REPORT TO COUNCIL
SUBJECT
Title
Receive and File the City of Sunnyvale Investment Report -Second Quarter 2023
Report
BACKGROUND
In accordance with California Government Code Section 53646, staff is submitting the attached investment report for Council’s review. The report includes all investments held by the City of Sunnyvale. Chandler Asset Management (Chandler) manages funds not immediately needed for disbursement and held in an investment portfolio.
Funds for the City’s Deferred Compensation Plan, the City’s Retirement Plan, the City’s Pension Trust, Other Post-Employment Benefits (OPEB) Trust, and any proceeds from debt issuance are not included in this report. Third party administrators and trustee custodial banks manage and hold these funds.
EXISTING POLICY
California Government Code Section 53600 et seq., strictly governs which investments public agencies can hold. In some cases, state law also governs what percentage of the portfolio can be invested in certain security types, maximum maturities, and minimum credit ratings by major rating agencies (Standard & Poor’s and Moody’s Investors Service). Public agencies can only invest in fixed income securities. The purchase of stock is prohibited. Therefore, the City primarily invests in highly rated securities such as U.S. Treasury, federal agencies, and government sponsored enterprise debt as well as high credit quality, non-governmental debt securities.
The California Government Code also requires investment objectives of safety, liquidity, and return, in that order. As such, safety of principal is the foremost objective of the City’s investment program. The portfolio must remain sufficiently liquid to enable the City to meet all cash requirements.
The City Council first adopted a policy (7.1.2 Investment and Cash Management) governing the investment of City funds on July 30, 1985. The City Council reviews and adopts this policy annually. Council adopted an updated policy for FY 2022/23 at its September 27, 2022 meeting. The City’s investment policy follows the Government Code and includes additional restrictions beyond state law on some investments such as a lower allowable percentage per investment type or issuer.
ENVIRONMENTAL REVIEW
This action does not require environmental review because it is not a project that has the potential for causing a significant impact on the environment. (CEQA Guideline 15061(b)(3). Furthermore, the action being considered does not constitute a “project” with the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines Section 15378 (b) (4) in that it is a fiscal activity that does not involve any commitment to any specific project which may result in a potential significant impact on the environment.
DISCUSSION
This report provides information on the values (par, book and market), the type of investment, issuer, maturity date and yield of each investment. The par value of a bond is the amount that the issuer agrees to repay the City by the maturity date. The book value is what the City initially paid for the bond. It changes gradually if a premium or discount is amortized. The market value is what the bond is worth as of the date of the report.
Investment Portfolio
The majority of the City’s funds continue to be actively managed by the City’s portfolio manager in the City’s portfolio of investment securities, with maturities ranging between 0 and 5 years. The City’s main investment portfolio of securities has a target duration of approximately 2.56 years. As of quarter end, the portfolio had a duration position of 2.38 years, or 96% of its duration target. This shorter duration period allows the portfolio to more quickly capture higher rates now available in the market as interest rates rise. Given tighter financial conditions as a result of Fed tightening activity, purchases for the portfolio during the quarter focused on the most liquid sectors: U.S. Treasury obligations, federal agency debt, and federal agency-issued mortgage-backed securities. New purchases averaged yields between 3.97% and 4.38%. The yield to maturity of the main portfolio of securities alone was 2.41%. The main portfolio of securities totaled $810,082,372 as of June 30, 2023.
Local Agency Investment Fund (LAIF) and Liquid Investments
The Local Agency Investment Fund (LAIF) holds additional liquid funds needed to meet short-term cash needs (liquid investments)LAIF totaled $40,118,253 as of June 30, 2023. LAIF is a program created by statute as an investment alternative for California’s local governments and special districts.
The City’s investment program maintains an additional portfolio of securities also managed by the City’s portfolio manager, where the City may invest funds required for short-term liquidity needs if market rates are more competitive than the interest rate available through LAIF. During the quarter, the City moved approximately $35 million out of LAIF and into governmental securities shorter than six months. The yield on this portfolio was 5.03% as of June 30, which compares favorably to the yield offered by LAIF (3.26%). The liquidity portfolio balance totaled $35,529,363 as of June 30, 2023. Staff utilizes funds maturing from this portfolio to pay for various City expenditures due in the next six months.
Total City Investments
This Report provides a summary and detailed information on each security. Also included is an activity report of sales, purchases and maturities for the three-month accounting period as required by Government Code Section 53607. Total investments (portfolios of securities and LAIF) had a value of $885,729,988 as of June 30, 2023. This amount does not include $4,268,466 of accrued interest, which has been earned but not yet received. The investment program’s average yield to maturity (the income expected to be earned over the next twelve months if portfolio holdings do not change) was 2.55% as of June 30, 2023. This yield includes the yield earned on assets invested in LAIF. The value of the portfolio is impacted by market forces in the bond market such as the movement of interest rates, credit quality, fiscal policy, and economic growth. It is also affected by property tax revenues; development related activity such as park impact fees, housing impact fees, traffic mitigation fees, developer contributions, and building and planning fees; utility enterprise funds revenues and other City financial activities. The higher yields earned this quarter, along with a slight drop in interest rates (which increases the value of bonds) caused the value of the portfolio to rise in comparison to last quarter.
The portfolio manager primarily focuses on following the long-term duration investment strategy. Staff continue to monitor cashflow needs regularly and communicate actively with the portfolio manager regarding operational and capital projects funding needs.
Economic Conditions
Recent economic data continues to suggest positive but below trend growth this year. Although the pace of job growth is moderate, labor markets remain solid, and the U.S. consumer has demonstrated resiliency. Inflationary trends are subsiding, but core levels remain well above the Fed’s target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, it is likely the economy will gradually soften and the Fed will remain data dependent as they tread cautiously going forward.
As anticipated at the July meeting, the Federal Open Market Committee (FOMC) voted unanimously to raise the Federal Funds rate by 0.25% to a target range of 5.25 - 5.50%, the highest level in over 20 years. Fed Chair Powell maintained that the FOMC will remain data dependent going forward, and that they do not anticipate a recession, leaving the option open for the possibility of additional rate hikes in the future if needed.
The yield curve remained inverted in June. The 2-year Treasury yield surged 50 basis points to 4.90%, the 5-year Treasury yield rose 40 basis points to 4.16%, and the 10-year Treasury yield increased 19 basis points to 3.84%. The inversion between the 2-year Treasury yield and 10-year Treasury yield widened to -106 basis points at June month-end versus -76 basis points at May month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was +6 basis points. The inversion between 3-month and 10-year Treasuries narrowed to -146 basis points in June from -176 basis points in May. The shape of the yield curve indicates that the probability of recession is increasing.
FISCAL IMPACT
Overall, the City’s investment income remained strong for the second quarter, totaling $4,818,261. In comparison, the investment income for the same period last year was $3,286,838.
PUBLIC CONTACT
Public contact was made by posting the Council meeting agenda on the City's official-notice bulletin board at City Hall, at the Sunnyvale Public Library and in the Department of Public Safety Lobby. In addition, the agenda and this report are available at the NOVA Workforce Services reception desk located on the first floor of City Hall at 456 W. Olive Avenue (during normal business hours), and on the City's website.
RECOMMENDATION
Recommendation
Receive and file the City of Sunnyvale Investment Report - Second Quarter.
Staff
Prepared by: Inderdeep Dhillon, Finance Manager
Reviewed by: Tim Kirby, Director, Director of Finance
Reviewed by: Jaqui Guzmán, Deputy City Manager
Approved by: Kent Steffens, City Manager
ATTACHMENTS
1. City of Sunnyvale Second Quarter Investment Report