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, 2021, these funds had a market value of $77,790,191, with $44,126,082 (56.72 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 2021 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 June 30, 2021:
 

Investment Environment (provided by Chandler Asset Management)
We believe the outlook for US economic growth in the second half of the year is strong, fueled by ongoing fiscal support, accommodative monetary policy, widespread vaccinations, and the continued reopening of the economy.  Although some of these factors have begun to moderate, we expect they will continue to provide tailwinds for the economy through year-end. Vaccination rates in the US have slowed, and infection rates have recently increased but remain well below their peak.  Thus far, US-approved vaccines have shown to be effective against COVID-19 as well as more aggressive variants. As such, we remain optimistic about the continued reopening of the US economy.  Meanwhile, although some pandemic-related fiscal relief is starting to phase out, President Biden and a group of bipartisan senators have agreed to an overall framework for an infrastructure plan.  Though the details haven’t been finalized or approved by Congress, the negotiations signal that more fiscal stimulus is likely on the horizon. 

Meanwhile, the Federal Reserve continues to signal that it will look past the near-term uptick in inflation to facilitate continued improvement in the labor market.  While we believe financial market volatility is likely to increase in the second half of the year, we anticipate that gross domestic product (GDP) will continue to grow at an above-trend pace.

The Federal Open Market Committee (FOMC) kept monetary policy unchanged in June.  The Fed's target rate remains in the range of 0.0% to 0.25%, and the Fed continues to purchase $80 billion of Treasuries per month, and $40 billion of agency mortgage-backed securities per month.  The Fed has started to discuss the idea of reducing its asset purchases at some point, but that decision remains uncertain.
FOMC members’ updated economic projections also suggest that the Fed may start to raise interest rates in 2023, versus the previous estimate of 2024.  Overall, monetary policy remains highly accommodative for now, but the Fed seems to be inching toward a path of policy normalization.  We believe the Fed will proceed with caution, particularly given the high number of people who remain unemployed and continued uncertainty about the pandemic and impact of COVID-19 variants.  While about 55% of people in the U.S. have received at least one dose of a COVID-19 vaccine, less than a quarter of the world population has received at least one dose.  Should the U.S. economy remain on its current trajectory, and global vaccination rates improve meaningfully, we believe there is a high probability that the Fed will begin tapering its asset purchases during the first half of next year.

The yield curve flattened in June.  We believe multiple factors influenced Treasury rates in June, including market technical dollar strengthening, uneven global vaccination rates, and a more modest forecast for U.S. infrastructure spending than initially expected.  Nevertheless, we believe longer-term rates have room to move higher this year and we believe the Treasury yield curve is poised to steepen in the second half of the year.

The treasury yield curve is steeper on a year-over-year basis.  The 3-month T-bill yield was about nine basis points lower, while the 2-year Treasury yield was about ten basis points higher, and the 10-Year Treasury yield was about 81 basis points higher, year-over-year, as of June month-end.  The Fed has signaled plans to keep the front end of the Treasury yield curve anchored near zero until 2023. We believe longer-term rates still have room to move higher this year.

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.  Benefits of the Section 115 Trust include the following:

· 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 June 30, 2021:
 

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Trust (pension obligations) as of June 30, 2021: