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Consent
Item No. 9.
| MEETING DATE: 12/18/2023 |
|
| TO: | HONORABLE MAYOR AND COUNCILMEMBERS |
| FROM: | JIM SADRO, CITY MANAGER By: Mel Shannon, Director of Finance |
| SUBJECT: | TREASURER’S INVESTMENT REPORT FOR THE QUARTER ENDING SEPTEMBER 30, 2023
|
RECOMMENDATION:
That the City Council receive and file the Treasurer’s Investment Report for the quarter ending September 30, 2023.
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 September 30, 2023, these funds had a market value of $83,186,968, with $39,846,789 (47.90 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.
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 September 30, 2023:
| Values as of 9/30/23 | |||
| Portfolio Funds | Amount of Funds | Effective Yield | Average Weighted Maturity |
| Internally Managed Funds (shorter-term) | $39,744,248 | 3.19% | 1 day |
| Externally Managed Funds (shorter-term) | $43,422,720 | 5.16% | 2.6 years |
| Total Investment Portfolio | $83,186,968 | 4.22% | 1.3 years |
| Comparative Total 06/30/23 | $92,274,692 | 3.61% | 1.3 years |
| Comparative Total 03/31/23 | $87,421,542 | 3.24% | 1.3 years |
| Comparative Total 12/31/22 | $83,714,418 | 3.02% | 1.3 years |
| Comparative Total 09/30/22 | $77,501,368 | 2.91% | 1.4 years |
| State of California L.A.I.F. | For comparative purpose only | 3.53% | 256 days |
Investment Environment (provided by Chandler Asset Management):
Recent economic data continues to suggest positive but below trend growth this year. Labor markets remain solid, and the U.S. consumer has demonstrated resiliency. Inflationary trends are subsiding, but core levels remain well above the Fed’s target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, we believe the economy will gradually soften and the Fed will remain data dependent as they tread cautiously going forward.
As anticipated at the September meeting, the Federal Open Market Committee voted unanimously to maintain the target Federal Funds at the range of 5.25 - 5.50%. The Fed’s Summary of Economic Projections (SEP) also revealed expectations of higher economic growth, reduced unemployment, and a gradual easing of inflation compared to earlier forecasts. The Fed is continuing to focus on achieving price stability and bringing inflation down toward their 2% policy objective, while leaving the option open for the possibility of additional rate hikes in the future if needed.
Bond yields rose in September, with the long end of the curve bearing the brunt of the increase. During the month, the 2-year Treasury yield increased by 18 basis points, ending at 5.04%, while the 5-year Treasury yield increased by 36 basis points to 4.61%. Additionally, the 10-year Treasury yield saw a notable uptick of 46 basis points, reaching 4.57%. The yield curve remains inverted but has become less so over the past few months as market participants adjust to the Fed's new narrative of higher for longer. It is worth noting that the yield curve has remained inverted since July 2022, signaling potential economic concerns or uncertainties.
Bond yields rose across the yield curve in September as the Federal Reserve and market participants adopted the narrative of higher for longer related to interest rates. The inversion between the 2-year Treasury yield and 10-year Treasury yield narrowed to -48 basis points at September month-end, from -76 basis points at August month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -45 basis points. The inversion between 3-month and 10-year Treasuries narrowed to -88 basis points in September from -134 basis points in August. The shape of the yield curve indicates that the probability of recession persists.
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 a 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 may 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 September 30, 2023:
| CalPERS Retiree Medical Trust - (OPEB) | Amount of Funds | Investment Return |
| Values as of 09/30/23 | $4,801,473 | -3.91% |
| Comparative 06/30/23 | $4,996,997 | 2.65% |
| Comparative 03/31/23 | $4,442,691 | 4.69% |
| Comparative 12/31/22 | $4,243,664 | 6.83% |
| Comparative 09/30/22 | $3,972,296 | -7.32% |
| Inception to date: Annualized net rate of return 6/8/16-9/30/23 = 4.23% | ||
The following table summarizes the performance of the City’s PARS Post-Employment Benefits Section 115 Trust (pension obligations) as of September 30, 2023:
| PARS Post Employment Benefits Section 115 Trust | Amount of Funds | Investment Return |
| Values as of 09/30/23 | $6,092,503 | -4.82% |
| Comparative 06/30/23 | $4,933,887 | 2.53% |
| Comparative 03/31/23 | $4,812,237 | 3.79% |
| Comparative 12/31/22 | $4,636,474 | 4.65% |
| Comparative 09/30/22 | $4,430,506 | -8.13% |
| Inception to date: Annualized rate of return 5/1/19-9/30/23 = 3.67% | ||
It should be noted that trust fund gains or losses are not “realized” until such time that investments are sold and funds are withdrawn for eligible uses, which has not happened since the inception of either trust.
FISCAL IMPACT/SOURCE OF FUNDING:
There is no fiscal impact related to receiving and filing this report.
GENERAL PLAN RELEVANCE/CITY COUNCIL GOALS & OBJECTIVES:
The Treasurer’s Investment Report for Quarter Ending September 30, 2023, is consistent with the following areas of the General Plan:
D 9 Fiscal Strength-Stability
City Council Goals & Objectives:
Goal 2 - Management of Public Revenues and Fiscal Assets
Objective A: Closely monitor revenues, expenditures, and fiscal trends to ensure the City’s long term stability
D 9 Fiscal Strength-Stability
City Council Goals & Objectives:
Goal 2 - Management of Public Revenues and Fiscal Assets
Objective A: Closely monitor revenues, expenditures, and fiscal trends to ensure the City’s long term stability