All right.

Good afternoon, everybody, and welcome to the May 21st meeting of the Administration Investment and Fiscal Management Board.

Clerk, can you please call the roll?

Thank you, Chair.

Member Tamayo here.

Member Colville is absent.

Member O'Toole is absent.

Member Zemanudin here.

And Chair Coletto.

I am here.

If everyone will please rise for the land acknowledgement and pledge of allegiance.

So please rise for the opening acknowledgments in honor of Sacramento's indigenous people and tribal lands to the original people of this land, the Nissanan people, the Southern Maidu, Valley and Plains Miwok, Patwin Winton peoples, and the people of the Wilton Rancheria, Sacramento's only federally recognized tribe.

May we acknowledge and honor the Native people who came before us and still walk beside us today on these ancestral lands by choosing to gather together today in the active practice of acknowledgement and appreciation for Sacramento's indigenous peoples' history, contributions, and lives.

Thank you.

Salute and pledge.

I pledge allegiance to the flag of the United States of America and to the Republic for which it stands.

One nation under God, indivisible with liberty and justice for all.

Okay, so first let's move to the consent calendar.

Are there any public comments on consent?

Thank you, Chair.

I have none.

Entertain a motion.

I'll move it.

I'll second.

Are there any board member comments or questions?

All right.

Uh seeing none, I will do roll call vote.

All those in favor, please say aye.

Aye.

Opposed.

Abstentions.

The motion passes.

So we'll move to the discussion calendar and we will start with item number six.

So for our annual asset allocation, which you do have in the we can I can scroll through it if we need to.

Um we are going to recommend for the upcoming fiscal year that we move more funds into the fixed account as we try and maintain the funded status being over 100%, and we're not in the scenario now where we need to be reaching for outsized returns.

Um I will talk about some of the de-risking measures we've made on the portfolio this fiscal year, and I'll talk about that in the quarterly report just because I have some pages that show that.

So for going forward, we are looking for July 1st to change the allocation on the fixed account to 47.5%.

But when we looked at the long-term returns on a 10-10 and 20-year basis, we were just under hitting the actuarial return.

So we thought it was more prudent to back it down a little bit and make it 47.5 fixed and 52.5 equities.

The outlook for the bond market was we were in a an environment where they were going to be reducing interest rates over the next six to eight months, two, three cuts.

Things have changed.

Interest rates have gone up dramatically since then.

So the odds are that the short-term returns for the fixed funds is probably going to be greater than when they did the analysis back in January.

Um in January when we started looking at the report, the 10-year treasury was of 4.17.

Um as of yesterday's close, it's at 4.6.

So we've seen a quite dramatic increase across all the maturities with a steepening yield curve.

Um so we're very comfortable that we can achieve our actuarial um return by having the 47.5, 52.5% split.

Um and also of note is as we're able to secure these higher interest rates, um, these increased payments at these higher interest rates are going to offset any operating needs we have, which is always great to not have to be a consistent seller to meet the operating needs of the fund.

At um the next meeting in November, I anticipate that if the market just kind of treads water for the next six weeks, we should we could probably see another three to five percent increase over our funded status when the actuary produces their report this fall.

So we think at this point it's prudent to move more into the fixed fund and try to insulate somewhat the gains that we've had in the portfolio.

Thank you.

Um are there any members of the public signed up to speak?

Thank you, Chair.

I have no speaker slips.

Uh, are there any uh board member comments or questions?

Just a quick question.

Uh Stacy, do we still have the wiggle room of five percent by asset class?

We do, five percent, correct, on either side.

Is this the highest allocation we've ever had for fixed income?

It is not.

Um the if you go back a long, long time ago, it was over fifty percent.

Um, so it's really just a return to normal.

And 20 some years ago, the fund was overfunded as well, and then equity markets went the wrong direction, and we went in one year.

I think we were like 110% down to like 90% when equity markets really took a hit.

Um so at that time when interest rates were higher, there was a higher allocation to it.

Um, so it's almost like the funds come full circle.

