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Consent
Item No. 9.
| MEETING DATE: 03/20/2023 |
|
| 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 DECEMBER 31, 2022
|
RECOMMENDATION:
That the City Council receive and file the Treasurer's Investment Report for the quarter ending December 31, 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 December 31, 2022, these funds had a market value of $83,714,418, with $42,455,999 (50.72 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
The following table summarizes the performance of the City’s general government investment portfolio as of December 31, 2022:
| Values as of 12/31/22 | |||
| Portfolio Funds | Amount of Funds | Effective Yield | Average Weighted Maturity |
| Internally Managed Funds (shorter-term) | $40,948,644 | 1.46% | 1 day |
| Externally Managed Funds (shorter-term) | $42,765,774 | 4.51% | 2.6 years |
| Total Investment Portfolio | $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 |
| 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 |
| State of California L.A.I.F. | For comparative purpose only | 2.17% | 287 days |
Investment Environment (provided by Chandler Asset Management):
Market volatility has intensified as global central banks pursue monetary policies to combat persistently high inflation. Although the pace of job growth is moderating, the strength of the labor market has sustained economic growth. Inflation metrics are trending downward but remain significantly higher than the Fed’s target. While evidence of slower economic conditions has begun to mount, we expect the Federal Reserve to continue to raise rates to battle inflation, albeit at a less aggressive pace. Over the near-term, we expect financial market volatility to remain intensified with persistent inflation, geopolitical risk, and the Fed's hawkish monetary policy.
As expected at the December 14th meeting, the Federal Open Market Committee (FOMC) raised the fed funds target rate by 50 basis points to a range of 4.25 – 4.50%, in a downshift from four consecutive 75 basis point hikes. The decision was unanimous, and there was no change to the November statement. The sentiment was hawkish, indicating that “ongoing increases” in the fed funds rate are likely appropriate and citing continued labor market imbalances. FOMC members forecasted a higher fed funds rate, slower GDP growth, higher inflation, and higher unemployment in 2023 than in the September projections. We believe the FOMC will continue to implement tighter monetary policy at a slower pace and hold rates at restrictive levels for some time until inflationary pressures subside and remain in the Fed’s target range.
In December, yields rose, and the curve became less inverted. The 2-year Treasury yield increased 12 basis points to 4.43%, the 5-year Treasury yield rose 27 basis points to 4.01%, and the 10-year Treasury yield climbed 27 basis points to 3.88%. The inversion between the 2-year Treasury yield and 10-year Treasury yield narrowed to -55 basis points at December month-end versus -71 basis points at November month-end. The spread was a positive 78 basis points one year ago. The inversion between 3-month and 10-year treasuries narrowed to -50 basis points in December from -74 basis points in November. The year 2022 saw a dramatic shift in the Federal Reserve’s policy from highly accommodative to aggressive tightening, resulting in significantly higher rates and an inverted yield curve. The shape of the yield curve indicates that the probability of recession is increasing.
Yields on Treasury securities increased in December and remain significantly higher from a year ago. The 2-year Treasury yield was 369 basis points higher, and the 10-Year Treasury yield was about 236 basis points higher, year-over-year. The inversion between 3-month and 10-year Treasury yields narrowed to -50 basis points in December from -74 basis points in November. The average historical spread between the 2-year Treasury and 10-Year Treasury yield (since 2003) is about +125 basis points. Inverted yield curves are typically harbingers of slower economic growth or an increased probability of a recession in the future.
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.
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 December 31, 2022:
| CalPERS Retiree Medical Trust - (OPEB) | Amount of Funds | Investment Return |
| Values as of 12/31/22 | $4,687,468 | 6.83% |
| Comparative 09/30/22 | $3,972,296 | -7.32% |
| Comparative 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% |
| *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, 2022:
| PARS Post Employment Benefits Trust | Amount of Funds | Investment Return |
| Values as of 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% |
| Comparative 03/31/22 | $3,754,274 | -4.60% |
| Comparative 12/31/21 | $3,149,250 | 2.13% |
| *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 recommendation achieves the following element of the La Habra General Plan:
In addition, this recommendation achieves the following element of the Fiscal Year 2022-2023 City of La Habra Goals & Objectives:
D.9 Fiscal Strength-Stability
In addition, this recommendation achieves the following element of the Fiscal Year 2022-2023 City of La Habra Goals & Objectives:
Goal 2, Objective A: Closely monitor revenues, expenditures, and fiscal trends to ensure the City's long-term fiscal stability.