Fiscal Sustainability Ad Hoc Committee - Regular Meeting

Committee member Walker.

Present.

Council member Charles. Committee member Park. Committee member Kim, vice chair Cho.

Present.

And committee chair Atwang.

Thank you.

We do not have quorum. Yes. That's correct. So I do wanna point out on the minutes actually, and I do apologize in advance. I spelled a committee member at Wong's first name wrong.

It should be Matthew instead of Manny. So there's gonna be an amendment and a revised version for the next meeting when we approve the next minutes, basically.

Can you hear me?

It's on. Yeah. It's on. Yeah.

It's on.

Yeah. Just have to get closer to the mic.

I I want to make a welcoming statement to all of you. My name is Matthew Adlong, and I will be chairing today's meeting. I have been the Commissioner here since last year. I'm very pleased to be the Chair today, and I want to welcome all of you here, ladies and gentlemen, all our distinguished staff. We have in our presence Mr. Kinsley Obereka.

He

is our director of administrative services. We also have Tony Smart. She's our direct deputy director of administrative services, and our administrative assistant is Noah Hine. Yeah. Hun, I'm sorry.

So we also want to welcome our consultant, John Gary with Profit Trust and so is Mark Krager with Public Trust. Thank you, all of you. Welcome all the Fullerton citizens online and guests, if any, that we welcome you here to join us in this IAC meeting. As you all experienced some financial turbulence and economic turbulence starting this year, so this year, our economic situation is pretty volatile. Unlike last year, we were very smooth sailing, thanks to the advisors and consultants last year, as well as Allison Chang, our former Finance Director.

They helped us to steer through those good time and landed us in pretty solid lending. This year, we would anticipate something different. There is a pretty volatile market, so we definitely will need the direction and advice from our advisers and our new team on the administrative services so that we can steer through. As most of you are aware that we had even just the last two, three months, we had quite a lot of rough time with the new administration. Under Mr.

Musk, the Department of Office Efficiency DOT has eliminated a number of jobs from different departments, including education, FDA, some of the social services that created quite a bit of unemployment. So our unemployment rate probably will trickle down with more significant unemployment in coming months. So last year, we ended at 4.2, I think, unemployment rate, But I think this is going to be a little bit the unemployment rate will increase a little bit. Stock market also fluctuated quite a bit the last few months, especially after the President after President Trump announced on the Liberation Day of April 2 with quite a lot of worldwide tariffs. Stock market had the impact and had almost free fall for three days and we just got shortly recovered.

Yesterday, the French Chair, Gerald Powell, felt that the economy is not stable enough to determine if any interest how much interest is going to come down. So there was no interest rate cut yesterday. But there may still be some coming up because there is still the wish from the White House that there should be lower interest rate. So there are a lot of these turbulence coming forward. We are not trying to get into politics, but just want to forewarn everyone that the environment is not too favorable.

So from my standpoint is since we are trying to protect the retirement fund and the funds entrusted by us and entrusted to us by the city, I think if we could just manage it conservatively so that we do not lose any, that will be great. With our range, if I remember right, it's usually pretty conservative anyway between about 2.5 to 3.5. So I think if we can stay there, then it will lead us to a safe landing. So with this, I want to thank everyone and I want to make sure that we're with you and anyone online for your input because we would like to be inclusive. We want to get everyone's input to make this a success.

Thank you very much. Okay. Then we move on to any other comments?

Did you want to ask about any public comments at all?

Okay. Are there any members of the public that would like to comment on a matter within the committee's jurisdiction, but that is not listed on the agenda?

We do have one call in user, which I will allow to speak right now.

Call

in user, you're, allowed to speak now.

Hi. Good evening, everyone. Maureen Melton, independent advocate advocate for the disabled, handicapped, little people, and the mobily challenged. I've got a problem. I can't mute my there we go.

But, anyway, my question is that is is there anyone representing? Yeah. I'm gonna have to because it's it's not right that we have static. So I thought I was wondering if there's anyone from the city attorney's office that assist with questions and making sure that everything is gone correctly. I can't see if anyone sitting in the sitting attorney's office are are seat or not.

So that was my main question. And the other one was and the other question was oh oh, what is un unfunded liabilities and what are corporate notes. I thank you so very much, and I better get off until I find out what's wrong with my mute button. Thanks. Bye.

Thank you.

That's all the public comments we have.

Do any of our consultant want to identify and help to address this to define what's the unfunded liability? I think she has two terms that she wants to define. Right?

Good evening, mister chairman. John Grady with Public Trust. I don't know if the city would prefer to answer that the unfunded liability is from the city's perspective, and then we can address the corporate notes if you like or Mr. Okuricka can do that.

I can address the unfunded liability part and you guys can talk about the corporate notes. Sounds good. The as you know, Mr. Chairman, we have two components of the presentation in your packet. I think the first one is the Paris pension.

And the unfunded liability relates to the pension obligation of the city. And the unfunded liability is just, the difference between the, pension assets that's been accumulated over the years to take care of our pensions versus the calculated, excuse me, the calculated, liability amount. That difference is what's, the unfunded liability, which essentially means the liability calculated is bigger than the assets, you know, that's collected so far to take care of those obligations over the years. And that unfunded liability amount fluctuates. It's all market driven.

In some years, as the market recovers, you probably will see a smaller unfunded liability. If the market goes down, that number tends to go up, and it's all determined on an actuarial basis. It's not a one for one kind of calculation. It's all it takes several elements into account. The projected salary increases, the average age of employees, time to retirement, all those kinds of elements come into play in calculating that number.

So that's essentially what it is. Unless there's a follow-up question, that's basically an explanation of that term of funded liability.

Can I add a question Sure? Or a comment? Since my my five years here, I I haven't seen that unfunded liability go down. It's it's increased Mhmm. At least one or two percentage points per year. Right. Right? Correct.

Just about.

Just about. And we don't see that unless there is sufficient or significant investment towards funding those liabilities. Correct? Yes. And currently, we do not have those. Correct?

Well, let me put it this way. Over the past absolutely correct. Over the past in the recent years, that number has been basically increasing. And, as I said, there's a lot of factors that goes into calculating that number. And, the biggest mover of that number is the discount rate that the car pros, the retirement body assumes in in, sort of, discounting that liability, total liability to present value versus also discounting those assets to a present value and taking the difference between the two.

So the smaller the discount rate, the higher that number goes. And, what's happened over the past, I think even over the past ten years, if, my memory serves me right, is that, you know, when for cities like Fullerton or cities that are part of the CalPERS, there's two components of pension contribution. There's what's called a regular contribution and then there's another element of contribution that is specifically designed to go towards reducing that unfunded liability. So it's financed over, say, a twenty year period that cities are supposed to catch up. And Fullerton has been paying that both components for both the miscellaneous and safety plans comfortably over the past years, at least from the reviews I've done for the few weeks that I've been here.

The city has been able to pay those and stay current with all the pension obligation payments. So the numbers there, you're absolutely right. It has been increasing. But I do remember a time in the '90s when cities were also in surplus. So you get some of these things, and I'm not trying to predict or I don't know what's going to happen ten years from now.

But over the years that I've been in the government business, there have been situations where the pension becomes overfunded versus being underfunded as we have had in the past decade, resulting in this unfunded liability.

Is it this past decade because sorry. Is it just this past decade or much longer? Because my understanding or my my limited scope, it is since they passed a law where Orange County where we cannot invest in in in in higher return vehicles that in some sense because in my understanding is this will permanently be underfunded

Mhmm.

In the sense that we will never catch up to inflation with our current returns on and it's it's not like we're not trying. It's just our capabilities and legal limitations in terms of where we can fund. So it in some senses, every city is in in in needs to overfund in order to be equally funded, in order to maintain funding. We may be surviving now, but in the long term, even though there there I mean, you're you're right. There's some ways this is a a game because they're based off act actual act Actuarial.

I can't say that word, but you understand. The the the the those tables. Right?

Yeah.

And those are, you know, those are good numbers based off of huge histories. Mhmm. But still, they're not necessarily equal to what is actually going on the ground, but they are in general, that's the most effective way to to to calculate forward. Right. Right? Correct?

