REPORT TO COUNCIL
SUBJECT
Title
Receive and File the City of Sunnyvale Investment Report - First Quarter 2024
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 unspent 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 (Council 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 2023/24 at its October 10, 2023 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, which changes over time 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 zero and seven years. The City’s main investment portfolio of securities has a target duration of 2.75 years. As of the quarter end, the portfolio had a duration position of 2.5 years, or 91% of its duration target, which was rebalanced to be closer to its target. The City’s portfolio manager continues to anticipate that rates will keep trending lower in the coming months. They are maintaining the duration position close to the duration of the portfolio’s target to reduce relative market risk and protect income if rates do fall. New purchases focused on high credit quality medium-term corporate notes, U.S. Treasury obligations, and federal agency mortgage-backed securities. These purchases averaged yields between 3.97% and 5.98%. The average yield to maturity of the main portfolio of securities alone was 2.96%, up from 2.77% over the prior quarter. The market yield, which can infer a reinvestment rate, was 4.87%, up from 4.53% on December 31, 2023. The market value of the main portfolio of securities totaled $819,079,806 as of March 31, 2024, with accrued interest (interest earned but not yet received) of $4,154,692.
Local Agency Investment Fund (LAIF)
The Local Agency Investment Fund (LAIF) holds additional liquid funds needed to meet short-term cash needs (liquid investments). LAIF is a program created by statute as an investment alternative for California’s local governments and special districts. The market value of LAIF was $18,087,097 as of March 31, 2024. This includes the LAIF balance of $17,903,421 and earned interest of $183,676 for the quarter.
Summary of 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 (Investment Portfolio and LAIF) had a value of $837,166,917 as of March 31, 2024. This amount does not include $4,154,692 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 2.99% as of March 31, 2024. This yield includes the yield earned on assets invested in LAIF. The market yield of the investment program was 4.85%.
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 the volume and timing of City revenues available to invest after maintaining sufficient liquidity. Revenue sources include, but are not limited to, 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 revenues or financial activities.
The portfolio manager primarily focuses on following the long-term duration investment strategy. Staff continues to monitor cash balance available, assess cashflow needs regularly, and communicate routinely with the portfolio manager regarding operational and capital projects funding needs.
Sweep Account Balance Held with US Bank
The City’s sweep account with US Bank is an interest-bearing account, to which any excess funds are automatically swept daily from the operating bank account held with US Bank. The sweep account balance was $20,262,001 as of March 31, 2024, with the average rate of return of 4.91%.
Economic Conditions
Recent economic data has shown above trend growth fueled by a rise in consumer spending and a healthy US job market. Inflationary trends are subsiding, but core levels remain above the Fed’s target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, the City’s investment advisor believes the economy will gradually soften and the Fed will loosen monetary policy in 2024.
As expected at the March 2024 meeting, the Federal Open Market Committee voted unanimously to leave the Federal Funds rate unchanged at a target range of 5.25 - 5.5%. The March Summary of Economic Projections (SEP) showed stronger outlook on real GDP growth and higher core inflation projections for 2024 on resilient labor market and consumer data. The median projection for Federal Funds rate by year-end remained the same at 4.625%, implying three 0.25% cuts. It is likely the FOMC will loosen monetary policy in mid-2024 as inflation and economic growth continue to moderate.
The US Treasury yield curve stabilized in March as the FOMC left the Federal Funds rate unchanged. The 2-year Treasury yield was unchanged at 4.62%, the 5-year Treasury fell four basis points to 4.21%, and the 10-year Treasury yield dropped five basis points to 4.20%. The inversion between the 2-year Treasury yield and 10-year Treasury yield widened to -42 basis points, however remains less than -56 basis point spread from one year ago. The inversion between 3-month and 10-year Treasuries widened to -117 basis points in March from -113 basis points in February.
FISCAL IMPACT
Overall, the City’s investment income remained strong for the first quarter, totaling $6,170,000. In comparison, the investment income for the same period in the prior year was $4,176,185.
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 - First Quarter 2024.
Staff
Prepared by: Inderdeep Dhillon, Finance Manager
Reviewed by: Tim Kirby, Director of Finance
Reviewed by: Jaqui Guzmán, Deputy City Manager
Approved by: Kent Steffens, City Manager
ATTACHMENTS
1. City of Sunnyvale First Quarter Investment Report 2024