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HomeMy Public PortalAbout2014.005 (01-21-14)RESOLUTION NO. 2014.005 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LYNWOOD APPROVING THE TREASURER'S STATEMENT OF INVESTMENT POLICY WHEREAS, the Treasurer is responsible for the City of Lynwood's cash flow whereby funds are transferred from various accounts to meet operating obligations; and WHEREAS, the Treasurer is also responsible for the investment of idle cash; and WHEREAS, the Treasurer has prepared guidelines for a prudent investment policy; and WHEREAS, the policy contains certain investment criteria; and WHEREAS, the basic premise of the policy is to ensure the safety of funds and assure that the Lynwood City Council's cash needs are met NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF LYNWOOD DOES HEREBY RESOLVE, DECLARE, DETERMINE AND ORDER AS FOLLOWS: Section 1. That the Treasurer's Statement of Investment Policy attached hereto as Exhibit "A" is hereby approved. Section 2. This Resolution shall take effect immediately upon its adoption. PASSED, APPROVED and ADOPTED this 21s` day of January, 2014. Ai e Castro, Mayor ATTEST: Maria Quinonez, City Cl6rk APPROVED AS TO FORM: v nl -'� david A. Garcia, City Attorney APPROVED AS TO CONTENT: Richard N. Warne, Interim City Manager STATE OF CALIFORNIA } ) SS. COUNTY OF LOS ANGELES ) I, the undersigned, City Clerk of the City of Lynwood, do hereby certify that the foregoing Resolution was passed and adopted by the City Council of the City of Lynwood at a regular meeting held on the 21St day of January, 2014. AYES: COUNCIL MEMBERS ALATORRE, SANTILLAN -BEAS, SOLACHE, HERNANDEZ AND CASTRO NOES: NONE ABSENT: NONE ABSTAIN: NONE Maria Quinonez, City Clerk STATE OF CALIFORNIA ? ) SS. COUNTY OF LOS ANGELES ) I, the undersigned, City Clerk of the C Council of said City, do hereby certify that the copy of Resolution No. 2014.005 on file in adopted on the date and by the vote thereir 2014. Maria Quinonez, tfty Clerk ty of Lynwood, and the Clerk of the City above foregoing is a full, true and correct my office and that said Resolution was stated. Dated this 21St day of January, INVESTMENT POLICY PURPOSE The purpose of this Statement of Investment Policy ( "Policy ") is to establish guidelines for the prudent investment of the City of Lynwood's idle cash or reserve cash and outlines the policies essential to ensure the safety and financial strength of the City's investment portfolio. This policy is based on the principles of prudent money management and conforms to all applicable Federal and State Laws governing the investment of public funds under the control of the Treasurer. 1.0 POLICY: Annually, in accordance with California Government Code (CGC) Section 53646, the Treasurer will render to the City Council a Statement of Investment Policy for consideration and approval at a public meeting. Any investments currently held at that time that do not meet the guidelines of this policy, as changed from time to time by the City Council, shall be exempt from the requirements of this policy. However, at the investment maturity or liquidation, such funds shall be reinvested only as provided by this policy, which offer guidance to brokers and any external investment advisors on the investment of City funds. This investment policy applies to all investment activities of the City, except for the Employees Retirement and Deferred compensation funds are excluded because it is separately managed by a third party administrator. This policy applies to all City funds, except for bond proceeds that are managed by trustees. Trustees must comply with the provision of bond's indenture agreements. 2.0 SCOPE: Policy statements outlined in this document apply to the City's pooled funds, as well as other financial assets under the City Treasurer's control unless exempted by resolution or by statute. These funds are accounted for in the City of Lynwood Comprehensive Annual Financial Report (CAFR), and include: 1. General Fund 2. Special Revenue Funds 3. Capital Project Funds 4. Enterprise Funds 5. Trust and Agency Funds 6. Retirement Pension Funds 7. Internal Service Funds 8. Any new fund created by the City Council unless specifically exempted 3.0 PRUDENCE: The standard of prudence to be used by.investment officials shall be the "prudent investor" standard (CGC Section 53600:3) and shall be applied in the context of managing an overall portfolio which 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 INVESTMENT POLICY, 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 City'". At the time of purchase, it is the City's intent to hold all investments until maturity to ensure the return of all invested principal. However, it is recognized -;that market prices of securities will vary depending on economic and interest' rate condition at any point in.time. The City Treasurer, and other individuals who, may be designated to manage the City's investment portfolio, when acting within the intent and, scope of-this investment policy and other authorized written "procedures, and'when exercising due diligence, are relieved of personal liability for the individual security's credit risk or market price change of a security or other investment; provided that deviations from expectations are reported to .the,,City of Lynwood in a timely manner and that appropriate action is taken to mitigate unforeseen adverse conditions. 4.0- OBJECTIVES: Within the overriding requirement of compliance with all Federal, State and local laws governing the investment of moneys under the� control of the'Treasurer, and as specified in CGC Section 53600.5, when investing„ reinvesting,♦ purchasing, acquiring, exchanging, selling or managing public funds, the primary objective of a trustee. shall be to safeguard the principal of the funds under,its,control. The secondary objective shall be to meet the liquidity.. needs of the, depositor: The third objective shall be to achieve a return on the funds under its control. Taking into account the City's daily and periodic . cash flow needs, the City desires to invest all temporarily idle funds as close to 100% as is reasonably possible. At least 30% of the overall investment_portfolio will be comprised of investments maturing in one year or less. _No single investment shall be purchased with a term to maturity at the date 'of purchase that exceeds-5 years, except as special circumstances dictate and with the expressed appioval 'of the City Treasurer. The basic goal of the City's investment policy is'to_ ensure safety and availability of temporarily idle funds.when they are needed- The primary objectives, in priority order, of the investment activities shall be: Safety: Safety