HomeMy WebLinkAbout1995-02-07; City Council; 13016; ANNUAL REVIEW OF CITY INVESTMENT POLICY0 C# A
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CITY MGR.*& DEPT. TRS
ANNUAL REVIEW OF CITY INVESTMENT POLICY MTG. 02/07/95
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IECOMMENDED ACTION:
Adapt Rek6lution NCJ~~’~’ appraving the City’s investment policy.
ITEM EXPLANATION:
The effective management of the City’s investment portfolio plays an important role in
maintaining Carlsbad’s fiscal health. The portfolio is made up of funds received from
many sources having a variety of restrictions, designations, or special uses. Among other
responsibilities, it is the City Treasurerls job to ensure that these funds will be available
when needed, and to manage this resource in a prudent way to provide a reasonable rate
of return on investment.
The Treasurer is guided in this process by the City’s investment policy. This policy sets
out the City’s plan for investment of funds based on acceptable levels of security, liquidity,
and yield.
Under section 53646 of the California Government Code the City Treasurer must present
an investment policy to the City Council on an annual basis for their review. This annual
policy, or to improve the plan to take advantage of market changes.
The Treasurer has assembled an investment review committee made up of the Assistant
City Manager, Financial Management Director, City Attorney, and himself to review the
status of investments and potential changes to the policy prior to recommending these
changes to the City Council. This committee meets on a quarterly basis.
This year the Treasurer is recommending several changes to the investment policy to
allow the Ciy to continue to earn a reasonable return on invested funds without
significantly increasing investment risk. The investment review committee concurs with
these recommendations. The summary of the major revisions are outlined below:
review also gives the Treasurer an opportunity to recommend revisions to the investment
a. The investment policy was expanded to include investments held separately.
Previous to this proposed modification, the investment policy only covered pooled
investments. Investments held separately are funds from bond proceeds. The
major source of funds for pooled investments are tax revenues, user fees, and
development impact fees.
b. Explicit statements are included for ongoing investments practices, as follows:
1, The portfolio will not be leveraged.
2. Maturities will be laddered.
3. Material exceptions will be noted in the monthly report.
4. A buy and hold strategy for pooled investments will generally be followed.
5. Rising interest rates with a buy and hold strategy will result in unrealized
losses.
6. With at least 50% of the portfolio maturing within one year, the rate of return
of the portfolio will more closely approximate short-turn market rates.
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Page Two of Agenda Bill No. 13: 0 / 6
c. Eliminate the option to invest in single "A medium-term corporate notes. Investments
in medium-term corporate notes will be restricted to the top two rating categories, i.e., "A" and "AA", This modification will result in more conservative investing with on\y a
minimum loss of interest. At current market rates the spread between "AA" and "A" notes
is only 6 basis points.
d. Eliminate the option to invest in mutual funds, except in the case of sweep account funds
for overnight investments. Mutual fund investments do not have a maturity date nor a
fixed maturity value. Investments in mutual funds place principle at an additional risk.
FISCAL IMPACT:
This policy plays an important part in safeguarding the City's investment portfolio. Eliminating
the option to invest in single "A medium-term corporate notes could result in a reduction of
annual interest income ranging from zero to $24,000.
EXHIBITS:
1. Resolution No. 9 5-33 adopting a revised city investment policy.
2. Revised City Investment Policy.
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RESOLUTION NO. 95-33'
A RESOLUTION OF THE CITY COUNCIL OF
THE CITY OF CARLSBAD, CALIFORNIA,
REVISING THE CITY'S INVESTMENT POLICY
WHEREAS, the City adapted an investment policy on January
2, 1985 as required by Section 53646 of the Government Code; and
WHEREAS, the City Council may from time to time revise this
policy as may be necessary to provide proper guidance to City staff and
the City Treasurer; and
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WHEREAS, the City Treasurer has reviewed the existing.
investment policy and has recommended modifications which improve the
City's ability to manage inactive funds; and
NOW, THEREFORE, BE IT RESOLVED by the City Council of
the City of Carlsbad, California, as follows:
1. The attached investment policy (Exhibit A) is hereby
adopted and shall become effective immediately.
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2. That the Council finds that the investment policy
(Exhibit A) is in conformance with Sections 53601 and 53635 of the
Government Code.
PASSED, APPROVED AND ADOPTED at a regular meeting of
the City Council on the 14th day of FEBRUARY , 1995, by the following
vote, to wit:
AYES: Council Members Lewis, Nygaard, Kulchin, Finnila, Hall
NOES: None
ABSENT: None
ATTEST:
ALETHA L. RAUTENKRANZ, City Clerk
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3.1 .I
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.8
4.17 . ,.,
General Fund
Special Revenue Funds
Debt Service Funds
Capital Project Funds
Enterprise Funds
Internal Service Funds
Any new funds created by the City Council, unless specifically
exempted.
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4.0 Objectives. 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.
4.3 Return on investment. Investment return becomes a consideration only after
the basic requirements of safety and liquidity have been met. The City shall attempt
to obtain the highest available return provided that the requirements of safety and
liquidity are first met.
