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

Office of the Treasurer & Tax Collector City and County of San Francisco José Cisneros, Treasurer Tajel Shah, Chief Assistant Treasurer Robert L. Shaw, CFA, Chief Investment Officer Treasury Oversight Committee November 16, 2018 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 3-5 Strategy 6-8 The Economic Outlook 9-12 Pooled Fund Review 13-16 Pool Participants Breakdown 17-18 September Monthly Report 2018 Separate handout 2

Key Economic Data Producer Price Index vs Consumer Price Index Gross Domestic Product 5% 61 4.5% Core CPI Core PPI CPI PPI 4% 59 3.5% 3% 57 2% 2.5% 1% 55 0% 1.5% 53 -1% 0.5% -2% 51 -3% GDP Year-over-Year Change -0.5% 49 ISM Manufacturing PMI -4% ISM Non-Manufacturing PMI -1.5% -5% 47 9/14 9/15 9/16 9/17 9/18 9/14 9/15 9/16 9/17 9/18 Employment JOLTS & Jobless Claims 12% 700K 8,000K Wage Growth 66% 7,000K Wage Growth & Unemployment Rate 600K Labor Participation Rate 10% Unemployment Rate 6,000K Labor Participation Rate 500K 65% 8% 5,000K 400K 6% 4,000K 64% 300K 3,000K 4% 200K 2,000K 63% 2% 100K US Initial Jobless Claims US Job Openings 1,000K 62% 0% 0K 0K 9/08 9/10 9/12 9/14 9/16 9/18 9/08 9/10 9/12 9/14 9/16 9/18 3 Source: Bloomberg

Key Economic Data Housing 7 800K Existing Homes Sales New Home Sales Millions 700K 6 600K 5 500K 4 400K 3 300K 2 200K 1 100K 0 0K 9/08 9/09 9/10 9/11 9/12 9/13 9/14 9/15 9/16 9/17 9/18 S&P/Case-Shiller Home Price Indices 300 20 Metro Composite San Francisco Area 250 200 150 100 8/08 8/09 8/10 8/11 8/12 8/13 8/14 8/15 8/16 8/17 8/18 4 Source: Bloomberg

Yield Curve Changes 3.2% 3.0% 2.8% 2.6% 2.4% 2.2% UST Yields 08/31/2018 11/07/2018 Change 3M 2.09 2.35 0.26 2.0% 6M 2.26 2.50 0.24 1Y 2.45 2.73 0.28 1.8% 2Y 2.63 2.94 0.31 3Y 2.69 3.01 0.32 1.6% 5Y 2.74 3.05 0.31 1.4% 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 5 Source: Bloomberg

Strategic Considerations 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): • • $4.2 Trillion (August 2018); and • Decline is in-line with scheduled run-off. 7

Strategic Considerations 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

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 9

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 1 st time since March 2009. 10

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. 11

The Dot Plot 12

Historical Maturity Distribution Comparison Maturity Distribution 50% 40% 30% 9/30/2017 20% 9/30/2018 10% 0% 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 50% 40% 30% 9/30/2017 20% 9/30/2018 10% 0% 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 13 Source: SunGard APS2

Portfolio Comparison 10,500 $ Millions 9,750 7.3% 9,000 4.4% 1.0% Supranationals 8,250 7.0% Money Market Funds 4.1% 7,500 4.5% Medium Term Notes 0.7% 0.8% 9.2% 19.6% 10.2% Commercial Paper 6,750 1.6% 5.3% Banker's Acceptances 1.7% 6,000 10.0% 1.9% Negotiable CDs 17.3% 10.6% 6.5% 5,250 Public Time Deposits 3.6% 3.6% 12.1% State/Local Agencies 4,500 3.3% TLGP 3,750 Federal Agencies 49.0% U.S. Treasuries 51.5% 3,000 53.7% 58.8% 2,250 1,500 750 17.4% 9.7% 7.4% 5.9% - 9/30/2015 9/30/2016 9/30/2017 9/30/2018 14 Source: SunGard APS2

Portfolio Comparison STEP STEP CPN CPN 5% 3% FLOAT FLOAT 20% 28% FIXED FIXED 77% 67% September 30, 2017 September 30, 2018 15 Source: SunGard APS2

County Pooled Fund Statistics 3.2% Name of Fund Portfolio 3.0% Size* ($ mns) 2.8% $27,628.0 Los Angeles County 2.6% LAIF 20,193.6 Monthly Change In Earned Income Yield 2.4% City and County of San Francisco 9,910.6 City and County of San Francisco 2.2% Sacramento San Diego County 8,257.9 2.0% San Bernardino County 6,166.0 1.8% 5,818.8 Riverside County Fresno County 1.6% LAIF Contra Costa Orange County (ex. Schools) 3,761.7 SD SB 1.4% Fresno County 3,325.6 Los Angeles County Sonoma County 1.2% Riverside Sacramento County 3,196.0 1.0% Orange County Contra Costa County 2,216.7 0.8% Sept 2017 Sept 2018 Sonoma County 2,082.1 0.6% * as of September 2018 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 Weighted Average Maturity (in days) LGIP Index 30-Day Gross Yield July 2012 – July 2018 2.0% 1.5% 1.0% 0.5% San Francisco Earned Income Yield LGIP Index 30-Day Gross Yield 0.0% Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 16 Sources: Bloomberg, Sacramento County as of 08/01/2018

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

Pool Participants Trends June 30, 2005 - June 30, 2018 12 Billions 10 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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 18 Source: 2005 – 2017 Ending Balance Cognos Impromptu, 2018 Average Daily Balance June FSP and Controllers Office.