REPORT TO COUNCIL
SUBJECT
Title
Adopt the City’s Investment Policy for Fiscal Year 2025/26 and Receive the Annual Performance Report for Fiscal Year 2024/25
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, 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, the 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 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 consider changes to its investment policy at a public meeting.
Council Policy 7.1.2 Investment and Cash Management requires that the Investment Policy be reviewed and adopted annually within 120 days of the beginning of each fiscal year. This review ensures consistency with the City's overall investment objectives and that the policy conforms to current laws and is responsive to 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 potential market and credit risk. The investment policy outlines the percentage of funds that can be allocated to each investment type and issuer, as well as 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 enable the City to meet all operating requirements that might be reasonably anticipated. A schedule of major revenues and expenditures for at least 12 months is maintained 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 is 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 approach, risk appetite, 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 is in compliance with the requirement that all investments be held in safekeeping by a third-party bank trust department. U.S. Bank currently provides safekeeping, 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 2024/25
For FY 2024/25, the total rate of return of the core portfolio was 6.39%. The return outperformed the City’s performance and risk measurement benchmark (6.06%), which is based on the ICE BAML 1-5 Years US Treasury Securities/Agency Index. Total return represents the growth of the portfolio arising from both interest earnings and fair value appreciation (whether realized or unrealized) achieved during the fiscal year. Interest earnings-a component of the total return (interest earnings exclude unrealized gains) were strong for the fiscal year, totaling 3.36%.
The average duration of investments in the portfolio at fiscal year-end was 2.65 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 $875.9 million as of June 30, 2025, representing an increase of $32.7 million (or 4%) from the $843.2 million balance as of June 30, 2024. This increase was mainly attributed to higher property tax revenue receipts and strong interest earnings. Additional details on the City’s fiscal year-end performance will be available with the Budgetary Year-End Financial Report in December 2025.
FY 2024/25 interest earnings for the core portfolio totaled $28,875,927, which does not include the fair market value appreciation of $24,699,564 in unrealized gains. The realized loss for the year was $1,066,539. Chandler occasionally sells a security at a loss so that it may purchase a high-yielding one, which nets the City more earnings over the term of the purchased security.
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 4.57% ($1,168,854) for the fiscal year.
Additionally, the Money Market Sweep account with U.S. Bank, which holds funds for operational needs, earned interest of $935,549 for the fiscal year. Funds are swept out of the City’s operational account into an interest-bearing account every night.
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 since 1999. As part of its investment management role, Chandler reviews the City’s Investment Policy and recommends modifications to update it with the latest best practices and to enhance clarity and readability.
Chandler has proposed a few minor updates to the Investment Policy to match the California Government Code, which are as follows:
• Updates to the Authorized Financial Dealers and Institutions to align with the actual language used in the Code.
• Revision to the names of these placement services changed to “Placement Service Deposits” and to incorporate an extension of the concentration limit to 50% up to January 1, 2031, including Certificates of Deposit.
• Clarification of Local Government Investment Pool manager investment experience requirements, updating the Policy to mirror the language used in the Code.
• Prohibition of securities with a forward settlement date exceeding 45 days from the date of purchase of a security to align with the statute.
The proposed updates are included in the Investment Policy as Attachment 1.
Once adopted by the Council, staff will submit the Investment Policy for re-certification by the Association of Public Treasurers. In addition, the proposed FY 2025/26 Investment Policy will be incorporated into the Council Policy Manual as Council Policy 7.1.2, replacing the Investment Policy for Fiscal Year 2024/25.
FISCAL IMPACT
There is no 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 2025/26 and receive the Annual Performance Report for Fiscal Year 2024/25.
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
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
___ Contracts under $50,000 or non-fiscal
___ Contracts between public entities
_X_ General policy and legislative actions
Staff
Prepared by: Inderdeep Dhillon, Accounting Manager
Reviewed by: Matthew Paulin, Director of Finance
Reviewed by: Sarah Johnson-Rios, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENT
1. Red-lined Version - Proposed Sunnyvale Investment Policy 7.1.2 FY 2025-26