of principal is the foremost objective of the investment program. Each investment transaction must seek' to ensure that capital losses are avoided, whether from securities default, broker- dealer default, or erosion of market value. The City will endeavor to preserve principal by mitigating both credit risk and market risk, as specified below. Credit risk, which is defined as;the risk of loss due tonsolvency or other failure of the issuer of a security, -must be mitigated by purchasing investment grade securities and by diversifying the investment portfolio so that the failure of any one issuer does not unduly harm` the City's capital base and cash flow. 3 INVESTMENT POLICY Market risk, which is defined as market value fluctuations, must be mitigated by limiting the average maturity of the City's investment portfolio to one year, limiting the maximum maturity of any one security to five years, structuring the portfolio to take into account historic and current cash flow analysis, eliminating the need to sell securities for the sole purpose of short term speculation. Liquidity Because the City operates its own water utility and bills monthly for utility services, cash flow is generated on a daily basis. Historical cash flow trends must be compared to current cash flow requirements on an ongoing basis to ensure that the City's investment portfolio will remain sufficiently liquid to enable the City to meet all reasonable anticipated operating requirements. Return on the Investment. The investment portfolio shall be designed and managed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment objectives, authorized investments and the cash flow needs of the City. 5.0 DELEGATION OF AUTHORITY: In accordance with Section 53607 of the Government Code, the City of Lynwood management responsibility for the investment program is hereby delegated to the Treasurer, who shall be responsible for all transactions underlaken and shall establish a system of control to regulate the activities of subordinate officials, and their procedures in the absence of the Treasurer. Under the provision of CGC Section 53600.3, the Treasurer is a trustee and a fiduciary subject to the prudent investor standard. The City may delegate to the City Treasurer the authority to invest or reinvest City funds for a one -year period. The Treasurer may delegate all, or a portion of his /her investment authority to a Deputy City Treasurer. Prior to the delegation of the investment authority to a Deputy City Treasurer, the Treasurer shall notify the City council and request confirmation of the delegation. Delegation of investment authority will not remove or abridge the Treasurer's investment responsibility. The City may engage the services of one or more external investment managers to assist in the management of the City's investment portfolio in a manner consistent with the City's objectives. Such external managers may be granted discretion to purchase and sell investment securities in accordance with this Investment Policy. The Treasurer shall establish written investment policy procedures for the operation of the investment program consistent with this policy. The procedures - -should include reference to' safekeeping, wire transfer agreements, banking service contracts and collateralldeposltory agreements, Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Treasurer. INVESTMENT POLICY 6.0 ' ETHICS: Elected officials, City officers, employees and any other, individual, involved in the investment operations are prohibited from personal; business activity that could conflict with.proper execution of the investment program, or which could impair their ability to make impartial investment decisions, or which ,could give the appearance thereof. Furthermore, these same individuals shall disclose any material financial interest in financial institutions that conduct business within their jurisdiction, and they shall further disclose any darge personal financial /investment positions that could be related, to the ;performance of-the City: The Treasurer shall immediately disclose any financial interest, which is subject to disclosure under the California Political Reform Act or would constitute a conflict of interest under Government Code Section 1090 to the City Manager. All other City Investment Officials shall immediately disclose'any financial.interest which is subject to disclosure under the California Political. Reform Act of would constitute'a conflict of interest under Government Code.Sectiorf 1090 to the City Manager. 7.0 AUTHORIZED DEALERS AND INSTITUTIONS: The City may conduct investment transactions only ' with banks, savings and loans associations, and registered broker / dealers. Any inves4ments`other1han those purchased directly from a issuer must be purchased from (i) an. individual or entity licensed by the State as a broker- dealer;.as defined in Section 25004 of the Corporations Code, and which is a member of the Financial Industry . Regulatory Authority, (FINRA) or (ii) from a member of a federally - regulated securities exchange, or (iii) a national or state charted bank;.or", (iv) a federal or state association (as defined by Section 5102 of the - Financial Code); 'or ,(v) a brokerage firm designated as a primary government dealer' by 'the Federal Reserve Bank. The City Treasurer, either directly or through an authorized party, must investigate and evaluate all financial institutions, on an annual basis, that desire to do business with the City in order to determine :whether they-,are adequately capitalized' and whether they make markets in that are appropriate to the City's needs. This may be accomplished by the following:. a financial institution to complete and return an appropriate questionnaire, audited financial statements. and proof of Financial - Industry Regulatory ,Authority (FINRA) registration and good standing. Nothing in this section precludes the City from engaging .the -services of a Registered Investment Advisory firm to assist the City, on'a discretionary' basis, with the investment of the City's portfolio. 