What is the current state of the City of Melville’s investments?

The purchase price of the City of Melville's total investment portfolio as at 31 October 2008 was $69.731 million. As at 31 October 2008, the estimated market value of the portfolio was $55.608 million. (This is an approximate book loss difference of $14.123 million).

Of the City's total investment portfolio, $21.23 million is invested in CDOs (Collaterised Debt Obligations). As at 31 October 2008, the market value of our CDOs was $7.895 million. (This is an approximate book loss difference of $13.335 million).

It is the CDOs that have been most affected by the downturn in the global credit markets since the advent of the U.S. led world economic crisis.

At this point these are only book losses.  Many of our investments particularly the CDO's have long-term maturity dates, which means that should the number of credit defaults that is allowed for in each portfolio not be exceeded (this may be six to thirteen companies from a list of 100 to 220), the full value of these investments will be returned.  Due to the extreme volatility in global economic conditions it is now expected that some of the CDO's will default and actual losses will be realised.

At this time the City is still earning an attractive interest rate from some of its CDO investments.  Interest is however not currently being received on $5.3 million of the CDO's which are Lehman Brothers arranged CDO's.  The non receipt of interest is due to the pending bankruptcy of Lehman Borthers and as a result, the Bank of New York Mellon who is the trustee for the collateral underpinning the CDOs has taken control of the collateral and has instigated the process of determining how the investors wish the collateral to be dealt with. At this point in time it is estimated that upon the sale of the collateral a return of up to 70% of the original amount invested may be achieved - this compared favourably with the estimated value of the CDO's if this event had not occured.

In the past five years, the City has earned about $15.5 million in interest from its entire investment portfolio.

Note that detailed Investment Statements are also included in the Agenda and Minutes of every Ordinary Meeting of Council.

Click here to view the Detailed Investment Statements

• Please note that Detailed Investment Statements are also included in the Agenda and Minutes of every Ordinary Meeting of Council.
  

What products do we currently hold investments in?

As at end of October 2008, Council funds were invested in:

• Term deposits with Australian Banks
• Sub-ordinated Debt Floating Rate Notes for authorised deposit taking institutions (these are Australian Banks)
• 11am At Call bank deposits with Australian Banks
• A Deutsche Bank Capital Guaranteed Yield Note with Deutsche Bank Australia
• Collaterised Debt Obligations (CDOs) arranged in Australia and denominated in Australian dollars
  

 Why do we choose to invest in these products?

Whilst the City of Melville has always sought to take a conservative approach to investments, it has however tried to maintain the real value of invested funds by earning rates of return slightly above the benchmark bank bill rate. The Council has never looked for a high rate of return, instead seeking a better return at low levels of risk commensurate with the trusteeship of public monies.

Before the global economic crisis, the City of Melville’s investment portfolio was structured and managed by Grange Securities/Lehman Brothers who were contracted by the City to provide expert advice and manage our investment portfolio based on the City’s investment policy. The City selected Grange Securities/Lehman Brothers from the WA Local Government Association’s (WALGA) common-use contracts list for investment advisory and management services.

The City’s policy at the time stated that investments should be made on the basis of providing security of capital, liquidity and a conservative income return 0.35% above the bank bill index. While income returns were achieved, we are investigating whether fundamental aspects of the policy were maintained at all times by the funds managers Grange Securities/Lehman Brothers.

Following the downturn in worldwide credit markets, precipitated by the sub-prime mortgage crisis, the City of Melville quickly took action to review and revise our investment policy to reflect the change in market conditions. Sensibly, the policy changes included prohibiting any further investment in CDOs, which have been hit hard by the global market downturn.

The City of Melville has also now appointed new expert independent investment advisors Grove Research and Advisory and surplus funds are currently being invested for short periods and only with highly credit rated major Australian banking institutions.

Click here to view the City of Melville Investment Policy

Are ratepayers at risk of losing any money?

The City of Melville believes our community understands that financial markets are subject to fluctuations and that Council has sought to manage those risks by employing expert funds managers and advisers.

