City Council - Regular Meeting

And greetings to our city treasurer, our city attorney, I see a chief of staff, our deputy clerk, and those that are here in the audience with us this evening. This is the special meeting. Today's date is Monday, June 8th. And the purpose of this special meeting study session is to discuss the quarterly investment report. And at this time, we will have roll call. Councilwoman Abdo? Here. Councilman Bullock? Here. Councilman Jones? Here. Councilwoman Roscoe? Here. Councilwoman Talley? Here. Councilman Wadsworth? Here. And Councilman Wilhite? Here. Madam Chair, we have a quorum.

Thank you.

Tonight's special meeting study session agenda is as follows. Number one, roll call. Number two, agenda. Number three, discussion. Quarterly investment report. Four is public comment. And number five is adjournment. And a motion will be in order to accept the special meeting study session agenda as presented.

So moved to accept agenda.

Motion by Mr. Weisberg, seconded by Mr. Jones, for the approval of the special meeting agenda as presented. Mr. Weisberg? Yes. Mr. Jones? Yes. Ms. Roscoe? Yes. Ms. Abdo? Yes. Mr. Bullock? Yes. Mr. Wilhite? Yes. Chair votes yes. Motion approved.

Thank you, Council. Madam Chair, at this time, we're at three discussion, and I would like to turn this portion of the meeting over to our sitting treasurer, and then she'll do the appropriate introduction. Thank you.

Thank you very much, and thank you. Good evening, and thank you all for being here. I know you love this. And this evening, I have Bray Lepley here, and she's going to do the presentation for the quarter ending March 31st, 2026. Welcome, and thank you for coming. Absolutely.

I feel like there's a little bit of sarcasm there. I feel a little bit slighted, but it's okay. There's a lot to talk about, but I'm going to try to make sure we hit the high notes here. So, there's been a lot going on in the markets, as you're all very aware. I'm not going to go through every single slide that's in this deck, but feel free if you do, if you are interested in all of this, feel free to go back through and look at some of these pages because I think they're really interesting. I do want to talk about a few things. So when we're talking about the quarter that we're reporting on, it was December to the end of March. So the first two months of the quarter were pretty even keel, and then we saw the conflict in Iran start at the end of February. So for the last month, really, of the quarter, we saw very different market environments, geopolitical environment, et cetera, than we had seen for the prior two months. So just keep that in mind when we're looking at the actual market returns and what's been going on. I just wanted to keep that at the front of everyone's mind here. So the first slide that I'm showing here on the screen is really talking about what had happened from the end of February to the end of March. And you can see the change, the price change of all the different energy commodities that occurred. We're showing here gas, natural gas, urea, ammonia, polyethylene. Urea and ammonia are the main components that go into fertilizer, or two of the main components that go into fertilizer. Polyethylene into plastics generation. So when we're thinking about all these different energy commodities, just over that short period of time of a month, we saw, right, 44% increase in gas, 61% in natural gas, et cetera, et cetera. Very high increases. because the Strait of Hormuz was shut down because of the conflict in Iran. So what we've seen recently is a big, big pullback in terms of overall actual traffic going through the straits. And as a result of that, 20% of the world's energy quantities aren't able to be transported as they typically would be. And so that's not necessarily affecting everyone equally. It's definitely affecting the world in general. I would say the US in general, because of the fact that we are a net supplier of gas right now, is not as affected as other parts of the world. Like Europe is very, very affected by all of this. That being said, we obviously have still seen impacts here in the US, one of them being what's shown on the bottom right here, which is inflation expectations over the next one and five years. So if we expect that energy prices are going to stay higher for longer because we expect the Iran conflict to last longer, that means that inflation is going to be worse for a longer period of time, right? chart on the