Fiscal & Investments Oversight Committee - Regular Meeting

investment oversight committee meeting of july 15th 2026 uh taking the roll call greg kevin myself is present ron valencic is here lisa jackson is not robert buster howard is not here george superior is present and mary wilshire also with that i will ask if there are any citizens present that would like to be the committee Having seen none in the room, I'll ask, is there anybody on Zoom that would like to address the committee?

No, there's no one online.

Perfect. Thank you. It brings us to item number five, staff updates. Do we have any staff updates?

There are no staff updates.

The only other thing that I would mention at this point in time is that city council if you remember at our last meeting city manager sean scully came in and gave his presentation on tax revenues and a potential sales tax initiative that may be on the ballot the city council has chosen to place a sales tax initiative on the ballot being that we are all related to the city We are limited in what we can say in our capacity as committee members. We're not allowed to advocate for, and we're not allowed to say anything detrimental about it. We must remain neutral. Take it from there. Does everybody understand that? As a private citizen, you're talking to your friends and neighbors and you're not representing the city. As far as members of the committee, you can talk, but as a representative of the city and on city time, you can't do that. So with that, I'm sure you'll see more information about the next initiative. Watch your mailbox for updates. new and continuing business. We'll start with Michael Kronbetter from BFL.

Okay. Thanks for having me this quarter to present what is your fiscal year end June 30th quarterly investment report. Let's see if I can get this up on the screen. Oh, thanks. as Nita pulls that up, we'll turn to the current market themes, which is our label slide one on the deck that we've provided at the top of current market themes. And we provide this slide with every report each quarter to the committee. And it really surprises what we believe is driving the markets and factors that we are considering as an advisor for the city on the investments as we manage the portfolio and what factors are at play. And overall, we're characterizing the market as remaining resilient, but noting kind of an interesting new dynamic behind what is contributing to economic growth. And that's the AI and tech sector that's been emerging as an important contributor to economic growth in the U.S. So we'll take a look at that in a few slides. At the same time, that's really... been helping as an offset to what we would also characterize as a moderating consumer. Although the consumer is moderating, it's not struggling, but it is notably, I guess, slower or more modest in its current health status. The return to inflation, the question has been whether the higher energy prices would flow through to other sectors outside of just energy and gas-reliant industries. And if it would eventually hit the goods and services market, there have been more recent hopeful signs that that is evading. And it really never did trickle too much into the core goods and services. It rose modestly, but it's on its way down, as it was headline inflation for June, which we'll look at. So that's good. We saw CPI come out yesterday. And as the market seems to be getting used to the volatility of oil prices, it's not impacting oil as much as of recent, although we did see a spike just this last week with the ramp up of pensions in Iran. As far as the labor market, labor generally remains on balance, unemployment at 4.2%, but it's real wage growth because of that after inflation impact that is putting pressure on the households. Federal Reserve, we have a new regime in charge and June was the first meeting with the Federal Reserve with Kevin Warsh as the chair. So that was highly anticipated because it was expected that he would come in and be very dovish and start reducing rates and implement a lot of new policies that are somewhat unconventional. And while he did announce some changes, which we'll address in a moment, it was surprising, I think, to the market to hear how hawkish the committee was coming out of that meeting. And when I say hawkish, That means leaning more toward higher rates, if anything, than lower rates. We saw nine of 18 members in that meeting anticipating at least a one-rate hike for this year as opposed to a rate cut, which we were coming into this year expecting. And then lastly, one of the themes in the market, treasury yields continued to move higher for the second consecutive quarter. About the same amount short-term front-end rates rose in the first quarter, two-year rates rose. as we look at total return for the city. Turning to the next slide, the implications of the energy shock. One of the themes has been, significant themes for the economy and to the market has been the impact overall on oil prices and to the consumer's pocketbook as more of it gets taxed away and higher gas costs at the cost of the pump. But here we show kind of where inflation set and the trajectory. If you look at the bottom left chart, CPI is mostly energy-driven. We see that because the blue bars include energy and food prices. year over year reported inflation rate on an annualized basis. And for May, the report came in at 4.2% when you include the immediate impacts of higher oil prices. But when you strip out the oil and food prices, you see a more moderate increase to the yellow line, which excludes that volatile commodity pricing. So it did have some absorption of that higher cost price, but to a less degree, which was comfortable to the market to see that increase. And if we add the June report, the blue and yellow bars would be reduced as inflation moderated year over year, reducing the