Novato Revamps Investment Strategy to Achieve Higher Yields

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Novato City Council Adjusts Investment Strategy to Combat Budget Deficits

In a decisive move aimed at enhancing the city’s financial health, the Novato City Council has unanimously approved modifications to its investment strategy. This change, which was voted on this week, seeks to transition from cash holdings to non-liquid investment funds, allowing the city to pursue greater returns on its investments. The decision comes at a critical time as Novato grapples with chronic budget deficits projected to reach $3.3 million in the 2025-26 fiscal year and continue to rise in subsequent years.

A Strategic Shift in Investment Policy

The newly approved investment policy allows for longer-term investments, potentially improving yields beyond the current 4.18% that the city maintains. Mayor Pro Tempore Tim O’Connor emphasized the council’s commitment to exploring avenues for reducing costs and increasing revenue. “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,” he stated, highlighting the proactive approach the council is taking to address financial challenges.

The city’s investment adviser, PFM Asset Management, will manage the holdings in accordance with the revised policy, which is subject to annual review. The investment strategy divides the city’s securities into various portfolios, including the operating account, Hamilton Trust, municipal services account, senior housing account, and general mitigation funds.

Understanding the Financial Landscape

Currently, the operating account, which consists of funds from the general fund, reserves, special revenue sources, and fiduciary funds, holds approximately $37.9 million. In contrast, the Hamilton Trust Fund Portfolios account, which follows a one- to five-year investment strategy, has $29.3 million. O’Connor expressed optimism about adopting a different strategy for the Hamilton Trust, indicating a willingness to explore new avenues for investment.

The city’s funds are allocated between overnight funds, which are held in the state’s Local Agency Investment Fund (LAIF) and the city’s bank account, and invested securities. Presently, Novato has about $35 million in the LAIF account and $9.7 million in its bank account. The investment policy prioritizes the protection of principal investments, followed by liquidity and potential yield.

Weighing Risks and Rewards

Allison Kaune, an analyst with PFM Asset Management, has been managing Novato’s investment policy since 2012. She noted that the new recommendations come with inherent risks and rewards. While higher potential yields could bolster the city’s financial standing, they may also impact the city’s credit and liquidity, potentially leaving insufficient funds to cover expenses. However, Kaune reassured that the city’s accounts are currently in good shape, being diversified, of high credit quality, and performing well against their benchmarks.

Ensuring Financial Stability

To further safeguard the city’s financial future, the revised policy mandates the development of a cash management strategy that aligns with the new investment approach. This strategy will ensure that sufficient funds are available to cover costs, with annual audits monitoring cash holdings as a key component of this oversight.

Finance Director Carla Carvalho-DeGraff echoed the importance of adhering to the recommendations of the city’s financial adviser, emphasizing the need for a longer-term investment strategy for the Hamilton accounts. “My opinion is we should do that if our adviser advises us to do that,” she stated, reinforcing the collaborative approach between the council and financial experts.

Addressing Ongoing Budget Deficits

The urgency of these changes is underscored by Novato’s ongoing budget deficits. The city concluded the 2023-24 fiscal year with a budget of $53.4 million, which included $49.7 million in revenue and a $3.3 million deficit. The 2024-25 budget forecasts a $4.3 million deficit, with expenses projected at approximately $54.5 million against general fund revenues of just under $50.3 million. This marks the fifth consecutive year of budget deficits, with previous years showing deficits of $2.5 million, $207,000, $1.7 million, and $3.3 million.

Conclusion

As Novato officials embark on this new investment strategy, the hope is that it will provide the necessary financial boost to address the city’s chronic deficits. By diversifying investments and seeking higher yields, the City Council aims to secure a more stable financial future for Novato, ensuring that the city can meet its obligations and continue to serve its residents effectively. The coming months will be crucial as the city implements these changes and monitors their impact on its financial landscape.

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