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HomeMy WebLinkAbout2019-05-07; City Council; ; Revisions to the City's Statement of Investment Policy~ CITY COUNCIL ~ Staff Report Meeting Date To: From: May 7, 2019 Mayor and Council Members Scott Chadwick, City Manager CA Review u.:L, Staff Contact: Craig Lindholm, City Treasurer; Laura Rocha, Deputy City Manager Laura.Rocha@carlsbadca.gov or 760-602-2430 Subject Revisions to the City's Statement of Investment Policy Recommended Action Adopt a resolution approving revisions to the city's investment policy dated July 25, 2017. Executive Summary/Discussion At the January 8, 2019 City Council meeting, the city treasurer provided a report titled "Annual Review and Approval of City's Investment Policy". Per Section 5.0 of the city's Statement of Investment Policy (Policy), the city treasurer shall bring forth the Policy to City Council annually for their review and approval, whether revisions occur or not. On that evening, due to discussions involving certain investments and the overall investment strategy for corporate notes, the City Council did not approve the Policy dated January 8, 2019. Instead, the City Council directed the city treasurer to bring back a report to the City Council to discuss alternative investment strategies for said corporate notes. At the March 19, 2019 City Council meeting, the city treasurer provided a report regarding the city's strategies for investing in corporate notes and alternative investment opportunities. This report was in response to the request at the January 8, 2019 meeting mentioned above, to shift investments to companies that are more aligned with the city's Climate Action Plan, and if possible, eliminate investments into corporations involved in the. business of exploration, extraction and further processing of oil and gas, and those which did not support healthy lifestyle choices. The City Council agreed with the recommendation of the city treasurer to hold all existing investments in Chevron and Exxon Mobil to their final maturity dates. In a similar recommendation, the existing investments in Coca-Cola will be retained through their final maturities. In addition to these actions, the city treasurer recommended the adoption of a split rating minimum for all new investments in corporate notes, defined as "AA"/" A" by two of the three primary Nationally Recognized Statistical Rating Organizations (NRSRO). This modification will expand the potential universe of high credit quality investment options while still exceeding the allowable California standard. Recommended language changes incorporating these new directives into our investment process can be found in the City of Carlsbad Statement of Investment Policy dated May 7, 2019, section 8.1.7 . In addition, the title of "Administrative Services Director" was revised to "Deputy City Manager of Administrative Services". May 7, 2019 Item #7 Page 1 of 35 Fiscal Analysis None. Next Steps None. 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. City Council Resolution. 2. Red-lined version of Statement of Investment Policy. May 7, 2019 Item #7 Page 2 of 35 RESOLUTION NO. 2019-061 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA APPROVING THE CITY'S INVESTMENT POLICY DATED MAY 7, 2019 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 recommended modifications this year; and NOW, THEREFORE, BE IT RESOLVED by the City Council ofthe City of Carlsbad, California, as follows: 1. The above recitations are true and correct. 2. The attached investment policy, dated May 7, 2019, (Attachment A) is hereby adopted and supersedes the policy dated January 8, 2019. 3. That the Council finds that the investment policy dated May 7, 2019, (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 of the City of Carlsbad on the 7th day of May 2019, by the following vote, to wit: AYES: Hall, Blackburn, Bhat-Patel, Schumacher, Hamilton. NAYS: None. ABSENT: None. MA1t1d1Jf1/ May 7, 2019 Item #7 Page 3 of 35 CITY OF CARLSBAD STATEMENT OF INVESTMENT POLICY Dated May 7, 2019 (Supersedes Investment Policy dated 07 /25/17) ATTACHMENT A 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 1 May 7, 2019 Item #7 Page 4 of 35 3.2 Investments held separately. Investments of bond proceeds will be held separately when required by the bond indentures or when necessary to meetarbitrage 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 investmentprogram. Investments ofthe 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 an Assistant to the City Treasurer, who in the absence of the City Treasurer, will assume the City Treasurer's duties and responsibilities. The City 2 May 7, 2019 Item #7 Page 5 of 35 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's Deputy City Manager of Administrative Services 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. 