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Consent
Item No. 8.
| MEETING DATE: 08/19/2024 |
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| 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 JUNE 30, 2024
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RECOMMENDATION:
That the City Council receive and file the Treasurer's Investment Report for the quarter ending June 30, 2024.
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 June 30, 2024, these funds had a market value of $94,210,307, with $49,241,258 (52.27 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 one month 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 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 one month 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 June 30, 2024:
| Values as of 6/30/24 | |||
| Portfolio Funds | Amount of Funds | Effective Annual Yield |
Average Weighted Maturity |
| Internally Managed Funds (shorter-term) | $28,447,072 | 3.80% | 1 day |
| Externally Managed Funds (shorter-term) | $65,763,235 | 4.77% | 2.9 years |
| Total Investment Portfolio | $94,210,307 | 4.48% | 2.0 years |
| Comparative Total 03/31/24 | $87,063,143 | 3.65% | 1.5 years |
| Comparative Total 12/31/23 | $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 |
| State of California L.A.I.F. | For comparative purposes only | 4.48% | 217 days |
Investment Environment (provided by Chandler Asset Management):
Recent economic data suggests positive but slower growth this year fueled by consumer spending. While the consumer has been resilient, growing credit card debt, higher delinquencies, and a moderating labor market pose potential headwinds to future economic growth. 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 June meeting, the Federal Open Market Committee (FOMC) voted unanimously to leave the federal funds rate unchanged at a target range of 5.25-5.50%, emphasizing the need to see sustained evidence of easing inflation before considering any rate cuts. The FOMC's latest projections now suggest only one interest rate cut in 2024, with four more cuts expected in 2025 and a slightly higher long-term neutral rate. Additionally, the Fed continues to reduce its holdings of U.S. Treasury securities and agency mortgage-backed securities as per its predefined schedule of $25 billion and $35 billion per month.
The US Treasury yield curve shifted lower in June as economic data moderated. The 2-year Treasury yield fell 12 basis points to 4.76%, the 5-year Treasury dropped 13 basis points to 4.38%, and the 10-year Treasury yield declined 10 basis points to 4.40%. The inversion between the 2-year Treasury yield and 10-year Treasury yield remained relatively stable at -36 basis points at June month-end versus -37 basis points at May month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -106 basis points. The inversion between 3-month and 10-year Treasuries widened to -96 basis points in June from -91 basis points in May.
The US Treasury yield curve shifted lower in June as economic data moderated. The 2-year Treasury yield fell 12 basis points to 4.76%, the 5-year Treasury dropped 13 basis points to 4.38%, and the 10-year Treasury yield declined 10 basis points to 4.40%. The inversion between the 2-year Treasury yield and 10-year Treasury yield remained relatively stable at -36 basis points at June month-end versus -37 basis points at May month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -106 basis points. The inversion between 3-month and 10-year Treasuries widened to -96 basis points in June from -91 basis points in May.
After reaching their highest levels in April, U.S. Treasury yields have declined over the past two months, leading to generally positive returns for bonds. Bond markets are highly focused on economic data releases to gain better guidance on the future path of interest rates. U.S. economic data has become increasingly crucial as markets seek certainty about the timing of the first rate cuts. A strong employment report early in the month caused the bond market rally to stall and yields to rise, followed by an inflation point that fell below market expectations, driving yields lower again. Despite this, the Fed has pushed back its expectation for rate cuts this year in their updated Summary of Economic Projections. Investors are closely monitoring economic indicators for potential favorable monetary policy adjustments. The inversion between the 2-year and 10-year Treasury yields was -36 basis points, while the average 20-year historical spread is +103 basis points. The yield curve inversion is likely to persist until the Federal Reserve begins to cut rates, with September 2024 being a likely point for the first cut given recent inflationary trends and a weaker economic outlook.
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 prefunding 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 a 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.
| CalPERS Retiree Medical Trust - (OPEB) | Amount of Funds | Quarterly Investment Return |
| Values as of 06/30/24 | $5,930,945 | 0.74% |
| Comparative 03/31/24 | $5,503,411 | 3.58% |
| Comparative 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% |
| Inception to date: Annualized net rate of return 6/8/16-6/30/24 = 6.14% | ||
The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of June 30, 2024:
| PARS Post Employment Benefits Trust | Amount of Funds | Quarterly Investment Return |
| Values as of 06/30/24 | $11,093,860 | 0.95% |
| Comparative 03/31/24 | $11,003,357 | 5.62% |
| Comparative 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% |
| Inception to date: Annualized rate of return 5/1/19-6/30/24 = 5.52% | ||
The amount of funds information in the tables above represents quarter-end balances, which may include any contributions, earnings, expenses, distributions during the quarter. 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 June 30, 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 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