Item No. 7.
| MEETING DATE: 04/05/2021 |
|
| TO: | HONORABLE MAYOR AND COUNCILMEMBERS |
| FROM: | JIM SADRO, CITY MANAGER By: Mel Shannon, Director of Finance |
| SUBJECT: | RECEIVE AND FILE TREASURER'S INVESTMENT REPORT FOR THE QUARTER ENDING DECEMBER 31, 2020 |
RECOMMENDATION:
That the City Council receive and file the Treasurer's Investment Report for the quarter ending December 31, 2020.
DISCUSSION:
The Finance Department invests City funds in compliance with California Government Code, Section 53600 et seq., and the City’s Investment Policy. As of December 31, 2020, these funds had a market value of $58,730,264, with $25,366,569 (43.19 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.
All investment transactions have been executed in conformance with California Government Code and the City's Investment Policy. 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.
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 California Government Code and the City’s Investment Policy. 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 December 31, 2020:
Investment Environment (provided by Chandler Asset Management)
While we remain optimistic about the longer-term outlook, recent economic data suggests that the economy has lost momentum as virus cases have risen. We believe the near-term will remain challenging as the labor market remains under pressure and many regions have renewed business restrictions due to the virus. However, the passage of the $900 billion and $1.3 trillion COVID-19 fiscal relief bills should help cushion the economy over the next few months, and we believe the incoming Presidential administration will have a keen focus on accelerating vaccine distribution and getting the economy back on track. While the vaccine rollout has gotten off to a slow start, we expect more widespread distribution of vaccines in the second and third quarter of 2021. We also expect the Fed’s highly accommodative monetary policy framework will continue to provide support for the financial markets.
The Federal Open Market Committee (FOMC) kept monetary policy unchanged at their December meeting as expected, with the fed funds target rate in a range of 0.0% to 0.25%. The Fed intends to remain highly accommodative until their goals of maximum employment and higher inflation are achieved. The Fed’s summary of economic projections continues to signal that the target fed funds rate will remain unchanged until at least 2023, as policymakers do not expect inflation to exceed 2.0% during that timeframe. Until the Fed has made substantial progress toward achieving their dual mandate of maximum employment and price stability, they have set a floor for monthly asset purchases of at least $80 billion per month of Treasuries and $40 billion per month of agency mortgage-backed securities. Notably, the Fed's outlook for GDP over the next few years was revised higher and the outlook for unemployment was revised lower compared with their previous forecasts in September, which suggests increased optimism. Nevertheless, the outlook remains uncertain and Fed Chair Powell indicated that the Fed would increase policy accommodation further if progress toward their dual mandate slows.
The Treasury yield curve steepened in December, due at least in part by favorable developments on the vaccine front and anticipation of improving economic activity in 2021. The yield on 2-year Treasuries was down slightly to 0.12% while the yield on 10-year Treasuries was up nearly eight basis point to 0.92%.
Treasury yields declined in 2020, but the curve steepened as short-term rates declined more than long-term rates. The 3-month T-bill yield was down 149 basis points, the 2-year Treasury yield was down 145 basis points, and the 10-Year Treasury yield was down 100 basis points, year-over-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 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 benefits of Section 115 Trust are:
The following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of December 31, 2020:
The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of December 31, 2020:
All investment transactions have been executed in conformance with California Government Code and the City's Investment Policy. 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.
