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HomeMy WebLinkAbout2024-03-12; City Council; ; Annual Investment Policy UpdateCA Review JRT Meeting Date: March 12, 2024 To: Mayor and City Council From: Scott Chadwick, City Manager Staff Contact: Craig Lindholm, City Treasurer craig.lindholm@carlsbadca.gov, 442-339-5246 Zach Korach, Finance Director zach.korach@carlsbadca.gov, 442-339-2127 Subject: Annual Investment Policy Update Districts: All Recommended Action Adopt a resolution approving the city’s Investment Policy dated March 12, 2024. Executive Summary The City Council and the California Government Code require the city’s Investment Policy and any modifications to the policy to be reviewed annually. The Investment Policy is more conservative than applicable California Government Code section requirements to ensure that the fiduciary responsibility is tailored to best practices and the city’s best interests. The updated policy includes minor adjustments that update position titles to correctly correlate with duties, and adjustments to the limitations on agency backed mortgage passthrough securities1 to align with similar investments and the updated government code. Nonessential changes have also been made to improve the document structure, but do not change the substance of the policy. Explanation & Analysis The effective management of the city's investment portfolio plays an important role in maintaining Carlsbad's fiscal health. Section 53646(a) of the Government Code states that the City Treasurer “may annually render to the legislative body . . . a statement of investment policy, which the legislative body of the local agency shall consider at a public meeting. Any change in the policy shall also be considered by the legislative body of the local agency at a public meeting.” An annual review of the policy is a requirement under the city’s current Investment Policy. 1 Mortgage pass-through securities are investment products similar to bonds that are based on pools of mortgages. Agency backed means the principal and interest payments on these mortgages are guaranteed by federal agencies. March 12, 2024 Item #2 Page 1 of 54 The Investment Policy includes such subjects as: • Investment objectives of safety, liquidity and return on investment • Ethics and conflicts of interest and internal controls • Authorized dealers, institutions and investments • Portfolio strategy, review and reporting The scope of the Investment Policy covers general and operating funds, as well as stating the objectives of the investment strategy. The scope of the Investment Policy does not cover the city’s Section 115 Pension Trust or debt as each is governed by City Council policies (Nos. 98 and 94, respectively). The city’s investments are performing as desired and as designed by the city’s Investment Policy. Due to changes in the California Government Code and ongoing evaluation of supportive roles to the Treasury Department, however, the City Treasurer has recommended the following changes: • Section 5.0 - Delegation of Authority: Change delegation of duties from an Assistant to the City Treasurer to a Deputy City Treasurer and change reporting information to the City Treasurer from the city’s Deputy City Manager of Administrative Services to the City Manager may designate an employee to assist the City Treasurer. These changes align the correct position titles with the assigned duties and expectations. • Section 8.1.14 - Agency Backed Mortgage Passthrough Securities: Adjust requirements for percent of portfolio, issuer and ratings. These changes align with other agency investment limitations and updates to California Government Code Section 53601(o). • Section 10.0 - Review of Investment Portfolio: Add the Finance Director to the committee and remove the Assistant to the City Treasurer. This change aligns the correct position title with the assigned duties and expectations. Formatting changes were made to Section 8.0 - Authorized and Suitable Investments for readability and consistency purposes. No changes to the directive were made. All of the other changes were made to improve readability, clarity of intent or provide additional information and do not alter the substance of the policy. Fiscal Analysis There is no fiscal impact from this action. Next Steps The City Treasurer will continue to implement and review the Investment Policy at least once every year. Environmental Evaluation This action does not require environmental review because it does not constitute a project within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 in that it has no potential to cause either a direct physical change or a reasonably foreseeable indirect physical change in the environment. March 12, 2024 Item #2 Page 2 of 54 Exhibits 1.City Council resolution 2.2024 Investment Policy (redlined) March 12, 2024 Item #2 Page 3 of 54 RESOLUTION NO. 2024-042 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, APPROVING THE CITY'S INVESTMENT POLICY DATED MARCH 12,2024 WHEREAS, the City Council of the City of Carlsbad, California, adopted an lnvestment Policy on Jan. 2, 1985, as permitted by Section 53646 of the California Government Code; and WHEREAS, Section 53646(a) of the California Government Code states the City Treasurer may annua Ily 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 the city's lnvestment Policy as deemed necessary to provide proper guidance to city staff and the City Treasurer; and WHEREAS, the City Treasurer has reviewed the existing lnvestment Policy and has 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 lnvestment Policy dated March 12, 2024 (Attachment A) is hereby adopted and supersedes the policy dated Feb. 7, 2023. 3.That the City Council finds that the lnvestment Policy dated March 12, 2024, conforms to Sections 53601 and 53635 of the California Government Code. Exhibit 1 March 12, 2024 Item #2 Page 4 of 54 PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the 12th day of March, 2024, by the foliowing vote, to wit: AYES: NAYS: ABSTAIN: ABSENT: BLACKBURN, BHAT-PATEL, ACOSTA, BURKHOLDER, LUNA. NONE. NONE. NONE. KEITH BLACKBURN, Mayor SHERRY FREISINGER, City Clerk (SEAL) March 12, 2024 Item #2 Page 5 of 54 City of Carlsbad Investment Policy March 12, 2024 Craig Lindholm City Treasurer 1635 Faraday Avenue Carlsbad, CA 92008 (442) 339-5246 www.carlsbadca.gov/city-hall/other-elected-officials/city-treasurer Attachment A March 12, 2024 Item #2 Page 6 of 54 Table of Contents 1.0 Policy ...................................................................................................................................... 4 2.0 Scope ...................................................................................................................................... 4 2.1 Pooled Investments ........................................................................................................ 4 2.2 Investments Held Separately ......................................................................................... 5 3.0 Prudence ................................................................................................................................ 5 4.0 Objective ................................................................................................................................ 5 4.1 Safety .............................................................................................................................. 5 4.2 Liquidity .......................................................................................................................... 5 4.3 Return on Investment .................................................................................................... 6 5.0 Delegation of Authority ......................................................................................................... 