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Consent
Item No. 10.
| MEETING DATE: 02/05/2024 |
|
| 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 DECEMBER 31, 2023
|
RECOMMENDATION:
That the City Council receive and file the Treasurer’s Investment Report for the quarter ending December 31, 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 December 31, 2023, these funds had a market value of $87,150,330, with $43,297,898 (49.68 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 December 31, 2023:
| Values as of 12/31/23 | |||
| Portfolio Funds | Amount of Funds | Effective Yield | Average Weighted Maturity |
| Internally Managed Funds (shorter-term) | $42,336,275 | 3.41% | 1 day |
| Externally Managed Funds (shorter-term) | $44,814,055 | 4.81% | 2.8 years |
| Total Investment Portfolio | $87,150,330 | 4.13% | 1.5 years |
| Comparative Total 09/30/23 | $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 |
| State of California L.A.I.F. | For comparative purposes only | 3.93% | 230 days |
Investment Environment (provided by Chandler Asset Management):
Recent economic data has shown above trend growth fueled by a rise in consumer spending and a continuing healthy US job market. Inflationary trends are subsiding, but core levels remain 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 loosen monetary policy in 2024.
As anticipated at the December meeting, the Federal Open Market Committee voted unanimously to leave the Federal Funds rate unchanged at a target range of 5.25 - 5.50%. Fed Chair Powell signaled that the federal funds rate is likely at or near its peak. The new Summary of Economic Projections reflected Core PCE inflation reaching the target 2% level in 2026 without a significant increase in unemployment. We believe the FOMC will loosen monetary policy in mid-2024 as inflation and economic growth continue to moderate.
Treasury yields declined across the yield curve in December as market participants priced in higher probabilities of Federal Reserve rate cuts in 2024. After reaching their peak in 2023, interest rates followed a more accommodative stance by the Federal Reserve later in the year, resulting in yield declines across the board and signaling a less restrictive monetary policy for 2024. For the month of December, the 2-year Treasury yield dropped 43 basis points to 4.25%, the 5-year Treasury yield fell 42 basis points to 3.85%, and the 10-year Treasury yield decreased by 45 basis points to 3.88%. Recent market activity emphasizes the significant influence of the Federal Reserve on interest rates. While many anticipate multiple rate cuts in 2024, some investors may have grown overly optimistic about the timing and extent of these cuts. Market participants will closely scrutinize Federal Reserve Chair Jerome Powell and the Federal Open Market Committee's policy announcement on January 31st, 2024, to ascertain the future path of monetary policy.
The Treasury yield curve became slightly more inverted during the month of December, with the spread between the 2-year and 10-year Treasury yields widening to -37 basis points by the end of December, up from -35 basis points at the close of November. For reference, the average historical spread since 2003 has been approximately +130 basis points. Furthermore, the inversion between 3-month and 10-year Treasuries deepened to -146 basis points in December, compared to -107 basis points in November. It's worth noting that the inversion of the yield curve is likely to persist until the Federal Reserve begins to cut rates, a probability that has increased in recent months.
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 Trusts are:
Recent economic data has shown above trend growth fueled by a rise in consumer spending and a continuing healthy US job market. Inflationary trends are subsiding, but core levels remain 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 loosen monetary policy in 2024.
As anticipated at the December meeting, the Federal Open Market Committee voted unanimously to leave the Federal Funds rate unchanged at a target range of 5.25 - 5.50%. Fed Chair Powell signaled that the federal funds rate is likely at or near its peak. The new Summary of Economic Projections reflected Core PCE inflation reaching the target 2% level in 2026 without a significant increase in unemployment. We believe the FOMC will loosen monetary policy in mid-2024 as inflation and economic growth continue to moderate.
Treasury yields declined across the yield curve in December as market participants priced in higher probabilities of Federal Reserve rate cuts in 2024. After reaching their peak in 2023, interest rates followed a more accommodative stance by the Federal Reserve later in the year, resulting in yield declines across the board and signaling a less restrictive monetary policy for 2024. For the month of December, the 2-year Treasury yield dropped 43 basis points to 4.25%, the 5-year Treasury yield fell 42 basis points to 3.85%, and the 10-year Treasury yield decreased by 45 basis points to 3.88%. Recent market activity emphasizes the significant influence of the Federal Reserve on interest rates. While many anticipate multiple rate cuts in 2024, some investors may have grown overly optimistic about the timing and extent of these cuts. Market participants will closely scrutinize Federal Reserve Chair Jerome Powell and the Federal Open Market Committee's policy announcement on January 31st, 2024, to ascertain the future path of monetary policy.
The Treasury yield curve became slightly more inverted during the month of December, with the spread between the 2-year and 10-year Treasury yields widening to -37 basis points by the end of December, up from -35 basis points at the close of November. For reference, the average historical spread since 2003 has been approximately +130 basis points. Furthermore, the inversion between 3-month and 10-year Treasuries deepened to -146 basis points in December, compared to -107 basis points in November. It's worth noting that the inversion of the yield curve is likely to persist until the Federal Reserve begins to cut rates, a probability that has increased in recent months.
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 Trusts 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, 2023:
| CalPERS Retiree Medical Trust - (OPEB) | Amount of Funds | Investment Return |
| Values as of 12/31/23 | $5,313,399 | 10.66% |
| Comparative 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% |
| Annualized net rate of return from 6/8/16 to 12/31/23: 6.20% | ||
The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of December 31, 2023:
| PARS Post Employment Benefits Trust | Amount of Funds | Investment Return |
| Values as of 12/31/23 | $6,630,624 | 8.83% |
| Comparative 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% |
| Annualized net rate of return from 5/1/19 to 12/31/23: 5.21% | ||
It should be noted that gains or losses in either trust fund 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 December 31, 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