Finance Committee - Regular Meeting

I think we are live and ready to begin our financial finance committee meeting. Oh, okay. We'll pause. We have a technical item we're gonna work out and then we'll be up and ready shortly. All right. We are back, ready to call to order our Finance Committee meeting for August 12 at 3.02 p.m. So we'll call the meeting to order, and our first item is public comment. So we'll hear the recording.

Public comment is now open for this item, available in both English and Spanish. Call 951-826-8686 and follow the prompts to access the meeting in either language. To request to speak, press star 9. You can also join via Zoom. The meeting ID for both languages can be found on the agenda.

All right, we have no callers online and I do not have any requests to speak in the chamber. So if there are no requests for public comment, we will close public comment and move on to agenda item number two on our discussion calendar. This is to look at any updated investment policy and resolutions for the investment funds. So we will turn it over to, I don't have, do I have your name listed here? I think I do. Oh, yes, Eleni Carranza. Yes, please. Thank you.

Thank you. We actually have our investment advisor, Chandler, on the phone, so they're going to give the first presentation, which is a brief portfolio update and market update, and then I'll come back to you to discuss the policy. Do we have Jason or Bill on the line?

Good afternoon. This is Bill Dennehy from Chandler Asset Management. I'm calling from my home. I'm actually out on vacation this week, so I apologize for my golf shirt attire. But before I get started, if anyone has any questions about some of the slides I'm going to go over, don't hesitate to stop me so I can explain in greater detail. My plan is just to cover a few of the economic slides and then talk about the portfolio. So if we could go to page four, which has the payrolls report. Back a little bit. Back. One more. Right here, so this is just a picture of the payroll situation and the unemployment rate in the US, this report comes out on the first Friday of every month at 530 am and it really sets the tone for the overall market for the month. The most recent report came out last Friday and it was a little soft. It actually came in with a negative 23,000 jobs created. But the three-month moving average is 20,000 and the six-month moving average is 44,000. Those numbers are not reflected in these charts. These are the most updated numbers. But we have really described the employment backdrop as we started the year expecting really a low hire, low fire environment. And the market really surprised to the upside in the first half of the year. We think largely because of the fiscal stimulus that was in the system, as well as some of the pickup and jobs that we saw because the World Cup was hosted in North America and predominantly in the United States. And that certainly helped the payroll backdrop in the first half of the year. We do expect to see some modest softening, like we're starting to see with the July report as we roll through the second half of the year. But we do expect the unemployment rate to remain low. And we think just the overall employment backdrop is going to remain relatively positive because of the demographic situation with the aging of the population. We just think that unemployment rate is likely to stay low and really supportive of the economy. We can go to the next page. So the next page really just highlights oil prices. They've certainly popped up a lot because of the crisis in the Middle East. We would argue that given Given how tenuous the negotiations are currently, we really think that oil prices are actually a little too sanguine. But we think that West Texas Intermediate is likely to average around $80 for the course of the year. I believe when the market closed today, it was just under 84. So we do think that that will pressure headline inflation, but not core inflation. So that is really an important differentiation at this point. If we go to the next page. So the next page on the left shows the consumer price index. This number was actually updated this morning at 5.30 a.m. And the numbers are really positive. On the headline number, it was only one-tenth increase for the month. And for the core number, which excludes food and energy, it was positive two-tenths, so really pretty benign numbers. The Fed forecast based on the personal consumption expenditures index on the right, and they really want that dashed line to be around 2%. Right now, that number is at 3.3%. And we believe even if core PCE inflation averages 3 tenths for the next three months and then settles in at that 2 tenths pace, core inflation will end the year within a range of 3.1 to 3.4%. which, based on our view, that means that the Fed's current policy rate at 3.5% to 3.75% is actually appropriate. And we have an out-of-consensus view where we really think the Federal Reserve is going to remain on hold over the six-month forecast horizon and through the end of the year. Part of the reason why we think that is because the new Fed chair, although he talks very hawkishly, hawkishly indicating he's willing to tighten monetary policy or raise rates, He did form these five task force and we think these five task force really give the Fed cover to keep the rate steady until their conclusion. And because we're not seeing any elevated wage inflation and because the market based measures of inflation also remain contained, we really have a view that the Fed is going to remain on hold through the balance of the year. If we could go to page 11. Actually, you know what? Why don't we just leave that right there for our economic update? So we really think the economy is still going to grow positively in the second half of the year, but not at the same velocity that we did in the first half of the year because the fiscal stimulus will have waned and sort of the euphoria from the World Cup will also have dissipated, which should slow down the economy just a little bit. If we could go to page 13, which is where we just were, which is the compliance dashboard. So, Malene will speak a little bit about the investment policy. We need to go back a couple of pages. I'm sorry.

