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Consent
Item No. 15.
MEETING DATE: 09/19/2022
 
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 THE QUARTER ENDING JUNE 30, 2022

RECOMMENDATION:


That the City Council receive and file the Treasurer's Investment Report for the quarter ending June 30, 2022.

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, 2022, these funds had a market value of $86,002,153, with $45,331,932 (52.71 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 (5) 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 (3) years.

Investment Performance
The City’s portfolio is generally invested in the following 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 June 30, 2022:
 
    Values as of 06/30/22
Portfolio Funds Amount of Funds Effective Yield Average Weighted Maturity
Internally Managed Funds (shorter-term) $42,860,333 0.82%
1 day
Externally Managed Funds (longer-term) $43,141,820 2.96% 2.7 years
Total Investment Portfolio $86,002,153 1.89% 1.4 years
Comparative Total 06/30/22 $68,063,752 0.48% 1.4 years
Comparative Total 03/31/22 $73,590,787 1.39% 1.3 years
Comparative Total 12/31/21 $68,292,002 0.64% 1.4 years
Comparative Total 09/30/21 $68,063,752 0.48% 1.4 years
State of California L.A.I.F. For comparative purpose only 0.86% 311 days


Investment Environment (provided by Chandler Asset Management):
Tightening financial conditions and higher interest rates continue to adversely impact the trajectory of the US and global economy.  Inflation is weighing heavily on consumer sentiment and beginning to impact discretionary spending.  Labor markets remain strong, but wage gains are not keeping up with inflation.  While we expect the Fed to continue to tighten monetary policy, evidence of slower economic conditions has begun to mount.  Over the near-term, we expect financial market volatility to continue and conditions to remain tighter with persistent inflation, geopolitical risk, supply chain bottlenecks, and the Fed's shift to a more hawkish monetary policy.

At the July meeting, the Federal Open Market Committee (FOMC) delivered another 75-basis point increase to the Fed Funds Rate.  The FOMC acknowledged spending and production were trending lower, offset by a strong labor market and elevated inflation metrics.  Although declining to provide “forward guidance,” Fed Chair Powell acknowledged current policy settings are close to neutral but emphasized policy would need to move to a more restrictive stance to counterbalance the elevated inflation trends.  We anticipate additional rate hikes as the Fed remains focused on lowering inflation.

In July, yields fell and the curve inverted.  The 2-year Treasury yield declined 7 basis points to 2.89%, the 5-year Treasury yield plunged 36 basis points to 2.68%, and the 10-year Treasury yield dropped 37 basis points to 2.65%. The spread between the 2-year Treasury yield and 10-year Treasury yield inverted to -24 basis points at July month-end versus 6 basis points at June month-end, and 104 basis points one year ago. The spread between 3-month and 10-year treasuries compressed to just 29 basis points. 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.

At the end of July, the 2-year Treasury yield was 270 basis points higher, and the 10-Year Treasury yield was about 143 basis points higher, year-over-year.  The spread between the 2-year Treasury yield and 10-year Treasury yield inverted to -24 basis points at July month-end versus 6 basis points at June month-end.  The average historical spread (since 2003) is about 130 basis points. The spread between 3-month and 10-year treasuries compressed to just 29 basis points.  The shape of the yield curve does not indicate an imminent recession but bears watching as a better predictor of recession over the medium-term.

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 include:

· 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.

The following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of June 30, 2022:
CalPERS Retiree Medical Trust - (OPEB) Amount of Funds Investment Return
Values as of 06/30/22 $4,285,829 -12.99%
Comparative 03/31/22 $4,415,360 -4.70%
Comparative 12/31/21 $4,633,090 4.85%
Comparative 09/30/21 $4,418,865 -0.43%
Comparative 06/30/21 $4,437,934 6.57%
*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 June 30, 2022:
PARS Post Employment Benefits Trust Amount of Funds Investment Return
Values as of 06/30/22 $3,407,485 -9.24%
Comparative 03/31/22 $3,754,274 -4.60%
Comparative 12/31/21 $3,149,250 2.13%
Comparative 09/30/21 $3,083,678 -0.70%
Comparative 06/30/21 $3,105,457 4.37%
*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/CITY COUNCIL GOALS & OBJECTIVES:

This item achieves the following element of the City of La Habra's General Plan:

ED 9.1  Balanced Fiscal Practices

This item achieves the following element of the FY2022-23 City of La Habra Goals and Objectives:

Goal 2  Management of Public Revenues and Fiscal Assets - Objective A
 

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