HomeMy WebLinkAbout2009-04-21; City Council; 19775; Revision of city investment policyCITY OF CARLSBAD - AGENDA BILL
AB# 19,775
MTG. 4/21/09
DEPT. TRS
REVISION OF
CITY INVESTMENT POLICY
DEPT. HEAD f/M/
CITY ATTY. '' J^
CITY MGR. <j£^
RECOMMENDED ACTION:
Adopt Resolution No. 2009-076 approving 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, the City Treasurer
must ensure that these funds will be available when needed, and to manage this resource in a prudent
way to provide an acceptable rate of return on investment.
The Treasurer is guided in this process by the City's investment policy, which, among other things,
establishes (1) investment strategy and objectives, (2) investment authority and responsibility, (3)
acceptable levels of risk, (4) risk management and disclosure, (5) reporting requirements, and (6)
levels of investment reviews.
Section 53646(a) of the California Government Code recommends that the City Treasurer annually
present an investment policy to the City Council for its review and approval. The Treasurer may
propose changes to the policy more frequently, if desired. These reviews give the Treasurer an
opportunity to recommend revisions to the investment policy, or to improve the plan to take
advantage of market changes.
The Treasurer has assembled an investment review committee made up of the City Manager, Deputy
City Treasurer, the Administrative Services Director, and City Attorney or designee from each such
department, two Carlsbad citizens, and himself to review the status of investments and potential
changes to the policy prior to recommending these changes to the City Council.
The Investment Review Committee has completed the annual review of the investment policy.
The City's investments are performing as desired and as designed by the City's investment policy.
The City Treasurer recommends a number of changes at this time. Many of these changes are due
to recent modifications of the California codes. Some changes are substantive, some procedural.
Other changes recommended reflect the City's conservative investment philosophy by making this
policy more restrictive than the California code. The recommended changes are listed below.
FOR CITY CLERKS USE ONLY.
COUNCIL ACTION: APPROVED
DENIED
CONTINUED
WITHDRAWN
AMENDED
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CONTINUED TO DATE UNKNOWN
RETURNED TO STAFF
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DEPARTMENT CONTACT: Nancy Sullivan (760)602-2473 nsull@ci.carlsbad.ca.us
PAGE 2 OF AB REVISION OF CITY INVESTMENT POLICY
Recommended Changes:
6.0 Prudence. The following sentence establishing the Standard of Care, "Investments shall be
made with judgment 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." is replaced, by statute, with the following Standard of Care
"The 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."
The next paragraph adds the following language to the existing sentence. It is the policy of
this Council that investment officers acting in accordance with written procedures ...
8.0 The word "Time" in Time Certificates of Deposit is removed.
8.1.1 The sentence "Obligations of the US Government, its agencies, and instrumentalities." is
revised to read "Obligations of the US Government, its agencies, instrumentalities and
sponsored enterprise obligations."
8.1.2 Is revised as follows, "Bankers Acceptances drawn on and accepted by a commercial
bank." Replaced the words "eligible for purchase by the Federal Reserve System."
8.1.3 Certificates of Deposit. The word "Time" in Time Certificates of Deposit is removed and
the bolded sections added. "Certificates of Deposit shall not exceed five years to maturity.
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. Furthermore, the combined investments in Certificates
of Deposit and Prime Commercial Paper, if a private sector entity is used, shall not
exceed, in total, more than thirty percent (30%) of the portfolio.
The original $100,000 limit in 8.1.3 is replaced by "the amount allowed" to reflect changes
by the FDIC; the 30% limit for Certificates of Deposit and Prime Commercial Paper.
8.1.3.1 Prior to January 1, 2012, the City may use a private sector entity that assists in the
placement of Certificates of Deposit, provide that the certificates in total, do not exceed
the thirty percent (30%) limits imposed under 8.1.3 above.
Section 8.1.3.1 is added to allow an investment strategy within the policy to enhance FDIC
insurance limits to investments in Certificates of Deposit.
8.1.5 Prime Commercial Paper. If the issuer has other existing debt, it must have a "AA" or
higher credit rating from both Moody's Investment Services, Inc. and Standard & Poor's.
Prime Commercial Paper may neither exceed 270 days maturity nor ten percent 10% of the
portfolio, nor may it represent more than five percent 5% of the outstanding paper of an
issuing corporation."
