That the City Council receive and file the Treasurer's Investment Report for the quarter ending September 30, 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 September 30, 2024, these funds had a market value of $86,837,134, with $40,089,446 (46.17 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.
 
The following table summarizes the performance of the City’s general government investment portfolio as of September 30, 2024:

Recent economic data suggests positive but slower growth this year fueled by consumer spending. While the consumer has been resilient, declining savings rates, 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. The labor market is showing signs of cooling, reflecting an improved balance between supply and demand for workers. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, we believe the economy will gradually soften and the Fed will continue to lower rates at a measured pace through this year with the ability to move more aggressively should the employment data warrant.

The Federal Open Market Committee (FOMC) delivered the first rate cut of the easing cycle with a 50 basis point cut at the September meeting. Although a reduction in the Fed Funds Rate was widely anticipated, the magnitude was somewhat of a surprise, as market participants were split between whether the FOMC would cut by 25 basis points or 50 basis points. Chair Jerome Powell reiterated previous statements acknowledging that monetary policy has shifted into a more balanced approach addressing price stability and full employment in tandem. The Fed released the quarterly Summary of Economic Projections (SEP) which now forecasts a substantially lower median Fed Funds Rate expectation among Fed Governors in 2025 due to lower inflation expectations and a higher projected unemployment rate. We believe the Fed will continue to lower rates at a measured pace through this year with the ability to move more aggressively should the employment data warrant.

The US Treasury yield curve steepened in September following the 50 basis points rate cut by the FOMC mid-month. The 2-year Treasury yield fell 28 basis points to 3.64%, the 5-year Treasury dropped 15 basis points to 3.56%, and the 10-year Treasury yield declined 12 basis points to 3.78%. The 2-year and 10-year Treasury yield points on the curve began to normalize to +14 basis points at September month-end versus -2 basis points at August month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -47 basis points. The inversion between 3-month and 10-year Treasuries ended the month of September at -85 basis points.

Treasury yields declined across the yield curve in September after the first interest rate reduction by the Federal Reserve since the onset of the Covid-19 pandemic in March of 2020. The rate cut led to lower yields, along with decreased bond market volatility through September month-end. While the 50 basis point rate reduction was larger than many market participants had anticipated, Chair Jerome Powell substantiated the magnitude by citing economic data indicating inflation trending lower and a higher projected unemployment rate. The Fed Chair acknowledged continued strength in the labor market, however stated that the FOMC believed easing monetary policy prior to material labor market weakening was warranted.

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 Trust 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 September 30, 2024:

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of September 30, 2024:

The amount of funds in the tables above represents quarter-end balances which may include contributions, earnings, expenses, and distributions made 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.
 

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

The Treasurer’s Investment Report for the Quarter Ending September 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