Treasury Oversight Committee November 16, 2018 City Hall - Room 140 - - PowerPoint PPT Presentation

Treasury Oversight Committee

November 16, 2018

Office of the Treasurer & Tax Collector City and County of San Francisco

Tajel Shah, Chief Assistant Treasurer Robert L. Shaw, CFA, Chief Investment Officer

José Cisneros, Treasurer

City Hall - Room 140 ● 1 Dr. Carlton B. Goodlett Place ● San Francisco, CA 94102-4638 Telephone: 415-554-5210 ● Facsimile: 415-554-5660

Table of Contents

Economic & Market Overview Strategy The Economic Outlook Pooled Fund Review Pool Participants Breakdown September Monthly Report 2018 3-5 6-8 9-12 13-16 17-18 Separate handout

2

Source: Bloomberg

Key Economic Data

3

0% 2% 4% 6% 8% 10% 12% 62% 63% 64% 65% 66% 9/08 9/10 9/12 9/14 9/16 9/18

Wage Growth & Unemployment Rate Labor Participation Rate

Employment

Wage Growth Labor Participation Rate Unemployment Rate

47 49 51 53 55 57 59 61

• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 9/14 9/15 9/16 9/17 9/18

Gross Domestic Product

GDP Year-over-Year Change ISM Manufacturing PMI ISM Non-Manufacturing PMI

• 1.5%
• 0.5%

0.5% 1.5% 2.5% 3.5% 4.5% 9/14 9/15 9/16 9/17 9/18

Producer Price Index vs Consumer Price Index

Core CPI Core PPI CPI PPI

0K 1,000K 2,000K 3,000K 4,000K 5,000K 6,000K 7,000K 8,000K 0K 100K 200K 300K 400K 500K 600K 700K

9/08 9/10 9/12 9/14 9/16 9/18

JOLTS & Jobless Claims

US Initial Jobless Claims US Job Openings

0K 100K 200K 300K 400K 500K 600K 700K 800K

1 2 3 4 5 6 7 9/08 9/09 9/10 9/11 9/12 9/13 9/14 9/15 9/16 9/17 9/18 Millions

Housing

Existing Homes Sales New Home Sales

Source: Bloomberg

Key Economic Data

4

100 150 200 250 300 8/08 8/09 8/10 8/11 8/12 8/13 8/14 8/15 8/16 8/17 8/18

S&P/Case-Shiller Home Price Indices

20 Metro Composite San Francisco Area

Yield Curve Changes

5

1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 2.8% 3.0% 3.2%

3M 1Y 2Y 3Y 5Y

UST Yield Curve as of 04/30/2018 UST Yield Curve as of 08/31/2018 UST Yield Curve as of 11/07/2018

UST Yields 08/31/2018 11/07/2018 Change

3M 2.09 2.35 0.26 6M 2.26 2.50 0.24 1Y 2.45 2.73 0.28 2Y 2.63 2.94 0.31 3Y 2.69 3.01 0.32 5Y 2.74 3.05 0.31

Source: Bloomberg

Policy Issues:

• Monetary –Steady as expected:
• Rate Increases Continuing at one (0.25%) per Quarter;
• Future Rate Increases:
• December: +0.25% is at 75% probability; and
• Was 64% at September TOC.
• Fiscal:
• Tax Reform:
• Corporate. Mostly for Buybacks; and
• Individual. One-time Bonus, not Pay Raises.
• Tariffs: Shifting demand to domestic supplies.

6

Strategic Considerations

Government Policy Issues:

• Federal Reserve’s Balance Sheet - $4.5 Trillion (Fall 2017):

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Strategic Considerations

• $4.2 Trillion (August 2018); and
• Decline is in-line with scheduled run-off.

Portfolio Issues:

• Pool Liquidity Requirements:
• SFO issued over $370 Million in Commercial Paper in October
• Use Money Market Sector to Satisfy Liquidity Needs
• Extending Portfolio Duration: 1.08
• 1.05 in June 2018;
• 0.95 in December 2017;
• 0.88 in August 2017; and
• 0.68 in December 2016.
• Lengthening Duration is an Outcome, not an Objective. Focus is on:

Purchasing Securities that mature on (or slightly before) a known need – such as Payroll, Debt Service, Capital Project, etc.

8

Strategic Considerations

9

The Economic Outlook

“…indeed all the business of life, is to endeavour to find out what you don't know by what you do; that's what I called "guessing what was at the other side of the hill.” The Duke of Wellington, 1853

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The Economic Outlook Goldilocks Zone:

Frequently characterized by:

Factor Current Low unemployment rate; 3.7% (lowest since 1969) Increasing asset prices (stocks, real estate, etc.); S&P 500 (+13.95% for 5 years) Low interest rates; Below historical norms Brisk but steady GDP growth; and > 2.5% past several years Low inflation Low (2.3%), but increasing

Counterpunching:

• Labor participation rate has remained stubbornly low – despite the large number of job opening;
• Asset prices (such as US Equities) have stumbled over the past 10-12 months;
• Interest Rates are rising – and the FOMC is expected to continue raising rates through 2019;
• GDP - The best positive among the factors; and
• Inflation - Average Hourly Earnings moved above 3.0% for the 1st time since March 2009.

