HomeMy WebLinkAbout1999-02-16; City Council; Resolution 99-681
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RESOLUTION NO. 99-68
RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF CARLSBAD, CALIFORNIA,
REVISING THE CITY'S INVESTMENT POLICY DATED SEPTEMBER 8,1998
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, revised February 9, 1999,
(Exhibit 2) is hereby adopted and shall become effective immediately.
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2. That the Council finds that the investment policy, revised
February 9, 1999, (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
16th February
City Council on the L day of / ~ 1999, by the following vote, to wit:
AYES: Council Members Lewis, Hall, Nygaard and Kulchin
NOES: None
ABSENT: Council Member Finnila
CLAUDE A. LEWIS, Mayor
ATTEST:
(SEAL)
KAREN R. KUNDTZ, Assistant City Clerk
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STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Submitted by: Jim Stanton, City Treasurer
February 9,1999
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TABLE OF CONTENTS
Introduction ......................................................................................................... 1
Policy .................................................................................................................. 1
Scope .................................................................................................................. 1
Pooled Investments ................................................................................... 1
Investments Held Separately .................................................................... 1
Objectives ........................................................................................................... 2
Safety ........................................................................................................ 2
Liquidity ..................................................................................................... 2
Return on Investment ................................................................................ 2
Duties & Responsibilities ..................................................................................... 2
Prudence ............................................................................................................. 3
Ethics and Conflicts of Interest ........................................................................... 3
Authorized Investments ...................................................................................... 3
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 ............................................................................................................. 8
Short Term Borrowing ......................................................................................... 9
Short Term Loan ....................................................................................... 9
Line of Credit ............................................................................................. 9
Exceptions ........................................................................................................... 9
Internal Control .................................................................................................... 9
Review ................................................................................................................ 9
Investment Policy Adoption ............................................................................... 10
Glossary ............................................................................................................ 11
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CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Approved by City Council September 8, 1998
1.Q Introduction. The purpose of this document is to identify various policies an
procedures that enhance opportunities for a prudent and systematic investment polic
and to organize and formalize investment-related activities. Related activities whic
comprise good cash management include accurate cash projections, the expeditiou
arranging for a short-term borrowing program which coordinates working capit;
requirements and investment opportunities.
2.0 Policy. It is the policy of the City of Carlsbad to invest public funds not require
for immediate day-to-day operations in safe and liquid investments having a
acceptable return while conforming to all state statutes and the City's Investmet
Policy governing the investment of public funds.
3.0 Scope. It is intended that this policy cover the investment activities of 2
contingency reserves and inactive cash under the direct authority of the City.
collection of revenue, the control of disbursements, cost-effective banking relations, an
3.1 Pooled Investments. Investments for the City and its component units w
be made on a pooled basis, including the City of Carlsbad, the Housing authorii
of the City of Carlsbad, the Parking Authority of the City of Carlsbad, the City (
Carlsbad Public Improvement Corporation, the Carlsbad Redevelopment Agenc;
and the Carlsbad Municipal Water District. The City's Comprehensive Annu;
Financial Report identifies the fund types involved as follows:
General Fund
0 Special Revenue Funds
Debt Service Funds
0 Capital Project Funds
Enterprise Funds
0 Internal Service Funds
0 Redevelopment Funds
0 Trust Funds
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 he
separately when required by the bond indentures or when necessary to me1
arbitrage regulations, If allowed by the bond indentures, or if the arbitrac
regulations do not apply, investments of bond proceeds will be held as part of tt
pooled investments.
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4.0 Objectives. Section 53600.5 of the California Government Code outlines th
primary objectives of a trustee investing public money. The primary objectives, in orde
of priority, of the City's investment activities shall be:
4.1 Safety. Safety of principal is the foremost objective of the investmer
program. Investments of the City shall be undertaken in a manner that seek t
ensure preservation of capital in the overall portfolio.
4.2 Liquidity. The City's investment portfolio will remain sufficiently liquid t
enable the City to meet all operating requirements which might be reasonabl
anticipated.
4.3 Return on investment. Investment return becomes a consideration on
after the basic requirements of safety and liquidity have been met. The City sh;
attempt to obtain an acceptable return provided that the requirements of safei
and liquidity are first met.
