REPORT TO COUNCIL
SUBJECT
Title
Adopt the City’s Investment Policy for Fiscal Year 2024/25 and Receive the Annual Performance Report for Fiscal Year 2023/24
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.
To support the management of an increasingly complex investment environment and growing portfolio, Council approved a three-year contract with Chandler Asset Management, Inc. (Chandler) with an option to extend for two additional years on April 24, 2018 (RTC No. 18-0281). On July 30, 2024, Council approved an additional two-year contract extension (RTC No. 24-0703).
Chandler investment managers have been managing City investments since July 2018. They have also advised the City on Investment Policy amendments each year in order to adapt to changing laws and best practices.
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. This review ensures consistency with the overall objectives and its relevance to current laws as well as financial and economic trends.
The key provisions of the existing Investment and Cash Management 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 to minimize exposure to any potential market and credit risk. 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 (GSE) investments and shorter maturities for all other investments.
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. The daily checking account balance is also tracked to ensure sufficient funds are available to pay operational expenses. Liquidity requirements have been met through utilizing the State’s Local Agency Investment Fund (LAIF) and the City’s interest-bearing bank accounts.
3. Yield- the portfolio will be maintained with the objectives of safety and liquidity first, and then the objective of obtaining a reasonable market rate of return based on economic cycles while considering the City’s investment risk approach and cash flow needs.
All investments in the portfolio are in accordance with the California Government Code requirements and authorized by the City’s Investment Policy. The City is in compliance with the requirement that all investments be held in safekeeping by a third-party bank trust department. US Bank currently provides 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 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
The City’s investment portfolio includes funds not immediately needed for disbursement. Third-party administrators manage funds for the City’s Deferred Compensation Plan, Retirement Plan, Other Post-Employment Benefits (OPEB) Trust, Pension Trust, and debt issuance proceeds; therefore, they are not covered by this Investment Policy. Funds needed for immediate disbursement are maintained in a liquid checking account.
Annual Performance Reporting for FY 2023/24
For FY 2023/24, the total rate of return of the core portfolio was 4.74%. The return outperformed the City’s performance and risk measuring benchmark (4.18%) based on the ICE BAML 1-5 Years US Treasury Securities/Agency Index. Total return represents growth of the portfolio arising from both interest earnings and fair value appreciation achieved during the fiscal year.
Interest earnings were strong for the fiscal year, averaging approximately 2.79%. The fair value of the portfolio increased as investors pushed interest rates lower in anticipation of a potential change in Fed policy.
The average duration of investments in the portfolio at fiscal year-end was 2.54 years, slightly longer than the portfolio’s risk measuring benchmark. This longer duration was deliberately built up to protect income as reinvestment was expected at lower yield levels. This duration stance, as well as the strong diversification into yield-enhanced sectors were the strongest contributing factors to the portfolio’s excess return over the benchmark return.
The portfolio balance was $843.2 million as of June 30, 2024, which decreased by $42.5 million or 5% from the $885.7 million balance on June 30, 2023. This decrease was mainly attributed to the Water Pollution Control Plant project that will be reimbursed from a State Revolving Fund loan in FY 2024/25. Additional details on the City’s fiscal year ending performance will be available with the Budgetary Year End Financial Report in December 2024.
Interest earnings for FY 2023/24 for the core portfolio totaled $23,352,070, which does not include the fair market value appreciation of $15,993,760 in unrealized gains. The realized loss for the year was $3,811,407.
The rate of return in the LAIF account, which is a California State interest-bearing vehicle available to local agencies and comprises of interest earnings only (no fair value adjustments), was 4.12% for the fiscal year. Interest earnings in the LAIF account was $865,820.
Additionally, the Money Market Sweep account with US Bank that holds funds needed for short-term use earned interest in the amount of $1,451,635.
All interest earnings and realized gains or losses are allocated pro rata to each fund throughout the City based on the periodic cash balance held in each fund.
Investment Policy
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. As part of their investment management role, Chandler provides a review the City’s Investment Policy and recommends modifications to update the Investment Policy with the latest best practices and to enhance clarity and readability.
Staff met with Chandler managers and proposed a minor update to the Investment Policy. California Government Code places limitations on the term or remaining maturity of authorized investments. In 2022, Senate Bill 1489 added a limitation on forward settlement, or the time between the date of purchase of a security and the date the purchase is settled, of 45 days. The City's investment policy already measured maturity from settlement date, but in order to more closely align to the new statute, staff is recommending the inclusion of the forward settlement date limit of 45 days in the City's investment policy. The proposed update is included in the Investment Policy as Attachment 1 on page 10.
Once adopted by Council, staff will submit the Investment Policy for FY 2024/25 to be re-certified by the Association of Public Treasurers of the United States and Canada (APT US&C). In addition, the proposed FY 2024/25 Investment Policy will be incorporated into the Council Policy Manual as Council Policy 7.1.2, replacing the Investment Policy for Fiscal Year 2023/24.
FISCAL IMPACT
There is no fiscal impact associated with 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 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
Adopt the City’s Investment Policy for FY 2024/25 and receive the Annual Performance Report for Fiscal Year 2023/24.
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 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
ATTACHMENT
1. Proposed Investment Policy for FY 2024/25