Yes. Correct. But let me just so just for general understanding here. When we talk about unfunded liability, we're not talking about the Citi investment portfolio. That's totally different and and what we can do with the city portfolio. That's why the two consultants here will address that unfunded liability relates to just the retirement fund and the retirement fund for the city is managed by Carl Perce.

Yes.

Okay. We do not manage those funds. Yeah. Basically, we are dependent

Yes.

On California retired you know, public employees retirement system, CalPERS, to manage that. And CalPERS is one of the largest retirement funds in the world. And so basically, of the elements that I mentioned before that goes into the calculation of these numbers, including, the discount rate, which is the biggest lever that moves that number, those are determined by CalPERS. So yes, to some degree, what you said, it may be longer than a decade that these numbers or funding liability numbers has been increasing for cities. And I don't have any projections as to whether it will continue or it will abate in the near future, maybe five years or ten years from now.

But it all depends on the market. All of a sudden, we have a significant growth in the stock market, given that the city is continuing to make the required contributions because CalPERS actually sets the required contributions that the city has to make every year. And as I said, the city have been making that comfortably. But if it continues to increase, there might be a point where it will become a huge strain on the city resources to continue to make. But I don't have any crystal clear projections as to what that would be short term or long term.

But that's basically the situation with the funding liability. But we just need to separate it. It's not anything to do with whether we are earning more in our portfolio or not. That's different. It's just totally within the realm of CalPERS, who are our fund managers with respect to retirement for all of our employees. I don't know if that answers your question or not.

It's sort of, but I think the bottom line in terms of unknowns, what is unknown is in as we are continually becoming less funded, as we become more and more underfunded, at what point does it become onerous for the city where it where the the payment and what is being able to be funded or even raised through interest various means, will it becomes where we must be putting a lot more in? I think that's the question. Yeah. I mean, this is the question that this is good I'm willing to go further in this conversation because I realized, you know, I think for us, that's the elephant in the room. Right.

And I think even though I'm not sure if the lady understood this, but I that is the question. What type of solutions are being prepared for that moment, or are we just waiting? See, for me, waiting seems like we're not doing anything Yeah. Rather than saying, hey, we see this coming. What are the potential solutions?

Right.

And what are the key challenges? And then we need although we we are not a decision making body Right. We can make recommendations to the council, and it's and it it behooves us as a as a committee to continually make those recommendations upwards. Just other council other committee members, comments, or am I just

you want me to, let me ask

you something. No. I I believe you're kinda spot on on on that. I mean, you're right. That is the biggest that is the big elephant in the room, the concern. Really, what does that look like? Right? It it may not be one of those situations that were you're not you're not all of a sudden gonna know when it's hit. It's gonna be a slow potentially a slow degradation of service. Right? But at the same time, we need to be prepared for what those off ramps or what those create off ramps for in order to address those that situation in various levels or at least be able to provide recommendations. Either that they're, you know, with hopes that the council is able to take more corrective action sooner than later.

If I can respond a little bit to that, I think you're spot on in terms of the city taking some proactive actions. And if you look in your package today, part of the component of that presentation, this PARS, P A R S, is all part of that solution. It's part of setting aside some monies to prefund the expected increases in those pension obligations. Granted, right now, I think it's closer to a little over just a tad under $700,000 that's in there, you know. But that's also that's part of the preemptive or proactive measures that the city say, okay, we expect that some of these pension rates will increase and we're going to set aside some monies to be able to draw upon so that it's not a weight on the annual budget.

Maybe more money needs to be put in here because you don't know what it will be. Like you pointed out, it's a big unknown. And and and, so that's, you know, part of the strategy as well.

Yes. But I I thank you for that point. I'm just looking at the numbers. You're talking about 700,000 compared to was it the actual liability of 900

Mhmm.

Million?

Yep. I

just wanted to just it's an effort, but is it a an effort that actually creates enough movement to actually change the tide?

That's to me is that, you know, it goes back to the way the number is calculated. It's an actuarially determined number on an actuarial basis. And if you see on that slide, I think Slide 10 that you have, yes, it does outline the actual liability. And then the unfunded liability, that minus the asset is the unfunded liability. So your funded ratio for the city is about 65.6%.

You want to get that up above 70% or above 75%. And it shows you how much the contribution amount for the city is or was in 2022 and also in 2023. So that what you're looking at in terms of the money that you set aside in the PERS is really the increment, the incremental contribution that you are required to make from year to year. That's really where that amount comes in. You are not looking to put in 900,000,000 I mean $300,000,000 and zap the entire unfunded liability because it's some cities have considered doing that and issued pension obligation bonds to really take that out.

And basically, in the mindset that at least you stabilize your contributions, you know what they are every year and you take out this huge number. But the other concern is you could take out this $300,000,000 today. As I said before, this is a number that is determined by the market and is an actuarial calculation. You could take out $300,000,000 today. At the end of next year, you would also have additional calculated liability. So it's sort of a number that could go up and down.

Yes. Thank you. Thank you. I don't want to belabor the comment, I just want just to make sure that even in for the public, for everyone to know, these are the key issues. And I you're right.

I don't think this will be fixed overnight. And part of me, as I learn, as I grow in financial management, Sometimes debt some debts are good debts, and some debts are if you can you don't wanna offset debt to create another debt to actually end up paying more money on your debts Yeah. Rather than less. So, you know, the other cities putting put a bond measure, well, you're just replacing the debt. The question is, is the interest on the new debt more than the debt on this?

Or maybe it's good if we can get from a double a to a triple a rating or a single a to a double a rating. In that point, that may be worth it or that type of suggestions. But beyond that, you know, just sort of trying to think through some potential solutions. But I I think, nonetheless, even, let's say, our payment of $30,000,000 a year. Right? 700,000, sorry to say, is like when your kid comes to you, say, I have a $100 dead debt. I'll give you 10¢. I'd see I I I did my part rather than saying, no. Yes. You did your part, but really, no.

You gotta dig deeper and actually try to find not necessarily 300,000,000, but at least get up to maybe $4.05, ten, fifteen, 20,000,000 to show at least a good faith measure because at 10¢ and this is not even 10¢. This this is, like, not even good faith. This is sort of, like, more of, like, a token effort rather than actually serious engagement with the issue. Thank thank you. That's in my comment.

Thank you, vice chair. And we'll follow-up, with Ms. Milton's question on corporate note, and, I'll turn it over to Mark in a moment. But just for the benefit, as the committee and staff knows for the public on the call, California Code, of course, directs how public entities can invest. And then the city has an investment policy that very similar to the code, but it falls within the risk parameters of the city. It was just updated just a few months ago, very current. And by design, public funds, operating funds are invested in liquidity investments and fixed income securities, which corporate notes are a type. Mark, would you mind addressing what a corporate note is?

Yes, John. Thanks for the introduction. Yes, so the California Government Code Section 53,601 establishes a range of permitted investments for local agencies in California. A corporate note is quite simply a corporate bond issued in accordance or as defined by the California State Statutes that has a credit rating of single A rated category or better. It is a corporate obligation or a depository note, institution note issued by a qualified or registered bank in the State of California or in The United States that has a term to maturity of five years or less.

So it is a bond for to use a simple term issued by a corporation in The United States or a banking institution qualified to business in The United States or the State of California with a term to maturity of five years or less.

I had a really quick question. As far as the rules that really govern how we can invest, is that, only app is that applicable to all cities or only California charter cities?

So the cal each state is different. So the the rules for local agencies within the state of California are established by the state. And the state's rationale is that the financial health of local agencies within the state is a matter of state interest. So they have established a list of eligible investment types for surplus or operating dollars of local agencies within United States. A lot of this stems from the Orange County situation where things were risks were taken and weren't fully understood, ended up being a matter of state interest because of the impact that they had on local agencies and residents within the state.

So the eligible investments for operating funds within local agencies in the state of California are by design very conservative, things like U. S. Treasury bonds, bonds issued by what we call government sponsored enterprises, which are kind

of quasi governmental agencies and corporate bonds issued by high quality corporations in The United States. And there's some other kind of securitized type products that are backed by high quality kind of receivables. But to answer the question, corporate bonds issued by eligible institutions as defined in the California Code. And Mr. Walker, just one more comment.

