REPORT TO COUNCIL
SUBJECT
Title
Receive and File the City of Sunnyvale Investment Report for Fourth 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), the City’s investment adviser, manages the long-term portion of the City’s portfolio, while staff manages the liquid/short-term portion.
Funds for the City’s Deferred Compensation Plan, the City’s Retirement Plan, the City’s 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, and 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, so Council last 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 Chandler, with maturities ranging between zero and seven years. The City’s main investment portfolio of securities has a target duration of 2.54 years as measured by its risk and performance measuring benchmark. As of the quarter end, the portfolio had a duration position of 2.55 years, which was rebalanced to be neutral to slightly longer than its target in anticipation of lower interest rates available in the markets. The portfolio’s duration is a measure of how the portfolio’s market value will be impacted for a 1.0% shift in interest rates, and the longer the duration, the more the impact. The City’s portfolio manager continues to anticipate that rates may trend lower in the coming months and will continue to position the duration neutral to 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 two high credit quality medium-term corporate notes, one federal agency mortgage-backed security, an obligation of the State of California, and three U.S. Treasury obligations. The average yield to maturity of the main portfolio of securities alone was 3.38%, up from 3.31% three months prior. The market yield, which can infer a reinvestment rate, was 4.48%, higher than last quarter’s 3.93%. The market value of the main portfolio of securities totaled $816,142,605 as of December 31, 2024, with interest earned of $6,908,725 less realized losses of $124,246. Chandler occasionally sells securities at a loss to free up funds for purchases that will produce higher yields and more than offset the loss.
Local Agency Investment Fund (LAIF)
The City holds funds in the Local Agency Investment Fund (LAIF) that it can easily access to meet short-term cash needs. LAIF totaled $10,492,627 as of December 31, 2024 and earned interest of $184,974 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
Attachment 1 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. The City’s total investments (Investment Portfolio and LAIF) had a value of $826,635,632 as of December 31, 2024. This amount does not include $5,336,488 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 3.38% as of December 31, 2024. This yield includes the yield earned on assets invested in LAIF. The market yield of the investment program was 4.49%, up from 3.93% the prior quarter end.
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 to meet operational needs. Some 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 available cash balances, 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 $14,575,626 as of December 30, 2024, with an average rate of return of 4.16% and earnings of $233,310 for the quarter.
Economic Conditions
Recent economic data suggests continued growth fueled by a resilient consumer base. Inflationary trends have subsided, but some components and core levels remain above the Federal Reserve Board’s target. The labor market reflects improved balance between supply and demand for workers. While job creation has been robust, continuing jobless claims remain elevated. Given the economic outlook, gradual normalization of monetary policy and a steepening yield curve is expected. As broadly anticipated, the Federal Open Market Committee (FOMC) left the Federal Funds Rate unchanged at the range of 4.25-4.50% at its January meeting. Chair Jerome Powell reiterated previous statements indicating the economy is in a good place and that monetary policy is well positioned, adding that the committee is in no hurry to make any changes to monetary policy. The City’s investment advisor believes monetary policy easing will continue at a slower cadence, and lower short-term yields will likely contribute to a steepening yield curve.
FISCAL IMPACT
Overall, the City’s investment income remained strong for the fourth quarter, totaling $7,202,763. In comparison, the investment income for the same period last year was $6,067,826.
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
Receive and file the City of Sunnyvale Investment Report for Fourth Quarter 2024.
Staff
Prepared by: Inderdeep Dhillon, Accounting Manager
Reviewed by: Matt Paulin, Director of Finance
Reviewed by: Sarah Johnson-Rios, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. City of Sunnyvale Fourth Quarter Investment Report 2024