"Either" is changed to "both" and "or" is changed to "and." 25% is changed to 10% to
reflect the City's conservative fiscal policy.
8.1.6 The section "Repurchase Agreements will only be with primary dealers of the Federal
Reserve Bank of New York, and who have long term debt rated in the "AAA" or "AA"
categories of Moody's Investment Services, Inc. or Standard and Poors Corporation." is
deleted. .
This language is not required by CA Code, and would prevent the City from using overnight
Repurchase Agreements with our current bank, Wells Fargo. These Repurchase Agreements
are collateralized as required by this policy and CA State law. Additionally, spelling of the
percentages is made.
8.3 Housing Loans. In the second paragraph, the word "would" is changed to "will." "As assets
of the City, individual loans will be reported by the City Treasurer and any changes will be
explained."
9.0 Collateralization. Perfection, Security and Contracts. The second sentence is changed to
read, "To give greater security the City's investments, when an investment is collateralized
and not perfected under existing law, an attempt to perfect the collateralization should be
made.
10.1.2 Is changed to read "No investment will be made in any security that could result in zero
interest accrual if held to maturity."
13.1 Pooled Investments. "Generally" is added to the first sentence which now reads "A policy of
laddered maturities will generally be followed for pooled investments.
13.1.3 In this section dealing with investments which exceed five (5) years, the Administrative
Services Director is replaced with the Finance Director.
Also added is "A resolution authorizing such investment must first be approved by the
City Council".
14.2 The following criteria for a broker/dealer is added: A designation as a primary
government dealer by the Federal Reserve Bank.
In the last paragraph, the minimum net worth to asset ratio is changed from 3% to "as
provided by law." The sentence now reads: 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 a positive net earnings
for the last reporting period.
16.0 Safekeeping and Custody. The following sentence is revised as follows: All securities will
be held in the nominee 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. The following sentence is deleted: Collateral for time deposits in
savings and loans will be held by the Federal Home Loan Bank or an approved Agent of
Depository.
18.1 Pooled Investments. Two of the listed elements to be included in the monthly report were
revised. 1) Date of maturity is removed from "Itemized listing of portfolio investments by
type, yield to maturity, and issuer. 2) Excluding due date is added to "Investment transactions
for the reporting period excluding due dates." ^
The dates were removed to reduce the possibility of cyber fraud.
18.3 California Debt and Investment Advisory Commission. The submission of the policy is
changed from twice a year to once a year to comply with the state statue. The revision is as
follows: "A copy of this investment policy will be sent to the California Debt and Investment
Advisory Commission within sixty (60) days following the end of the second quarter of each
calendar year." Prior law required the investment report. Current law requires the investment
policy.
19.1 Short-Term Loan. The word "will" is changed to "may." The section now reads: "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." This allows the
treasurer the ability to secure other, less costly methods to provide for a shortfall.
20.0 Exceptions. The second paragraph is revised to comply with the state statue. "Section
53061 of the California Government Code specifies a percentage limitation for a particular
category of investment. That percentage is applicable only at the date of purchase. The
Treasurer shall also review exceptions of corporate notes downgraded below "AA" rating,
as well as the percentage limitation of any investment which exceeds the maximum allowed
under this policy for possible corrective action."
22.0 Review. An Investment Review committee is hereby established ... This committee will be
composed of the City Treasurer (acting as the Chair), the City Attorney, the City Manager,
the Finance Director, and the Deputy City Treasurer, or delegate from each such
department."
Changes include substituting the City Manager for the Assistant City Manager, Finance Director
for Administrative Services Director and authorization of each department to designate a
representative.
Glossary. "Time" is removed from Certificates of Deposit.
FISCAL IMPACT:
The recommended changes have no effect on the yield of the investment portfolio.
