The public funds investment act (PFIA) in the Texas Government Code 2256 and the City's investment policy requires an investment report to be prepared and submitted to City Council not less than quarterly. The City's investment report, as presented, incorporates requirements of the PFIA, including details of security holdings, changes in value, and earned income. It also includes a market recap for the period ending June 30, 2026.

The quarterly investment report through the period ending June 30, 2026, is attached for review. The last quarterly investment report through the period ending March 31, 2026, was provided to the City Council at the July 21, 2026, City Council meeting. The primary objectives of the investment portfolio in order of priority are safety, liquidity, and yield. The City's investment portfolio complied with the PFIA and the City's Investment Policy throughout the period. All investment transactions made during the period were made in compliance with the PFIA and the City's Investment Policy.

Investment Portfolio Summary

The City's investment portfolio for the quarter ending June 30, 2026, totaled $126.7 million, a decrease of approximately 3.4% or $4.5 million from March 31, 2026. This decrease is primarily attributable to expenditures on capital projects funded by previously issued bond proceeds, particularly from the CO Series 2022 and GO Series 2022 Proposition A funds, partially offset by investment earnings and growth in operating funds.

Total investment income for the quarter was $888,813, an increase of 16.6% from the previous quarter's $762,115. Although the ending portfolio size declined, the increase in earnings reflects higher average invested balances during the quarter (supported by the CO Series 2026 proceeds received in the prior quarter) together with the rise in shorter-term interest rates observed in June. The portfolio continues to maintain a substantial allocation to Treasury State and Local Government Series (SLGS) securities (yielding approximately 2.94%) to comply with arbitrage yield restriction requirements associated with tax-exempt bond proceeds. This allocation remains a prudent fiscal practice that helps mitigate potential arbitrage rebate liabilities under federal tax regulations.

The portfolio's weighted average yield to maturity (3.42%) remains below the 12-month T-Bill (approximately 4.00%) and Two-Year T-Note (approximately 4.12%) benchmarks primarily due to the large allocation to SLGS for restricted bond proceeds. The unrestricted portions of the portfolio, such as LGIP holdings yielding approximately 3.77%, remain competitive with prevailing short-term market rates. The City continues to evaluate performance against these U.S. Treasury benchmarks while maintaining a conservative investment strategy focused on safety and liquidity.

The weighted average maturity decreased slightly to 0.20 years (approximately 73 days), reflecting the continued investment emphasis on highly liquid, short-term instruments including LGIPs, SLGS, and Money Market Funds, all with daily liquidity. This positions the City to meet upcoming cash flow requirements for capital projects while preserving flexibility.

Portfolio Allocation Changes

The City's allocation to Local Government Investment Pools (LGIPs) increased modestly as funds were managed for liquidity needs, while the allocation to Treasury SLGS declined slightly as bond proceeds were expended on capital projects. SLGS securities remain a core holding for restricted bond proceeds, allowing the City to match or remain below the permitted arbitrage yield. This approach continues to mitigate arbitrage rebate liability, ensures compliance with federal tax regulations, and optimizes earnings on restricted funds within allowable limits.

Economic & Market Impact

The March 2026 and June 2026 quarterly reports provide the following key economic context:

• The Federal Reserve signaled a more restrictive stance at its June meeting. Short-term rates rose during June, and futures markets now anticipate a rate increase later in 2026 — a reversal from late February, when pricing implied roughly two to three quarter-point cuts by December.
• Headline CPI reached its highest level since 2023, driven primarily by energy price increases. A subsequent decline in oil prices is expected to moderate the rate of inflation change.
• Economic growth remains solid. First quarter 2026 GDP was revised upward to 2.1 percent, and second quarter growth is projected near 2.5 percent.
• At the end of February (prior to geopolitical developments), futures markets priced approximately 2.5 quarter-point cuts by December 2026; by the end of June, futures data projected a rate hike later in the year.
• The Treasury yield curve steepened at the short end in June, with 3-month to 2-year yields rising 12 to 22 basis points while longer maturities declined modestly.

City staff will continue to meet with the City’s investment advisor to monitor conditions and adjust strategies to balance safety, liquidity, and yield.

Investment income for the current quarter totaled $888,813, bringing fiscal year-to-date earnings to $2,592,555. Total maturities and liquidity within the portfolio remain strong given the short weighted average maturity of 0.20 years, ensuring the City can meet cash requirements for ongoing operations and capital projects funded by bond proceeds and other sources.

Changes in Federal Reserve policy, inflation trends, energy prices, and broader economic conditions could impact future earnings and investment valuations. The Finance Department will continue to monitor these factors closely and make necessary adjustments to optimize returns while prioritizing safety and liquidity in full compliance with the Public Funds Investment Act and the City's Investment Policy.

Pros:

•  Demonstrates compliance with the Texas Public Funds Investment Act and the City's Investment Policy.
•  Provides the City Council and public with a clear and detailed overview of the City’s financial position and investment strategy.
•  Allows the Council to assess the effectiveness of the City's investment strategy by comparing returns against benchmarks such as U.S. Treasury yields.
•  Supports informed financial decisions regarding fund allocations, liquidity needs, and investment adjustments.
•  Provides insight into economic trends, such as interest rate changes, inflation, and market conditions, which impact future investment strategies.
•  Strengthens oversight and governance of public funds.
•  Provides context on Federal Reserve policies, inflation trends, and interest rate movements, helping the City align investment strategies with market conditions.

Cons:

• Economic factors such as Federal Reserve rate changes, inflation, and recession risks can impact portfolio performance beyond the City's control.
• The report may highlight challenges that cannot be immediately addressed through local policy changes.

Not applicable.