HomeMy WebLinkAbout2017-07-25; City Council; ; Approve: Revision of City Investment Policy(i S~~fiR~port
Meeting Date
To:
From:
July 25, 2017
Mayor and Council Members
Kevin Crawford, City Manager
CA Review (}JC-
Staff Contact: Craig Lindholm, City Treasurer; Nancy Sullivan, Deputy City Treasurer
Nancy.Sullivan@carlsbadca.gov or 760-602-2473
Subject Approve: Revision of City Investment Policy
Recommended Action
Adopt a resolution approving the city's investment policy dated July 25, 2017.
Executive Summary/Discussion
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.
Pursuant to Section 53646(a) of the California Government 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 Administrative
Services Director, Deputy City Treasurer, and City Attorney or designee from each such
department, three 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.
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Revision of City Investment Policy
Meeting Date: July 25, 2017
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Changes may be substantive or procedural. Changes may reflect the city's conservative
investment philosophy by making this policy more restrictive than the California code.
An opportunity to increase the diversification of the City of Carlsbad investment portfolio was
added to the State of California local agency investment guidelines. Effective January 1, 2015,
supranational securities were eligible for inclusion into local agency portfolio allocations.
California Code Section 53601(q) permits investment of up to 30 percent of a local agency
portfolio into these securities, however, we are initiating this change with a more conservative
initial portfolio limitation of 10 percent. These entities carry the highest credit rating of triple A
(AAA).
As we gain experience with the inclusion of these securities, we may propose an upward
revision to this initial limitation at some point in the future. The section 8.1.11 shown below is
the proposed section to be added to our current Investment Policy Statement (IPS).
Recommended Change: Section 8.1
Add Section 8.1.11 which will read as follows
8.1.11 SUPRANATIONAL SECURITIES: Supranational securities are defined as United States
dollar denominated senior unsecured, unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and Development (IBRD or World
Bank), International Finance Corporation (IFC), or Inter-American Development Bank (IADB).
These organizations were established by international treaties, are headquartered in
Washington D.C. and incorporated into U.S. Federal Law by Congressional Acts.
Allowable investment instruments per State of California Code Section 53601(q) permits the
securities of these three organizations to be incorporated into local agency investment
portfolios.
Securities eligible for investment shall have a maximum remaining maturity of five years or less,
and be eligible for purchase and sale within the United States. Supranational securities eligible
for investment shall be rated double A (AA) or better from at least two nationally recognized
statistical rating organizations (NRSRO). Investments in Supranational Securities shall not
exceed 10 percent of the City of Carlsbad's investment portfolio.
Recommended Change: Glossary
Add the following definitions to the glossary:
NRSRO: A nationally recognized statistical rating organization (NRSRO) is a credit rating agency
(CRA) that issues credit ratings that the U.S. Securities and Exchange Commission permits other
financial firms to use for certain regulatory purposes. Three of the primary recognized rating
agencies are Moody's Investment Services, Inc., Standard & Poor's and Fitch.
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Revision of City Investment Policy
Meeting Date: July 25, 2017
Page3
Supranational Organization: A supranational organization is formed by a group of countries
through an international treaty. Member states transcend national boundaries or interests to
share in the decision making process to promote economic development in the member
countries.
Supranational Securities: Supranational securities are United States dollar denominated senior
unsecured, unsubordinated obligations issued or unconditionally guaranteed by the
International Bank for Reconstruction and Development {IBRD or World Bank), International
Finance Corporation (IFC), or Inter-American Development Bank {IADB). These organizations
were established by international treaties, are headquartered in Washington D.C and
incorporated into U.S. Federal Law by Congressional Acts.
State of California Code section 53601{q) permits the securities of these three organizations to
be incorporated into local agency investment portfolios.
Fiscal Analysis
None.
Next Steps
The Revision of the City Investment Policy is produced annually by the City Treasurer.
Environmental Evaluation (CEQA)
Pursuant to Public Resources Code section 21065, this action does not constitute a "project"
within the meaning of CEQA in that it has no potential to cause either a direct physical change in
the environment, or a reasonably foreseeable indirect physical change in the environment, and
therefore does not require environmental review.
Public Notification
This item was noticed in accordance with the Ralph M. Brown Act and was available for viewing
at least 72 hours prior to the meeting date.
Exhibits
1. Resolution adopting the city investment policy.
2. Strikeout/underline of policy showing changes to investment policy.
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RESOLUTION NO. 2017-143
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CARLSBAD, CALIFORNIA APPROVING THE CITY'S
INVESTMENT POLICY DATED JULY 25, 2017
Exhibit 1
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 states that the City
Treasurer may annually 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
WHEREAS, The City Treasurer has reviewed the existing investment policy and has two
recommended modifications this year.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California,
as follows:
1. The above recitations are true and correct.
2. The attached investment policy, dated July 25, 2017, (Attachment A) is hereby
adopted and supersedes the policy dated January 12, 2016.
3. That the Council finds that the investment policy dated July 25, 2017, (Attachment
A) conforms to Sections 53601 and 53635 of the California Government Code.
PASSED, APPROVED AND ADOPTED at a regular meeting of the City Council ofthe City of
Carlsbad on the 25th day of MY, 2017, by the following vote, to wit:
AYES: M. Hall, K. Blackburn, M. Schumacher, M. Packard.
NOES: C. Schumacher.
ABSENT: None.