Just to give you some perspective nationwide, that's generally what most states or some states that are much more restrictive than California, others that are similar in scope to what they are permitted to utilize. And ultimately, in our view, when you look at investments, it's great that a state has a state code that governs those to provide an overall umbrella. But it's we believe it's even more important that each specific entity has their own policy that reflects the risk tolerance, the cash flows, the liquidity needs, those sort of things, which the City of Fullerton does have. And we believe it certainly mirrors your investment program and the risk tolerances, safety first.

If I may add, just to be specific, I don't think it matters whether we're Cheddar City or a General Law City.

All right. Thank you.

So do we have any more open questions from the online? No. No more questions. So we can come back to the agenda.

Actually, can we answer the one can we answer first question about the city attorney's office? The city attorney's office is not present. Right? Can you tell can someone from the city explain why?

I'm not sure why, but they you know, they're not present in this particular committee, and I'm not sure that is necessary. But I can assure you that, you know, our investment policy or any actions that the city takes is run through the city manager's office and the city attorney's office. So they are very much aware and and has input on all the actions of the city.

Thank you. Also, Lucinda made made a comment. The city attorney only is at the council meetings, and she said PC meetings. Is it a private council meetings? I don't know. But, also, I she's trying to keep us all illegal, but I think one of things we are not a decision making body. We're only a recommendation body, if I'm if I'm not mistaken. Correct, Lu Lisinda? Plan committee. Okay. We're only a recommendation body, so we don't actually make decisions here. Yeah. We only recommend up to the council which actually makes the decision. Correct?

Yes.

So there actually would be no need because we are not I don't see a need, and I think the city does not see a need because we don't make any decisions per se.

Correct?

Or That would be correct, but subject to city attorney's office. This

yes. Subject to the city attorney's office. Thank you. We don't we're I'm just assuming. I'm not I'm not saying I know, but I I sort of put those two together.

Yeah. Bless himself.

Thank you, Lucinda. So do we have any other questions before we move forward? Okay. If there are no questions, we'll just move forward with the agenda, right? So our agenda at this time is the presentation from PTA.

Good evening, Chair Out Wang, Vice Chair, Committee members. Thank you for having us again this evening for our quarterly investment update. I'm fortunate to have my colleague and your portfolio manager, Mark Kreger, with us tonight. And, Mark's gonna start us off this evening with the economic update, and, not that much has been going on, right, Chair Atwong? So plenty to talk about this evening, but we we want to be respectful of of everyone's time also. But with that, Mark, I'll turn it over to you and then we'll follow-up with the portfolio strategy review. Okay. John, thank you

for the introduction. Chairman, and members of the committee, thanks for having us again this evening. I think we can save a little bit of time because I think, Chair Atwater did a wonderful job of kind of introducing some of the topics, that are very pressing in terms of the market right now, in particular stemming from some of the uncertainties that have arisen given, how some of the trade tensions that have evolved, some of the tariff conversations may end up impacting domestic economic growth, global growth, rates of inflation, which have already been a problem here in The United States for quite some time. So relative to our last update last quarter, I would just frame our discussion today as the economic outlook is much less certain, quite a bit more cloudy than it was last quarter given some of the uncertainties that have been introduced by, some of these evolving policies, which I'll speak to in my remarks. Broadly speaking, the economy entered the New Year on very sound footing.

The fourth quarter rate of growth in The United States as measured by GDP, which was the most recent which is the most recent data available, was released at the end of last month at the March. We'll get a look at the first quarter growth rate here coming up at the April. But looking in the rearview mirror, The U. Economy performed quite strongly in the fourth quarter of last year, driven by some of the very same fundamentals that have kept it growing above trend through much of the post pandemic era, that being primarily consumer spending. The economy expanded at a 2.4% annualized pace in the fourth quarter.

There was a little bit less than market expectations, and quite a bit of a give up from the prior quarter's 3.1%. But the details of the report were quite strong. Consumer spending, actually performed very well, growing 4%, over the quarter on an annualized basis. It was responsible for 2.7% of the total 2.4 growth rate in the quarter. That obviously implies that other sectors of GDP detracted from growth.

So one area of emerging concern is the fact that business investment contracted in the fourth quarter, perhaps foreshadowing a little bit of growing uncertainty on the part of businesses as they're looking out at some of the emerging trade uncertainties and how that affects their capital investment planning. Other uncertainties that have emerged and are pointing towards, I would say, the first quarter growing substantially less robustly than we saw in the fourth quarter, and in fact, even contracting, has been some of the kind of preliminary impacts of the trade tensions. And most notably, in the first couple of months of the New Year, the trade deficit in The United States, excuse me, expanded at a very significant level. And the way that GDP math works in The U. S.

Is net trade, the difference between the amount that we import and the amount that we export is measured as net exports. We are a net importer, which means trade is typically a negative contributor to U. S. GDP growth. The magnitude of the trade deficit in the first quarter is such that some of the economic models maintained by the Federal Reserve themselves are forecasting the economy could contract by, call it, 2.2% in the first quarter.

So a significant deceleration from the positive 2.4% growth rate in the prior quarter. In addition to that, there's evidence that the consumer is beginning to retrench some of their activity. That would be a very negative development because the consumer, despite all of the headwinds, higher interest rates, prices, elevated inflation, has been a robust pillar of support for the economy. And if we could go back to the first slide. I don't want to get too far ahead of the data. Yes, there we go. A couple of pages forward on GDP, gross domestic product. There we go. Back one. There we go.

Again, the consumer spending piece is an emerging area of concern. It has been a pillar of support. During the first quarter, what is referred to as real excuse me, real personal spending, which is basically consumer spending adjusted for inflation, grew at a negative 0.6% pace in January, so quite a bit of contraction, and it only expanded by 0.1% in February. That marks the weakest back to back month performance in personal spending on a real basis going back to the pandemic. It remains to be seen whether or not that's a little bit of payback for the very strong fourth quarter consumer showing or if it's reflective of the consumer getting a little bit more conservative in the face of growing economic uncertainties emerging from the trade tensions.

Next slide. The labor market has been a pillar of support. Obviously, that's very important for a consumption based economy like The United States. It has been decelerating certainly from the very robust pace post pandemic as we reopen and jobs have been readded. We had a positive growth in labor markets in February, where net farm payrolls came in at 151,000.

We had another strong showing in March subsequent to the publication of these materials, which released in early April, which showed the economy added another 228,000 jobs in the month of March, so quite a bit of reacceleration relative to February. Certainly, we continue to add jobs at least through the most recently available data at a pace that is helping to keep the unemployment rate contained. But the employment data at this point is very backwards looking given how the data has been emerging in the last couple of weeks. Unemployment rate last month in February was at 4.1%. We ticked a little bit higher in the March update to 4.2%.

But one of the growing areas of concern is how businesses and consumers react to the potential higher prices stemming from the trade tensions. In particular, corporate profits are very elevated right now, which on the service is a very good thing. It provides cushion to absorb some of the higher prices before having to pass those through to the consumer. On the flip side of that is some of these uncertainties may cause them to begin to defend those margins if the trade tensions persist for a prolonged period of time. They are profit maximizing entities.

And to the extent they're facing pressures to defend profit margins in the face of those higher prices coming from tariffs, that introduces significant uncertainty to the labor market outlook. If they're forced to begin defending margins, cutting costs, you could start to see an uptick to the Chairman's opening comments in the unemployment rate as corporations begin to cut costs and defend profitability. One area that may occur is in the labor market. So we might start to see the pace of layoffs, joblessness rates rising. That would be a very negative development for The U.

S. Economy. But otherwise, consistent with, I think, the expectations of tariffs generally, which to this point are being perceived as very stagflationary, right? Their immediate impact is going to be very inflationary. We're going to feel the effect of those higher prices, those higher tariffs quite quickly once they are fully enacted.

On the other hand, on a longer term basis, consumers are illustrating signs of exhaustion with respect to these higher prices, and there's a limited capacity for them to continue to do this heavy lifting that they've been doing to support growth. So that's a difficult combination for the Fed, this prospect of slower growth and higher inflation. I'll speak to that point in a little bit because it puts their dual objectives of price stability and full employment at odds with each other. And I'll speak to those comments when we speak to the Fed. But the labor market outlook for the last couple of months has been very strong, but I think the outlook as we look forward, once the tariffs come into effect, could be substantially a little bit less constructive.