EXHIBITS:
1. Resolution No. 2009-076 adopting the City investment policy.
2. Revised City Investment Policy.
3. Revised City Investment Policy with additions and deletions noted.
EXHIBIT 1
RESOLUTION NO. 2009-076
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RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF CARLSBAD, CALIFORNIA,
APPROVING THE CITY'S INVESTMENT POLICY DATED APRIL 21, 2009
WHEREAS, the City adopted an investment policy on January 2, 1985 as
required by Section 53646 of the California Government Code; and
WHEREAS, Section 53646(a) of the California Government Code
suggests that the City Treasurer to render annually to the City Council a statement of
investment policy; 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
WHEREAS, The City Treasurer has reviewed the existing investment
policy and has recommended modifications this year; and
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City
of Carlsbad, California, as follows:
1. The attached investment policy, dated April 21, 2009, (Exhibit 2) is hereby adopted
and supersedes the policy dated February 13, 2007.
2. That the Council finds that the investment policy dated April 21, 2009, (Exhibit 2)
continues to be in conformance with Sections 53601 and 53635 of the California
Government Code.
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council
of the City of Carlsbad on the 21?t day of APr11 ,
2009, by the following vote to wit:
AYES: Council Members Lewis, Kulcbin,/HJ9]a/ Packard $nd BJ&ckburn.
NOES: None.
ABSENT: None.
ATTEST:
LORRAINE M. WOOD, City Clerk >*
EXHIBIT 2
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
H. V. (Mac) McSherry, City Treasurer
Submitted April 21, 2009
TABLE OF CONTENTS
1. Introduction 1
2. Policy 1
3. Scope 1
4. Objectives 2
5. Duties & Responsibilities 2
6. Prudence 2
7. Ethics and Conflicts of Interest 3
8. Authorized Investments 3
9. Collateralization 5
10. Unauthorized Investment / Investment Activity 5
11. Investment Strategy 5
12. Diversification 6
13. Maximum Maturities 6
14. Selection of Financial Institutions and Brokers 7
15. Purchase, Sale, Payment and Delivery 8
16. Safekeeping and Custody 8
17. Performance Standard for Pooled Investments 8
18. Reporting 8
19. Short Term Borrowing 9
20. Exceptions 10
21. Internal Control 10
22. Review 10
23. Investment Policy Adoption 10
Glossary 11
CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Submitted to City Council April 21, 2009
1.0 Introduction. 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.
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, liquid and medium term investments. These
investments shall yield an acceptable return while conforming to all California statutes
and the City's Investment Policy.
3.0 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.
3.1 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 Parking Authority of the City of
Carlsbad, the City of Carlsbad Public Improvement Corporation, the Carlsbad
Redevelopment Agency, and the Carlsbad Municipal Water District. The City's
Comprehensive Annual 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
• Redevelopment Funds
• Trust Funds
• Miscellaneous Special Funds
• Any new funds created by the City Council, unless specifically exempted
3.2 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.
4.0 Objectives. Section 53600.5 of the California Government Code 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.
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
Treasurer shall attempt to realize a yield on investments consistent with California
statutes and the City's Investment Policy.
The City Treasurer should strive to maintain the level of investment of all contingency
reserves and inactive funds as close to one hundred percent 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 Duties and Responsibilities. By the annual adoption of this policy, the
management of inactive cash and the investment of funds identified in paragraph 3.1 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 paragraph 14 of this
policy.
The City Treasurer may designate in writing a 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 City Finance Director
will assist the City Treasurer in the gathering of information to create cash flow
estimates.
6.0 Prudence. Section 53600.3 of the California Government Code identifies as
trustees 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 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.
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. Officers and employees
involved in the investment process shall refrain from personal business activity that
could conflict with proper 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.
8.0 Authorized 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.
8.1.1 Obligations of the US Government, its agencies, instrumentalities
and sponsored enterprise obligations.
8.1.2 Bankers Acceptances drawn on and accepted by a
commercial bank. Bankers' Acceptances may neither exceed 180 days
maturity nor twenty five percent (25%) of the portfolio. Furthermore, no more
than thirty percent (30%) of the portfolio may be invested in any one
commercial bank.
8.1.3 Certificates of Deposit shall not exceed five years to maturity.
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.
Furthermore, the combined investments in Certificates of Deposit and Prime
Commercial Paper, if a private sector entity is used, shall not exceed, in total,
more than thirty percent (30%) of the portfolio.
8.1.3.1 Prior to January 1, 2012, the City may use a private sector entity
that assists in the placement of Certificates of Deposit. These Certificates
of Deposit shall not exceed the limits imposed under 8.1.3 above.
