HomeMy WebLinkAbout1996-09-10; City Council; Resolution 96-3041
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RESOLUTION NO. 96-304
RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF CARLSBAD, CALIFORNIA,
REVISING THE CITY'S INVESTMENT POLICY
WHEREAS, the City adopted an investment policy on January 2,
1985 as required by Section 53646 of the California Government Code; and
WHEREAS, Section 53646(a) of the California Government Code
requires the City Treasurer to render annually to the City Council a statement of
investment policy; and
WHEREAS, the City Council may from time to time revise this policy
as may be necessary to provide proper guidance to City staff and the City
Treasurer; and
WHEREAS, the City Treasurer has reviewed the existing investment
policy and has recommended modifications which improve the City's ability to
manage inactive funds; and
NOW, THEREFORE, BE IT RESOLVED by the City Council of the
City of Carlsbad, California as follows:
1. The attached investment policy (Exhibit 2) is hereby adopted and
shall become effective immediately.
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2. That the Council finds that the investment policy (Exhibit 2) is in
conformance with Sections 53601 and 53635 of the California Government
Code.
PASSED, APPROVED AND ADOPTED at a regular meeting of the
City Council on the 2 day of September , 1996, by the following vote, to wit:
AYES: Council Members Lewis, Nygaard, Kulchin, and Hall
NOES: None
ABSENT: Council Member Finnila
YY CLAUDE A. LEWIS, Mayor
ATTEST:
k+U (SEAL) ALETHA L. RAUTENKRANZ, City Clerk
Exhib it 2 e 0
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Submitted by: Jim Stanton, City Treasurer
August 20,1996
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TABLE OF CONTENTS
Introduction ......................................................................................................... 1
Policy .................................................................................................................. i
Scope .................................................................................................................. 1
Pooled lrivestments ................................................................................... 1
Investments Held Separately .................................................................... 1
Objectives ........................................................................................................... 2
Safety ........................................................................................................ 2
Liquidity ..................................................................................................... 2
Return on Investment ................................................................................ 2
Duties & Responsibilities ..................................................................................... 2
Prudence ............................................................................................................. 2
Ethics and Coniflicts of Interest ........................................................................... 3
Authorized Investments ...................................................................................... 3
Pooled Investments ................................................................................... 3
Investments Held Separately .................................................................... 4
Collaterization ..................................................................................................... 4
Unauthorized Investment / Investment Activity ................................................... 5
Investment Strategy ............................................................................................ 5
Diversification ...................................................................................................... 5
Maximum Maturities ............................................................................................ 5
Selection of Financial Institutions and Brokers ................................................... 6
Purchase, Payment and Delivery ........................................................................ 7
Safekeeping and Custody ................................................................................... 7
Performance Standard for Pooled Investments ....................... : .......................... 7
Reporting ............................................................................................................. 7
Short Term Bolrrowing ......................................................................................... 8
Short Term Loan ....................................................................................... 8
Line of Credit ............................................................................................. 8
Exceptions .......................................................................................................... 8
Internal Control .................................................................................................... 9
Review ................................................................................................................ 9
Investment Policy Adoption ................................................................................. 9
Glossary ............................................................................................................ 10
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CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Approved by City Council Febmaqe
1.0 Introduction. The purpose of this document is to identify various policies and
procedures that enhance opportunities for a prudent and systematic investment policy
and to organize and formalize investment-related activities. Related activities which
comprise good cash management include accurate cash projections, the expeditious
collection of revenue, the control of disbursements, cost-effective banking relations, and
arranging for a short-term borrowing program which coordinates working capital
requirements and investment opportunities.
2.0 Policy. It is the policy of the City of Carlsbad to invest public funds not required
for immediate day-to-day operations in safe and liquid investments having ar
acceptable return while conforming to all state statutes and the City's lnvestmenl
Policy governing the investment of public funds.
3.0 Scope.
contingency reserves and inactive cash under the direct authority of the City.
It is intended that this policy cover the investment activities of al
3.1 Pooled Investments. Investments for the City and its component units wil
be made on a pooled basis, including the City of Carlsbad, the Housing authorib
of the City of Carlsbad, the Parking Authority of the City of Carlsbad, the City oi
Carlsbad Public Improvement Corporation, the Carlsbad Redevelopment Agency
and the Carlsbad Municipal Water District. The City's Comprehensive Annua
Financial Report identifies the fund types involved as follows:
0 General Fund
0 Special Revenue Funds
0 Debt Service Funds
0 Capital Project Funds
0 Enterprise Funds
0 Internal Service Funds
0 Redevelopment Funds
0 TrustFunds
0 Miscellaneous Special Funds
0 Any new funds created by the City Council, unless specifically exempted.
3.2 Investments held separately. Investments of bond proceeds will be helc
separately when required by the bond indentures or when necessary to mee
arbitrage regulations. If allowed by the bond indentures, or if the arbitragc
regulations do not apply, investments of bond proceeds will be held as part of thc
pooled investments.