One more. One more.

Okay, so this page really delineates all the different tenants of your investment policy. We have a pre and post trade compliance system and you can see everything that is invested in the pool portfolio meets both California government code and the city's investment policy requirements. So this is good news. If we could go to page 19. Yeah, back a little. Can you go back maybe two more? One more.

One more.

Right here. So this is the pooled portfolio. This report shows the change from February to May. The report that I have showed it through the end of June. But nonetheless, the characteristics are pretty similar. You can see our duration at 244 is very close to the duration of the benchmark at 249. We're really trying to keep that pretty much in line with the benchmark. And we're really trying to add alpha or outperform based on our asset allocation and structure the portfolio relative to the benchmark. If we go to the next page. So this shows the overall asset allocation of the portfolio. We are trying to increase our exposure moderately to the corporates, which right now are at 24%. We'd like that to be a little bit higher. We're also trying to keep our ABS allocation just a little bit higher than where it is today. And we're also trying to opportunistically grow our agency CMBS exposure as well. We're really keeping our overall agency and supranational exposure low, and that's because the relative value in that sector is very compressed and doesn't really offer an opportunity for us to differentiate the performance by allocating to those sectors. We can go to the next page. So this just shows the overall diversification of the portfolio. So we don't have any concerns about any of the underlying holdings in the portfolio being downgraded to be outside the scope of the investment policy. So all this looks good. If we could go forward one or two more pages. One more. So this shows the duration distribution of the portfolio relative to the benchmark. So we are trying to be overweight that two to three and three to four year portion relative to the benchmark. So you can see those green bars are a little bit higher. We've also been adding to the four to five year portion of our allocation. We want to get that closer to in line with the benchmark based on our view that monetary policy is going to be stable and we want to really lock in some of those longer term interest rates with the treasury curve being a little bit elevated. Can you go to the next page? So here's just a quick snapshot of the performance. Over that three month period between February to May, interest rates rose. So the portfolio did generate a negative total return, although it did outperform the benchmark. And you can see those longer-term returns are all positive and, importantly, all above the benchmark. So this is something we're striving for at Chandler, and we hope the council and finance committee is happy to see that as well. I have some comments on the decommissioning trust, if the council would like me to make those. Otherwise, this will conclude my report for this afternoon.

