HomeMy Public PortalAboutResolution No. 472-16 08-16-2016Resolution No. 472-16
A RESOLUTION APPROVING THE CITY OF RICHLAND HILLS
INVESTMENT POLICY AND INVESTMENT STRATEGIES
WHEREAS, Chapter 2256 of the Texas Government Code, commonly known as the
"Public Funds Investment Act," requires the city to adopt an investment policy by rule,
order, ordinance, or resolution; and
WHEREAS, the Public Funds Investment Act requires the city to review its investment
policy and investment strategies not less than annually; and
WHEREAS, investment and administration of the city's funds shall promote public
confidence and trust based on an investment policy that promotes safety of principal
and liquidity of funds; and be guided by investment strategies emphasizing preservation
of principal, liquidity, marketability, diversification and yield; and
WHEREAS, the Public Funds Investment act requires the treasurer, chief financial
officer, and investment officers of the city to attend Public Fund Investment training as
required by law; and
WHEREAS, the City Council has reviewed the attached investment policy and the city's
investment strategies, as required by law; and
WHEREAS, the attached investment policy and incorporated revision comply with the
Public Funds Investment Act, as amended, and authorize the investment of city funds in
safe and prudent investments.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Richland
Hills:
That the City of Richland Hills has complied with the requirements of the Public
Funds Investment Act, as amended, and the attached investment policy and investment
strategies is hereby adopted as the investment policy of the city effective August 16,
2016.
PASSED, ADOPTED AND APPROVED by the City Council of the City of Richland Hills
this 16th day of August, 2016.
APPROVED: Attest:
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Mayor = ~ '~~ ' ~ retary
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CITY OF RICHLAND HILLS
INVESTMENT POLICY AND STRATEGIES
POLICY STATEMENT
It is the Policy of the City of Richland Hills that the administration of its funds and the
investment of those funds shall be handled at its highest public trust. Investments
shall be made in a manner which will provide the maximum security of the principal
through established limitations and diversification while meeting the daily cash flow
needs of the City and conforming to all applicable state statutes governing the
investment of public funds.
This Policy serves to satisfy the statutory requirements of defining and adopting a
formal investment policy. The policy and investment strategies shall be reviewed
annually by the City Council who will formally approve any modifications and
legislative changes. This Investment Policy, as approved, is in compliance with all
state laws and statutes which govern the investments of public funds, including but
not by way of limitation, the Public Funds Investment Act (PFIA), Chapter 2256,
Texas Government Code.
II. SCOPE
A. The Investment Policy applies to all the financial assets of the City of Richland Hills.
These funds are accounted for in the City's Comprehensive Annual Financial
Report (CAFR) and include:
- General Fund -used to account for resources traditionally associated with
government, which are not required to be accounted for in another fund.
- Soecial Revenue Funds -used to account for the proceeds from specific
revenue sources which are restricted to expenditures for specific purposes.
- Debt Service Funds -including reserves and sinking funds to the extent not
required by law or existing contract to be kept segregated and managed
separately and used to account for resources to be used for the payment of
principal, interest and related costs on general obligation debt.
- Capital Projects Funds -used to account for resources to enable the acquisition
or construction of major capital facilities which are not financed by enterprise
funds, internal service funds, or trust funds.
- Proprietary Funds -used to account for operations that are financed and
operated in a manner similar to private business enterprises.
- All Other Funds. Any new funds created by the City unless specifically exempted
from this policy by the City or the law.
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II1. GENERAL OBJECTIVES
It is the policy of the City that, giving due regard to the safety and risk investments, all
available funds shall be invested in conformance with State and Federal Regulations,
applicable Bond Ordinance requirements, adopted Investment Policy and adopted
Investment Strategies. In accordance with the Public Funds Investment Act Section
2256.005(d), the following prioritized objectives (in order of importance) apply to each of
the City's investment strategies:
A. Suitability - Understanding the suitability of the investment to the financial
requirements of the City is important. Any investment eligible in the Investment
Policy is suitable for all City funds.
B. Preservation and Safety of Principal -Preservation and safety of principal are the
foremost objective of the City. Investments of the City shall be undertaken in a
manner that seeks to insure preservation of capital in the overall portfolio.
C. Liquidity -The City's investment portfolio will be based on a cash flow analysis of
cash needs and will remain sufficiently liquid to enable it to meet all operating
requirements which might be reasonably anticipated. Liquidity shall be achieved by
matching investment maturities with estimated cash flow requirements and by
investing in securities with active secondary markets.
D. Marketability -Securities with active and efficient secondary markets are necessary
in the event of an unanticipated cash requirement. Historical market "spreads"
between the bid and offer prices of a particular security type or less than a quarter of
a percentage point shall define an efficient secondary market.
E. Diversification -Diversification of the portfolio will include diversification by maturity
and market sector to protect against credit and market risk. The City will diversify its
investments in an effort to avoid incurring unreasonable and avoidable risks
regarding specific security types or individual financial institutions.
F. Yield - Attaining a competitive market yield, commensurate with the City's
investment risk constraints and the cash flow characteristics of the portfolio, is the
desired objective. The goal of the City's investment portfolio is to regularly meet or
exceed the average rate of return on U.S. Treasury Bills at a maturity level
comparable to the portfolio's weighted average in days. The yield of an equally
weighted, six month Treasury Bill portfolio shall be the minimum yield objective or
"benchmark". A secondary objective will be to obtain a yield equal to or in excess of
a local government investment pool or money market mutual fund.