Although the current position in regard to Council’s investments appears extremely poor, there have currently been no defaults of any CDOs within the City’s investment portfolio.  Post balance day events have however resulted in seven Corporate defaults referenced by the CDO’s which in turn has reduced the probability that some of the CDO's will survive through until maturity.

If the investments fail the loss of funds will be a combination of ratepayer contributed funds, past investment earnings and funds derived from other sources such as untied government grants and user fees and charges.

As no active market currently exists for CDO's investments the City cannot sell these investments at this time.

Will the provision of the City’s services and facilities be affected by the current downturn in investments?

The drop in the market value of our investments will have no effect on the day-to-day operations of the Council. The CDO investments form part of the City’s Reserve Funds, which are set aside for future projects.  Adequate funding is available to carry out the works identified in Council’s 2008/2009 Budget.

Obvioulsy the loss of a significant amount of money whilst not being fatal to the ongoing viability of the City, will have a negative impact on the ability of the City to expend those funds on Capital Projects.  The loss of any invested funds will make the already difficult task of funding the renewal of Councils Infrastructure Assets even more difficult than it is at present.

One of the most immediate and significant impacts of the current economic crisis will be the effect of reducing interest rates and the possibility of being required to meet the cost of the Federal Governments guarantee on deposits of $1m or more in Authorised Deposit Taking Institutions (ADI's).  Councils 2008/2009 investment earnings budget is $3,950,000 and when formulated did not take these factors into account.  Interest rates have now reduced by 1.5% and are expected to further reduce in coming months.  Due to the significant economic turmoil Council has appropriately restricted investments to term deposits with less risky but lower returning ADI's.  Early indications are that the combined impact of these factors is, in 2008/2009 it may be up to $1 million.  This will mean that adjustments to projects for programmes scheduled to occur in the current financial year may need to be made or transfers to Reserve Funds reduced.

What strategies has or will Council deploy to minimise the loss?

1. Take expert financial advice. 
   Council obtained independent advice from Price Waterhouse Coopers (PwC) in September 2007 and appointed Grove Research & Advisory in January 2008 to undertake a further review of the existing portfolio and provide ongoing investment advice. It should be noted that Grove only provides its advice and research skills to Council. It does not manage Council’s investment funds, has not been authorised to undertake investments on our behalf and does not market investment products.
2. Restructure investment policy.
   Council amended its investment policy in November 2007 to prohibit further investment in CDOs, tighten the credit ratings and also to include other elements to ensure that advisors are independent to funds managers.
3. Realise the revenue generating capacity of other City of Melville assets.
4. The city owns land assets that are currently under utilised which can be leased  (Councils preferred   option) or sold to generate revenue to meet any shortfall in revenues caused by the loss of cash investments.
5. Terminate former investment advisors.
   The Investment Management Portfolio Agreement with Grange Securities/Lehman Brothers was terminated in December 2007. 
6. Legal Action.
   In conjunction with other Local Authorities who have been similarily affected by investments that were undertaken by Lehman Brothers, the City has engaged a legal firm to investigate the possibility of  recovery of any losses.

Will rates need to be increased to cover for the drop in investments?

There will be no need to increase rates in the short term to cover the market losses on our investments. If our investments do sustain real losses in the long term, there may be a need to increase rates, however, the City will seek other sources of income such as leasing or selling other non-cash assets for sale.

Additionally, as the City has amended its investment policy to no longer include investment in CDOs, the City will be earning less interest from its investments, which means funds will have to be sought from other sources, possibly rates.

Where can people view the City of Melville’s Investment Statements?

Up to date Investment statements will be added to this section of Council's website on a regular basis Click here to view the Detailed Investment Statements

Additionally, the City of Melville’s Investment Statements are published each month in the Agenda of the Ordinary Meeting of Council. The agenda is available on Council’s website on the Friday two weeks prior to the Council meeting and copies can also be collected at the meetings, which are open to the public.

How can the community find out more about Council’s investments?

The up-to-date information contained in the monthly investments report to Council together with the detailed investment statement discloses all the relevant information (other than any issues in relation to legal proceedings which must remain confidential in order to maintain legal privilege) in relation to Councils Investments.