6 6.0 Ethics and Conflicts of Interest .............................................................................................. 6 7.0 Authorized Financial Dealers and Institutions ....................................................................... 7 7.1 Financial Institutions ...................................................................................................... 7 7.2 Broker & Dealers ............................................................................................................ 7 7.3 Purchase, Sale, Payment, and Delivery .......................................................................... 7 8.0 Authorized and Suitable Investments .................................................................................... 8 8.1 Pooled Investments ........................................................................................................ 8 8.2 Investments Held Separately ....................................................................................... 12 8.3 New Securities .............................................................................................................. 12 8.4 Housing Loans ............................................................................................................... 12 9.0 Unauthorized Investments .................................................................................................. 12 10.0 Review of Investment Portfolio ........................................................................................... 12 10.1 Exceptions .................................................................................................................... 13 11.0 Investment Pools & Mutual Funds ...................................................................................... 13 12.0 Collateralization, Perfection, Security and Contracts .......................................................... 14 March 12, 2024 Item #2 Page 7 of 54 13.0 Safekeeping and Custody ..................................................................................................... 14 14.0 Diversification ...................................................................................................................... 14 15.0 Maximum Maturities and Maximum Modified Duration .................................................... 14 15.1 Maximum Maturities for Pooled Investments ............................................................. 15 15.2 Maximum Modified Duration ....................................................................................... 15 15.3 Investments Held Separately ....................................................................................... 16 16.0 Internal Controls .................................................................................................................. 16 17.0 Performance Standard for Pooled Investments .................................................................. 16 18.0 Short-term Borrowing .......................................................................................................... 16 18.1 Short-term Loan ........................................................................................................... 17 18.2 Line of Credit ................................................................................................................ 17 19.0 Investment Strategy ............................................................................................................. 17 19.1 Pooled Investments ...................................................................................................... 17 19.2 Investments Held Separately ....................................................................................... 17 20.0 Reporting.............................................................................................................................. 17 20.1 Pooled Investments ...................................................................................................... 17 20.2 Investments Held Separately ....................................................................................... 18 21.0 Investment Policy Adoption ................................................................................................. 18 22.0 Glossary ................................................................................................................................ 19 24.0 Summary of Authorized Investments .................................................................................. 24 March 12, 2024 Item #2 Page 8 of 54 - 4 - City of Carlsbad Investment Policy March 12, 2024 (Supersedes Investment Policy dated Feb. 7, 2023) 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. 1.0 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. 2.0 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. 2.1 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 Annual Comprehensive 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 Fiduciary Funds Miscellaneous Special Funds Any new funds created by the City Council, unless specifically exempt. March 12, 2024 Item #2 Page 9 of 54 - 5 - 2.2 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. 3.0 Prudence California Government Code Section 53600.3 identifies 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 Prudent Investor standard states that a 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. 4.0 Objective California Government Code Section 53600.5 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. To attain this objective, the City Treasurer will diversify the city’s investments by investing funds among a variety of securities with independent returns. 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. March 12, 2024 Item #2 Page 10 of 54 - 6 - 4.3 Return on Investment Investment return becomes a consideration only after the requirements of safety and liquidity have been met. The City Treasurer shall have the objective of attaining a comparative performance measurement or an acceptable rate of return throughout budgetary and economic cycles. These measurements shall be commensurate with the city’s investment risk constraints identified in the Investment Policy and the cash flow characteristics of the portfolio. The City Treasurer should strive to maintain the level of investment of all contingency reserves and inactive funds as close to 100% as possible. While the objectives of safety and liquidity must first be met, it is recognized that portfolio assets represent a potential source of significant revenues. It is to the benefit of the city that these assets be managed to realize a yield on investments consistent with California statutes and the city’s Investment Policy. 5.0 Delegation of Authority By the annual adoption of this policy, the management of inactive cash and the investment of funds identified in Section 2.0 Scope 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 Section 7.0 Authorized Financial Dealers and Institutions. The City Treasurer may designate in writing a Deputy City Treasurer who, in the absence of the City Treasurer, will assume the City Treasurer's duties and responsibilities. The City Treasurer shall retain full responsibility for all transactions undertaken under the terms of this policy. In the endeavor to have all inactive cash invested all the time, the City Manager may designate an employee to assist the City Treasurer. 6.0 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 March 12, 2024 Item #2 Page 11 of 54 - 7 - 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. 7.0 Authorized Financial Dealers and Institutions 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 provide written confirmation 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 documents below. 