And just one point of note for the committee. We shared this with a colleague who recently did a presentation for a Government Officers Association in Florida. So that's where you see that. Yeah. Maybe you had a chance to update that on our overall firm wide eco update. But I know we Mark, you did pull down the California unemployment. I want to talk about that.

Yeah. So that's right. The slide is a is a holdover from a recent presentation to a Florida GFOA seminar from one of our colleagues. But the unemployment rate in California, just for reference, is currently 5.4%. So it is a little bit above the national average. But historically speaking, relative to the historical unemployment rate in California is at some of its lowest levels going back to the 1980s. So relative to national levels, a little bit elevated, but relative to California history, still at some of its lowest levels going back to the 1980s. Okay. Next slide. So another area within the labor markets that is beginning to get quite a bit of attention is the labor force participation rate.

There's a lot to unpack here. But when we talk about the labor force, it sounds like a very straightforward concept. It is, in fact, not so straightforward as as is is the case in in many pieces of federal data. But what we're looking at in the top right graph is the size of the labor force, which we could define that as the number of working age people in in The United States. The civilian labor force is the proportion of those people that is actually working or looking for work.

And so that is an important distinction because when somebody disengages from the labor from the civilian labor force from the labor market, they stop actively looking for work because they can't find employment. They're otherwise frustrated. They're no longer counted as part of the civilian labor force. They are no longer counted as part of the unemployment rate. So, looking beyond the headline unemployment number, the ratio of the size of the labor force and the participation in the labor force as as defined by the civilian labor force, that ratio is defined as the labor force participation rate.

So what percentage of the overall labor force is engaged with the labor market and participating as part of the civilian labor force? The participation rate has been declining. It's below its averages over the last several years. That is a noteworthy development because what it suggests is that potential employees are becoming less engaged with the labor force. They're dropping out.

It may also suggest that employers are slowly scaling back their efforts to re add employees, so jobs are getting more difficult to find. I think it's a leading indicator to the fact that we might begin to see continued upward pressure on the unemployment rate going forward as this participation rate faces additional downside pressures. So it's a headwind that is developing with respect to the labor markets. Labor markets drive consumer spending. Consumer spending is the largest part of economic growth in The United States. It builds into this narrative that 2024 was a great year. It capped a very strong post pandemic performance of The U. S. Economy. As we look forward into 2025, the outlook is much less constructive.

Some of the, again, the Atlanta Fed models are predicting contractions of 2.2% for GDP in the first quarter. Private economists forecasts according to a Bloomberg survey of 64 economists, a little forecasting growth decelerating to a 1.1% annualized pace in the first quarter. The range, would tell you, of those forecasts are quite wide. So the weakest expectation is for the economy to contract by 1.1%. The strongest forecast from those 64 economists is a 3% growth rate.

So that range is very wide, and I think that is reflective of the uncertainty, right? So much of the performance of the economy in the coming quarters hinges upon the level of the tariffs, how long they remain in place, what sectors are most impacted and how businesses and consumers respond to those still unknown variables. So I think that uncertainty is reflected in that wide range of private economic forecasts for what growth in the first quarter will have been or was and what that looks like for the second quarter and the remainder of the year. I would note just similar along this discussion that a lot of larger Wall Street organizations, JPMorgan, Goldman Sachs, for example, have increased their recession probabilities. And again, that's stemming from both uncertainty surrounding the impact of tariffs and how businesses and consumers will respond through spending investment spending and investment cuts going forward.

The markets don't like uncertainty. You see that with respect to the equity market volatility that Chair opened up his remarks with this evening. That to refresh the committee, typically, you see that level of volatility in the equity markets, that's an expression of risk aversion. The bond market where where by statute, your Citi's funds are required to be invested, that is typically the beneficiary of those periods of heightened volatility. The bond market is seen as a safe haven asset.

By design, that's why public funds are limited to investment in only the safest of assets with respect to these kind of operating or surplus dollars. So in periods of economic stress, the assets that are eligible per California state code, eligible per the city's investment policy and that the portfolio is invested in, they tend to perform very well during periods of stress because the demand for these very safe high quality assets increases when you start to see the volatility arising in some of those riskier asset classes. And we have some comments on that a little bit later. Let's go on to the next slide, please.

Excuse me.

Yes.

Could we go back one slide on Page four?

Page four.

Yes. Okay. So the last bullet here is talking about Florida. Why do we talk about Florida? Do we expect higher unemployment rate there?

Mister chair

because of previous previous presentation.

Mister chair, but that was an edit on our this is a firm wide economic update. One of our colleagues recently did a presentation to a Florida Government Finance Officers Association. So when we were preparing this, we didn't change that over, simply because we use this firm wide. So that's our our our apologies for that.

No problem. No problem. So I just thought maybe something special about what That

was Okay.

Added on our part to leave that in there. Apologies.

Actually, can I can I have a quest ask a question? I heard in the news recently that US t bills are now being less relied upon. And so or the the or the the the view of people in buying UST bills has dropped. The confidence has dropped quite a bit. How does that affect all of this since we're talking about bond markets?

Yeah. So you're you're getting into a very what could be a very deep conversation.

It's not

so much that the risk that folks bill T bills as risky. They do not. T bills are amongst the safest assets in the world. Mhmm. What they're talking about is the relative differences between other short term investment alternatives that participants in the treasury bill market have. And specifically, they're referencing a couple of Federal Reserve programs. So the Federal Reserve maintains two programs that many of the largest investors in treasury bills are also eligible to participate in. One is the reverse repurchase agreement program. That is open to financial institutions, banks who have excess reserves on their balance sheet. They typically might invest those in treasury bills.

The rate that the Federal Reserve is offering on the overnight reverse repurchase program is pegged at a level that is higher than US treasury bills. And in fact, that reflects, I think, a couple of things. It reflects the fact that the remaining investor base of treasury bills, there is sufficient demand for those treasury bills that it pushes their interest administered rates from the Federal Reserve. So it's in fact, think almost an opposite interpretation that investors would be bidding up the price of treasury bills to a level below these other Federal Reserve guaranteed rates simply because they're not able to participate in those programs coming from the Fed.

Okay. Thank you.

Thank you for the question. So inflation continues to be a very hot topic. We've seen a lot of progress towards the Federal Reserve's 2% target. That progress has slowed in some of the more recent months. We did get a better than expected print in February, which was the most recent data available as of the quarter end.

So we saw the CPI numbers come in at 0.2% for both headline and core that pushed down their year over year rates. We also had an even better print in March subsequent to the publication of these materials. The March headline CPI print came in at negative 0.1%, so we had a little bit of disinflation or deflation, and headline CPI, last month. Core CPI came in at a weaker than expected 0.1%. That had the effect of taking these year over year rates that you see expressed on the screen here on a headline basis to 2.4%.

Core CPI came down in March to 2.8%. Unfortunately, much like lots of the other data we've covered thus far, that is rearview mirror looking. It's looking in the past and the effect of tariffs expectations have been significantly accelerated. In fact, I'll come back to this point in a minute because I'm going to talk about it in a different context. But many of the banks, that I mentioned previously, JPMorgan, Goldman Sachs, other streets other, analysts on the street are now forecasting that the core rate of of CPI inflation here that we see at 2.4% excuse me, 2.8 could actually end 2025 back up at 4% Wow.

Because of the impact of tariffs. So that would be a notable reacceleration from the disinflation we've been experiencing over the last several months. That's another factor which is feeding into kind of expectations of weaker growth. As consumers deal with these now, again, elevated prices, there's an expectation they could pull back their consumption. Moving on to the next slide and staying with the CPI.

One of the reasons inflation has been sticky is that some of the main areas in the CPI weighting continue to remain quite elevated. So the cost of shelter component of CPI, which is now still running at a little over around 4.25%, represents 35% of the CPI calculation. There is I think we do believe there is some relief coming in terms of housing inflation. I don't want I won't get into the details out of respect for your time, but the way that housing is treated within the CPI calculations is very counterintuitive. They do a survey of individuals and ask them, if you thought you could rent your house, how much do you think you could rent your house for?

