Hello, which is 401, and we're calling for the finance committee, so it is lost out of the second 2025.

Present council member Pivotas Bolton.

Present.

Councilmember Angular.

Present.

After each agenda item is presented, the mayor will ask for committee member comments and then take public comment.

You will have two minutes for your comment.

Account down timer will appear for the convenience of the speaker in attendance.

Okay, so this point I will proceed with item 2A, which is the request for approval for one time carryover appropriations.

And we've got Director Nicole O'Shouse here.

The item before you this afternoon is the review and consideration of carryover adjustments for fiscal year 25, excuse me, 2025 into fiscal year 2026.

So the item for you is a request as I stated for um to carry forward or carry over any unspent funds from fiscal year 25 to the current fiscal year, fiscal year 2026.

And so as a reminder, these are budgeted amounts that were authorized as part of the budget process or throughout the fiscal year and fiscal year 2025.

What we are requesting this evening or this afternoon is a reappropriation request to maintain funding from previously approved council operating initiatives that are in progress but are not uh yet either entered into a contractual obligation or encumbered in a purchase order.

Um so again, these are not new requests coming before you, but ultimately just a request to carry over and continue to move forward with the council approved initiatives and will not ultimately impact or change the fundamentals based on what was previously approved.

So at this point, I'm going to be turning it over to Felicia Silva, Assistant Finance Director, who will provide more detail on the various carry forward requests as it relates to the general fund, and then also related to uh non-general fund uh funds such as special revenue funds, enterprise and short service funds.

Felicia Zilva, assistant finance director, mayor's uh member of the finance committee.

Uh we will take a look at our general fund carryover requests.

So ultimately, we're requesting to carry over a little under three million dollars and uh taking it from top to bottom.

Uh the first carryover request is coming from city council, and it's regarding fiscal year 25 unspent city council transportation and training funds that are to be carried over into a shared poll per the council handbook.

Um, second, we have uh our five-year commitment to um Louelling interim housing operations support at 2.6 million, and then library also has some uh donation funded program expenditures um from Alta D.

Davis in front of the library of uh 17,000, and police has next gen um 911 phone upgrade funding uh that we would like to carry over as uh the project is required by the state and stone rock.

And uh now moving on over to non-geral fund carryover requests.

Um we've got um enterprise funds, um, special revenue funds, internal service funds here in this slide, and we're gonna start with our um special revenue funds and um we've got uh a request to carry over some funds from uh the Harrow and Bay Fund, and that's for the Marshland uh hydrology study, a little under a hundred thousand there, and then for um our maintenance for um that's required um and is provided by the Alameda County Public Works.

We're requesting to carry over 56,700 uh SB1 funding is related to our pavement work, and so we're requesting to carry over 21,000 for asphalt and other street supplies, and now moving on into our enterprise funds.

Uh, we're requesting to carry over um 44,000 related to the water pollution control plant fund, and these are for restricted asset associates works with project settlement actions, stormwater fund, requesting to carry over 161,000 related to stormwater compliance program development work that is required.

And now moving on to our internal service funds.

We request from the IP department to carry over 104,000 for the continuation of phase two of our network equipment upgrades.

Additionally, we have a request to carry over $408,000 for our Acela System Goal Life Support Enhancements, and then $450,000 for our ERP implementation of so in progress.

And then finally, we have public works that's requesting to carry over $114,000 related to analysis roller.

All in all, again, across enterprise funds, internal service funds as well as our special revenue funds.

We're requesting to carry over $1,459,000.

And with that, we are happy to answer any committee questions and take any feedback.

Thank you.

So this is part of the beginning of the comment on this item.

We'll close public comment and come back to council or committee members for questions and commentary.

Okay, seeing that is a motion to make the recommendation.

So, yeah.

Okay, so you do have consensus from this committee to move forward as request.

We'll go to go to item two B please.

So here we've got a review of statement of investment policy.

I think we still have director of Los Alves presenting this item.

Thank you.

Again, good afternoon.

The item for you this afternoon is a little bit of a uh two-part.

Um, I would like to take the opportunity to introduce Monique Spike with PFM asset management.

Um city recently engaged investment management services with PFM asset management in the summer of uh 2025.

Um, and the item um for you this afternoon will roll provide a review of the city's uh current investment policy along with proposed changes, um, an overview of the city's portfolio benchmark and the strategy which is being implemented, as well as just kind of brief update on uh economic updates.

So with that, I'd like to introduce Monique Spike who will walk us through the recommendation.

Okay, yeah, short term.

It's a pleasure to be with you this afternoon.