8.0 AUTHORIZED AND.SUITABLE INVESTMENTS: Investments must be made in accordance with the- "prudenf investor rule ".that is cited under the heading "Prudence." The City is subject to California Government Code, Sections 53600 et seq. within the context of these limitations, the following investments are authorized, subject to the restrictions noted below: INVESTMENT POLICY a. United States treasury bills, notes, and bonds or similar instruments for which the full faith and credit of the United States is pledged for payment of principal and interest. There is no limitation on the percentage of the City's surplus funds that can be invested in these instruments. The maximum maturity period may not exceed 5 years. b. Obligation issued by banks for cooperatives, federal land banks, federal intermediate credit banks, the Federal Home Loan Board (FHLB), Federal Home Loan Mortgage Corporation (FHLMC), Federal Farm Credit Bank (FFCB), and the Federal National Mortgage Association (FNMA). Although there is no percentage limitation on investments in these obligations, the "prudent investor rule" applies to obligations issued by any of these agencies, because U.S. Government backing is implied rather than guaranteed. The maximum maturity period may not exceed 5 years. c. Commercial paper rated "P -1" by Moody's Investor Services or "A -1" by Standard & Poor's, and issued by a domestic corporation having assets in excess of $500;000,000 and has a long -term debt rating of "A2" or higher by Moody's or "A" or higher rating by S &P. The purchase of eligible commercial paper may not exceed 270 days maturity nor represent more than 5% of the outstanding paper of an issuing corporation. The Purchase of commercial paper not to exceed 25% of the City's surplus funds. d. FDIC Insured Certificates of Deposit issued by a nationally or state - chartered bank, or a state of federal savings and loan association, or by a state - licensed branch of a foreign bank. The invested amount per institution shall not exceed the current FDIC insured limit (currently $250,000). Purchases of eligible FDIC' insured certificates of deposit shall not exceed five years to maturity. e. Negotiable certificates of deposit issued by a national or state - charted bank or a state or federal saving and loan association. Negotiable certificates of deposit may not exceed 30% of the City's total portfolio. Certificates purchased from a bank may not exceed 30% of the City's total portfolio. Certificates purchased from a bank may not exceed the shareholder's equity in the bank. Certificates over $500,000 purchased from savings and loan associations may not exceed the net worth of the association. The maximum maturity period may not exceed 5 years. f State of California Local Agency Investment Fund (LAIF) Funds may be invested in LAIF, a State of California managed investment pool, up to the maximum dollar amounts per separate legal entity in conformance with the account balance limits authorized by the State Treasurer. Annual review of LAIF's Pool Money Investment Board Annual Report will be conducted to continue to ensure LAIF's investment policy, standards, and rate of return are compatible with the City's risk tolerance. Limits: Maximum concentration $40 million combined limit for all accounts. INVESTMENT POLICY g. Funds held under the terms of a Trust Indenture or °other contract or debt issuance agreement may be invested according to the, provisions of those indentures' agreements. h. The City may invest.in non - negotiable time deposits that are collateralized as required by the California Government Code, and that are maintained, in banks and savings and loans associations that meet the requirement for accepting deposits of public funds., Because time deposits are not .liquid, no more than, 25% of the City's ,temporarily idle .funds may: be invested in this category. A maximum maturity period-may not.•ezceed one year. is Medium term corporate notes with a maximum maturity of 5 years may be purchased. Securities eligible for investment must be rated "A2" or higher by Moody's or "A" or higher rating by S &P. `Medium -term notes may not exceed 30% of the market value of the City's, portfolio, and not mbre -than. 2% of the market value of the portfolio may be invested in notes issued °by any corporation. Commercial paper holdings must be included wnen calculating this 2% limitation. The maximum maturity period may',not exceed 5 years.. 9.0 UNAUTHORIZED INVESTMENTS:. State and Federal laws notwithstanding, any investment not specifically described herein including, but not limited to,, reverse repurchase agreements, derivatives, options, futures, zero coupon bonds; -inverse floaters, range notes, first mortgages or trust deeds, collateralized `mortgage obligations' (CMG's), limited partnerships, real estate investments, trusts (REIT's),•:open -end Mutual funds with a weighted average maturity greater than 180 =days, unregulated and/or uninsured investment pools, common stock, preferred stock, commodities, precious metals, securities with high price volatility,' limited•,marketability`(less than three active bidders), securities that may default on interest payments and any other speculative investment deemed inappropriate under'the Prudent Invest standard are strictly prohibited. 10.0 REVIEW OF INVESTMENT PORTFOLIO The securities held by the City of Lynwood must be in compliance with Section 8 -0 Authorized and Suitable Investments at the time of purchase. The-Quarterly Investment report will identify any securities that do not comply.. The Treasurer shall report any instances of noncompliance identified through the review of the portfolio to the City Council 11.0 COLLATERAL REQUIREMENTS: Collateral for Certificates of Deposit (CD) and Negotiated Certificates of Deposit (NCD) must comply with Government Code ,'..Chapter 4; , Bank. Deposit law Section 16500 et seq. and the Savings and Loan and Credit Union Deposif1aw Government Code Section 16600 et seq. In order to reduce market risk and providea level of security for all funds, -the market value of securities that underlay Certificates of Deposit shall be valued at 7 INVESTMENT POLICY 110% of the market value of principal and accrued interest. Repurchase Agreements shall be valued at 102% of the market value of principal and accrued interest. In conformity with the provisions of the Federal Bankruptcy Code that provide for the liquidation of securities held as collateral, the only securities acceptable as collateral are certificates of deposit, commercial paper, eligible bankers acceptances, and medium term notes or securities that are the direct obligation of, or are fully guaranteed as to principal and interest by the United States or any City of the United States. An independent third party with whom the City has a current custodial agreement will always hold collateral. The right of collateral substitution is granted with prior approval of the City Treasurer. 12.0 SAFEKEEPING AND CUSTODY All securities owned by the City shall be held in safekeeping by the City's custodial bank or by a third party bank trust department, acting as agent for the City under the terms of a custody agreement or master repurchase agreement. All security transactions, including collateral for repurchase agreements, entered into by the City shall be conducted on a delivery - versus - payment (DVP) basis through the City's safekeeping agent. Securities held in custody for the City shall be independently audited on an annual basis to verify investment holdings. 