And so they call it a rent of shelter adjustment. It's not actually measure housing prices. So there's a lot of subjectivity to that number. And I think individuals tend to think they can get a lot more than they can. So that metric tends to be elevated for longer.

It adjusts adjusts to the reality of the economy a little bit more slowly, which explains some of its stickiness. But with some of the trends that are developing in the housing sector right now, we do think that you will continue to see home prices come down and then the reality setting in to the expected rental kind of cost of shelter piece to that. So that would be a downward, I think, tailwind to inflation moving lower. But unfortunately, the effect of tariffs, as we've discussed, is likely to continue to exert much more significant upward pressure on prices as we progress through the year. Next slide, please.

So the consumer, as we noted, is again, it's the largest component of The U. S. GDP, consumer spending that is. Measures of consumer confidence and consumer sentiment right now are quite depressed, in part for obvious reasons. What I would say is there is a difference in methodologies between the University of Michigan Sentiment Index, which is the the more subdued 57 reading.

That is one of the lowest readings in the history of that data series going back to the nineteen sixties. By contrast, the conference board's measure of consumer confidence is a little bit more optimistic. It is still trending around kind of its average level or so going back to the 1980s. So it's not quite as subdued as you would, expect just looking at the Michigan sentiment numbers in isolation. The difference for that is simply this, the Michigan, Sentiment Index is much more correlated in the way that the survey is structured with personal financial conditions and expectations and inflation.

Their questions skew towards those data points. In the Conference Board's survey of consumers, their questions skew more towards labor market conditions. And so the labor market has held up much more strongly because of labor market scarcity issues we've been dealing with, because the consumer has remained relatively robust. So we haven't seen the pace of layoffs that we would have otherwise expected. So you have this combination of elevated inflation and inflation concerns coupled with a still strong labor market, you can see these divergences in the two surveys.

But again, a lot of this is it's all pre tariff and we'll see how it evolves going forward. And one of the concerns is that some of the due nature of consumer confidence will feed into less consumption on a going forward basis. And on the next slide, here we're looking at, again, as we noted, and I think this is a kind of a great illustration of that, the consumer has been doing the heavy lifting. Unfortunately, a big part of that heavy lifting has come through the continued expansion of consumer debt. So here, we're just looking at trends in different measures of consumer debt.

They could be mortgage debt, home equity lines and then, of course, credit card, auto loans, and student loans. The measures of debt have continued to trend higher. That has been one of the tailwinds to the pace of consumer spending as consumers have remained gainfully employed, as labor markets have remained robust, they have not been afraid to continue using debt to subsidize consumption, particularly in the face of higher prices. So unfortunately, for many people, compensation hasn't increased as much as inflation has for a prolonged period of time. They've turned to additional debt to continue to finance that consumption.

This has been great. The joke is when the party ends, and the punch bowl is taken away, what happens on a going forward basis? So the concern, I would say, is that the accumulated the continued accumulation of debt, the continued consumption debt based consumption has been a pulling forward of demand. And so when the economy softens, the pullback or retrenchment on the consumer side could be a little bit stronger than perhaps it has been in the past because now they still have to service this debt. Interest rates are at substantially higher levels than they were before.

This could be a tailwind the economy's performance going forward because the consumption has already occurred, but the debt repayment still has to happen. And it's right now is a very challenging environment for these, and I'll just highlight the credit card debt as an example. Credit card debt is at an all time high of just over $1,200,000,000,000. That's at the same time that credit card interest rates are still trading at north of 20%. So you have the highest credit card balances in history at the same time when interest rates credit card are at some of their highest levels.

It's a challenging forward looking environment for the consumer, which has benefited from low interest rates for a prolonged period of time and robust labor market conditions. When those tailwinds to the consumer abate as we expect that they will in 2025, we could see a little bit of payback coming from the consumer spending that has really carried the economy to this point.

Just real quick, Mark, before you jump into the interest rates and then we turn it into the portfolio, just the thought really. And if you look at these charts, think about inflation and Mark talking about inflation potentially going to 4%, could go higher, may not we don't know where that goes, right? But if we look at these charts and we can plainly see that when we had upwards of 9% inflation a couple of years ago, it appears that the consumer basically borrowed our way out of that inflation with continued growth. And so just talking to what Mark just said, can the consumer continue to do that with these levels of debt versus where we were even a couple of years ago, which is substantially higher?

Yes, it's a really great point. I think the risk of payback is substantial. The other point I'll make before we move on since we brought up that subject is what's happening with debt at the federal level has been and continues to be a challenge on a to sustain on a going forward basis. So U. S. Is running fiscal deficits, right, the difference between revenues and expenses, that are stabilizing at around $2,000,000,000,000 a year. Those are roughly 6% to 7% of U. S. GDP. Outside of the financial crisis and COVID, we never run fiscal deficits of those magnitude, particularly when the economy is not even in a recession.

So we're we're we're spending deficits of 6% to 7% of GDP while the economy is growing at, you know, a 3% average pace over the last couple of years, and unemployment is down at 4.2%. That is when efforts of Doge, for example, to reduce some of the deficits to bring, you know, a little bit more, efficiency or or or effectiveness to federal spending, try to reduce some of the the inefficient spending within government. When those things, you know, begin to take effect, one of the reasons we think the economy has performed better than anticipated has not only been the consumer debt and the consumers' willingness to continue to consume, but the fiscal boost that has been provided by such rope such a magnitude of federal spending still while the economy is growing very robustly, still while unemployment is very low by historical standards. And it raises the uncomfortable question about despite all the efforts to address the deficit, what happens when the economy turns to a recession? Deficit spending really kicks in when you're in a recession because all insurance programs and other things kind of kick in, and it takes the spending to another level at the same time when revenues are contracting.

So the concern is we're running these magnitude of deficits, and it's been helping to support the level of growth that it has. What happens when the recession comes and the deficits get even wider? Those are some uncomfortable questions that hopefully we won't have to address, but, you know, the trajectory, the trends are moving

challenging. Next

slide, please. So here, we're looking at the Federal Reserve's most recent what we call dot plot. This was from the Federal Reserve's most recent meeting back on March 19. They, of course, at that meeting, chose to hold interest rates unchanged at their current range of between four and a quarter and four and a half percent. So the dot plot represents the Federal Reserve's estimates of the appropriate federal funds rate at different points in the future.

So on 2025, that would imply this is where the Federal Reserve believes the appropriate fed funds rate will be at the end of this year, at the end of '26, '27, and then for the longer term. The individual dots reflect the individual FOMC's individual unique personal point estimates of where they believe the federal funds rate will be at each of the year ends expressed on the bottom axis based upon their personal projections of the economic data. The blue line that intersects all of those is the median of the individual point estimates. So the market focuses on the dot plot and the individual point in in in the the median quite a bit as a potential guidepost for policy. We we we don't we don't buy into that.

The the Fed's dot plot is notoriously inaccurate, massive, subject to massive revisions. And then in most obviously, if you simply look at the dispersion of the individual's own estimates. So back in March, some members thought that we might have rates up at four and a half close to four and a half percent. Some members thought they might be down closer to three and three quarters percent. There's a 125 basis points of spread in the voting FOMC members' individual estimates of where the Fed funds rate will be simply nine months in the future.

So and then that that dispersion gets even wider the further out into the future you go. So we don't ascribe a lot of predictive power to this, but what it does inform is market sentiment. The market pays attention to these numbers. The market will trade based upon these dot plots. So it's really it's a it's a it's a measure of sentiment more more so than anything else because of the wide dispersions.

Quick question. Yes. On that, this is March.

This is March 19 meeting.

Yes. Pre April.

Pre April. Exactly. So their next meeting, I believe, is in May, and we're gonna get an update. We we actually won't get an update. So the interesting thing about the dot plot is that it is, provided as part of what the Federal Reserve calls their summary economic projections, SEP updates. They only provide those on quarter ends. So that's a that's an interesting observation, and I think it speaks to, you know, the market is looking for what the Fed is going to do in response to this. We won't get an updated dot plot in until May. That's a long time with all the volatility we're seeing for the market to be kind of looking back at old data from 2019. So Chairman Powell the other day did come out and say that, you know, he thinks that policy is appropriately calibrated presently.

