Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: Discussion on City Investments and Management
Date: March 14, 2023
Written by: Angela Courter, Director of Administrative Services Recommendation
It is recommended that the City Council review and discuss the proposed active investment approach and provide feedback to staff.
Background
City of Cotati has historically invested surplus cash in a combination of investment pool funds including the State Local Agency Investment Fund (LAIF) and Sonoma County Investment Pool (SCIP), laddered Certificates of Deposits (CD) held and managed by RBC and cash balances held with Exchange Bank. Since 2020, the CD market has been in decline with returns less than the more secure earnings with LAIF. As these CD’s matured, they were not reinvested through RBC, but liquidated and used as cash funds available for projects or placed with LAIF. This conservative (Passive) strategy worked well because market interest rates were so low. It provided complete liquidity while providing the highest possible interest earnings.
The strategic objectives for the Administrative Services Department in Fiscal Year 2021/22 includes initiating an Investment Planning Program. The goal of this objective aligns with the City Investment Policy whereby, “City of Cotati to invest public funds in a manner which will provide the highest investment return with the maximum security while meeting the daily cash flow demands of the City of Cotati and conforming to all state a[n]d local statu[t]es governing the investment of public funds.”
The City has an adopted Investment Policy that is reviewed annually in consolidation with the Financial Principals and Policies included with the Annual Adopted Budget. This policy encompasses many of the mandates that are required by California Government Code (GC) Sections 53600-53610 & 53630-53686. Key requirements for Investment of Surplus Funds include:
- Quarterly Reporting - Government Agencies may render a quarterly report outlining cash assets invested, investment types and affirmation of agency projection of sufficient cash availability need to meet operating needs. (GC 53646)
- The Investment Policy - The treasurer or chief fiscal officer of the local agency may annually render to the legislative body a statement of investment policy at a public meeting. Any change in the policy shall also be considered by the legislative body of the local agency at a public meeting. (GC 53646)
- Fiduciary Subject to Prudent Investor Standards - All governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds are trustees and therefore fiduciaries subject to the prudent investor standard. (GC 53600.3)
o When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.
- Objectives in Investing - When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the primary objective of a trustee shall be to safeguard the principal of the funds under its control. The secondary objective shall be to meet the liquidity needs of the depositor. The third objective shall be to achieve a return on the funds under its control. (GC 53600.5)
The City Investment policy is included within the City Financial Policies, which is reviewed by staff on an annual basis and adopted along with the annual budget process. The current policy is attached to the report and is also included within the adopted budget online for reference.
Over the last year, market interest rates have risen dramatically, which allows for more opportunities to manage investments to benefit the community. Therefore, a City Council goal has been to have staff review various options related to a more active investment strategy. To complete this project, staff have been exploring various options for a more active investment program.
Analysis/Discussion
Currently, staff provides the City Council with Quarterly Financial reports, which include the quarterly Cash and Investments, as well as affirmation of the ability to have sufficient cash availability to meet operating needs. With implementation of a more active investment management strategy, the summary report would expand to include detailed investment information and the ability to develop a more sophisticated investment program that accounts for longer term strategic reserves and near term cash flow needs to provide funds when needed, but at a higher rate of return (i.e. a “laddered” approach).
When reviewing alternatives to take a more active investment approach, there are very few investment advisors that specialize in smaller municipalities (reserves under $25 million). Of the options explored, Optum specializes as an investment advisor for small municipalities in California, can assist in updating the investment policy, and can provide many of the treasury reporting needed to ensure the City Council and community are regularly updated on the fund balances and performance. The role of the advisor will be to support staff with the information needed to make active decisions about investments that meet both the statutory requirements and the City’s investment goals.
If the City Council directs staff to move forward with an active investment strategy, staff will work with Optum Investment Partners to update the investment policy to achieve this and return to the City Council at a future public meeting to consider adoption of the updated policy and investment approach.
Financial Considerations
Hiring of an investment partner to assist in actively managing the City’s cash surplus does incur fees based on a percentage of investments managed (0.25%). However, moving to active management of investments will improve the financial reporting and investment returns; the value of which is expected to exceed the management fees.
Environmental Issues
This action is exempt from the California Environmental Quality Act (CEQA) because it is not a project which has a potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, pursuant to CEQA Guideline section 15378.
Attachments:
Council Presentation on Municipal Investments - Rules and Types (PDF) Optum Investment Partners Brochure (PDF)
City of Cotati - Current Investment Policy (PDF)