HomeMy WebLinkAbout1994-12-20; City Council; 12966; REPORT ON CITY INVESTMENTS#TY OF CARLSBAD - AWDA BILL 97 a& r/
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CITY MGR.* DEPT Treasurer
CITY ATT~ Tiimr REPORT ON CITY INVESTMENTS
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RECOMMENDED ACTION:
Accept the report from the City Treasurer.
ITEM EXPLANATION:
In the past few days there has been a flurry of interest in the way that local
governments invest their funds. The headlines of billion dollar losses in the Orange
County investment pool and the 180 public agencies that will share in that loss bring
into focus the importance of the agencies investment policies and safeguards.
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In Carlsbad, the City Treasurer is charged with the responsibility of investing the
inactive funds held by the City. His actions are guided by the City’s Investment
Policy, which is reviewed quarterly and presented to the Council annually for
approval or amendment. The City’s Investment Policy has proven to be liberal
enough to allow the City to realize adequate returns on invested funds, while being
conservative- enough to reduce the risk of loss. This Investment Policy also
establishes an Investment Review Committee, comprised of the City Treasurer, City
Attorney, Assistant City Manager, and the Financial Management Director, who
review the portfolio and investment strategies on a quarterly basis. This committee can recommend modifications to the Investment Policy to the City Council, or
suggest changes in the investment strategy within the guidelines of the existing
policy. A copy of the most recent investment policy is attached to this agenda bill.
The City Treasurer presents a monthly report to the City Council that shows the
status of all investments, and how the existing portfolio complies with the City’s
Investment Policy. Additianally, the City Treasurer presents an annual report to the
City Council that summarizes and analyzes the investment activities of the past year.
The recent events in Orange County point out how important this reporting is in
keeping the Council informed on issues related to treasury management. A copy
l of the most recent monthly report is attached to this agenda bill for your information.
Finally, the attached memo from the Treasurer to the Mayor and Council Members
describes how the investment pool operated by the County of San Diego differs
from the Orange County pool. Although the City does invest in the San Diego
County pool, there has been no use of borrowed funds (leverage) by the San Diego
County Treasurer. The use of leveraged investments in a market with rising interest
rates has been the key factor in the demise of Orange County’s investment strategy.
The- Treasurer will provide the Council with a brief report outlining the City’s
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I investment strategy, Carlsbad’s Investment Policy, and investment in the San Diego 5 County investment pool, 0
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Page Two of Agenda Bill No. Ja,q 66
FISCAL IMPACT:
Proper management of the City’s investments provides millions of dollars in interest
revenue to the General Fund and other special funds. The City Treasurer’s role is
to provide for the Safety of those funds first. Providing Liquidity (cashflow) falls
second in the Treasurer’s goals, followed by seeking the best Yield. By
emphasizing safety first, the city will be more able to avoid any of the risks inherent
in the money markets. Although no investment is without risk, a prudent investment
policy and conservative practices can minimize those risks.
EXHIBITS:
1. City’s Investment Policy dated January 14, 1992.
2. Treasurer’s monthly report as of October 31, 1994.
3. Memo to Mayor and Council dated December 8, 1994.
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a a EXHIBIT 1
CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Revised January 14, 1992
1.0 htrod~ction. 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 disbursments, cost-effective banking relations, and arranging for a short-term borrowing program which coordinates working capita requirements and
investment opportunities.
2.0 Policy. It is the policy of the City of Carlsbad to invest public funds not required for
immediate day-to-day operations in safe and liquid investments having the highest possible
return while conforming to all state statutes governing the investment of public funds.
3.0 Scope. It is intended that this policy cover the investment activities of all surplus
cash and idle or inactive funds under the direct authority of the City. These funds are
accounted for in the, City's Comprehensive Annual Financial Report and include: -
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3.2
3.3
3.4
3.5
3.6
3.7
3.8
General Fund
Special Revenue Funds
Debt Service Funds
Capital Project Funds
Internal Service Funds
Carlsbad Municipal Water District Funds
Any new funds created by the City Council, unless specifically exempted.