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4.0 Objectives. Section 53600.5 of the California Government Code outlines the primary objectives of a trustee investing public money. The primary objectives, in order
of priority, of the City's investment activities shall be:
4.1 Safety. Safety of principal is the foremost objective of the investment
program. Investments of the City shall be undertaken in a manner that seek to
ensure preservation of capital in the overall portfolio.
4.2 Liquidity. The City's investment portfolio will remain sufficiently liquid to
enable the City to meet all operating requirements which might be reasonably
anticipated.
4.3 Return on investment. Investment return becomes a consideration only aftei
the basic requirements of safety and liquidity have been met. The City shall
attempt to obtain an acceptable return provided that the requirements of safety
and liquidity are first met.
The City Treasurer shall strive to maintain the level of investment of all contingency
reserves and inactive funds as close to 100% as possible. While the objectives oi
safety and liquidity must first be met, it is recognized that portfolio assets represent E
potential source of significant revenues. It is to the benefit of the City that these assets
be managed to produce optimum revenues, consistent with state statutes and loca
ordinances.
5.0 Duties and Responsibilities. The management of inactive cash and the
investment of Gtty funds are the responsibility of the Citj
Treasurer as directed by he authority granted by the Cit)
' unless dire
The City Treasurer may designate in writing a Deputy City Treasurer, who in thc
absence of the City Treasurer, will assume the City Treasurer's duties anc
responsibilities. The City Treasurer shall be responsible for all transactions undertaker
under the terms of this policy.
In the endeavor to have all inactive cash invested all the time, the City Finance Direct0
will assist the City Treasurer in the gathering of information to create cash flov
estimates.
6.0 Prudence. Section 53600.3 of the California Government Code identifies a!
trustees those persons authorized to make investment decisions on behalf of a loc~
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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.
Investments shall be made with judgment and care--under circumstances then
prevailing--which persons of prudence, discretion, and intelligence exercise in the
management of their own affairs, not for speculation, but for investment, considering
the probable safety of their capital as well as the probable income to be derived.
Investment officers acting in accordance with written procedures and the investmenj
policy and exercising due diligence shall be relieved of personal responsibility for ar
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 tc
control adverse developments.
7.0 Ethics and conflicts of interest. All participants in the City's investment proces:
shall seek to act responsibly as custodians of the public trust. Officers and employee:
involved in the investment process shall refrain from personal business activity tha
could conflict with proper execution of the investment program, or which could impaii
their ability to make impartial investment recommendations and decisions. lnvestmen
officials and employees shall make all disclosures appropriate under the Fair Politica
Practices Act and may seek the advice of the City Attorney and the Fair Politica
Practices Commission whenever there is a question of personal financial or investmen
positions that could represent potential conflicts of interest.
8.0 Authorized investments.
8.1 Pooled investments. The City Treasurer may invest City funds in thc
following instruments as specified in the California Government Code,
Section 53601, and as further limited in this policy.
8.1.1 Obligations of the U.S. Government, its agencies an(
instrumentalities.
Bankers Acceptances that are eligible for purchase by the Federa
Reserve System. Purchases may not exceed 270 days maturity o
25% of the portfolio.
8.1.3 Time Certificates of Deposit. Deposits should not exceed one yea
maturity. Deposits will be collateralized as specified in paragraph 9.(
of this Investment Policy.
8.1.2
8.1.4 Negotiable Certificates of Deposit issued by nationally or state
chartered bank. Purchases may not exceed 30% of the portfolio.
Prime Commercial Paper of the highest numerical rating of Moody'
Investment Services, Inc. or Standard & Poors Corporation. Furthei
eligible paper is limited to issuing corporations that are organized an1
8.1.5
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operating within the United States and having total assets in excess of
$500 million and having a "AA" or higher rating for other debt of the
issuer. Purchases may not exceed 180 days maturity or 15% of the
portfolio, and may not represent more than 5% of the outstanding
paper of an issuing corporation.
