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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED DECEMBER 31, 2023
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended December 31, 2023.
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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, 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 $912.5 million as of December 31, 2023, which represents an increase of $68.3 million from the prior market value reported on September 30, 2023. 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 pages 23-24 of Attachment A and page 89 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 $60.6 million, had interest earnings of $868,010 for the quarter ended December 31, 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 #2023-06-20-1601). 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 December 31, 2023, and includes detailed information on the holdings of the City’s portfolio on that date, as aggregated on page 15 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: https://www.stocktonca.gov/government/budget___financial_reports/debt_and_investments.php#collapse8940b1
Portfolio Balances and Performance
The Federal Reserve (Fed) kept the overnight target rate at its current range of 5.25% to 5.50% at its December 13, 2023 meeting and indicated that the historic 2022-23 hiking cycle had likely come to an end. The Fed also messaged a more dovish policy stance for 2024 as its updated “dot plot” showed three 25 basis points (bps) rate cuts for the year, which was more than previously projected. Yields fell significantly as a result, and the yield on 2-, 5-, and 10-year U.S. Treasuries declined 79 bps (0.79%), 76 bps (0.76%), and 69 bps (0.69%), respectively. As a result of notably lower yields, bond markets posted one of the best quarters over the past several decades.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $912.5 million as of December 31, 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 and California Asset Management Program 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 falling interest rates. These returns are detailed on pages 23-24 (PFMAM) and page 89 (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 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 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 positive for the quarter, as realized earnings were combined with unrealized market value gains, due to falling interest rates.
Looking ahead, with inflation still above the Fed’s 2% target, rates are expected to remain elevated. That said, the Federal Reserve is expected to begin lowering the Fed Funds Target Rate, and at year end the Fed projected three 25 basis point (0.25%) rate cuts in 2024, which would bring the overnight rate to a range of 4.50%-4.75%. Growth in the U.S. economy is expected to slow in 2024, but to remain positive, with U.S. consumers continuing to support growth through spending.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter Ended December 31, 2023
Attachment B - Certification of Quarterly Investment Report