REPORT TO COUNCIL
SUBJECT
Title
Adopt the City's Investment Policy for Fiscal Year 2014/15 and Receive the Annual Performance Report for Fiscal Year 2013/14
Report
BACKGROUND
The City Council first adopted a policy governing the investment of City funds on July 30, 1985. This policy has been reviewed and adopted on an annual basis since that time.
EXISTING POLICY
Council Policy 7.1.2 - Investment and Cash Management requires that the Investment Policy be reviewed and adopted annually within 120 days of the fiscal year to ensure consistency with the overall objectives of safety, liquidity, and yield and its relevance to current law and financial and economic trends. A report on portfolio performance for the preceding fiscal year is also presented to the City Council as part of the annual investment policy review.
ENVIRONMENTAL REVIEW
N/A.
DISCUSSION
Staff invests funds not immediately needed for disbursement. Funds for the City's Deferred Compensation Plan, the City's Retirement Plan, Other Post-Employment benefits (OPEB) Trust, and debt issuance proceeds are not invested by City staff and therefore are not included in the investment portfolio. Funds needed for disbursement are maintained in a liquid checking account.
The following annual report on portfolio performance for FY 2013/14 includes the key provisions of the policy, a statement of compliance with the investment policy, and comparisons of the City's performance compared to the investment policy objectives.
The key provisions of the existing policy are as follows:
1. Safety of principal is the foremost objective of the investment program. The City's portfolio is diversified by type of investment, issuer, and maturity date. Diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. The investment policy specifies the percentage of funds that can be invested in each investment type and issuer and the maximum maturity of each investment. The policy allows a maximum maturity of seven years for US Treasury, US Agency and Government Sponsored Enterprises investments and shorter maturities for all other investments.
All investments in the portfolio are authorized by the investment policy and the City is in compliance with the requirement that all investments be held in safekeeping by a third party bank trust department. The City currently has a contract with Union Bank to provide this service.
2. Liquidity- the portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. A schedule of major revenues and expenditures for at least 12 months is maintained in order to determine liquidity needs. Liquidity requirements have been met through utilizing the State's Local Agency Investment Fund (LAIF) and the City's interest bearing bank accounts. Approximately 16 percent of the portfolio was invested in LAIF at the end of FY 2013/14.
3. Yield- the portfolio will be maintained with the objectives of safety and liquidity first, and then the objective of obtaining a market rate of return throughout the budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio.
With yields continuing to be at historical all-time lows, the City's investment strategy continues to be one of keeping investments short in anticipation of rising interest rates. When interest rates increase, investments existing in the portfolio with longer maturities, that were purchased when rates were low, will experience a decrease in their market value because the interest rate on those investments is less than the current market's interest rate. The strategy is to invest in higher yielding investments when rates rise as opposed to having to wait for low interest bearing investments to mature or sell those investments at a loss so that funds can be reinvested at the higher rate.
For FY 2013/14, the portfolio yield averaged .56 percent while the average yield of our benchmark (Treasury securities with an average life similar to our portfolio) was .25 percent; a difference of 31 basis points. The average life of the portfolio during the last fiscal year was 496 days.
Interest earnings for FY 2013/14 for all City funds totaled $1,542,258. Interest earnings are allocated pro rata to each fund throughout the City based on the cash balance held by each fund.
It should be noted that the portfolio balance has increased by 15 percent from $265 million in June 2013 to the current market value of $305 million. This increase can be attributed to higher than anticipated revenues (such as development related fees, property tax, and transient occupancy tax) and the fact that City expenditures for FY 2013/14 were less than budgeted.
The City's Investment Policy has been reviewed and certified annually by the Association of Public Treasurers of the United States and Canada (APT US&C) since 1999. Once approved by Council, staff will submit the Investment Policy for FY 2014/15 to be re-certified.
Last year, the Investment Policy was reviewed by Chandler Asset Management, an independent third party firm founded in 1988 that specializes in portfolio management for public agencies in California. Several changes were made to the policy last year following the review: two new investment alternatives were added and the maturities of certain investments were extended as permitted by State law. In addition, staff can now do business with regional brokers headquartered outside of California and the City can employ an investment advisor to invest the City's cash. These changes were made to provide more flexibility while maintaining the key provisions of safety, liquidity, and yield. As a result of that extensive review, no changes to the Investment Policy are proposed for FY 2014/15.
FISCAL IMPACT
There is no fiscal impact associated with adoption of the Investment Policy.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City's official-notice bulletin board outside City Hall, at the Sunnyvale Senior Center, Community Center and Department of Public Safety; and by making the agenda and report available at the Sunnyvale Public Library, the Office of the City Clerk and on the City's website.
RECOMMENDATION
Recommendation
Adopt the Investment Policy for FY 2014/15 as presented.
Prepared by: Therese Balbo, Treasury Manager
Reviewed by: Grace K. Leung, Director, Finance
Reviewed by: Robert A. Walker, Assistant City Manager
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. Proposed Investment Policy for FY 2014/15