3 May 7, 2019 Item #7 Page 6 of 35 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 U11ited States shall not exceed thirty percent 30% of the investment portfolio. The Corporate Notes shall carry a split rating of "AA" by one of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investment Services, Inc., Standard & Poor's and Fitch . A second rating of "A" by an NRSRO is required for any Corporate Note to be considered eligible for inclusion in the 4 May 7, 2019 Item #7 Page 7 of 35 portfolio. New investments into corporations involved in the business of exploration, extraction and further processing of oil and gas are no longer eligible pursuant to a decision by the Carlsbad City Council at their March 19, 2019 Council Meeting. 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) ofthe 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 5 May 7, 2019 Item #7 Page 8 of 35 this Investment Policy. The City Council will manage these loans directly. As assets of the city, individual loans will be reported by the City Treasurer and any changes will be explained. Collections and conformance with the requirements of each individual housing loan will be reported as an addendum to the City Treasurer's Investment Report each quarter. 8.4 New Securities. New types of securities authorized by California law, but which are not currently allowed by this investment policy, must first be approved by the City Council. 9.0 Collateralization, Perfection, Security and Contracts. When required by California statute or this Investment Policy, any investment capable of being collateralized, shall be collateralized by the required amounts imposed by law. To give greater security the city's investments, when an investment is collateralized and not perfected under existing law, an attempt to perfect the collateralization should be made. Section 53652 of the California Government Code requires that the depository secure active or inactive deposits with eligible securities having a fair market value of at least ten percent 10% in excess of the total amount of all deposits, and fifty percent 50% in excess of the deposit when secured with mortgage pools. Section 53649 of the California Government Code specifies that the City Treasurer is responsible for entering into deposit contracts with each depository. 10.0 Unauthorized investments/investment activities. Section 53601.6 of the California Government Code disallows the following investments acquired after January 1, 1996: inverse floaters, range notes, or interest-only strips that are derived from a pool of mortgages. 10.1 In addition, and more generally, investments are further restricted as follows: 10.1.2 No investment will be made in any security that could result in zero interest accrual if held to maturity. 10.1.3 No investment will be made that could cause the portfolio to be leveraged. 10.1.4 Purchases of investments on margin will not be made. 6 May 7, 2019 Item #7 Page 9 of 35 11.0 Investment strategy. 11.1 Pooled Investments. A buy and hold strategy will generally be followed; that is, investments once made will usually be held until maturity. A buy and hold strategy will result in unrealized gains or losses as market interest rates fall or rise from the coupon rate of the investment. Unrealized gains or losses, however, will diminish as the maturity dates of the investments are approached or as market interest rates move closer to the coupon rate of the investment. A buy and hold strategy requires that the portfolio be kept sufficiently liquid to preclude the undesired sale of investments prior to maturity. Occasionally, the City Treasurer may find it advantageous to sell an investment prior to maturity, but this should only be on an exception basis and only when it is in the best interest of the city. 11.2 Investments held separately. Investments held separately for bond proceeds will follow the trust indenture for each issue. 12.0 Diversification. The portfolio will be diversified to avoid incurring unreasonable and avoidable risks regarding specific security types or individual financial institutions. In addition to the limitations on specific security types indicated in paragraph 8.0 of this Investment Policy, and with the exception of U.S. Treasury/Federal agency securities and authorized pools, no more than five percent 5% of the city's portfolio will be placed with any single issuer. 13.0 Maximum maturities and maximum modified duration. 13.1 Pooled Investments. A policy of laddered maturities will generally be followed for pooled investments. The following maturity requirements will apply as of the month end of each reporting period. 13.1.1 Investments maturing within one year must be no less than two-thirds (2/3} of the approved operating budget of the current year. This requirement should be met within 3 months following adoption of the current operating budget. Remaining investments of the portfolio 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 7 May 7, 2019 Item #7 Page 10 of 35 purchase, the City Treasurer and the Deputy City Manager of Administrative Services 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. lfthe 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 8 May 7, 2019 Item #7 Page 11 of 35 • Proofthat commercial banks, savings banks, or savings and loan associations are state or federally chartered 14.2 Broker/Dealers. • Current audited financial statements • Proof that brokerage firms are members in good standing of a national securities exchange, or • A designation as a primary government dealer by the Federal Reserve Bank. Commercial banks, savings banks, and savings and loan associations must maintain a minimum net worth to asset ratio as provided by law (total regulatory net worth divided by total assets), and must have had a positive net earnings for the last reporting period. 