8.1.4 Negotiable Certificates of Deposit issued by a nationally or state-
chartered bank may neither exceed five (5) years to maturity nor exceed
thirty percent (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. Further, eligible
paper is limited to issuing General Corporations that are organized and
operating within the United States and having total assets in excess of $500
million. If the issuer has other existing debt, it must have a "AA" or higher
credit rating from both Moody's Investment Services, Inc. and Standard &
Poor's. Prime Commercial Paper may neither exceed 270 days maturity nor
ten percent, 10% of the portfolio, nor may it represent more than five percent,
5% of the outstanding paper of an issuing corporation.
8.1.6 Repurchase Agreements with a maximum maturity of one year.
Repurchase Agreements may not exceed five percent 5% of the portfolio.
The market value of securities that underlay a Repurchase Agreement shall
be valued at one hundred two percent 102% or greater of the funds borrowed
against those securities.
8.1.7 Corporate Notes with a maximum remaining maturity of five (5) years
or less, issued by corporations organized and operating within the
United States and may not exceed thirty percent 30% of the
investment portfolio. The Corporate Notes must be rated in the
"AAA" or "AA" categories by Moody's Investment Services, Inc. and
Standard & Poor's.
8.1.8 Money market funds whose portfolio consists of one or more of the
foregoing lawful investments.
8.1.9 Sweep accounts for the investment of overnight funds when the funds
are swept into investments allowed by this policy.
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.
8.2 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 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
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management requirements of this Investment Policy. The City Council will
manage these loans directly.
As assets of the City, individual loans will be reported by the City Treasurer and
any changes will be explained. Collections and conformance with the
requirements of each individual housing loan will be reported as an addendum to
the City Treasurer's Investment Report each quarter.
8.4 New Securities. New types of securities authorized by California law, but
which are not currently allowed by this investment policy, must first be approved by
the City Council.
9.0 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 the City's investments, when an investment is collateralized and
not perfected under existing law, an attempt to perfect the collateralization should be
made.
Section 53652 of the California Government Code requires that the depository secure
active or inactive deposits with eligible securities having a fair market value of at least
ten percent 10% in excess of the total amount of all deposits, and fifty percent 50% in
excess of the deposit when secured with mortgage pools. Section 53649 of the
California Government Code specifies that the City Treasurer is responsible for entering
into deposit contracts with each depository.
10.0 Unauthorized investments/investment activities. Section 53601.6 of the
California Government Code disallows the following investments acquired after January
1, 1996: inverse floaters, range notes, or interest-only strips that are derived from a pool
of mortgages.
10.1 In addition, and more generally, investments are further restricted as follows:
10.1.2 No investment will be made in any security that could result in zero
interest accrual if held to maturity.
10.1.3 No investment will be made that could cause the portfolio to be
leveraged.
10.1.4 Purchases of investments on margin will not be made.
11.0 Investment strategy.
11.1 Pooled Investments. A buy and hold strategy will generally be followed;
that is, investments once made will usually 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.
11.2 Investments held separately. Investments held separately for bond
proceeds will follow the trust indenture for each issue.
12.0 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, and with the exception of U.S. Treasury/Federal agency securities
and authorized pools, no more than five percent 5% of the City's portfolio will be placed
with any single issuer.
13.0 Maximum maturities and maximum modified duration.
13.1 Pooled Investments. 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.
13.1.1 Investments maturing within one year must be no less than two-thirds
(2/3) of the approved operating budget of the current year. This
requirement should be met within 3 months following adoption of the
current operating budget. Remaining investments of the portfolio will not
have a maturity greater than five (5) years from the date of investment
except as provided in paragraph 13.1.3 of this Investment Policy.
13.1.2 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.
13.1.3 An investment which exceeds five (5) years in length may be made
upon the following conditions. Before an investment, which is allowed
by California statute, is made in securities that mature more than 5
years from the date of purchase, the City Treasurer and the Finance
Director 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 5 years will not be greater than ten percent 10%
of the portfolio, and will be counted in the percentage of the portfolio
that may mature beyond 1 year. No investments will be made that
mature beyond 10 years from the date of investment.