He said that Federal Reserve is really not looking to do anything with policy right now because of the uncertain economic outlook. He acknowledged that the the the there's so much uncertainty uncertainty with with respect to trade policy that if the Fed were to take an aggressive stance either way, raise rates because they thought inflation was going to accelerate or cut rates because they thought growth was going to stagnate. They're taking they're making a bet on how long the tariffs persist, at what levels they persist at, and what the reaction function from consumers and business is, all of this is unknown. So right now, the Fed is extraordinarily data dependent. And the impact of tariffs on the economy and therefore monetary policy, interest rate markets more generally, is it's a bit in wait and see mode, but the Federal Reserve and and for good reason.

Stagflation, right, lower growth, high inflation, there's nothing the Fed can do to address that. On the one hand, they would want to raise interest rates to combat the higher inflation from tariffs, but that would crush growth in labor markets, which are already slowing and expected to slow on and labor and labor markets. On the other hand, if they were to reduce rates because they thought the economy was going to slow because of higher prices resulting from tariffs, lower rates would stimulate even more inflation because consumers would because money would be less expensive. Consumers and businesses could borrow more cheaply, that would filter into more demand, more spending, more investment that would push prices higher. There's nothing really the Fed can do to address stagflation, which is why they don't wanna do anything right now with policy.

They just wanna wait and see what actually happens and now they'll respond accordingly.

Mark doesn't have the advantage because I've got the laptop with the Bloomberg that Mark looks at for hours a day. But just based on your comments, Mr. Cho, is it that right now the market there's another line you could add to this chart which shows really what the market is pricing at any given time. And right now and probably for the last several days now, the market is pricing in an additional rate cut versus what this blue line is showing. Although next time we meet, this blue line will probably be quite different, right, Mr. And so will the green line that you don't see, but we'll add that just so you can see where that is. But you got we've shown this in the past and it's notoriously wrong as Mr. Krueger has mentioned. Yeah. Thanks, Mark. Yeah. Thank you, John.

So here oh, there we go. So here we're looking at a little bit of related to what John was looking at on on his his screen off camera right now. But this is the pricing of federal funds futures contracts. It's an expression of so the first the the prior graph was the so called dot plot. That's the Federal Reserve's own kind of point estimates and median estimates of the appropriate policy rates over the time horizon specified.

This is looking at market based measures of those same expectations of where the federal funds rate policy rates will be on a going forward basis on the dates expressed on the left side. It's market based insofar it's based upon the pricing of Fed funds futures contracts. Those are simply financial contracts that investors can purchase or sell based upon where they expect the average Fed funds rate will be for the for the month in question. And so from that, you can extrapolate both the anticipated policy rate and implied policy rate and the number of rate hikes or rate cuts implied by the difference of those forward rates relative to current cash current market rates. So you can see that in early April, right after quarter end, the market was expecting the first rate cut from the Fed, the first 25 basis point rate cut to occur in the June 2018 FOMC meeting.

Then flash forwarding to the end of the year, the market was anticipating that the Fed would have now moved forward with roughly four twenty five basis point rate cuts or a full 100 basis points of rate cuts, which would take current policy rates down from kind of 4.25% down to just over 3.35%. So the market is grown a little bit more, has been expecting the Fed is going to their hand is going to be forced through the impact of tariffs to reduce rates a little bit more than the Fed was projecting back in March. And I think market's kind of belief is at this point that if pressed on the issue, the Fed would on the side of trying to bail out labor markets and letting inflation run a little bit hotter. So that's there's no way to know that until we're until the Fed's hand may be forced. But that's kind of the current market expectation being reflected here is if they were pressed, they'd be more inclined to reduce rates in that stagflation issue or if they saw the labor market conditions weakening to the point that they felt it would really jeopardize the economy.

I think they'd On the next slide, here we're going to look at the change in the shape and level of yields in the U. S. Treasury curve over the past twelve months. So this is looking back at the change in rates that's occurred since the end of the third excuse me, the first quarter in twenty twenty four. Obviously, what really stands out is the magnitude of rate declines. That's a combination of a couple of things. It's the fact that the Fed reduced actual rates by 100 basis points beginning back in September 2024. It's also the fact that the market has been pricing at expectations of lower growth. It's the fact that inflation has come down from very elevated levels of the prior several years while still above the Fed's 2% target. Progress has been made.

Yields have come down because inflation has come down, also because longer term growth expectations have come down a little bit as well. So against that backdrop, interest rates across the treasury yield curve have also moved lower. And on the last slide, here we're looking at it from a from a little bit more of a historical perspective. And so you can see just the the volatility. So I'll I'll start by describing what's on the screen.

The blue line that is a little bit more linear, a stair step shape, if you will, that's the federal funds rate. The green line reflects three month treasury bill rates. So those very short term rates are directly tied, directly correlated to changes in the Federal Reserve's policy rates. The blue line is two year treasury yields and the gray line represents five year treasury yields. So I'll start by a couple of things. You can see that market yields began to rise. Two and five year rates began to rise as the fund reserve began to raise was raising interest rates back in in 2023. When they stopped raising rates in July 2023, you can see that two and five year treasury rates were very volatile. Right? They traded in a quite a wide range.

And just looking at the two year, you know, in a range of, call it, five and a quarter percent down to four and a quarter percent. So a 100 basis point range even though the Fed was doing nothing, five year kind of trading in a similar range. It's important to note those those longer term rates don't trade in direct correlation with actual policy rates. The volatility you see represents evolving expectations of what the Fed is going to do in the future. When rates move lower, that's a reflection that the market believes the Fed is going to begin cutting rates.

So they try to lock in yields in advance of eventual Fed cuts. And similarly, when those when the data does not support the level of expected rate cuts, you'll see those market rates begin to move higher as the market scales back those expectations of future rate One of the things that really stands out on this graph, and and I'll and I'll conclude my comments here momentarily, that is, you know, if you look at that September 2024 time frame when the Fed stepped in with a '25 excuse me, the 50 basis point cut to the Fed funds rate, That coincided with the this the the the the post pandemic low of two and five year treasury yields. Over the course in in the period of time since the Fed began cutting interest rates and they cut them by a 100 basis points through, I believe, December 2024, two and five year treasury yields actually rose by almost a 100 basis points. Very counterintuitive that while the Fed is reducing interest rates, two year treasury yields in particular, but also five year yields would be rising by a commensurate amount. That speaks to the power of expectations in the yield curve.

So effectively, what is expressed when a two year, five year treasury yields bottom and then begin to increase even though the Fed is cutting interest rates is that the magnitude of rate cuts that were expected by the market at that time were way overstated relative to what the data would support. And so as those expectations began to be scaled back, market interest rates began to rise even though the Fed was cutting short term policy rates. And just for context, and and I'm I'm happy to take any additional questions. At that point in time, September 2018, the market was expecting the Fed would have to cut policy rates by, eight twenty five basis point increments, so 200 basis points, at that point in time. Flash forward to today, now the market is only by the '25.

Flash forward to today, the market is only expecting now just under four twenty five basis point rate cuts, so less than half. So that increase in market yields whilst the Fed was lowering rates is just a reflective changing market expectations about what the Fed is going to do in the future, not what they've already done. So with that, I'm happy to address any additional questions that the committee may have. Right. And hearing none, John I'll turn it back over to John.

Excellent presentation. Thank you.

Thank you very much. Yes. Thank you. And and mister Awong, know you started with some of your commentary, just wanna make sure no other thoughts after that detailed discussion from Mr. Krieger. And but if you do, let us know. At this point, I'll go through the portfolio strategies recognizing the time. We'll cover it, but also we'll be somewhat brief. That said, we thought that it was important to spend a little more time on the economic update this time. Mister Okuricki, generally don't spend that quite an amount of time just for your benefit.

This is your first meeting, sir, but we recognize the importance. We also appreciate the conversation that we have with this investment committee in particular and we appreciate that. So I hope that you found that valuable. As you can tell, Mark loves talking about these things and so do I, as you know, but we appreciate you giving us that opportunity. So thank you for that. And thank you, Ms. Smart, for helping us through that presentation. With that, we'll jump

right into May I ask a question, Sure, absolutely. So when you show those at the the freight rate, the dotted rates, the dots, is that where the market say they anticipate the threat has three more cuts or four more cuts is basing on that, right? Because the common people, we don't see that. Until I see this one, then I say, okay, now that's where it comes from. About the dot. Like the dot plot.