blue line from 4.2% overall headline inflation to 3.5% year over year as gas prices were contained following May. And if you look at the core stripping out that oil, you have an inflation rate at 2.6%. And it's that rate that is more impactful to the Fed, more... interest to the Fed because food and oil is more volatile. And when you look at more discretionary spending, it tends to show up in the core goods and services. And so that 2.6 certainly is a relief to see that line approaching its target of 2% annualized inflation rate. And then just a note on the right-hand side, we're comparing here the blue line, which is the one-year expectation in inflation versus the five-year expectation on inflation. And what's notable is the fact that that blue line moves a bit more radically as it adjusts more to current expectations. But over the long run, the five-year term, the line moves a little bit less. And that kind of gap represents the kind of supply side shock and short-term expectations of what prices will do as opposed to the longer term, more comfortable run inflation rate being less concerning. And you do see the blue light dipping with lower inflation coming out more recently. But that would be more reactionary to oil prices as opposed to long-term outlook. That matters actually to the portfolio because as we manage the portfolio, one thing that we always want to target is the benchmark for the city's portfolio, which is the one to five U.S. treasury. And in a time when rates shot up so quickly and yet inflation isn't, perhaps as it comes down, as it has justified where current rates are, we think it's a good opportunity to extend the portfolio, capturing the higher rates where they are currently. And so we'll see Onto the next page, looking at the other side of the Federal Reserve's dual mandate, the labor side, the labor markets. What we capture between the two slides here is really kind of some tension between the consumer at this point and spending by households. We do think it remains in balance, but we think that there may be some rising pressure among households with spending and inflation. On the left-hand side, On a whole, unemployment remains strong as far as an unemployment rate of 4.2%. That's broadly in line with Fed's view of maximum employment. But the decline in unemployment for this period, it must be noted that a lot of that was due to the participation rate, because it's a factor of those looking for work versus the entire participation of actively active workers. When you have 720,000 people dropping from the labor force in a month, as we had in June, that impacts the denominator more than the numerator. We had a healthy unemployment rate, but it is notable to say that the participation rate is the lowest we've seen in five years during the pandemic. If you strip the pandemic era participation rate out, it hasn't been this low for 50 years, June of 1976. On the right-hand side, this is where we talk about the health of the consumer. And we reflect that in personal spending versus personal income. And these lines are real personal spending, real personal income. So if you take out the effect of inflation, this isolates the health of the consumer. And what's notable here is The light blue line means that consumers are getting ahead if the line is positive. But as it dips into that negative territory, real personal income falling below zero is falling behind inflationary rate. So real wages are falling behind. And at the same time, consumers haven't moderated their spending quite as dramatically as wages have fallen behind. when considering the inflation impact. So we have a savings rate now with households that has hit 3%, and that's a two decade low. So consumers would look to that as to wonder the health of the consumer and how sustainable that is. But as inflation abates, we would hopefully see this picture improve. But for now, we're noting there is some observation too. modest consumer's health.

If I can ask for clarification on my part, when you talk about personal savings at 3%, that's the difference between personal spending and personal income. Correct.

Correct. This line, you can't just take 2.1 and subtract it out. This is after inflationary impact. It's funny, I was actually looking at that yesterday in more detail, trying to understand where the 3% is. And there's a formula out on the BEA website that looks at personal income minus taxes paid, and then subtracts out expenses, interest, cost, et cetera.

Yeah, so it's not an actual measure of people that are putting money into savings accounts or investing in it, but it's just the difference between those two numbers.

That's right. But I suppose it's hard for all of us to try to cut our spending back when we're used to spending a certain way and inflation kicks in and that is a form of a tax as well. So this is something that we'll continue to watch. If we turn to the next page, one thing to note about GDP, which I said in the summary slide earlier, Offsetting weakening consumer demand is AI and tech investment, and this reflects what quarterly GDP on an annualized basis has been recorded over the last couple of years. So what's evident is that where the blue line represents the contribution of technology, vis-a-vis AI, vis-a-vis technology components and peripherals and services where that spending has contributed to the overall GDP that's in the entire gray dotted line area of each bar. So over the past year and a half, we've certainly seen, I should say a couple of years, we've seen a shift in the GDP compilation component with technology contributing more over that time. Consumers typically represent about two-thirds of GDP, but here we're seeing a shift in that where that is moderating, having contributed 0.4% to the overall GDP rate in the first quarter of 2.1%, and technology served about 2% contribution.