The City Treasurer shall strive to maintain the level of investment of all contingenc
reserves and inactive funds as close to 100% as possible. While the objectives (
safety and liquidity must first be met, it is recognized that portfolio assets represent
potential source of significant revenues. It is to the benefit of the City that these assei
be managed to produce optimum revenues, consistent with state statutes and loci
ordinances.
5.0 Duties and Responsibilities. By the annual adoption of this policy, th
management of inactive cash and the investment of funds identified in paragraph 3.1
the responsibility of the City Treasurer as directed by the City Council. Under th
authority granted by the City Council, no person may engage in an investmel
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 accoun
with qualified financial institutions and brokersldealers for the purpose of effectir
investment transactions in accordance with this policy. The criteria used to sele
qualified financial institutions and brokersldealers are identified in paragraph 15 of th
policy.
The City Treasurer may designate in writing a Deputy City Treasurer, who in tk
absence of the City Treasurer, will assume the City Treasurer's duties ar
responsibilities. The City Treasurer shall retain full responsibility for all transactior
undertaken under the terms of this policy.
In the endeavor to have all inactive cash invested all the time, the City Finance Direct
will assist the City Treasurer in the gathering of information to create cash flo
estimates.
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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:
agency. As a trustee, the standard of prudence to be used shall be the "pruder
investor" standard and shall be applied in the context of managing the overall portfolic
Investments shall be made with judgment and care--under circumstances the1
prevailing--which persons of prudence, discretion, and intelligence exercise in thl
management of their own affairs, not for speculation, but for investment, considerin1
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 investmer
policy and exercising due diligence shall be relieved of personal responsibility for a
individual securityk credit risk changes or market price changes, provided- deviation5
from expectations are reported in a timely manner and appropriate action is taken t
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 th:
could conflict with proper execution of the investment program, or which could impa
their ability to make impartial investment recommendations and decisions. lnvestmer
officials and employees shall make all disclosures appropriate under the Fair Politic;
Practices Act and may seek the advice of the City Attorney and the Fair Politic;
Practices Commission whenever there is a question of personal financial or investmer
positions that could represent potential conflicts of interest.
8.0 Authorized investments.
8.1 Pooled investments. The City Treasurer may invest City funds in th
following instruments as specified in the California Government Code, Sectior
53601, and as further limited in this policy.
8.1.4 Obligations of the U.S. Government, its agencies an
instrumentalities.
8.1.2 Bankers Acceptances that are eligible for purchase by the Feder,
Reserve System. Purchases may not exceed 270 days maturity (
25% of the portfolio.
8.1.3 Time Certificates of Deposit. Deposits should not exceed one ye;
maturity. Deposits will be collateralized as specified in paragraph 9
of this Investment Policy.
8.1.4 Negotiable Certificates of Deposit issued by nationally or statc
chartered bank. Purchases may not exceed 30% of the portfolio.
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Government Code requires that the depository pledge securities with a market value c
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 th
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 t
anticipate market changes and provide a level of security for all funds, th
collateralization level will be 102% of market value of principal and accrued interest.
10.0 Unauthorized investmentslinvestment activities. Section 53601.6 of th
California Government Code disallows the following investments acquired after Januar
I, 1996: inverse floaters, range notes, or interest-only strips that are derived from
pool of mortgages. In addition, and more generally, investments are further restricted a
follows:
10.1 No investment will be made that has either (1) an embedded option (
characteristic which could result in a loss of principal if the investment is held i
maturity, or (2) an embedded option or characteristic which could seriously lirr
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.
I1 .O Investment strategy.
11.1 Pooled Investments. A buy and hold strategy will generally be followec
that is, investments once made will usually be held until maturity. A buy and hol
strategy will result in unrealized gains or losses as market interest rates fall or ris
from the coupon rate of the investment. Unrealized gains or losses, however, w
diminish as the maturity dates of the investments are approached or as markc
interest rates move closer to the coupon rate of the investment. A buy and hol
strategy requires that the portfolio be kept sufficiently liquid to preclude tl-
undesired sale of investments prior to maturity. Occasionally, the City Treasurc
may find it advantageous to sell an investment prior to maturity, but this shou
only be on an exception basis and only when it is clearly favorable to do so.