Enterprise' Funds
4.0 Objectives. The City Treasurer shall strive to maintain the level of investment of all
idle funds as close to 100% as possible. 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 seek- to ensure
preservation of capital in the overall portfolio.
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 & vestment. tnvestment return becomes 0 a consideration only after the
basic requirements of safety and liquidity have been met. The City shall ittempt to
obtain the highest available return provided that the requirements of safety and
liquidity are first met.
5.0 Prudence. The standard of prudence to be used shall be the "prudent investor"
standaad and shall be applied in the context of managing the overall portfolio.
Investments shall be made with judgement and care--under circumstances then prevailing--
which persons of prudence, discretion, and intelligence exercise in the management of their
own affairs, not for speculation, but for investment, considering the probable safety of their
capital as well as the probable income to be derived.
6.0 Duties and Responsibilities. The management of idle cash and the investment of
City funds are the responsibility of the City Treasurer as directed by the City Council. In the endeavor to have all idle cash invested all the time, the City Finance Director will assist
the City Treasurer in the gathering of information to create cash flow estimates. The City
Treasurer may designate a Deputy City Treasurer, who in the absence of the City Treasurer,
will assume the City Treasurer's duties and responsibilities.
No person may engage in an investment transaction covered by the terms of this policy
unless directed by the City Treasurer. The City Treasurer shall be responsible for all
transactions undertaken under the terms of this policy.
7.0 Ethics and conflicts of interest. AU participants in the City's investment process shall
seek to act responsibly as custodians of the public trust. The City Treasurer, or when
appropriate the Deputy City Treasurer, shall avoid any transaction that might impair public
confidence in the City's ability to govern effectively.
8.0 Authorized invesments. 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.
8.1 Obligations of the U.S. Government, its agencies and instrumentalities.
8.2 Bankers Acceptances that are eligible for purchase by the Federal Reserve
System. Purchases .may not exceed 270 days maturity or 25% of the
portfolio,
8.3 Time Certificates of Deposit. Deposits should not exceed one year maturity.
Deposits will be collateralized as specified in paragraph 12.0 of this
investment Policy.
8.4 Negotiable Certificates .of Deposit issued by nationally or state-chartered
bank. Purchases may not exceed 30% of the portfolio.
8.5 Prime Commercial Paper of the highest numerical rating of Moody's
Investment Services, Inc. or Standard & Poors Corporation. Purchases may
not exceed 180 days maturity or 15% of the portfolio.
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agreements will only be with banks and primary dealers who have long-term
debt rated in one of the top 2 categories of Moody's Investment Services, Inc.
or Standard and Poors Corporation. Investments will be collateralized as
specified in paragraph 12.0 of this Investment Policy and may not exceed
10% of the portfolio.
8.7 Money market funds whose portfolio consists of one or more of the foregoing
legal investments.
8.8 Medium-term Corporate Notes issued by corporations operating within the
United States and rated in the top two rating categories by two of the three
largest rating services. Purchases may not exceed 30% of the portfolio.
8.9 No Load Mutual Funds investing in the securities and obligations of the
foregoing legal investments. Purchases may not exceed 15% of the portfolio.
8.10 Local Agency Investment Fund (LAIF) of the State of California. Investments
will be made in accordance with the laws and regulations governing those
Funds.
8.11 County Investment Pool of the County of San Diego. Investments will be
made in accordance with the laws and regulations governing the Pool.
9.0 Diversification. The portfolio will be diversified to avoid incurring unreasonable and
avoidable risks regarding specific. security types or individual financid institutions. In addition to the limitations on specific security types 'indicated in paragraph 8.0 of this
Investment Policy, no more than 10% of the City's portfolio will be placed with any single
financial institution.
