TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Finance Director
PREPARED BY: Geovanny Calvopina, Financial Analyst
SUBJECT: Treasurer’s Report - Quarter 1 of Fiscal Year 2023/24
title
title
end
RECOMMENDATION
recommendation
Receive the Fiscal Year 2023/24 Treasurer’s Reports for Quarter 1 (July - September 2023).
body
PRIOR ACTION/VOTE
On September 5, 2023, the City Council received the Treasurer’s Report for Quarter 4 of Fiscal Year 2022/23.
CITY COUNCIL GOAL
Maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency.
BACKGROUND
Pursuant to Government Code Section 53646(b) and the City of Murrieta (City) Investment Policy, the Finance Department renders a quarterly investment report to the City Council concerning the investment portfolio’s earnings and performance results. The City contracts with Chandler Asset Management to manage the City’s investment portfolio and to advise on all investment-related matters. The purpose of this report is to present the investment earnings for the period July 1, 2023, through September 30, 2023 (Quarter 1).
Total Portfolio Composition
The portfolio comprises available cash balances from over 100 separate funds. The balances are tracked in the City’s financial records individually but combined for the purpose of investing cash to maximize investment returns. The City’s investment manager invests funds not needed in the near future into securities with maturities of less than five years. The City also utilizes the Local Agency Investment Fund (LAIF), an investment pool operated by the State of California and used by most cities in California to manage the City’s short-term cash flow requirements. Wells Fargo’s “Cash Sweep Program” is the City’s third investment tool, and it allows the City to earn a return on uninvested cash balances in our General Checking Account by automatically "sweeping" cash balances into a sweep investment vehicle until such balances are otherwise needed to satisfy obligations arising in the account. The Cash Sweep Program exclusively targets high-quality, short-term, U.S. dollar-denominated money market instruments that consist of U.S. Government obligations and repurchase agreements collateralized by U.S. Government obligations. This complies with our Investment Policy and California Government Code
Section 53607.
Investment Portfolio Performance
As of September 30, 2023, the City’s total market value (including accrued interest) of operating funds and liquidity investments totaled $140,116,536.46. The book value, or what the City actually paid for the investments, totaled $143,265,948.82. The fair market value of the City’s portfolio, less accrued interest, totaled $139,495,287.49. The value of fixed-income securities may fluctuate with changes in interest rates. As interest rates go up, the market value of the securities may go down, and the reverse is true; when interest rates go down, the market value of the securities may go up. The difference between the book and fair market value is considered an unrealized gain or loss. The unrealized loss for this reporting period is ($3,770,661.33). It is important to note that a loss or gain is realized when an investment is redeemed or sold before its maturity date. City’s investments are retained until the maturity date. Nonetheless, the City may elect to sell an investment before its maturity and record a capital gain or loss to manage the portfolio's quality, liquidity or yield in response to market conditions or City’s risk preferences. The portfolio’s total market value (including accrued interest) increased by $20,866,479 from the previous quarter’s end, as the City transferred $20 million from the short-term investment account to increase interest-earning potential. Moreover, the rising interest rate environment has continued to support higher investment income from the higher reinvestment rate for bonds maturing in the portfolio.
As of September 30, 2023, the yield to maturity on the portfolio increased to 2.86% from 2.08% on June 30, 2023, due to a combination of the $20 million new money contribution and the proceeds from maturing securities being reinvested at higher interest rates. During the quarter, the inversion of the 2- to 10-year points on the yield curve flattened as longer-dated US Treasury yields increased due to the market expectation of “higher for longer” yields. The 2-year US Treasury Note yield increased from 4.90% to 5.05%, while the 5-year Treasury increased from 4.16% to 4.61% over the reporting period. Recent economic data continues to suggest positive but below-trend growth this year. Labor markets remain solid, and the U.S. consumer has demonstrated resiliency. Inflationary trends are subsiding, but core levels remain well above the Federal Reserve’s (Fed) target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, market participants believe the economy will gradually soften, and the Fed will remain data-dependent as they tread cautiously going forward. Since the Fed began its “quantitative tightening” activity by reducing the US Treasury and Agency Mortgage-Backed Securities on its balance sheet in June 2022, the Fed’s balance sheet reduction program has reduced securities held outright by more than $1 trillion. The Fed Funds target rate ended the fiscal quarter in the range of 5.25-5.50% after the Fed raised rates by 25 basis points in July. The September Summary of Economic Projections has the median Fed Funds rate projected to end the calendar year at 5.6%. The portfolio’s market value benefited from the sector diversification and remains stable due to the high-quality assets contained within the portfolio.