8.1.6 Repurchase Agreements with a maximum maturity of one week.
Repurchase Agreements will only be with primary dealers of the
Federal Reserve Bank of New York, and who have long-term debt
rated in the "AAA" or "AA" categories of Moody's Investment
Services, Inc. or Standard and Poors Corporation. Investments will
be collateralized as specified in paragraph 9.0 of this Investmeni
Policy and may not exceed 5% of the portfolio.
Medium-term Corporate Notes issued by corporations operating within
the United States and rated in the "AAA" or "AA" categories oi
Moody's Investment Services, Inc. and Standard and Poors
Corporation. Purchases may not exceed 30% of the portfolio.
Money market funds (whose portfolio consists of one or more of the
foregoing legal investments).
8.1.9 Sweep account for the investment of overnight funds when the funds
are swept into investments allowed by this policy.
8.1.7
8.1.8
8.1.10 Local Agency Investment Fund (LAIF) of the State of California.
Investments will be made in accordance with the laws and regulations
governing those Funds.
8.2 Investments held separately. Investments of bond funds will be made ir
conformance with the trust indenture for each issue. Such investments wil
be held separately when required.
9.0 Collateralization. Investments in time certificates of deposit shall be fully insurec
up to $100,000 by the Federal Deposit Insurance Corporation or the Federal Savings E
Loan Insurance Corporation, as appropriate. Investments in time certificates of deposi
in excess of $100,000 shall be properly collateralized. Section 53652 of the Californi:
Government Code requires that the depository pledge securities with a market value o
at least 10% in excess of the City's deposit as collateral in government securities, an(
50% in excess of the deposit as collateral in mortgage pools. Section 53649 of thc
California Government Code specifies that the City Treasurer is responsible for enterin!
into deposit contracts with each depository.
Investments in repurchase agreements must also be collateralized. In order tc
anticipate market changes and provide a level of security for all funds, thc
collateralization level will be 102% of market value of principal and accrued interest.
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10.0 Unauthorized investmentdinvestment activities. Effective January 1 , 1996
Section 53601.6 was added to the California Code to specifically disallow investment:
in inverse floaters, range notes, or interest-only strips that are derived from a pool o
mortgages. In addition, and more generally, investments are further restricted a:
follows:
10.1 No investment will be made that has either (I) an embedded option o
characteristic which could result in a loss of principal if the investment is helc
to maturity, or (2) an embedded option or characteristic which could seriousl)
limit accrual rates or which could result in zero accrual periods.
10.2 No investment will be made that could cause the portfolio to be leveraged.
11.0 Investment strategy. For pooled investments, a buy and hold strategy wil
generally be followed, that is, investments once made will usually be held until maturity
A buy and hold strategy will result in unrealized losses as market interest rates rise.
Unrealized losses, however, will dissipate as the maturity dates of the investments art
approached or as market interest rates decline. A buy and hold strategy requires tha
the portfolio be kept sufficiently liquid to preclude the undesirable sale of investment!
prior to maturity. Occasionally, the City Treasurer may find it advantageous to sell at
investment prior to maturity, but this should only be on an exception basis and on!
when it is clearly favorable to do so.
Investments held separately for bond proceeds will follow the trust indenture for eacl
issue.
12.0 Diversification. The portfolio will be diversified to avoid incurring unreasonablc
and avoidable risks regarding specific security types or individual financial institutions.
In addition to the limitations on specific security types indicated in paragraph 8.0 of thi
Investment Policy, and with the exception of U.S. Treasury/Federal agency securitie
and authorized pools, no more than 5% of the City's portfolio will be placed with an
single issuer.
13.0 Maximu
13.1 At least 50% of the portfolio will be invested in instruments maturing withi
one year from the current date. Of the remaining portion, no more tha
25% of the entire portfolio may have a maturity date between 3 and 5 year
from the current date. Investments having a maturity greater than 5 year
will not be made except as provided in paragraph 13.3 of this lnvestmer
Po I icy.
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13.2 The average portfolio investment maturity shall be 3 years or less. A dollar-
weighted average will be used in computing the average maturity of the
portfolio.
13.3 Before an investment is made in securities that mature more than 5 years
from the current date, the City Treasurer and the Financial Managemenl
Director will review the City's long term cash needs. Both must concui
before such an investment is made. Investments beyond 5 years will not be
greater than 10% of the portfolio, and will be counted in the percentage oi
the portfolio that may mature beyond 3 years. No investments will be made
that mature beyond 10 years from the current date.
To further provide for liquidity, investments will be made only in readily marketable
securities actively traded in the secondary market.
Maturities for investments held separately will conform with the trust indenture for each
issue.
