That the City Council receive and file the Treasurer's Investment Report for the quarter ending March 31, 2023.

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 March 31, 2023, these funds had a market value of $87,421,542, with $45,364,767 (51.89 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.

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 March 31, 2023:

Investment Environment (provided by Chandler Asset Management):

Economic trends have been decelerating along with tighter financial conditions and restrictive monetary policy. Recent data 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. Market participants and the Federal Reserve are maintaining very divergent views regarding the future trajectory of monetary policy. Given the cumulative effects of tighter monetary policy and stress in the banking sector, we believe the Federal Reserve is likely near a pause in their rate-hiking campaign. If moderate growth continues, we believe the Fed will likely maintain the Federal Funds rate in restrictive territory until inflationary pressures subside.

At the May meeting, the Federal Open Market Committee (FOMC) voted unanimously to raise the target federal funds rate by 0.25% to a range of 5.00 - 5.25%. Notably, the committee omitted a line from its March statement referencing that “some additional policy firming may be appropriate.” Instead, the FOMC will determine “the extent to which additional policy firming may be appropriate,” implying a potential pause that is data dependent. Fed Chair Powell reiterated the committee’s focus on bringing down inflation to their 2% target and indicated that their outlook did not support rate cuts, contrary to the market consensus. The statement also emphasized that the U.S. banking system is “sound and resilient” and acknowledged the tightening of financial conditions. Considering the totality of economic data, the Chandler team continues to believe the Fed is likely near a pause in their rate-hiking cycle and will maintain higher rates for some time.

In April, short-term Treasury yields increased while the yields in the 2-10 year segment of the yield curve decreased. The 2-year Treasury yield dropped 2 basis points to 4.01%, the 5-year Treasury yield declined 9 basis points to 3.49%, and the 10-year Treasury yield fell 5 basis points to 3.43%. The inversion between the 2-year and 10-year Treasury yields widened to -58 basis points at the end of April, compared to -56 basis points at the end of March. Given the current shape and the duration of the yield curve inversion, there is a growing probability of a recession.

The yield curve maintained its inversion in April, and bond yields remain significantly above levels seen a year ago. The 2-year Treasury yield was 129 basis points higher, while the 10-year Treasury yield was approximately 49 basis points higher, year-over-year. The inversion of the yield curve expanded in April, with the spread between the 2-year and 10-year Treasury yields increasing to -58 basis points at the end of April, from -56 basis points at the end of March. The yield spread between the 2-year and 10-year Treasury yields continues to sit substantially below the average spread of approximately +122 basis points since 2003. Given its current shape, the yield curve, a vital economic indicator, signals an increased probability of a recession.

 

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.

The following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of March 31, 2023:

There is no fiscal impact related to receiving and filing this report.

The Treasurer's Investment Report For Quarter Ending March 31, 2023, is consistent with the following areas of the General Plan:
D 9 Fiscal Strength-Stability

It is also consistent with the following City Council Goals & Objectives:
Goal 2, Objective A: Closely monitor revenues, expenditures and fiscal trends to ensure the City's long-term fiscal stability.