Thank you, Bill, for the presentation. If we can switch to the second presentation, please. So the second part of this agenda item is a review and update of our investment policy. My name is Melinne Carranza. I am your debt and treasury manager within the finance department. And this item being presented to you is our annual review. The updates ensure that our policy continues to reflect current statutory requirements of California and state code, I mean, California and municipal code, excuse me, and best practices in public treasury and investment management. So the city's investment policy provides a framework for how the city's surplus funds are invested through Chandler Asset Management, who actively manages our portfolio. It ensures our investment practices comply with federal, state, and local laws, including the California government code that requires the governance of our excess funds. City Council formally delegates the investment authority to our City Treasurer or Chief Financial Officer, Edward, as part of our budget process, and we do currently outsource the active management of the portfolio to Chandler. The current investment policy was updated last on April 2020 under Resolution 23566, and staff and our investment advisors have reviewed it annually, and updates are brought only when material or statutory changes are required. And our core investment priorities always remain unchanged, safety, liquidity, and yield in that order. The policy continues to emphasize prudent risk management, diversification of the portfolio, and strong transparency as highlighted with the list of diverse issuers we buy and the... compliance grid that Bill just provided. The changes recommended today are minor and largely technical. They align our policy with recent updates to California code and ensure consistency with current public treasury standards and terminology. And I'll discuss the changes in detail right now. The two highest updates are related to the commercial paper asset class. The first was that state law increased the maturity duration to 397 days. So we're aligning our policy with state law, increasing that flexibility. And the second is to the agency category. Previously, public entities with less than $100 million in assets couldn't buy up to 40% of commercial paper, which is another asset type that Coe permits us to invest in. This authority has been extended through January of 2031, so we want to align our policy with that. And then the other changes are minor. They're grouped together. One was to update outdated terminology. One was to make sure that our day counts are based upon settlement date, which allows us a little bit further of maximum maturity. And the last is to update the prohibited investments to not allow zero interest accrual securities of any type. And with that, we recommend that the finance committee receive and provide input on the updated policy and recommend that we bring it to city council next month to adopt and update the investment policy and accompanying resolution. And that concludes my presentation. I or Bill can answer any technical questions if you have some.

excellent thank you so much in clarifying questions before we go to public comment if we have any no do we have any one that would like to comment we have no one online and I see no cards here in the chamber so we'll close public comment and turn back to the dais here for any questions thoughts comments or emotion So we have a motion and a second to move this forward. Thank you. I think it's fairly straightforward, the updates that you've outlined. This is sort of an annual process we go through, pretty straightforward. For the public's edification, there's a redlined version attached as well. So anyway, thank you for that. Do we need the device here? Do we need to vote? All right, we'll do that. Motion Ward 3, seconded Ward 1. And it passes unanimously. Thank you. All right. Thank you all. We'll move on again to another procedural item here, an annual review of our financial health indicators. And I'll turn that over to Ryan Carter.

All right. Thank you.