15.0 Purchase, Sale, Payment, and Delivery. A competitive bid process, when deemed practical by the City Treasurer, will be used to place all investment transactions. It is recommended that the City Treasurer obtain two or more bids from broker/dealers before purchasing an investment, and three (3) or more quotes when selling an investment. When two or more investment opportunities offer essentially the same maturity, liquidity, yield, and quality, the City Treasurer may give considerations to financial institutions based in the City of Carlsbad, the State of California and within the United States. Payment for securities will be done on a Delivery Versus Payment (DVP) basis via the city's custodian . Delivery of securities will be made to the city in accordance with the third party custodial agreement. 16.0 Safekeeping and custody. All security transactions, including collateral for repurchase agreements, entered into by the city shall be conducted on a delivery-vs.-payment basis. All securities owned by the city will be held by a third-party custodian designated by the City Treasurer and evidenced by a monthly statement from the custodian. All securities will be held in the nominee name of the custodian unless the counterparty bank's trust department is used for the delivery of the security, in which case the security will be held in the city's name. Collateral for time deposits in banks will be held in the city's name in the bank's Trust Department or in the Federal Reserve Bank. 17.0 Performance standard for pooled investments. Laddered maturities and a buy and hold strategy for pooled investments will cause the investment portfolio to attain a market-average rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the city's cash flow needs. Since the amount maturing within one year must be at least equal to two-thirds (2/3) of the currently approved operating budget, the rate of return will be more closely related to, but lag behind, changes in short-term market rates. The rate of return of the investment portfolio will be based on the maturity value of the investments. 9 May 7, 2019 Item #7 Page 12 of 35 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 Deputy City Manager of Administrative Services in the absence of an Internal Auditor). 18.1 Pooled investments. The investment report will be submitted monthly by the City Treasurer within 30 days following the end of the month covered by the report. The monthly report will include the following elements: • Itemized listing of portfolio investments by type, yield to maturity, and issuer • Par value, dollar amount invested, amortized cost, and current market value as of the date of the report will be given for the total of all securities, investments, and moneys held by the city and its component units. The source of the market values will be cited • Credit ratings of corporate notes • Accrued income • Weighted average yield of the portfolio • Weighted average days to maturity of the portfolio from the date of the report • Weighted average modified duration of the portfolio • Dollar amount and percentage of portfolio maturing within one year • Dollar amount and percentage of portfolio maturing between one and 5 years • Percent that each type of investment represents in the portfolio • Investment transactions for the reporting period excluding due dates • Fund source of investments when available • Statement that the investment portfolio has the ability to meet the city's cash flow demands for the next six (6) months • Statement of compliance of the portfolio with the city's Investment Pol icy. 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. 10 May 7, 2019 Item #7 Page 13 of 35 18.2 Investments held separately. A report of investments held separately will be made quarterly. Within 30 days following the end ofthe 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. 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"/"A" 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"/" A" 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. 11 May 7, 2019 Item #7 Page 14 of 35 21.0 Internal control. This policy and the strategy for and conduct ofthe 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 Deputy City Manager of Administrative Services, and the Assistant to the 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. 