11.2 Investments held separately. Investments held separately for bor
proceeds will follow the trust indenture for each issue.
12.0 Diversification. The portfolio will be diversified to avoid incurring unreasonab
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 th
Investment Policy, and with the exception of U.S. Treasury/Federal agency securitic
and authorized pools, no more than 5% of the City's portfolio will be placed with ar
single issuer.
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13.3 Investments Held Separately. Maturities for investments held separately
will conform with the trust indenture for each issue.
14.0 Selection of financial institutions and brokerddealers. Investments shall b
purchased only through well established, financially sound institutions. The Cil
Treasurer shall maintain a list of financial institutions and brokeddealers approved fc
investment. All financial institutions and brokeddealers who desire to become qualifie
bidders for investment transactions will be given a copy of the City's Investment Polic!
and a return cover letter which must be signed indicating that the investment policy ha
been read and understood. Qualified financial institutions and broker/dealers mu!
swpply 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, 2
0 Proof that commercial banks, savings banks, or savings and loa
appropriate.
associations are state or federally chartered.
14.2 BrokedDealers.
0 Current audited financial statements.
0 Proof that brokerage firms are members in good standing of
national securities exchange.
Commercial banks, savings banks, and savings and loan associations must maintain
minimum net worth to asset ratio of 3% (total regulatory net worth divided by tot
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 practic:
will be used to place all investment transactions. When two or more investme
opportunities offer essentially the same maturity, liquidity, yield, and quality, priority VI
be given first to the financial institutions based in the City of Carlsbad, and second
other financial institutions in the State of California.
Purchases on margin will not be made. Payment for securities will be done on
Delivery Versus Payment (DVP) basis via the City's custodian. Delivery of securitit
will be made to the City in accordance with the third party custodial agreement.
16.0 Safekeeping and custody. All security transactions, including collateral f
repurchase agreements, entered into by the City shall be conducted on a delivery-v:
payment basis. All securities owned by the City will be held by a third-party custodi:
designated by the City Treasurer and evidenced by a monthly statement from tt
custodian. All securities will be held in the nominee name of the custodian. Collate1
for time deposits in savings and loans will be held by the Federal Home Loan Bank
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an approved Agent of Depository. Collateral for time deposits in banks will be held i
the Cityk name in the bank's Trust Department or in the Federal Reserve Bank.
117.0 Performance standard for pooled investments. Laddered maturities and a bu
and hold strategy for pooled investments will cause the investment portfolio to attain
market-average rate of return throughout budgetary and economic cycle:
commensurate with the investment risk constraints and the cash flow needs. Since 2
least 50% of the' portfolio must mature within 1 year, the rate of return will be mor
closely related to, but lag behind, changes in short-term market rates. The rate c
return of the investment portfolio will be based on the maturity value of the investment:
A dollar-weighted average of yields to maturity will be used in calculating the rate (
return of the entire portfolio.
18.0 Reporting. Sections 53607 and 53646 of the California Government Code
require reports of investments and transactions to the City Council, City Manager, an
internal auditor (or the Finance Director in the absence of an internal auditor).
18.1 Pooled investments. The investment report shall be submitted monthly k
the City Treasurer within 30 days following the end of the month covered by th
report. The monthly report shall include the following elements:
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Itemized listing of portfolio investments by type, date of maturity, yield 1
maturity, and issuer.
Par value, dollar amount invested, amortized cost, and current market valu
as of the date of the report will be given for the total of all securitie:
investments, and moneys held by the City and its component units. Th
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 th
report
Weighted average modified duration of the portfolio
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
Investment transactions for the reporting period
Fund source of investments when available
Statement that the investment portfolio has the ability to meet the City
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 followir
the close of the fiscal year. Among other items, the annual report will include 2
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analysis of the composition of the portfolio with regard to fund source; a review c
trends regarding the size of the fund, portfolio yields, and cash income; and a statemer
regarding anticipated fund activity in the next fiscal year.
18.2 Investments held separately. A report of investments held separatel)
including deferred compensation balances, shall be made quarterly within 30 day
following the end of the quarter and submitted as an exhibit in the City Treasurer'
monthly report. The quarterly report shall contain the information required b
Section 53646 when available.
