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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED SEPTEMBER 30, 2024
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RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended September 30, 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 have two portfolio managers managing separate portions of the City’s Reserve portfolio. Both Quarterly Investment Reports and Certification for the quarter ending September 30, 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 $975 million as of September 30, 2024, which represents a decrease of $58 million from the prior market value reported on June 30, 2024. The decrease was due to net outflows of $49.5 million to CalPERS to prepay the City’s employer portion of the fiscal year 2024-25 required contribution along with Debt Service payments of approximately $18 million. This consolidated investment portfolio includes the City’s liquidity position, short-term investments, and the reserve portfolios (as shown on page 13 of Attachment A). The total market value-based earnings for the most recent quarter are shown on page 19 for PFM Asset Management (PFMAM) & page 82 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 $93.3 million, with an interest earning of $1 million for the quarter ended September 30, 2024.
DISCUSSION
Background
To comply with state law and City policy, the City is required to present 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 No. 2024-06-18-1603). 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 with 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 September 30, 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’s website along with the monthly reports.
Portfolio Balances and Performance
Economic performance in the quarter ended September 30, 2024, continued to support a soft-landing outlook for the U.S. economy, underpinned by historically low unemployment, resilient consumer spending, record household wealth and a supportive Federal Reserve (Fed). Inflation continued to make progress towards the Fed’s 2% target, while the labor market cooled from it formerly overheated state. This prompted the Fed to acknowledge that the risks on both sides of its dual mandate - stable prices and full employment - were now “roughly in balance.” The Fed cut the overnight policy rate by 50 basis points (bps) (0.50%) to a new target range of 4.75% to 5.00% at its September 18 meeting, marking the first rate cut in over four years. U.S. Treasury yields fell throughout the quarter, as the markets prepared for the first rate cut in September, after the Fed noted in July that the risks to jobs and prices have come into better balance. The yield on the 2-, 5-, and 10-year U.S. Treasuries ended the quarter at 3.64%, 3.56%, and 3.78%, respectively. This represented decreases of 111 bps, 82 bps, and 62 bps, respectively. As a result of lower yields, U.S. Treasury indices generated strong total returns for the quarter. The ICE BofA 2-Year and 5-Year U.S. Treasury indices returned 2.85% and 4.41% respectively, while the 10-Year U.S. Treasury index returned 5.73% for the quarter.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $975 million as of September 30, 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 total returns on the consolidated portfolio for the fourth quarter of the fiscal year were positive, as higher income more than offset the negative price effects from modestly higher yields.
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 positive, as the portfolios benefited not only from interest income, but also from positive market value adjustments because of falling interest rates. 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 September “dot plot” implied an additional 50 bps of rate cuts through the balance of 2024 and 100 bps of cuts in 2025. Risks to achieving the Fed’s employment and inflation goals are now “roughly in balance.” However, risks do remain, including elevated geopolitical risks in Ukraine, Israel and China. Additionally, a changing administration in the United States government will present uncertainties as we move into 2025.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Combined Quarterly Investment Report
Attachment B - Certification of Quarterly Investment Report