You believe that's mostly AI-driven?

Well, so that's a great question, actually, because it comes from, again, the Bureau of Economic Analysis website. And it's kind of interpolated from the data that's pulled from that. It's extrapolated based on three components, and it's there on the footnotes. It's contributions from computers and peripheral equipment, information processing equipment, and software. But the ramp up of the AI and... Yeah. discussion and we've seen in our own workflow use of AI and the capex spending by S&P companies has reported amount of issuance and bonds and equity to raise money to build out and to roll out the build out of these data centers that are required, et cetera. I think it's fair to attribute it to that, at least a large portion of it. In either case, it's hard to deny that there is a tech ramp up right now. is softening. I would be proactive about asking a question that was already asked because I thought it was a good one. And the question is, are we in an AI bubble, similar to what we saw in 2000? In our view, and from our view of credit research, our research department does not believe we're in a credit bubble. And they cite really three reasons. That hyperscaler investment demand is real. It's not speculative. They already have more compute demand under contract than they can deliver. So they need to build out further. And number two, debt levels are manageable. And AI-related debt is mostly concentrated among the large MAG-7 type companies, Amazon, Apple, Meta, and so on. But there is one exception in there, and that's Oracle. They have... And they have some cash flow differences compared to the other companies. So that was recently downgraded, but we think that's an isolated incident. And third, companies are raising equity to offset AI. It's not necessarily all credit-driven. And balance sheets remain healthy, and cash flow remains healthy.

So what was the short answer to that question? Is it available?

