REPORT TO COUNCIL
SUBJECT
Title
Authorize the Issuance of a Consultant Services Agreement with Chandler Asset Management Inc., in an Amount Not-to-Exceed $1,050,000 for Investment Management Services (F26-558)
Report
REPORT IN BRIEF
Approval is requested to issue a three-year contract to Chandler Asset Management Inc., of San Diego, California, in an amount not to exceed $1,050,000 to continue to provide investment management services for the City. Approval is also requested to authorize the City Manager to execute up to two one-year extensions if cost and services remain acceptable to the City.
EXISTING POLICY
Pursuant to Chapter 2.08.040 of the Sunnyvale Municipal Code, City Council approval is required for the procurement of goods and/or services exceeding $250,000 in any one transaction.
Further, Section 2.08.070(b)(3) authorizes the purchase of goods and/or services to be exempted from the competitive bidding requirements when the solicitations of bids or proposals would be impractical, unavailing or impossible.
This contract and the investment services Chandler provide support the City Council’s Responsive Government strategic goal by prudently investing idle City funds to maximize yield while preserving safety and liquidity.
ENVIRONMENTAL REVIEW
The proposed actions are exempt from environmental review under 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 commitment to any specific project that may result in a significant impact on the environment.
BACKGROUND
City funds needed for immediate disbursement are maintained in a liquid checking account while funds that are not needed for disbursement are held in the City’s pooled investment portfolio. Additionally, the City’s Deferred Compensation Plan, the City’s Defined Benefit Retirement Plan, Other Post-Employment Benefits (OPEB) Trust, and debt issuance proceeds are managed and held by third-party administrators and trustee custodial banks.
The City Council first adopted a policy governing the investment of City funds on July 30, 1985. The key provisions of the City’s Investment Policy are:
1) Safety of principal - being the foremost objective of the investment program;
2) Liquidity - retaining sufficient short-term cash or investments to meet all operating requirements; and,
3) Rate of return - obtaining a reasonable market rate of return based on consideration of the City’s investment risk approach and cash flow needs.
The City Council reviews and adopts the Investment Policy annually within 120 days of the end of the fiscal year to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. Also, the Investment Policy follows the Government Code and includes additional restrictions on some investments.
California Government Code Section 53600 et seq. strictly governs the investments public agencies can hold. State law also governs what percentage of the portfolio that may be invested in certain security types, maximum investment maturities, and minimum investment credit ratings by the major rating agencies (Standard & Poor’s and Moody’s Investors Service). Public agencies may invest only in fixed-income securities; therefore, the City primarily invests in highly rated securities such as U.S. Treasury securities, Federal agency securities, and government-sponsored enterprise debt, as well as high-credit-quality, non-governmental debt securities.
On June 20, 2017, the City Council amended the 2017 Priority Advocacy Issues to support legislation to limit or eliminate direct or indirect investment of public funds in the production of fossil fuel drilling. Therefore, the Investment Policy encourages investments that support sound Environmental, Social and Governance (ESG) investing. While the portfolio may not be classified as an ESG portfolio, investments in entities that support community well-being through safe and environmentally sound practices and fair labor practices and equality of rights regardless of sex, race, age, disability, sexual orientation, and other protected characteristics are encouraged. Investments are discouraged in entities that manufacture tobacco products, firearms, or nuclear weapons and are direct or indirect investments to support the production or drilling of fossil fuels.
To maintain compliance with the Government Code and the City’s Investment Policy while meeting the criteria for social responsibility and environmental consciousness, specialized investment management expertise and research tools are required. A competitive vendor selection process was conducted in 2018, and Chandler was selected to provide the City with investment management services. The City Council awarded Chandler a three-year contract and authorized the City Manager to approve two one-year extensions to manage the City's investment portfolio, beginning in July 2018 (RTC No. 18-0281).
On July 30, 2024, the City Council approved an additional two-year agreement with Chandler, not to exceed $700,000, to continue investment management services for the City (RTC No. 24-0703).
Since Chandler was first engaged in 2018, the firm has consistently managed the City's investment portfolio in compliance with California Government Code requirements and the City's Investment Policy while assisting staff with investment reporting, policy updates, and portfolio strategy. Staff believes that maintaining continuity with the City's current investment manager provides the greatest overall benefit to the City.
DISCUSSION
Staff recommends continuing with Chandler Asset Management, Inc. because the firm has consistently provided investment management services that comply with California Government Code requirements and the City's Investment Policy while delivering competitive investment returns and declining management fees over successive contract terms.