Applicable tax exempt debt proceeds shall attempt to achieve a return equal to the
above unless that return exceeds applicable arbitrage yield limit on the debt. In
certain interest rate environments the City may need to restrict yields in order not to
exceed arbitrage limits.
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IV. STANDARDS OF CARE
A. Prudent Person Rule. The City's Investment Officers will follow the "Prudent Person"
statement relating to the standard of care that must be exercised when investing
public funds as expressed in PFIA Sec. 2256.006(a-b):
"Investments shall be made with judgment and care, under prevailing circumstances,
that a person of prudence, discretion, and intelligence would exercise in the
management of the person's own affairs, not for speculation, but for investment,
considering the probable safety of capital and the probable income to be derived".
Investment of funds shall be governed by the following investment objectives, in
order of priority:
1. Preservation and safety of principal;
2. Liquidity; and
3. Yield.
The Investment Officers and those delegated investment authority under this Policy
shall seek to act responsibly as custodians of the public trust. Investment
participants shall avoid any transactions that might impair public confidence in the
City's ability to govern effectively. The governing body recognizes that in a
diversified portfolio, occasional measured losses due to market volatility are
inevitable and must be considered within the context of the overall portfolio's
investment rate of return, provided that adequate diversification has been
implemented.
In determining whether an Investment Officer has exercised prudence with respect to
an investment decision, the determination shall be made taking into consideration:
1. The investment of all funds, or funds under the entity's control, over which the
officer had responsibility rather than a consideration as to the prudence of a
single investment; and
2. Whether the investment decision was consistent with the written investment
policy of the City.
The Investment Officers, when acting in accordance with the written procedures and
due diligence, shall not be held personally responsible for market price changes,
provided that deviations from expectations are reported in a timely manner and that
appropriate action is taken to control adverse market effects. The governing body of
the investing entity retains ultimate responsibility as fiduciaries of the assets of the
entity.
B. Delegation of Investment Authority
The City Manager and Director of Finance, acting on behalf of the City, are
designated as the Investment Officers of the City and are responsible for investment
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management decisions and activities. The Investment Officers are also responsible
for considering the quality and capability of staff, investment advisors, and
consultants involved in investment management and procedures.
The Investment Officers shall develop and maintain written administrative procedures
for the operation of the investment program which are consistent with this Investment
Policy. The Investment Officers shall also designate a staff person as a
liaison/deputy in the event circumstances require timely action and the Investment
Officers are not available.
The Investment Officers shall be responsible for all transactions undertaken and shall
establish a system of controls to regulate the activities of subordinate officials and
staff. No officer or designee, shall engage in an investment transaction except as
provided under the terms of this policy, the procedures established by the Finance
Director and the explicit authorization by the City Manager to withdraw, transfer,
deposit and invest the City's funds.
C. Internal Controls
The Investment Officers shall establish a system of written internal controls which will
be reviewed annually with the City's independent auditors. The controls shall be
designed to prevent loss of public funds due to fraud, employee error,
misrepresentation by third parties, unanticipated market changes, or imprudent
actions by employees. Controls deemed most important include: control of collusion,
separation of duties, third party custodial safekeeping, avoidance of bearer-form
securities, clear delegation of authority, specific limitations regarding securities
losses and remedial action, written confirmation of telephone transactions,
minimizing the number of authorized investment officials, and documentation and
rationale for investment transactions.
D. Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from
personal business activities that could conflict with proper execution of the
investment program or which could impair their ability to make impartial investment
decisions. Investment Officers involved shall disclose in writing to the City Council
any financial interest in financial institutions that conduct business with the City or
any personal financial/investment position that could be related to the performance of
the City.
The Investment policy requires the investment officers to file a disclosure statement
with the Texas Ethics Commission and the governing body if the investment officer
has a personal business relationship or is related within the second degree of affinity
or consanguinity to an individual or organization seeking to sell an investment to the
City. For purposes of this section, an investment officer has a personal relationship
with a business organization if and as defined in PFIA 2256.005(1)(1-3):
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1. The Investment officer owns 10% or more of the voting stock or shares of the
business organization or owns $5,000 or more of the fair market value of the
business organization;
2. Funds received by the investment officer from the business organization
exceed 10% of the investment officer's gross income for the previous year; or
3. The Investment officer has acquired from the business organization during
the previous year investments with a book value of $2,500 or more for the
personal account of the investment officer.
E. Investment Training Requirements
The City of Richland Hills shall provide periodic training in investments for the
investment personnel through courses and seminars offered by professional
organizations and associations in order to ensure the quality and capability of the
City's investment personnel making investment decisions in compliance with the
PFIA 2256.008.
All Investment Officers shall attend ten (10) hours of training within twelve (12)
months of taking office or assuming duties and eight (8) hours in each succeeding
two year period as defined by PFIA. The training provider must be an independent
source.
For purposes of this policy, an "independent source" from which investment training
shall be obtained shall include a professional organization, an institute or higher
learning or any other sponsor other than a business organization with whom the City
of Richland Hills may engage in an investment transaction. Such training shall
include education in investment controls, credit risk, market risk, investment
strategies, and compliance with investment laws, including the State of Texas Public
Funds Investment Act.
V. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
All investments made by the City will be made through either the City's banking services
or an authorized broker/dealer.
A. De,oositorv -The City Council shall, by ordinance, "select and designate one or more
banking institutions as the depository for the monies and funds of the City" in
accordance with PFIA. At least every five years a depository shall be selected
through the City's banking services procurement process, which shall include a
formal request for proposal (RFP). The selection of the depository will be
determined by a competitive process and evaluated on the following criteria:
1. Qualified as a depository for public funds in accordance with state and local
laws.