Um as finance director Gonzalez stated, I'll be talking through the investment policy review that we completed on behalf of the city.

Um we'll talk about the portfolio benchmark and strategy recommendations, and I'll make some short comments about the economy.

Uh, first we'll start with the investment policy.

We have a massive management in coordination with the city, conducted a very thorough and exhaustive review of the city's investment policy.

Um, the first thing I'll note is that the city's investment policy was well written and comprehensive.

Uh, the changes that we made, uh, we're meant to do a few things.

One, uh, bring the language in compliance to our current California government code.

Um, two, bring the policy in line with best practices for California public agencies.

Uh we wanted to help increase the clarity of the policy, and lastly, to help increase investment opportunities in certain sectors.

I'll go through each of these uh right now.

Uh, with regard to the policy recommendations, we had some significant edits to bring the language in line with California government code.

We do note that the edits that we made did not alter what the city was allowed to invest in.

It simply reiterated the California government code language verbatim.

The reason to do that is to increase clarity.

If the city did not have restrictions beyond what the California government code allowed, we felt that it would be imperative to be consistent with the exact code language to reduce any misunderstandings.

And other investment pools, which are pooled funds allowed for California local agencies to invest in.

We have a recommended separate session for investment policy adoption.

And we expanded other sections in the policy with regard to collateralization for certain investment types and performance standards.

These changes are meant to again clarify and highlight these particular aspects of the policy.

So when you have constituents who are looking at the policy online, it's very easy for them to follow these particular standards.

We also wanted to increase clarity of the policy.

And so in some cases, we consolidated some paragraphs or language that were talking about the same thing into one paragraph.

There were some sections where there was language addressing certain investment types that were not allowed by the state's policy.

And in the socially responsible investment category, we added very specific language on how we would need the city's social responsible investment goals to align the screening process that we will be adopting as the city's investment manager.

One, we increase investment opportunities in agency mortgage backed securities.

These are federal agency securities like Banning May, like Ready Mac, that are backed by specific pools of mortgages, but are still guaranteed by the MAC and Annie May.

And so in some cases, higher credit quality than typical corporate note, and very attractive investment for California local agencies.

We also increase the investment opportunities in municipal obligations, essentially expanding the city's ability to buy municipal bonds from other local agencies in the state of California and other state level agencies across the country.

Okay, let's talk about the portfolio benchmarking strategy.

So we wanted to talk about the portfolio benchmark because that is the year stake by which we will be measured in terms of performance.

It's also the guide that's going to help determine the strategy that we implement on behalf of the city.

Benchmarks provide a good basis of comparison for risk and return.

It's important that it should be an independent metric that folks will be able to independently look at.

Sometimes benchmarks are a mix of different credit types, different sectors, or baselines such as the Treasury Index.

In California, many local agencies prefer Treasury Index benchmarks because it provides a great baseline of what we're diversifying in.

And then lastly, of course, the reflex realistic performance standards.

Speaking of with city staff, we've talked about a number of different benchmarks, and this table is meant to provide you with an example of the different types of benchmarks that are utilized by California local agencies or that can be considered by California local agencies.

This chart is organized from the shortest duration to the longest duration within the concept of the California government code.

One of the things I will note is that the shorter duration strategies tend to reduce risk, and I have a great chart on the next slide that shows that a little bit.

However, the market value or the price changes can be negative.

And as you can see, there were 80 quarters over the last 20 years.

The shortest duration strategies have the least amount of quarters with negative returns.

But as you go out longer, the longer term strategies have more quarters with negative returns, which simply means that the market value exceeded income in that month order.

This chart is a great graphic of what I just described.

I'm going to direct your attention to the darkest blue, which is the zero to one year treasury index and the orange.

And this is just a great graphic of the volatility.

Longer duration strategies again have a little bit more ups and downs because the market value or the price of the securities change the most when interest rates change.

Now we mentioned that just to say that there may be some quarters if you go with longer strategies, or as we implement longer strategies that you'll see some negative returns, but over time they do smooth out because although you have lower lows, you also have higher highs with regard to the return.

So we drill down to the types of strategies that we're generally considering for our clients.

We have a snapshot here that shows some government and corporate indices, essentially just showing the difference between having treasury-only benchmark and adding government or corporate securities to those benchmarks.

And that's just because treasuries are the dominant investment type available in these maturity ranges.

I also note that corporate government indices do have fewer quarters of negative return, mainly due to the increased income in those sectors available versus treasury securities.

Now, for the city, one of the things we've worked with staff on is transitioning the city's benchmark from the one to three year US Treasury Index, what they're using previously to the zero to five year Treasury index.

