HomeMy WebLinkAbout2025-02-20; Investment Review Committee; Resolution 2025-001RESOLUTION NO. 2025-001
A RESOLUTION OF THE INVESTMENT REVIEW COMMITTEE OF THE CITY OF
CARLSBAD, CALIFORNIA, RECOMMENDING CITY COUNCIL APPROVAL OF
THE UPDATED INVESTMENTMENT POLICY
WHEREAS, the City of Carlsbad's Investment Policy requires the policy be annually reviewed by
the City Council; and
WHEREAS, the Investment Policy includes such subjects as (1) investment objectives of safety,
liquidity and return on investment; (2) ethics and conflicts of interest and internal controls; (3)
authorized dealers, institutions and investments; and (4) portfolio strategy, review and reporting; and
WHEREAS, the City Treasurer has reviewed the Investment Policy and proposed changes to
multiple sections including Section 7.0-Authorized Financial Dealers and Institutions; Section 8.1.2 -
Municipal Bonds; Section 8.1.6-Commercial Paper; Section 8.4-Housing Loans; Section 10.0-Review
of Investment Portfolio; and Section 10.1-Exceptions; and
WHEREAS, the City Treasurer presented the updated Investment Policy (Attachment A) to the
Investment Review Committee and the committee reviewed the proposed changes.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1. That the above recitations are true and correct.
2. That the Investment Review Committee recommends the City Council adopt the
updated Investment Policy (Attachment A).
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the Investment Review Committee
of the City of Carlsbad on the 20th day of February, 2025, by the following vote, to wit:
AYES:PEACOX,ROCHA,KORACH,HABER,TRUE
NAYS: NONE.
ABSTAIN: NONE.
ABSENT: NONE.
CHRISTIAN/E~ ir
KA a ROEDER, Senior Accountant
Attachment A
City of Carlsbad
Investment Policy
February 25, 2025
Christian Peacox
City Treasurer
1635 Faraday Avenue
Carlsbad, CA 92008
(442) 339-5119
www.carlsbadca.gov/city-hall/city-treasurer
Table of Contents
1.0 Policy ...................................................................................................................................... 4
2.0 Scope ...................................................................................................................................... 4
2.1 Pooled Investments ........................................................................................................ 4
2.2 Investments Held Separately ......................................................................................... 5
3.0 Prudence ................................................................................................................................ 5
4.0 Objective ................................................................................................................................ 5
4.1 Safety .............................................................................................................................. 5
4.2 Liquidity .......................................................................................................................... 5
4.3 Return on Investment .................................................................................................... 6
5.0 Delegation of Authority ......................................................................................................... 6
6.0 Ethics and Conflicts of Interest .............................................................................................. 6
7.0 Authorized Financial Dealers and Institutions ....................................................................... 7
7.1 Financial Institutions ...................................................................................................... 7
7.2 Broker & Dealers ............................................................................................................ 7
7.3 Purchase, Sale, Payment, and Delivery .......................................................................... 7
8.0 Authorized and Suitable Investments .................................................................................... 8
8.1 Pooled Investments ........................................................................................................ 8
8.2 Investments Held Separately ....................................................................................... 12
8.3 New Securities .............................................................................................................. 12
8.4 Housing Loans ............................................................................................................... 12
9.0 Unauthorized Investments .................................................................................................. 12
10.0 Review of Investment Portfolio ........................................................................................... 12
10.1 Exceptions .................................................................................................................... 13
11.0 Investment Pools & Mutual Funds ...................................................................................... 13
12.0 Collateralization, Perfection, Security and Contracts .......................................................... 14
13.0 Safekeeping and Custody ..................................................................................................... 14
14.0 Diversification ...................................................................................................................... 14
15.0 Maximum Maturities and Maximum Modified Duration .................................................... 14
15.1 Maximum Maturities for Pooled Investments ............................................................. 14
15.2 Maximum Modified Duration ....................................................................................... 15
15.3 Investments Held Separately ....................................................................................... 16
16.0 Internal Controls .................................................................................................................. 16
17.0 Performance Standard for Pooled Investments .................................................................. 16
18.0 Short-term Borrowing .......................................................................................................... 16
18.1 Short-term Loan ........................................................................................................... 17
18.2 Line of Credit ................................................................................................................ 17
19.0 Investment Strategy ............................................................................................................. 17
19.1 Pooled Investments ...................................................................................................... 17
19.2 Investments Held Separately ....................................................................................... 17
20.0 Reporting.............................................................................................................................. 17
20.1 Pooled Investments ...................................................................................................... 17
20.2 Investments Held Separately ....................................................................................... 18
21.0 Investment Policy Adoption ................................................................................................. 18
22.0 Glossary ................................................................................................................................ 19
24.0 Summary of Authorized Investments .................................................................................. 24
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City of Carlsbad
Investment Policy
February 25, 2025
(Supersedes Investment Policy dated March 12, 2024)
The purpose of this document is to identify various policies and procedures that enhance
opportunities for a prudent and systematic investment policy and to organize and formalize
investment-related activities. Related activities which comprise good cash management include
accurate cash projections, the expeditious collection of revenue, the control of disbursements,
cost-effective banking relations, and arranging for a short-term borrowing program which
coordinates working capital requirements and investment opportunities.