At this point, we're monitoring for any change in the significant shifts and fundamentals of the companies and balance sheets and spending. But at this point, we don't believe it is. If we look at the next slide, we talk about here the new Federal Reserve leadership. As I mentioned, it was Kevin Marsh's first meeting in June. And here, there are really three key takeaways. From that meeting, at first, there was a clear hawkish lean, as opposed to the dullish lean lower rates where there wasn't a tone that the Fed was interested in lowering rates from that meeting. That was kind of, I think, a market surprise. There was a unanimous vote to keep rates unchanged at 3.5% to 3.75%. That's the Federal Reserve's overnight benchmark rate. And the dot plot, which they produce, and we'll look at it at the next page, showed nine members actually anticipating by the end of the year we would see a rate hike, largely resulting from the impacts of the Iran war and higher energy costs. Uh, second, um, there was a more kind of concise and fact based fed statement. It was really curtailed to what we had seen in practice in the past. It essentially said no rate change right now. And there's not enough information to deduce whether or not rates would go higher or lower in the future. Um, chair Warsh is very, he's a fan of fact based evidence and not providing forward guidance. He doesn't think that future guidance is, is helpful based on current information. Um, that rhetoric and more fact-based. In fact, he withheld his own projection in the next slide when we look at the doc file. We'll talk about that next. But the third item and takeaway from the meeting is five new task force that he introduced. And they'll be in charge of looking at different things and ways to improve the Fed results and financial system. And five tasks, four, as we note here, are communication, balance sheet, the Fed's balance sheet, data, how it collects data, the type of data it collects, what it's looking at, the methods, et cetera. Four, productivity and jobs and their overall inflation framework. Essentially, everything's on the table for review. Looking to the dot plot on the next page, what's notable here, if you counted the dots, I'm guessing you didn't, I didn't, but I know that there's one less here. Okay, I did count it once I realized there was one less, but there are nine members that believe that each of the dots represent each of the members of the Federal Reserve. And we have nine dots above where the current range is, which would imply a rate hike by end of year. And notably, it's Fed Warsh. He's that last 19th dot that we don't see on here because he didn't provide his projections for this particular chart that they typically produce every other meeting. So again, limited guidance. It's really difficult to see what the Fed and There are projections out there for each of these next couple of years and their longer term projection, which really didn't change. Longer term, they still expect terminal rate Fed funds to be at 3.1. As I mentioned, now we're at three and a half to three and three quarters. So where we are for the current period would imply there is a rate hike ahead. I'm not so sure the market agrees with that after the next CPI print normal. soft but stable labor market and waning inflation concerns. And because of the less data, I'm going to rely less on speaking to the next slide. I'll skip over that turn to slide eight as a number of far right. We are managing the city's policy to that one to five year US treasury, which gives us a duration of about two and a half years on average. And over that period, if you look at the two-year, the benchmark treasury most close to that duration, we see that yields did rise, and particularly notable in that belly of the curve sector where the two-year sits. It rose up to a 4.13% at quarter end, which was about 30 to 35 basis points higher than where we began, similar to what we saw in the first quarter. And that, again, muted returns for the second consecutive quarter. because when rates rise, bond prices fall. Since January 1st, the two-year treasury is about 70 to 80 basis points higher than where we began the year. That's, I think, certainly one of the big surprises of the year. Now, in the second half, looking back over where we've been, the market came in expecting two to three rate cuts. That's gone. We've seen the rates rise by this amount. I think that would probably be a shocker in the fixed income market and why it pays to diversify, continue to average over time, diversify across maturity sector. in the portfolio, which is And again, we think the market may have overshot this pricing because if you consider the Fed fund rates being between three and a half to three and three quarters, even with a rate hike this year, three and three quarters to 4%, and the two-year sitting at end of quarter at 417, that's above where the Fed funds rate would be. So even if they did so by year end, we think the two-year is an attractive place and extending bond portfolios is an attractive option at this point. The next page highlights the entire yield curve. It looks at less than just the two year and extends it from three months to 30 years. And I guess what we'll take away here is that the curve continued to rise in the front end with rates most notably higher in the one to five year area. And the curve is positively sloped. That is a positive for fixed income. active managed fixed income portfolios, that's an element of contribution to total return as we sell bonds and are able to take gains and reinvest at higher rates out longer term. I think that the two-year rose more impactfully than long-term because of those short-term inflation expectations. But as we saw on that five-year outlook on inflation, So the next page shows us credit spreads for various asset types that we hold in the city's portfolio. And we saw at the end of last quarter volatility in spreads. And so we were able, particularly in March, to take advantage of wider spreads. And again, the spread is the value of which we could buy corporate bonds in yield above what the similar dated U.S. Treasury yield would be. So here, from the beginning of quarter two, March 31, to the end, the opposite occurred. Spreads again tightened to again historic lows. And that's great for investor demand, for the overall markets and financial conditions. Investors are interested in buying credit. Financials look good and continue to do so. But investors through the quarter saw less value overall, as reflected from the black line where we began the quarter to the yellow dot where we ended the quarter. So just looking directly at corporates, although the overall yield is higher than treasuries at that zero level bar, the additional amount of yield you get as reflected by that black bar and yellow dot declined over the quarter from that black bar to that yellow dot. So that was supportive of overall returns outperforming treasuries for the period. But when considering buying new credit, it makes it more difficult to get that value that we want to see out of those corporates. And the same could be true with the others, just to a less degree. Federal agencies are kind of a one-off because they're already negative to treasuries. There's dynamics there largely with kind of a slow housing market at the moment, less issuance. So that would be one of the factors there. So we're just not interested in buying agencies and haven't been for some time.

So the two that you have, you're just essentially locked into them. That's why they're still on the books then? That's right.