We're back to a situation where we're overfunded and we have interest rates that are substantial enough that we feel comfortable moving more money back into the fixed fund.

Good news.

Yeah, it is good news.

With yields being higher than what they were when the numbers were run, um, would it make more sense to go back to the initial thought of going 50-50?

Um, we did talk about that, but like Michael mentioned, um, we have the 5% buffer.

Okay.

So we could, even though we're at 47.5, we could go up to 52.5.

That was my follow-up question.

Exactly.

So we do have the room to do that.

Okay.

If that's what the market outlook looks like.

Got it.

Okay.

And is there any uh openness to if there's opportunities in the equity market, is there any openness to go back into equities?

I know within that 5% range, but do you need ROK to be able to go back?

Um, only if it was going to be more or less than the 5% buffer.

Okay.

Thank you.

I mean, I'll just say I'm very supportive of taking some risk off the table.

So uh I appreciate this.

I think this is the right way to go.

And as I mentioned, we have made some moves this past um or during this fiscal year, and I will go over those in the quarterly report later on.

Do you have one more question?

Uh, with the fixed income, are you going more towards corporates or treasuries?

What do you think?

Um, well, we try to do a mix.

Um, we stay away pretty much from munis right now.

Um, but the yields in the corporates are very attractive.

Um, and as I was gonna mention later on, but I do have some notes on it that it's kind of an interesting dynamic.

Right now, the long bonds at 5.10 and spreads on high grade corporates are 70 to 100 basis points.

So, in theory, you could take the entire portfolio, put it in high grade corporates, and lock in the actuarial rates.

Not something we're gonna do, but um, so right now corporates high grade corporates are offering the most bang for the buck.

Are there any more uh comments or questions?

Um if not, do we have a motion?

I'll motion.

We have a second.

I'll second.

Okay.

Uh we have a motion and a second.

All those in favor, please say aye.

Aye.

Any opposed abstentions?

Uh the motion passes.

Uh so we're gonna go a little out of order.

So next we're gonna take item number eight.

Okay.

Uh so as usual, we have our quarterly report.

Uh this goes through March 31st.

Uh, as I think I've been saying at every meeting for the last couple of years, uh things have changed.

Uh it seems like whatever's shown in the report is different by the time we sit down for this meeting.

And uh a year ago, it it was very very similar when the early April tariff announcements were made.

Liberation day markets crashed.

They were they were already weak and they they crashed and then within a couple weeks bounced very strongly back, and and stock market really for the rest of the year was on an upward trend.

This year, first quarter was was not good uh for stocks, but it was really March.

January, February were we're fine for stocks and bonds.

Late February, the Iran war started.

Uh markets did not like that.

SP 500 ended up, as you can see, down over 4% for the quarter, and bond yields went up, and as Stacy was just saying, have continued to go up.

Not huge amounts in the first quarter.

The brown line there in the upper right is where we ended March.

The green line is where we had been at the end of the year.

So kind of especially in sort of the belly of the curve, as they call it.

That's where the biggest increases were.

But those increases have continued since then.

On the equity side, obviously, since the end of March, we've once again seen a dramatic turn in performance.

April was one of the best months ever in the stock market.

May's been choppier, but but still positive.

So the SP, as of a few days ago, had gone from you know down more than four percent through March to up more than eight percent through like the end of last week.

This week, couple bad days, a good day yesterday.

So you you can see a pretty dramatic, actually very dramatic turn in stocks.

Stacey can talk more about you know what what she's actually doing in the portfolio, but just a quick snapshot.

Here's the allocations as of the end of March compared to December, not much change there, and in terms of weights versus targets, pretty close.

Uh a little bit underweight in equity, a little bit overweight in fixed, but but well within the bands uh around those targets.

And then here's the performance.

So for the quarter, slightly positive, uh, which was good given the bond market was basically flat, and equity markets uh you know overall were down.

But if you if you look down that quarterly line, you see the equity income fund was was up more than two and a half percent, which was one percent ahead of its its index.