1.0 Policy
It is the policy of the City of Carlsbad to invest public funds not required for
immediate day-to-day operations in safe, liquid, and medium-term investments.
These investments shall yield an acceptable return while conforming to all
California statutes and the city's Investment Policy.
2.0 Scope
It is intended that this policy cover the investment activities of all contingency
reserves and inactive cash under the direct authority of the city.
2.1 Pooled Investments
Investments for the city and its component units will be made on a pooled basis
including, but not limited to, the City of Carlsbad, the Housing Authority of the City
of Carlsbad, the City of Carlsbad Public Improvement Corporation, and the
Carlsbad Municipal Water District. The city's Annual Comprehensive Financial
Report identifies the fund types involved as follows:
General Fund
Special Revenue Funds
Debt Service Funds
Capital Project Funds
Enterprise Funds
Internal Service Funds
Fiduciary Funds
Miscellaneous Special Funds
Any new funds created by the City Council, unless specifically exempt.
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2.2 Investments Held Separately
Investments of bond proceeds will be held separately when required by the bond
indentures or when necessary to meet arbitrage regulations. If allowed by the
bond indentures, or if the arbitrage regulations do not apply, investments of bond
proceeds will be held as part of the pooled investments.
3.0 Prudence
California Government Code Section 53600.3 identifies trustees as those persons
authorized to make investment decisions on behalf of a local agency. As a trustee,
the standard of prudence to be used shall be the "Prudent Investor” standard and
shall be applied in the context of managing the overall portfolio. The Prudent
Investor standard states that a trustee shall act with care, skill, prudence, and
diligence under the circumstances then prevailing, including, but not limited to,
the general economic conditions and the anticipated needs of the agency, that a
prudent person acting in a like capacity and familiarity with those matters would
use in the conduct of funds of a like character and with like aims, to safeguard the
principal and maintain the liquidity needs of the agency.
It is the policy of this Council that investment officers acting in accordance with
written procedures and the Investment Policy and exercising due diligence shall
be relieved of personal responsibility for an individual security's credit risk
changes or market price changes, provided deviations from expectations are
reported in a timely manner and appropriate action is taken to control adverse
developments.
4.0 Objective
California Government Code Section 53600.5 outlines the primary objectives of a
trustee investing public money. The primary objectives, in order of priority, of the
city's investment activities shall be:
4.1 Safety
Safety of principal is the foremost objective of the investment program.
Investments of the city shall be undertaken in a manner that seeks to ensure
preservation of capital in the overall portfolio. To attain this objective, the City
Treasurer will diversify the city’s investments by investing funds among a variety
of securities with independent returns.
4.2 Liquidity
The city's investment portfolio will remain sufficiently liquid to enable the city to
meet all operating requirements which might be reasonably anticipated.
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4.3 Return on Investment
Investment return becomes a consideration only after the requirements of safety
and liquidity have been met. The City Treasurer shall have the objective of
attaining a comparative performance measurement or an acceptable rate of
return throughout budgetary and economic cycles. These measurements shall be
commensurate with the city’s investment risk constraints identified in the
Investment Policy and the cash flow characteristics of the portfolio.
The City Treasurer should strive to maintain the level of investment of all
contingency reserves and inactive funds as close to 100% as possible. While the
objectives of safety and liquidity must first be met, it is recognized that portfolio
assets represent a potential source of significant revenues. It is to the benefit of
the city that these assets be managed to realize a yield on investments consistent
with California statutes and the city’s Investment Policy.
5.0 Delegation of Authority
By the annual adoption of this policy, the management of inactive cash and the
investment of funds identified in Section 2.0 Scope is the responsibility of the City
Treasurer as directed by the City Council. Under the authority granted by the City
Council, no person may engage in an investment transaction covered by the terms
of this policy unless directed by the City Treasurer.
In the execution of this delegated authority, the City Treasurer may establish
accounts with qualified financial institutions and brokers/dealers for the purpose
of effecting investment transactions in accordance with this policy. The criteria
used to select qualified financial institutions and brokers/dealers are identified in
Section 7.0 Authorized Financial Dealers and Institutions.
The City Treasurer designates the Finance Director as Deputy City Treasurer who,
in the absence of the City Treasurer, will assume the City Treasurer's duties and
responsibilities. The City Treasurer shall retain full responsibility for all
transactions undertaken under the terms of this policy.
In the endeavor to have all inactive cash invested all the time, the treasury
department accountant will assist the City Treasurer in the gathering of
information to create cash flow estimates.
6.0 Ethics and Conflicts of Interest
All participants in the city's investment process shall seek to act responsibly as
custodians of the public trust. Officers and employees involved in the investment
process shall refrain from personal business activity that could conflict with proper
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execution of the investment program, or which could impair their ability to make
impartial investment recommendations and decisions. Investment officials and
employees shall make all disclosures appropriate under the Fair Political Practices
Act and may seek the advice of the City Attorney and the Fair Political Practices
Commission whenever there is a question of personal financial or investment
positions that could represent potential conflicts of interest.
7.0 Authorized Financial Dealers and Institutions
Investments shall be purchased only through well established, financially sound
institutions. The City Treasurer may maintain a list of financial institutions and
broker/dealers who are approved to provide the city with investment services.
This list should be updated annually by the City Treasurer to ensure compliance
with this Investment Policy. All financial institutions and broker/dealers who
desire to become qualified bidders for investment transactions will be given a
copy of the city's Investment Policy and provide written confirmation indicating
that the Investment Policy has been read, understood and that their investment
offers will comply with this policy and applicable state and federal law. Qualified
financial institutions and broker/dealers must supply the City Treasurer with the
documents below.
7.1 Financial Institutions
Current audited financial statements.
Depository contracts, as appropriate.
A copy of the latest Federal Deposit Insurance Corporation call report, and
Proof that commercial banks, savings banks, or savings and loan associations are
state or federally chartered.
7.2 Broker & Dealers
Current audited financial statements
Proof that brokerage firms are members in good standing of a national securities
exchange, or
A designation as a primary government dealer by the Federal Reserve Bank
Commercial banks, savings banks, and savings and loan associations must
maintain a minimum net worth to asset ratio as provided by law (total regulatory
net worth divided by total assets) and must have had positive net earnings for the
last reporting period.
7.3 Purchase, Sale, Payment, and Delivery
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A competitive bid process, when deemed practical by the City Treasurer, will be
used to place all investment transactions. It is recommended that the City
Treasurer obtain two or more bids from broker/dealers before purchasing an
investment, and three or more quotes when selling an investment. When two or
more investment opportunities offer essentially the same maturity, liquidity,
yield, and quality, the City Treasurer may consider financial institutions based in
the City of Carlsbad, the State of California, and within the United States. Payment
for securities will be done on a Delivery Versus Payment (DVP) basis via the city's
custodian. Delivery of securities will be made to the city in accordance with the
third-party custodial agreement.
8.0 Authorized and Suitable Investments
Except for Certificates of Deposit, investments will be made only in readily
marketable securities actively traded in the secondary market.
8.1 Pooled Investments
The City Treasurer may invest city funds in the following instruments as specified
in the California Government Code Section 53601 and as further limited in this
policy.
Obligations of the U.S. Government
Government Sponsored Enterprise (GSE) debt and its agencies.
Maximum remaining maturity of five years as of the date of settlement.
Percentage of portfolio, issuer, and ratings are not applicable.
Municipal Bonds
Registered treasury notes or bonds of any of the other 49 states in addition to
California, including bonds payable solely out of the revenues from a revenue
producing property owned, controlled, or operated by a state or by a department,
board, agency, or authority of any of the other 49 states, in addition to California.
Bonds, notes, warrants, or other evidence of indebtedness of a local agency within
California, including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by the local agency, or by a
department, board, agency, or authority of the local agency.
Maximum remaining maturity of five years as of the date of settlement.
Shall not exceed 15% of the investment portfolio.
No more than 5% of the portfolio may be invested in any single issuer.
8.1.1
8.1.2
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Shall carry a rating of “AA” by one and “A” by another of the three
Nationally Recognized Statistical Rating Organization (NRSRO) rating
agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch
Ratings, Inc.
Bankers Acceptances
Bankers Acceptances drawn on and accepted by a commercial bank.
Maximum maturity 180 days as of the date of settlement.
Shall not exceed 25% of the investment portfolio.
No more than 10% of the portfolio may be invested in any single issuer.
Rating measures are not applicable.
Certificates of Deposit
Investments in Certificates of Deposit and checking accounts shall be fully insured
up to the amount allowed per account by the Federal Deposit Insurance
Corporation or the National Credit Union Administration. The city may use a
private sector entity that assists in the placement of Certificates of Deposit.
Maximum remaining maturity of five years as of the date of settlement.
Shall not exceed 30% of the investment portfolio.
No more than 10% of the portfolio may be invested in any single issuer.
Rating measures are not applicable.
Negotiable Certificates of Deposit
Negotiable Certificates of Deposit issued by a nationally or state-chartered bank.
Maximum remaining maturity of five years as of the date of settlement.
Shall not exceed 30% of the investment portfolio.
No more than 10% of the portfolio may be invested in any single issuer.
Rating measures are not applicable.
Commercial Paper
Eligible paper must be of “prime” quality of the highest ranking or of the highest
letter and number rating as provided for by a Nationally Recognized Statistical
Rating Organization (NRSRO). Additionally, the issuer must be a general
corporation organized and operating within the United States, have total assets
in excess of $500 million, and have debt other than commercial paper, if any,
rated in a rating category of “A” or its equivalent or higher by an NRSRO.