ATTACHMENT A
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Craig Lindholm, City Treasurer
Recommended July 25, 2017
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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 ............................................................................................ 6
10. Unauthorized Investment I Investment Activity ............................................ 6
11. Investment Strategy ..................................................................................... 6
12. Diversification ............................................................................................... 7
13. Maximum Maturities ..................................................................................... 7
14. Selection of Financial Institutions and Brokers ............................................ 8
15. Purchase, Sale, Payment and Delivery ....................................................... 9
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 ............................................................. 12
Glossary ..................................................................................... 13
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CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Dated July 25, 2017
(Supersedes Investment Policy dated 01 /12/16)
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 City of Carlsbad Public Improvement
Corporation, 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
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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 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
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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 Administrative
Services 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, government sponsored enterprise
(GSE) debt and its agencies.
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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. The City may use
a private sector entity that assists in the placement of Certificates of
Deposit.
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 shall 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 shall 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.
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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.
8.1.11 Supranational securities are defined as United States dollar
denominated senior unsecured, unsubordinated obligations issued or
unconditionally guaranteed by the International Bank for Reconstruction
and Development (IBRD or World Bank), International Finance
Corporation (IFC), or Inter-American Development Bank (IADB). These
organizations were established by international treaties, are
headquartered in Washington D.C. and incorporated into U.S. Federal
Law by Congressional Acts.
Allowable investment instruments per State of California Code Section
53601 (q) permits the securities of these three organizations to be
incorporated into local agency investment portfolios.
Securities eligible for investment shall have a maximum remaining
maturity of five years or less and be eligible for purchase and sale within
the United States. Supranational securities eligible for investment shall be
rated "AA" or better from at least two nationally recognized statistical
rating organizations (NRSRO). Investments in supranational securities
shall not exceed 10 percent of the City of Carlsbad's investment portfolio.
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.
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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.
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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 shall 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 Services
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,
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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.
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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 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 Administrative Services Director in the absence of an Internal Auditor).
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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 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:
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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 Administrative
Services 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.
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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 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.
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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 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.
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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.
NRSRO: A nationally recognized statistical rating organization (NRSRO) is a credit
rating agency that issues credit ratings that the U.S. Securities and Exchange
Commission permits other financial firms to use for certain regulatory purposes. Three
of the primary recognized rating agencies are Moody's Investment Services, Inc.,
Standard & Poor's and Fitch.
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.
Supranational Organization: A supranational organization is formed by a group of
countries through an international treaty. Member states transcend national boundaries
or interests to share in the decision making process to promote economic development
in the member countries.
Supranational Securities: Supranational securities are United States dollar
denominated senior unsecured, unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and Development (IBRD or
World Bank), International Finance Corporation (IFC), or Inter-American Development
Bank (IADB). These organizations were established by international treaties, are
headquartered in Washington D.C and incorporated into U.S. Federal Law by
Congressional Acts.
The State of California Code section 53601 (q) permits the securities of these three
organizations to be incorporated into local agency investment portfolios.
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.
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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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EXHIBIT 2
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Craig Lindholm, City Treasurer
Recommended July 25, 2017
Page 56
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 ............................................................................................ 6
10. Unauthorized Investment I Investment Activity ............................................ 6
11. Investment Strategy ..................................................................................... 6
12. Diversification ............................................................................................... 7
13. Maximum Maturities ..................................................................................... 7
14. Selection of Financial Institutions and Brokers ............................................ 8
15. Purchase, Sale, Payment and Delivery ....................................................... 9
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 ............................................................. 12
Glossary ..................................................................................... 13
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CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Dated July 25, 2017
(Supersedes Investment Policy dated 01/12/16)
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 City of Carlsbad Public Improvement
Corporation, 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
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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 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
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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 Administrative
Services 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, government sponsored enterprise
(GSE) debt and its agencies.
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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. The City may use
a private sector entity that assists in the placement of Certificates of
Deposit.
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 shall 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 shall 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.
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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.
8.1.11 Supranational securities are defined as United States dollar
denominated senior unsecured, unsubordinated obligations issued or
unconditionally guaranteed by the International Bank for Reconstruction
and Development (IBRD or World Bank). International Finance
Corporation (IFC), or Inter-American Development Bank (IADB). These
organizations were established by international treaties, are
headquartered in Washington D.C. and incorporated into U.S. Federal
Law by Congressional Acts.
Allowable investment instruments per State of California Code Section
53601 (q) permits the securities of these three organizations to be
incorporated into local agency investment portfolios.
Securities eligible for investment shall have a maximum remaining
maturity of five years or less and be eligible for purchase and sale within
the United States. Supranational securities eligible for investment shall be
rated "AA" or better from at least two nationally recognized statistical
rating organizations (NRSRO). Investments in supranational securities
shall not exceed 10 percent of the City of Carlsbad's investment portfolio.
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.
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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.
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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 shall 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 Services
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,
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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.
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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 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 Administrative Services Director in the absence of an Internal Auditor).
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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 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:
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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 Administrative
Services 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.
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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 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.
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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 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.
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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.
NRSRO: A nationally recognized statistical rating organization (NRSRO) is a credit
rating agency that issues credit ratings that the U.S. Securities and Exchange
Commission permits other financial firms to use for certain regulatory purposes. Three
of the primary recognized rating agencies are Moody's Investment Services, Inc.,
Standard & Poor's and Fitch.
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.
Supranational Organization: A supranational organization is formed by a group of
countries through an international treaty. Member states transcend national boundaries
or interests to share in the decision making process to promote economic development
in the member countries.
Supranational Securities: Supranational securities are United States dollar
denominated senior unsecured, unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and Development (IBRD or
World Bank), International Finance Corporation (IFC), or Inter-American Development
Bank (IADB). These organizations were established by international treaties, are
headquartered in Washington D.C and incorporated into U.S. Federal Law by
Congressional Acts.
The State of California Code section 53601 (q) permits the securities of these three
organizations to be incorporated into local agency investment portfolios.
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.
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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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