2. Provided requested information or financial statements for the periods
specified.
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3. Complied with all requirements in the banking RFP.
4. Completed responses to all required items on the proposal form.
5. Offered lowest net banking service cost, consistent with the ability to provide
an appropriate level of service.
6. Met credit worthiness and financial standards.
a Investment Broker/Dealers -When applicable, the City Council will, at least
annually, review, revise and approve a list of authorized/qualified
broker/dealers along with this investment policy. These firms may include:
1. All primary government securities dealers; and
2. Those regional broker/dealers who qualify under Securities and Exchange
Commission rule 15C3 (Uniform Net Capital Rule), and who meet other
financial criteria standards in the industry.
These firms will be selected based on their competitiveness, participation in agency
selling groups, and experience and background of the salesperson handling the
account.
B. Signed Investment Policv Certification Form. Investments shall only be made with
those business organizations, including money market mutual funds and local
government investment pools, that have provided the City with a written instrument,
executed by a qualified representative of the firm, acknowledging that the business
organization has:
1. Received and reviewed the City's Investment Policy; and
2. Implemented reasonable procedures and controls in an effort to preclude
investment transactions conducted between the City and the organization that
are not authorized by the City's Investment Policy, except to the extent that this
authorization is dependent on an analysis of the makeup of the City's entire
portfolio or requires an interpretation of subjective investment standards. PFIA
2256.005(k).
C. All financial institutions and broker/dealers who desire to become qualified bidders
for investment transactions must supply the investment officers with the following:
1. Audited financial statements;
2. Proof of National Association of Securities Dealers (NASD) certification,
unless it is a bank;
3. Resumes of all sales representatives who will represent the financial
institution or broker/dealer firm in dealings with the City, and
4. Any other document that should help evaluate the financial institution's and
broker/dealers' soundness such as rating agency reports, review of call
reports and analysis of management profitability, capitalization and assets
quality.
D. Financial/Investment Advisor -The City may retain the services of an investment
advisory firm registered under the Investment Advisers Act of 1940 or with the State
Securities Board to assist in the review of cash flow requirements, the formulation of
investment strategies, and the execution of security purchases, sales and deliveries.
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The investment advisory contract with the City may not be for a term longer than two
(2) years and its renewal or extension must be approved by the City Council by
ordinance or resolution as required by PFIA 2256.003(b). If the City has contracted
with an investment advisor, the advisor shall be responsible for performing financial
due diligence on the City's behalf. On an annual basis, the advisor will provide the
City with a list of its authorized broker/dealers as well as the written instrument
above.
VI. SAFEKEEPING AND CUSTODY OF INVESTMENT ASSETS
A. As specified in PFIA 2256.005(b)(4)(E), the laws of the State of Texas and prudent
treasury management require that all purchased securities be bought on a delivery
versus payment (DVP) basis and be held in safekeeping by an independent third
party financial institution, or the City's designated banking services depository.
Funds shall not be wired or paid until verification has been made that the correct
security was received by the safekeeping bank. The only exception to DVP
settlement shall be wire transactions for money market funds and government
investment pools. The safekeeping or custody bank is responsible for matching up
instructions from the City's investment officers or an investment settlement with what
is wired from the broker/dealer, prior to releasing the City's designated fund for a
given purchase.
B. All safekeeping arrangements shall be approved by the Investment Officers and an
agreement of the terms executed in writing. The third party custodian shall be
required to issue safekeeping receipts to the City or its agent a listing of each
specific security, rate, description, maturity, par value amount, CUSIP number and
other pertinent information. Each safekeeping receipt will be clearly marked that the
security is held for the City or pledge to the City.
C. All securities pledged to the City for certificates of deposit or demand deposits shall
be held by an independent third party bank doing business in the State of Texas.
The safekeeping bank may not be within the same holding company as the bank
from whim the securities are pledged.
VII. SUITABLE AND AUTHORIZED INVESTMENTS
A. Acceptable investments under this policy shall be limited to the investments
authorized by PFIA listed in Sections 2256.009-2256.016 and as shown below:
1. Obligations, including letters of credit, of the United States or its agencies and
instrumentalities;
2. Direct obligations of the State of Texas or its agencies and instrumentalities;
3. Collateralized mortgage obligations directly issued by a federal agency or
instrumentality of the United States;
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4. Obligations fully guaranteed or insured by the Federal Deposit Insurance
Corporation (FDIC) or by the explicit full faith and credit of the United States;
5. Obligations of states, agencies, counties, cities and other political subdivisions of
any state rated not less than A or its equivalent;
6. Bonds issued, assumed, or guaranteed by the State of Israel.
If additional types of securities are approved for investment by public funds by state
statue, they will not be eligible for investment by the City until this policy has been
amended and the amended version approved by the City Council.
B. Investment instruments not authorized for purchase by the City of Richland Hills,
including those specifically prohibited by PFIA 2256.009(b)(1-4), include:
1. Obligations whose payment represents the coupon payments on the outstanding
principal balance of the underlying mortgage-backed security collateral and bears
no interest, such as banker's acceptances;
2. Obligations whose payment represents the principal stream of cash flow from the
underlying mortgage-backed security collateral and bears no interest, such as
mutual funds;
3. Collateralized mortgage obligations that have a stated final maturity date of
greater than 10 years; and
4. Collateralized mortgage obligations the interest rate of which is determined by an
index that adjusts opposite to the changes in the market index.