13.1.4 Callable investments will be recorded at their maturity dates.
13.2 Maximum modified duration. The investment restrictions identified in
paragraphs 8 and 10, and the maturity requirements identified in paragraph 13.1,
imply that the value of City investments should not change more than two and
two-tenths percent, 2.2% for every one percent, 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 two and two-tenths percent, 2.2% for every one percent, 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.
13.3 Investments Held Separately. Maturities for investments held separately
will conform to the trust indenture for each issue.
14.0 Selection of financial institutions and brokers/dealers. 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 a return
cover letter which they must sign indicating that the investment policy has been read,
understood and that their investment offers will comply with this policy. Qualified
financial institutions and broker/dealers must supply the City Treasurer with the
following:
14.1 Financial Institutions.
• Current audited financial statements
• Depository contracts, as appropriate
• A copy of the latest FDIC call report or the latest FHLBB report, as
appropriate
• Proof that commercial banks, savings banks, or savings and loan
associations are state or federally chartered
14.2 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 a positive net earnings for the last reporting period.
15.0 Purchase, Sale, Payment, and Delivery. 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 (3) 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 give considerations to 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.
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 monthly statement from the
custodian. All securities will be held in the nominee 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.
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 (2/3) 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 Reporting. Sections 53607 and 53646 of the California Government Code allows
the City Council, at its discretion, to require reports meeting the standards set forth in
these sections, as well as any additional information desired. Therefore, it is the policy
of the City that the of investments and transactions described in these sections, and as
outlined in 18.1 below be given to the City Council, City Manager, and Internal Auditor
(or the Finance Director in the absence of an Internal Auditor).
18.1 Pooled investments. The investment report will be submitted monthly by the
City Treasurer within 30 days following the end of the month covered by the report.
The monthly 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, and cash income; and a statement
regarding anticipated fund activity in the next fiscal year.
18.2 Investments held separately. A report of investments held separately,
including deferred compensation balances, 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 Section 53646 when available.
18.3 California Debt and Investment Advisory Commission. A copy of this
Investment Policy will be sent to the California Debt and Investment Advisory
Commission within sixty (60) days following the end of the second quarter of each
calendar year.
19.0 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 one hundred
percent 100% of inactive funds at all times. To provide for these contingencies the City
Treasurer is authorized to take the following actions:
19.1 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.
19.2 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.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified in
this Investment Policy may occur for pooled investments 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 "AA" rating, or total assets in the portfolio decline
causing the percentage invested in corporate notes to rise above thirty percent 30%, or
an unforeseen expenditure causes investments maturing within one year to fall below
two-thirds (2/3) of the approved operating budget of the current fiscal year.
Section 53601 of the California Government Code specifies a percentage limitation for a
particular category of investment. That percentage is applicable only at the date of
purchase. The Treasurer shall also review exceptions of corporate notes downgraded
below "AA" rating, as well as the percentage limitation of any investment which exceeds
the maximum allowed under this policy for possible corrective action. Exceptions may
be temporary or more lasting; they may be self-correcting or require specific action. If
specific action is required, the City Treasurer will determine the course of action that will
correct exceptions to move the portfolio into compliance with State and City
requirements. Decisions to correct exceptions will not expose the assets of the portfolio
to undue risk, and will not impair the meeting of financial obligations as they fall due.
Any subsequent investments will not extend existing exceptions. Exceptions, and the
decisions to correct the exceptions, will be reviewed with the Investment Review
Committee referred to in paragraph 22.0 below.
21.0 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.
22.0 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 City Attorney, the City Manager, the Finance
Director, and the Deputy City Treasurer or delegate from each such department.
Additionally, the City Treasurer may appoint other city residents as advisors to the
Committee. The Committee will convene periodically as necessary or desirable but, no
less frequently than once each quarter.
23.0 Investment policy adoption. Section 53646(a) (2) of the California Government
Code allows the City Treasurer to render to the City Council and the Investment Review
10
'7
Committee a statement of investment policy, and recommends that one be presented
each year. Therefore, the City's investment policy and any modifications thereto 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.
11
12
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 in order 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.
Certificate of Deposit: A deposit account paying interest for a fixed term, with the
understanding that funds cannot be withdrawn before maturity without giving advance
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.
12
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.
Laddered Portfolio: A bond investment portfolio with securities in each maturity range
(e.g. monthly) over a specified period of time (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 on a
daily basis.
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.
Nominee Name: 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.