13.0 DIVERSIFICATION: The Treasurer shall maintain a diversified portfolio to minimize the risk of loss resulting from over concentration of assets in a specific maturity, issuer, or security type. With the exception of U.S. Treasury securities, Federal agencies, and LAIF, no more than 50% of the City's total investment portfolio will be invested in with a single institution. Additionally, no more than 2 %, calculated at the time of purchase, of the portfolio shall be invested in one name or with one credit counterparty. 14.0 MAXIMUM MATURITIES: To the extent possible the portfolio will attempt to match its investments with anticipated cash flow requirements_ Matching maturities with cash flow dates will reduce the need to sell securities prior to maturity, thus reducing a potential realized loss. The portfolio will not directly invest in securities maturing more than five (5) years from the date of purchase pursuant to Government Code Section 53601. (Excluding LAIF)_ The weighted average maturity of the portfolio shall not exceed 3 years. Reserve funds may be invested in securities exceeding one year if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds. No portion of the portfolio may exceed five years. M INVESTMENT POLICY,, 15.0 INTERNAL CONTROL: The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the City's assets are protected from loss,'theft or misuse. The internal control structure shall be designed,to provide reasbriable assurance that those objectives are met. The concept of reasonable assurance, recognizes that the cost of a control should not exceed the benefits to be derived and that the valuation of costs and benefits requires estimates and judgments;by management. Internal control procedures shall address: • Separation of duties, • Contra[ of collusion. • Custodial safekeeping. • Avoidance of physical delivery otsecurities. •- Written confirmation of transfers for investments and wire-- trariisfers. • Written procedures for placing investment transactions. • Delegation of authority to investment officials. 16.0 PERFORMANCE STANDARDS: The investment portfolio shall be designed with the objective of obtaining a market rate of return throughout budgetary and economic cycles, commensurate with investment risk constraints and cash flow needs: a. 'Investment Strategy: The portfolio's basic investment strategy is, to buy and hold investments until maturity. However the Treasurer may sell'a security due to adverse changes in credit risk or „due to unexpected cash flow needs, or to improve the quality, yield, 'or target',Auration of the portfolio. b. Market Yield (Benchmark): The City portfolio is 'managed wifh' the objective of obtaining a market rate of return„ commensurate 'Wth identified risk constraints and cash flow characteristics. The appropriate benchmarks will be periodically reviewed;by °the CityT.reasurer. 17.0 REPORTING: In compliance with Government code Section'53607 and 53646, the Treasurer shall provide the City Council quarterly investment reports, which- provide a clear picture of the status of the current investment portfolio. The Quarterly Investment Report will include the following information; portfolio statistics, portfolio performance, compliance reporting requirements, and investment trading: Portfoiio Statistics • Classification of the investment, the percentage of the 4otal portfolio which each type of investment represents, issuer; 'CUSIP„ purchase date, rating of security, date of maturity, par'and dollar amount invested ''on ail securities and investments. • Current market value and the source of the market value. W INVESTMENT POLICY Weighted average maturity of the investment portfolio. Maturity aging by type of investment. Unrealized gain or loss resulting from appreciation or depreciation in the market value of securities. Compliance Reporting Requirements Cash management projection: Statement denoting the ability of the City to meet its expected obligations over the next six months. Statement of compliance with the Policy: Reasons for and number of violations or exceptions to the investment policy during the quarter being reported on, as well as prior violations or exceptions which have not yet been corrected. Investment Trading Activity All investment transactions occurring during the quarter whether or not the transaction has been fully settled. A description of any security purchased during the quarter with a maturity exceeding five years. A description of any security downgraded below the minimum acceptable ratings level (below prime for short term ratings, or below investment grade for long term ratings). 18.0 INVESTMENT POLICY ADOPTION: The Treasurer shall annually render to the City Council a Statement of Investment policy as required in Section 53646(a) of the Government Code. The City's investment policy shall be adopted by resolution of the City Council and shall be reviewed annually; any modification made thereto must be approved by the legislative body. 19.0 GLOSSARY Definitions of investment - related terms are listed on Exhibit A. 10 INVESTMENT POLICY EXHIBIT A GLOSSARY ACCRETION: Adjustment of the difference between the price of a bond bought at an original discount and the par value of the bond. AGENCIES: Federal agency securities and /or Government - sponsored enterprises (GSEs), also known as U.S. Government instrumentalities. Securities issued by Government National Mortgage Association (GNMA) are considered true agency securities, backed by the full faith and credit of the U.S. Government. GSEs are financial intermediaries established by the federal government to fund loans to certain groups of borrowers, for example homeowners, farmers and students and are privately owned corporations with a public purpose. The most common GSEs are Federal Farm Credit System Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Association, and Federal National Mortgage Association. AMORTIZATION: Accounting procedure that gradually reduces the cost value of a limited life or intangible asset through periodic charges to income. For fixed assets, the term used is "depreciation ". It is common practice to amortize any premium over par value paid in the purchase of preferred stock or bond investments. APPRECIATION: Increase in the value of an asset such as a stock bond, commodity or real estate. ASKED PRICE: The price a broker /dealer offers to sell securities. ASSET BACKED: A type of security that is secured by receivables, such as credit card and auto loans. These