Unless there was a callable with a structure that made sense, but we really generally stay away from callables in an actively managed total return portfolio. We don't like the selling the option because they typically don't work in favor of total return values. On the next page, we just substantiate those spread changes with the amount of returns we saw for each of those asset classes that we just talked about. And here we do this on the left-hand side for the quarter and on the right-hand side for the full year. And this is a function of overall market yield, as well as change in credit spreads to the similar data U.S. Treasury. I'm not fond of the next slide that we included this again. Here we look at the two-year again, but I think it provides good context for where we were historically and why we continue to believe extending is the right option at this point. That blue line is the two-year shows we ended at 4.17 on the two-year Treasury. why we're extending it for her. If we move ahead three slides, these are things we like to kind of summarize our future factors to consider for the next six to 12 months on slide 16. We've really only adjusted two areas of the six that we show each quarter. That's inflation. We do believe the inflation picture is improving as the headline risk of oil has been softening. Page 16, a couple of slides ahead or behind this, before this. Thanks. Yeah. So that top random. We saw that as a concern and a risk last quarter, and we see that softening, and we've moved our view onto that to the yellow. And financial conditions, you know, given where we've been with volatility from the prior quarter, equity and fixed income markets have largely dismissed the Iran war and conflict in the Middle East, closure of the streets. volatility on oil and inflation has waned, as I've mentioned. So our view overall with 80% of the S&P companies reporting better than expected earnings continues to be strong. So we've moved that to the green area. Okay, now we can look to the items. If we move ahead three pages to what you're on, the portfolio snapshot page is found on the slide. I can't pull that up on mine. I'm sorry, I don't have the page number, but it's titled Portfolio Snapshot. That's up on the screen here. Total market value at the end of the second quarter for the city in a managed portfolio, this excludes any overnight investments made by the city, $170.4 million. That includes market values, accrued interest, and the money market fund balance. It excludes, as I said, money invested in life and other outside balances. We have a portfolio duration of 2.52 years. That's about 102% of benchmark. And we'll never go well beyond the benchmark. We think 5% is an extreme in either direction. So this kind of reflects where we are with the portfolio and bucking in longer rates. Yield at cost for the portfolio was 4.29%, and that compares to the yield at market, 4.36%. Prior quarter was 406. So we are slightly now behind by seven basis points, the current market. But with a 30 basis point increase over the quarter on the two-year, we think that's a pretty good return. I shouldn't say return. It's a pretty good average yield for the portfolio, considering we bought bonds over time. And now we're trailing the two-year by only seven at a time when they have risen by 70, 80 basis points over the year. I think it's something to be proud of. In terms of credit quality, we still continue to manage the portfolio for the three priorities that have been laid out in the policy, safety, liquidity, and yield. So about 80% of the managed portfolio has credit ratings of AA or higher by S&P, as we note in the bottom left. If it's not rated or if it shows BBB, it's not out of policy. It's just rated by Moody's or Fitch, according to it. Sector allocation. U.S. Treasuries rose 4% from 44%. We're now at 48% of the portfolio. And that was reallocated from asset-backed securities, which is now at 9% from 13% in March. Corporates, there was no change at 27%. But I think I'd remind you the high... So we've found an opportunity to kind of move back into treasuries and kind of await that whitening again. And then the chart of duration distribution shows how we align with the overall benchmark. In the end, we get to a similar duration, but we sometimes do that with targeting different buckets in terms of the duration of year. Turning to the next page, we look at made sure diversification. Outside of U.S. Treasuries and agencies, excuse me, it wasn't the next page, it was three ahead, but I skipped over the... You're right. Okay. Okay. Our largest holding outside of U.S. Treasuries and agencies is Citigroup at 1.5% overall of the portfolio, followed by an asset-backed security of a We also picked up some new names in here, things like issuers like ServiceNow and Charles Schwab and NVIDIA are now part of the portfolio and those you'll see in the corporate section there. Sector allocation review on the next slide. Just another way to look over the past few quarters at where we've been, and I've highlighted this in the sector allocation on the snapshot page showing that we moved from Treasuries, And again, on the next page, we see that over the past quarter, we were buyers of treasuries on the net. We didn't stop buying ABS or excuse me, stop buying corporates necessarily, but we bought less of them over the period that we did treasuries. And getting close to the end on the next page, we'll turn to the portfolio's performance. For the three months ending June 30th, interest earned $1.6 million. And a change in market value, it declined by $943,000 for a total dollar return of $703,000 for the quarter. That represented a modest return of 4.1%, which did outperform the benchmark by about 18 basis points Of course, it's a bit modest, and it pulled down the overall one-year return to 3.14%, because as I mentioned, we've seen higher rates in the last two quarters. But fixed income is a double-edged sword. So at the same time, although we have higher yields, it allows us to reinvest new monies at higher rates. So we're locking in that as well. So if you exclude the unrealized gains and losses and strictly look at overall earnings, we can turn to the next page for that. This is more of the kind of the accounting accrual basis earnings for the city. Since all positions in the portfolio continue to accrue interest, if we strip out market value changes and look strictly at earnings, that aligns more with that 4.29% overall earnings rate. This gives you that picture. For the three months, we have the same amount of interest earned as shown on the prior slide. We have some realized gains of $5,000 for the quarter as well as a change in amortized costs upward of $156,000, producing total accrual-based earnings of $1.8 million. 1st, 2019. And that's noted in the footnotes.