14.0 Selection of financial institutions and brokers/dealers. Investments shall be
purchased only through well established, financially sound institutions. The City
Treasurer shall maintain a list of financial institutions and brokeridealers approved for
investment. All financial institutions and broker/dealers who desire to become qualified
bidders for investment transactions will be given a copy of the City's Investment Policy,
and a return cover letter which must be signed indicating that the investment policy has
been read and understood. Qualified financial institutions and brokeddealers must
supply the City Treasurer with the following:
14.1 Financial Institutions.
0 Current audited financial statements.
0 Depository contracts, as appropriate.
0 A copy of the latest FDIC call report or the latest FHLBB report, as
appropriate.
0 Proof that commercial banks, savings banks, or savings and loan
associations are state or federally chartered.
In addition to the above, Commercial banks, savings banks, and savings
and loan associations must maintain a minimum net worth to asset ratio
of 3% (total regulatory net worth divided by total assets), and must have
had a positive net earnings for the last reporting period.
14.2 Broker/Dealers.
0 Current audited financial statements.
0 Proof that brokerage firms are members in good standing of a
national securities exchange.
Commercial banks, savings banks, and savings and loan associations must maintain a
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minimum net worth to asset ratio of 3% (total regulatory net worth divided by total
assets), and must have had a positive net earnings for the last reporting period.
15.0 Purchase, Payment, and Delivery. A competitive bid process, when practical,
will be used to place all investment transactions. When two or more investmeni
opportunities offer essentially the same maturity, liquidity, yield, and quality, priority will
be given first to the financial institutions based in the City of Carlsbad, and second tc
other financial institutions in the State of California.
Purchases on margin will not be made. Payment for securities wi\\ be done on a
Delivery Versus Payment (DVP) basis via the City's custodian. Delivery of securities
will be made to the City in accordance with the third party custodial agreement.
16.0 Safekeeping and custody. All security transactions, including collateral for
repurchase agreements, entered into by the City shall be conducted on a delivery-vs.-
payment basis. All securities owned by the City will be held by a third-party custodian
designated by the City Treasurer and evidenced by a monthly statement from the
custodian. All securities will be held in the nominee name of the custodian. Collateral
for time deposits in savings and loans will be held by the Federal Home Loan Bank or
an approved Agent of Depository. Collateral for time deposits in banks will be held in
the City's name in the bank's Trust Department or in the Federal Reserve Bank.
17.0 Performance standard for pooled investments. Laddered maturities and a buy
and hold strategy for pooled investments will cause the investment portfolio to attain a
market-average rate of return throughout budgetary and economic cycles,
commensurate with the investment risk constraints and the cash flow needs. Since at
least 50% of the portfolio must mature within 1 year, 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.
18.0 Reporting. Section 53646 of the California Government Code requires a
q-ua&dy report of investments to the City Council, City Manager, and internal auditor
(or the Finance Director in the absence of an internal auditor).
18.1 Pooled investments. The investment report shall be submitted monthly by
the City Treasurer within 30 days following the end of the month covered by
the report. The monthly report shall include the following elements:
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Itemized listing of portfolio investments by type, date of maturity, yield to
maturity, and issuer.
Par value, dollar amount invested, book value, 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.
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Credit ratings of corporate notes
@Ga&
Weigh ge yield of the portfolio
Weighted average days to maturity of the portfolio from the date of the
0 Fund source of investments
report
Percent of portfolio maturing within one year
Percent of portfolio maturing between one and 3 years
Percent of portfolio maturing between 3 years and 5 years
Percent that each type of investment represents in the portfolio
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. Amo
analysis of the composition of the
trends regarding the size of the fund
regarding anticipated fund activity in the next fiscal year.
18.2
19.0 Short-term borrowing. The City is permitted by law to borrow money to meet
current short-term cash flow needs. These needs may arise either because projected
cash disbursements exceed projected cash receipts, or because the City's cash
accounts may be temporarily overdrawn due to the efforts to invest 100% of inactive
funds at all times. To provide for these contingencies the City Treasurer is authorized
to take the following actions:
19.1 Short-term loan. When there is a shortfall between projected cash
revenues and projected cash disbursements, the City Treasurer will secure a
loan in the amount that would equal the cash deficit plus projected cash
disbursements for one month. Any such loan will be repaid within one year.
19.2 Line of credit. The City Treasurer may maintain a line of credit with the
City's bank in an amount to cover sums temporarily overdrawn because of
efforts to invest all inactive funds at all times.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified in
this Investment Policy may occur for pooled investments because of events subsequent
to the purchase of investment instruments, e.g., the rating of a corporate note held in
the portfolio is downgraded below an "AA" rating, or total assets in the portfolio decline
causing the percentage invested in corporate notes to rise above 30%, or an
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unforeseen expenditure causes investments maturing within one year to fall below 50%
of the portfolio.