10.0 selection of hcial institutions and brokers. Investments shall be purchased only
through well established, financially sound institutions. The City Treasurer shall maintain
a list of financial institutions and brokers approved for investment. All financial
institutions and brokers who desire to become qualified bidders for investment transactions
will be given a copy of the City's Investment Policy, and in turn must supply the City
Treasurer with the following:
10.1 Current audited financial statements.
10.2 Depository contracts, as appropriate.
10.3 A copy of the latest FDIC call report or the latest FHLBB report, as
approprlate.
are state or federally chartered.
securities exchange.
10.4 Proof that commercial banks, savings banks, or savings and loan associations
10.5 Proof that brokerage firms are members in good standing of a national
Commercial banks, savings banks, and savings and loan associations must maintain a
minimum net worth to asset ratio of 3% (total regulatory net worth divided by total
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assets), and must 1.e had a positive net earnings for t d e last reporting period.
When two or more investment opportunities offer essentially the same maturity, liquidity,
yield, and qualky, priority will be given first to the financial institutions based in the City of Carkbad, and second to other financial institutions in the State of California.
11.0. Purchase and Papat. A competitive bid process, when practical, will' be used to
place all investment purchases. Purchases on margin will not be made. Payment for
securities will be done on a Delivery Versus Payment (DVP) basis via the City's custodian.
12.0 Collateralization. Investments in time certificates of deposit shall be fully insured
up to $100,000 by the Federal Deposit Insurance Corporation or the Federal Savings &
Loan Insurance Corporation, as appropriate. tnvestments in time certificates of deposit in
excess of $100,000 shall be properly collateralized. Section 53652 of the California
Government Code requires that the depository pledge securities with a market value of at
least 10% in excess of the City's deposit as collateral in government securities, and 50%
in excess of the deposit as collateral in mortgage pools, Section 53649 of the California Government Code specifies that the City Treasurer is responsible for entering into deposit
contracts with each depository.
Investments in repurchase agreements must also be collateralized. In order to anticipate
market changes and provide a level of security for all funds, the collateralization level wiU
be 102% of market value of principal and accrued interest.
13.0 Maximum maturities. To the extent possible, the City Treasurer will attempt to
match investments with anticipated cash requirements. Unless matched to a specific cash
flow, the City Treasurer will maintain the following policy on investment maturities.
13.1 At least 50% of the portfolio will be invested in instruments maturing within
one year from the current date. An additional 25% of the portfolio may have
maturities extending to 3 years from the current date, and the remaining
25% may have maturities extending to 5 years from the current. Investments
having a maturity greater than 5 years will not be made except as prgvided
in paragraph 13.3 of this Investment Policy.
13.2 The average portfolio investment maturity shall be 3 years or less.
A dollar-weighted average will be used in computing the average maturity
of the portfolio.
13.3 Before an investment is made in securities that mature more than 5 years
from the current date, the City Treasurer and the Financial Management
Director will review the City's long term cash needs. Both must concur before
such an investment is made. Investments beyond 5 years will not be greater
than 10% of the portfolio, and will be counted in the percentage of the
portfolio that may mature beyond 3 years. No investments will be made
that mature beyond 10 years from the current date.
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0 0 To further provide for liquidity, investments will be made only in readily marketable
securities actively traded in the secondary market.
14.0 Performance standard. The investment portfolio shall be designed to attain a
market-average rate of return throughout budgetary and economic cycles, taking into
account the City's risk constraints, the cash flow characteristics of the portfolio, and state and local laws, ordinances or resolutions that restrict investments. Given these requirements, the basis used by the City Treasurer to determine whether market yields are
being achieved shall be the rate of retum of the Local Agency Investment Fund (LAIF) as
it existed 3 months prior. A dollar-weighted average will be used in calculating the rate
of return of the Civs portfolio.