Maximum remaining maturity of 270 days as of the date of settlement.
8.1.3
8.1.4
8.1.5
8.1.6
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Shall not exceed 10% of the investment portfolio.
No more than 5% of the portfolio may be invested in any single issuer.
Shall carry a rating of “AA” by two of of the three Nationally Recognized
Statistical Rating Organization (NRSRO) rating agencies: Moody's Investors
Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. if the issuer has
other existing debt.
Repurchase Agreements
The market value of securities that underlay a Repurchase Agreement shall be
valued at 102% or greater of the funds borrowed against those securities.
Maximum remaining maturity of one year as of the date of settlement.
Shall not exceed 5% of the investment portfolio.
No more than 5% of the portfolio may be invested in any single issuer.
Rating measures are not applicable.
Corporate Notes
Corporate Notes permitted are issued by corporations organized and operating
within the United States or by depository institutions licensed by the United States
or any state and operating within the United States.
New investments made directly into corporations involved in the business of
exploration, extraction, or further processing of oil and gas are not eligible for
investment.
Maximum remaining maturity of five years as of the date of settlement.
Shall not exceed 30% of the investment portfolio.
No more than 5% of the portfolio may be invested in any single issuer.
Shall carry a rating of “AA” by one and “A” another of the three Nationally
Recognized Statistical Rating Organization (NRSRO) rating agencies,
Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc.
Money Market Funds
Money market funds whose portfolio consists of one or more of the foregoing
lawful investments.
Sweep Accounts
Sweep accounts for the investment of overnight funds when the funds are swept
into investments allowed by this policy.
Local Agency Investment Fund (LAIF)
8.1.7
8.1.8
8.1.9
8.1.10
8.1.11
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LAIF of the State of California Investments will be made in accordance with the
laws and regulations governing those Funds.
California Asset Management Program (CAMP)
CAMP investments will be made in accordance with the laws and regulations
governing those funds.
Supranational Securities
Supranational securities are defined as United States dollar denominated senior
unsecured, unsubordinated obligations issued or unconditionally guaranteed by
the International Bank for Reconstruction and Development (IBRD or World Bank),
International Finance Corporation (IFC), or Inter-American Development Bank
(IADB). These organizations were established by international treaties, are
headquartered in Washington D.C., and incorporated into U.S. Federal Law by
Congressional Acts.
California Government Code Section 53601(q) permits the securities of these
three organizations to be incorporated into local agency investment portfolios.
Maximum remaining maturity of five years as of the date of settlement.
Shall not exceed 10% of the investment portfolio.
No more than 5% of the portfolio may be invested in any single issuer.
Shall carry a rating of “AA” by at least two of the three Nationally
Recognized Statistical Rating Organization (NRSRO) rating agencies,
Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc.
Agency Backed Mortgage Passthrough Securities
Mortgage passthrough securities issued or guaranteed by the U.S. Government
and its agencies.
Maximum remaining maturity of five years as of the date of settlement.
Percentage of portfolio, issuer, and ratings are not applicable.
Non-agency Backed Mortgage Passthrough Securities
Non-agency backed mortgage passthrough security, collateralized mortgage
obligation, mortgage backed or other pay-through bond, equipment lease-backed
certificate, consumer receivable passthrough certificate, or consumer receivable-
backed bond.
Maximum remaining maturity of five years as of the date of settlement.
Shall not exceed 5% of the investment portfolio.
8.1.12
8.1.13
8.1.14
8.1.15
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No more than 5% of the portfolio may be invested in any single issuer.
Shall carry a rating of “AA” by at least one of the three Nationally
Recognized Statistical Rating Organization (NRSRO) rating agencies,
Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc.
8.2 Investments Held Separately
Investments of bond funds will be made in conformance with the trust indenture
for each issue. Such investments will be held separately when required.
8.3 New Securities
New types of securities authorized by California law, but which are not currently
allowed by the city’s Investment Policy, must first be approved by the City Council.
8.4 Housing Loans
Housing loans approved by the City Council to private developers and
homeowners as part of the city housing program shall comply with California
statutes but need not meet the investment objectives and the risk management
requirements of this Investment Policy. The City Council will manage these loans
directly.
9.0 Unauthorized Investments
California Government Code Section 53601.6 disallows the following investments:
Inverse floaters
Range notes
Interest-only strips that are derived from a pool of mortgages.
In addition, and more generally, investments are further restricted as follows:
No investment will be made in any security that could result in zero interest
accrual if held to maturity.
No investment will be made that could cause the portfolio to be leveraged.
Purchases of investments on margin will not be made.