Yeah, good afternoon, members of the committee. I'm Ryan Carter, controller. Today I'll be presenting our financial health indicators. All right, so each year the finance department prepares these indicators to spot early signs of financial stress and ensure we're managing city resources proactively. The purpose of these indicators is to open a dialogue and provide clear and useful financial information. As we go through these indicators, we'll be trying to answer one basic question. Is the city of Riverside financially healthy? And to do this, we'll be asking three additional questions with 11 measures to evaluate the city's financial condition. Each question evaluates Riverside's services to its residents. And we'll also compare the Riverside with its neighboring cities to see how the city relates. These comparative cities were chosen as a part of a market basket of full-service cities similar to the city of Riverside. All right, so our first key question is, can the city pay its bills now? And we'll examine two indicators to answer this. Okay, before I begin, I do want to mention two key points as we go over this data. First, keep in mind their support is not intended to give an overall grade of the city's financial health. It should be viewed as one lens among many for evaluating our financial condition. Other financial information such as the quarterly budget updates, biannual budget, and city credit ratings should be considered when viewing this information. The second item is that where available, I will mention any benchmarks for a particular ratio. However, not all ratios will have a benchmark, and this is due to governments having unique functions, priorities, and revenue sources. With that being said, let's dive into the first ratio. The first measurement is the General Fund Reserve Ratio. A declining fund balance can be a sign of fiscal stress. If you look at the city's five-year trend, we're showing a decline in fiscal year 24 and 25. However, the decline was not from overspending, but from setting aside reserves, such as the future pension costs, which are not included in this calculation. At the bottom, you will see the city's ratio remains strong as it relates to the comparative cities. And then for a benchmark, the Government Finance Officers Association, or GFOA, recommends maintaining two months' worth of revenues or expenditures as available fund balance. And if you're gonna put that into a percentage, it's roughly 17%, making the city's 33% well above the recommended amount. All right, our next indicator is the general fund liquidity ratio. A negative ratio may indicate a city does not have sufficient cash available to meet its current obligations. A downward trend may show a declining cash reserve or significant increases in current obligations. If you look at the five-year trend, the city is showing a positive and upward trend, implying cash reserves have increased and they're available to pay for current obligations. The city has experienced increased revenues and investment earnings over the years, which has raised the ratio and resulted in a strong ratio compared to our peers. And then for an overall benchmark for this ratio would be right at one, indicating that an agency has enough liquid assets to cover its short-term financial obligations. The city's ratio of 5.74 puts us well above the benchmark amount. Okay, next we'll ask, can the city's revenues cover its expenses? And we'll look at three indicators to evaluate this. Our next measure is the general government growth in net position ratio. The general government includes all funds except for enterprise funds, such as electric and water, and fiduciary funds. This is our successor agency. A higher ratio suggests that annual costs are adequately funded and financial condition is improving. If we look at the five-year trend, the city had a 0.4% ratio, implying a small growth in the current year net position. The small growth is primarily due to revenue slightly outpacing expenses for fiscal year 2025. The city's fiscal year 2025 ratio indicates that resources are not spent faster than they are earned, but also that funds are not overly accumulated. All right, our next measure is the general government operating margin ratio. A higher ratio indicates basic government services are more self-sufficient through charges, fees, and grants, and less reliant on general tax dollars such as sales and property taxes to fund program revenues. The city's fiscal year 2025 ratio indicates that the city funds 31% of its governmental activity expenses through program revenues such as business license tax, permits, fines, and grants. In the bottom chart, the other cities appear to fund a larger share of their operations through charges, fees, and grants compared to the city of Riverside. In April 2025, updated developer fees were adopted by the city council. This ratio is expected to trend higher in the future as revenues become more closely aligned with service costs. All right, our next measure is the General Government Owned Source Ratio, our revenue ratio. This ratio explains how much of our revenues are from grants, which is 25% for fiscal year 2025. If we look at the five-year trend, the city saw a large ratio in fiscal year 2021 of 23%. This is due to increases in CARES Act grant and other related grants and remained relatively high at 21 and 20% in the two subsequent fiscal years. This is due to funds recognized for the emergency rental assistance program and American Rescue Plan Act, or ARPA. Then a reduction to 17% in fiscal year 2024 as COVID-19 grants subsided, followed by an increase to 25% in fiscal year 2025 as the final ARPA grant funds were fully expended. Looking at the bottom chart, it appears the city of Riverside is right in the middle, indicating our grant revenue seems in alignment with the other comparative cities. All right, now we move on to our third and final question. Can the city pay its bills in the future? And to assist with answering this question, we'll be looking at indicators six through 11. All right, the first of these indicators is the general government near-term solvency ratio. This ratio demonstrates the city's ability to pay a larger portion of its debts with annual revenues. A lower ratio indicates a stronger financial condition. The city's