7.1 Financial Institutions Current audited financial statements. Depository contracts, as appropriate. A copy of the latest Federal Deposit Insurance Corporation call report, and Proof that commercial banks, savings banks, or savings and loan associations are state or federally chartered. 7.2 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 positive net earnings for the last reporting period. 7.3 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 March 12, 2024 Item #2 Page 12 of 54 - 8 - Treasurer obtain two or more bids from broker/dealers before purchasing an investment, and three 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 consider 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. 8.0 Authorized and Suitable 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. Obligations of the U.S. Government Government Sponsored Enterprise (GSE) debt and its agencies. Maximum remaining maturity of five years as of the date of settlement. Percentage of portfolio, issuer, and ratings are not applicable. Municipal Bonds Bonds of any local agency within the United States, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. Maximum remaining maturity of five years as of the date of settlement. Shall not exceed 15% of the investment portfolio. No more than 5% of the portfolio may be invested in any single issuer. Shall carry a rating of “AA” by one and “A” another of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. March 12, 2024 Item #2 Page 13 of 54 8.1.1 8.1.2 - 9 - Bankers Acceptances Bankers Acceptances drawn on and accepted by a commercial bank. Maximum maturity 180 days as of the date of settlement. Shall not exceed 25% of the investment portfolio. No more than 10% of the portfolio may be invested in any single issuer. Rating measures are not applicable. Certificates of Deposit 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. The city may use a private sector entity that assists in the placement of Certificates of Deposit. Maximum remaining maturity of five years as of the date of settlement. Shall not exceed 30% of the investment portfolio. No more than 10% of the portfolio may be invested in any single issuer. Rating measures are not applicable. Negotiable Certificates of Deposit Negotiable Certificates of Deposit issued by a nationally or state-chartered bank. Maximum remaining maturity of five years as of the date of settlement. Shall not exceed 30% of the investment portfolio. No more than 10% of the portfolio may be invested in any single issuer. Rating measures are not applicable. Commercial Paper 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. Maximum remaining maturity of 270 days as of the date of settlement. Shall not exceed 10% of the investment portfolio. No more than 5% of the portfolio may be invested in any single issuer. Shall carry a rating of “AA” by two of Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies: Moody's Investors Service, Inc. and S&P Global Ratings if the issuer has other existing debt. March 12, 2024 Item #2 Page 14 of 54 8.1.3 8.1.4 8.1.5 8.1.6 - 10 - Repurchase Agreements The market value of securities that underlay a Repurchase Agreement shall be valued at 102% or greater of the funds borrowed against those securities. Maximum remaining maturity of one year as of the date of settlement. Shall not exceed 5% of the investment portfolio. No more than 5% of the portfolio may be invested in any single issuer. Rating measures are not applicable. Corporate Notes Corporate Notes permitted are issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. New investments made directly into corporations involved in the business of exploration, extraction, or further processing of oil and gas are not eligible for investment. Maximum remaining maturity of five years as of the date of settlement. Shall not exceed 30% of the investment portfolio. No more than 5% of the portfolio may be invested in any single issuer. Shall carry a rating of “AA” by one and “A” another of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. Money Market Funds Money market funds whose portfolio consists of one or more of the foregoing lawful investments. Sweep Accounts Sweep accounts for the investment of overnight funds when the funds are swept into investments allowed by this policy. Local Agency Investment Fund (LAIF) LAIF of the State of California Investments will be made in accordance with the laws and regulations governing those Funds. California Asset Management Program (CAMP) CAMP investments will be made in accordance with the laws and regulations governing those funds. March 12, 2024 Item #2 Page 15 of 54 8.1.7 8.1.8 8.1.9 8.1.10 8.1.11 8.1.12 - 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. California Government Code Section 53601(q) permits the securities of these three organizations to be incorporated into local agency investment portfolios. Maximum remaining maturity of five years as of the date of settlement. Shall not exceed 10% of the investment portfolio. No more than 5% of the portfolio may be invested in any single issuer. Shall carry a rating of “AA” by at least two of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. Agency Backed Mortgage Passthrough Securities Mortgage passthrough securities issued or guaranteed by the U.S. Government and its agencies. Maximum remaining maturity of five years as of the date of settlement. Percentage of portfolio, issuer, and ratings are not applicable. Non-agency Backed Mortgage Passthrough Securities Non-agency backed mortgage passthrough security, collateralized mortgage obligation, mortgage backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable- backed bond. Maximum remaining maturity of five years as of the date of settlement. Shall not exceed 5% of the investment portfolio. No more than 5% of the portfolio may be invested in any single issuer. Shall carry a rating of “AA” by at least one of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. March 12, 2024 Item #2 Page 16 of 54 8.1.13 8.1.14 8.1.15 - 12 - 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 New Securities New types of securities authorized by California law, but which are not currently allowed by the city’s Investment Policy, must first be approved by the City Council. 8.4 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. 9.0 Unauthorized Investments California Government Code Section 53601.6 disallows the following investments acquired after January 1, 1996: Inverse floaters Range notes Interest-only strips that are derived from a pool of mortgages. In addition, and more generally, investments are further restricted as follows: No investment will be made in any security that could result in zero interest accrual if held to maturity. No investment will be made that could cause the portfolio to be leveraged. Purchases of investments on margin will not be made. 10.0 Review of Investment Portfolio 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 Manager, the City Attorney, the Deputy City Manager of Administrative Services and the Finance Director or delegate from each such department. Additionally, the City Treasurer may appoint other city residents as advisors to the committee. The committee will convene March 12, 2024 Item #2 Page 17 of 54 - 13 - periodically as necessary or desirable but, not less frequently than once each quarter. 10.1 Exceptions The securities held must be in compliance with Section 8.0 Authorized Investments at the time of purchase. 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 has been downgraded by an NRSRO or the total value of the portfolio has declined causing the percentage invested in corporate notes to rise above 30%, or an unforeseen expenditure causes investments maturing within one year to fall below two-thirds of the approved operating budget of the current fiscal year. California Government Code Section 53601 specifies a percentage limitation for a particular category of investment. That percentage is applicable only at the date of purchase. 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 and reported on the monthly investment report presented to city council. 11.0 Investment Pools & Mutual Funds An investigation and due diligence will be conducted before investing in any investment pool or mutual fund. The City Treasurer shall review at a minimum: The investment policy and objectives. Interest calculations and distributions. Safeguard and settlement processes. A description of the program including legal investors and the minimums and maximum transactions allowable. Schedule for receiving statements. How reserves and retained earnings are treated. The fee schedule. March 12, 2024 Item #2 Page 18 of 54 - 14 - 12.0 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 to the city’s investments, when an investment is collateralized and not perfected under existing law, an attempt to perfect the collateralization should be made. California Government Code Section 53652 requires that the depository secure active or inactive deposits with eligible securities having a fair market value of at least 10% more than the total amount of all deposits, and 50% in excess of the deposit when secured with mortgage pools. California Government Code Section 53649 specifies that the City Treasurer is responsible for entering into deposit contracts with each depository. 13.0 Safekeeping and Custody All security transactions, including collateral for repurchase agreements, entered into by the city shall be conducted on a delivery-versus-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. 14.0 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 Section 8.0 Authorized Investments, and with the exception authorized pools and investments, no more than 5% of the city's portfolio will be placed with any single issuer. 15.0 Maximum Maturities and Maximum Modified Duration Maximum maturity and maximum modified duration evaluation supports the principal of liquidity by ensuring that adequate cash is available to meet anticipated cash flow requirements of the city. March 12, 2024 Item #2 Page 19 of 54 - 15 - 15.1 Maximum Maturities for 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. Two-Thirds Within One Year Investments maturing within one year, measured at par value, must be no less than two-thirds of the approved operating budget of the current year. This requirement should be met within three months following adoption of the current operating budget. Remaining investments of the portfolio shall not have a maturity greater than five years from the date of investment except as provided in Section 15.1.3 Five Year Exception. Three Years Average The average portfolio investment maturity shall be three years or less. A dollar- weighted average will be used in computing the average maturity of the portfolio. Five-Year Exception Before an investment, which is allowed by California statute, is made in securities that mature more than five years from the date of 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 five years will not be greater than 10% of the portfolio and will be counted in the percentage of the portfolio that may mature beyond one year. Ten-Year Limit No investments will be made that mature beyond 10 years from the date of investment. Callable Investments Callable investments will be recorded at their maturity dates. 15.2 Maximum Modified Duration The investment restrictions identified in paragraphs of Section 8.0 Authorized Investments and Section 9.0 Unauthorized Investments, and the maturity requirements identified in Section 15.1 Maximum Maturities for Pooled Investments, imply that the value of city investments should not change more than 2.2% for every 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 March 12, 2024 Item #2 Page 20 of 54 15.1.1 15.1.2 15.1.3 15.1.4 15.1.5 - 16 - unrealized gains and losses of the portfolio are not expected to exceed 2.2% for every 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. 15.3 Investments Held Separately Maturities for investments held separately will conform to the trust indenture for each issue. 16.0 Internal Controls The City Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the city are protected from loss, theft, fraud or misuse. The treasurer shall present all monthly and annual reports to the City Council, internal auditor, deputy city manager, finance manager, and by the city’s external auditors in the conduct of their annual audit of the city. 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 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 Short-term Borrowing The city is permitted by law to borrow money to meet current short-term cash flow needs. These needs may arise either because projected cash disbursements exceed projected cash receipts, or because the city's cash accounts may be temporarily overdrawn due to the efforts to invest 100% of inactive funds at all times. To provide for these contingencies the City Treasurer is authorized to take the following actions: March 12, 2024 Item #2 Page 21 of 54 - 17 - 18.1 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. 18.2 Line of Credit The City Treasurer may maintain a line of credit with the city's bank in an amount to cover sums temporarily overdrawn because of efforts to invest all inactive funds at all times. 19.0 Investment Strategy 19.1 Pooled Investments A buy and hold strategy will be followed; that is, investments once made will 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. 19.2 Investments Held Separately Investments held separately for bond proceeds will follow the trust indenture for each issue. 20.0 Reporting California Government Code Section 53600 require reports meeting the standards set forth in these sections to be presented to City Council, 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 Section 20.1 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). 20.1 Pooled Investments The investment report will be submitted monthly by the City Treasurer within 60 days following the end of the month covered by the report. The monthly report March 12, 2024 Item #2 Page 22 of 54 - 18 - will be published to the City Treasurer webpage after reporting to City Council. Each 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, cash income, and a statement regarding anticipated fund activity in the next fiscal year. 20.2 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 California Government Code Section 53646 when available. 21.0 Investment Policy Adoption California Government Code Section 53646(a)(2) 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, March 12, 2024 Item #2 Page 23 of 54 - 19 - the city’s Investment Policy and any modifications to it 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. 22.0 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 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 are 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. California Asset Management Program (CAMP) A California Joint Powers Authority (JPA) established in 1989 to provide California public agencies with professional investment services. The CAMP Pool is a permitted investment for all local agencies under California Government Code March 12, 2024 Item #2 Page 24 of 54 - 20 - Section 53601(p). CAMP is directed by a Board of Trustees, which is made up of experienced local government finance directors and treasurers. Certificate of Deposit A deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving 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. 