securities typically pay principal and interest monthly. BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. This money market instrument is used to finance international trade. BASIS POINT: One - hundredth of one percent (i.e., 0.01 %). BENCHMARK: A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio's investment. BID PRICE: The price a broker /dealer offers to purchase securities. BOND: A financial obligation for which the issuers promises to pay the bondholder a specified stream of future cash flows, including periodic interest payments and a principal repayment. BOOK RATE OF RETURN: A measure of a portfolio's performance over time. It is the internal rate of return which equates the beginning value of the portfolio with the ending value, and includes interest earnings and realized gains and losses on the portfolio. INVESTMENT POLICY BOOK VALUE: The value at which a debt security is shown on the holder's balance sheet. Book value is acquisition cost less amortization of premium or accretion of discount. BROKER: A broker acts as an 'intermediary between a buyer 'and seller for a commission and does not trade for his /her own risk and account or inventory. CALLABLE SECURITIES: A security that can be redeemed by the issuer before.the scheduled maturity date. CASH FLOW: An analysis of all changes that affect the cash account during a specified period. CERTIFICATE OF DEPOSIT (CD): A time deposit with -a `specifiq maturity evidenced by a certificate. Larger denomination CD's are typically negotiable. COLLATERAL: Securities, evidence of deposit or :other property "which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a barik`to . secure deposits of public monies. COLLATERALIZED MORTGAGE OBLIGATION.(CMO):' A type of. mortgage backed, security that creates separate pools of pass- through, rates for. different classes 'of bondholders with varying maturities, called tranches. The repayments from the pool'.of pass- through securities are used to retire the bonds in the order specified by the bonds' prospectus. COMMERCIAL PAPER: Short-term, unsecured, negotiable promissory notes. -,of corporations. COMMERCIAL RECEIVABLES`. Business debt owed to a credifor which may be used as collateral for asset backed securities. These receivables include equipment, leases, building leases, and other business loans. COMPREHENSIVE ANNUAL FINANCIAL'REPORT ;(6AFR): The official annual financial report for` the City. It includes combined statements and basic financial statements for each individual fund and account group prepared in conformity -with Generally Accepted Accounting Principles (GAAP) . CONDUIT FINANCING: A financing in which, a governmental agency issues debt and the proceeds of the issue are loaned to a nongovernmental borrower who theri applies- the ,proceeds for a project financing or {if permitted by federal tax1aws for a qualified 501(c)(3) bond) for working capital purposes. CONSUMER RECEIVABLES: Consumer debt owed to a:creditor which'may be used, as, collateral for asset backed securities. These receivables include- credit card, "auto, and''home equity loans. CORPORATE NOTE: Debt instrument issued by a private corporation.. COUPON:, The annual rate at which a bond pays interest. INVESTMENT POLICY CREDIT ANALYSIS: An analysis of the economic and financial conditions to determine creditworthiness or the ability to meet debt obligations. CREDIT RATINGS: A grade given to a debt instrument that indicates its credit quality. Private independent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations of the issuer's financial strength, or its ability to pay principal and interest in a timely fashion. High graded credit ratings are as follows: N1ood s ""adut` "��#'qe1 Standard & Poor's Fitch Long Term Short Term Long Term Short Term Long Term Short Term Aaa P1 AAA A1+ AAA A1+ Aal AA+ -AA+ Aa3 PEA AA- Al Al A+ Al A+ A2 A A P2 A2 A2 Baal BBB+ BBB+ CREDIT RISK: The risk that an obligation will not be paid and a loss will result due to a failure of the issuer of a security. CUSIP: Stands for Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most securities, including: stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. The CUSIP system — owned by the American Bankers Association and operated by Standard & Poor's- facilitates the clearing and settlement process of securities. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security. CURRENT YIELD: The annual interest on an investment divided by the current market value. Since the calculation relies on the current market value rather than the investor's cost, current yield is unrelated to the actual return the investor will earn if the security Is held to maturity. CUSTODIAN: A bank or other financial institution that keeps custody of stock certificates and other assets. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his /her own risk and account or inventory. DEBENTURES: A bond secured only by the general credit of the issuers. DEFEASED BOND ISSUES: Issues that have sufficient money to retire outstanding debt when due, so that the agency is released from the contracts and covenants in the bond documents. DELIVERY VERSUS PAYMENT (DVP): Delivery of securities with a simultaneous exchange of money for the securities. INVESTMENT POLICY DERIVATIVE: A financial instrument that is based on, or derived from_ , some underlying asset, reference date, or index DIRECT ISSUER: Issuer markets its own paper directly.to the investor without use ofan' intermediary. DISCOUNT: The difference between the.cost of a security and its value at maturity when quoted at lower than face value. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns and risk profiles, DURATION: A measure of the timing of the cash flows, su_ ch as the interest payments and: the principal repayment, to be received from a'given fixed - income security 'This calculation is based on three variables: term to maturity, coupon'rate,'and yield. to maturity. Duration measures, the price sensitivity of a bond to changes in interest rates. EARNED INCOME YIELD THIS ,PERIOD (annualized): The Total net Earnings. this period divided by Average Daily Portfolio Balance and the number of days,in the period, multiplied by 365 (or 360 depending on the profile setting), and then,multiplied'by 100: FACE VALUE: The principal amount owed on a debt instrument It is the amount-,on which interest is computed and represents the amount that the issuer - promises to,pay, at maturity. FAIR VALUE: The amount at which .a security could ,be exchanged'between :willing parties, other than in a forced or liquidation sale. If a market price, is available,'tKe fair value is equal to the market value. FANNIE MAE: Trade name for the Federal National Mortgage Association (FNMA); a U.S. Government sponsored enterprise. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency:'that provides insurance on bank deposits, guaranteeing deposits to .a sef limit.per account, currently $100,000. FEDERAL FARM CREDIT BANK (FFCB): Government- sponsored enterprise': that consolidates the financing activities of the Federal Land Banks, the,Federal Intermediate Credit Banks and the Banks for Cooperatives. Its securities do not 'carry direc`t,U.S. government guarantees. FEDERAL FUNDS RATE: The rate of interest at which Federal funds "are traded. -Thin rate is considered to be the most sensitive indicator of,the' direction'of interest rates as it is currently pegged by the federal Reserve through open- market operations FEDERAL GOVERNMENT AGENCY SECURITIES Federal,Agency.br United' States government- sponsored enterprise' obligations, participations, or other, instruments, including those issued by or fully guaranteed as to principal and'interest by. federate agencies or United States government- sponsored enterprises. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored enterprise (currently' made up of 12 regional banks) that regulates and lends funds and provides correspondent banking services to member commercial. banks, thrift institutions,7r0edit. INVESTMENT POLICY unions and insurance companies. Although the banks operate under federal charter with government supervision, the securities are not guaranteed by the U. S. Government. FEDERAL HOME LOAN MORTGAGE CORPORATION ( FHLMC): Government sponsored enterprise that helps maintain the availability of mortgage credit for residential housing. FHLMC finances these operations by marketing guaranteed mortgage certificates and mortgage participation certificates. Its discount notes and bonds do not carry direct U.S. government guarantees. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): Government sponsored enterprise that is the largest single provider of residential mortgage funds in the United States. FNMA is a private stockholder -owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed -rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA securities do not carry direct U.S. Government guarantees. FEDERAL OPEN MARKET COMMITTEE (FOMC): A committee of the Federal Reserve Board, which establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves. FEDERAL RESERVE SYSTEM: The central bank of the U.S. which consists of a seven member Board of Governors, 12 regional banks and about 5,700 commercial banks that are members. FED WIRE: A wire transmission service established by the Federal Reserve Bank to facilitate the transfer of funds through debits and credits of funds between participants within the Fed system. FREDDIE MAC: Trade name for the Federal Home Loan Mortgage Corporation ( FHLMC), a U.S. government sponsored enterprise. FITCH INDIVIUAL BANK RATINGS: Individual Ratings are assigned to banks that are legal entities. These ratings, which are internationally comparable, attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. These ratings are designed to assess a bank's exposure to, appetite for, and management of risk, and thus represent the agency's view on the likelihood that it would run into significant financial difficulties such that it would require support. The ratings are as follows: A. A very strong bank - Characteristics may include outstanding profitability and balance sheet integrity, franchise, management, operating environment or prospects. B. A strong bank - There are no major concerns regarding the bank. Characteristics may include strong profitability and balance sheet integrity, franchise, management, operating environment or prospects. C. An adequate bank, which, however, possesses one or more troublesome aspects. There may be some concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects INVESTMENT POLICY D. A bank that has weaknesses of internal and/or external origin. There dare concerns regarding its profitability and .balance sheet . integrity, franchise;, management„ operating environment or prospects. Banks, in emerging ' markets are necessarily faced with a greater number of potential deficiencies of external origin. E. A bank with very serious problems, which either requires` or is likely (o require external support: F. A bank that has either defaulted or, in Fitch Ratings' opinion, would have' defaulted if it had not received external support: Examples'of such support include state or local government support, (deposit) -- insurance- funds, acquisition by some other corporate entity or an,: injection of hew funds from its shareholders or equivalent. Note: Gradations may be used among the ratings A to E:1 e. A/B, B /C;:C1D; and DIE. No gradations apply to the F rating, GINNIE'MAE: Trade name for the Government National MortgaFge Association (GNMA) a direct obligation bearing the full faith and credit of the U S: Government.. GOVERNMENT ACCOUNTING STANDARDS BOARD. (GASB)i' A standard- setting body, associated with the Financial Accounting Foundation,, which prescribes standa, rd accounting practices for governmental units. GUARANTEED INVESTMENT CONTRACTS (GIGS): An agreement acknowledging receipt of funds, for deposit, specifying terms for withdrawal; and guaranteeing a.rate :of interest to be paid., INACTIVE DEPOSITS: Funds not immediately needed for` disbursement._; . INTEREST RATE: The annual yield earned on an investment,' expressed".-as, a percentage. INTEREST RATE ,RISK: The risk of gain or loss in market values of securities due 'to changes in interest -rate levels. For example, rising interest rates will, cause the market value of portfolio securities to decline. INVESTMENT AGREEMENTS: A contract providing for the lending of'issuer funds o a financial institution which agrees to repay the funds with interest under predetermined specifications. INVESTMENT GRADE (LONG TERM RATINGS): The minimum ,,high high quality'ratings . for Hong term debt such as corporate notes. ;Investment Grade ratings are as foil o_ws: A3 °(Moody's), A- (SAP), and A- (Fitch). INVESTMENT PORTFOLIO: A collection of securities held by a bank, individual; institution or government agency for investment purposes. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into casFi with minimum risk of principal: INVESTMENT POLICY LOCAL AGENCY INVESTMENT FUND (LAIF): An investment pool sponsored by the State of California and administered /managed by the State Treasurer. Local government units, with consent of the governing body of that agency, may voluntarily deposit surplus funds for the purpose of investment. Interest earned is distributed by the State Controller to the participating governmental agencies on a quarterly basis. LOCAL AGENCY INVESTMENT POOL: A pooled investment vehicle sponsored by a local agency or a group of local agencies for use by other local agencies. MARK TO MARKET: Current value of securities at today's market price. MARKET RISK: The risk that the value of securities will fluctuate with changes in overall market conditions or interest rates. Systematic risk of a security that is common to all securities of the same general class (stocks, bonds, notes, money market instruments) and cannot be eliminated by diversification (which may be used to eliminate non - systematic risk). MARKET VALUE: The price at which a security is currently being sold in the market. See FAIR VALUE. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase agreements and reverse repurchase agreements that establish each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer - lender to liquidate the underlying securities in the event of default by the seller- borrower. MATURITY: The date that the principal or stated value of a debt instrument becomes due and payable. MEDIUM -TERM NOTES (MTNs): Unsecured, investment -grade senior debt securities of major corporations which are sold in relatively small amounts either on a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences. MODIFIED DURATION: The percent change in price for a 100 basis point change in yields. This is a measure of a portfolio's or security's exposure to market risk. MONEY MARKET: The market in which short term debt instruments (Treasury Bills, Discount Notes, Commercial Paper, Banker's Acceptances and Negotiable Certificates of Deposit) are issued and traded. MORTGAGED BACKED SECURITIES: A type of security that is secured by a mortgage or collection of mortgages. These securities typically pay principal and interest monthly. MUNICIPAL BONDS: Debt obligations issued by states and local governments and their agencies, including cities, counties, government retirement plans, school districts, state universities, sewer districts, municipally owned utilities and authorities running bridges, airports and other transportation facilities. MUTUAL FUND: An entity that pools money and can invest in a variety of securities which are specifically defined in the fund's prospectus. INVESTMENT POLICY NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination; certificates of deposit which can be sold in the open market prior to maturity: . NET'PORTFOLIO YIELD: Calculation in which the 365 -day basis equals;the annualized percentage of the sum of all Net Earning during the period divided by. surri ofnall. Average Daily Portfolio Balances. NEW ISSUE: Term used when a security is originally'`.brougW to market. NOTE: A written promise to pay a specified amount to,a_ certain entityop tlemandror on' a specified date. t OPEN MARKET OPERATIONS: Purchases and sales of government and cert ain other securities in the open market by the New York Federal Reserve Bank as directed Eby. ' e- FOMC in order to influence the volume of money and credit in the economy: - 'Purchases, inject reserves into the bank system and stimulate growth of money and, credit: Sales have the opposite effect. Open market operations are the Federal-,Reserve's most important and most flexible monetary policy tool. PAR VALUE: The amount of principal which must be paid at maturity. Also referred to as the face amount of a_ bond. See FACE VALUE. 4. . PORTFOLIO: The collection of securities held by an individual or institution. PREMIUM: The difference between the par value of a�bond and the cost of the bond, when the cost is above par. PRIMARY DEALER: A group of government securities dealers who submit daily reports , of market activity and positions and monthly financial statements`to the Federal Reserve. Bank of New York and are subject to its informal oversight. These dealers. are authorized to buy and sell government securities in direct dealing .with the Federal Reserve Bank of, New York in its execution Hof market operations to carry outrUS.. monetary policy. Such dealers must be qualified in terms,of reputation; capacity,,'and. adequacy of staff and facilities. PRIME (SHORT TERM RATING): High quality ratings .for short term, debt such as commercial paper. Prime ratings are as follows: P1 (Moody's), Al (S &P), and F1 (Fitch) PRINCIPAL: The face value or par value of a debt instrument,.'or the amount of- capital invested in a given security. PROSPECTUS: A legal document that must be provided.fo any prospective purchaser, of a new securities offering registered with the Securities. and Exchange,Comhiissi6n thaf'typically includes information on the issuer, the issuer's business, the proposed use. of proceeds, the experience of the issuer's management, and certain certified financial statements (also known as an "official statement"). PRUDENT INVESTOR STANDARD: A standard of conduct for fiduciaries; Investments shall, be made with judgment and care - -under circumstances the which persons of prudence, discretion and intelligence ,exercise in the management of .their INVESTMENT POLICY own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. PUBLIC DEPOSITS: A bank that is qualified under California law to accept a deposit of public funds. PURCHASE DATE: The date in which a security is purchased for settlement on that or a later date. Also known as the "trade date ". RATE OF RETURN: 1) The yield which can be attained on a security based on its purchase price or its current market price. 2) Income earned on an investment, expressed as a percentage of the cost of the investment. REALIZED GAIN (OR LOSS): Gain or loss resulting from the sale or disposal of a security. REGIONAL DEALER: A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities and that is not a primary dealer. REPURCHASE AGREEMENT (RP or REPO): A transaction in which a counterparty or the holder of securities (e.g. investment dealer) sells these securities to an investor (e.g. the City) with a simultaneous agreement to repurchase them at a fixed date. The security "buyer" (e.g. the City) in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate the "buyer" for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, which is, increasing bank reserves. REVERSE REPURCHASE AGREEMENT (REVERSE REPO): The opposite of a repurchase agreement. A reverse repo is a transaction in which the City sells securities to a counterparty (e.g. investment dealer) and agrees to repurchase the securities from the counterparty at a fixed date. The counterparty in effect lends the seller (e.g. the City) money for the period of the agreement with -terms of the agreement structured to compensate the buyer. RISK: Degree of uncertainty of return on an