That the City Council receive and file the Treasurer’s Investment Report for the Quarter Ending December 31, 2021.

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 December 31, 2021, these funds had a market value of $68,292,002, with $35,055,278 (51 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 2021 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 December 31, 2021:

Fed policymakers have recently pivoted toward a more hawkish stance as inflation indices continue to run hot and the labor market appears relatively tight, given their dual mandate of promoting maximum employment and stable prices. Although labor force participation remains lower than it was prior to the pandemic, there are signals the economy may be near full employment within the context of the current health situation. The unemployment rate declined from 6.7% to 3.9% in 2021, a high percentage of workers are voluntarily quitting jobs, the level of job openings relative to those looking for work remains high, and wage growth has been strong. Meanwhile, inflation continues to run well above the Fed’s long-run 2.0% target. The Consumer Price Index excluding food and energy was up 5.5% in December. The Core PCE index, the Fed’s preferred inflation measure, was up 4.7% year-over-year in the latest report. Given the current inflation and employment dynamics, Fed policymakers have begun discussing plans to remove monetary policy accommodation. The Fed is currently tapering its asset purchases and we expect that process will be complete within the next few months. Should aggregate demand remain strong and economic activity remain robust, we believe the first rate hike may be announced in the first half of this year after the taper is complete. However, we do not believe monetary policy is on a pre-set course. We expect the Fed to adjust policy at a gradual pace and believe policymakers will adjust their views as necessary based on incoming economic and financial market data.

We believe US economic growth is likely to moderate this year but remain above the long-run trend rate of growth. The consensus forecast for GDP growth this year is 3.9% versus estimated growth of 5.6% in 2021. Amid the current surge of virus infection rates, we believe global supply chains remain challenged and we see risk to the first quarter US GDP consensus estimate of 3.9%. Nevertheless, we believe aggregate consumer demand remains strong and consumer spending, the largest component of US GDP, should remain solid this year, supported by healthy consumer balance sheets, an improving health situation, and ongoing improvement in the labor market. We expect supply chain bottlenecks will continue to put upward pressure on inflation over the near-term but we believe inflation may be at or near a peak, We believe pricing pressure is likely to abate in the second half of this year amid an improving global health backdrop and less acute global supply chain stress.

In December, the 2-year Treasury yield increased nearly 17 basis points to 0.73%, the 5-year Treasury yield increased ten basis points to 1.26%, and the 10-year Treasury yield increased about seven basis points to 1.51% in the month. We have witnessed a relatively swift move in Treasury rates this month with the 2-year Treasury yield up roughly 19 basis points, and the 10-year Treasury yield up more than 20 basis points, year-to-date.

At the end of December, the 2-year Treasury yield was about 61 basis points higher and the 10-Year Treasury yield was about 60 basis points higher, year-over-year. We believe Treasury yields are likely to increase further this year, across the curve.

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 December 31, 2021:

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of December 31, 2021: