Improving Investment Management via Better Portfolio Visibility

The San Diego Association of Governments (SANDAG) wins the 2022 Silver Alexander Hamilton Award in Technology Excellence—congratulations!

The San Diego Association of Governments (SANDAG) is a regional planning agency for San Diego County. Its board consists of county supervisors, as well as the mayor or a city council member from each of the county’s 19 local governments. Transit agencies, water authorities, a tribal association, the Port of San Diego, and other entities are represented to the board as advisory members.

“When representatives of all these member agencies come together, they take off their city-specific hats and do work that requires a regional perspective,” explains Andre Douzdjian, CFO of SANDAG. “That includes housing, energy, shoreline preservation, and habitat planning. But most of the work we do is around transportation planning and transit construction for the region.”

SANDAG has annual cash inflows that average $1.3 billion. Most of those funds come from federal, state, and local sources, and are designated for specific projects. As an example, Douzdjian cites the Mid-Coast Extension of San Diego’s Blue Line Trolley. “At a cost of $2 billion, that was the largest infrastructure project in the history of San Diego,” he says. “We spent the past several years building it, to connect downtown San Diego with midtown.”

The agency has many other plates spinning, as well. “We currently have about 350 projects under way,” Douzdjian says. “How much cash we have on hand for each project depends on where we are in the planning and implementation process. But we always have a sizable investment portfolio of funds earmarked to be spent on upcoming initiatives. Currently our investment portfolio totals approximately $1 billion.”

Managing that portfolio falls to Douzdjian’s finance team. SANDAG has no dedicated treasury staff, but select members of the finance team handle the agency’s treasury needs amid their other responsibilities. Previously, the treasury processes were manual and inefficient. Like most municipalities, they would download cash balances from various bank portals; receive investment information from their portfolio managers and bank statements from their banks; and then record, reconcile, and verify data in spreadsheets.

“About two-thirds of our investments are a bit longer-term, and those are managed by external portfolio managers. The other third, we handle internally,” Douzdjian says. “In total, we have around 80 different bank and investment accounts. Reconciling all those account statements each month, summarizing the journal entries, and putting the data into our ERP [enterprise resource planning] system was a lot of work.”

Once a quarter, the team would develop a consolidated report for SANDAG’s board of directors. Douzdjian says three finance professionals were spending close to 600 hours a year on investment management duties. “They spent a lot of time on reconciling,” he says, “and then obviously the manual processes left room for fat-finger errors, consolidation errors, etc.” Perhaps worst of all, the team had difficulty optimizing investments because of the timing of their reporting.

“If they had had enough time, they would have been consolidating more frequently than on a quarterly basis, but they just didn’t have time,” Douzdjian adds. “So the team would see the overall picture once a quarter, and by the time they got the information, it would be getting a little stale. Some of it would be four months old when the report was finished. That meant that, from a cash flow perspective, we sometimes had more money in our short-term investments than we needed to, in order to be sure we wouldn’t run out of short-term funds.”

Believing there must be a solution on the market that could simplify investment management, Douzdjian asked SANDAG’s internal audit department to examine the process and see if they had any ideas. “Everybody in the agency is competing for funding for projects,” he explains. “If you need the budget, the best approach is to shine a light on it.”

The strategy worked: SANDAG’s internal audit team agreed that the organization needed to revamp investment management. During the next annual budgeting cycle, Douzdjian included spending on a solution that could automate journal entries and investment reporting, better track inflows and outflows of cash, and purchase money market funds. He pointed to internal audit’s opinion and received funding for the project.

Douzdjian polled the jurisdictions that are SANDAG members to see how they manage their investments. He was surprised to find out that none had the type of solution he was envisioning. “It became pretty evident that we were all suffering from the same pain,” he says. “There were a couple of providers that were doing what we needed, but they were mostly in the private sector and were cost-prohibitive for us as a government entity.”

SANDAG was already using ICD’s investment portal, and Douzdjian liked the reports it provided. In a meeting with his ICD representative, Douzdjian inquired about whether the reports could be extended to include information from SANDAG’s external portfolio managers, and to provide some of the other functionality the agency needed.

“It happened somewhat by accident—I mentioned it, and ICD took enough interest to dig deeper and see if that was something they could do,” Douzdjian says. “I explained our needs, including automated journal entries and account reconciliation, and they agreed to work closely with us to build the functionality we were looking for.”

After six months of collaboration, the ICD report provided the capabilities SANDAG required. The new solution pulls data points from SANDAG’s custodians, investment managers, and banks. Data arrives in a wide array of formats. “The initial challenge in this project was getting enough standardization of the data for the new system to consolidate it,” Douzdjian says. “Some of the reports we get are in Excel or CSV [comma-separated value] formats. Other reports are PDFs.

“Our outside investment managers worked with us to provide data in a consistent format,” he adds, “but that wasn’t always an option. The state of California was not going to change their reporting just for us.”

SANDAG and ICD collaborated to leverage artificial intelligence (AI) capabilities to interpret the disparate data and make it consistent, regardless of source. The system then consolidates all the data and automatically performs reconciliations. It also pulls out the custody fees, investment manager fees, and banking fees, and puts them into an Excel worksheet.

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“The system generates a summary sheet that shows interest earnings and all of the investment accounts’ various expenses,” Douzdjian says. “We download that directly into our ERP system, and our staff accountants use it in their reconciliations.

“We’ve streamlined these processes so much that tasks which previously took us 140 hours each quarter now happen with the click of a button,” he continues. “We’ve been able to redirect one of the finance staff members who used to work on treasury operations, and we’ve reduced the number of people with treasury responsibilities from three to two.”

Moreover, the staff who still work on investment management can spend more time thinking strategically and communicating about treasury issues with other stakeholders, Douzdjian says. “They now do more work in other areas within the department, rather than focusing so much time on putting together the numbers for investment reports. They also put more effort into making the reports user-friendly and providing context around the numbers, which means the reports themselves are easier to understand and use.”

Better yet, because investment management processes are so much more efficient, SANDAG can easily run reports on its investments. It’s currently on a monthly reporting schedule, but could further increase frequency if needed. The monthly reporting gives Douzdjian and his team better visibility into their cash position at a given time. That has helped them optimize investments in a way they couldn’t previously.

“Before, because we saw our positions on a quarterly basis, we would sometimes put a little more slush than necessary into our short-term investments,” Douzdjian says. “Now, having better insight into our cash flows helps us take advantage of longer-term investments. That is especially crucial now that yields are going up. We’re looking at locking in some of our investments a little longer than we have in the past. That’s something we wouldn’t have had the confidence to do a couple of years ago, before we undertook this project.”

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