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
Sweep Account: A short-term income fund into which all uninvested cash balances
from the non-interest bearing checking account are automatically transferred on a daily
basis.
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 overperforming
(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 of time in which an investment accumulates no
interest.
14
EXHIBIT 3
CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Submitted toApprovod by City Council April 21.-, 2009
1.0 Introduction. 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.
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, liquid and medium term investments. These
investments shall yield an acceptable return while conforming to all California statutes
and the City's Investment Policy.
3.0 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.
3.1 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 Parking Authority of the City of
Carlsbad, the City of Carlsbad Public Improvement Corporation, the Carlsbad
Redevelopment Agency, and the Carlsbad Municipal Water District. The City's
Comprehensive Annual 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
• Redevelopment Funds
• Trust Funds
• Miscellaneous Special Funds
• Any new funds created by the City Council, unless specifically exempted
3.2 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.
4.O Objectives. Section 53600.5 of the California Government Code 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.
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
Treasurer shall attempt to realize a yield on investments consistent with California
statutes and the City's Investment Policy.
The City Treasurer should strive to maintain the level of investment of all contingency
reserves and inactive funds as close to one hundred percent 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 Duties and Responsibilities. By the annual adoption of this policy, the
management of inactive cash and the investment of funds identified in paragraph 3.1 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 paragraph 14 of this
policy.
The City Treasurer may designate in writing a 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 City Finance Director
will assist the City Treasurer in the gathering of information to create cash flow
estimates.
6.0 Prudence. Section 53600.3 of the California Government Code identifies as
trustees 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 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.
Investments shall bo made with judgment and caro, under circumstances thon
prevailing, which persons of prudence, discretion, and intelligence oxercise in the
managoment 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.
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.
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. Officers and employees
involved in the investment process shall refrain from personal business activity that
could conflict with proper 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.
8.0 Authorized investments.
Except forTime 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.
8.1.1 Obligations of the US Government, its agencies, instrumentalities
and sponsored enterprise obligations.
8.1.2 Bankers Acceptances which are eligible for purchase by the Fodoral
Reserve System drawn on and accepted by a commercial bank. Bankers'
Acceptances may neither exceed 180 days maturity nor twenty five percent
(25%) of the portfolio. Furthermore, no more than thirty percent (30%) of the
portfolio may be invested in any one commercial bank.
8.1.3 Time Certificates of Deposit shall not exceed five years to maturity.
Investments in Time-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 Federal Savings & Loan Insurance Corporation,
as appropriate National Credit Union Administration. Furthermore, the
combined investments in Certificates of Deposit and Prime Commercial
Paper, if a private sector entity is used, shall not exceed, in total, more than
thirty percent (30%) of the portfolio.
_8.1.3.1 Prior to January 1. 2012. the City may use a private sector entity
that assists in the placement of Certificates of Deposit. These Certificates
of Deposit shall not exceed the limits imposed under 8.1.3 above.
8.1.4 Negotiable Certificates of Deposit issued by a nationally or state-
chartered bank may neither exceed five (5) years to maturity nor exceed
thirty percent (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. Further, eligible
paper is limited to issuing General Corporations that are organized and
operating within the United States and having total assets in excess of $500
million. If the issuer has other existing debt, it must have a "AA" or higher
credit rating from ettbef-both Moodv's Investment Services, Inc. of-and
Standard &a«4 PoorX Corporation. Prime Commercial Paper may neither
exceed 270 days maturity nor ten percent. 10%2§% of the portfolio, nor may
it represent more than five percent. 5% of the outstanding paper of an issuing
corporation.
8.1.6 Repurchase Agreements with a maximum maturity of one year.
Ropurchaso Agroemonts will only bo with primary doalors of the Federal
Reserve Bank of New York, and who have long-term debt rated in the "AAA"
or "AA" categories of Moody's Investment Services, Inc. or Standard and
Poors Corporation.—Repurchase Agreements may not exceed five percent
5% of the portfolio. The market value of securities that underlay a
Repurchase Agreement shall be valued at one hundred two percent 102% or
greater of the funds borrowed against those securities.
