title
ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED SEPTEMBER 30,2023
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended September 30, 2023.
body
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 September 30, 2023, 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 $844.2 million as of September 30, 2023, which represents a decrease of $79.4 million from the prior market value reported on June 30, 2023, due to net outflows of $42.5 million to CalPERS to prepay the City’s employer portion of the fiscal year 2023-24 required contributions, 2019A Water bond tender payment of $9.9 million, and other water debt service payments. This consolidated investment portfolio includes the City’s liquidity position, short-term investments, and the reserve portfolios (as shown on page 12 of Attachment A). The total market value-based earnings for the most recent quarter are shown on pages 20-21 for PFM Asset Management and page 87 for Chandler Asset Management of Attachment A. Additionally, the City’s liquidity holding in both CAMP and LAIF, with combined holdings of $59.8 million, has interest earnings of $1.3 million for the quarter ended September 30, 2023.
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, PFM Asset Management LLC (PFMAM), and Chandler Asset Management Inc (Chandler).
Present Situation
The attached report (Attachment A) details the activities of the quarter ended September 30, 2023, and includes detailed information on the holdings of the City’s portfolio on that date, as aggregated on page 12 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
After hiking in July, the Federal Reserve left the overnight target rate unchanged at its current range of 5.25% to 5.50% following the September Federal Open Market Committee (FOMC) meeting. While the hike pause was widely expected, the dot plot was a focus, as year-end 2024 and 2025 median expectations indicated a target rate 50 basis points (0.50%) higher than where it was shown in the June dot plot. Additionally, the Fed indicated there may be one more rate hike before the end of 2023. During the quarter, yields approached the highest levels seen in nearly 20 years, setting the tone for an extended period of elevated interest rates. At quarter end the yield curve remained inverted, as shorter maturities offered higher yields than longer maturities, despite the notable increase in the 10-year yield over the quarter. Longer maturities saw larger yield increases than shorter maturities, and, for the quarter, shorter strategies outperformed longer strategies.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $844.2 million as of September 30, 2023. 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 quarter of the fiscal year were positive due to decreased volatility in interest rates. These returns are detailed on pages 20-21 (PFMAM) and page 86 (Chandler Asset Management) of 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 PFMAM and Chandler through September 30, 2023, is benchmarked against 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 benchmark generally reflects the portfolio’s strategy and composition. City staff works closely with both PFMAM 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 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. The portfolio’s earnings on a market value basis were negative for the quarter, as unrealized market value losses due to rising interest rates, particularly on longer maturity securities, were greater than the portfolio’s realized earnings.
Looking ahead, inflation remains stubbornly above the Fed’s target, and we may see one more rate hike this year. Updated Fed economic projections, from the September FOMC meeting point to stronger GDP growth expectations, higher inflation, and slightly lower unemployment for the remainder of 2023 and into 2024. Headwinds to growth still exist, including higher energy prices, elevated geopolitical risks, high inflation, and reduced consumer savings.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter Ended September 30, 2023
Attachment B - Certification of Quarterly Investment Report