Under Chandler’s investment advisory and portfolio management services, the City portfolio adheres to the California Government Code and the City’s Investment Policy. In addition, Chandler provides monthly reporting and annual reports for financial reporting and holds quarterly meetings with the Finance staff to discuss quarterly results and cashflow needs. Chandler also assists staff with the annual update of the Investment Policy for Council approval.
Due to increasing cash balances, the City's investment portfolio average balance has increased from $580.6 million in FY 2018/19 to $880.3 million in FY 2025/26, a 66% increase over seven fiscal years. The following table details the City's average investment portfolio balance, investment income, investment management fees, and average purchased yield since Chandler began managing the portfolio in FY 2018/19:
|
|
Investment |
|
Investment |
Average |
|
|
Portfolio |
Investment |
Management |
Purchase |
|
Fiscal Year |
Average Balance |
Income |
Fee |
Yield |
|
2018/19 |
$580,587,348 |
$13,000,279 |
$262,270 |
2.22% |
|
2019/20 |
$704,661,647 |
$16,476,247 |
$318,184 |
2.41% |
|
2020/21 |
$709,733,510 |
$13,750,330 |
$344,683 |
2.12% |
|
2021/22 |
$723,048,278 |
$12,946,215 |
$279,306 |
1.69% |
|
2022/23 |
$825,718,160 |
$16,655,997 |
$307,616 |
2.17% |
|
2023/24 |
$836,776,984 |
$20,016,069 |
$255,009 |
2.81% |
|
2024/25 |
$855,641,087 |
$27,809,388 |
$331,692 |
3.45% |
|
*2025/26 |
$880,318,878 |
$29,152,524 |
$339,096 |
3.90% |
|
*Through 5/31/2026 |
|
|
|
|
The investment income figures above include accruals, coupon payments, and realized gains and losses.
After the initial contract period, which began in FY 2021/22, Chandler reduced the management fee to 4.5 basis points, down from an average of 6.0 basis points. Beginning in FY 2023/24, Chandler further reduced the fees to an average of 3.9 basis points annually. Chandler has proposed the following change in fee structure, resulting in an average of 3.6 basis points annually. Based on the City’s current portfolio, this would result in a fee reduction of $25,000 annually, or 7.7%.
Current:
|
Assets Under Management |
Annual Asset Management Fee |
Estimated Fee |
|
First $200 million |
0.06 of 1% (6 basis points) |
$120,000 |
|
Next $150 million |
0.04 of 1% (4 basis points) |
$60,000 |
|
Assets in excess of $350 million |
0.03 of 1% (3 basis points) |
$144,000 |
|
|
Total: |
$324,000 |
Proposed:
|
Assets Under Management |
Annual Asset Management Fee |
Estimated Fee |
|
First $200 million |
0.05 of 1% (5 basis points) |
$100,000 |
|
Next $100 million |
0.04 of 1% (4 basis points) |
$40,000 |
|
Assets in excess of $300 million |
0.03 of 1% (3 basis points) |
$159,000 |
|
|
Total: |
$299,000 |
FISCAL IMPACT
Investment management fees are paid from investment earnings generated by the City's investment portfolio and do not require an additional General Fund appropriation. Staff is requesting a not-to-exceed total amount of $1,050,000 to account for potential growth in the City’s investment pool.
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 City Hall 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
Take the following actions:
- Authorize the issuance of a three (3) year consultant services agreement to Chandler Asset Management, Inc. for investment management services in an amount not to exceed $1,050,000;
- Authorize the City Manager to execute the contract when all necessary conditions have been met; and
- Authorize the City Manager to execute up to two additional one-year extensions and increase the contract amount, subject to available funding and acceptable pricing and services.
Levine Act
LEVINE ACT
The Levine Act (Gov. Code Section 84308) prohibits city officials from participating in certain decisions regarding licenses, permits, and other entitlements for use if the official has received a campaign contribution of more than $500 from a party, participant, or agent of a party or participant in the previous 12 months. The Levine Act is intended to prevent financial influence on decisions that affect specific, identifiable persons or participants. For more information see the Fair Political Practices Commission website: www.fppc.ca.gov/learn/pay-to-play-limits-and-prohibitions.html
A check or “Y” in the checklist below indicates that the action being considered falls under a Levine Act category or exemption:
SUBJECT TO THE LEVINE ACT
___ Land development entitlements
___ Other permit, license, or entitlement for use
_X_ Contract or franchise
EXEMPT FROM THE LEVINE ACT
___ Competitively bid contract
___ Labor or personal employment contract
___ General policy and legislative actions
Staff
Prepared by: Dennis Jaw, Assistant Director of Finance
Reviewed by: David Battaglia, Purchasing Officer
Reviewed by: Matthew Paulin, Director of Finance
Reviewed by: Sarah Johnson-Rios, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. Draft Consultant Services Agreement