Dots and then the blue line that was reflecting them?

Right. Thank you, John. This one. Yeah.

Thank you. So that is the Federal Reserve dot plot. That comes directly from the the Federal Reserve.

Okay.

The individual blue dots that you see reflect where the voting FOMC members believe the appropriate Fed funds rate will be at the end of 2025, '26, 2027, and then for the longer term. So those individual blue dots are the estimates of individual Fed members.

Right.

The blue line is simply the median of those individual estimates. So this is not the market's expectations. This is the Federal Reserve's own best guesstimates as those as the body that sets this interest rate that they're trying to forecast, this is their individual best guesstimates.

Sure, Atwang. Just on that note, if we look to the far right side, Mark mentioned earlier, the further out you go, the more dispersed those dots are. And it really ties into the comments that we make pretty much each quarter when we talk about your investment program and how it's disciplined based on cash flow needs, risk tolerances and your policy and, of course, California Code. But I'll make the point that you know, we somewhat joke internally, these are Fed members. They're some of the smartest people in the world technically, right, or theoretically.

And if we look at that right hand side, look how dispersed those dots are. And so I think that is a great illustration. We talk about this in our presentations when we do trainings. If these folks don't know where that rate's gonna be, I don't think anybody should be making investment decisions based on where rates would be. But rather to have a disciplined approach that's set and you manage that accordingly and not try to make huge adjustments based on what market is so called forecasting at any point in time.

No. That's correct. If

you guys have the numbers. The Federal Open Market Committee, how many members?

Yeah. I'm not sure how many they have right now. There's a couple of unfilled positions, but I think typically there's seventeen

Seventeen members. So each one of those dots represents one each member's expectation or projection. And you see the dispersion. Somebody would think it's four, another person would think it's two. And then you draw that line, taking the median of all of that. So mister chair, I mean, it's not a market expectation, but rather just, a collection of the individual opinions like a committee like this, where they think, it will be. And, so I don't know if that helps.

Very good. Very good. Thank you very much.

Thank you. Yes, thank you for those additional comments. And thank you, Ms. Mart. We'll jump right into your one to three year on this slide. So as we know with the one to three year portfolio, really Mark and the team maintaining that duration very similar from prior quarter end at just around 01/1974 to one point seven five years and 01/1976 to be exact at March 31. And then just a couple of other highlights. You can see I'll go down third from the bottom over the book yield, and that's where we want to focus on when we think about the income opportunities for the portfolios. And you can see that starting to stabilize at 4.34% versus 4.33%. That's actually great news.

What that means is that a majority, almost all of those very low yielding securities that were in the portfolio from the, call it, twenty to twenty two time frame when rates were just very low, have been sold out of the portfolio and reinvested at much higher levels. And I'll give you those stats when we cover the aggregate here in just a couple of moments. But that's great news. The market yield, just below that. So you can see that declined by, call it, 30 basis points.

That's something that's just purely driven by what the market's doing. And as we know, we saw rates start to drop towards the end of the quarter. So, the good news and going back to the disciplined approach of your portfolio and really tying into what Mark talked about, no matter what the volatility, your portfolio is designed not to have that type of volatility. And that's, again, not just for you all, but for public funds in general. We believe that's very important.

And so just to highlight that, when we look over to the right and just to summarize your cost and book value and market value, of course, all metrics there. The chains there, you can see net unrealized gainsloss went from $37,000 to $351,000 I just point that out that that number, as a reminder, goes up as rates go down and vice versa. It doesn't mean that you're going to realize that whether it's gains or losses, right? That's just if you were to sell that portfolio and it's something that you have to record really just on an annual basis. But we believe it's important to show market value certainly at month and quarter end.

During the quarter, we reinvested around $8,100,000 or 15% of this portfolio. But most of that was in treasuries, around 90% of those funds were in treasuries. But we did buy a couple of corporate notes during the period. And Mark and his team and they identified John Deere and PACCAR. And you may recall we've owned that in the past.

PACCAR is the entity that builds those big Freightliner trucks that you see delivering very quality names that we like to see in the portfolio. The maturities in the pardon me, the investments in this portfolio were, call it, between 1.5 and out to the three year. But the average maturity, Mark and the team did, was close to two point seven years. So really focusing out on the latter part of that portfolio and capturing that. Your portfolio is very well diversified.

We talked about this earlier with Mr. Okoriegia about the allocation and of course as you all know, the safety first, yes, God bless, the safety first approach. We generally have a higher allocation in both portfolios to treasuries and normally two reasons. One, as you know, for the last few years we've not been buying agencies because they trade at or sometimes through or below treasuries. And so we talked about that earlier in our pre meeting as well.

And so that's part of the reason. And the other reason is and we've talked about this in recent quarters is that narrow spread or relative value in corporate notes and municipals for the most part, but not always. And we did, again, see a couple of opportunities for corporate notes. So we do take advantage of that when that makes sense. And I can't help myself, but just to make sure we put this out there, any time you're buying a security that's outside of a treasury, municipals, corporate notes, in particular, it is evaluated by an independent credit team at Public Trust.

Once that's approved, then the portfolio team is allowed to buy that. So from there, good, very safe, primarily with treasuries utilizing corporates and munis when possible. On the next page, we'll look at your maturity distribution by design, why this is called the one to three, of course, close to 90% of the portfolio in that one to three year area. And then the smaller percentages, mainly that 7.7% in the nine to twelve month, that's really where Mark and the team will generally see those securities rolling under a year, take advantage when opportunities arise to reinvest those funds out between the one to three year area. And then you've seen for the last several quarters, Mark and team have also allowed some of those corporate notes to roll down to maturity pretty much.

And so you see over on the left hand side of the table at the top some corporate notes there. And that's simply because of the relative value case. Again, those corporate notes providing some additional yield versus a treasury.

Yeah, John, I'll add a little bit of context. Thank you. So the California State Code and the city's investment policy allow for up to 30% of the portfolio to be invested in corporate notes, no more, but up to 30%. We have effectively positioned the portfolio higher in quality because the incremental yield that has been available, for example, on corporate notes and also taxable municipal bonds have been trading at some of their lowest levels looking back for the last two, three, four, five year periods. So as a result of that, we have not been compelled to increase those allocations because we did not think that those spreads, those incremental yields reflected the risk, geopolitical risks and subsequent economic risks that we were, I think, aware of.

So as a result of that, we have maintained lower allocations and the idea being to insulate the portfolio from those sectors underperformance, when those spreads begin to widen, which they have. So spreads have you've seen the volatility in equity markets. You start we also see some of that volatility in the corporate bond market. Now even in high quality corporate bond market, spreads have increased, in some cases, than doubled over the past couple of weeks. So number one, the portfolio through the higher in quality allocation and, for example, treasury bonds has been insulated from the underperformance of that sector.

We also have dry powder in the portfolio. And so one of the things we're actively looking at now across the firm spreads are 25, 75% higher than they were just a couple of quarters ago. So we may now look to begin increasing those allocations because we're finally getting the extra yield. And to John's point, all of this though being constrained by we're only buying names that we're extremely comfortable with. We're only buying names.

We have a team of five dedicated credit analysts. That's all they do is analyze credit, for corporate bonds and municipal bonds, any other, security with credit exposure. They are not portfolio managers. They simply do the due diligence, the independent credit analysis. And if they are comfortable with the fundamentals and we identify appropriate spreads, only then are we would be considering adding them to the portfolio. So it's disciplined approach, very thoughtful approach. I, as a portfolio manager, can't see a nice shiny spread on a corporate bond, for example, and just go buy it. It has to be preapproved by our credit team. They are they are not compensated like the portfolio managers. They don't manage portfolios.

Their entire, world revolves around independent analysis of the credit. So I think that's just a very important distinction as we talk about considering increasing these allocations that would only be in the context of still very strong credit quality, just better valuations. Thank you, Mark.