We have the same information with regard to the past 20 years.

You can get a sense of the return.

One of the things is as you'll note the zero to five year Treasury Index is slightly longer duration at 2.05 years versus 1.84 years.

The average return over the past 20 years each year is much higher than the month of three year return.

But we only have two additional quarters of negative return.

In the bottom right, you can see the maturity structure of the one to three year index and the maturity structure of the zero to five, which is in yellow.

One of the reasons we recommend and are implementing the strategy is because it allows us to utilize the entire scale of the California government code, which generally allows for investments between zero and five years.

We're able to capture the higher yields available in the three to five year area of the yield curve over time.

Traditionally, that has provided more income opportunities in the short term.

And by utilizing the zero to one year area, it allows us to mitigate some of that market value risk with allocations to the zero to one year area and take advantage of some of the investment types like commercial paper.

So we think this change will allow the city to maintain good income, to hedge against the risk of volume rates by being able to buy some investments out on the longer end of the yield term while also taking advantage of the zero to one-year area to manage some of the risk.

This strategy has been executed over the past few months.

This is a simple graphic that shows where there have been maturities in sales in the light blue and where we've purchased investments in the darker blue.

You can see the average maturity of buys, which is sort of the middle tax column, and you'll know it's four years, 4.6 years, 4.3 years.

So we've really been focused on building out that three to five year area of the city's maturity structure.

Yields today are a bit lower than they've been historically as rates are declining, but the portfolio structure in yield is still very attractive.

Um we have this portfolio snapshot as of mid-September, and the market value is 168.3 million.

The duration is right in line where we wanted a full over two years, and the yield on the portfolio is a 4.3%.

But you can see that maturity distribution just again are well covered across the California government code maturity spectrum.

So we're really happy with that, although maintaining fairly high credit quality.

Our goal is to maintain broad diversification not only across the yield curve but also by sector.

We will be carefully managing the risk in the portfolio both from an interest rate standpoint and issuer credit quality.

We will be meeting with the staff on a quarterly basis.

We'll be providing month end reporting and quarterly performance reports as we execute this strategy.

I won't spend too much time here.

But one of the things I do want to emphasize is right now the Fed has made a cut in September.

We are anticipating two more rate cuts this year, which means that you know the assets that you have in cash and other old investments will come down in terms of interest rates, but it's a great time to have them locking in longer term investments in the three to five year area that's going to help sustain investment income.

And the U.S.

Treasury curve is shown here.

Again, we've caught some additional positive slope after two years, but the short end is still higher.

But we expect, as I said, that's come down as the Fed makes this cuts by the end of December.

And I will pause here for questions on the economic outlook.

We're uncertain.

The economy is still grappling with the tariffs and the volatility.

Again, the Fed has been very clear that they're waiting for data.

But again, as I mentioned a few slides ago, we're pretty confident of that two basis point cut.

And our goal is to pay attention to the market, the issue of portfolio diversify, being constant contact with your staff, and the event there's anything we need to communicate.

And I will pause here for questions.

Okay, thank you for your presentation.

I just want to have a public comment on this end.

Okay.

We have closing public comment on the sand.

I'm coming back to my members, right?

Council member I think that.

Thank you so much for the presentation.

Can we go to slide 12 on this, please?

And I kind of wanted to get like a little more explanation with regards to the dip.

What happened during February 20 and February 22?

Is that COVID and recession?

Uh definitely.

So when you see dips in the return like this, typically do you think are happening?

When interest rates rise, market values decline.

And so anytime you see striking interest rates, that's where you're going to see longer term indices have negative returns.

And so if you look at these charts, these like low lows over time is when you're seeing that.

And you know, shortly after COVID, there was that period where interest rates were rising rapidly in an intent to slow down inflation, and that caused longer-term indices to really take a hit.

You had essentially the worst returns during that period because of that reason.

Thank you for explaining that.

And then with regards to I was looking at the policy attachment A.

And there was, I believe, on page 12 as well.

Um sorry I had I had the highlighted here, but there was a number of 360 days and not 365.

So I'm trying to understand, I had it highlighted in it.

I'll type what pages on the attachment A.

So kind of explain what why 365 days is not listed versus 360 listed on it's a repurchase agreements on page eight of 1807 investment policy statement.

So the repurchase agreement indicates a legal maximum maturity on these investments is 360 days.

Um can you explain why it's 360 versus why it's not 265?

Yeah, that's a good question.

So I will say that the repurchase agreements in particular are one of the investment types where it's defined very specifically in the bankruptcy code.

And so the bankruptcy code has very specific guidelines for repurchase agreements are going to be bankruptcy remote.

