|State law allows the City Council to annually adopt the Statement of Investment Policy. Thus, per the City's fiscal policies, "The City Council will review and adopt annually an investment policy as recommended by the Investment Advisory Committee." The Investment Policy serves as a guideline for the investment of City and Successor Agency funds. The Brea Investment Advisory Committee annually reviews the Statement of Investment Policy for the City of Brea and the Successor Agency to the Brea Redevelopment Agency.
The below changes and additions were recommended by Chandler Asset Management, the City's Portfolio Manager, and were reviewed by the Investment Advisory Committee (IAC). The City's current investment policy takes advantage of the maximum allowable allocation in the Government Code for permitted investments such as Medium Term Corporate Notes, Pass Thru Securities, Bankers Acceptances, Money Market Funds, etc. Additionally, SB 998 provides updates regarding investment in zero or negative interest accrual investments. These changes were recommend by Chandler in order for the City's Investment Policy to be consistent with the passing of SB 988, which went into effect January 1, 2021.
- Investment Instruments Section (Commercial Paper) – Update the language related to the maximum allowable allocation to Commercial Paper. SB 998 allows public agencies with more $100,000,000 of investable assets to increase the percent of portfolio invested in commercial paper to 40%. This provision is set to expire on January 1, 2026 (page 3). However, at the Investment Advisory Committee Meeting on July 26, 2021, the Committee recommended that the maximum allocation to Commercial Paper remain at its current allocation of 25%. Therefore, this change has since then been removed from the policy.
- Prohibited Investments Section (zero or negative interest accrual investments) – SB 998 Authorizes a local agency to invest in securities issued or backed by the United States government that could result in zero- or negative- interest accrual if held to maturity. Currently, zero and negative interest rate policies are currently being adopted by multiple developed market central banks:
a. US Federal Reserve Fed Funds Policy Rate: 0.00% to 0.25%
b. European Central Bank Policy Rate: -0.50%
c. Bank of Japan Policy Rate: -0.10%
Existing law generally prohibits a local agency from investing any funds that could result in zero interest accrual if held to maturity. The amendment accommodates the possibility of a negative yield investment environment, if it should occur like it has in other developed countries. Leaving the funds in the bank may also result in a zero- or negative- interest accrual because of additional fees and penalties applied to large deposits and banks may also limit the size of deposits that can be held in an account in a negative yield environment because they are no longer profitable. The change requested is to adopt SB 998 as a risk mitigation tool. The base case does not call for a negative rate policy in the US; however, with rates already pegged close to zero, the policy tool cannot be ruled out. The language added to the policy also includes language that zero or negative interest securities, “will only be permitted in the portfolio in the event the United States Federal Reserve adopts a negative interest rate monetary policy framework” and “notification to the City Council , the Investment Advisory Committee, the City Treasurer, and the Administrative Services Director will be given within two (2) business days when securities of this type are being added to the portfolio.” (page 4). The IAC agreed with this recommendation and this change has been included in the proposed policy.
Also, references throughout the Investment Policy to the Revenue and Budget Manager have changed to reflect the revised position to Financial Services Manager. This title change was approved by the City Council with the adoption of the FY 2021-22 Budget. These changes were approved by the IAC and included in the proposed policy.
For ease of reference, the current Investment Policy is attached along with the red-lined version with recommended changes. In addition, a clean version with the recommended changes is also attached.