HomeMy WebLinkAbout2012-08-28; City Council; 20986; Revision of City Investment Policy10
CITY OF CARLSBAD - AGENDA BILL
AB# 20.986 REVISION OF DEPT. DIRECTOR -jT
MTG. 8/28/12 CITY INVESTMENT POUCY CITYATTY. /U^^^^
DEPT. TRS CITY MGR. [p^
RECOMMENDED ACTION:
Adopt Resolufion No. 2012-200 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 fiinds 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 objecfives, (2) investment authority and responsibility, (3)
acceptable levels of risk, (4) risk management and disclosure, (5) reporting requirements, and (6)
levels of investment reviews.
Pursuant to Section 53646(a) of the Califomia Govemment Code the City Treasurer may present
annually 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 Deputy City Manager,
Deputy City Treasurer, the Finance Director, and City Attomey or designee from each such
department, four Carlsbad citizens, and himself to review the status of investments and potenfial
changes to the policy prior to recommending these changes to the City Council.
The Investment Review Committee has completed the aimual review of the investment policy.
The City's investments are performing as desired and as designed by the City's investment policy.
Changes may be substantive or procedural. Changes may reflect the City's conservative
investment philosophy by making this policy more restrictive than the Califomia code. The City
Treasurer has one recommended change at this time. The recommended change is listed below.
DEPARTMENT CONTACT: Nancy Sullivan (760) 602-2473 nancy.sullivanl@carlsbadca.gov
FOR CITY CLERKS USE ONLY.
COUNCIL ACTION: APPROVED X CONTINUED TO DATE SPECIFIC •
DENIED CONTINUED TO DATE UNKNOWN •
WITHDRAWN • RETURNED TO STAFF •
AMENDED • COUNCIL RECEIVED THE •
REPORT/PRESENTATION
OTHER - SEE MINUTES •
PAGE 2 OF AB REVISION OF CITY INVESTMENT POLICY
Recommended Change: Section 8.1.7
Currently Section 8.1.7 reads as follows:
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" categones by Moody's Investment Services, Inc. and
Standard & Poor's.
The recommended change would add Fitch as an additional rating agency and allow the
investment in a corporate note rated in the "AAA" or "AA" categories by two of the three rating
agencies.
Revised Section 8.1.7
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 two of the three rating agencies. Moody's
Investment Services, lnc.^-aR4 Standard & Poor's and Fitch.
FISCAL IMPACT:
None
ENVIRONMENTAL IMPACT:
None
EXHIBITS:
1. Resolution No. 2012-200 adopting the City investment policy.
2. Recommended City Investment Policy.
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1 RESOLUTION NO. 2012-200
2 RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF CARLSBAD, CALIFORNIA,
3 APPROVING THE CITY'S INVESTMENT POLICY
DATED AUGUST 28, 2012
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WHEREAS, the City adopted an investment policy on January 2, 1985 as required by
^ Section 53646 of the Califomia Govemment Code; and
7 WHEREAS, Section 53646(a) ofthe Califomia Govemment Code states that the City
8 Treasurer may armually render to the City Council a statement of investment policy; and
WHEREAS, the City Council shall consider such investment policy at a public meeting;
and
WHEREAS, upon consideration the City Council may from time to time revise this
policy as deemed necessary to provide proper guidance to City staff and the City Treasurer; and
12 WHEREAS, The City Treasurer has reviewed the existing investment policy and has one
\ 3 recommended modifications this year; and
NOW, THEREFORE, BE IT RESOLVED by the City Council ofthe City ofCarlsbad,
Califomia, as follows:
1. The above recitations are tme and correct.
2. The attached investment policy, dated August 28, 2012, (Exhibit 2) is hereby adopted and
^ ^ supersedes the policy dated June 21,2011.
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3. That the Council finds that the investment policy dated August 28, 2012, (Exhibit 2)
conforms to Sections 53601 and 53635 of the Califomia Govemment Code.
PASSED, APPROVED AND ADOPTED at a regular meeting ofthe City Council on
the 28th day of August 2012, by the following vote, to wit:
AYES: Council Memb ers Hall, Kulchin, Blackburn, Douglas, Packard
NOES: None.
ABSENT: None.
IALL, Mayor
ATTEST:
LORRAINE M. WOOD, City Clerk
(SEAL)
EXHIBIT 2
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Jim Comstock, City Treasurer
Recommended August 28, 2012
TABLE OF CONTENTS
1. Introduction 1
2. Policy 1
3. Scope 1
4. Objectives 2
5. Duties & Responsibilities 2
6. Prudence 3
7. Ethics and Conflicts of Interest 3
8. Authorized Investments 3
9. Collateralization 5
10. Unauthorized Investment / Investment Activity 6
11.1 nvestment Strategy 6
12. Diversification 6
13. Maximum Maturities 7
14. Selection of Financial Institutions and Brokers 8
15. Purchase, Sale, Payment and Delivery 8
16. Safekeeping and Custody 9
17. Performance Standard for Pooled Investments 9
18. Reporting 9
19. Short Term Borrowing 10
20. Exceptions 11
21. Internal Control 11
22. Review 11
23. Investment Policy Adoption 11
Glossary 12
CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Dated August 28, 2012
(Supersedes Investment Policy dated 6/21/11)
1.0 Introduction. The purpose of this document is to identify vanous policies and
procedures that enhance opportunities for a prudent and systematic investment policy
and to organize and formalize investment-related activities. Related activities which
compnse 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 Cartsbad 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 Cartsbad, the
Housing authority of the City of Cartsbad, the Parking Authority of the City of
Cartsbad, the City of Cartsbad Public Improvement Corporation, the Cartsbad
Redevelopment Agency, and the Cartsbad Municipal Water Distnct. 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
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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
pnmary objectives of a trustee investing public money. The pnmary objectives, in order
of pnority, ofthe City's investment activities shall be:
4.1 Safety. Safety of pnncipal 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 critena used to select
qualified financial institutions and brokers/dealers are identified in paragraph 14 of this
policy.
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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 ali 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 ofthe 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 underiay a Repurchase Agreement
shall be valued at one hundred two percent 102% or greater of the funds
borrowed against those securities.
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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 two of the three rating agencies, Moody's Investment
Services, Inc., Standard & Poor's and Fitch.
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 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
I, 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.
II. 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 ofthe 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.
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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 Carisbad, 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 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 ofthe 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.
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.
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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
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.
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 lOU, 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.
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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 eariier
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.
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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 over performing
(underperforming) the current market for similar investments. An increase in value
indicates the portfolio is earning relatively more interest than current market conditions,
and a decrease in value indicates that the portfolio is earning relatively less interest than
current market conditions.
Zero Accrual Periods: A period of time in which an investment accumulates no
interest.
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