C. Authorized Investments:
1. Certificates of Deposit and Share Certificates -authorized investment if the
certificate is issued by a depository institution that has its main office or a branch
office in the State of Texas and is (1) guaranteed or insured, (2) collateralized, or
(3) secured in any other manner provided by law. (PFIA 2256.010)
In addition, an investment in certificates of deposit made in accordance with the
following conditions is an authorized investment: (1) the funds are invested
through abroker/depository institution that has its main office or a branch office in
the state of Texas and (2) the broker/depository institution arranges for the
deposit of funds in certificates of deposit in one or more federally insured
depository institutions, wherever located, for the City's account.
2. Repurchase agreements -authorized investment as defined in Section 2256.11
if (1) has a defined termination date, (2) is secured by obligations in Section
2256.009(a)(1) and (3) requires third-party safekeeping and (4) is placed through
a primary government securities dealer, as defined by the Federal Reserve, or a
financial institution doing business in the State of Texas.
- Repurchase agreement means a simultaneous agreement to buy, hold for a
specified time, and sell back at a future date.
- Reverse security repurchase agreement may not exceed 90 days.
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- Investments acquired must mature no later than the expiration in the reverse
security repurchase agreement.
3. Securities Lending Program - to qualify as an authorized investment under PFIA
2256-0115:
- The value of the securities loaned under the program must not be less than
100% collateralized, including accrued income;
- A loan under this program must allow for termination at any time;
- Must be secured by cash, letters of credit or securities described in PFIA
2256.009(a)(1);
- Collateral must be (1) pledge, (2) held in the City's name and (3) be
deposited with a third party.
- A loan made under this program must be placed through a primary dealer or
a financial institution doing business in the State of Texas.
- An agreement to lend securities executed under this section must have a
term of one (1) year or less.
4. Bankers' Acceptances -authorized investment under PFIA 2256.012 if it has a
stated maturity of 270 days or fewer; will be liquidated in full at maturity; is eligible
for collateral for borrowing from a Federal Reserve Bank; and is accepted by a
U.S. bank rated no less than A-1 or P-1 or an equivalent rating by at least one
nationally recognized credit rating.
5. Commercial Paper - authorized investment under PFIA 2256.013 if the
commercial paper has a stated maturity of 270 days or fewer and is rated not
less than A-1 or P-1 or an equivalent rating by at least two nationally recognized
credit rating agencies, or one credit rating agency and an irrevocable bank letter
of credit.
6. Mutual Funds
a. A no-load money market mutual fund is an authorized investment under
PFIA 2256.014 if:
1. It is registered with and regulated by the Securities Exchange
Commission (SEC);
2. Provides a prospectus and other information required by the SEC Act of
1934 or the Investment Company Act of 1940;
3. Has adollar-weighted average stated maturity of 90 days or fewer; and
4. Includes in its investment objectives the maintenance of a stable net
asset value of one (1) dollar for each share.
b. A no-load mutual fund is an authorized investment under this section if:
1. It is registered with the SEC;
2. Has an average weighted maturity of less than two years;
3. Is invested exclusively in approved obligations;
4. Is continuously rated as to investment quality by at least one nationally
recognized investment rating firm of not less than AAA or its equivalent;
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5. Conforms to the requirement set forth in PFIA 2256.016(b-c) relating to
the eligibility of investment pools to receive and invest funds of investing
entities.
c. An entity is not authorized by this section to:
1. Invest in the aggregate more than 15 percent of its monthly average
fund balance, excluding bond proceeds and reserves and other funds
held for debt service, in mutual funds described above;
2. Invest any portion of bond proceeds, reserves and funds held for debt
service, in mutual funds described above; or
3. Investing entity may not own more than 10 percent of the mutual fund's
total net assets.
7. Guaranteed Investment Contracts -authorized investment for bond proceeds under
PFIA 2256.015 if the guaranteed investment contract:
- It has a defined termination date;
- Is secured by obligations described in PFIA 2256.009(a)(1);
- Is pledged to the entity and deposited with the entity or with athird-party
selected and approved by the entity;
- Term may not exceed 5 years from date of bond issuance, excluding
reserves and debt service funds;
- To be eligible as an authorized investment: (1) it must be specifically
authorized when authorizing bond, (2) requires at least 3 bids from separate
providers, (3) the entity must purchase the highest yielding guaranteed
investment contract for which a qualifying bid is received, (4) must take into
account the reasonably expected drawdown schedule for the bond proceeds
to be invested, and (5) must have reasonable administrative costs expected
to be paid to third parties in connection with the guaranteed investment
contract.
8. Investment Pools - An entity may invest its funds and funds under its control through
an eligible investment pool if the governing body of the entity by rule, order,
ordinance, or resolution, as appropriate, authorizes investment in that particular pool.
A pool must be continuously rated no lower than AAA or AAA-m or at an equivalent
rating by at least one nationally recognized rating service. A public funds investment
pool created to function as a money market mutual fund must mark to market daily
and stabilize at a $1 net asset value. (PFIA 2256.016 and 2256.019)
The City shall take all prudent measures consistent with this Investment Policy to
liquidate an investment that no longer meets the required minimum rating standards, as
per PFIA 2256.021. The City is not required to liquidate investments that were
authorized investments at the time of purchase. (PFIA 2256.017)
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VIII. COLLATERALIZATION
A. Market Value
In order to anticipate market changes and provide a level of additional security for all
funds, the market value of collateral will be maintained at 102% of total principal and
accrued interest for cash balances in excess of the Federal Deposit Insurance
Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF)
insurance coverage. The City's depository will be contractually liable for monitoring
and maintaining the collateral and margins at all times. The depository or custodian
will also provide monthly reports to the City detailing the collateral and including
current market values. Only an authorized City representative will approve and
release all pledged collateral.