And oftentimes when you see very specific metrics like 360 days and the types of collateral that are allowed for repurchase agreements, it's because it's a look back to the bankruptcy code to make sure that the language fits.

So if you have investments in repos, you're able to sell the collateral immediately and take the proceeds in the event something goes awry.

Rosha, thank you.

Thank you for explaining that.

I just kind of also wanted to highlight um on page 12 of the semi-investment policy statement of eTeam, that socially responsible investing.

It's um 10-10.11.

The investment policy prohibits investing in any entity that has a main business line according to revenue in any of the quality industries or the voter sectors, firearms, ammunition, explosives, coal, oil and gas, oil and gas services pipelines, private corrections, and tobacco.

I just wanted to highlight that and I think that's aligned with the community that you can afford to actually argue to not invest in those particular entities.

So those are my questions because we have just uh a few uh questions.

Mortgage backed securities, so there were a big source of problems in the financial meltdown, and I think they've kind of been a persona non-rata, so to speak, for the investment world.

Help me understand a little bit about why we would be expanding to mortgage backed securities.

What has changed in the world that makes us feel more comfortable?

So, uh a couple of things.

Um, the mortgage-backed security market during 07 and 08 was certainly under a lot of pressure, and a lot of that had to do with the way private corporations, individual banks were packaging mortgage-backed securities and selling them to the market.

Um, essentially, as we all know, packaging very low-grade, low-quality mortgages, putting them all together and putting them out here.

Um, in the case of the mortgage backed securities that we're talking about here, um, they're very high quality.

They are direct obligations of Annie May and Freddy Mac.

And so technically they're no different uh credit-wise from the federal agencies that were generally allowed to invest in.

Um, the difference with the mortgage backed securities uh that we're speaking of is the payment structure, and so instead of a set maturity date, um let's say you have a two-year regular federal agency security, you get like the same manual coupon, and you get the principal at maturity.

The mortgage backed security structures are structured differently where you get consistent payouts as the mortgages themselves mature.

Um, but the investment principal structure is guaranteed by Panny May and Freddy Math, and so your exposure is to the agency itself, and the other things are just the cash flows.

Is that the case, during the market meltdown?

During the market meltdown, those mortgage backed securities or obligations of the private institutions.

So, you know, Washington Neutral, for example, which you know, we know is assumed for one other or other financial institutions, and so credit-wise, the government code has a very clear distinction between uh mortgage back securities that are federal agencies, and actually a clarification to the government code was made just last year, clarifying that the mortgage backed securities uh that they're talking about in the specific section, weren't referring to federal agency mortgage back securities because it's a different type of mortgage backed security and has a very different risk of file.

So I'm gonna just kind of close this section on this particular thought.

Um, securities MBS, it's hard for me to imagine that they have the same credit rating as the federal government, because if they did, we would still invest in treasuries.

I think you get a higher return because there's more risk.

And so I think that we need to understand why there's a higher return.

You do not get more return without more risk.

That's just Econ Well, and so we need to understand why.

Before you know I can be supportive of making that particular change, mortgage backed securities.

Um let's talk about the benchmark.

One of the concerns that I've expressed in the finance committee is that we're always being the benchmark, um, which means that it's not a good benchmark.

Because typically, if you have a benchmark, you should do better than that sometimes or worse than it sometimes.

So help me understand a little bit about how this what we mean here by benchmark in comparison to the benchmark that's just from the investment return reports that we get quarterly.

Question, so I'll put us on the zero to five-year treasury index because that's currently where we're investing.

For us, the benchmark does a couple of things.

It provides good guardrails around how much risk we're taking in the portfolio.

And so the benchmark duration, which in this chart is 2.05, is our standard for interest rate risk that we want to take on the portfolio.

And so when we report out to the city, we're going to be reporting on that duration metric.

And I say that we should generally be within 10% of that.

If we are any broader than that, then we're taking on more risk than we communicated to the city.

That viewpoint is I do understand it's it is a benchmark for curation risk in particular.

Thank you.

So I might have all in five-year treasuries, but 20% of those mature this year, 20% mature in two-year, 20% mature in three years, 2% mature, 4 years.

They're all five-year treasuries.

Is that envisioned, encompassed, considered, prohibited by how does that play out with respect to the language that we are being presented here?

So, my example, hypothetical example, it would be a two and a half year average duration.

So it'd be higher than this 2.0506.05.

Um, but they would all of the underlying assets would have been provided as a five-year instrument.

So I think we can correct me if I'm wrong, Mayor Gonzalez.

What it feels like you're describing to me is the way in which we plan to manage the city's portfolio.