bottom is showing is that market participants, so people who are actually going in and buying and selling every single day on the stock market, et cetera, at the end of March anyway, thought that over the next year, our inflation number would be closer to 3.2%, as you can see on the right-hand side of that chart. If you look at the five-year number, which is in yellow, that's much lower, right? And that's essentially saying that we don't expect inflation to be a long-standing issue for many, many years, but we do expect over the short term that it's going to have some big impacts on what happens here in the U.S. and with the Federal Reserve, especially which impacts your portfolio. So I did look this up. What we show here on this page is changing gas prices on the left-hand side of the page for every state in the US. Obviously, Michigan is in red. They're all in red to a certain extent. Not the darkest red that's on here, but pretty substantial change over that period of a month. And I did want to give you some updates. So what we're showing at the bottom here, the national average price of gasoline for Regular gallon of gas was 4.02. So four dollars and two cents at the time. That was March 31st We've actually been kind of all over the place and right now it's about 415 So when I dig into Michigan specifically, it's around 415 as well So there's not much of a difference currently in terms of that that price differential here in Metro Detroit, though, looking at my handy-dandy AAA website, it's currently about 423. So that doesn't sound terrible in comparison to a month ago where it was 478, right? And if you go back a year, though, we were at 315. So just thinking over just a short period of time, all of that increase, even if we have seen a little bit of a pullback recently, it's still a very significant change to what you and I are spending on a regular basis. So what we have on the right-hand side, though, is the good news, I guess you could say, which is to say that in comparison to where we have been in the 70s, 80s, et cetera, we're actually paying a lot less in terms of gas as a percentage of our overall spending. So you and me as consumers, even though gas is really inexpensive right now, aren't spending as much on gas as we had been during the 70s, for instance. So if you look at the 70s oil embargo, that was above 6% of overall spending on a monthly basis for each household. Now it's closer to about two, two and a half percent. So while it is impactful, yes, it's still something that is not as bad as it could have been or was necessarily during the 1970s when we were seeing people coming to gas stations every other day and all that kind of stuff. Okay. So what does this mean for the markets? When we look at these two factors, inflation and unemployment, those are really the main focuses of the Fed, right? The Fed is trying to maintain steady but reasonable inflation at a level of about 2%. Well, where are we right now? We're closer to about 3.5%. So we're not right where we need to be. Actually, it's more like 3.9%, excuse me. So we're not where we need to be there, and we've been moving the opposite direction because of what's been happening in Iran. with that the fed is in a position where they don't want to cut rates too much or too quickly because they don't want inflation to get out of control right and go back up to for instance the nine percent that we saw during june of 2022 after the world had shut down because of covet and then came back online um so that's one of the things that's going on with the fed right now they don't want to cut rates into a situation where inflation is really high They also, though, don't want to be in a position where they're not supporting the jobs market. And so on the right-hand side, you can see the unemployment rate. It's currently 4.3%. We actually had a really good jobs report on Friday. I don't know if any of you saw that, but we did add quite a few jobs to the overall economy during the last month. And so that's been positive. There have been some months previously where we've seen some cooling in the jobs market and so the Fed has been in this kind of difficult position of do we focus more on inflation or do we focus more on supporting the job market, right? And so right now, they're kind of sitting steady and waiting to see how things play out. But luckily, with the jobs report on Friday being so strong, they're not in a position where they really need to make a move imminently.