Collateral will be pledged under the terms of a written third-party depository
agreement executed under the terms of the Financial Institutions Resource and
Recovery Enforcement Act (if the custodian is the Federal Reserve the City will
execute a Circular 7 form). The agreement will be approved by resolution of the
bank's board or loan committee.
B. Collateral Substitution
Collateralized investments often require substitution of collateral. The safekeeping
bank must contact the City for approval and settlement. The substitution will be
approved if its value is equal to or greater than the required collateral value.
C. Collateral Reduction
Should the collateral's market value exceed the required amount, the Safekeeping
bank may request approval from the City to reduce collateral. Collateral reductions
may be permitted only if the collateral's market value exceeds the required amount.
D. Letters of Credit
Letters of credit are acceptable collateral for Certificates of Deposit. Upon the
discretion of the City, a letter of credit can be acceptable collateral for City funds held
by the City's bank depository.
E. Subject to Audit -All collateral shall be subject to inspection and audit by the City
Manager, or designee, as well as the City's independent auditors.
IX. INVESTMENT PARAMETERS
A. Bidding Process for Investments
It is the Policy of the City of Richland Hills to require at least three (3) competitive
bids or offers for all investment transactions (securities and CD's) except for:
1. Transactions with money market mutual funds and local government investment
pools (which are deemed to be made at prevailing market rates); and
2. Treasury and agency securities purchased at issue through an approved
broker/dealer.
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B. Maximum Maturities
The maximum maturity for each fund group and instrument is set forth in the
investment strategies under the Investment Strategies section of this Policy.
C. Maximum Dollar-Weighted Average Maturity
Under most market conditions, the composite portfolio will be managed to achieve a
one (1) year or less dollar-weighted average maturity. However, under certain
market conditions investment officers may need to shorten or lengthen the average
life or duration of the portfolio to protect the City. The maximum dollar-weighted
average maturity based on the stated final maturity, authorized by this investment
policy for the composite portfolio of the City is two (2) years.
D. Diversification
It is the policy of the City to diversify its investment portfolio. Invested funds shall be
diversified to minimize risk or loss resulting from over-concentration of assets in a
specific maturity, specific issuers, or specific class of securities. Diversification
strategies shall be established and periodically reviewed. At a minimum,
diversification standards by security type and issuer shall be:
Security Type Max % of Portfolio
U.S. Treasury obligations 100%
U.S. Government agencies and instrumentalities not to exceed 75%
Fully insured or collateralized CDs not to exceed 30%
Limitation by individual bank not to exceed 15%
Repurchase agreements 100%
Money market funds not to exceed 75%
Local government Investment Pools 100%
Maximum percent ownership of Investment Pool 10%
The Investment Officer shall be required to diversify maturities. The Investment
Officers, to the extent possible, will attempt to match investment with anticipated
cash flow requirements. Matching maturities with cash flow dates will reduce the
need to sell securities prior to maturity, thus reducing market risk.
Investments in eligible investment pools are "diversified" by the very nature of their
inclusion in a very large and active pool of investments. Consequently,
concentrations of investment pools represent a lower risk than concentrations in
such individual instrument as agency discount notes or certificates of deposit.
The Investment officers shall review diversification strategies and establish or
confirm guidelines on at least an annual basis regarding the percentages of the total
portfolio that may be invested in securities other than U.S. Government obligations.
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X. INVESTMENT STRATEGIES
A. General. The City will group investment instruments into a number of "pool
investment groups". These groups will reflect characteristics of maturity limits,
diversity and liquidity, commensurate with the underlying purpose for which
investments are intended to ultimately fund. Under this approach various individual
investment instruments will comprise the total pool type. Individual funds will share
equity interest in the assets and earnings of each pool (or pools), equal to their
proportionate contributions to the pool (or pools). A pooled investment approach
should provide several advantages including yield enhancement, improved diversity
and improved liquidity, over a system that seeks to procure specific investment
instruments for specific fund types and financial resources.
B. Basic Pool Requirements. The City requires the following basic types of pools:
a. Short Term/Operating Funds -Most of the City's fund types contain operating
capital required to finance the particular activities for which the fund is
responsible. Cash flows are reasonably predictable but occasional circumstances
may require unforeseen or unpredicted cash requirements. Financial resources
for this category should be maintained at relatively short levels. The weighted
average maturity of operating funds may not exceed one (1) year.
This pooled investment group includes the total of cash and investment available
for current operations plus all required operating reserves of the following fund
types:
- General Fund
- Debt Service Funds
- Special Revenue Funds
- Proprietary Funds
A key investment strategy for operating funds is to assure that anticipated cash
flows are matched with adequate investment liquidity. Diversification among
authorized investment options is not restricted and will be determined and
approved by the Investment Officers in light of existing market conditions.
b. Long term/Non-Operating Funds -Various fund types may contain financial
assets in excess of the amounts necessary to fund the sum of operating costs
and operating reserves. Other financial assets may be designated for projects
schedule to be implemented beyond the current operating period. The pool
structured to invest these assets will require longer maximum maturity limit than
the operating pool. The size of the pool may vary widely over time. The pool will
expand rapidly with the receipt of bond fund proceeds and contract as the capital
is used for project construction.
The primary revenue source of this pooled investment group is bond proceeds
(which are typically subject to arbitrage yield limitations). This category also
includes any amount of cash and investments in excess of the estimated
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required operating reserves in the general fund, enterprise funds or debt service
funds. The maximum weighted average maturity of the portfolio shall not exceed
two (2) years. Diversification among authorized investment options is not
restricted and will be determined and approved by the Investment Officers in light
of existing market conditions.
c. Yield/Restricted Funds -Proceeds from bond issuances subject to arbitrage
restrictions may necessitate yield restrictions under some market conditions.
