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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED DECEMBER 31, 2022
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended December 31, 2022.
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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, 2022, 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 $839.6 million as of December 31, 2022; which represents an increase from the prior market value reported at September 30, 2022 due to a net inflow of liquidity from the first installment of Property tax increment from the County. This consolidated investment portfolio includes the City’s liquidity position, short-term investments, and the reserve portfolios (as shown on page 12, Attachment A). The total market value-based earnings for the most recent quarter are shown on pages 20-21 of the PFM report and page 22 of the Chandler Asset Management report in Attachment A. Additionally, the City’s liquidity holding in both CAMP and LAIF, together holding $95.6 million, has interest earnings of $677,170 for the quarter ended December 31, 2022.
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 type 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, PFM Asset Management LLC (PFM), and Chandler Asset Management Inc (Chandler).
Present Situation
The attached report (Attachment A) details the activities of the quarter ended December 31, 2022, 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 online along with monthly reports: <http://www.stocktongov.com/government/departments/adminServices/finInv.html>
Portfolio Balances and Performance
During the quarter, the U.S. economy was characterized by high inflation, a strong labor market, depressed consumer confidence, and growing potential for an economic recession. To combat sustained high inflation, the Federal Reserve continued to tighten monetary policy, bringing the Fed Funds target rate to a new range of 4.25% to 4.50% at their December Federal Open Market Committee meeting. The one-half of one percent rate hike at that meeting came after three consecutive three-quarter of one percent rate hikes that followed an earlier one-half increase early in 2022, and interest rates have risen across the yield curve after three quarters of surging yields, U.S. Treasuries traded within in a range in the quarter, albeit a somewhat wide one. Short-term maturities (less than one year) continued to increase in lockstep with adjustments to Fed policy, reflecting the two rate hikes totaling 1.25% in the quarter. Yields on longer-term issues were mixed, with yields on 3-7 year Treasuries lower, while those 10 years and longer rose modestly. As a result, fixed income indexes posted positive total returns in the fourth quarter, following three prior negative quarters.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $839.6 million as of December 31, 2022. The Reserve portion represents the long-term assets managed by PFM 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 second quarter of the fiscal year were positive due to decreased volatility in interest rates. These returns are detailed on pages 20-21 of the PFM report and page 22 of the Chandler Asset Management report 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 performance of the reserve portion of the portfolio, managed by both PFM and Chandler through December 31, 2022, is benchmarked against the Bank of America Merrill Lynch index of 1-5 year government and U.S. issued corporate securities rated A- or better. The benchmark generally reflects the portfolio’s strategy and composition. City staff works closely with both PFM and Chandler to monitor the status of the City’s investment portfolio and its returns.
The City’s investment portfolio complies with California Government Code 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. The portfolio’s earnings on a market value basis were positive for the quarter.
The Fed’s December Summary of Economic Projections forecasts a 2023 year-end fed funds rate of 5.1%, while market expectations based on fed funds futures show a peak rate just below 5% by mid-year, with the target rate falling back to about 4.5% by year end. In any case, both estimates point to additional rate hikes in store for early 2023 followed by a period of elevated rates. New investments will continue to be evaluated and purchased for the City’s portfolio to balance the capture of higher yields against the risk of potentially higher rates to come and the possibility of any recession that may be caused by the Fed’s tightening cycle, and the lower rates that such a recession might bring.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter Ended December 31, 2022
Attachment B - Certification of Quarterly Investment Report