I've got a question for you.

Yes, absolutely.

We've got jobs that's come in and we've got these job market up, but is people working? I mean, do we have stats to show if people are working, are they taking advantage of these jobs?

That's a really good question. So one of the things that we look at is underemployment. Another thing that we look at is the overall labor force participation ratio. So when I talk about labor force participation ratio, that is talking about how many people are actually working or looking for work versus how many people are actually available in the job market to do that. So for instance, not available in the job market, but available in terms of demographics to be working. So we had been in a place where we had seen much higher overall labor force participation a few years ago. It dropped off a cliff during COVID. And the reason it dropped off a cliff during COVID was because we saw a lot of people that were close to retirement age just decide to pull the trigger and retire, right? It's come back to a significant amount, but not to the level it was previously. And so we're in a position where it's kind of been steady and not really been very attractive. So to your point, there are a lot of people that are basically staying on the sidelines or not participating in the labor force. Thank you. Good question. So let's talk about the Fed a little bit more. And again, this dovetails right into the actual portfolio. So when we saw the Fed meet most recently and provide a new chart, which is shown here, the dot plot, we didn't see much of a change from the last time. And the last time they did this was in December. So when I say not much of a change, if you look at the median, which is the blue line and also the dotted gray line, it's hard to see the difference between the two because they're basically right on top of each other. What does this mean? It means that at this most recent meeting where they put this out in March, they did say that they're not in a position where they want to be cutting rates any further right now or hiking rates. They said that they think that by the end of the year, the median indicator was that there might be one cut by the end of the year, which would mean that we would take the overnight rate from 350 to 375 right now down to 325 to 350. Now, did the market agree with this? No, the market totally disagrees with that interpretation. And the market has actually been in a position where they've been counting in hikes. And that's the opposite movement, right? That's the opposite of what we have been doing for the past few years here, lowering rates on a steady basis. But to turn around and then start increasing rates, essentially to fight inflation, is a pretty big turnaround. Now do we think that's necessarily gonna happen? I don't know. 100% sold on it. We actually have a new Fed chair that just came in, Kevin Morsh. And so he is more of a dove when it comes to looking at overall inflation and overall numbers in terms of where overnight rates would be. What that means, a dove is someone who is more focused on unemployment than they are on the inflation picture. So they're more interested in supporting unemployment or supporting employment, excuse me, and therefore making sure that rates are pretty much lower than they would be otherwise. So all that to say, as we continue forward, it's going to be interesting to see what happens. What we have been able to do, though, in the portfolio over this period of time is because interest rates have actually risen, you can see from the dotted line where they were in December versus the solid line where they were at the end of March, they've risen significantly across the board with the exception of the front end of the curve. And that's because inflation is expected to continue to be higher. So if inflation is expected to continue to be higher, then the market is not expected to cut as quickly. So interest rates shot back up. That's been beneficial for the portfolio because we've been able to continue to purchase securities at higher yields than we had been able to a quarter ago when we were in this lower interest rate environment. As a reminder, we're invested in that zero to five year space for PFMS and management as the about $40 million in our portfolio right now. And so we're trying to make sure we get as much squeeze, as much juice out of the current interest rate environment as we can. I'm going to skip to the portfolio, but does anyone have any questions or comments before I get to that? So if we go to this page, this shows all the bank deposits and securities, investment securities as of March 31st versus where the city's portfolio was on December 31st. So a quarter to quarter change. You can see that across the board, it's pretty much in line with where it has been. There's not a huge change to any one sector necessarily. When you look at the overall balance, it's somewhat in line with where it had been as well, so it's not a very large difference there either, about $112 million at the time of this printing. This goes back and says the same thing, but shows on a year-over-year basis, and on a year-over-year basis, there is significantly more money than there had been a year ago. I don't know if, Stacey, you want to comment on that at all.

Just more tax revenue, basically. I mean, there's some growth going on, but yeah. Yeah.

