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PFM tells Los Altos Hills finance committee portfolio weathered yield spike; staff urged to budget conservatively for FY27
Summary
At the May 4 FIC meeting, PFM adviser Justin reported that March yield increases caused paper losses but recent reinvestments and purchases lifted quarterly interest earnings; he recommended conservative FY27 interest-earnings assumptions while staff outlined a draft budget showing narrow near-term surpluses and long-term pressure.
Justin, a PFM representative, told the Finance & Investment Committee on May 4 that global events and the March rise in Treasury yields disrupted markets and produced paper losses in many fixed‑income portfolios but also presented reinvestment opportunities for the town.
"Beginning in March, there was a rise in yields of about 42 basis points that certainly caused some paper losses," Justin said, adding that PFM purchased about $2.8 million of new issuance for the town, including corporate and Treasury securities. He said the town’s effective duration was extended slightly to about 2.58 years and that the portfolio remained compliant with its benchmark and policy constraints.
The firm reported roughly $201,000 in interest earnings through March 31 and about $8,000 of realized gains during the quarter, producing total quarterly earnings above $250,000, Justin said. He cautioned that forward interest‑earnings forecasts are uncertain and recommended that staff adopt conservative interest‑income assumptions for the FY27 budget.
Thomas, the town’s finance lead, thanked Justin for the overview and asked whether portfolio repositioning required selling holdings at a loss. Justin said repositioning was done strategically and that sales generated a modest realized gain in the quarter; he pointed the committee to further details in the presentation packet.
Why it matters: The committee is preparing the FY27 budget amid higher contract costs — most notably a sheriff’s contract increase the town estimates at roughly $700,000 — and forecast models that show expenditures growing faster than revenues over a five‑year horizon. Conservative earnings assumptions could reduce projected available funding for capital projects or staffing in the near term.
The committee had time for a few questions before the meeting moved to the budget discussion. Justin said PFM will provide a formal FY27 interest‑earnings forecast to staff for inclusion in the budget documents.
