-allocated monies to the Pomona Fund in order to make $330,000 available from Pomona for appropriations to fund various programs as determined by the Board. The residual balance of de-allocated monies was directed toward the continued buildup of the Demeter Fund so that it can generate a perpetual annuity of $400,000 from the year 2023. Thus, the priority was shifted toward funding current programs through Pomona, rather than the long-term funding of the endowment.
In recent times, economic conditions have produced a different set of circumstances that warrant a fine-tuning of our investment objectives. De-allocations in the past few years have been below the estimates projected by Public Financial Management (PFM), the County's outside investment advisor, based on certain assumptions on market factors that affect bond values. These assumptions did not bear out and thus de-allocations have been lower than predicted. For the fiscal year ended June 30, 2017, the de-allocated funds totaled $263,137, which after investment fees only resulted in $250,709 available to Pomona. Thus, after satisfying the funding need of Pomona, there was insufficient resources to fund the Demeter fund for the purpose of future endowment. There are two major reasons for the decreases in the de-allocations: (1) Debt service in the original bonds were expected to be paid down quicker through Turbo payments from excess Tobacco sales revenue and paid off in 2022 rather than the required debt service schedule extending though 2043, and (2) Investment earnings during the period since 2008 have been lower than originally anticipated due to federal reserve lowering and holding interest rates near zero until December 2015 when they have slowly raised rates.
Furthermore, due to unforeseen capital financing needs, the Demeter Fund has been used for a series of short-term internal and external loans that have facilitated various capital projects. Outstanding loans from Demeter total over $1 million as of 12/31/17 and are shown below (not including loans in process):
| Demeter Fund - Outstanding Loans as of 12/31/17 |
| Borrower |
Start Date |
Amount |
Term |
Interest Rate |
| Valley Clean Energy Alliance |
01/23/17 |
$500,000 |
Until VCEA is able to repay |
Treasury Pooled Rate |
| North Davis Meadows CSA - Sewer Fund |
06/30/17 |
$92,081 |
Renewed Annually up to 4 years |
Treasury Pooled Rate |
| North Davis Meadows CSA - Water Fund |
06/30/17 |
$430,000 |
Renewed Annually up to 4 years |
Treasury Pooled Rate |
| Total |
|
$1,022,081 |
|
|
To address these shrinking resources for long-term funding, Department of Financial Services staff modeled the future availability of resources from de-allocated funds in collaboration with our investment advisor, PFM Asset Management, and various scenarios for Board consideration are presented below. In order to model the long term performance of Ceres, Demeter, and Pomona, it was assumed the Tobacco bonds will be paid off by 2043. It was further assumed that current earnings as of December, 2017 on Ceres and Demeter will continue into the future with gradual escalation. These are conservative assumptions that are used throughout the three scenarios below, which are listed in order of increasing long-term benefit.
Scenario A: Maintain current funding at $300,000 and get $250,000 in long-term.
Maintain current capacity to fund programs through Pomona at $300,000 annually, while building up Demeter to generate a perpetuity of $250,000 from 2043 (Att A).
1. Out of monies de-allocated from the Ceres Endowment, transfer annually $300,000 to the Pomona Fund and the balance to the Demeter Fund. In years where inadequate funding is available for Pomona from Ceres, make up shortfall from Demeter Fund.
2. Continue to invest balances in the Demeter Fund in long-term maturities to generate $250,000 from 2043 (or debt payoff) into perpetuity.
3. Make available for appropriation from Pomona annually $300,000 until 2043 (or debt payoff) and then $250,000 thereafter.
4. Update the projections annually and report on the status of these funds to the Board of Supervisors.
Scenario B: Reduce current funding to $225,000 and get $300,000 in long-term.
Reduce capacity to fund programs through Pomona to a lower level of $225,000 annual, while building up Demeter to generate a perpetuity of $300,000 annually from 2043 (Att B).
1. Out of monies de-allocated from the Ceres Endowment, transfer annually $225,000 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 available for appropriation from Pomona annually $225,000 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.
Scenario C: Eliminate current funding and invest in capital project financing.
Merge funding for current and future programs into the County budget process and allow all de-allocated monies to build up the Demeter Fund and continue to use it as a revolving loan fund to provide temporary financing for capital projects of the County and affiliated agencies. This fund is expected to reach $21 million in 2043 and can be re-purposed at that time (Att C).
1. Out of monies de-allocated from the Ceres Endowment, transfer all funds to the Demeter Fund. The Pomona Fund is eliminated.
2. Continue to invest balances in the Demeter Fund in short to intermediate maturities to have funds available for internal loans to capital projects.
3. On an as needed basis, seek board approval to loan Demeter funds as interim financing for capital projects.
4. Update the projections annually and report on the status of these funds to the Board of Supervisors.
Under Scenario C, the entire amount of the de-allocation would accumulate in the Demeter Fund and would be loaned out internally to finance capital project needs at an interest rate comparable to the portfolio's investment earnings. If the outstanding loan balance stays at $1 million the annual interest saving from internal financing versus external financing would be approximately $40,000. The Pomona Fund is eliminated and any existing balance is absorbed into the General Fund. By 2043, it is projected that Demeter will reach a balance of $21.6 million. |