That the City Council receive and file the Treasurer's Investment Report for the quarter ending September 30, 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 June 30, 2022, these funds had a market value of $77,501,368, with $37,432,978 (48.30 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 September 30, 2022:
 

Investment Environment (provided by Chandler Asset Management):

Market volatility has intensified as financial conditions tighten and global central banks pursue monetary policies to combat persistently high inflation and maintain financial market stability. Labor markets and consumer balance sheets remain strong; however, inflation is weighing heavily on consumer sentiment and beginning to impact discretionary spending. Corporate earnings have generally performed better than expected, but warnings are growing along with wider credit spreads. While evidence of slower economic conditions has begun to mount, we expect the Federal Reserve to continue to raise rates until a sustainable improvement in inflationary conditions has been achieved. Over the near-term, we expect financial market volatility to remain intensified and conditions tighter with persistent inflation, geopolitical risk, and the Fed's hawkish monetary policy.

At the September meeting, the Federal Open Market Committee (FOMC) delivered the third 75-basis point increase to the Fed Funds Rate, increasing the range from 3.00% to 3.25%. The FOMC acknowledged spending and production are experiencing modest growth, offset by a robust labor market and elevated inflation metrics. We expect the Fed to continue to increase the federal funds rate in the near term until inflationary pressures weaken.

In September, yields rose significantly across the curve. The 2-year Treasury yield increased 79 basis points to 4.28%, the 5-year Treasury yield rose 74 basis points to 4.09%, and the 10-year Treasury yield gained 64 basis points to 3.83%. The spread between the 2-year Treasury yield and 10-year Treasury yield became more inverted at -45 basis points at September month-end versus -30 basis points at August month-end. The spread was a positive 121 basis points one year ago. The spread between 3-month and 10-year treasuries widened to 56 basis points in September compared to just 27 basis points in August. The shape of the curve does not necessarily indicate an imminent recession but bears watching as a better predictor of recession over the medium-term.

US Treasury yields rose sharply in September. On a year-to-date basis, the 2-year Treasury yield was up 355 basis points, the 5-year Treasury yield rose 283 basis points, and the 10-year Treasury yield gained 232 basis points. The spread between the 2-year Treasury yield and 10-year Treasury yield inverted to -45 basis points versus +78 basis points at year-end. The average historical spread (since 2003) is about 130 basis points. The spread between 3-month and 10-year treasuries was 56 basis points in September compared to about 148 basis points at the start of the year.

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 City maintains oversight of investment management and control over the risk tolerance level of the portfolios through the investments it authorizes.
· The deposited funds and interest earnings can be accessed by the City at any time in order to help fund annual OPEB or pension payments, which will help partially offset impacts to the annual General Fund operating budget (rate stabilization).
· Assets held in the funds allow for greater investment flexibility and risk diversification compared to the City’s general government portfolio investments or, potentially, what CalPERS is authorized to invest pension funds in.

The following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of September 30, 2022:

                 

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of September 30, 2022:

It should be noted that trust fund gains or losses are not "realized" until such time that investments are sold and funds withdrawn for eligible uses, which has not happened since the inception of either trust.

This recommendation achieves the following element of the La Habra General Plan:

D 9 Fiscal Strength-Stability

In addition, this recommendation achieves the following element of the FY2022-23 City of La Habra Goals and Objectives:

Goal 2, Objective A - Closely monitor revenues, expenditures, and fiscal trends to ensure the City's long-term fiscal stability.