19.0 Short-term borrowing. The City is permitted by law to borrow money to mec
current short-term cash flow needs. These needs may arise either because projecte
cash disbursements exceed projected cash receipts, or because the City's cas
accounts may be temporarily overdrawn due to the efforts to invest 100% of inactiv
funds at all times. To provide for these contingencies the City Treasurer is authorize
to take the following actions:
19.1 Short-term loan. When there is a shortfall between projected cas
revenues and projected cash disbursements, the City Treasurer will secure a loa
in the amount that would equal the cash deficit plus projected cash disbursemen
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 tt
City's bank in an amount to cover sums temporarily overdrawn because of effor
to invest all inactive funds at all times.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified
this Investment Policy may occur for pooled investments because of events subsequel
to the purchase of investment instruments, e.g., the rating of a corporate note held
the portfolio is downgraded below an "AA" rating, or total assets in the portfolio declir
causing the percentage invested in corporate notes to rise above 30%, or E
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 9:
temporary or more lasting; they may be self-correcting or require specific action.
specific action is required, the City Treasurer should determine the course of action th
would correct exceptions to move the portfolio into compliance with State and Ci
requirements. Decisions to correct exceptions should not expose the assets of tk
portfolio to undue risk, and should not impair the meeting of financial obligations as tht
fall due. Any subsequent investments should not extend existing exceptions
Exceptions, and the decisions to correct the exceptions, will be reviewed with tt
Investment Review Committee referred to in paragraph 22.0 below.
21.0 Internal control. This policy and the strategy for and conduct of the investme
of City funds will be reviewed by an Investment Review Committee as set forth belc
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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 conduc
reviews of the City's investment portfolio, the strategy being utilized for the investmer
of City funds, and the City's investment policy. This Committee will be composed of th
City Treasurer (acting as the Chair), the City Attorney, the Assistant City Manager, th
Administrative Services Director, and the Deputy City Treasurer (when not one of th
foregoing). Additionally, an outside financial advisor may be included as an advisc
without a vote. The Committee will convene periodically as necessary or desirable bt
no less frequently than once each quarter.
23.0 Investment policy adoption. Section 53646(a) of the California Governmer
Code requires the City Treasurer to render to the City Council and the lnvestmer
Review Committee a statement of investment policy no less frequently than oncl
each year. The City's investment policy and any modifications thereto shall bl
considered at a public meeting. Adoption shall be made by resolution of the Cit
Council.
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GLOSSARY
Amortized Cost: cost of investments adjusted for amortized premiums and
discounts. Amortized cost is used to maintain comparability with market value.
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
bondholders.
Bookvalue: 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.
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.
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
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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 bondlnote structure. The interest rate earned by the bondlnote
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 bondhote
will decline. An inverse floater increases the market rate risk and modified
duration of the investment.
Laddered Portfolio: bond investment portfolio with securities in each maturity
range (e.g. monthly) over a specified period of time (e.g. five years).
Leverage: investing with borrowed money with the expectation that the interest
earned on the investment will exceed the interest paid on the borrowed money.
Local Agency Investment Fund (LAIF): a voluntary investment program
offering participating agencies the opportunity to participate in a major portfolio
which daily invests hundreds of millions of dollars, using the investment expertise
of the State Treasurer’s Office Investment staff at no additional cost to the
taxpayer. Investment in LAIF, considered a short term investment, is readily
available for cash withdrawal on a daily basis.
Market Risk: the risk that market interest rates will rise causing a loss of value
in investments held. All investments made by the City involve a degree of
market risk. See also “Unrealized Gains (Losses).
Modified Duration: a measure of the sensitivity that the value of a fixed-income
security has to changes in market rates of interest. Modified duration is the best
single measure of a portfolio’s or security’s exposure to market risk. Modified
duration identifies the potential gain/loss in value before the gainlloss 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: 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
beneficia! owner, who acts as holder of record for securities and other assets.
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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 Note: 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
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 Gains (Losses): increases (decreases) 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
overperforming (underperforming) the current market for similar investments. An
increase in value indicates the portfolio is earning relatively more interest than
current market conditions, and a decrease in value indicates that the portfolio is
earning relatively less interest than current market conditions.
Zero Accrual Periods: a period of time in which an investment accumulates no
interest.
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