City Council


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  10.       
Meeting Date: 12/21/2020  
Submitted By: Mary Ann Sy, Accounting Supervisor

RECOMMENDATION:

That the City Council receive and file the Treasurer's Investment Report for the quarter ending September 30, 2020.
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 September 30, 2020, these funds had a market value of $57,149,032, with $23,482,484 (41.09 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.

All investment transactions have been executed in conformance with the City's 2020 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 does not exceed three years.

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 September 30, 2020:
    Values as of 9/30/20
Portfolio Funds Amount of Funds Effective
Yield
Average Weighted
Maturity
Internally Managed Funds (shorter-term) $22,363,531 0.75% 1 day
Externally Managed Funds (longer-term) $34,785,501 0.28% 2.8 years
Total Investment Portfolio $57,149,032 0.46% 1.7 years
Comparative Total 06/30/20 $64,817,490 0.97% 1.5 years
Comparative Total 03/31/20 $59,458,384 1.14% 1.5 years
Comparative Total 12/31/19 $54,716,757 1.79% 1.6 years
Comparative Total 09/30/19 $54,001,427 1.86% 1.6 years
State of California L.A.I.F. For comparative
purposes only
0.69% 169 days


Investment Environment Extract (provided by Chandler Asset Management):
As noted by Chandler Asset Management, the City's investment advisor, U.S. equities experienced a moderate selloff in September (with the S&P 500 index down 3.9% month-over-month) and investment grade corporate credit spreads widened modestly (based on the ICE BofA US Corporate Index). In our view, the recent repricing of risk assets has been rational and consistent with the evolving economic and political backdrop.  The economy has improved significantly from the depths of the pandemic crisis earlier this year, but the recovery is losing steam.  We continue to believe the outlook for the economy hinges largely on the course of the pandemic, the timing and amount of additional fiscal relief, and the timeline for a vaccine.  While we remain optimistic about the progress toward a vaccine, we are seeing a resurgence of the virus in some locations and negotiations in Congress over a Phase 4 fiscal relief package remain at a stalemate.  While we have a high degree of confidence that another round of fiscal stimulus will ultimately be passed, the timeline has been pushed out and the chances of getting something done before the November election have dimmed.  This may not bode well for the fourth quarter and we anticipate near-term economic data may soften.  We believe financial markets are potentially poised for increased volatility through year-end.

The Federal Open Market Committee (FOMC) kept monetary policy unchanged in September with the fed funds target rate in a range of 0.0% to 0.25%.  Monetary policy remains highly accommodative and policymakers remain dovish.  The Fed’s balance sheet has grown to over $7.0 trillion from about $4.2 trillion prior to the pandemic and the Fed has indicated it will continue to use its balance sheet to support smooth financial market functioning, as needed.  In the September policy statement, the FOMC noted that inflation continues to run below its 2.0% target, as weaker demand and lower oil prices are holding down consumer prices.  Over the longer-term, the FOMC will likely allow inflation to run above 2.0% for some period of time before it looks to tighten policy, which implies the fed funds target rate will remain anchored near zero for years.  The Fed’s summary of economic projections signals that the target fed funds rate will remain unchanged through at least 2023.

The Treasury yield curve was little changed in September on a month-over-month basis, following moderate curve steepening in August.  In the first week of October, the yield curve has steepened further, driven by an increase in longer-dated Treasury yields.

At September month-end, Treasury yields were much lower on a year-over-year basis.  The 3-month T-bill yield was down 172 basis points, the 2-year Treasury yield was down 150 basis points, and the 10-Year Treasury yield was down 98 basis points, year-over-year.  Yields declined precipitously in March 2020, with the Fed cutting rates by a total of 150 basis points and a flight to safe-haven assets driving down yields across the curve.  The Fed has signaled plans to keep the front end of the Treasury yield curve anchored near zero for at least the next few years.  In the past few months, the Treasury yield curve has steepened, which we believe has been driven by a flood of new issuance as well as rising inflation expectations.

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 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 benefits of the 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, 2020:
 
CalPERS Retiree Medical
Trust  - (OPEB)
Amount of Funds Investment Return
Values as of 09/30/20 $3,330,927 5.48%
Values as of 06/30/20 $3,157,810 14.22%
Values as of 03/31/20 $2,402,744 -15.16%
Values as of 12/31/19 $2,832,128 5.62%
Values as of 09/30/19 $2,681,546 1.24%
*Plan's Inception Date: 4/20/16    

The following table summarizes the performance of the City’s PARS Post-Employment Benefits Section 115 Trust (pension obligations) as of September 30, 2020:
 
PARS Post Employment Benefits 115 Trust Amount of Funds Investment Return
Values as of 09/30/20 $1,782,829 3.98%
Values as of 06/30/20 $1,717,170 10.94%
Values as of 03/31/20 $1,550,076 -10.70%
Values as of 12/31/19 $538,899 4.30%
Values as of 09/30/19 $517,439 1.25%
*Plan's Inception Date: 10/12/18    
FISCAL IMPACT/SOURCE OF FUNDING:
There is no fiscal impact related to receiving and filing this report.
GENERAL PLAN RELEVANCE:
D 9 Fiscal Strength-Stability
Attachments
1. Investment Portolio Summary, Investment & Trust Portfolio Summary, and Investment Portfolio Chart
2. Reports from Chandler Asset Management, CalPERS and PARS.


    

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