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. March 12, 2024 Item #2 Page 25 of 54 - 21 - Laddered Portfolio A bond investment portfolio with securities in each maturity range (e.g. monthly) over a specified period (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 daily. 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. Municipal Bonds Municipal bonds are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. March 12, 2024 Item #2 Page 26 of 54 - 22 - 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. Nationally Recognized Statistical Rating Organization (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 Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. 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 California Government Code Section 53601(q) permits the March 12, 2024 Item #2 Page 27 of 54 - 23 - 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 daily. 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 in which an investment accumulates no interest. March 12, 2024 Item #2 Page 28 of 54 - 24 - 24.0 Summary of Authorized Investments Investment Type Maximum Maturity1 Maximum % Portfolio Maximum % Issuer NRSRO Minimum2 Obligations of the US Government 5 years - - - Certificates of Deposit 5 years 30% 10% - Negotiable Certificates of Deposit 5 years 30% 10% - Corporate Notes 5 years 30% 5% AA/A Municipal Bonds 5 years 15% 5% AA/A Supranational Securities 5 years 10% 5% AA/AA Agency Backed Mortgage Passthrough Securities 5 years - - - Non-agency Backed Mortgage Passthrough Securities 5 years 5% 5% AA Repurchase Agreements 1 year 5% 5% - Commercial Paper 270 days 10% (3)AA/AA Bankers Acceptances 180 days 25% 10% - Money Market Funds N/A - - - LAIF N/A - - - CAMP N/A - - - Sweep Accounts N/A - - - 1 Exceptions are addressed in §15.0 Maximum Maturities and Maximum Modified Duration. Total portfolio Modified Duration shall be 2.2 or less. 2 NSRSOs used by the city are limited to Moody’s Investors Service, Inc., S&P Global Ratings., and Fitch Ratings, Inc. If two ratings are listed for an investment type, then at least two of the three agencies must have ratings compliant with this Investment Policy. Credit rating minimums include rating modifiers (+/-). 3 Commercial Paper shall not represent more than 5% of the outstanding paper of an issuing company. March 12, 2024 Item #2 Page 29 of 54 City of Carlsbad Investment Policy March 12, 2024 Craig Lindholm City Treasurer 1635 Faraday Avenue Carlsbad, CA 92008 (442)339-5246www.carlsbadca.gov/city-hall/other-elected-officials/city-treasurer Exhibit 2 March 12, 2024 Item #2 Page 30 of 54 Table of Contents 1.0 Policy ...................................................................................................................................... 4 2.0 Scope ...................................................................................................................................... 4 2.1 Pooled Investments ........................................................................................................ 4 2.2 Investments Held Separately ......................................................................................... 5 3.0 Prudence ................................................................................................................................ 5 4.0 Objective ................................................................................................................................ 5 4.1 Safety .............................................................................................................................. 5 4.2 Liquidity .......................................................................................................................... 5 4.3 Return on investments ................................................................................................... 6 5.0 Delegation of Authority ......................................................................................................... 6 6.0 Ethics and Conflicts of Interest .............................................................................................. 6 7.0 Authorized Financial Dealers and Institutions ....................................................................... 7 7.1 Financial Institutions ...................................................................................................... 7 7.2 Broker & Dealers ............................................................................................................ 7 7.3 Purchase, Sale, Payment, and Delivery .......................................................................... 8 8.0 Authorized and Suitable Investments .................................................................................... 8 8.1 Pooled Investments ........................................................................................................ 8 8.2 Investments Held Separately ....................................................................................... 13 8.3 New Securities .............................................................................................................. 13 8.4 Housing Loans ............................................................................................................... 13 9.0 Unauthorized Investments .................................................................................................. 13 10.0 Review of Investment Portfolio ........................................................................................... 13 10.1 Exceptions .................................................................................................................... 14 11.0 Investment Pools & Mutual Funds ...................................................................................... 14 12.0 Collateralization, Perfection, Security and Contracts .......................................................... 15 March 12, 2024 Item #2 Page 31 of 54 13.0 Safekeeping and Custody ..................................................................................................... 15 14.0 Diversification ...................................................................................................................... 15 15.0 Maximum Maturities and Maximum Modified Duration .................................................... 15 15.1 Maximum Maturities for Pooled Investments ............................................................. 16 15.2 Maximum Modified Duration ....................................................................................... 16 15.3 Investments Held Separately ....................................................................................... 17 16.0 Internal Controls .................................................................................................................. 17 17.0 Performance Standard for Pooled Investments .................................................................. 17 18.0 Short-term Borrowing .......................................................................................................... 17 18.1 Short-term Loan ........................................................................................................... 18 18.2 Line of Credit ................................................................................................................ 18 19.0 Investment Strategy ............................................................................................................. 18 19.1 Pooled Investments ...................................................................................................... 18 19.2 Investments Held Separately ....................................................................................... 18 20.0 Reporting.............................................................................................................................. 