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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED DECEMBER 31, 2024
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RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended December 31, 2024.
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Summary
Pursuant to California Government Code section 53646 and the City’s Investment Policy (Policy No. 17.01.030), the City Treasurer (Chief Financial Officer) is required to provide a quarterly report and certification to the City Council, City Manager, and City Auditor.
Starting July 1, 2022, the City moved to having two portfolio managers managing separate portions of the City’s Reserve portfolio. Both Quarterly Investment Reports and Certification for the quarter ending December 31, 2024, are provided as required (Attachments A and B). This report is presented as required and will bring the City current on its reporting requirements.
The City’s consolidated investment portfolio was approximately $998 million as of December 31, 2024, which represents an increase of $23 million from the prior market value reported on September 30, 2024. This consolidated investment portfolio includes the City’s liquidity position, short-term investments, and the reserve portfolios (as shown on page 15 of Attachment A). The total market value-based earnings for the most recent quarter are shown on page 21 for PFM Asset Management (PFMAM) & page 81 for Chandler Asset Management (Chandler) of Attachment A. Additionally, the City’s liquidity holding in both California Asset Management Program (CAMP) and Local Agency Investment Fund (LAIF), with combined holdings of $94.4 million, with an interest earning of $1.1 million for the quarter ended December 31, 2024.
DISCUSSION
Background
To comply with state law and City policy, the City is required to present a quarterly certification and investment reports detailing the City’s investment portfolio to the City Council, City Manager, and City Auditor. The City also posts monthly transaction reports to the City’s website. The Quarterly Investment Report shall include a complete description of the portfolio, the types of investments, the issuers, maturity dates, par value, and dollar amounts invested in all securities, investments, or programs that are under the management of contracted parties, including lending programs. The certification must provide assurances that investments were made consistent with the City’s Investment Policy and that the City will meet its expenditure obligations for the next six months. The authority of the Council to invest, reinvest funds, sell, or exchange securities is delegated to the City’s Chief Financial Officer, who also serves as City Treasurer (Resolution #2022-06-21-1601). Pursuant to the Investment Policy, the City Treasurer may and does delegate some fiduciary responsibility to outside investment management firms. An investment manager’s fiduciary responsibility is a legal requirement related to registration with the Securities and Exchange Commission under the Investment Advisor Act of 1940.
Due to the specialized services and expertise required to assist the City in the varied investment options available, the City contracts with two experienced investment managers, PFMAM and Chandler.
Present Situation
The attached report (Attachment A) details the activities of the quarter ended December 31, 2024, and includes detailed information on the holdings of the City’s portfolio on that date, as aggregated in the first page of Attachment A, followed by portfolio reports from both investment managers. Incorporated by reference is a certification (Attachment B) that the assets comply with the requirements of State law and City policy and that there is sufficient liquidity to cover the subsequent six months of budgeted activities.
The attached quarterly investment report has been published on the City of Stockton website along with monthly reports.
Portfolio Balances and Performance
The fourth calendar quarter of 2024 was characterized by an increase in yields and volatility as investors digested the potential impact of the new administration’s policy proposals. Areas of focus include taxes, tariffs, immigration, and deregulation, which the market generally expects could result in more growth, larger budget deficits and higher inflation. U.S. inflation readings remained ‘sticky’ during the quarter and did not show progress in moving towards the Fed’s 2% target. The U.S. labor market continued to show strength with 511,000 jobs added in the quarter compared to 477,000 in the prior quarter. Additionally, the unemployment rate ended the quarter at 4.1%, which is 0.4% higher than the calendar year low of 3.7%, but still near historic lows. The Fed cut the overnight rate by 25 basis points (bps) (0.25%) at both its November and December meetings to bring the new target range to 4.25% - 4.50%. Both fiscal and monetary expectations steepened the Treasury curve, with the yield on the 2-, 5-, and 10-year Treasuries ending the quarter at 4.24%, 4.38%, and 4.57%. This represents increases of 60, 82, and 79 basis points (bps), respectively. The 3-month Treasury, heavily influenced by the Fed, moved 30 bps lower, ending the quarter at 4.31%. As a result of higher yields, U.S. Treasury indexes generated negative total returns for the quarter. The ICE BofA 2-, 5-, and 10-year U.S. Treasury indices returned -0.20%, -2.72%, and -5.22% for the quarter, while the shorter-duration ICE BofA 3-month U.S. Treasury index returned 1.16%.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $998 million as of December 31, 2024. The Reserve portion represents the long-term assets managed by PFMAM and Chandler, and the Liquid portion represents funds invested in several short-term investment vehicles including State of California Local Agency Investment Fund, California Asset Management Program, and Dreyfus Treasury Money Market, to maintain adequate liquidity and optimize returns.
The performance of the reserve portion of the portfolio is managed against a benchmark. The PFMAM portfolio benchmark is made up of 80% of the ICE Bank of America (BofA) 1-5 Year AAA-A U.S. Corporate and Government Index and 20% the ICE BofA 5-10 Year U.S. Treasury Index. The Chandler portfolio benchmark is the ICE BofA U.S. Issuers 1-5 Year AAA-A U.S. Corporate/Government Index. The benchmarks generally reflect each portfolio’s strategy and composition. City staff works closely with both PFMAM and Chandler to monitor the status of the City’s investment portfolios and their returns. For the quarter, the total return performance of the portfolios was negative, as unrealized losses as a result of higher interest rates were greater than realized earnings. These returns are detailed on page 23 for PFMAM and page 95 for Chandler in Attachment A. The quarterly return valuation includes funds from all activities, restricted and unrestricted, and includes changes in fair market value (unrealized gains/losses).
The City’s investment portfolio complies with California Government Code section 53601. It is invested solely in fixed-income securities (no stock holdings) that, while earning certain rates of interest, gain in market value when interest rates fall and lose market value when interest rates rise.
Looking ahead, the Fed’s updated “dot plot” implied only 50 bps (0.50%) of rate cuts in 2025, down from previous projections indicating a full percentage point of rate cuts in 2025. This revision, plus some pointed commentary from Fed officials, has resulted in the market generally expecting the Fed to pause rate cuts for some time.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter Ended December 31, 2024
Attachment B - Certification of Quarterly Investment Report