CITY OF SAN MATEO
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CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 13 Section Name: {{section.name}} Account Number: 10-2011 File ID: {{item.tracking_number}} TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: May 19, 2025
SUBJECT:
2025 Annual Investment Policy – Approval
RECOMMENDATION:
Adopt a Resolution approving the City of San Mateo 2025 Investment Policy and authorizing investments in United States Treasury obligations, Federal Agency obligations and State and Local Municipal obligations with a maximum maturity of up to seven years and an aggregate amount not to exceed ten percent of the City’s investment portfolio at the time of purchase.
BACKGROUND:
The investment of public funds by a California local agency, including the types of securities in which an agency may invest, is governed by the California Government Code Sections 53000-53610. The City’s Investment Policy provides a framework for managing public funds with a focus on safety, liquidity and return, and is designed to comply with State law and best practices in public fund management.
The City’s investment policy is reviewed periodically to reflect changes in investment strategies and regulatory updates. It has been the City’s practice to bring the investment policy to the City Council annually for review and approval, regardless of whether changes are proposed.
The current policy is more conservative than State law, including a more limited list of eligible investments and stricter caps on investment types and durations. Notably, the City currently limits the maximum maturity for all fixed-income securities to five (5) years, even though State law permits longer maturities under certain conditions.
As part of the 2025 annual review, staff identified an opportunity to update the Investment Policy to allow longer maturities, up to seven (7) years, for a limited set of high-quality fixed-income securities:
• United States Treasury obligations
• United States Federal Agency obligations
• State and Local Municipal obligations
This proposed change is timely and strategic for the following reasons:
Interest Rate Environment Creates a Unique Opportunity
The current fixed-income investment environment reflects a historically high-interest rate cycle. The yield curve, previously inverted, has flattened with some upward movement in long-term yields. While rates have declined slightly from recent peaks, they remain attractive. Allowing certain high-quality investments to extend to seven (7) years would enable the City to lock in attractive long-term rates, supporting consistent interest earnings over time.
CITY OF SAN MATEO
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As shown below in Table 1, a 7-year U.S. Treasury currently yield 4.1 percent, compared to 3.9 percent for a 5-year or 3.8 percent for a 3-year.
These yields exceed the current core inflation rate, which remains around 3.0 percent per the latest CPI information. The ability to invest at the longer end of the yield curve allows the City to protect purchasing power and generate consistent income while maintaining a high level of safety and credit quality.
Table 1: Treasury market rates as of May 2, 2025 *
Treasury Notes Market Yield
7-Year Note 4.107%
5-Year Note 3.920%
3-Year Note 3.813%
2-Year Note 3.832%
1-Year Note 4.002%
*Note: It is important to note that interest rates fluctuate daily and are unlikely to match exactly the rates shown in Table 1.
Alignment with the City's Investment Approach: The City does not invest in equities. Instead, our investment portfolio is composed of high-quality fixed-income securities, structured to prioritize safety and long-term stability. Investments in the longer-term portfolio are typically held to maturity. Expanding the allowable maturity for certain high-quality securities aligns with this conservative approach and enhances both portfolio diversification and income stability.
Limited to High-Quality Securities: The proposed change applies only to the most secure investment types: U.S. Treasury obligations (backed by the full faith and credit of the federal government), U.S. Federal Agency obligations, and State and Local Municipal obligations.
Portfolio Diversification with Risk Control: The proposed change includes a 10 percent cap on securities with maturities beyond five years. This ensures that while the City can take advantage of higher long-term yields, the overall portfolio duration remains balanced, and risk exposure is managed within acceptable limits.
Support Fund Reserve Structure: All major City funds, including the General Fund, Special Revenue Funds, Enterprise Funds, and Internal Service Funds, maintain long-term reserves. Investing a portion of these reserves in longer-duration, high-quality securities is financially prudent and aligned with the long-term nature of the City’s reserve structure.
Next Steps
Under Government Code Section 53601, investments with maturities beyond five years require the City Council to grant express authority to make the investment either specifically or as part of an investment program. If the proposed Resolution and Amendments to the Investment Policy are approved by the City Council, the City will be authorized to purchase longer term securities as part of its investment program after a 90-day (three-month) waiting period.
BUDGET IMPACT:
Approval of the proposed changes to the City's Investment Policy for 2025 will not have an immediate budgetary impact.
ENVIRONMENTAL DETERMINATION:
Approval of the City’s 2025 Investment Policy is not a project subject to CEQA, because it is a government fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. (CEQA Guidelines Section 15378(b)(4).)
NOTICE PROVIDED
All meeting noticing requirements were met.
ATTACHMENTS
Att 1 – Proposed Resolution
CITY OF SAN MATEO
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Att 2 – 2025 Investment Policy (redline)
Att 3 – 2025 Investment Policy (clean version)
STAFF CONTACT
Karen Huang, Finance Director
[email protected]
(650) 522-7110