10.0 Review of Investment Portfolio
An Investment Review Committee is hereby established to conduct reviews of the
city's investment portfolio, the strategy being utilized for the investment of city
funds, and the city's Investment Policy. This committee will be composed of the
City Treasurer (acting as the chair), the City Manager, the City Attorney, the
Deputy City Manager of Administrative Services and the Finance Director or
delegate from each such department. Additionally, the City Treasurer may appoint
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other city residents as advisors to the committee. The committee will convene
periodically as necessary or desirable but, not less frequently than once each
quarter. All members of the Investment Review Committee, including the city
resident advisors, must comply with the disclosure requirements in the city’s
Conflict of Interest Code.
10.1 Exceptions
Securities must be in compliance with Section 8.0 Authorized Investments at the
time of purchase. If an unauthorized investment is purchased or an authorized
investment experiences a subsequent change that causes its not to comply with
this Investment Policy (e.g., the rating of a corporate note held in the portfolio has
been downgraded by an NRSRO or the total value of the portfolio has declined
causing the percentage invested in corporate notes to rise above 30%, or an
unforeseen expenditure causes investments maturing within one year to fall
below two-thirds of the approved operating budget of the current fiscal year) the
City Treasurer will determine the course of action necessary to correct such
exceptions and move the portfolio into compliance with state and city
requirements. The City Treasurer’s determination may not expose the assets of
the portfolio to undue risk and may not impair the meeting of financial obligations
as they fall due. Additionally, any subsequent investments may not extend existing
exceptions. Exceptions, and the decisions to correct the exceptions, will be
reviewed with the Investment Review Committee and reported on the monthly
investment report presented to city council.
11.0 Investment Pools & Mutual Funds
An investigation and due diligence will be conducted before investing in any
investment pool or mutual fund. The City Treasurer shall review at a minimum:
The investment policy and objectives.
Interest calculations and distributions.
Safeguard and settlement processes.
A description of the program including legal investors and the minimums
and maximum transactions allowable.
Schedule for receiving statements.
How reserves and retained earnings are treated.
The fee schedule.
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12.0 Collateralization, Perfection, Security and Contracts
When required by California statute or this Investment Policy, any investment
capable of being collateralized, shall be collateralized by the required amounts
imposed by law. To give greater security to the city’s investments, when an
investment is collateralized and not perfected under existing law, an attempt to
perfect the collateralization should be made.
California Government Code Section 53652 requires that the depository secure
active or inactive deposits with eligible securities having a fair market value of at
least 10% more than the total amount of all deposits, and 50% in excess of the
deposit when secured with mortgage pools. California Government Code Section
53649 specifies that the City Treasurer is responsible for entering into deposit
contracts with each depository.
13.0 Safekeeping and Custody
All security transactions, including collateral for repurchase agreements, entered
into by the city shall be conducted on a delivery-versus-payment basis. All
securities owned by the city will be held by a third-party custodian designated by
the City Treasurer and evidenced by a monthly statement from the custodian. All
securities will be held in the nominee’s name of the custodian unless the
counterparty bank’s trust department is used for the delivery of the security, in
which case the security will be held in the city’s name. Collateral for time deposits
in banks will be held in the city's name in the bank's Trust Department or in the
Federal Reserve Bank.
14.0 Diversification
The portfolio will be diversified to avoid incurring unreasonable and avoidable
risks regarding specific security types or individual financial institutions. In
addition to the limitations on specific security types indicated in Section 8.0
Authorized Investments, and with the exception authorized pools and
investments, no more than 5% of the city's portfolio will be placed with any single
issuer.
15.0 Maximum Maturities and Maximum Modified Duration
Maximum maturity and maximum modified duration evaluation supports the
principal of liquidity by ensuring that adequate cash is available to meet
anticipated cash flow requirements of the city.
15.1 Maximum Maturities for Pooled Investments
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A policy of laddered maturities will generally be followed for pooled investments.
The following maturity requirements will apply as of the month end of each
reporting period.
Two-Thirds Within One Year
Investments maturing within one year, measured at par value, must be no less
than two-thirds of the approved operating budget of the current year. This
requirement should be met within three months following adoption of the current
operating budget. Remaining investments of the portfolio shall not have a
maturity greater than five years from the date of investment except as provided
in Section 15.1.3 Five Year Exception.
Three Years Average
The average portfolio investment maturity shall be three years or less. A dollar-
weighted average will be used in computing the average maturity of the portfolio.
Five-Year Exception
Before an investment, which is allowed by California statute, is made in securities
that mature more than five years from the date of purchase, the City Treasurer
and the Deputy City Manager of Administrative Services will review the city's long-
term cash needs. Both must concur before such an investment is made. A
resolution authorizing such investment must first be approved by the City Council.
Investments beyond five years will not be greater than 10% of the portfolio and
will be counted in the percentage of the portfolio that may mature beyond one
year.
Ten-Year Limit
No investments will be made that mature beyond 10 years from the date of
investment.
Callable Investments
Callable investments will be recorded at their maturity dates.