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 California Government Code and the City’s Investment Policy. 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 December 31, 2020:
| Values as of 12/31/20 | |||
| Portfolio Funds | Amount of Funds | Effective Yield | Average Weighted Maturity |
| Internally Managed Funds (shorter-term) | $23,883,143 | 0.59% | 1 day |
| Externally Managed Funds (longer-term) | $34,847,121 | 0.24% | 2.7 years |
| Total Investment Portfolio | $58,730,264 | 0.38% | 1.6 years |
| Comparative Total 09/30/20 | $57,149,032 | 0.46% | 1.7 years |
| Comparative Total 06/30/20 | $64,817,490 | 0.97% | 1.5 years |
| Comparative Total 03/31/20 | $59,458,384 | 1.14% | 1.5 years |
| Comparative Total 12/31/19 | $54,716,757 | 1.79% | 1.6 years |
| State of California L.A.I.F. | For comparative purpose only | 0.54% | 165 days |
Investment Environment (provided by Chandler Asset Management)
While we remain optimistic about the longer-term outlook, recent economic data suggests that the economy has lost momentum as virus cases have risen. We believe the near-term will remain challenging as the labor market remains under pressure and many regions have renewed business restrictions due to the virus. However, the passage of the $900 billion and $1.3 trillion COVID-19 fiscal relief bills should help cushion the economy over the next few months, and we believe the incoming Presidential administration will have a keen focus on accelerating vaccine distribution and getting the economy back on track. While the vaccine rollout has gotten off to a slow start, we expect more widespread distribution of vaccines in the second and third quarter of 2021. We also expect the Fed’s highly accommodative monetary policy framework will continue to provide support for the financial markets.
The Federal Open Market Committee (FOMC) kept monetary policy unchanged at their December meeting as expected, with the fed funds target rate in a range of 0.0% to 0.25%. The Fed intends to remain highly accommodative until their goals of maximum employment and higher inflation are achieved. The Fed’s summary of economic projections continues to signal that the target fed funds rate will remain unchanged until at least 2023, as policymakers do not expect inflation to exceed 2.0% during that timeframe. Until the Fed has made substantial progress toward achieving their dual mandate of maximum employment and price stability, they have set a floor for monthly asset purchases of at least $80 billion per month of Treasuries and $40 billion per month of agency mortgage-backed securities. Notably, the Fed's outlook for GDP over the next few years was revised higher and the outlook for unemployment was revised lower compared with their previous forecasts in September, which suggests increased optimism. Nevertheless, the outlook remains uncertain and Fed Chair Powell indicated that the Fed would increase policy accommodation further if progress toward their dual mandate slows.
The Treasury yield curve steepened in December, due at least in part by favorable developments on the vaccine front and anticipation of improving economic activity in 2021. The yield on 2-year Treasuries was down slightly to 0.12% while the yield on 10-year Treasuries was up nearly eight basis point to 0.92%.
Treasury yields declined in 2020, but the curve steepened as short-term rates declined more than long-term rates. The 3-month T-bill yield was down 149 basis points, the 2-year Treasury yield was down 145 basis points, and the 10-Year Treasury yield was down 100 basis points, year-over-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 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 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.
- 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 December 31, 2020:
| CalPERS Retiree Medical Trust - (OPEB) | Amount of Funds | Investment Return |
| Values as of 12/31/20 | $3,697,046 | 10.99% |
| Comparative 09/30/20 | $3,330,927 | 5.48% |
| Comparative 06/30/20 | $3,157,810 | 14.22% |
| Comparative 03/31/20 | $2,402,744 | -15.16% |
| Comparative 12/31/19 | $2,832,128 | 5.62% |
| *Plan's Inception Date: 4/20/16 |
The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of December 31, 2020:
| PARS Post Employment Benefits Section 115 Trust | Amount of Funds | Investment Return |
| Values as of 12/31/20 | $1,922,869 | 8.01% |
| Comparative 09/30/20 | $1,782,829 | 3.98% |
| Comparative 06/30/20 | $1,717,170 | 10.94% |
| Comparative 03/31/20 | $1,550,076 | -10.70% |
| Comparative 12/31/19 | $538,899 | 4.30% |
| *Plan's Inception Date: 10/12/18 |
FISCAL IMPACT/SOURCE OF FUNDING:
There is no fiscal impact related to receiving and filing this report.
GENERAL PLAN RELEVANCE:
ED 9.1 - 9.3
Attachments
- Investment Portfolio Summary, Investment & Trust Portfolio Summary, and Investment Portfolio Chart
- Reports from Chandler Asset Management, CalPERS and PARS