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HomeMy WebLinkAbout1994-12-20; City Council; 12966; REPORT ON CITY INVESTMENTS#TY OF CARLSBAD - AWDA BILL 97 a& r/ AB # /a 9 6 6 TITLE; MTG. DEPT. HD:b CITY MGR.* DEPT Treasurer CITY ATT~ Tiimr REPORT ON CITY INVESTMENTS I I I 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. z!! 0 4 E 8 z 2 0 F 0 a i z - 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 I I investment strategy, Carlsbad’s Investment Policy, and investment in the San Diego 5 County investment pool, 0 1 e 0 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. 1 d 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: - 3.1 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. 1 4 J 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. 2 0 0 8.6 Repurchase Agreements with a maximurn maturity of one week. Repurchase 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 3 s- 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. 4 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 5 7 ? 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. . 6 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. File: H:\LIBRARY\FINANCDATAUNVESTI 7 4