REPORT TO COUNCIL
SUBJECT
Title
Approval of the Annual Investment Policy Statement for the City of Santa Clara, its Agencies and Corporations
Report
COUNCIL PILLAR
Enhance Community Engagement and Transparency
BACKGROUND
Council Policy 017 Investment Policy: Annual Statement provides the framework and guidance for managing the City’s investment portfolio. The City’s Investment Policy expands on the Council Policy framework by providing further guidance and processes.
Section 904 of the City Charter states that the Director of Finance is required to have custody of all investments and invested funds of the City government, or in possession of such government in a fiduciary capacity, and have the safe-keeping of all bonds and notes of the City and the receipt and delivery of City bonds and notes for transfer, registration or exchange. In accordance with Government Code §53646, City Council adopted an investment policy and the Director of Finance brings that policy to Council on an annual basis, particularly highlighting any changes to the policy for consideration and approval by Council. In addition, the Investment Policy itself (Section R) requires annual approval by Council.
The Investment Policy is a written document that governs the selection of investments and provides staff with guidance for consistent, informed investment decision making. The Investment Policy is reviewed and updated annually in order to promote prudent investment decisions and to remain compliant with State and Federal laws.
DISCUSSION
The City’s Investment Policy is continually monitored to determine if periodic updates are necessary and prudent. The following notable changes are recommended to the 2022 Investment Policy to increase diversification with the objective of reducing risk and increasing portfolio returns:
1. Increase maximum investment maturity from five years to seven years for U.S. Treasuries and Securities Guaranteed or Backed by the Full Faith and Credit of the U.S. Government, U.S. Government Agency Securities, and Municipal Obligations. Historically, longer maturity securities have provided higher rates of return than securities with shorter maturities (positive sloping yield curve) as indicated in the following tables. There have been opportunities outside of the 5-Year maturity window that we believe would help to enhance the yield with minimal impact to additional risk.
Bloomberg, as of December 31, 2021
2. Allow investment in Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO) issued or guaranteed by the U.S. Government. This additional asset class will provide flexibility to increase portfolio diversification and is expected to increase yield based on historical returns within this asset class as indicated in the following table.
3. Increase Medium-Term Corporate Notes maximum allocation from 20% of portfolio dollars to 25%. Notes eligible for investment shall be rated A or its equivalent or better by at least one rating agency and rated no lower than A- by any rating agency. These changes will expand opportunities to purchase investment-grade corporate notes in line with California Government Code. Returns on corporate notes that have historically outperformed U.S. Treasuries as indicated in the following table.
4. Revise the portfolio benchmark to reflect the extended maximum maturities described in recommendations 1 and 2 above. The portfolio will continue to maintain an appropriate allocation to short-term liquid funds for daily City operations. Historical duration and annualized total returns for the 0-5 Year U.S. Treasury Index and 1-5 Year U.S. Treasury Index benchmarks are provided in the following table.
Other additional key changes are detailed below:
Section M - Diversification
The minimum percentage of securities portfolio holdings for U.S. Treasury Bills, Notes and Bonds and Securities Guaranteed or Backed by the Full Faith and Credit of the U.S. Government; U.S. Government Agency Securities, and Municipal Obligations shall be 30%.
Section N - Maximum Term of Investment
Increases in maximum maturity beyond five years shall be effective three months following City Council approval of the 2022 Investment Policy pursuant to Government Code 53601. No greater than 30% of the portfolio’s cost value may include securities with a final maturity greater than five years.
The approved Investment Policy will be included in the City of Santa Clara Council Policy Manual as Council Policy 017 (Attachment 1) and published on the City’s website.
The Investment Policy (Attachment 2 - blackline and Attachment 3) as submitted is in compliance with the City Charter and the California Government Code relevant to the investment of public funds by local agencies.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within 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.
FISCAL IMPACT
There is no cost to the City other than administrative staff time and expense.
COORDINATION
This report has been coordinated with the City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov.
RECOMMENDATION
Recommendation
Approve the Investment Policy for the City of Santa Clara, its agencies and corporations.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. Council Policy 017 Investment Policy: Annual Statement
2. Investment Policy 2022 (blackline)
3. Investment Policy 2022