ratio has been moving in a lower and financially healthy trend from fiscal year 2020 to fiscal year 2022, then showed a slight uptick in fiscal year 23 and 24, and then finally a decrease in fiscal year 2025 due to the revenues outpacing expenses, primarily due to the final year recognition of the ARPA grant funds. Okay, the next measure is the general government debt, pension liability, and OPEB burden per resident. In the five-year trend, you will see a gradual decrease in fiscal year 2022 due to decreased pension liabilities. The increase in fiscal year 2023 was due to the return of the net pension liability primarily caused by the CalPERS decreased investment returns. Fiscal year 2024 and 25 remained relatively flat as the liability items increased at the same rate as the city's population. When looking at the city's comparative chart below, you will see the city of Riverside has the lowest burden per resident. The next four ratios will be continuing to analyze the question, can the city pay its bills in the future, and measure our long-term solvency. The indicator number eight is our governmental funds coverage ratio. The city has interest and principal payments on debt. The lower the amount of these payments compared to all other expenditures, the stronger the financial condition. Looking at the five-year trend, the city has been showing a downward and healthy trend in the past four fiscal years. Looking at the bottom chart, the city of Riverside shows a higher ratio indicating a weaker financial condition at first glance. However, this is primarily due to the conversion of the city's unfunded pension liability, which is not considered debt for this calculation, to a pension obligation bond in order to achieve long-term interest savings. This next slide is showing our enterprise funds coverage ratio. Some of our main enterprise funds are electric, water, and sewer funds. This ratio represents the interest payments made in comparison to the total enterprise fund revenues. A higher ratio indicates a stronger financial condition. If we look at the five-year trend, the ratio has been an upward and positive trend, mainly attributed to the continued debt obligation payments resulting in lower interest expense as well as gradually increasing revenues. In the bottom chart, the city's ratio appears to be low in relation to the comparative cities. This is primarily due to the city's significant investment in capital assets for electric, water, and sewer funds, with major capital assets funded through debt issuance. Our next indicator is the general government capital asset value ratio. Capital assets include land, building, vehicles, and public infrastructure. Over time, capital assets will lose value to depreciation and will gain value as new assets are placed into service. A declining ratio means that the overall value of the city's assets decreased over the year, indicating some assets may need to be renovated or replaced. A higher ratio indicates a stronger financial condition. Looking at the five-year trend, fiscal year 2021, we had a high ratio of 7%. This is due to a prior period adjustment of 80.3 million for land and infrastructure. This is due to a change in calculating street mileage from a system upgrade that year. Had that abnormality been excluded, the ratio would have been closer to 1%. The remaining fiscal years were between zero and 1%, indicating assets are being replaced at roughly the same rate they're being depreciated. When looking at the bottom of the chart, the city of Riverside's ratio is generally in line with the comparative cities. All right, this next indicator is our enterprise funds capital asset age ratio. This calculation is comparing our total value of enterprise capital assets to accumulated depreciation. A lower ratio indicates capital assets are newer and may not require as much replacement and maintenance costs compared to older capital assets. A 100% ratio would indicate an asset has been fully depreciated. If we look at the five-year trend, the capital assets have been aging over the past five fiscal years. But as we look at the bottom chart, we can see the city's enterprise capital assets are in a better condition than the majority of our peers. However, the increasing trend in the ratio shows that capital assets could require additional maintenance or replacement costs in the future. All right, now we'll be moving on to our informational indicator. This indicator is for informational purposes only and is a resource allocation measurement. All right, our last indicator is the general fund public safety cost ratio. This indicator is comparing the total costs of the general fund public safety, which includes police and fire, to the general fund expenditures and transfers out. A higher ratio would indicate more funds are dedicated to public safety. If we look at the five-year trend, in fiscal year 2023, there was a decline of 8% from the previous year. This is mainly due to the overall general fund expenditures outpacing the public safety expenditures for that year. The increase in 2024 was due to a rise in pension costs as well as additional personal costs as vacant positions were filled. Then again, in fiscal year 2025, the ratio dipped to 52% as overall general fund expenditures increased at a higher rate than public safety. All right, with that, we recommend that the finance committee receive, provide input on, and recommend that the city council receive and file the financial health indicators discussed herein. And that concludes my presentation. Here to answer any questions you may have. Thank you.

thank you before we see if there's any public comment do we have any clarifying questions all right we'll look to the back to see if we have any callers for this item no callers for item three and we have no public comment As always, this is enlightening. It looked so great up until 8, 9, and 10, and 11, but I think that we're on the right track. So that's the key. If there are no questions, we've got a motion from Ward 1 and a second from Ward 3. So we'll vote. All right, that motion carries unanimous. And we'll keep moving on with our meeting. Any legislative updates? Nope, no legislative updates.

Items for future consideration?

Man, 30 minutes on the dot. We will adjourn at 3.30. Thank you all. Appreciate it.