REPORT TO COUNCIL
SUBJECT
Title
Adopt the City’s Investment Policy for Fiscal Year 2026/27 and Receive the Annual Performance Report for Fiscal Year 2025/26
Report
BACKGROUND
The City Council first adopted a policy governing the investment of City funds on July 30, 1985. This policy is reviewed and updated annually.
To support the management of an increasingly complex investment environment and growing portfolio, the City has contracted with Chandler Asset Management, Inc. (Chandler) since 2018. On August 11, 2026, the Council approved a three-year services agreement with Chandler and authorized the City Manager to execute up to two one-year extensions if costs and services remain acceptable to the City (RTC No. 26-0659). Chandler manages the long-term portion of the City’s portfolio, while staff manages the liquid/short-term portion. Chandler has also advised the City on annual investment policy amendments to adapt to changing laws and best practices.
EXISTING POLICY
State law (Government Code 53464(a)(2)) requires the legislative body of a local agency to annually consider changes to its investment policy at a public meeting.
Council Policy 7.1.2 - Investment and Cash Management. The Investment Policy shall be reviewed and adopted annually within 120 days of the beginning of each fiscal year to ensure consistency with the City's investment objectives, conformance to current laws, and responsiveness to financial and economic trends.
The key provisions of the existing Investment and Cash Management Policy are as follows:
1. Safety - Safety of principal is the foremost objective of the investment program. The City’s portfolio is diversified by investment type, issuer, and maturity date. Diversification is required to minimize exposure to market and credit risk. The investment policy outlines the percentage of funds that can be allocated to each investment type and issuer, and the maximum maturity of each investment. The policy allows a maximum maturity of seven years for U.S. Treasury, U.S. Agency, and Government-Sponsored Enterprises (like Fannie Mae and Freddie Mac) investments, and shorter maturities for all other investments.
2. Liquidity - The portfolio needs to remain sufficiently liquid to meet all City anticipated operating requirements. Liquidity needs are determined by keeping a schedule of major revenues and expenditures for at least 12 months. The daily checking account balance is also tracked to ensure sufficient funds are available. Liquidity requirements have been met through utilizing the State’s Local Agency Investment Fund (LAIF), CalTrust, and the City’s interest-bearing bank accounts.
3. Return on Investment (Yield) - The portfolio is maintained with the objectives of safety and liquidity first, followed by the objective of obtaining a reasonable market rate of return throughout the budgetary and economic cycles, while considering the City’s investment approach, risk appetite within legal limits, and cash flow needs.
All investments in the portfolio are in accordance with state law requirements and authorized by the City’s Investment Policy. The City complies with the requirement that all investments be held in safekeeping by a third-party bank trust department. U.S. Bank currently provides safekeeping and custodial services to the City.
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 Guidelines Section 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
FY 2026/27 Investment Policy
The City’s investment policy establishes objectives and criteria for investing the City’s temporarily idle funds and provides guidelines for the City’s cash management system.
This policy is set forth by the City for the following purposes:
1. To establish a clear understanding for the City Council, City management, responsible employees, residents and third parties of the objectives, policies and guidelines for the investment of the City’s temporarily idle funds;
2. To offer guidance to investment staff on the investment of City funds; and
3. To establish a basis for evaluating investment results.
Chandler reviewed the investment policy and recommends several changes shown in the redlined version included as Attachment 1 to this report. A summary of the changes is as follows:
• Clarification that savings associations and federal associations, as defined in Section 5102 of the California Financial Code, are eligible financial institutions allowed to do business with the City. This change makes this paragraph consistent with California Government Code Section 53601.5 (Page 3).
• An update to the sunset date for a 40% concentration limit for commercial paper for the City (so long as City assets under management exceed $100 million) from 2026 to 2031 pursuant to Senate Bill No. 595 (Page 8).
• A removal of the requirement that the City may not purchase more than 10% of the outstanding commercial paper of any single issuer. SB 595 removed this limitation (Page 8).