State law is silent as to how exceptions should be corrected. Exceptions may be
temporary or more lasting; they may be self-correcting or require specific action. I1
specific action is required, the City Treasurer should determine the course of action thai
would correct exceptions to move the portfolio into compliance with State and City
requirements. Decisions to correct exceptions should not expose the assets of the
fall due. Any subsequent investments should not extend existing exceptions.
Exceptions, and the decisions to correct the exceptions, will be reviewed with thE
Investment Review Committee referred to in paragraph 22.0 below.
21.0 Internal control. This policy and the strategy for and conduct of the investmen'
of City funds will be reviewed by an Investment Review Committee as set forth beloM
and by the City's auditors in the conduct of their annual audit of the City.
22.0 Review. An Investment Review Committee is hereby established to conduct
reviews of the City's investment portfolio, the strategy being utilized for the investment
of City funds, and the City's investment policy. This Committee will be composed of the
City Treasurer (acting as the Chair), the City Attorney, the Assistant City Manager, the
Financial Management Director, and the Deputy City Treasurer (when not one of the
foregoing). Additionally, an outside financial advisor may be included as an advisor
without a vote. The Committee will convene periodically as necessary or desirable bul
no less frequently than once each quarter.
23.0 Investment policy adoption. Section 53646(a) of the California Governmeni
Code requires the City Treasurer or Chief Fiscal Officer to render annually to the
legislative body of the local agency a statement of investment policy. The City's
investment policy shall be adopted by resolution of the City Council. The
policy shall be reviewed as required but at least on an annual basis by the Investmeni
Review Committee. Any modifications must be approved by the City Council.
portfolio to undue risk, and should not impair the meeting of financial obligations as the)
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GLOSSARY
Arbitrage Regulation: law to control the use of profit making by purchasing
securities on one market for immediate resale on another in order to profit from a
price difference.
Bankers Acceptances: 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: 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
bond holders.
Buy and Hold Strategy: investments in which management has the positive
intent and ability to hold each issue until maturity.
Collateralization: to secure a debt in part or in full by pledge of collateral, asset
pledged as security to ensure payment or performance of an obligation.
Commercial Paper: 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: securities industry term indicating payment is due
when the buyer has securities in hand or a book entry receipt.
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: mortgage backed bond, usually part of a collateralized
mortgage obligation (CMO) bearing an interest rate that moves in the opposite
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direction of an index, for example, the LIBOR rate. An inverse floater may have
a floor and a cap.
Laddered Portfolio: bond investment portfolio with securities in each maturity
range (e.g. monthly) over a specified period of time (e.9. five years).
Leverage: investing with borrowed money with the expectation that the interest
earned on the investment will exceed the interest paid on the borrowed money.
Local Agency Investment Fund (LAIF): a voluntary investment program
offering participating agencies the opportunity to participate in a major portfolio
which daily invests hundreds of millions of dollars, using the investment expertise
of the State Treasurer’s Office Investment staff at no additional cost to the
taxpayer. Investment in LAIF, considered a short term investment, is readily
available for cash withdrawal on a daily basis.
Negotiable Certificates of Deposit: large denomination ($1 00,000 or more)
interest bearing time deposits, paying the holder a fixed amount of interest at
maturity. Issues can be sold to a new owner before maturity.
Nominee Name: registered owner of a stock or bond if different from the
beneficial owner, who acts as holder of record for securities and other assets.
Typically, this arrangement is done to facilitate the transfer of securities when it
is inconvenient to obtain the signature of the real owner, or the actual owner may
not wish to be identified. Nominee ownership simplifies the registration and
transfer of securities.
Pooled Investment: grouping of resources for the common advantage of the
participants.
Range Notes: 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: contract to purchase and subsequently sell securities
at a specified date and price
Sweep Account: short-term income fund into which all uninvested cash
balances from the non-interest bearing checking account are automatically
transferred on a daily basis.
Third-party Custodian: 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
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securities safekeeping, and collection of dividends and interest. The bank acts
only as a transfer agent and makes no buy-sell recommendations.
Time Certificates of Deposit: deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without
giving advance notice.
Unrealized Profits (Losses): paper profits (losses) representing the difference
between the book value of the securities owned and their current market value.
Paper profits (losses) in an investment portfolio are realized when the securities
are sold.
Zero Accrual Periods: a period of time in which an investment accumulates no
interest.
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