And I'll pause there and be happy to answer any questions.

I do. I think that just one, and I think This is an opportunity to see it probably more as taking the dots of what you've already indicated. But they're in the summary of cells. This would be more like page 56 or so. There's only about roughly something less than 10,000 losses on those activities. It looks like the largest. hits on those bonds that were sold were in the callable sector. Just with everything that you just reported, help connect the dots for the reasoning behind these transactions that resulted in the hits, albeit minor.

Yeah, thanks for the question. You mentioned callable and it struck me. I was thinking, I just finished saying we don't buy a lot of callables for the portfolio. With corporate, and I know this doesn't answer the question, but I'll get back there. I just want to get ahead of this one. Corporate bonds, most corporate bond issuance have call structures, but it's not in the economic sense of agencies that I was referring to where they're called when rates go down. Most corporate bonds have call structures to be able to refinance or in the case of financials, there are capital reasons for Basel. capital requirements that banks have, that they issue bonds with call structures that turn into floating at the end, et cetera. So it's very difficult to buy a corporate bond that doesn't have some form of call on there. But the calls generally are longer calls as well. They're not five-year bonds with three-month call options. They're, for example, five-year bonds with four-year call structures. So you still have a long walkout. So it's a little bit different than what I was referring to earlier from that perspective. And how do we make the decision to sell bonds? A lot of it is a function of movement because of spread movement. If we see spreads narrowing and we think it's a good option to kind of wait into treasuries, we'll still continue to earn. We may have to realize a loss to get out of the corporate, but we're moving back into treasuries and awaiting that spread to widen out again to kind of reallocate into corporations. sector. And perhaps a more primary reason to sell is less of a function of realizing gains and losses, but to maintain the duration of the portfolio to have a target to meet that benchmark duration. That two and a half years becomes a very important part of the strategy for the city. We don't ever want to try to anticipate where we think rates are going to be. We're not in the game of guessing. We would have been rates rise as opposed to fall. So reallocating bonds that are closer to maturity and moving them out the curve to maintain that duration is a big factor of why we're doing that.

That wasn't the answer I was expecting. Thank you. What was the answer you were expecting? Well, I thought it would be more yield related and such as well. So that's why I'm asking these questions because I know I don't know the answer. It's very interesting.

Thank you for the question. Yeah, yield is not the primary factor of that, if even a factor at all in most cases.

One other question I do have then, is there advanced notification with the city when you make a trade like that? And are the calculations provided to the city in advance of those decisions? Or is that pretty much delegated out to your firm?

to PFM, but transactions do go through NIDA for approval.

Yeah, because they don't receive advance notification, but we do what we'll receive is trade recommendations from the investment side of PFM that come to Sean and I for requests for approval. Every single trade has to be approved by either him or me, but no, they do address the rating, the assumed yield of the training question. And then we make our determination from that.

Well, this really is very minor in the big picture of things. So it's more, my question is related more to the processes than anything else. Thank you. Anything else?

Any other questions?

Any questions?

George? No, thank you. One more question I have, and I think we talked about this last time or the time before, when we're looking at realized gains, losses, earnings, the fee structure that we talked about possibly putting in what the fees are to give us what an actual net gain or loss on the portfolio? Is that possible? Is that a good idea? Is that a bad idea? It's absolutely possible.

And we typically generate that because of the And this is preliminary. You did ask that. And we don't have that for this report. I can always send a follow up after this. It would be included on the page before this. And it makes it very obvious.

Absolutely. For the public to show what exactly happened.

Yeah, it's just due to the timing of this meeting and then when the report is generated and available by PFM, the fees aren't generated by the system by the time Michael has to provide this report to us. So they won't ever be in this report in a timely manner to this committee with this meeting date.