15.0 Active and passive trading. Active and passive trading of securities is authorized.
Active trading is the buying and selling of securities in the market in an effort to take
advantage of short term profits and advantageous arbitrage situations. Passive trading is
the purchase of securities and their retention until they mature. Active trading can result
in occasional loss of principal and should be engaged in only when there appears to be a
clear advantage at the outset. e.
16.0 Safekeeping and custody. All security transactions, including collateral for
repurchase agreements, entered into by the City shall be conducted on a delivery-vs.-
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 statement from the custodian. All
securities will be held in the nominee name of the custodian.
Collateral for time deposits in savings and loans will be held by the Federal Home Loan
Bank or an approved Agent of Depository. 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.
17.0 Reporting. California Government Code 53646 requires that a monthly investment
report be made to the City Council. The following elements will be included in the monthly report,
17.1 Type of investment
17.2 Institution
17.3 Date of maturity
$7.4 Amount of deposit or cost of the security
17.5 Current market value of securities with a maturity in excess .of 12 months
17.6. Yield to maturity
17.7 Weighted average yield of the portfolio
17.8 Weighted average days to maturity of the portfolio from the current date
17.9 Percent of portfolio maturing within one year
17.10 Percent of portfolio maturing between one and 3 years
17.11 Percent of portfolio maturing between 3 years and 5 years
17.12 Percent that each type of investment represents in the portfolio
An annual report 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
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? 0 the fund; a review o trends regarding the size of the fund, portfolio yields, and cash
income; and a statement regarding antkipaated fund activity i6 the next fiscal year.
18.0 Short-term borrowing. The City is permitted by law to borrow money to meet
~u~~nt ~hort-term cash flow needs, These needs may arise either because projected cash
di~b~~~~~nts exceed projected cashxeceipts, or because. the City's cash accounts may be
temporarily overdrawn due to the efforts to invest 100% of idle funds at all times. To
provide for these contingencies the City Treasurer is authorized to take the following
actions:
18.1 Short-term loan. When there is a shortfall between projected cash revenues
and projected cash disbursements, the City Treasurer will 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 will maintain a line of credit with the City's
bank in an amount to cover sums temporarily overdraw because of efforts to invest
all idle funds at all times.
19.0 Exceptions. Occasionally, exceptions to some of the requirements specified in this
Investment Policy may occur because of events subsequent to the purchase of investment
fnstruments, e+, the rating of a corporate note held in the portfolio is downgraded below
an "AA" rating, or total assets in the portfolio decline causing the percentaage invested in
corporate notes to rise above 30%, or an unforeseen expenditure causes investments
maturing within one year to fall below 50% of the portfolio.
State law is silent as to how exceptions should be corrected. Exceptions may be temporary
or more lasting; they may be self-correcting or require specific action. If specific action is
required, the City Treasurer should determine the course of action that would correct
,exceptions to move the portfolio into compliance with State and City requirements.
Decisions to correct exceptions should not expose the assets of the portfolio to undue risk,
and should not impair the meeting of financial obligations as they fall due. Any
subsequent investments should not extend existing exceptions. Exceptions, and the
decisions to correct the exceptions, will be reviewed with the Investment Review
Committee referred to in paragraph 21.0 below.
20.0 fntenaat control. This policy and the strategy for and conduct of the investment of
City funds will be reviewed by an Investment Review Committee as set forth below and by
the City's auditors in the conduct of their annual audit of the City.
21.0 Review. 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 Deputy City Treasurer, and the Financial Management
Director. Additionally, an outside financial advisor may be included as an advisor without
a vote. The Committee will be convened periodically as necessary or desirable but no less
frequently than once each quarter. .
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a a 22.0 Investment poE& adoption. Section 53646(a) of theCalifornia Government Code
requires the City Treasurer or Chief Fiscal Officer to render annually to the legislative body
of the local agency a statement of investment policy. The Cityls investment policy shall be
adopted by resolution of the City Council. The policy shall be reviewed as required but at
Ieast on an annual basis by the Investment Review Committee. Any modifications must be
approved by the City Council.
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