• An extension of maturity allowed for commercial paper from 270 days to 397 days pursuant to SB 595 (Page 8).
• An extension of maturity allowed for Municipal Securities from five to seven years as allowed under California Government Code. This change will match the investment policy to the Code and allow the City to increase diversification when purchasing securities longer than five years (Page 10).
• An update to the sunset date for inclusion of zero- or negative-interest rate securities from 2026 to 2031 (Page 11).
Annual Performance Reporting for FY 2025/26
The total portfolio balance excluding the City’s operating account was $903.3 million as of June 30, 2026, up $27.4 million (3.1%) from $875.9 million as of June 30, 2025. This increase mainly reflects higher property and sales tax revenue receipts and strong interest earnings. Total interest earnings across all accounts were approximately $31.4 million. Additional details on the City’s fiscal year-end performance will be available with the Budgetary Year-End Financial Report presented to the City Council in December 2026. Chandler manages the long-term portion of the City’s portfolio, while staff manages the liquid/short-term portion.
Long-Term Portfolio
For FY 2025/26, the long-term (over one year) portfolio’s total rate of return was 3.15%. The return outperformed the City’s performance and risk measurement benchmark (2.71%), which is based on the ICE BAML 1-5 Years US Treasury Securities/Agency Index. Total return represents the portfolio's growth from both interest earnings and fair value appreciation (whether realized or unrealized) during the fiscal year. Interest earnings, a component of the total return (interest earnings excluding unrealized loss/gains), were strong for the fiscal year, totaling 4.02% as of June 30, 2026. These earnings were significantly higher than the prior year interest earned of 3.36%.
At 2.49 years, the average duration of investments in the portfolio at fiscal year-end was lowered to align more closely with the duration of the market risk-measuring benchmark. This adjustment was deliberate, as rising market rates negatively impacted the fair value of the longest-duration portfolios. This duration stance, along with strong diversification into yield-enhanced sectors, was the strongest contributor to the portfolio’s excess return over the benchmark.
FY 2025/26 interest earnings for the long-term portfolio totaled $28,611,310. The amount does not include an unrealized reduction in fair market value of $7,975,628 over the fiscal year. When interest rates in the bond market rise, existing City investment holdings drop in (unrealized) fair market value. This contrasts with the unrealized gain in the prior fiscal year of $24,699,564 due to falling interest rates.
The portfolio also realized $1,196,322 in gains during the fiscal year from sales of securities before their maturity date. Chandler occasionally sells securities on the City’s behalf at a gain or a loss to reposition the portfolio's market risk, improve credit quality, and enhance return.
Short-Term Portfolio
The rate of return in the LAIF account, a State of California interest-bearing vehicle available to local agencies, is comprised of interest earnings only (no fair value adjustments) and was 4.00% ($792,819) for the fiscal year.
The CalTRUST account had an annual rate of return of 3.98% and interest earnings of $1,315,774 during the fiscal year. CalTRUST is a joint power authority functioning as a publicly governed investment pool for California public agencies to safely invest idle funds.
Additionally, the City maintains a Money Market Sweep account with U.S. Bank that holds funds for operational needs. This account earned $695,922 in interest (average rate of 3.25%) during the fiscal year. Funds are swept out of the City’s operational account into an interest-bearing account on a nightly basis.
FISCAL IMPACT
There is no direct fiscal impact associated with the adoption of the Investment Policy as
recommended.
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
Adopt the City’s Investment Policy for FY 2026/27 and receive the Annual Performance Report for Fiscal Year 2025/26.
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
An “X” 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
___ Contract under $50,000 or non-fiscal
___ Contract between public agencies
_X_ General policy and legislative actions
* "Competitively bid" means a contract that must be awarded to the lowest responsive and responsible bidder.
Staff
Prepared by: Dennis Jaw, Assistant Director of Finance
Reviewed by: Matthew Paulin, Director of Finance
Reviewed by: Sarah Johnson-Rios, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. Red-lined Version - Proposed Sunnyvale Investment Policy 7.1.2 FY 2026/27