15.2 Maximum Modified Duration
The investment restrictions identified in paragraphs of Section 8.0 Authorized
Investments and Section 9.0 Unauthorized Investments, and the maturity
requirements identified in Section 15.1 Maximum Maturities for Pooled
Investments, imply that the value of city investments should not change more
than 2.2% for every 1% change in market interest rates. To ensure that this is the
case, a maximum modified duration is established at 2.2. This states that the
unrealized gains and losses of the portfolio are not expected to exceed 2.2% for
15.1.1
15.1.2
15.1.3
15.1.4
15.1.5
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every 1% change in market interest rates. A modified duration in excess of 2.2
would indicate that the portfolio is exposed to more market risk than is desired by
this policy. If the modified duration of 2.2 is exceeded, an explanation will be made
in the first monthly report following the occurrence.
15.3 Investments Held Separately
Maturities for investments held separately will conform to the trust indenture for
each issue.
16.0 Internal Controls
The City Treasurer is responsible for establishing and maintaining an internal
control structure designed to ensure that the assets of the city are protected from
loss, theft, fraud or misuse. The treasurer shall present all monthly and annual
reports to the City Council, Internal Auditor, Deputy City Manager of
Administrative Services, Finance Manager, and the city’s external auditors in the
conduct of their annual audit of the city.
17.0 Performance Standard for Pooled Investments
Laddered maturities and a buy and hold strategy for pooled investments will cause
the investment portfolio to attain a market-average rate of return throughout
budgetary and economic cycles, commensurate with the investment risk
constraints and the city’s cash flow needs. Since the amount maturing within one
year must be at least equal to two-thirds of the currently approved operating
budget, the rate of return will be more closely related to, but lag behind, changes
in short-term market rates. The rate of return of the investment portfolio will be
based on the maturity value of the investments. A dollar-weighted average of
yields to maturity will be used in calculating the rate of return of the entire
portfolio. The city’s performance benchmarks may change from year to year but
should strive to mirror the assets held in the city’s portfolio.
18.0 Short-term Borrowing
The city is permitted by law to borrow money to meet current short-term cash
flow needs. These needs may arise either because projected cash disbursements
exceed projected cash receipts, or because the city's cash accounts may be
temporarily overdrawn due to the efforts to invest 100% of inactive funds at all
times. To provide for these contingencies the City Treasurer is authorized to take
the following actions:
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18.1 Short-term Loan
When there is a shortfall between projected cash revenues and projected cash
disbursements, the City Treasurer may secure a loan in the amount that would
equal the cash deficit plus projected cash disbursements for one month. Any such
loan will be repaid within one year.
18.2 Line of Credit
The City Treasurer may maintain a line of credit with the city's bank in an amount
to cover sums temporarily overdrawn because of efforts to invest all inactive funds
at all times.
19.0 Investment Strategy
19.1 Pooled Investments
A buy and hold strategy will be followed; that is, investments once made will be
held until maturity. A buy and hold strategy will result in unrealized gains or losses
as market interest rates fall or rise from the coupon rate of the investment.
Unrealized gains or losses, however, will diminish as the maturity dates of the
investments are approached or as market interest rates move closer to the
coupon rate of the investment. A buy and hold strategy requires that the portfolio
be kept sufficiently liquid to preclude the undesired sale of investments prior to
maturity. Occasionally, the City Treasurer may find it advantageous to sell an
investment prior to maturity, but this should only be on an exception basis and
only when it is in the best interest of the city.
19.2 Investments Held Separately
Investments held separately for bond proceeds will follow the trust indenture for
each issue.
20.0 Reporting
California Government Code Section 53600 require reports meeting the standards
set forth in these sections to be presented to City Council, as well as any additional
information desired. Therefore, it is the policy of the city that the investments and
transactions described in these sections, and as outlined in Section 20.1 below be
given to the City Council, City Manager, and Internal Auditor (or the Deputy City
Manager of Administrative Services in the absence of an Internal Auditor).
20.1 Pooled Investments
The investment report will be submitted monthly by the City Treasurer within 60
days following the end of the month covered by the report. The monthly report
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will be published to the City Treasurer webpage after reporting to City Council.
Each report will include the following elements:
Itemized listing of portfolio investments by type, yield to maturity, and issuer
Par value, dollar amount invested, amortized cost, and current market value as of
the date of the report will be given for the total of all securities, investments, and
moneys held by the city and its component units. The source of the market values
will be cited.
Credit ratings of corporate notes.
Accrued income.
Weighted average yield of the portfolio.
Weighted average days to maturity of the portfolio from the date of the report.
Weighted average modified duration of the portfolio.
Dollar amount and percentage of portfolio maturing within one year.
Dollar amount and percentage of portfolio maturing between one and 5 years.
Percent that each type of investment represents in the portfolio.
Investment transactions for the reporting period excluding due dates.
Fund source of investments when available.
Statement that the investment portfolio has the ability to meet the city's cash flow
demands for the next six (6) months.
Statement of compliance of the portfolio with the city’s Investment Policy. When
applicable, any material exceptions will be noted.