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Future Rate Increases Closer to the End:

• Fed Funds: 2.00% - 2.25% Range;
• +2.00% (8 Rate Increases since December 2015);
• Forecast (Fed Dot Plot) is for 4-5 more 0.25% rate increases; and
• Increases projected to end in late 2019 / early 2020.

Pool Impact:

• Longer Maturity Bonds (beyond 2 years) become more attractive

as short-term securities no longer benefit from rolling over to the higher interest rates.

12

The Dot Plot

Historical Maturity Distribution Comparison

13 0% 10% 20% 30% 40% 50% 0 TO 1 MONTHS 1 TO 3 MONTHS 3 TO 6 MONTHS 6 TO 12 MONTHS 12 TO 24 MONTHS 24 TO 36 MONTHS 36 TO 48 MONTHS 48 TO 60 MONTHS

Maturity Distribution

9/30/2017 9/30/2018

Source: SunGard APS2

0% 10% 20% 30% 40% 50% 0 TO 1 MONTHS 1 TO 3 MONTHS 3 TO 6 MONTHS 6 TO 12 MONTHS 12 TO 24 MONTHS 24 TO 36 MONTHS 36 TO 48 MONTHS 48 TO 60 MONTHS

Effective Maturity Distribution

9/30/2017 9/30/2018

7.4% 17.4% 5.9% 9.7% 58.8% 51.5% 53.7% 49.0% 3.3% 3.6% 3.6% 1.9% 12.1% 10.6% 17.3% 19.6% 6.5% 5.3% 10.2% 7.0% 10.0% 1.6% 0.8% 1.0% 1.7% 9.2% 4.5% 4.4% 0.7% 4.1% 7.3%

• 750

1,500 2,250 3,000 3,750 4,500 5,250 6,000 6,750 7,500 8,250 9,000 9,750 10,500

9/30/2015 9/30/2016 9/30/2017 9/30/2018

$ Millions

Supranationals Money Market Funds Medium Term Notes Commercial Paper Banker's Acceptances Negotiable CDs Public Time Deposits State/Local Agencies TLGP Federal Agencies U.S. Treasuries

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Portfolio Comparison

Source: SunGard APS2

Portfolio Comparison

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FIXED 67% FLOAT 28% STEP CPN 5% FIXED 77% FLOAT 20% STEP CPN 3%

Source: SunGard APS2

September 30, 2017 September 30, 2018

Name of Fund

Portfolio Size* ($ mns)

Los Angeles County $27,628.0 LAIF 20,193.6 City and County of San Francisco 9,910.6 San Diego County 8,257.9 San Bernardino County 6,166.0 Riverside County 5,818.8 Orange County (ex. Schools) 3,761.7 Fresno County 3,325.6 Sacramento County 3,196.0 Contra Costa County 2,216.7 Sonoma County 2,082.1

LGIP Index 30-Day Gross Yield July 2012 – July 2018

County Pooled Fund Statistics

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Sources: Bloomberg, Sacramento County as of 08/01/2018

* as of September 2018

0.0% 0.5% 1.0% 1.5% 2.0% Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 San Francisco Earned Income Yield LGIP Index 30-Day Gross Yield

City and County of San Francisco Sacramento Fresno County LAIF Los Angeles County Orange County Riverside SB SD Sonoma County Contra Costa 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 2.8% 3.0% 3.2% 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 Monthly Change In Earned Income Yield

Weighted Average Maturity (in days)

Sept 2017 Sept 2018

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Pool Participants Breakdown

As of June 2018

Pool Participant Fund Balance Percent of Fund

General Fund/Special City Funds/Internal Services Funds $4,962,817,250 45.21% San Francisco International Airport 1,562,100,022 14.23% San Francisco Municipal Transportation Authority 1,059,144,993 9.65% San Francisco Public Utilities Commission 1,052,366,913 9.59% Facilities and Capital Projects Funds - General 795,697,979 7.25% San Francisco Unified School District 675,023,186 6.15% OCII - Successor Agency – former SFRDA 323,572,395 2.95% Port of San Francisco 203,940,714 1.86% San Francisco Community College District 172,523,135 1.57% Other agencies (incl. Transbay Joint Powers, Trial Courts) 62,815,113 0.57% San Francisco General Hospital and Laguna Honda Hospital 59,440,617 0.54% Pension and Retiree Health Care Trust Fund 33,351,922 0.30% San Francisco County Transportation Authority 13,853,214 0.13%

Totals

$10,976,647,452 100.0%

Sources: FSP, Controller’s Office. Fund Balance reflects Average Daily Balance in June 2018

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Source: 2005 – 2017 Ending Balance Cognos Impromptu, 2018 Average Daily Balance June FSP and Controllers Office.

2 4 6 8 10 12 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Billions

General Fund/Special City Funds/Internal Services Funds San Francisco International Airport San Francisco Municipal Transportation Authority San Francisco Public Utilities Commission Facilities and Capital Projects Funds - General San Francisco Unified School District San Francisco General Hospital and Laguna Honda Hospital Other

June 30, 2005 - June 30, 2018

Pool Participants Trends