California Government Code Section 53646(a)(1) states that the Treasurer or Chief Fiscal Officer of the local agency may annually render to the legislative body of that local agency a statement of investment policy, which the legislative body of the local agency shall consider at a public meeting. Staff has been following this general guideline and providing our updated investment policy annually for the City Council to review and adopt.  The Investment Policy is a formal statement of objectives and constraints of the City's investment approach.

The City of Garden Grove, as with all local governments in California, maintains an investment portfolio to hold its inactive cash.  The City’s investments allow funds to earn a return while they are in the queue to be expended on City projects and services, pursuant to the City’s adopted budget.  The current balance of the City’s investment portfolio is approximately $278 million, including funds invested with Local Agency Investment Fund (LAIF) managed by the State Treasurer's Office.   

Historically, the City of Garden Grove’s Investment Policy has been much more conservative than the California Government Code, and the types of investments have been limited to US Treasury bills and federal agency notes. These practices do not allow diversification to maximize liquidity as well as yield.  The City has recently contracted with an investment advisor, Meeder Investment Management, Inc. through a comprehensive Request for Proposal process. To maximize efficiency and effectiveness of the investment advisory services, staff is recommending several changes to our current policy, including but not limited to:

•  Allow the services of external investment management advisors to assist in the management of the City’s investment portfolio in a manner consistent with the City’s objectives;
•  Define the percentage of each type of the allowable investment within the portfolio to ensure diversification;
•  Define the duration of each type of the allowable investment to ensure compliance with the State codes; and
• Expand the allowable investment (Attachment 1 to the proposed Investment Policy) to include:

• ­Bonds, notes or other evidence of indebtedness in other states, in addition to California, with “A” or better rating, not to exceed 25% of the portfolio for combined municipal debt;
• Commercial paper with “A1/P1” rating, not to exceed 25% of the portfolio, with terms not to exceed 270 days;
•  Medium-term notes issued by corporations with “A” or better rating, not to exceed 30% of portfolio, with terms not to exceed 5 years;
•  Mortgage-backed pass-through securities/collateralized mortgage obligations and asset–backed securities, with “A” or higher rating for issuer debt, not to exceed 20% of investing agency’s surplus, with terms not to exceed 5 years; and
•  Supranationals with “AA” or better rating, not to exceed 20% of portfolio, with terms not to exceed 5 years.

California Government Code 53600 et. seq. sets legal parameters around the degree of risk any municipal treasury can take in its investments.  These parameters ensure that public investments are sufficiently diversified, of high credit quality, and have terms of length that enable the treasury to maintain liquidity and protect against longer-term shifts in the market.  The proposed allowable investments and their corresponding credit rating requirement, percentage of the portfolio limitation, and terms are either consistent with or well below the State code limits.  This strategy will provide additional assurance on prudent investment, and at the same time yield better return and liquidity to meet the City’s financial needs.

Overall, the proposed Investment Policy remains more conservative than the California Government Code requirements, providing our taxpayers with adequate protection, while enabling the City additional flexibility to invest in selected assets that are likely to perform better in the current market.  Investment strategies will be updated throughout the year by the City’s investment advisor, to adjust balance between cash and investment on continuous basis to improve overall return on investment.  This strategy update will stay within the Policy framework and provisions.

Through the City’s contracted investment advisor, Meeder Investment Management, the City will invest in a variety of instruments that provide a reliable yield over a duration of maturity between 3 months to 5 years to ensure that cash is available to meet the City’s needs.  Meeder Investment Management makes these investments according to the City’s Investment Policy, with the oversight of the City Council through the delivery of monthly investment reports and quarterly market and economic update.

Approximately 17% of the City’s invested portfolio other than LAIF (or $48 million) will be maturing within the next fiscal year.  Continue with the City’s existing investment strategy under the current market condition, staff anticipate a rate of return of 0.41%.  With the strategy formulated by Meeder Investment Management and the expanded investment options, it is estimated the rate of return of the same $48 million will be 0.72%.  The 31 basis points increase in rate of return will translate into additional investment income of $148,800 for next year. It is the City and Meeder’s goal to restructure our entire portfolio to allow more investable funds to be strategically invested for better asset protection, optimal liquidity and improved return.

The annual cost of investment advisory management service of $72,000 is included in the City’s FY2020-21 operating budget.

It is recommended that the City Council:

•  Adopt the attached resolution approving the City of Garden Grove Investment Policy - 2020.