That the City Council receive and file the Treasurer’s Investment Report for the quarter ending December 31, 2025.

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, 2025, these funds had a market value of $85,865,316, with $39,102,868 (45.54 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 2025 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 December 31, 2025:

Economic conditions evolved notably during the fourth quarter of 2025 as markets transitioned from anticipating policy easing to adjusting to the early stages of a Federal Reserve normalization cycle. From October through December, economic data generally pointed to moderating growth, with continued cooling in the labor market and softer interest rate-sensitive sectors such as housing and business investment. At the same time, consumer spending remained relatively resilient, supported by solid household balance sheets and easing inflation pressures. Core inflation continued its gradual descent toward the Federal Reserve’s target, although progress remained uneven and closely monitored by policymakers.

Following the initial policy rate cut earlier in the fall, the Federal Reserve delivered a cautious and data-dependent message throughout the quarter. The Federal Open Market Committee emphasized that further rate adjustments would depend on continued evidence of disinflation and a sustainable balance in the labor market. By year-end, the federal funds target range had been reduced incrementally, reinforcing the Fed’s intent to support economic stability while avoiding a premature or aggressive easing cycle. Chair Jerome Powell reiterated that policy was moving toward a more neutral stance, but not yet on a preset path.

U.S. Treasury yields declined across much of the curve during the fourth quarter, with the most pronounced moves occurring in short and intermediate-term maturities as markets priced in additional policy easing in 2026. The 2-year Treasury yield fell meaningfully over the quarter, reflecting expectations that the federal funds rate would continue to trend lower. Intermediate yields, including the 5-year Treasury, also declined, while longer dated yields moved more modestly as longer term inflation expectations and fiscal considerations limited the extent of the rally at the long end.

As a result, the Treasury yield curve continued to steepen modestly during the fourth quarter. The spread between the 2-year and 10-year Treasury notes widened further, marking a clear shift away from the deeply inverted conditions that characterized much of the prior tightening cycle. This steepening was driven primarily by declining short-term yields rather than rising long-term rates, consistent with an environment of easing monetary policy amid contained inflation expectations.

Overall, market conditions in the fourth quarter reflected a transition phase for monetary policy and fixed income markets. Investors focused on positioning portfolios for a gradual normalization of interest rates, favoring high quality duration as short-term yields adjusted lower. While uncertainty around inflation, fiscal policy, and global growth remained, the bond market closed 2025 with improved clarity around the direction of Federal Reserve policy and a yield curve that more closely resembled historical expansionary conditions.

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 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 December 31, 2025:

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of December 31, 2025:

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

General Plan Relevance:
The Treasurer’s Investment Report for Quarter Ending December 31, 2025, 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