REPORT TO COUNCIL
SUBJECT
Title
Receive and File the City of Sunnyvale Investment Report - Third 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 the 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 2024/25 at its October 15, 2024 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, with maturities ranging between zero and seven years. The City’s main investment portfolio of securities has a target duration of 2.58 years as measured by its risk and performance measuring benchmark. As of the quarter end, the portfolio had a duration position of 2.61 years, or 101% of its duration target, which was rebalanced to be longer than its target in anticipation of lower interest rates available in the markets. The City’s portfolio manager continues to anticipate that rates will trend lower in the coming months and will continue to position the duration 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 more in value if rates fall. New purchases focused on high credit quality medium-term corporate notes and U.S. Treasury obligations. The average yield to maturity of the main portfolio of securities alone was 3.32%, up from 3.22% in the prior quarter. The market yield, which can infer a reinvestment rate, was 3.93%, slightly lower compared to prior quarter and indicative of a lower rate market. The market value of the main portfolio of securities totaled $830,183,669 as of September 30, 2024, with accrued interest (interest earned but not yet received) of $4,353,055.
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 $13,298,864 as of September 30, 2024 and earned interest of $193,763 for the quarter, which is included in the market value of the total portfolio. 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 $843,482,533 as of September 30, 2024. This amount does not include $4,353,055 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 3.31% as of September 30, 2024. This yield includes the yield earned on assets invested in LAIF. The market yield of the investment program was 3.93%.
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 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 $16,971,133 as of September 30, 2024, with the average rate of return of 4.71%.
Economic Update and Outlook
Recent economic data continues to suggest positive but slower growth this year fueled by consumer spending. However, declining savings rates, growing credit card debt, higher delinquencies, and a moderating labor market remain as potential obstacles to future economic growth. Inflationary trends are subsiding, but core levels remain above the Federal Reserve’s (Fed) target. The labor market is showing signs of cooling, which reflects an improved balance between supply and demand for workers. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, it is expected the economy will gradually soften and the Fed will continue to lower rates at a measured pace through this year with the ability to move more aggressively should the employment data warrant.
The Federal Open Market Committee (FOMC) delivered the first rate cut of the easing cycle with a 50 basis point cut at the September meeting. Fed Chair Jerome Powell reiterated previous statements acknowledging that monetary policy has shifted into a more balanced approach, addressing price stability and full employment in tandem. The Fed released the quarterly Summary of Economic Projections (SEP) which now forecasts a substantially lower median Fed Funds Rate expectation among Fed Governors in 2025 due to lower inflation expectations and a higher projected unemployment rate. It is expected the Fed will continue to lower rates at a measured pace through this year with the ability to move more aggressively should the employment data warrant.
The US Treasury yield curve shifted lower in September following the 50 basis points rate cut by the FOMC mid-month. The 2-year Treasury yield fell 28 basis points to 3.64%, the 5-year Treasury dropped 15 basis points to 3.56%, and the 10-year Treasury yield declined 12 basis points to 3.78%. The 2-year and 10-year Treasury yield points on the curve began to normalize to +14 basis points at September month-end versus -2 basis points at August month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -47 basis points. The inversion between 3-month and 10-year Treasuries ended the month of September at -85 basis points.
FISCAL IMPACT
Overall, the City’s investment income, or interest earned net of realized gain or loss, remained strong for the third quarter, totaling $6,794,848 for the core portfolio. In comparison, the investment income for the same period in the prior year was $4,479,173.
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 - Third 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, Acting Accounting Manager
Reviewed by: Inderdeep Dhillon, Acting Assistant Director of Finance
Reviewed by: Dennis Jaw, Acting Director of Finance
Reviewed by: Sarah Johnson-Rios, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. City of Sunnyvale Third Quarter Investment Report 2024