Length of investment maturity may be dependent on market conditions as well as
cash flow needs.
The Investment strategy for these funds is to limit investment yields to arbitrage
ceilings. The maximum weighted average maturity of an individual investment
shall not exceed two (2) years. Diversification among authorized investment
options is not restricted and will be determined and approved by the Investment
Officers in light of existing market conditions.
d. Debt Service Reserve Funds -These reserves are usually specifically defined in
terms of amount and size. Bond covenants typically require that reserve
balances be maintained with a third party financial institution or paying agent.
These institutions invest deposited reserves on behalf of the City and indirectly
on the behalf of investors in whose interest the reserves are established. In such
instances, the City may contract with such parties who will operate in the
capacity of an investment advisor. These relationships will be approved by the
City Council. The Investment advisors will be confined to the particular
instruments and parameters specified as appropriate for this pool of funds.
A primary investment strategy for debt service funds is to provide income to the
reserve portions of revenue bonds. Because investments may be subject to
arbitrage yield restrictions, the secondary investment strategy is to attempt to
invest at a yield equal to the arbitrage limit applicable to the reserves.
Diversification among authorized investment options is not restricted and will be
determined and approved by the Investment Officers in light of existing market
conditions.
e. Interest and Sinking Fund Reserve -These funds are usually specifically defined
in terms of amount and size. The primary investment strategy for debt service
sinking funds is to match investment maturities with debt service payment
requirements. Diversification among authorized investment options is not
restricted and will be determined and approved by the Investment Officers in light
of existing market conditions.
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XI. PERFORMANCE EVALUATION AND REPORTING
A. Reporting. The Investment Officers shall submit an investment report at least
quarterly to the City Council (PFIA 2256.023) containing sufficient information to
permit and informed outside readers to evaluate the performance of the investment
program and consistent with the Act's statutory requirements. All reports shall be in
compliance with the Act. At a minimum the report shall include:
1. Description of each investment and depository position;
2. Book and market values at the end of the reporting period;
3. Be signed by all investment officers of the entity;
4. Changes to the market value and accrued interest during the period;
5. The maturity date of each separately invested asset;
6. The account, fund, or pooled group fund for which investment was acquired;
7. The earnings for the period; and
8. The overall yield for the portfolio in comparison to its benchmark yield for the
period.
B. Marking to Market. The market value of the portfolio must be determined at least
quarterly and included in the quarterly investment reports. Market prices for all
public fund investments will be obtained and monitored through the use of a third
party independent pricing source or by means of an on-line financial data service.
C. Annual Compliance Audit. If the City invests in other than money market mutual
funds, investment pools or accounts offered by its depository bank in the form of
certificates of deposit, or money market accounts or similar accounts, the reports
prepared by the Investment Officers under this section shall be formally reviewed at
least annually by an independent auditor, and the result of the review shall be
reported to the governing body by that auditor.
The City shall, in conjunction with its annual financial audit, perform a compliance
audit of management controls on investments and adherence to the City's
Investment Policy.
D. Monitoring. The Investment officers shall monitor, on no less than a weekly basis, the
credit rating on all authorized investments in the portfolio based upon independent
information from a nationally recognized rating agency and/or approved
broker/dealer. If any security falls below the minimum rating required by Policy, the
investment officers shall immediately solicit bids for and sell the security, if possible,
regardless of a loss of principal.
E. Policy Considerations. The City's Investment Policy and Strategies shall be
reviewed, revised and adopted annually by the City Council. A written resolution
approving that review will be passed and recorded by the City Council.
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GLOSSARY OF INVESTMENT POLICY TERMS
Accrued Interest -The accumulated interest due on a bond as of the last interest payment
made by the issuer.
Agency - A debt security issued by a federal or federally sponsored agency. Federal agencies
are backed by the full faith and credit of the U.S. Government.
Arbitrage -The simultaneous purchase and sale of an asset in order to profit from a difference
in the price (profiting from the mispricing in the market). Arbitrage exists as a result of market
inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair
value for long periods of time.
Banker's Acceptance - A short-term debt instrument issued by a firm that is guaranteed by a
commercial bank. Banker's acceptances are issued by firms as part of a commercial
transaction. These instruments are similar to T-Bills and are frequently used in money market
funds. Banker's acceptances are traded at a discount from face value on a secondary market,
which can be an advantage because the banker's acceptance does not need to be held until
maturity. The date of maturity typically ranges from between 30 and 180 days from the date of
issue. Banker's acceptances are considered to be relatively safe investments, since the bank
and the borrower are liable for the amount that is due when the instrument matures.
Bid -The anticipated price at which a buyer is willing to purchase a security or commodity.
Bond covenant - A legally binding term of an agreement between a bond issuer and a bond
holder. Bond covenants are designed to protect the interest of both parties. Bond covenants
may include restrictions on the issuer's ability to take on additional debt, requirements that the
issuer provide audited financial statement to bond holders and limitations on the issuer's ability
to make new capital investments. A common penalty for violating a bond covenant is the
downgrading of a bond's rating, which could make it less attractive to investors and increase the
issuer's borrowing costs.
Book value -The value at which a security is carried on the inventory lists or other financial
records of an investor. The book value may differ significantly from the security's current value
in the market.