18 20.1 Pooled Investments ...................................................................................................... 19 20.2 Investments Held Separately ....................................................................................... 19 21.0 Investment Policy Adoption ................................................................................................. 19 22.0 Glossary ................................................................................................................................ 20 24.0 Summary of Authorized Investments .................................................................................. 25 March 12, 2024 Item #2 Page 32 of 54 - 4 - City of Carlsbad Investment Policy March 12, 2024 (Supersedes Investment Policy dated Nov. 2, 2021 Feb. 7, 2023) 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. 1.0 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. 2.0 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. 2.1 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 Annual Comprehensive 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 • Fiduciary Funds • Miscellaneous Special Funds • Any new funds created by the City Council, unless specifically exempt March 12, 2024 Item #2 Page 33 of 54 - 5 - 2.2 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. 3.0 Prudence California Government Code Section 53600.3 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 Prudent Investor standard states that a 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. 4.0 Objective California Government Code Section 53600.5 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. To attain this objective, the City Treasurer will diversify the city’s investments by investing funds among a variety of securities with independent returns. 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. March 12, 2024 Item #2 Page 34 of 54 - 6 - 4.3 Return on investment Investment return becomes a consideration only after the 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 shall have the objective of attaining a comparative performance measurement or an acceptable rate of return throughout budgetary and economic cycles. These measurements shall be commensurate with the city’s investment risk constraints identified in the Investment Policy and the cash flow characteristics of the portfolio. The City Treasurer should strive to maintain the level of investment of all contingency reserves and inactive funds as close to 100% as possible. While the objectives of safety and liquidity must first be met, it is recognized that portfolio assets represent a potential source of significant revenues. It is to the benefit of the city that these assets be managed to realize a yield on investments consistent with California statutes and the city’s Investment Policy. 5.0 Delegation of Authority By the annual adoption of this policy, the management of inactive cash and the investment of funds identified in Section 2.0 Scope 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 Section 7.0 Authorized Financial Dealers and Institutions. The City Treasurer may designate in writing an assistant to the city treasurer a Deputy City Treasurer who, in the absence of the City Treasurer, will assume the City Treasurer's duties and responsibilities. The City Treasurer shall retain full responsibility for all transactions undertaken under the terms of this policy. In the endeavor to have all inactive cash invested all the time, the City Manager may designate an employee to city’s deputy city manager of administrative services assist the City Treasurer. in the gathering of information to create cash flow estimates. 6.0 Ethics and Conflicts of Interest March 12, 2024 Item #2 Page 35 of 54 - 7 - 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. 7.0 Authorized Financial Dealers and Institutions 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 provide written confirmation 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 documents below. 7.1 Financial Institutions • Current audited financial statements • Depository contracts, as appropriate • A copy of the latest Federal Deposit Insurance Corporation call report, and • Proof that commercial banks, savings banks, or savings and loan associations are state or federally chartered 7.2 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 March 12, 2024 Item #2 Page 36 of 54 - 8 - net worth divided by total assets) and must have had positive net earnings for the last reporting period. 7.3 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 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 consider 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. 8.0 Authorized and Suitable 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. Obligations of the U.S. Government Government Sponsored Enterprise (GSE) debt and its agencies. • Maximum remaining maturity of five years as of the date of settlement. • Percentage of portfolio, issuer, and ratings are not applicable. Municipal Bonds Bonds of any local agency within the United States, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. Municipal Bonds with a maximum remaining maturity of five years or less, issued by municipalities organized and operating within the United States shall not exceed 15% of the investment portfolio. The municipal bonds shall carry a combined rating of at least "AA” by one and “A” by another of the three Nationally March 12, 2024 Item #2 Page 37 of 54 8.1.1 8.1.2 - 9 - Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. • Maximum remaining maturity of five years as of the date of settlement. • Shall not exceed 15% of the investment portfolio. • No more than 5% of the portfolio may be invested in any single issuer. • Shall carry a rating of “AA” by one and “A” another of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. Bankers Acceptances Bankers Acceptances drawn on and accepted by a commercial bank. Bankers Acceptances may neither exceed 180 days maturity nor 25% of the portfolio. Furthermore, no more than 10% of the portfolio may be invested in any one issuer. • Maximum maturity 180 days as of the date of settlement. • Shall not exceed 25% of the investment portfolio. • No more than 10% of the portfolio may be invested in any single issuer. • Rating measures are not applicable. Certificates of Deposit 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 investments in Certificates of Deposit, if a private sector entity is used, shall not exceed more than 30% of the portfolio. The city may use a private sector entity that assists in the placement of Certificates of Deposit. Furthermore, no more than 10% of the portfolio may be invested in any one issuer. • Maximum remaining maturity of five years as of the date of settlement. • Shall not exceed 30% of the investment portfolio. • No more than 10% of the portfolio may be invested in any single issuer. • Rating measures are not applicable. Negotiable Certificates of Deposit Negotiable Certificates of Deposit issued by a nationally or state-chartered bank may neither exceed five years to maturity nor exceed 30% of the portfolio. March 12, 2024 Item #2 Page 38 of 54 8.1.3 8.1.4 8.1.5 - 10 - Furthermore, no more than 10% of the portfolio may be invested in any one issuer. • Maximum remaining maturity of five years as of the date of settlement. • Shall not exceed 30% of the investment portfolio. • No more than 10% of the portfolio may be invested in any single issuer. • Rating measures are not applicable. Commercial Paper Prime Commercial Paper of the highest numerical rating of Moody's Investors Service, Inc. or S&P Global Ratings. 