And then as we summarize the one to three and then we'll get into the one to five, just jumping through the Ratings page, just for compliance purposes, you're highly rated and you're compliant with your policy. Lastly, on the one to three, really the only note not much of a change in allocation from quarter to quarter and just a slight allocation slight lower one by 1% treasuries and that was made up by the 1% increase in corporate notes. The reason for that was the securities that were sold were all treasuries. The securities that were purchased were primarily treasuries with a couple of those corporate notes. So that's really the primary difference in the allocation.

Again, slight differences on there. And the one to five year portfolio, similar story, maintained a duration from throughout the period that was very similar. You can see 2.48, 2.48. So really the team and I think this is indicative when you see this type of volatility as well is really having a duration neutral approach to the portfolio management, which the team has done, Mark, and firm wide quite frankly. As a reminder, we balanced these portfolios just around a year ago.

And so they both have equal balances within the portfolios. This one, just one point, you'll see a notable difference in the unrealized gainloss between this one. So one thing to remember, it's not because of the size because now they're balanced, it's really because the one five year has more volatility to it and that's by design and one of the things we talked about with regard to this slightly longer duration. But the thought is that over time the one to five year will hopefully provide higher income based on historical performance and again through various interest rate cycles. So we're continuing to see the book yield of this portfolio.

We actually saw a bit of an increase here in the portfolio of 14 basis points. But again, the one to five is slower to increase in yield because of slightly longer duration. And as a reminder, it will be slower to decrease in yield in a prolonged decreasing interest rate environment. Also very highly rated securities. This one has slightly higher allocation to treasuries. The primary reason for that is the longer duration trades are generally in treasuries. In fact, we see this on this slide, Ms. March brought up for us. When we look at those gray bars in the three to four and four to five year area, those are representative of your U. S.

Treasuries. And again, that's by design for the portfolio. Generally, team we do have portfolios that you can invest out longer in corporates, but generally, especially in recent quarters, we've seen those corporate notes in three years and under. Mark?

I was just going to add, that's another expression of up in quality. So as you can imagine, just like a portfolio that has a longer duration is more sensitive to interest rate changes, when if you maintain an allocation to longer duration corporate bonds, they are more sensitive to spread widening. So in our technical terms, we call this spread duration. An expression of being up in quality and credit is also where you own it, owning it on shorter term so that when the spreads do widen, you're you don't underperform by as much had you owned them at a longer duration, which would have created more underperformance. So where we have taken the credit exposure has been on the shorter end of the yield curve, recognizing there is still some spread available but not wanting to go with substantial increases for reasons already discussed.

Thank you, Mark.

And just quickly on the strategy. So on this portfolio, reinvested around 9% of the portfolio during the quarter and that's typical for, again, a one to five year strategy. Continue to reinvest. And for both of these portfolios, by the way, the yields were anywhere from the high three percentages to as much as 4.7% in book yield on the reinvestment. So again, that provides, as we've talked about, continued opportunities for future income going out two, three and in this case out to four and five years from that one to five year strategy.

So that's great news because when we think about income that we've been for the last couple of years and looking out to the future that will even if rates don't go higher, if we think about where they've been over the last couple of years, even keeping steady income, and we'll see this in a moment, I'll talk to you about total income over the last couple of years versus this year. That's great news to hold that steady. And then just again, highly rated. So just jumping over to this last slide with the market value security distribution, we can see much like the one to three, the one to five year and I'm sorry, Ms. Smart, we're just two slides ahead just so we can show the committee. There you go. This is I'm sorry, my back point. That was right. Yes, thank Thank you. It was just one.

Go forward two now. There we go. Thank you so much. Just to highlight this again, the big difference was a change in treasuries to corporates. So utilize the same corporates that we had in the one to three for the one to five, sold all treasuries, so just slight change in corporate note allocation. But as Mark pointed out, still well below your permitted and not that we would ever be 30%, you're allowed to, but certainly well below I think the firm's historical, call it 15% to 20% allocation. And so hopefully, we'll see some more opportunities there. Thank you, Ms. Smart. And then I'll finish my comments and certainly welcome any questions or thoughts from the committee with the aggregate.

So just looking at your aggregate portfolio, we always say it, but I think it's always worth mentioning, the way that the city has developed your investment program, and we're proud to be a part of that with you all, is very balanced. You utilize LAEF and California CLAS for liquidity, and then you balance that out with these two investment portfolios. And they've been adjusted over time, as we know, and based on cash flows. And we'll be working with the team on those cash flows going forward as well to ensure that you have the appropriate balances. The overall yields on these at the time, the LAF hadn't published the yield, but your overall book yield is well above 4%.

So that's not reflected, but will be when the lay fields are updated in here. So the fact that the overall portfolio is above 4% compared to where we were just a couple of years ago, I think says a lot. And so when we look at that, look at your when we look at the market value on the top right of the aggregate, just that is, of course, that's just the seasonality of the portfolio and an increase in late balances of around 23,000,021 million dollars and then some interest earnings as well. Looking at net income for the quarter, in fact, what I did was I looked at let's see what this looks like for the first nine months. And for the first nine months of your fiscal year, you're at 5,800,000.0 Through March 31, if we compare that to the first nine months of last year, it was $5,100,000 So even though rates have been within a trading range of 100 basis points over the last twelve to twenty four months, You continue to reinvest and provide higher income.

But what's really meaningful and what's I think a wonderful thing for the portfolio is that in two years ago, the nine month interest earnings were $1,300,000 So considerably higher as a part of your maintaining a disciplined approach and being able to reinvest those funds in these higher yielding securities. As of March 31, in fact, you have 73% of the portfolio invested in 4% or higher. And so again, those are a lot and that doesn't include your LAEF and California class, which are closer to 4.5%. So a big part of the portfolio is now invested at four percent or higher. Again, with interest earnings throughout the first nine months and into the fourth quarter, I imagine that you'll have another year of higher income.

And again, we appreciate being able to work closely with the team to make sure that you have the appropriate balances in each bucket, if you will, of these investment strategies. With that, I'll pause for any questions from the committee or mister Okuricki or or miss Smart. Quick yes, sir?

Quick question. I'm I'm looking at the book value on that page on the aggregate.

Yes.

It went from one sixty nine million to $191,000,000?

Yes. That's the additional funds that came in during the period and were invested in the money in the local government investment pools. So that happens twice a year. Okay. Okay.

Because that I was like, that $30,000,000. And where did that $30,000,000 Yes. Your $20.20 some odd million came from, like

Yes.

That's a little confused me a little bit.

And then that spent down, of course, from the liquidity bucket through

the Okay. Yes. Okay. That makes sense.

So those are a summary of our comments. Again, I know this meeting went a little longer than normal, but we appreciate that opportunity and we're happy to stick around and talk through the portfolio strategy or anything you'd like to discuss at this point. Otherwise, Mr. Atwong, I will turn it back over to you. One thing if you allow me, first of all, I just wanna say we appreciate our partnership with you and the city of Fullerton.

Appreciate the opportunity to, work here with you, mister Karecki and miss Smart. And then also mention next quarter when we're here, we're happy to I'll be looking forward to introduce to you a new member of our team. We have Sarah is going to be joining us. She lives in Pasadena, so she lives not far. And she's going to be joining us in early May. So she'll be another a member of our team that will support the city and some of our other clients in the area. So I just wanted to mention that as we grow, we make sure we continue to grow as a firm as well to make sure we're serving our clients well. Thank you.

Thank you very much. Do we have any comments from the committee member or the staff? So if not, so we are almost ready to adjourn because the next meeting will be July 17. I'm sorry to say that I'll be on vacation starting that day.

Don't be sorry about that.

So I will I

will miss the meeting. I'll miss all these fun activities here. So we will rely on our capable vice chair, doctor James Chow. He will take over to chair the meeting. Alright?

Goodness

you. Without any other business, so we'll call this meeting to adjourn.

Wait. Wait. Wait. I think I'll get the motion or no? No motions? No. No. I forgot. We don't have quorum.

We don't have quorum. Okay. So this is just a general discussion. Okay. We're not adopting anything. Alright.

Thank you.

Thank Good. Thank you very much. Good meeting all of you.

Thank you. Okay.