Certificate of Deposit (CD) - A savings certificate entitling the bearer to receive interest; a
promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing
funds on demand. Although it is still possible to withdraw the money, this action will often incur
a penalty. A CD bears a maturity date, a specified fixed interest rate and can be issued in any
denomination. CDs are generally issued by commercial banks and are insured by the FDIC.
The term of a CD generally ranges from one month to five years.
Collateralization -Process by which a borrower pledges securities, property or other deposits
for the purpose of securing the repayment of a loan and/or security.
Collateralized Mortgage Obligations (CMO's) - A type of mortgage backed security in which
principal repayments are organized according to their maturities and into different classes
based on risk. A collateralized mortgage obligation is a special purpose entity that receives the
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mortgage repayments and owns the mortgages it receives cash flows from (called a pool). The
mortgages serve as collateral, and are organized into classes based on their risk profile. Income
received from the mortgages is passed to investors based on a predetermined set of rules, and
investors receive money based on the specified slice of mortgages invested in.
Commercial paper - An unsecured short-term promissory note issued by corporations, with
maturities ranging from 2 to 270 days.
Coupon rate -The annual rate of interest received by an investor from the issuer of certain
types of fixed-income securities. Also known as the "interest rate."
Delivery Versus Payment (DVP) - A type of securities transaction in which the purchaser pays
for the securities when they delivered either to the purchaser orhis/her custodian.
Discount -The amount by which the par value of a security exceeds the price paid for the
security.
Diversification - A process of investing assets among a range of security types by sector,
maturity, and quality rating.
Fair value -The amount at which an investment could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.
Federal Funds (Fed Funds) -Funds placed in Federal Reserve banks by depository
institutions in excess of current reserve requirements. These depository institutions may lend
fed funds to each other overnight or on a longer basis. They may also transfer funds among
each other on a same-day basis through the Federal Reserve banking system. Fed funds are
considered to be immediately available funds.
Government Securities - An obligation of the U.S. government backed by the full faith and
credit of the government. These securities are regarded as the highest quality of investment
securities available in the U.S. securities market. See "Treasury Bills, Notes and Bonds."
Guaranteed Investment Contract -Insurance contract that guarantees the owner principal
repayment and a fixed or floating interest rate for a predetermined period of time. Guaranteed
investment contracts are typically issued by insurance companies and marketed to institutions
that qualify for favorable tax status under federal laws. These products provide institutions with
guaranteed returns.
Interest rate -See "Coupon Rate."
Internal Controls - An internal control structure designed to ensure that the assets of the entity
are protected from loss, theft or misuse. The internal control structure is designed to provide
reasonable assurance that these objectives are met. The concept of reasonable assurance
recognizes that 1) the cost of a control should not exceed the benefits likely to be derived and 2)
the valuation of costs and benefits requires estimates and judgment by management. Internal
controls should address the following points:
1. Control of collusion -Collusion is a situation where two or more employees are
working in conjunction to defraud their employer.
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2. Separation of duties - By separating the person who authorizes or performs the
transaction from the people who record or otherwise account for the transaction, a
separation of duties is achieved.
3. Custodial safekeeping -Securities purchased by any bank or dealer including
appropriate collateral (as defined by state law) shall be placed with an independent
third party for custodial safekeeping.
4. Avoidance of physical delivery securities -Book entry securities are much easier to
transfer and account for since actual delivery of a document never takes place.
Delivered securities must be properly safeguarded against loss or destruction. The
potential for fraud and loss increases with physically delivered securities.
5. Clear delegation of authority to subordinate staff members -Subordinate staff
members must have a clear understanding of their authority and responsibilities to
avoid improper actions. Clear delegation of authority also preserves the internal
control structure that is contingent on the various staff positions and their respective
responsibilities.
6. Written confirmation of transactions for investments and wire transfers -Due to the
potential for error and improprieties arising from telephone and electronic
transactions, all transactions should be supported by written communications and
approved by the appropriate person. Written communications may be via fax if on
letterhead and if the safekeeping institution has a list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and third party
custodian -The designated official should ensure that an agreement will be entered
into and will address the following points: control, security provisions, and
responsibilities of each party making and receiving wire transfers.
Investment Policy - A concise and clear statement of the objectives and parameters
formulated by an investor or investment manager for a portfolio of investment securities.
Letter of Credit - A letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the event that the buyer is unable to make
payment on the purchase, the bank will be required to cover the full or remaining amount of the
purchase.
Liquidity - An asset that can be converted easily and quickly into cash.
Local Government Investment Pool (LGIP) - An investment by local governments in which
their money is pooled as a method for managing local funds.
Mark-to-market -The process whereby the book value or collateral value of a security is
adjusted to reflect its current market value.
Market risk -The risk that the value of a security will rise or decline as a result of changes in
market conditions.
Market value -Current market price of a security.
Maturity -The date on which payment of a financial obligation is due. The final stated maturity
is the date on which the issuer must retire a bond and pay the face value to the bondholder.
See "Weighted Average Maturity."
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Money Market Mutual Fund -Mutual funds that invest solely in money market instruments
(short-term instruments, such as Treasury bills, commercial paper, bankers' acceptances,
repos, and federal funds).
Mutual Fund - An investment company that pools money and can invest in a variety of
securities, including fixed-income securities and money market instruments. Mutual funds are
regulated by the Investment Company Act of 1940 and must abide by the following Securities
Exchange Commission (SEC) disclosure guidelines:
1. Report standardized performance calculations.
2. Disseminate timely and accurate information regarding the fund's holdings,
performance, management and general investment policy.
3. Have the fund's investment policies and activities supervised by a board of trustees,
which are independent of the adviser, administrator, or other vendor of the fund.