12 May 7, 2019 Item #7 Page 15 of 35 GLOSSARY Amortized Cost: The cost of investments adjusted for amortized premiums and discounts. Amortized cost is used to maintain comparability with market value. Arbitrage Regulation: Laws to control the use of profit making by purchasing securities on one market for immediate resale on another in order to profit from a price difference. Bankers Acceptances: An investment vehicle created to facilitate international commercial trade transactions. The bank accepts responsibility to repay a loan to the holder of the investment vehicle created in a commercial transaction. The credit worthiness of Bankers Acceptances is enhanced because they are secured by the issuing bank, the goods themselves, and the importer. Bankers Acceptances are sold on a discounted basis. Bond Indenture: A written agreement specifying the terms and conditions for issuing bonds, stating the form of the bond being offered for sale, interest to be paid, the maturity date, call provisions and protective covenants, if any, collateral pledged, the repayment schedule, and other terms. It describes the legal obligations of a bond issuer and the powers of the bond trustee, who has the responsibility for ensuring that interest payments are made to registered bondholders. Book Value: A term synonymous with amortized cost. Buy and Hold Strategy: Investments in which management has the positive intent and ability to hold each issue until maturity. Certificate of Deposit: A deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving advance notice. Collateralization: An asset used to secure a debt in part or in full by pledge of collateral. The collateral is used as security to help ensure payment or performance of an obligation. Commercial Paper: A short-term IOU, or unsecured money market obligation, issued by prime rated commercial firms and financial companies, with maturities from 2 days up to 270 days. A promissory note of the issuer used to finance current obligations, and is a negotiable instrument. Delivery versus Payment: A securities industry term indicating payment is due when the buyer has securities in hand or a book entry receipt. Embedded Option: A statement within the bond structure that would alter the interest rate earned by the bond. 13 May 7, 2019 Item #7 Page 16 of 35 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 oftime (e.g. five years). Leverage: Investing with borrowed money with the expectation that the interest earned on the investment will exceed the interest paid on the borrowed money. Local Agency Investment Fund (LAIF): A voluntary investment program offering participating agencies the opportunity to participate in a major portfolio which daily invests hundreds of millions of dollars, using the investment expertise of the State Treasurer's Office Investment staff at no additional cost to the taxpayer. Investment in LAIF, considered a short-term investment, is readily available for cash withdrawal on a daily basis. Market Risk: The risk that market interest rates will rise causing a loss of value in investments held. All investments made by the city involve a degree of market risk. See also "Unrealized Gains (Losses). Modified Duration: A measure of the sensitivity that the value of a fixed-income security has to changes in market rates of interest. Modified duration is the best single measure of a portfolio's or security's exposure to market risk. Modified duration identifies the potential gain/loss in value before the gain/loss actually occurs. It is a prospective measurement, e.g., a modified duration of 1.5 indicates that when and if a 1% change in market interest rates occurs, a 1.5% change in the value of a security will result. Investments with modified durations of one to three are considered to be relatively conservative. Negotiable Certificates of Deposit: A large denomination ($100,000 or more) interest bearing time deposits, paying the holder a fixed amount of interest at maturity. Issues can be sold to a new owner before maturity. 14 May 7, 2019 Item #7 Page 17 of 35 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 ~ecurities 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. 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. 15 May 7, 2019 Item #7 Page 18 of 35 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. 16 May 7, 2019 Item #7 Page 19 of 35 CITY OF CARLSBAD STATEMENT OF INVESTMENT POLICY Dated July 25, 2017 (Supersedes Investment Policy dated 01/12/16) EXHIBIT2 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 1 May 7, 2019 Item #7 Page 20 of 35 3.2 Investments held separately. Investments of bond proceeds will be held separately when required by the bond indentures or when necessary to meetarbitrage 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 5~600.5 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 investmentprogram. 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 poli_cy, 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 an Assistant to the City Treasurer Deputy City Treasurer, who in the absence of the City Treasurer, will assume the City Treasurer's duties and 2 May 7, 2019 Item #7 Page 21 of 35 responsibilities. The City Treasurer shall retain full responsibility for all transactions undertaken under the terms of this policy. In the endeavor to have all inactive cash invested all the time, the city's Deputy City Manager of Administrative Service$ 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. 