REPORT TO COUNCIL
SUBJECT
Title
Receive and File the City of Sunnyvale Investment Report - Second 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, Retirement Plan, 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 2.82 years as measured by its risk and performance measuring benchmark. As of the quarter end, the portfolio had a duration position of 2.54 years, or 90% of its duration target, which was rebalanced to be closer to its target. The City’s portfolio manager continues to anticipate that rates will trend lower in the coming months and will be positioning the duration position longer than the duration of the portfolio’s benchmark. This approach protects the City’s income and will cause the City’s investments to appreciate in value if rates fall. New purchases focused on high credit quality medium-term corporate notes, specifically debt securities issued by utilities and funding agreements issued by highly rated insurance corporations. The portfolio also acquired U.S. Treasury obligations and asset-backed securities (some with yields as high as 5.85%). The average yield to maturity of the main portfolio of securities alone was 3.22%, up from 2.96% in the prior quarter. The market yield, which can infer a reinvestment rate, was 4.88%, relatively flat when compared to the prior quarter. The market value of the main portfolio of securities totaled $825,115,005 as of June 30, 2024, with accrued interest (interest earned but not yet received) of $5,232,182.
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 totaled $18,094,702 as of June 30, 2024, with an accrued interest of $204,162 for the quarter. LAIF is a program created by statute as an investment alternative for California’s local governments and special districts.
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 $843,209,707 as of June 30, 2024. This amount does not include $5,436,344 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 3.20% as of June 30, 2024. This yield includes the yield earned on assets invested in LAIF. The market yield of the investment program was 4.88%.
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 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 continue 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 a money market 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 $43,173,122 as of June 30, 2024, with the average rate of return of 4.90%.
Economic Conditions
Recent economic data suggests positive but slower growth this year fueled by consumer spending. While the consumer has been resilient, growing credit card debt, higher delinquencies, and a moderating labor market pose potential obstacles to future economic growth. Inflationary trends are subsiding, but core levels remain above the Fed’s target. The labor market is showing marked signs of cooling, reflecting an improved balance between supply and demand for workers. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, it is likely the economy will gradually soften, and the Fed will begin lowering interest rates at upcoming meetings with pace and magnitude determined by the incoming data.
As expected at the July meeting, the Federal Open Market Committee (FOMC) voted unanimously to leave the federal funds rate unchanged at a target range of 5.25-5.50%. Although this was the eighth straight meeting that the overnight rate remained unchanged, they noted that risks to achieving their employment and inflation goals are moving “into better balance”. In addition, the FOMC adjusted their evaluation of the labor market pointing out that job gains have moderated. The market is now pricing for more aggressive easing in the coming months.
The US Treasury yield curve shifted significantly lower in July 2024 as economic data moderated. The 2-year Treasury yield fell 50 basis points to 4.26%, the 5-year Treasury dropped 46 basis points to 3.91%, and the 10-year Treasury yield declined 37 basis points to 4.03%. The inversion between the 2-year Treasury yield and 10-year Treasury yield narrowed to -23 basis points at July month-end versus -36 basis points at June month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -92 basis points. The inversion between 3-month and 10-year Treasuries widened to -126 basis points in July from -96 basis points in June.
FISCAL IMPACT
Overall, the City’s total investment income, or interest earned net of realized gain or loss, remained strong for the second quarter, totaling $6,137,807. In comparison, the investment income for the same period in the prior year was $5,249,278.
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 2024.
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 $250 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
___ Contract or franchise
EXEMPT FROM THE LEVINE ACT
___ Competitively bid contract
___ Labor or personal employment contract
_X_ General policy and legislative actions
Staff
Prepared by: Juan Castro, Interim Finance Manager
Reviewed by: Inderdeep Dhillon, Interim Assistant Director of Finance
Reviewed by: Dennis Jaw, Interim Director of Finance
Reviewed by: Jaqui Guzmán, Deputy City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. City of Sunnyvale Second Quarter Investment Report 2024