.jpg)
Consent
Item No. 9.
| MEETING DATE: 10/16/2023 |
|
| TO: | HONORABLE MAYOR AND COUNCILMEMBERS |
| FROM: | JIM SADRO, CITY MANAGER By: Mel Shannon, Director of Finance |
| SUBJECT: | RECEIVE AND FILE THE TREASURER'S INVESTMENT REPORT FOR QUARTER ENDING JUNE 30, 2023 |
RECOMMENDATION:
That the City Council receive and file the Treasurer's Investment Report for the quarter ending June 30, 2023
DISCUSSION:
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, 2023, these funds had a market value of $92,274,692, with $49,092,168 (53.20 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 2023 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.
Compliance: All investment transactions have been executed in conformance with the City's 2023 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
The following table summarizes the performance of the City’s general government investment portfolio as of June 30, 2023:
| Values as of 6/30/23 | |||
| Portfolio Funds | Amount of Funds | Effective Yield | Average Weighted Maturity |
| Internally Managed Funds (shorter-term) | $48,971,726 | 2.47% | 1 day |
| Externally Managed Funds (shorter-term) | $43,302,967 | 4.90% | 2.7 years |
| Total Investment Portfolio | $92,274,692 | 3.61% | 1.3 years |
| Comparative Total 03/31/23 | $87,421,542 | 3.24% | 1.3 years |
| Comparative Total 12/31/22 | $83,714,418 | 3.02% | 1.3 years |
| Comparative Total 09/30/22 | $77,501,368 | 2.91% | 1.4 years |
| Comparative Total 06/30/22 | $86,002,153 | 1.89% | 1.4 years |
| State of California L.A.I.F. | For comparative purpose only | 3.17% | 260 days |
Investment Environment (provided by Chandler Asset Management):
Recent economic data continues to suggest positive but below trend growth this year. Although the pace of job growth is moderating, labor markets remain solid, and the U.S. consumer has demonstrated resiliency. Inflationary trends are subsiding, but core levels remain well above the Fed’s target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, we believe the economy will gradually soften and the Fed will remain data dependent as they tread cautiously going forward.
As anticipated at the July meeting, the Federal Open Market Committee voted unanimously to raise the Federal Funds rate by 0.25% to a target range of 5.25 - 5.50%, the highest level in over 20 years. Fed Chair Powell maintained that the FOMC will remain data dependent going forward, and that they do not anticipate a recession, leaving the option open for the possibility of additional rate hikes in the future if needed.
The yield curve remained inverted in July. The 2-year Treasury yield decreased 2 basis points to 4.88%, the 5-year Treasury yield rose 2 basis points to 4.18%, and the 10-year Treasury yield increased 12 basis points to 3.96%. The inversion between the 2-year Treasury yield and 10-year Treasury yield narrowed to -92 basis points at July month-end versus -106 basis points at June month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -24 basis points. The inversion between 3-month and 10-year Treasuries narrowed to -145 basis points in July from -146 basis points in June. The shape of the yield curve indicates that the probability of recession persists.
The Treasury yield curve remains inverted, with the inversion between the 2-year Treasury yield and the 10-year Treasury yield increasing to -106 basis points at the end of June, compared to -76 basis points at the end of May. One year ago, the spread between the 2-year Treasury and the 10-year Treasury yield was +5 basis points. Additionally, the inversion between the 3-month and 10-year Treasuries tightened to -145 basis points in June from -174 in May. The shape of the yield curve continues to indicate a high probability of recession, although the timing remains uncertain, especially given the recent economic data, particularly the strong labor market.
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.
The City also has investments in irrevocable Section 115 Trusts for the purpose of prefunding 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.
Recent economic data continues to suggest positive but below trend growth this year. Although the pace of job growth is moderating, labor markets remain solid, and the U.S. consumer has demonstrated resiliency. Inflationary trends are subsiding, but core levels remain well above the Fed’s target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, we believe the economy will gradually soften and the Fed will remain data dependent as they tread cautiously going forward.
As anticipated at the July meeting, the Federal Open Market Committee voted unanimously to raise the Federal Funds rate by 0.25% to a target range of 5.25 - 5.50%, the highest level in over 20 years. Fed Chair Powell maintained that the FOMC will remain data dependent going forward, and that they do not anticipate a recession, leaving the option open for the possibility of additional rate hikes in the future if needed.
The yield curve remained inverted in July. The 2-year Treasury yield decreased 2 basis points to 4.88%, the 5-year Treasury yield rose 2 basis points to 4.18%, and the 10-year Treasury yield increased 12 basis points to 3.96%. The inversion between the 2-year Treasury yield and 10-year Treasury yield narrowed to -92 basis points at July month-end versus -106 basis points at June month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -24 basis points. The inversion between 3-month and 10-year Treasuries narrowed to -145 basis points in July from -146 basis points in June. The shape of the yield curve indicates that the probability of recession persists.
The Treasury yield curve remains inverted, with the inversion between the 2-year Treasury yield and the 10-year Treasury yield increasing to -106 basis points at the end of June, compared to -76 basis points at the end of May. One year ago, the spread between the 2-year Treasury and the 10-year Treasury yield was +5 basis points. Additionally, the inversion between the 3-month and 10-year Treasuries tightened to -145 basis points in June from -174 in May. The shape of the yield curve continues to indicate a high probability of recession, although the timing remains uncertain, especially given the recent economic data, particularly the strong labor market.
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 prefunding 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.
· 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 PARS Post-Employment Benefits Trust (pension obligations) as of June 30, 2023:
| PARS Post Employment Benefits Trust | Amount of Funds | Investment Return |
| Values as of 06/30/23 | $4,933,887 | 2.53% |
| Values as of 03/31/23 | $4,812,237 | 3.79% |
| Comparative 12/31/22 | $4,636,474 | 4.65% |
| Comparative 09/30/22 | $4,430,506 | -8.13% |
| Comparative 06/30/22 | $3,407,485 | -9.24% |
| Inception to date: Annualized rate of return 5/1/19-6/30/23 = 4.62% | ||
The following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of June 30, 2023:
| CalPERS Retiree Medical Trust - (OPEB) | Amount of Funds | Investment Return |
| Values as of 06/30/23 | $4,996,997 | 2.65% |
| Comparative 03/31/23 | $4,442,691 | 4.69% |
| Comparative 12/31/22 | $4,243,664 | 6.83% |
| Comparative 09/30/22 | $3,972,296 | -7.32% |
| Comparative 06/30/22 | $4,285,829 | -12.99% |
| Inception to date: Annualized net rate of return 6/8/16-6/30/23 = 5.44% | ||
It should be noted that trust fund gains or losses are not “realized” until such time that investments are sold and funds are withdrawn for eligible uses, which has not happened since the inception of either trust.
FISCAL IMPACT/SOURCE OF FUNDING:
There is no fiscal impact related to receiving and filing this report.
GENERAL PLAN RELEVANCE/CITY COUNCIL GOALS & OBJECTIVES:
The Treasurer’s Investment Report for Quarter Ending June 30, 2023, is consistent with the following areas of the General Plan:
D 9 Fiscal Strength-Stability
City Council Goals & Objectives:
Goal 2 - Management of Public Revenues and Fiscal Assets
Objective A: Closely monitor revenues, expenditures, and fiscal trends to ensure the City's long term stability
D 9 Fiscal Strength-Stability
City Council Goals & Objectives:
Goal 2 - Management of Public Revenues and Fiscal Assets
Objective A: Closely monitor revenues, expenditures, and fiscal trends to ensure the City's long term stability