So this was a change from what we had seen in prior years where it was the big tech companies, the Mag 7 dominating.

First quarter, what was best?

Energy uh companies were by far the best performers, and other things like utilities, you know, more defensive things did did well.

Uh you see large cap growth.

Uh the index was down four and a half percent.

That's the SP on a price change basis.

This portfolio only slightly down.

So good job, Stacy, on outperforming those benchmarks.

And then the bonds down at the bottom, like I said, basically flat.

Uh no, you know, 0.0% return for the quarter.

Fiscal year, the July to March column there, so that's nine months.

You can see 8% return at the top, top line, uh, well ahead of the actuarial assumption uh and the uh total plan benchmark.

And if you look over the longer term, you know, one, three, five, seven, ten, uh, well ahead of the actuarial assumption on all of those periods and and the benchmark.

So this continues to do very well on both an absolute and a relative basis, and probably most importantly compared to the uh actuarial assumption.

Uh so again, I I think given what's happened, uh bonds, bonds of with yields going up, bonds are are slightly negative this quarter.

Uh stocks are positive, so this overall plan return is probably going to be even a little bit better than what it was at the end of March, sitting here today, but kind of any anything can happen.

But all this looks looks good and very solid.

Any any questions?

Do we have any members of the public signed up to speak?

I have no public comment.

Or there are any uh member questions or comments?

Uh, are there any thoughts and uh are there any thoughts and rotating between uh the equity income portion versus growth?

Um it is something we look at um obviously, in this kind of a portfolio, if if we're more interested in wrapping up and keeping secure equity income would probably be a little more something we would look to.

And there are a lot of names in the large cap portfolio that don't pay any dividends, they're simply there for growth.

So it's something on our radar, and we do look at it.

And as when I go through the what the plan is for the quarter, because we are sitting on some cash positions, I'll I'll touch on that as well.

But it is something we we're very aware of.

Okay.

Okay.

Uh is there a motion to accept the report?

I'll move it.

Moved.

Uh do we have a second?

I'll second.

We have a second motion and a second.

Uh, all those in favor, please say aye.

Aye.

Any opposed abstentions?

Uh the motion passes.

So now we'll move to item seven, the quarterly investment report.

If I may, before before we do that, while she's calling that up.

Um, I think we mentioned that the at the last meeting I'm retiring later this year, actually in October.

Uh, so this will be my last meeting with you.

David Roll, my colleague is here.

He's going to take over.

Uh so he's he's been watching the videos, and he's here in person.

Uh, and you'll be seeing him going forward.

Well, on behalf of the city, thank you.

Uh, thank you so much.

It's been really uh informative, all your presentations.

I'll thank you.

I very much enjoyed this, and and everybody is doing a great job.

I wish I wish I could say that for all of our clients.

But this one is in very good shape.

Thank you.

Okay, um, so I'm gonna go over our the internal report just as I um talk about the quarter.

Um, I like to always have Jeff start to talk about the bigger picture, what's going on in the markets, and then kind of drill into what we're doing.

So, as I've alluded to a couple times, and then John and I we went back and forth with this at the previous two meetings.

We did opt to take some of the equity exposure off the table.

So on March 11th, we sold half 50% of the large cap and equity funds and place them in cash.

And at that time, the SP was at sixty-seven seventy-five.

So that's why on March 30, when the quarterly report closed, we were outperforming so much because we got the butt we got the benefit of the doubt that the markets went down and we were sitting half in cash.

That is reversed in April, obviously.

With um, as Jeff mentioned, the markets have continued to go up, but we're still participating in half of that.

The other um 50% that's in cash is in our pooled funds for the city, and that's earning just under four percent.

So we are sitting in the sidelines for part of it, but it's not uh complete cash drag because it is earning a pretty good interest rate on there.

Um so going looking forward for the new allocation, what we would look to do is to take those funds, go back into the market.

Obviously, a lot of those funds are now going to be allocated over to the fixed fund at much higher interest rates because of what's happened in the last month.

