August 17, 2004

SUBJECT: INVESTMENT AND CASH MANAGEMENT POLICY UPDATE FOR FISCAL YEAR 2004/2005

The City’s Investment and Cash Management Policy requires that it be reviewed annually to ensure consistency with respect to the objectives of safety, liquidity, and yield and relevance to current laws and financial and economic trends. State law also requires that the City’s Investment Policy be rendered annually to the City Council.

Staff is recommending only one change to the existing Investment Policy. Senate Bill 787 revised the Government Code’s provisions for purchasing commercial paper by tightening the requirements on corporations in which government entities can invest.

The City’s Investment Policy for FY 2003/2004 was reviewed by the Association of Public Treasurers of United States and Canada (APT US&C) and received their Written Investment Policy Certification. This organization was formerly known as Municipal Treasurer’s Association of United States and Canada (MTA US&C).

In accordance with State law, the City Council adopted a policy governing investment of City funds on July 30, 1985. This policy has been updated on an annual basis since that time.

The key provisions of the existing policy are as follows:

1. Safety of principal is the foremost objective of the investment program. Diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.

2. Liquidity-the portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated.

3. Return on Investment- 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.

As required in the City’s Investment Policy, a report of portfolio performance and compliance with the Investment Policy for the prior year shall be presented to the City Council as part of the annual Investment Policy review.

Safety: The City’s portfolio is diversified by type of investment, issuer, and maturity date. All investments fully comply with the requirement that the City have all instruments either in direct custody or in safekeeping by a third party bank trust department. All eligible investments are held for safekeeping by the Trust Department of the City’s contract bank (currently Union Bank).

Liquidity: A schedule of major revenues and expenditures for at least 13 months is maintained in order to determine liquidity needs. Liquidity requirements have been met through utilizing the State’s Local Agency Investment Fund (LAIF), overnight repurchase agreements, and the City’s interest-bearing business checking account.

Yield: For Fiscal Year 2003/2004, the portfolio yield has averaged 3.53% while the average yield of a Treasury security with an average life similar to our portfolio was 1.46%; a difference of 2.07%.

Use of Security Dealers and Brokers: During FY 2003/2004 staff has complied with all requirements specified in the existing Investment Policy regarding the use of security dealers and brokers. In addition, in accordance with policy, when staff has purchased an investment, quotations have been solicited from at least three financial dealers or institutions.

Increase in amount allowed to be invested in Local Agency Investment Fund (LAIF): Council may recall that staff requested approval to increase the amount allowed to be invested in the State of California Local Agency Investment Fund (LAIF) from 10% to 20% of the portfolio balance. This change was approved by the Council at the May 18, 2004 Council meeting (RTC #04-182). The Investment Policy has been updated for FY 2004/2005 to reflect this change.

Interest rates started to drop in early 2001 and have continued to decline. Currently, interest rates continue to remain low but market indicators have recently shown some improvement, indicating that rates will probably rise in the foreseeable future.

When rates do rise, 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 securities is less than the current market’s interest rate. Therefore, the City’s current investment strategy is to keep investments short since interest rates are expected to rise. When rates do rise, staff will be able to withdraw money from LAIF (since it is liquid) and invest funds in higher yielding securities. Increasing the limit from 10% to 20% allows the City to obtain higher interest earnings on liquid investments since LAIF’s yield is higher than other liquid investments.

Change to existing Investment and Cash Management policy: Staff is recommending only one change to the existing Investment Policy as a result of SB 787, which revised the Government Code’s provisions for investing in commercial paper. Section 53601(g) of the Government Code was revised to replace specific references to rating agencies with the generic term "nationally recognized statistical-rating organization (NRSRO). It also requires that the entity that issues the commercial paper meet all of the following conditions in either paragraph (1) or paragraph (2):

1. (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated "A" or higher by a nationally recognized statistical-rating organization (NRSRO).

2. (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has programwide credit enhancements including, but not limited to, overcollateralization, letters of credit, or surety bond. (C) Has commercial paper that is rated "A-1" or higher, or the equivalent, by a nationally recognized statistical-rating organization (NRSRO).

Written Investment Policy Certification: As previously mentioned, the City’s Investment Policy was reviewed by the Association of Public Treasurer’s of United States and Canada (APT US&C). This organization provides professional guidance and assistance in improving investment policies in the public sector and their program involves a review by at least three experts in the field, with certification that it meets their standards. Those jurisdictions who comply with APT US&C’s criteria are presented with the Association’s Written Investment Policy Certification. The City’s Investment Policy has been certified for every fiscal year since 1998/1999. Last year, Sunnyvale was one of only 41 governments to have its Investment Policy certified.

There is no fiscal impact associated with adoption of the Investment and Cash Management Policy. The City does not currently invest in Commercial Paper. Interest earnings for FY 2003/2004 for all City funds totaled $7.5 million.

Public Contact was made through posting of the Council agenda on the City’s official notice bulleting board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.

1. Adopt the attached Investment Policy as presented.

2. Adopt the attached Investment Policy with changes as proposed by the City Council.

It is recommended that the City Council adopt the attached Investment Policy for FY 2004/2005 as presented.

Prepared by:

Therese B. Balbo
Finance Manager

Reviewed by:

Mary J. Bradley
Director, Finance

Approved by:


Amy Chan
City Manager

Attachments
A. Investment and Cash Management Policy for FY 2004/2005 (.pdf format)