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 Investors Service, Inc. and S&P Global Ratings. Prime Commercial Paper may neither exceed 270 days maturity nor 10% of the portfolio, nor shall it represent more than 5% of the outstanding paper of an issuing corporation. • Maximum remaining maturity of 270 days as of the date of settlement. • Shall not exceed 10% of the investment portfolio. • No more than 5% of the portfolio may be invested in any single issuer. • Shall carry a rating of “AA” by two of Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies: Moody's Investors Service, Inc. and S&P Global Ratings if the issuer has other existing debt. Repurchase Agreements Repurchase Agreements with a maximum maturity of one year. Repurchase Agreements may not exceed 5% of the portfolio. The market value of securities that underlay a Repurchase Agreement shall be valued at 102% or greater of the funds borrowed against those securities. • Maximum remaining maturity of one year as of the date of settlement. • Shall not exceed 5% of the investment portfolio. • No more than 5% of the portfolio may be invested in any single issuer. • Rating measures are not applicable. Corporate Notes Corporate Notes permitted are with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and March 12, 2024 Item #2 Page 39 of 54 8.1.6 8.1.7 8.1.8 - 11 - operating within the United States shall not exceed 30% of the investment portfolio. The Corporate Notes shall carry a rating of "AA” and a second rating of “A” as combination of ratings by the three NRSRO rating agencies. New investments made directly into corporations involved in the business of exploration, extraction, or further processing of oil and gas are not eligible for investment. • Maximum remaining maturity of five years as of the date of settlement. • Shall not exceed 30% of the investment portfolio. • No more than 5% of the portfolio may be invested in any single issuer. • Shall carry a rating of “AA” by one and “A” another of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. Money Market Funds Money market funds whose portfolio consists of one or more of the foregoing lawful investments. Sweep Accounts Sweep accounts for the investment of overnight funds when the funds are swept into investments allowed by this policy. Local Agency Investment Fund (LAIF) LAIF of the State of California Investments will be made in accordance with the laws and regulations governing those Funds. California Asset Management Program (CAMP) CAMP investments will be made in accordance with the laws and regulations governing those funds. 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. March 12, 2024 Item #2 Page 40 of 54 8.1.9 8.1.10 8.1.11 8.1.12 8.1.13 - 12 - California Government 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 NRSROs. Investments in supranational securities shall not exceed 10% of the City of Carlsbad’s investment portfolio. • Maximum remaining maturity of five years as of the date of settlement. • Shall not exceed 10% of the investment portfolio. • No more than 5% of the portfolio may be invested in any single issuer. • Shall carry a rating of “AA” by at least two of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. Agency Backed Mortgage Passthrough Securities Mortgage passthrough securities issued or guaranteed by the U.S. Government and its agencies. An agency-backed mortgage passthrough security, collateralized mortgage obligation, mortgage backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond. Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision shall not exceed 20% of the city’s portfolio. • Maximum remaining maturity of five years as of the date of settlement. • Percentage of portfolio, issuer, and ratings are not applicable. Non-agency Backed Mortgage Passthrough Securities Non-agency backed mortgage passthrough security, collateralized mortgage obligation, mortgage backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable- backed bond. Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision shall not exceed 5% of the city’s portfolio. • Maximum remaining maturity of five years as of the date of settlement. March 12, 2024 Item #2 Page 41 of 54 8.1.14 8.1.15 - 13 - • Shall not exceed 5% of the investment portfolio. • No more than 5% of the portfolio may be invested in any single issuer. • Shall carry a rating of “AA” by at least one of the three Nationally Recognized Statistical Rating Organization (NRSRO) rating agencies, Moody's Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. 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 New Securities New types of securities authorized by California law, but which are not currently allowed by the city’s Investment Policy, must first be approved by the City Council. 8.4 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. 9.0 Unauthorized Investments California Government Code Section 53601.6 disallows the following investments acquired after January 1, 1996: • Inverse floaters • Range notes • Interest-only strips that are derived from a pool of mortgages In addition, and more generally, investments are further restricted as follows: • No investment will be made in any security that could result in zero interest accrual if held to maturity • No investment will be made that could cause the portfolio to be leveraged • Purchases of investments on margin will not be made 10.0 Review of Investment Portfolio March 12, 2024 Item #2 Page 42 of 54 - 14 - 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 Manager, the City Attorney, the Deputy City Manager of Administrative Services, assistant to the city treasurer the Finance Director 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, not less frequently than once each quarter. 10.1 Exceptions The securities held must be in compliance with Section 8.0 Authorized Investments at the time of purchase. 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 has been downgraded by an NRSRO or the total value of the portfolio has declined causing the percentage invested in corporate notes to rise above 30%, or an unforeseen expenditure causes investments maturing within one year to fall below two-thirds of the approved operating budget of the current fiscal year. California Government Code Section 53601 specifies a percentage limitation for a particular category of investment. That percentage is applicable only at the date of purchase. 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 and reported on the monthly investment report presented to city council. 11.0 Investment Pools & Mutual Funds An investigation and due diligence will be conducted before investing in any investment pool or mutual fund. The City Treasurer shall review at a minimum: • The investment policy and objectives • Interest calculations and distributions • Safeguard and settlement processes March 12, 2024 Item #2 Page 43 of 54 - 15 - • A description of the program including legal investors and the minimums and maximum transactions allowable • Schedule for receiving statements • How reserves and retained earnings are treated • The fee schedule 12.0 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 to the city’s investments, when an investment is collateralized and not perfected under existing law, an attempt to perfect the collateralization should be made. California Government Code Section 53652 requires that the depository secure active or inactive deposits with eligible securities having a fair market value of at least 10% more than the total amount of all deposits, and 50% in excess of the deposit when secured with mortgage pools. California Government Code Section 53649 specifies that the City Treasurer is responsible for entering into deposit contracts with each depository. 13.0 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. 14.0 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 Section 8.0 Authorized Investments, and with the exception of authorized pools and investments, no more than 5% of the city's portfolio will be placed with any single issuer. 