Exactly.

So I'm trying to understand if anything in here influences or affects that in particular.

Yes, and I'll describe it this way.

So I'm going to use to describe it the one-to-free year index in the bright blue and the zero to five-year index in the yellow.

Um, if we were managing the city's portfolio to the one to three-year index, um, today, if you had an investment that was supposed to maturity, we may take that investment and invest back out to the three-year, and that would generally be you know, the general mass that we would consider, maybe in some cases of three and a half year, but generally we're looking at three-year area, and that would restrict us in that way, because going much further than three years would you know be beyond the duration maximum that we were looking for, and then as time goes on, and we you know, every month you're doing that same activity where you're taking investments and you're reinvesting them out along on the curve.

The zero to five year index gives us more flexibility, and that now we're taking those investments, you know, in the sort of zero to one year area, and we're investing them as far out as five years, and so you have a really great active maturity ladder.

Um, another thing the zero to what the zero to five year does for us is it allows us flexibility where for any reason we don't necessarily want to release an investment and we want to hold it.

Uh, this past um economic cycle has been a great um example of that because as the interest rate environment was on its head, as you know, short-term securities were providing great income opportunities.

Um when we were in zero to five year strategies, we were able to hold on to some of that income and invest in that part of the yield curve rather than being restricted to a long-year strategy, which didn't necessarily prohibit but certainly discouraged investments in the sort of one year, like going back to your recommendation is what the zero five year.

Um we have approximately two hundred and fifty million dollars under management, that approximately we currently have in the portfolio about 168 million across all of our investments.

No, just across the work of the portfolio we're managing on behalf of the city, but we are having conversations with the city about cash flow needs.

Okay.

So for the part that we are actively managing, um, for that, but in particular, in our worst case scenarios over the last 20 30 years, have we spent some time looking at how much did we need to draw down?

Like what was the liquidity that we needed 30% of that amount, 25%?

Some kind of liquidity assessment, the liquidity requirement.

Thank you for that question.

Um, and want to clarify that um PFM asset is a new um consultant to the city.

We had previously contracted with Chandler, um, asset management for several years, and so um the strategy that was uh implemented under Chandler was a zero to three or one to three-year strategy really to address the city's liquidity needs.

Um there was a change um uh in I think in 2024, um, where there was a lot more investments that were made or um into this particular portfolio to really boyster our um potential returns for cash flow um at the time it would we were seeing a higher return than we were seeing in LAFE, um and so as a result we were uh investing more in this portfolio for liquidity.

Um we found that uh the strategy really is better to move back to life as a result.

We have not done a very um thorough of how much uh we pulled out or withdrew for liquidities.

It is something that we are working very closely um with PFM asset management to make sure that we are really investing our money uh in the best way possible and not necessarily investing just for liquidity.

That's that's really useful.

I'll go to city manager.

Do you have some sense of the system about some time frame for what we might hear back on this?

So um the item this evening is really to provide those proposed changes to the portfolio uh PFM asset management has already implemented a uh zero to five year strategy.

Um, and so when we uh moved our funds from Chandler to PFM management, um, we did change that strategy to from zero to five.

The policy itself, if supported uh by this committee will come before council for adoption um in the November or December.

I think my question really relates to this concept of liquidity.

This would be useful to know why we might care about on the results of your assessment.

Sure.

So um we will bring back quarter one um investment portfolio to this committee, um, I believe it's either in November or December, and I think at that time we could bring an analysis of the cash flow.

That would be useful.

Whether we need a motion or not, you're looking for recommendation for approval from this committee toward this forward to the council, correct?

Okay, so do I have a motion?

So moved.

So we have consensus to move this forward.

So at this point in time, we'll move to our third item, which is public comment on non-agenda items related to the public, which is the address of the committee.

Yeah.

So you're not alright.

Great.

Okay, thank you.

So we'll close that public item.

Same, right?

Oh, sorry, sorry.

This is just uh like housekeeping, I know that some of us are going to nationally a cities in Salt Lake City, and we have a finance committee scheduled for Wednesday, November 19th.

Uh that's the start of the conference.

I just wanted to clarify if we will be moving the date for finance committee since I don't know who is attending, but I will be there.

Um thank you, Councillor Ailar.

We uh that meeting date was moved from the original meeting date, which was I think it was the day before Thanksgiving.

So as of right now, my understanding is Councillor Blue, and we are in house will be present on the 19th.

We'll move forward with the meeting on that.

Thank you for like this.

So at this point in time, that is all the business of this committee.

It is six, six, four forty-four, and we are returning.

Yeah, that's fine.