3 May 7, 2019 Item #7 Page 22 of 35 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 •,vith a maximum remaining maturity of fi'Je (5) years or less, issued by corporations organized and operating within the United States shall not exceed thirty percent (30%) of the in'Jestment portfolio. The Corporate Notes must be rated in the "AAA" or "/V\" categories by two of the three rating agencies, Moody's ln'Jestment Ser1Jices, Inc., Standard & Poor's and ~itch. Corporate Notes with a maximum remaining maturity of five (5) years or less, issued by corporations organized and operating within the United States shall not exceed 4 May 7, 2019 Item #7 Page 23 of 35 thirty percent 30% of the investment portfolio. The Corporate Notes shall carry a split rating of "AA" by one of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investment Services, Inc., Standard & Pear's and Fitch. A second rating of "A" by an NRSRO is required for any Corporate Note to be considered eligible for inclusion in the portfolio. New investments into corporations involved in the business of exploration, extraction and further processing of oil and gas are no longer eligible pursuant to a decision by the Carlsbad City Council at their March 19, 2019 Council Meeting. 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. 5 May 7, 2019 Item #7 Page 24 of 35 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 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. 6 May 7, 2019 Item #7 Page 25 of 35 11.0 Investment strategy. 11.1 Pooled Investments. A buy and hold strategy will generally be followed; that is, investments once made will usually be held until maturity. A buy and hold strategy will result in unrealized gains or losses as market interest rates fall or rise from the coupon rate of the investment. Unrealized gains or losses, however, will diminish as the maturity dates of the investments are approached or as market interest rates move closer to the coupon rate of the investment. A buy and hold strategy requires that the portfolio be kept sufficiently liquid to preclude the undesired sale of investments prior to maturity. Occasionally, the City Treasurer may find it advantageous to sell an investment prior to maturity, but this should only be on an exception basis and only when it is in the best interest of the city. 11.2 Investments held separately. Investments held separately for bond proceeds will follow the trust indenture for each issue. 12.0 Diversification. The portfolio will be diversified to avoid incurring unreasonable and avoidable risks regarding specific security types or individual financial institutions. In addition to the limitations on specific security types indicated in paragraph 8.0 of this Investment Policy, and with the exception of U.S. Treasury/Federal agency securities and authorized pools, no more than five percent 5% of the city's portfolio will be placed with any single issuer. 13.0 Maximum maturities and maximum modified duration. 13.1 Pooled Investments. A policy of laddered maturities will generally be followed for pooled investments. The following maturity requirements will apply as of the month end of each reporting period. 13.1.1 Investments maturing within one year must be no less than two-thirds (2/3) of the approved operating budget of the current year. This requirement should be met within 3 months following adoption of the current operating budget. Remaining investments of the portfolio 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 7 May 7, 2019 Item #7 Page 26 of 35 purchase, the City Treasurer and the Deputy City Manager of 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, 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. lfthe 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 8 May 7, 2019 Item #7 Page 27 of 35 • Proofthat commercial banks, savings banks, or savings and loan associations are state or federally chartered 14.2 Broker/Dealers. • Current audited financial statements • Proof that brokerage firms are members in good standing of a national securities exchange,or • A designation as a primary government dealer by the Federal Reserve Bank. Commercial banks, savings banks, and savings and loan associations must maintain a minimum net worth to asset ratio as provided by law (total regulatory net worth divided by total assets}, and must have had a positive net earnings for the last reporting period. 15.0 Purchase, Sale, Payment, and Delivery. A competitive bid process, when deemed practical by the City Treasurer, will be used to place all investment transactions. It is recommended that the City Treasurer obtain two or more bids from broker/dealers before purchasing an investment, and three (3) or more quotes when selling an investment. When two or more investment opportunities offer essentially the same maturity, liquidity, yield, and quality, the City Treasurer may give considerations to financial institutions based in the City of Carlsbad, the State of California and within the United States. Payment for securities will be done on a Delivery Versus Payment (DVP} basis via the city's custodian. Delivery of securities will be made to the city in accordance with the third party custodial agreement. 