So as we continue on, here you can see the overall credit quality distribution as well as the amount that was in each of these different accounts. And then as we get into this section, this is what PFM Asset Management has been working on. So again, about $40 million in the account that we manage. You can see that overall we're in a place where the yielded cost is $4.4 million. which is still very attractive, versus where the yield in the market currently can be purchased, 3.9%. So essentially what that means is over time we have purchased all these different securities in the portfolio and their average yield is 4.2% where they were purchased. The 3.9 is saying, OK, we bought this entire portfolio for somebody else as of 3.31. What yield would they get? And they would get a 3.9. So you're holding it at a higher yield than what is able to be purchased in the current market. So anyway, all that to say is that is very positive. And as we've seen these interest rates go up, as I mentioned a few minutes ago, that is going to continue to be beneficial for the portfolio because we'll be able to swap out lower yielding securities with higher yielding ones. The sector allocation at the top right there shows how the overall portfolio is invested. Again, very liquid investments, very safe investments, all has to be purchased via your investment policy, which really mirrors Public Act 20. So what that means is you can buy treasuries, which are backed by the US government, federal agencies, which are implicitly backed by the US government. Those are Fannie Mae, Freddie Mac, Federal Home Loan Bank, things of that nature. Commercial paper is short-term corporate debt. I think we've talked about this before, but again, thinking about Toyota or Morgan Stanley or something like that issuing short-term debt. That is what commercial paper is. It all has to be highly rated in order to be a part of your portfolio. And then we do have a little bit in the local government investment pool government, as well as a little slice in super nationals and agency MBS. One thing I should point out here while we're on this page, in the top left hand at the top there we see portfolio effective duration versus benchmark effective duration. Typically these are in line. Typically you see if the benchmark is 2.02 years, you'll see the portfolio is generally 2.02 years or something very close to that. You can see we're a little bit longer or larger than the benchmark duration, and that's on purpose because we've seen so much more value in the yield curve right now, especially when you go out further to the three to five year space. We've actually structured the portfolio specifically to make sure that we're able to take advantage of some of those higher yielding securities. So we're a little bit long of the benchmark, which means as we see interest rate changes, they will be more pronounced in your portfolio than they are actually in the market. But that being said, we do expect the next moves to really be downward as we see the Strait of Hormuz open again, hopefully, and as we see the conflict in Iran come to a close. So when you see that change with interest rates moving downward, it will be really beneficial for your portfolio. So I did just want to point that out. That's a little bit of a difference than what we typically would see. And you can see that if you look at the duration distribution in the bottom right hand side, the four to five year space is the portfolio in blue versus the benchmark. You can see we're more invested in that four to five year space than where the benchmark is invested there. So 13% versus 8% because we're not putting as much in that one to three year space, but really looking at putting more value into the four to five year space. On this page, you see a change in sector allocation over time. And if you look at the bottom bars, you can see that we've continued to grow the fund to now be about $38 million over the past, these are the past four quarters. The only difference that you can see, it's kind of hard to see a difference between December and March if you look at the different colors. There's a little bit, more in the gray than there is in some of the other sectors. And what does that mean? That means that we're not seeing a whole lot of value in other sectors right now that we can purchase. And so we're really defaulting to or looking to put more money into treasuries, which are the highest rated, the most liquid. And therefore, when we do find opportunities in other sectors, we can transfer them easily out of treasuries and into those new sectors. Okay? So just wanted to make sure everyone saw that. But that's, again, a purposeful change. When we're looking at the overall portfolio, we really are valuing treasuries because of the yields that we're currently seeing. You can see what the trades were that we did over the quarter. Again, a lot of treasury purchases. That's in blue. Anything in gray is sales and maturities. So we were net purchasers of treasuries. We were net sellers of agency CMBS and of commercial paper. I think, though, if we talk about this quarter, we have purchased quite a bit more commercial paper because commercial paper yields are a bit so attractive. So getting to the fun stuff, how did the portfolio actually perform on page 34 here? What we're showing is, again, the past quarter, year, three years, five years, and 10 years. And the reason we're showing 10 years is because the since inception number was actually 2013, and therefore it's past that 10 year period of time now. So when we look at this area, what we're showing is that the three month, performance pretty muted, right? It's positive, our performance versus the benchmark is quite positive. We outperformed the benchmark 40 basis points to 33 basis points, so plus seven. So we did better than the benchmark by seven basis points. Why is it so muted though? It's because we saw interest rates rise. So when you see interest rates rise, that actually means that market values fall. So when you look at the line where it says change in market value, you see that that's negative, negative 180,000. But the line above it, 332,000, is the actual amount that you're getting in from coupons on a regular basis. So that was higher than the change in market value, and therefore you saw positive performance for the quarter. So again, we're really happy with this, hope you are too. Seven basis points better than the benchmark. But then if you look further back, that's a theme, right? So over the past one year, we've seen 4.16% returns versus the 391 of the benchmark. 4.56% returns over the past three years. And then all the way back to the past 10 years, 2.14% versus the 1.97 of the benchmark. So really strong numbers, again, muted for this quarter because we saw interest rates rise. If we see interest rates fall, we expect the opposite to be true. We expect those to be higher returns. If we saw a significant change where interest rates shot up like they did during 2022 and 2023, we will likely see negative performance. But because you're invested at such high yields right now, that's really buoying the overall performance of the portfolio. This last page just shows accrual-based servings. So again, for the past 10 years, you're at $6 million in terms of accrual-based servings. Just over this past three months, about $400,000. And then as you know, the rest of this is late-night reading for when you're dealing with some insomnia. Any other questions for me? Anything else I can answer or speak to?

Any questions from council?

Thank you.

I'm really good at that. Thank you so much. Thank you. Thank you.

Before we move on, Madam Chair, I just wanted to ask the city treasurer if she had any comments before we close this one out.

No, I think Gray did an excellent job. And then, of course, we're in June right now, so we'll have another quarter coming out, and she'll be back here sharing that information. But thank you. I appreciate it.

Thank you. And if you can bring some data on labor participation, If you can, it's no big deal, but it's just a... No, no, it's beautiful. Is it? Okay. Thank you.

Great. Number four is public comment, and this is a portion of the agenda for those in the audience who... on the discussion of the quarterly investment report. And Madam Chair, I do not see anyone else out in the audience, so can we move on? You can move on. Okay. All right, it takes us to number five, adjournment. Motion will be in order. Please support.

It's been motioned by Mr. Wadsworth, seconded by Ms. Roscoe to adjourn this special meeting. Mr. Wadsworth. Yes. Ms. Roscoe. Yes. Mr. Wilhite. Yes. Ms. Abdo.

Yes.

Mr. Jones. Yes. Mr. Bullock. Yes.