8.1.7 Corporate Notes with a maximum remaining maturity of five (5) years
or less, issued by corporations organized and operating within the
United States and may not exceed thirty percent 30% of the
investment portfolio. The Corporate Notes must be rated in the
"AAA" or "AA" categories by Moody's Investment Services, Inc. and
Standard &an4 Poor^ Corporation.
8.1.8 Money market funds whose portfolio consists of one or more of the
foregoing lawful investments.
8.1.9 Sweep accounts for the investment of overnight funds when the funds
are swept into investments allowed by this policy.
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.
8.2 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 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.
As assets of the City, individual loans will be reported by the City Treasurer and
any changes would will be explained. Collections and conformance with the
requirements of each individual housing loan will be reported as an addendum to
the City Treasurer's Investment Report each quarter.
8.4 New Securities. New types of securities authorized by California law, but
which are not currently allowed by this investment policy, must first be approved by
the City Council.
9.0 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 the City's investments, when an investment is collateralized and
not perfected under existing law, an attempt to perfect the collateralization should be
made.
Section 53652 of the California Government Code requires that the depository secure
active or inactive deposits with eligible securities having a fair market value of at least
ten percent 10% in excess of the total amount of all deposits, and fifty percent 50% in
excess of the deposit when secured with mortgage pools. Section 53649 of the
California Government Code specifies that the City Treasurer is responsible for entering
into deposit contracts with each depository.
10.0 Unauthorized investments/investment activities. Section 53601.6 of the
California Government Code disallows the following investments acquired after January
1, 1996: inverse floaters, range notes, or interest-only strips that are derived from a pool
of mortgages.
10.1 In addition, and more generally, investments are further restricted as follows:
10.1.2 No investment will be made in any security that could result in zero
interest accrual if held to maturity, that has either (1) an embedded option or
characteristic which could result in a loss of principal if the investment is hold to
maturity, or (2) an embedded option or characteristic which could seriously limit
accrual rates or which could result in zero accrual periods.
10.1.3 No investment will be made that could cause the portfolio to be
leveraged.
10.1.4 Purchases of investments on margin will not be made.
11.0 Investment strategy.
11.1 Pooled Investments. A buy and hold strategy will generally be followed;
that is, investments once made will usually 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.
11.2 Investments held separately. Investments held separately for bond
proceeds will follow the trust indenture for each issue.
12.0 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, and with the exception of U.S. Treasury/Federal agency securities
and authorized pools, no more than five percent 5% of the City's portfolio will be placed
with any single issuer.
13.0 Maximum maturities and maximum modified duration.
13.1 Pooled Investments. 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.
13.1.1 Investments maturing within one year must be no less than two-thirds
(2/3) of the approved operating budget of the current year. This
requirement should be met within 3 months following adoption of the
current operating budget. Remaining investments of the portfolio will not
have a maturity greater than five (5) years from the date of investment
except as provided in paragraph 13.1.3 of this Investment Policy.
13.1.2 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.
13.1.3 An investment which exceeds five (5) years in length may be made
upon the following conditions. Before an investment, which is allowed
by California statute, is made in securities that mature more than 5
years from the date of purchase, the City Treasurer and the
Administrative ServicesFinance Director 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 5 years will not be
greater than ten percent 10% of the portfolio, and will be counted in
the percentage of the portfolio that may mature beyond 1 year. No
investments will be made that mature beyond 10 years from the date
of investment.
13.1.4 Callable investments will be recorded at their maturity dates.
13.2 Maximum modified duration. The investment restrictions identified in
paragraphs 8 and 10, and the maturity requirements identified in paragraph 13.1,
imply that the value of City investments should not change more than two and
two-tenths percent. 2.2% for every one percent. 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 two and two-tenths percent. 2.2% for every one percent. 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.
13.3 Investments Held Separately. Maturities for investments held separately
will conform to the trust indenture for each issue.
14.0 Selection of financial institutions and brokers/dealers. 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 a return
cover letter which they must sign indicating that the investment policy has been read,
understood and that their investment offers will comply with this policy. Qualified
financial institutions and broker/dealers must supply the City Treasurer with the
following:
14.1 Financial Institutions.
• Current audited financial statements
• Depository contracts, as appropriate
• A copy of the latest FDIC call report or the latest FHLBB report, as
appropriate
• Proof that commercial banks, savings banks, or savings and loan
associations are state or federally chartered
14.2 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 of-3% as provided by law (total regulatory net worth
divided by total assets), and must have had a positive net earnings for the last reporting
period.