15.0 Maximum Maturities and Maximum Modified Duration March 12, 2024 Item #2 Page 44 of 54 - 16 - Maximum maturity and maximum modified duration evaluation supports the principal of liquidity by ensuring that adequate cash is available to meet anticipated cash flow requirements of the city. 14.115.1 Maximum Maturities for 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. Two-Thirds Within One Year Investments maturing within one year, measured at par value, must be no less than two-thirds of the approved operating budget of the current year. This requirement should be met within three months following adoption of the current operating budget. Remaining investments of the portfolio shall not have a maturity greater than five years from the date of investment except as provided in Section 15.1.3 Five Year Exception. Three Years Average The average portfolio investment maturity shall be three years or less. A dollar- weighted average will be used in computing the average maturity of the portfolio. Five-Year Exception Before an investment, which is allowed by California statute, is made in securities that mature more than five years from the date of 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 five years will not be greater than 10% of the portfolio and will be counted in the percentage of the portfolio that may mature beyond one year. Ten-Year Limit No investments will be made that mature beyond 10 years from the date of investment. Callable Investments Callable investments will be recorded at their maturity dates. 14.215.2 Maximum Modified Duration The investment restrictions identified in paragraphs of Section 8.0 Authorized Investments and Section 9.0 Unauthorized Investments, and the maturity March 12, 2024 Item #2 Page 45 of 54 14.1.115.1.1 14.1.215.1.2 14.1.~15.l.3 14.1.415.1.4 14.1.§15.1.5 - 17 - requirements identified in Section 15.1 Maximum Maturities for Pooled Investments, imply that the value of city investments should not change more than 2.2% for every 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 2.2% for every 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. 14.315.3 Investments Held Separately Maturities for investments held separately will conform to the trust indenture for each issue. 15.016.0 Internal Controls 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. The City Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the city are protected from loss, theft, fraud or misuse. The treasurer shall present all monthly and annual reports to the City Council, internal auditor, deputy city manager, finance manager, and by the city’s external auditors in the conduct of their annual audit of the city. 16.017.0 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 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. 17.018.0 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 March 12, 2024 Item #2 Page 46 of 54 - 18 - exceed projected cash receipts, or because the city's cash accounts may be temporarily overdrawn due to the efforts to invest 100% of inactive funds at all times. To provide for these contingencies the City Treasurer is authorized to take the following actions: 17.118.1 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. 17.218.2 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. 18.019.0 Investment Strategy 18.119.1 Pooled Investments A buy and hold strategy will be followed; that is, investments once made will 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. 18.219.2 Investments Held Separately Investments held separately for bond proceeds will follow the trust indenture for each issue. 19.020.0 Reporting California Government Code Section 53600 require reports meeting the standards set forth in these sections to be presented to City Council, 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 20.1 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). March 12, 2024 Item #2 Page 47 of 54 - 19 - 19.120.1 Pooled Investments The investment report will be submitted monthly by the City Treasurer within 60 days following the end of the month covered by the report. The monthly report will be published to the City Treasurer webpage after reporting to City Council. Each 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. 19.220.2 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 California Government Code Section 53646 when available. 20.021.0 Investment Policy Adoption March 12, 2024 Item #2 Page 48 of 54 - 20 - California Government Code Section 53646(a)(2) 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 to it 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. 21.022.0 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 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 are 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. California Asset Management Program (CAMP) March 12, 2024 Item #2 Page 49 of 54 - 21 - A California Joint Powers Authority (JPA) established in 1989 to provide California public agencies with professional investment services. The CAMP Pool is a permitted investment for all local agencies under California Government Code Section 53601(p). CAMP is directed by a Board of Trustees, which is made up of experienced local government finance directors and treasurers. Certificate of Deposit A deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving 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. 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 March 12, 2024 Item #2 Page 50 of 54 - 22 - 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 (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 daily. 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. Municipal Bonds March 12, 2024 Item #2 Page 51 of 54 - 23 - Municipal bonds are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. 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. Nationally Recognized Statistical Rating Organization (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 Investors Service, Inc., S&P Global Ratings, and Fitch Ratings, Inc. 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), March 12, 2024 Item #2 Page 52 of 54 - 24 - 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 California Government 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 daily. 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 in which an investment accumulates no interest. March 12, 2024 Item #2 Page 53 of 54 -25 - 23.024.0 Summary of Authorized Investments Investment Type Maximum Maturity1 Maximum % Portfolio Maximum % Issuer NRSRO Minimum2 Obligations of the US Government 5 years - - - Certificates of Deposit 5 years 30% 10% - Negotiable Certificates of Deposit 5 years 30% 10% - Corporate Notes 5 years 30% 5% AA/A Municipal Bonds 5 years 15% 5% AA/A Supranational Securities 5 years 10% 5% AA/AA Agency Backed Mortgage Passthrough Securities 5 years - - - Non-agency Backed Mortgage Passthrough Securities 5 years 5% 5% AA Repurchase Agreements 1 year 5% 5% - Commercial Paper 270 days 10% (3)AA/AA Bankers Acceptances 180 days 25% 10% - Money Market Funds N/A - - - LAIF N/A - - - CAMP N/A - - - Sweep Accounts N/A - - - 1 Exceptions are addressed in §15.0 Maximum Maturities and Maximum Modified Duration. Total portfolio Modified Duration shall be 2.2 or less. 2 NSRSOs used by the city are limited to Moody’s Investors Service, Inc., S&P Global Ratings., and Fitch Ratings, Inc. If two ratings are listed for an investment type, then at least two of the three agencies must have ratings compliant with this Investment Policy. Credit rating minimums include rating modifiers (+/-). 3 Commercial Paper shall not represent more than 5% of the outstanding paper of an issuing company. March 12, 2024 Item #2 Page 54 of 54