Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: Adoption of the Revised City of Cotati Investment Policy and Contract Approval To Implement Active Investment Management
Date: May 09, 2023
Written by: Angela Courter, Director of Administrative Services Recommendation
It is recommended that the City Council adopt a Resolution approving the update of the Investment Management Policy within the City of Cotati’s Financial Principles and Policies and authorize the City Manager to take actions necessary to begin actively managing the City's surplus funds in compliance with the Investment Policy, including engaging with Optum Investment Partners.
Background
Financial policies are essential and central to a strategic, long-term approach to the financial management of the City by the elected officials and staff. Financial policies also create and define a shared understanding of how the City will develop its financial practices and manage its resources to provide the best value to the community and provide structure, boundaries and limits on the actions City staff may take. Within the Financial Principles is the City’s policy on Investment Management. On March 14, 2023, City Staff brought to Council an initial discussion on investments for the City including state regulations and required reporting. Additionally, staff facilitated a discussion on adjusting the City’s Investment Management strategy from passive to a more active management.
Analysis/Discussion
Investment Policy
The policies will be updated periodically but are designed with a long-term perspective and provide the basic framework and road map for addressing a wide variety of financial and economic conditions that the City will encounter, as well as support long-term planning and enhance the City’s effectiveness in implementing long-term strategies to deliver efficient services to the public.
To clarify the policy and ensure consistency with state law, the Policy, Scope and Prudence sections were updated. Other changes incorporated into the proposed revised investment policy for the City include the following:
▪ Revising Objectives for Social and Political Considerations under Section 4 to continue to provide policy direction to City staff, while making the section compliant with State code and feasible to implement.
▪ Clarification and consolidation of the authorized and suitable investments Section 8
o No changes in the types of investments from the current policy ▪ Incorporation of requirements for review of the investment portfolio to evaluate for non-compliant securities.
▪ New Sections Focusing Primarily on Advanced Controls
o Investment Pools and Money Market Funds Advance Investigation Controls
o Collateralization of Investment Requirements (Section 11) o Safekeeping and Custody (Section 12)
o Diversification (Section 13)
o Maximum Maturities (Section 14)
o Internal Controls (Section 15)
o Performance Standards (Section 16)
o Reporting (Section 17)
o Policy Adoption (Section 18)
With these changes to the investment policy, new controls would be put in place to better direct and explicitly guide City Staff on best practices for management of the City surplus cash in pooled funds.
Active Investment Management
City of Cotati has historically invested its surplus cash in; (1) Local Agency Investment Fund (LAIF) which is a liquid investment pool managed by the California State Treasurers Office, (2) a business account with RBC Wealth Management which manages the purchase and liquidation of Certificates of Deposit, (3) Sonoma County Investment Pool (SCIP) which is a separate local investment pool managed by the Sonoma County Auditor Controller Treasurer and Tax Collectors Department, as well as (4) cash held in a General Checking account with Exchange Bank. Currently all balances held in these groups are highly liquid, especially now that all investments in RBC have matured and are now held in cash deposits. Over the last several years, holding investments in this conservative manner was appropriate because market interest rates were so low. It provided complete liquidity while providing some interest earnings. Over the last year, market interest rates have risen dramatically. To take advantage of recent changes in the investment market, City staff are proposing moving to a more active Investment Management strategy which would assist in facilitating all requirements of the proposed updated investment policy which requires Safety, Liquidity, and Return on Investments. Staff have continued meeting with registered investment advisors from Optum Investment Partners to better understand those options and how they can be implemented.
The services that Optum Investment Partners provides are unique in the industry. While most investment advisory firms only represent public agencies with assets greater than $25 million, their firm specializes in assisting smaller public agencies in California. Their scope of services includes cash-flow modeling; investment policy review/drafting; monthly cash account review; quarterly investment reporting; daily investment advice; unlimited virtual meetings with staff; and general investment advisory services.
Optum Investment Partners (OIP) has reviewed our City’s cash accounting and projects that we can earn an estimated $300,000 in additional investment interest earnings annually using only conservative, federally backed and/or collateralized investment products, based upon today’s interest rates and guided by the updated policy. While interest rates will change over time, having a full-time investment advisor will assist our City in maximizing our investment earnings while ensuring the safety of our surplus cash and maintaining sufficient liquidity for operations.
City staff additionally reached out to other public agencies that use OIP and have received only positive support for the actions put into place by the OIP. Additionally, per the terms of our professional services agreement, our contract can be cancelled with 30 days’ notice. Per the Investment Policy, all investment actions are still to be taken by the City Manager or Administrative Services Director and in line with the dictates of the investment policy.
Financial Considerations
There is no direct financial impact on the City resulting from the adoption of these policies. There will be additional staff time required in the development of related procedures that support the policy.
To move to active investing, it will require the City to enter into a custodial agreement with an authorized bank to hold the investment cash before and after investments are purchased. These banks do have annual maintenance fees which are anticipated to be less than $2,000 per year. The broker/dealer will use this custodial bank to purchase, hold and distribute agreed-upon investments. Using this third-party relationship guarantees an appropriate system of checks, balances, and insurance to ensure the safety of our investments.
Additionally, to optimize investments aligning with cashflows, engaging with OIP will allow the City to also be engaged to evaluate funds available and matching with budgetary project needs. As Investment Partners, OIP will not hold or maintain any control over the City’s cash. They will advise and recommend investments that are compliant with the City’s updated investment policy at a rate of approximately 12 basis points of cash under active management.
Engaging with Optum Investment Partners as Professional Service Providers for active management of the City’s cash surplus funds will allow for sufficient improvement in the City’s net investment earnings that can be utilized for ongoing operations while maintaining safety and liquidity of the portfolio.
At the Council’s request, City Staff performed a comparative analysis of the cost-benefits of engaging with an outside Investment Management company versus managing investments in- house using just a broker/dealer. Key assumptions included within the comparison include the following:
Engage with Optum Investment Partners
- The volume of investments held in active management are $10M and $5M in other surplus funds is retained in a Pooled Investment Funds like LAIF. - Investments in active management are earning average returns at 4.355% - Investments in LAIF are earning 2.831% per year (Rate as of March 2023) - Fees for an investment holdings/Bank at a holding fund are estimated at $2,000 per year.
- Administrative Fees for LAIF at .09% of assets held.
Self-Manage Investments
- The Volume of investments held in active management is reduced to just $5M due to capacity of staffing to reduce time to one day a month for monitoring and reporting development while mitigating risk through diversification. The remaining offset of $10M would be invested in LAIF or other similar pooled investment fund.
- Staff expenses are calculated on 1 day per month at the Administrative Services Staff Rate as included within our fee schedule. - Investment Management fees for the $5M partially invested funds are calculated at the investment management costs for retaining CD’s or other like investments with either RBC or like Investment Management Firm at 0.2% of assets under management.
- LAIF Fees is increased due to continued assets under management at a larger volume.
Per this evaluation, as attached to the staff report, the differential in possible returns on investments is approximately 0.52% or $78,000 per year. This is a cost comparison used for decision-making purposes only and is not an expectation of actual returns.
Environmental Issues
The action of adopting Financial Principles and Policies does not constitute a project as defined by California Environmental Quality Act Guidelines Section 15378; therefore, no further environmental review is required.
Attachments:
Investment Policy and Active Management Presentation (PPTX) Comparative Investment Earmings (PDF)
Investment Brokerage Resume and Firm Information - TVI (PDF)