Novato adjusts investment strategy for higher yields
Novato officials are modifying the city’s investment strategy to seek greater returns.
The City Council voted unanimously this week to approve changes in the investment policy that would allow shifts from cash holdings to non-liquid investment funds.
The policy changes approved Tuesday also allow for longer-term investments that could improve yields beyond the 4.18% the city currently maintains.
The move comes as the city grapples with chronic deficits. Novato is on track for a $3.3 million general fund deficit in the 2025-26 fiscal year. In following years, the projected deficit is $3.4 million, $3.4 million, $3.7 million and $3.5 million.
“As a council we are always looking for ways to reduce costs and increase revenue earned by the city. Taking a fresh look at our investment strategy in order to ensure we are maximizing the returns on the city’s funds is a part of this process,” Mayor Pro Tempore Tim O’Connor said.
PFM Asset Management, the city’s investment adviser, manages the holdings in accordance with the investment policy approved by the council. The policy is reviewed annually.
Invested securities are in divided into portfolios: the “operating” account, and portfolios known as the Hamilton Trust, the municipal services account, the senior housing account and general mitigation. The operating account is made of funds in the general fund, reserves, special revenue sources and fiduciary funds.
The operating account, which is on a one- to three-year investment strategy, has $37.9 million. The Hamilton Trust Fund Portfolios account has $29.3 million and is on a one- to five-year investment strategy.
“I do think we can move forward with adopting a different strategy in the Hamilton Trust right now,” said O’Connor.
The city’s funds are allocated between overnight funds and invested securities. Overnight funds are in the state’s Local Agency Investment Fund (LAIF) account and the city’s bank account. The city has about $35 million in funds in the LAIF account and $9.7 million available in the bank account.
The policy directs the investment manager to protect the principal investment, then focus on liquidity and potential yield.
Allison Kaune, an analyst with PFM Asset Management, has managed the investment policy for the city since 2012. She said the new recommendations come with both risk and reward — higher potential yields could mean impacts to city’s credit and insufficient funds to cover expenses without sufficient liquidity.
Overall, though, the accounts the city maintains are in good shape, she said.
“They’re diversified, they’re of high credit quality and they’ve performed well versus their benchmarks,” Kaune said.
The policy also says the city should develop a cash management strategy in accordance with the new policy so there are sufficient funds available to cover costs. The city will prioritize annual audits that monitor cash holdings in order to do so, a staff report said.
Finance Director Carla Carvalho-DeGraff said the finance commission also suggested a longer-term investment strategy for the Hamilton accounts. She noted that the city should prioritize the recommendation of their financial adviser.
“My opinion is we should do that if our adviser advises us to do that,” she said.
The city finished the 2023-24 fiscal year in June with a $53.4 million budget, including $49.7 million in revenue and a $3.3 million deficit. The 2024-25 budget has a $4.3 million deficit. The budget includes about $54.5 million in expenses and projected general fund revenues of just under $50.3 million.
The city has had a budget deficit for the last five fiscal years. In the 2020-21 budget, the deficit was $2.5 million. In following years, the deficits have been $207,000, $1.7 million, $3.3 million and $4.3 million.
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