asset. SAFEKEEPING: A service which banks offer to clients for a fee, where physical securities are held in the bank's vault for protection and book -entry securities are on record with the Federal Reserve Bank or Depository Trust Company in the bank's name for the benefit of the client. As agent for the client, the safekeeping bank settles securities transactions, collects coupon payments, and redeems securities at maturity or on call date, if called. SECURITIES AND EXCHANGE COMMISSION (SEC): Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3 -1: See UNIFORM NET CAPITAL RULE. SECONDARY MARKET: A market for the repurchase and resale of outstanding issues following the initial distribution. INVESTMENT POLICY, SECURITIES: Investment instruments such as notes, bonds, stocks, money market instruments and other instruments of indebtedness or equity: - SETTLEMENT DATE: The date on,which a trade is cleared by delivery of securities against funds. SPREAD: The difference between, two figures or percentages. It may be'the difference between the bid (price at which a prospective buyer offers, to pay) and asked (price, at which an owner offers to sell) prices of a quote, or between the' amount paid. when bought and the amount received when sold... STRUCTURED NOTE: A complex, fixed income instrument, which pays ,interest bas @d - on a formula tied to other interest rates, commodities or., indices. Examples °include "inverse floating rate" notes which have coupons that increase whenother interesfrates are falling, and which fall when other interest rates are rising and <'dual'index floaters ,", which pay interest based on the relationship between two other interest rates, for example, the yield on the ten -year Treasury note minus the Libor rate. ,Issuers of,such - notes lock in a reduced cost of borrowing by purchasing. interest rate swap agreements` `- STUDENT LOAN MARKET ASSOCIATION (SLMA): Government sponsored enterprise that purchases student loans from originating' financial ° institutions -and' provides financing to state student loan agencies. It provides ;a`national secondary market for federally - sponsored student loans and credit to participants in the `post secondary education lending sector. SUBORDINATED DEBT: Debt over which senior debt`has priority. , ln,the event 6f +a bankruptcy, subordinated debt holders receive paymerif,only after senior debt holders are paid in full. TIME DEPOSIT: A deposit,with a California bank or savings and loan--associatioh for a. specific amount.and with a specific maturity date and interest rate... Deposits of up'to - $100,000 are insured by FDIC. Deposits over $100,000 are collateraliied above; the insurance with either government securities (at 110% of par value) first' trust deeds (at 150% of par value), or letters of credit (at 105% of par value): TOTAL RATE OF RETURN: A measure of a portfolWs performance over time. It.is'the internal rate of return which equates the beginning value of the portfolio with the ending value, and includes interest earnings and realized and 'unrealized gains and losses on the portfolio. For bonds held to maturity, total return is the yield to maturity. TRUSTEE OR TRUST COMPANY OR TRUST DEPARTMENT.OF.A BANK ':A' financial institution with trust powers which acts in a fiduciary capacity, for the benefit of the bondholders in enforcing the terms of the bond contract., UNDERWRITER: A dealer which purchases new issue, of municipal securities -for resale. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement: that member firms as well as nonmember broker /dealers in securities maintain. a maximum ratio of indebtedness to liquid capital of 15 to;1; also called net capital rule: ... net capital ratio. Indebtedness covers all money owed to a firm; including margin loans and commitments to purchase securities, one reason new public issues are spread INVESTMENT POLICY among members of underwriting syndicates. 'Liquid capital includes cash and assets easily converted into cash. U.S. GOVERNMENT AGENCY SECURITIES: Securities issued by U.S. government agencies, most of which are secured only by the credit worthiness of the particular agency. See AGENCIES. U.S. TREASURY OBLIGATIONS: Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are the benchmark for interest rates on all other securities in the U.S. The Treasury issues both discounted securities and fixed coupon notes and bonds. The income from Treasury securities is exempt from state and local, but not federal, taxes. TREASURY BILLS: Securities issued at a discount with initial maturities of one year or less. The Treasury currently issues three -month and six -month Treasury bills at regular weekly auctions. It also issues very short-term "cash management" bills as needed to smooth out cash flows. TREASURY NOTES: Intermediate -term coupon- bearing securities with initial maturities of one year to ten years. TREASURY BOND: Long -term coupon- bearing securities with initial maturities of ten years or longer. UNREALIZED GAIN (OR LOSS): Gain or loss that has not become actual. It becomes a realized gain (or loss) when the security in which there is a gain or loss is actually sold. See REALIZED GAIN (OR LOSS). VOLATILITY: Characteristic of a security, commodity or market to rise or fall sharply in price within a short-term period. WEIGHTED AVERAGE MATURITY: The average maturity of all the securities that comprise a portfolio that is typically expressed in days or years. WEIGHTED AVERAGE YIELD AT THE END OF PERIOD: The summation of each investment's period -end scheduled book value multiplied by its ending sub - period yield and divided by the total scheduled book value. Investments maturing on or before the end date of the report period will not affect the weighted average yield. WHEN ISSUED (WI): Short form of "when, as, and if issued." WI refers to a transaction made conditionally because a security, although authorized, has not yet been issued with the exception of new Treasury, Agency, and Corporate issuances to settle within 21 days. YIELD: The annual rate of return on an investment expressed as a percentage of the investment. See CURRENT YIELD; YIELD TO MATURITY. YIELD CURVE: Graph showing the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity YIELD TO MATURITY: Concept used to determine the rate of return if an investment is held to maturity. It takes into account purchase price, redemption value, time to INVESTMENT POLICY maturity, coupon yield, and the time between interest payments, 1t is the rate;of income return on an investment, minus any premium or plus any discount,= with.the adjustment spread over the, period from the date of purchase to the date of maturity of the bond, expressed as a percentage.