An annual report for pooled investments will also be made to the City Council
following the close of the fiscal year. Among other items, the annual report will
include an analysis of the composition of the portfolio with regard to fund source,
a review of trends regarding the size of the fund, portfolio yields, cash income,
and a statement regarding anticipated fund activity in the next fiscal year.
20.2 Investments Held Separately
A report of investments held separately will be made quarterly. Within 30 days
following the end of the quarter the report will be submitted as an exhibit in the
City Treasurer’s monthly report. The quarterly report will contain the information
required by California Government Code Section 53646 when available.
21.0 Investment Policy Adoption
California Government Code Section 53646(a)(2) allows the City Treasurer to
render to the City Council and the Investment Review Committee a statement of
Investment Policy and recommends that one be presented each year. Therefore,
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the city’s Investment Policy and any modifications to it shall be considered no less
often than annually at a public meeting. Adoption of the Investment Policy and
any changes must be made by resolution of the City Council.
22.0 Glossary
Amortized Cost
The cost of investments adjusted for amortized premiums and discounts.
Amortized cost is used to maintain comparability with market value.
Arbitrage Regulation
Laws to control the use of profit making by purchasing securities on one market
for immediate resale on another to profit from a price difference.
Bankers Acceptances
An investment vehicle created to facilitate international commercial trade
transactions. The bank accepts responsibility to repay a loan to the holder of the
investment vehicle created in a commercial transaction. The credit worthiness of
Bankers Acceptances is enhanced because they are secured by the issuing bank,
the goods themselves, and the importer. Bankers Acceptances are sold on a
discounted basis.
Bond Indenture
A written agreement specifying the terms and conditions for issuing bonds, stating
the form of the bond being offered for sale, interest to be paid, the maturity date,
call provisions and protective covenants, if any, collateral pledged, the repayment
schedule, and other terms. It describes the legal obligations of a bond issuer and
the powers of the bond trustee, who has the responsibility for ensuring that
interest payments are made to registered bondholders.
Book Value
A term synonymous with amortized cost.
Buy and Hold Strategy
Investments in which management has the positive intent and ability to hold each
issue until maturity.
California Asset Management Program (CAMP)
A California Joint Powers Authority (JPA) established in 1989 to provide California
public agencies with professional investment services. The CAMP Pool is a
permitted investment for all local agencies under California Government Code
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Section 53601(p). CAMP is directed by a Board of Trustees, which is made up of
experienced local government finance directors and treasurers.
Certificate of Deposit
A deposit account paying interest for a fixed term, with the understanding that
funds cannot be withdrawn before maturity without giving notice.
Collateralization
An asset used to secure a debt in part or in full by pledge of collateral. The
collateral is used as security to help ensure payment or performance of an
obligation.
Commercial Paper
A short-term IOU, or unsecured money market obligation, issued by prime rated
commercial firms and financial companies, with maturities from 2 days up to 270
days. A promissory note of the issuer used to finance current obligations and is a
negotiable instrument.
Delivery Versus Payment
A securities industry term indicating payment is due when the buyer has securities
in hand or a book entry receipt.
Embedded Option
A statement within the bond structure that would alter the interest rate earned
by the bond.
Interest-Only Strips
Mortgage-backed instrument where investor receives only the interest, no
principal, from a pool of mortgages. Issues are highly interest rate sensitive. Cash
flows vary between interest periods. As well, the maturity date may occur earlier
than that stated if all loans within the pool are pre-paid. High prepayments on
underlying mortgages can return less to the holder that the dollar amount
invested.
Inverse Floater
A bond or note that does not earn a fixed rate of interest. Rather, the interest rate
that is earned is tied to a specific interest-rate index identified in the bond/note
structure. The interest rate earned by the bond/note will move in the opposite
direction of the index, e.g., if market interest rates as measured by the selected
index rises, the interest rate earned by the bond/note will decline. An inverse
floater increases the market rate risk and modified duration of the investment.
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Laddered Portfolio
A bond investment portfolio with securities in each maturity range (e.g., monthly)
over a specified period (e.g., five years).
Leverage
Investing with borrowed money with the expectation that the interest earned on
the investment will exceed the interest paid on the borrowed money.
Local Agency Investment Fund (LAIF)
A voluntary investment program offering participating agencies the opportunity
to participate in a major portfolio which daily invests hundreds of millions of
dollars, using the investment expertise of the State Treasurer’s Office investment
staff at no additional cost to the taxpayer. Investment in LAIF, considered a short-
term investment, is readily available for cash withdrawal daily.
Market Risk
The risk that market interest rates will rise causing a loss of value in investments
held. All investments made by the city involve a degree of market risk. See also
Unrealized Gains (Losses).
Modified Duration
A measure of the sensitivity that the value of a fixed-income security has to
changes in market rates of interest. Modified duration is the best single measure
of a portfolio’s or security’s exposure to market risk. Modified duration identifies
the potential gain/loss in value before the gain/loss actually occurs. It is a
prospective measurement, e.g., a modified duration of 1.5 indicates that when
and if a 1% change in market interest rates occurs, a 1.5% change in the value of
a security will result. Investments with modified durations of one to three are
considered to be relatively conservative.
