That the City Council receive and file the Treasurer’s Investment Report for the quarter ending March 31, 2024.

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, 2024, these funds had a market value of $87,063,143, with $43,246,260 (49.67 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 2024 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, 2024:

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 expected at the March meeting, the Federal Open Market Committee voted unanimously to leave the Federal Funds rate unchanged at a target range of 5.25 - 5.50%. The March Summary of Economic Projections (SEP) showed stronger real GDP growth outlook and higher core inflation projections for 2024 on resilient labor market and consumer data. The median projection for the Federal Funds rate by year-end remained the same at 4.625%, implying three 0.25% cuts.  We continue to believe the FOMC will loosen monetary policy in mid-2024 as inflation and economic growth continue to moderate.

The US Treasury yield curve stabilized in March as the Federal Open Market Committee (FOMC) left the Federal Funds rate unchanged. The 2-year Treasury yield remained steady at 4.62%, while the 5-year Treasury fell by 4 basis points to 4.21%, and the 10-year Treasury yield dropped by 5 basis points to 4.20%. By the end of March, the inversion between the 2-year Treasury yield and the 10-year Treasury yield widened to -42 basis points, compared to -37 basis points at the end of February. The movement of the yield curve suggests a potential flattening trend, indicating market expectations for slower economic growth. Upcoming inflation data are likely to be the primary drivers of the direction of interest rates in the near term and will play a key role in the Federal Reserve’s timing of potential rate cuts.

The US Treasury yield curve held within a narrow range in March.  The 2-year Treasury yield was unchanged at 4.62%, the 5-year Treasury fell 4 basis points to 4.21%, and the 10-year Treasury yield dropped 5 basis points to 4.20%. The inversion between the 2-year Treasury yield and 10-year Treasury yield widened to -42 basis points at March month-end versus -37 basis points at February month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -56 basis points. The inversion between 3-month and 10-year Treasuries widened to -117 basis points in March from -113 basis points in February.

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.

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 following table summarizes the performance of the City’s CalPERS Retiree Medical Trust (OPEB) as of March 31, 2024:

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of March 31, 2024:

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 yet occured since the inception of either trust.

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

The Treasurer’s Investment Report for Quarter Ending March 31, 2024, 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 fiscal stability