Portfolio Duration
The investment portfolio had an average duration of 1.65 years as of September 30, 2023. The portfolio duration remains within an acceptable range. The City continues to implement a disciplined, conservative approach to its portfolio in this time of financial market volatility.
Asset Allocation
The investment portfolio is allocated in compliance with California Government Code 53601. The sector allocation of the portfolio on September 30, 2023, was 18.60% in US Government Agency bonds, 20.60% in high-grade Corporate Bonds, 42.90% in U.S. Treasury bonds, 5.20% in Asset-Backed Securities (ABS), 1.90% in Supranational, 5.70% in Collateralized Mortgage Obligation, 1.40% in Commercial Paper, 1.40% in Negotiable CD and 2.20% Money Market Fund. A Supranational is a financial institution owned by member countries to promote international development. A Collateralized Mortgage Obligation is a mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment.
The following pie chart summarizes the asset allocation by sector.
Maturity Distribution
As of September 30, 2023, approximately 37.3% of the portfolio matured in less than one year, 26.9% matured from 1-2 years, 21% from 2-3 years, 10.70% from 3-4 years, and 4.10% from 4-5 years. The City’s portfolio maintains liquid funds through bank deposits, money market funds, and local government investment pools to satisfy its near-term liquidity needs.
(The chart above may not sum to 100% due to rounding.)
LAIF Balance
Funds deposited with LAIF act as the City’s savings account, which allows for the regular investment of short-term cash balances. LAIF complements our investment program by maximizing the earnings on liquid balances not needed for immediate disbursement. It also allows the City’s investment manager to focus on maximizing the return on its longer-term investments.
The balance in LAIF, as of September 30, 2023, was $26,618,414.67. The annual yield on the LAIF portfolio was 3.59%, representing an increase of 2.08% from the 1.51% earned at the end of September 2022.
Wells Fargo Cash Sweep Program
The Cash Sweep Program may include fixed, floating, or variable interest rates. The security selections for the Cash Sweep Program are based on several factors, including credit quality, yield, and maturity while considering the fund’s overall level of liquidity and weighted average maturity. The securities purchased have been determined to present minimal credit risk. For the quarter ending September 30, 2023, the total earnings from the Cash Sweep Program were $1,161,670.87 and had an Average Daily Yield of 5.197%.
The graph below compares the investment yields for the Investment Portfolio, LAIF, and the Cash Sweep Program for the period ending September 30, 2022, to September 30, 2023.
This report presents only the results of the operating portfolio managed by Chandler Asset Management, LAIF, and the Cash Sweep Program. The City’s and developer bond portfolios are available for review in the Finance Department or may be sent to the City Council upon request.
In compliance with the California Government Code Section 53646, the Treasurer of the City of Murrieta hereby certifies that sufficient investment liquidity and anticipated revenues are available to meet the City’s budgeted expenditure requirements for the subsequent six months, October through April 2024. All investments in the City’s portfolio comply with state law and City’s adopted Investment Policy.
FISCAL IMPACT
There is no fiscal impact associated with the recommended action.
ATTACHMENTS
1. City of Murrieta Investment Report September 30, 2023
2. LAIF Regular Monthly Statement September 30, 2023
3. Wells Fargo Sweep Account Statements for July, August, and September 2023
4. Portfolio Composition Chart as of September 30, 2023