4. Maintain the daily liquidity of the fund's shares.
5. Value their portfolios on a daily basis.
6. Have all individuals who sells SEC-registered products licensed with aself-regulating
organization (SRO) such as the National Association of Securities Dealers (NASD).
7. Have an investment policy governed by a prospectus which is updated and filed by
the SEC annually.
National Association of Securities Dealers (NASD) - Aself-regulatory organization (SRO) of
brokers and dealers in the over-the-counter securities business. Its regulatory mandate
includes authority over firms that distribute mutual fund shares as well as other securities.
Net Asset Value -The market value of one share of an investment company, such as a mutual
fund. This figure is calculated by totaling a fund's assets which includes securities, cash, and
any accrued interest earnings, subtracting this from the fund's liabilities and dividing this total by
the number of shares outstanding. This is calculated once a day based on the closing price of
each security in the fund's portfolio. (Total assets -liabilities/Number of shares outstanding)
No Load Fund - A mutual fund which does not levy a sales charge on the purchase of its
shares.
Nominal Yield -The states rate of interest that a bond pays its current owner, based on par
value of the security. It is also known as the "coupon," "coupon rate," or "interest rate."
Offer - An indicated price at which market participants are willing to sell a security or
commodity. Also refer to as the "Ask price."
Par -Face value or principal value of a bond, typically $1,000 per bond.
Premium -The amount by which the price paid for a security exceeds the security's par value.
Primary Market - A market that issues new securities on an exchange. Companies,
governments and other groups obtain financing through debt or equity based securities. Primary
markets are facilitated by underwriting groups, which consists of investment banks that will set a
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beginning price range for a given security and then oversee its sale directly to investors. Also
known as "New Issue Market" (NIM).
Prime rate - A preferred interest rate charged by commercial banks to their most creditworthy
customers. Many interest rates are keyed to this rate.
Principal -The face value or par value of a debt instrument. Also may refer to the amount of
capital invested in a given security.
Prospectus - A legal document that must be provided to any prospective purchaser of a new
securities offering registered with the SEC. This can include information on the issuer, the
issuer's business, the proposed used of proceeds, the experience of the issuer's management
and certain certified financial statements.
Prudent Person Rule - An investment standard outlining the fiduciary responsibilities of public
funds investors relating to investment practices.
Repurchase Agreement (Repo) - An agreement of one party to sell securities at a specified
price to a second party and a simultaneous agreement of the first party to repurchase the
securities at a specified price or at a specified later date.
Reverse Repurchase Agreement (Reverse Repo) - An agreement of one party to purchase
securities at a specified price from a second party and a simultaneous agreement by the first
party to resell the securities at a specified price to the second party on demand or at a specified
date.
Safekeeping -Holding of assets, such as securities, by a financial institution.
Secondary Market - A market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The national exchanges, such as the
New York Exchange and the NASDAQ are secondary markets. In any secondary market trade,
the cash proceeds go to an investor rather than to the underlying company/entity directly. In the
primary market prices are often set beforehand, whereas in the secondary market only basic
forces like supply and demand determine the price of the security.
Security - A financial instrument that represents: an ownership position in a publicly traded
corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or
rights to ownership as represented by an option. A security is a fungible, negotiable instrument
that represents some type of financial value.
Securities Lending -The act of loaning a stock, derivative, other security to an investor firm.
Securities lending requires the borrower to put up collateral, whether cash, security or a letter of
credit. When a security is loaned, the title and the ownership is also transferred to the borrower.
The borrower hopes to profit by selling the security and buying it back at a lower price. Since
ownership has been transferred temporarily to the borrower, the borrower is liable to pay any
dividends out to the lender.
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Serial Bond - A bond issue, usually a municipality, with various maturity dates scheduled at
regular intervals until the entire issue is retired.
Share Certificates - A share certificate is a written document signed on behalf of a corporation,
and serves a legal proof of ownership of the number of share indicated. Also refer to as "stock
certificate."
Sinking Fund -Money accumulated on a regular basis in a separate custodial account that is
used to redeem debt securities or preferred stock issues.
Treasury Bills -Short-term U.S. government non-interest bearing debt securities with
maturities of no longer than one year and issued in minimum denominations of $10,000.
Auctions of three- and six-month bills are weekly, while auctions of one-year bills are monthly.
The yields on these bills are monitored closely in the money markets for signs of interest rate
trends.
Treasury Notes -Intermediate U.S. government debt securities with maturities of one to 10
years and issued in denominations ranging from $1,000 to $1 million or more.
Treasury Bonds (T-bills) -Long-term U.S. government debt securities with maturities of ten
years or longer and issued in minimum denominations of $1,000. Currently the longest
outstanding maturity for such securities is 30 years.
Uniform Net Capital Rule -SEC Rule 15C3-1 outlining capital requirements for broker/dealers.
Weighted Average Maturity (WAM) -The average maturity of all the securities that comprise
a portfolio. According to the SEC rule 2a-7, the WAM for SEC registered money market mutual
funds may not exceed 90 days and no one security may have a maturity that exceeds 397 days.
Yield -The current rate of return on an investment security generally expressed as a
percentage of the security's current price.
Yield-to-call (YTC) -The rate of return an investor earns from a bond assuming the bond is
redeemed (called) prior to its nominal maturity date.
Yield-to-maturity -The rate of return yielded by a debt security held to maturity when both
interest payments and the investor's potential capital gain or loss are included in the calculation
of return.
Zero-coupon Securities -Security that is issued at a discount and makes no periodic interest
payments. The rate of return consists of a gradual accretion of the principal of the security and
is payable at par upon maturity.
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