Um, so we will look to go when we reallocate in the equity funds, we'll look to go to the ETFs for the benchmarks.

We currently have positions in a bunch of different names, but we feel like just to be nimble to be able to go in and out, and whether that's in between equity income or the SP, um, to have them all on the benchmarks easier easier for us to go in and out and try to take advantage of X states on dividends.

So we do want to keep actively managing it to try to take advantage of if we see the swing towards defensive, if we see the swing away from tech.

So that will be something on our radar.

And the goal would be that on July 1, we are at the new allocation of 52.5 and 47.5.

Um, so with some of that cash, we've been discussing internally prefunding some of the operating needs for the year, as opposed to going back into the markets and then turning around and having to sell them to raise cash for the operating needs.

We may just take a chunk of the operating the cash that we have right now, allocate that over to operating, just so that that's taken care of for the next few months.

Um so as of the end of April, so as of the end of March, we were at 7.96 as Jeff mentioned.

As of the end of April, and this is unaudited, our return had jumped up to 10.66%.

So if we had been all the way in, it probably would have been a couple percent higher.

Um but we're super comfortable with 10.66% with a six percent actuarial.

And again, when I mentioned that we if things kind of stay where they are, that we could see another three to five percent on our funded status that's from that alone basically what the return is.

I did already kind of mention the fixed account and just where the long bonds are years ago when I started John always said to me he wished he had bought 30 year treasuries when they were six and a half percent and stopped even managing the fund.

We're not going to do that but it is something we are keeping our eyes on.

So we're just really gonna try to take this very uh conservative approach to it yes the portfolio will still be in a majority of equities but we do want to be we do want to actively manage it and keep an eye on the as we've talked about before those seven names that seem to be the SP still dominating it and if if you're on the wrong side of that it will be painful.

So we really and I think Mr.

O'Toole you mentioned last time are those still 30% there's still 30% and moving the SP so it's I mean I kind of feel like it's not really if you're in the SP these days it's not even really a diversified asset.

It's really it's too top heavy with those names but um it it is our benchmark for now so we will continue to manage that going forward and be ready for the new fiscal year.

And other than that I think we're we're set up really great to end the fiscal year.

So yeah great job uh do we have any members of the public signed up to speak I have no speakers uh do I have any member comments or questions I have a question um so to allocate for operating expenses and prefunding it does that can you kind of elaborate on that does that mean to prepay or to keep us up operating cash yeah so we have a separate account that's an actual operating account and it doesn't get calculated in our weightings for the different asset classes.

So it's our asset classes are here and the operating sits outside of it.

So whether there's one million in here or 10 million it doesn't go to those percentages over here.

So it gets parked over there it earns the pooled rate which again is about 3.8% and then as the HR and payroll um they need the funds to send out for the participants they just draw it straight out of this account so part of our job is to always make sure there's enough money in this account over here for when they're drafting out of it.

So it still earns and the income it earns there the fund gets credit for it just gets pulled out of the weightings basically so yeah if if I may if you noticed in our report we didn't show a big cash position because of what she's talking about that that money's sitting over here and separately yeah.

And I will just one more thing I just wanted to add because we won't see you again until November and by then we'll have the actuarial report and they may look at our allocation and they may look at our weight um our overfunding status and they may push back and say we don't think six percent's the right number anymore they may ought to say it should be lower.

So that's a conversation we'll have with the actuaries probably September October as they're starting to do their report when they ran their analysis last year they run a sensitivity analysis for 100 basis points higher and lower and when they ran it last year at 5% it still showed we were underfunded so that that is something we might have a discussion about come November.

So and where's the 30 year treasury?

5.1 yeah John may get his dream he may get his dream do we have any other um member comments questions um so I think we need a motion to accept the quarterly investment report I'll move it second we have a motion and a second all those in favor please say aye.

Aye and the oppose abstention the motion passes um so next we move to any board member comments ideas and questions okay uh hearing none uh do we have any public comment for matters not on the agenda thank you chair I have no problem.

Yeah, yeah.