Negotiable Certificates of Deposit
A large denomination ($100,000 or more) interest bearing time deposits, paying
the holder a fixed amount of interest at maturity. Issues can be sold to a new
owner before maturity.
Municipal Bonds
Municipal bonds are debt securities issued by states, cities, counties and other
governmental entities to fund day-to-day obligations and to finance capital
projects such as building schools, highways or sewer systems.
Nominee Name
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The registered owner of a stock or bond if different from the beneficial owner,
who acts as holder of record for securities and other assets. Typically, this
arrangement is done to facilitate the transfer of securities when it is inconvenient
to obtain the signature of the real owner, or the actual owner may not wish to be
identified. Nominee ownership simplifies the registration and transfer of
securities.
Nationally Recognized Statistical Rating Organization (NRSRO)
A Nationally Recognized Statistical Rating Organization (NRSRO) is a credit rating
agency that issues credit ratings that the U.S. Securities and Exchange Commission
permits other financial firms to use for certain regulatory purposes. Three of the
primary recognized rating agencies are Moody’s Investors Service, Inc., S&P Global
Ratings, and Fitch Ratings, Inc.
Pooled Investment
A grouping of resources for the common advantage of the participants.
Range Note
An investment whose coupon payment varies (e.g. either 7% or 3%) and is
dependent on whether the current benchmark (e.g., 30-year Treasury) falls within
a pre-determined range (e.g., between 6.75% and 7.25%).
Repurchase Agreement
A contract to purchase and subsequently sell securities at a specified date and
price.
Supranational Organization
A supranational organization is formed by a group of countries through an
international treaty. Member states transcend national boundaries or interests to
share in the decision-making process to promote economic development in the
member countries.
Supranational Securities
Supranational securities are United States dollar denominated senior unsecured,
unsubordinated obligations issued or unconditionally guaranteed by the
International Bank for Reconstruction and Development (IBRD or World Bank),
International Finance Corporation (IFC), or Inter-American Development Bank
(IADB). These organizations were established by international treaties, are
headquartered in Washington D.C and incorporated into U.S. Federal Law by
Congressional Acts. The California Government Code Section 53601(q) permits the
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securities of these three organizations to be incorporated into local agency
investment portfolios.
Sweep Account
A short-term income fund into which all uninvested cash balances from the non-
interest-bearing checking account are automatically transferred daily.
Third-Party Custodian
A corporate agent, usually a commercial bank, who, acting as trustee, holds
securities under a written agreement for a corporate client and buys and sells
securities when instructed. Custody services include securities safekeeping, and
collection of dividends and interest. The bank acts only as a transfer agent and
makes no buy-sell recommendations.
Unrealized Gains (Losses)
An increase (decrease) in the value of investments representing the difference
between the amortized cost of the investments and their current market value.
Increases (decreases) in value are caused primarily by changes in market interest
rates subsequent to purchasing the investments. Increases (decreases) in value
indicate two things: 1. The portfolio has a potential gain (loss) in principal if the
securities are sold, and 2. The portfolio is over performing (underperforming) the
current market for similar investments. An increase in value indicates the portfolio
is earning relatively more interest than current market conditions, and a decrease
in value indicates that the portfolio is earning relatively less interest than current
market conditions.
Zero Accrual Periods
A period in which an investment accumulates no interest.
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24.0 Summary of Authorized Investments
Investment Type
Maximum
Maturity1
Maximum
% Portfolio
Maximum
% Issuer
NRSRO
Minimum2
Obligations of the US Government 5 years - - -
Certificates of Deposit 5 years 30% 10% -
Negotiable Certificates of Deposit 5 years 30% 10% -
Corporate Notes 5 years 30% 5% AA/A
Municipal Bonds 5 years 15% 5% AA/A
Supranational Securities 5 years 10% 5% AA/AA
Agency Backed Mortgage Passthrough Securities 5 years - - -
Non-agency Backed Mortgage Passthrough Securities 5 years 5% 5% AA
Repurchase Agreements 1 year 5% 5% -
Commercial Paper 270 days 10% 5%³ AA/AA
Bankers Acceptances 180 days 25% 10% -
Money Market Funds N/A - - -
LAIF N/A - - -
CAMP N/A - - -
Sweep Accounts N/A - - -
1 Exceptions are addressed in §15.0 Maximum Maturities and Maximum Modified Duration. Total portfolio Modified
Duration shall be 2.2 or less.
2 NSRSOs used by the city are limited to Moody’s Investors Service, Inc., S&P Global Ratings., and Fitch Ratings, Inc.
If two ratings are listed for an investment type, then at least two of the three agencies must have ratings compliant
with this Investment Policy. Credit rating minimums include rating modifiers (+/-).
³Commercial Paper shall not represent more than 5% of the outstanding paper of an issuing company.