Understood. And I'm recalling the whole conversation, and I think we were at around eight basis points per year overall for the portfolio. So if you look at the one-year return on this page and subtract out eight from the 3.14, just kind of 3.14 minus 0.08 will give you an idea that we're still above the overall benchmark return performing there. But I agree it should be included anyway, and we'll follow up with that as available and have it distributed.

Thank you. Any other comments from the committee? No, thank you. With that, Michael, thank you very much. Very thorough report. Thank you. I appreciate you. Then we move on to 6B, the fund balance analysis update from Anita.

Right. Let me pull that document up here. So you do have the report in your packet, and I am happy to answer any questions that you may have regarding any of the specific funds. We did just do a budget update to provide some updates to the estimated ending fund balances for the funds, although there was nothing really significant within that update. But if you have questions, I'll be happy to try to answer them.

The one question I have is a little different format because I see period 13. I don't think that was on prior reports.

It is.

When we talk period 13, are we doing 26 in a year or are we doing...

The financial statements are kept on a fiscal year end for June 30th with 12 months in the year, but every financial software is going to have period anywhere between periods 13 to periods 15 and typically that period 13 would be for year end adjustments and or auditor. So when we run a report like this to ensure that we're encompassing every piece of information that's available, we'll run it through period 13.

Understood. Thank you. Other questions about the funds?

I'm curious to know about the funding structure, the fund numbers. $1,000 is basically all general fund.

That's correct. $1,000 are the three general fund or funded through property tax dollars.

And then the $2,000, is that based on local entities? It looks like there's parks.

So a lot of those are restricted dollars. So if you look at, for example, the street fund, which is gas tax, those dollars are restricted to be spent on a purpose related to streets and streets improvements. And then further down, you'll see the PFP or the public facilities, element funds, transportation, admin, library, et cetera. Again, those funds have restricted purposes. So all of the 2000 funds are restricted in some way in what they can be expended on or how they can be expended, how the revenues are brought in. So for example, on this following page, all of the, lighting and landscape districts. Those revenues, as they come in, they can only be expended on those specific areas. So each one of those has its own fund.

So is there departmental decisions that are made based on the positivity or the negativity of those funds?

Well, yes. If a fund is in a negative status, for example, The Fund 270G, which is the original Lightning and Landscape District, is in a negative fund balance. While there are traditionally expenditures that happen in that original zone, the monies that come in from that are transferred from the general fund.

Okay. So is that generally how it works throughout all the funds? Is that the general fund? Not necessarily.

It just depends. So, for example, now that a lot of the referrals of the report, you can see that the airport is in a negative fund status as a result of the outstanding Interfund loans. And the loan is actually owed primarily to the general fund. And it will remain in that negative balance until that loan is paid off.

Is there, for the other funds that utilize general fund for a loan or for offset, Is there usually a city council measure that's made or is it presented to the city council?

It's presented to the city council as part of the budget process. So any transfers in between funds either have to be presented as part of the budget when the budget is approved or if they're not anticipated when the budget is approved, then they have to be taken to city council for approval. Okay.

I just case anybody asks me. I like to say there's a transparency or a method that can track it from one original source to another and the purpose behind movement.

Yeah, and there are a lot of transfers that occur on a routine basis. So, for example, we have a cost allocation plan and those transfers will occur on a monthly basis, but the kind of the grand total of those transfers are included on the budget. Similarly, in things like the contributions to our OPEB 115 trust that is pulled from all the funds that have employees in them. And it's recorded as a transfer to the general fund because that's where the check is cut up.

Okay.

How many of these... are being impacted by seasonality. In other words, if we're looking at it on a month-to-month basis, are there selected ones that can look quite different when you finally get into the last months? Or is it pretty trendy through each one?

You know, each fund is a little bit different. I wouldn't necessarily say they're affected by seasonality so much, but by their functions. and what they're proposed to do. So for example, the street fund with the gas tax, those expenditures really have to do with when the projects or the expenses are completed, which don't necessarily, I mean, you're not going to be doing a whole bunch of street work during the winter, but you could have a major street project that has to occur during the winter months. So it really just depends on the fund is trying to do more so than the season thank you any other questions no good understanding though of how it works i have one quick question on fund number 2370 a rpa federal assistance you know what that is yeah that's the arpa the remainder of the coven dollars that have to be expended by this December So the revenues had been previously received and the majority of the revenues, if you recall, were transferred out to the general fund as allowed by the U.S. Treasury standard allowance dollars. But there was about a million five that was restricted dollars and we're expending the final amount of those restricted dollars.