16.0 Safekeeping and custody. All security transactions, including collateral for repurchase agreements, entered into by the city shall be conducted on a delivery-vs.-payment basis. All securities owned by the city will be held by a third-party custodian designated by the City Treasurer and evidenced by a monthly statement from the custodian. All securities will be held in the nominee name of the custodian unless the counterparty bank's trust department is used for the delivery of the security, in which case the security will be held in the city's name. Collateral for time deposits in banks will be held in the city's name in the bank's Trust Department or in the Federal Reserve Bank. 17.0 Performance standard for pooled investments. Laddered maturities and a buy and hold strategy for pooled investments will cause the investment portfolio to attain a market-average rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the city's cash flow needs. Since the amount maturing within one year must be at least equal to two-thirds (2/3) of the currently approved operating budget, the rate of return will be more closely related to, but lag behind, changes in short-term market rates. The rate of return of the investment portfolio will be based on the maturity value of the investments. 9 May 7, 2019 Item #7 Page 28 of 35 A dollar-weighted average of yields to matu rity 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 Deputy City Manager of Administrative Services Director in the absence of an Internal Auditor). 18.1 Pooled investments. The investment report will be submitted monthly by the City Treasurer within 30 days following the end of the month covered by the report. The monthly report will include the following elements: • Itemized listing of portfolio investments by type, yield to maturity, and issuer • Par value, dollar amount invested, amortized cost, and current market value as of the date of the report will be given for the total of all securities, investments, and moneys held by the city and its component units. The source of the market values will be cited • Credit ratings of corporate notes • Accrued income • Weighted average yield of the portfolio • Weighted average days to maturity of the portfolio from the date of the report • Weighted average modified duration of the portfolio • Dollar amount and percentage of portfolio maturing within one year • Dollar amount and percentage of portfolio maturing between one and 5 years • Percent that each type of investment represents in the portfolio • Investment transactions for the reporting period excluding due dates • Fund source of investments when available • Statement that the investment portfolio has the ability to meet the city's cash flow demands for the next six (6) months • Statement of compliance of the portfolio with the city's Investment Policy. When applicable, any material exceptions will be noted An annual report for pooled investments will also be made to the City Council following the close of the fiscal year. Among other items, the annual report will include an analysis of the composition of the portfolio with regard to fund source; a review of trends regarding the size of the fund, portfolio yields, and cash income; and a statement regarding anticipated fund activity in the next fiscal year. 10 May 7, 2019 Item #7 Page 29 of 35 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: 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"/" A" 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 oft he 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"/" A" 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. 11 May 7, 2019 Item #7 Page 30 of 35 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 Deputy City Manager of Administrative Services Director, and the Assistant to 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. 12 May 7, 2019 Item #7 Page 31 of 35 GLOSSARY Amortized Cost: The cost of investments adjusted for amortized premiums and discounts. Amortized cost is used to maintain comparability with market value. Arbitrage Regulation: Laws to control the use of profit making by purchasing securities on one market for immediate resale on another in order to profit from a price difference. Bankers Acceptances: An investment vehicle created to facilitate international commercial trade transactions. The bank accepts responsibility to repay a loan to the holder of the investment vehicle created in a commercial transaction. The credit worthiness of Bankers Acceptances is enhanced because they are secured by the issuing bank, the goods themselves, and the importer. Bankers Acceptances are sold on a discounted basis. Bond Indenture: A written agreement specifying the terms and conditions for issuing bonds, stating the form of the bond being offered for sale, interest to be paid, the maturity date, call provisions and protective covenants, if any, collateral pledged, the repayment schedule, and other terms. It describes the legal obligations of a bond issuer and the powers of the bond trustee, who has the responsibility for ensuring that interest payments are made to registered bondholders. Book Value: A term synonymous with amortized cost. Buy and Hold