15.0 Purchase, Sale, Payment, and Delivery. 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 (3) 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 give considerations to 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.
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 monthly statement from the
custodian. All securities will be held in the nominee 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 timo deposits in savings
and loans will be held by tho Fodoral Homo Loan Bank or an approved Agont 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 Performance standard for pooled investments. Laddered maturities and a buy
and hold strategy for pooled investments will cause the investment portfolio to attain a
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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 (2/3) 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 Reporting. Sections 53607 and 53646 of the California Government Code allows
the City Council, at its discretion, to require reports meeting the standards set forth in
these sections, as well as any additional information desired. Therefore, it is the policy
of the City that the of investments and transactions described in these sections, and as
outlined in 18.1 below be given to the City Council, City Manager, and Internal Auditor
(or the Finance Director in the absence of an Internal Auditor).
18.1 Pooled investments. The investment report will be submitted monthly by the
City Treasurer within 30 days following the end of the month covered by the report.
The monthly report will include the following elements:
• Itemized listing of portfolio investments by type, date of maturity, 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, and cash income; and a statement
regarding anticipated fund activity in the next fiscal year.
18.2 Investments held separately. A report of investments held separately,
including deferred compensation balances, 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 Section 53646 when available.
18.3 California Debt and Investment Advisory Commission. A copy of this
tho second (2***) and fourth (4®*) quarter/ investment report Investment Policy will
be sent to the California Debt and Investment Advisory Commission within sixty
(60) days following the end of such quarter the second quarter of each calendar
year.
19.0 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 one hundred
percent 1 00% of inactive funds at all times. To provide for these contingencies the City
Treasurer is authorized to take the following actions:
19.1 Short-term loan. When there is a shortfall between projected cash
revenues and projected cash disbursements, the City Treasurer wW-mav 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.
19.2 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.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified in
this Investment Policy may occur for pooled investments 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 "AA" rating, or total assets in the portfolio decline
causing the percentage invested in corporate notes to rise above thirty percent 30%. or
an unforeseen expenditure causes investments maturing within one year to fall below
two-thirds (2/3) of the approved operating budget of the current fiscal year.
Section 53QQ'\-34ty of the California Government Code specifies a percentage limitation
for a particular category of investment. That percentage is applicable only at the date of
purchase. The Treasurer shall also review exceptions of corporate notes downgraded
below "AA" rating, as well as the percentage limitation of any investment which exceeds
the maximum allowed under this policy requires that exceptions be reviewed for
possible corrective action. Exceptions may be temporary or more lasting; they may be
self-correcting or require specific action. If specific action is required, the City Treasurer
will determine the course of action that will correct exceptions to move the portfolio into
compliance with State and City requirements. Decisions to correct exceptions will not
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expose the assets of the portfolio to undue risk, and will not impair the meeting of
financial obligations as they fall due. Any subsequent investments will not extend
existing exceptions. Exceptions, and the decisions to correct the exceptions, will be
reviewed with the Investment Review Committee referred to in paragraph 22.0 below.
21.0 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.
22.0 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 City Attorney, the Assistant City Manager, the
Administrativo SorvicesFinance Director, and the Deputy City Treasurer or delegate
from each such department. Additionally, the City Treasurer may appoint other city
residents as advisors to the Committee. The Committee will convene periodically as
necessary or desirable but, no less frequently than once each quarter.
23.0 Investment policy adoption. Section 53646(a) (2) of the California Government
Code 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, the City's investment policy and any modifications thereto 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.
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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 in order 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.
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
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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.
Laddered Portfolio: A bond investment portfolio with securities in each maturity range
(e.g. monthly) over a specified period of time (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 on a
daily basis.
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.
Nominee Name: 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.
Pooled Investment: A grouping of resources for the common advantage of the
participants.
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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
Sweep Account: A short-term income fund into which all uninvested cash balances
from the non-interest bearing checking account are automatically transferred on a daily
basis.
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.
Time-Certificates of Deposit: A deposit account paying interest for a fixed term, with
the understanding that funds cannot be withdrawn before maturity without giving
advance notice.
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 overperforming
(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 of time in which an investment accumulates no
interest.
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