Thank you. Does anybody ever add this all up for a net overall general fund for Say of Lincoln?

Well, so the general fund is those, the three funds, the 1000, the 1010 and 1020. And those are combined in the, both in the audit report and that they are also rolled up in the budget.

Okay.

And the other ones are always kept separate. Yeah. Don't co-mingle special funds.

Any thoughts? Thank you. Which moves us to 6C, which would be the quarterly treasurer's report.

You have the standard treasurer's report. However, I did want to bring to the attention of the committee that at our last meeting, That's not the right one. At our last meeting, a change was requested to include all three months of the statements. And I did actually develop a new monthly investment activity report, but it appears that when I loaded that into the agenda system, it didn't take. So I'll have to provide that to the committee after the fact. But we did provide this This report to include all three of the months to show the beginning and ending information and the activity for each one of the months of the quarter. So I'll email that out to the committee after this meeting.

Thank you. Appreciate having the three months.

Quick question. Seems like in the case of the local agency investments, Are they posted just once a year, or do we get return information on the agency fund every month?

It's once a quarter.

Once a quarter? Okay. I noticed that this was just under 1% for the local agency investment.

Yeah, that's pretty typical for the wave.

Do you have any idea what it looks like it might be for the year yet?

I don't know. We take a look. I think the information included from there is for the quarter ended. See if I can pull that up. So late for the quarter ended June. Is that a current rate of 3.92%? But the ratio earnings are the effective rate of 1.07.

Thank you. I would think we'd be very pleased with that, considering the times.

Yeah, I mean, you know, the LEIF is definitely the most, I'll say, secure investment. It's more just like a glorified savings account than anything else. We pretty much expect commensurate low interest amounts. Are there any other questions?

The only thing I know about this earlier, but CalPERS came back with their returns on Monday, and they showed a net investment return of 14.8% for the last year. which moved them to 85% funded, which is an increase up from 70% funded in 2016, and they're now 85% funded. So CalPERS is headed in the right direction. Ultimately, that'll have a positive impact on us.

That reminds me that as it deals with the retirement program, the Section 115 Trust retirement, I mean, it's brand new, so the observation or question wouldn't be quite as meaningful yet. It might be interesting to have a graph chart between CalPERS returns and the Section 115 Trust, the performance. line so we can make a decision where those funds go back or eventually deposited. In other words, do you take them out of the 115 trust and put them in with...

When council adopted the 115 trust, it was with a plan and an intention to pull those monies out when the current unfunded liabilities expected to reach a certain level. And I apologize, I don't have that That fiscal year in my head, but there is a plan of when those funds would come out to sort of cut the top off of the increased in those amounts.

But we would also during a year, if I understand it correctly, then. I said that we put 3 million into the section 115 trust retirement. We intend to do that again next year. we still always have the opportunity. We're not required to put money in the 115 trust every year. Am I correct in that? We can rededicate those, the new monies to go over to CalPERS instead?

Yeah, so we, again, when the trust was initially formed and I did pull up each one's activity, when the council did approve the initial trust, they approved a contribution of $1,000 $3.5 million that was put into the trust with a follow-up contribution this last fiscal year of $500,000. The initial plan didn't call for any additional contributions that putting that $4 million in and leaving it to sit for a number of years, again, would be sufficient to cut the top off of the increase in the unfunded liability. So there is at the moment a set plan to continue annual contributions. However, At the same time, the council did direct the finance director to seek the ways possible to mitigate the effects of the unfunded liability. So I'm planning when we bring forward the next biennium budget to continue the half million dollar contributions each year as long as funds are available.

offered out there, by the way, is not necessarily a good long-term strategy. My real interest was is having a good solid idea over time how the 115 Trust is doing compared to the CalPERS investments, retirement investments. So thank you. Sure.

With that, any other comments we can do? No? Very good work. Any words of wisdom?

No, sir.

With that, our next regularly scheduled meeting is October 21st at 3 p.m. I call this meeting adjourned.

The time is 4.03 p.m. By the way, Nita, if something I thought that