Strategy: Investments in which management has the positive intent and ability to hold each issue until maturity. Certificate of Deposit: A deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving advance notice. Collateralization: An asset used to secure a debt in part or in full by pledge of collateral. The collateral is used as security to help ensure payment or performance of an obligation. Commercial Paper: A short-term IOU, or unsecured money market obligation, issued by prime rated commercial firms and financial companies, with maturities from 2 days up to 270 days. A promissory note of the issuer used to finance current obligations, and is a negotiable instrument. Delivery versus Payment: A securities industry term indicating payment is due when the buyer has securities in hand or a book entry receipt. Embedded Option: A statement within the bond structure that would alter the interest rate earned by the bond. 13 May 7, 2019 Item #7 Page 32 of 35 Interest-Only Strips: Mortgage backed instrument where investor receives only the interest, no principal, from a pool of mortgages. Issues are highly interest rate sensitive. Cash flows vary between interest periods. As well, the maturity date may occur earlier than that stated if all loans within the pool are pre-paid. High prepayments on underlying mortgages can return less to the holder that the dollar amount invested. Inverse Floater: A bond or note that does not earn a fixed rate of interest . Rather, the interest rate that is earned is tied to a specific interest-rate index identified in the bond/note structure. The interest rate earned by the bond/note will move in the opposite direction of the index, e.g., if market interest rates as measured by the selected index rises, the interest rate earned by the bond/note will decline. An inverse floater increases the market rate risk and modified duration of the investment. Laddered Portfolio: A bond investment portfolio with securities in each maturity range (e.g. monthly) over a specified period of time (e.g. five years). Leverage: Investing with borrowed money with the expectation that the interest earned on the investment will exceed the interest paid on the borrowed money. Local Agency Investment Fund (LAIF): A voluntary investment program offering participating agencies the opportunity to participate in a major portfolio which daily invests hundreds of millions of dollars, using the investment expertise of the State Treasurer's Office Investment staff at no additional cost to the taxpayer. Investment in LAIF, considered a short-term investment, is readily available for cash withdrawal on a daily basis. Market Risk: The risk that market interest rates will rise causing a loss of value in investments held. All investments made by the city involve a degree of market risk. See also "Unrealized Gains (Losses). Modified Duration: A measure of the sensitivity that the value of a fixed-income security has to changes in market rates of interest. Modified duration is the best single measure of a portfolio's or security's exposure to market risk. Modified duration identifies the potential gain/loss in value before the gain/loss actually occurs. It is a prospective measurement, e.g., a modified duration of 1.5 indicates that when and if a 1% change in market interest rates occurs, a 1.5% change in the value of a security will result. Investments with modified durations of one to three are considered to be relatively conservative. Negotiable Certificates of Deposit: A large denomination ($100,000 or more) interest bearing time deposits, paying the holder a fixed amount of interest at maturity. Issues can be sold to a new owner before maturity. 14 May 7, 2019 Item #7 Page 33 of 35 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. 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. 15 May 7, 2019 Item #7 Page 34 of 35 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. 16 May 7, 2019 Item #7 Page 35 of 35 OFFICE OF THE CITY TREASURERCraig Lindholm –City Treasurer Revisions to Investment Policy •January 8, 2019 Council meeting –annual review of Investment Policy •Council direction to return with report and investment strategy for corporate notes –In alignment with city’s Climate Action Plan Revisions to Investment Policy •March 19, 2019 Council meeting – report provided •Council supported recommendation to hold existing investments in Chevron, Exxon Mobil, and Coca Cola to maturity Revisions to Investment Policy •Additional recommendation to adopt split rating minimum for all new investments –“AA/A” by two of three primary Nationally Recognized Statistical Rating Organizations (NRSRO) Revisions to Investment Policy •Revised Investment Policy dated May 7, 2019 has incorporated these two recommendations •In addition, title of “Administrative Services Director” revised to “Deputy City Manager of Administrative Services” Council Action •Adopt resolution approving revisions to the city’s investment policy dated July 25, 2017 Additional Information Craig J. Lindholm City Treasurer www.carlsbadca.gov To Review Monthly Investment Reports •Click on: City Hall Elected officials City Treasurer