The City Treasurer shall 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 produce optimum revenues, consistent with state statutes and local
ordinances.
5.0 Prudence. 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.
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 inactive 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 inactive 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. All 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.
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8.0 Authorized investments.
......................... .._. ..__ . . ._....._.,.(..,. ___/_/,,~. . .._..,(, ..... (...,.(. ... (. Y:f:;:::::::: . ::::.~~:~-...........:.~ ~~~~~X~~~~Y~~~~~~~ The City Treasurer may invest City funds in the following
instruments as soecified in the California Government Code, Section 53601. and as i.... ..... . .. . ... . .. , ,... ,. , ..,..... ,.......... . ,.......,.....,.. . _...,._.... . ....,._...,._.,..._. ............................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ../, .. further limited in this policy. N~x~~~~~~~~~~l~~~~~~~~~~~~~~!~~~~~~~~~~~~~i~
:,.j::::::jll::::I::IS~.:~~:~::::::::~:.::::::::::::, ,_ ,,:,:,:,:,:,:,:,;
. ................................ ............. .__.__._. . ........... ......-,....- ....,.....,. ..................................................................... ..... (., . ... (.....(. .............. ... ..................... ................................. .........
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... (.(.,.(. . . .................i..,.i.l_i_l_i_.ii_.ii..,.,...,.,...,.,.,.,.,.,.,.. .....................................
~~~~~~~~~~~~~ . .. . ............................... ...._. ...... ..i. I. n.. . ..... . ..... ....................... i... ..... ...._. ...... ....... . ..... . ..... L......... .._.. ............. i.. ...... ...... ......... ...... , , ., ..,.,.. ., , , . . _. . . _. __. .__ .__ .__ .__. ._. ._. _. . ___ .__. ._. ._. ._. ._. ._.
8.1.1 Obligations of the U.S. Government, its agencies and
instrumentalities.
8.1.2 Bankers Acceptances that are eligible for purchase by the Federal
Reserve System. Purchases may not exceed 270 days maturity or
25% of the portfolio.
8.1.3 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.
8.1.4 Negotiable Certificates of Deposit issued by nationally or state-
chartered bank. Purchases may not exceed 30% of the portfolio.
8.1.5 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.
8.1.6 Repurchase Agreements with a maximum 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.
8.1.7 Money market funds whose portfolio consists of one or more of the
foregoing legal investments.
8.1.8 Medium-term Corporate Notes issued by corporations operating
within the United States and rated in the top +kma W$ rating
categories by two of the three largest rating services. Purchases
may not exceed 30% of the portfolio.
. . . . . . . . . . . . . . . . . . . .
8.1.9 -
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8.1.10 Local Agency Investment Fund (LAIF) of the State of California.
Investments will be made in accordance with the laws and
regulations governing those Funds.
8.1.11 County Investment Pool of the County of San Diego. Investments
will be made in accordance ...... with the laws and regulations governing ......................... ~ .......................... ..............: ~ ............................................................................ the pool. ~a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,: ..'..,. 1 ................................................................. ..: ........................................................... ..I. ,. ................................................................................................................................................................................................................................................................ .........................................................................................................................................
9.0 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 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 financial 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
10.4 Proof that commercial banks, savings banks, or savings and loan
10.5 Proof that brokerage firms are members in good standing of a national
appropriate.
associations are state or federally chartered.
securities exchange.
Commercial banks, savings banks, and savings and loan associations must maintain a
assets), and must have had a positive net earnings for the last reporting period.
When two or more investment opportunities offer essentially the same maturity, liquidity,
yield, and quality, priority will be given first to the financial institutions based in the City
of Carlsbad, and second to other financial institutions in the State of California.
minimum net worth to asset ratio of 3% (total regulatory net worth divided by total
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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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To further provide for liquidity, investments will be made only in readily marketable
securities actively traded in the secondary market.
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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
17.2
17.3
17.4
17.5
17.7
17.8
17.9
17.10
17.1 1
17.12
17.6
Type of investment
Institution
Date of maturity
Amount of deposit or cost of the security
Current market value of securities - c? 12 mmths
Weighted average yield of the portfolio
Weighted average days to maturity of the portfolio from the current date
Percent of portfolio maturing within one year
Percent of portfolio maturing between one and 3 years
Percent of portfolio maturing between 3 years and 5 years
Percent that each type of investment represents in the portfolio
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Yield to maturity
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 the fund; a review of trends regarding the size of the fund, portfolio yields, and cash
income; and a statement regarding anticipated fund activity in the next fiscal year.
18,O 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:
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.
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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 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 instruments, e.g., the rating of a corporate note held in the
portfolio is downgraded below an "A" rating, or total assets in the portfolio decline
causing the percentage 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 .O below.
20.0 Internal 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.
22.0 Investment policy adoption. Section 53646(a) of the California 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 City's investment policy
shall be adopted. by resolution of the City Council. The policy shall be reviewed as
required but at least on an annual basis by the Investment Review Committee. Any
modifications must be approved by the City Council.
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