That the City Council receive and file the Treasurer's Investment Report for the quarter ending March 31, 2022.

The Finance Department invests City funds in compliance with the California Government Code, Section 53600 et seq., and the City’s Investment Policy.  As of March 31, 2022, these funds had a market value of $73,590,787, with $37,700,777 (51.23 percent of the portfolio) maturing within 180 days, ensuring that sufficient funds are available to meet the City's budgeted expenditure requirements for the next six months.

Compliance: All investment transactions have been executed in conformance with the City's 2022 Investment Policy and the California Government Code. The term of maturity for all investments is limited to a maximum of five years unless the City Council gives prior approval to exceed this limitation.  The average weighted maturity of the City’s portfolio did not exceed three years.

Investment Performance: The City’s portfolio is generally invested in four types of fixed-income investments: U.S. Agency obligations, U.S. Treasury obligations, highly rated corporate bonds, and the State of California Local Agency Investment Fund (LAIF). In general, Treasury, Agency and corporate securities held by the City have maturities ranging from eight months to five years, as authorized by the City’s Investment Policy and the State of California Government Code. City funds invested in LAIF are considered to be available overnight and, therefore, are assigned a one-day maturity.

The following table summarizes the performance of the City’s general government investment portfolio as of March 31, 2022:

Investment Environment (provided by Chandler Asset Management):

The Russian invasion into Ukraine and resulting Western sanctions on Russia continue to impact financial markets and the global economic outlook. As a result of the sanctions, inflationary pressures have increased, particularly in energy, metals, and agricultural commodities like wheat. Elevated inflation data is setting the stage for further rate hikes by the Federal Reserve (Fed) this year. The Fed is likely to continue to tighten monetary policy this year but has little margin for error to achieve a soft landing for the economy as it attempts to combat inflation without pushing the economy into a recession. We believe a strong labor market and consumer spending will continue to provide tailwinds to the economy; however, a prolonged conflict in Eastern Europe, elevated commodity prices, and tighter monetary policy present risks to economic growth. We expect financial market volatility to remain elevated and conditions to tighten as the Fed transitions to a less accommodative monetary policy.

The Federal Open Market Committee (FOMC) raised the federal funds rate by 0.25% at their March 16th meeting to a target range of 0.25% to 0.50%, the first increase since 2018 after two years of holding the federal funds rates near zero to insulate the economy from the impacts of the pandemic. The minutes from the March 16th meeting telegraphed their plans to continue to remove policy accommodation via increasing the Fed Funds rate and shrinking the size of the Federal Reserve’s balance sheet. They indicated a $95 billion cap for asset purchase runoff ($60 billion in Treasury securities and $35 billion in mortgage-backed securities) likely to be formally announced at the May 4th FOMC meeting. Reducing the size of the Federal Reserve’s balance sheet is effectively a tightening of monetary policy and could potentially serve to keep the pace of the Fed Funds increases measured.

In March, yields increased dramatically and the curve continued to flatten. The 2-year Treasury yield increased 90 basis points to 2.34%, the 5-year Treasury yield increased 74 basis points to 2.46%, and the 10-year Treasury yield increased 51 basis points to 2.34%. The spread between the 2-year and 10-year Treasury yield declined to zero at March month-end versus 40 basis points at February month-end and 158 basis points one year ago. While the flat yield curve bears watching over the longer run, the spread between 3-month and 10-year treasuries remains steep at about 185 basis points, which indicates likely economic growth in the coming year.

At the end of March, the 2-year Treasury yield increased to 2.33%, and the 10-Year Treasury yield rose to 2.34%. The spread between the 2-year Treasury yield and 10-year Treasury yield was one basis point at the end of March compared to the average historical 20-year spread (since 2003) of 143 basis points. 
 
Cash Management Goals:

The City's general government portfolio investment goals are to maintain and preserve the safety of funds in custody and provide liquidity for anticipated expenditure needs.

Trust Funds:

The City also has investments in irrevocable Section 115 Trusts for the purpose of pre-funding retiree health care costs, also known as other post-employment benefits (OPEB), as well as retiree pension obligations.  In March 2016, the City Council approved the establishment of Section 115 OPEB Trust with CalPERS California Employers’ Retiree Benefit Trust (CERBT).  Subsequently, in June 2018, the City Council approved the establishment of a Pension Rate Stabilization Trust Fund administered by the Public Agency Retirement Services (PARS).  The goal of investing funds in the Section 115 Trusts is to provide a reasonable level of return and growth that can create additional resources to help partially offset future OPEB and pension obligation payments.  Some of the benefits of Section 115 Trust are:

The following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of March 31, 2022:

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of March 31, 2022: