HomeMy WebLinkAbout1992-10-13 - AGENDA REPORTS - CITY OF SC INVESTMENT POLICY (2)AGENDA REPORT
CONSENT CALENDAR
DATE: October 13, 1992
City Manager
Item to be presented by:
R}PVP Stark
SUBJECT: City of Santa Clarita's Statement of Investment Policy
DEPARTMENT: Finance
BACKGROUND
The City Treasurer is required to annually present the City's Investment Policy to the City
Council to reaffirm or to make any changes to the existing policy. There are no
recommended amendments or changes at this time.
The Investment Policy provides guidelines for the management of the City's cash and the
investment of its idle funds. The Policy affords the City a broad spectrum of investment
opportunities as long as the investment is deemed prudent and allowable under the
current legislation of the State of California (Government Code Section 53500, et seq.).
The Policy's guidelines emphasizes the importance of safety and liquidity first. The yield
on the City's investment portfolio is secondary to these first two objectives.
RECOMMENDATION
Staffs recommendation is that the City Council reaffirm the attached Statement of
Investment Policy.
ATTACHMENTS
Statement of Investment Policy
KB/gh/agnda.frm
j� Item:—/It
City of Santa C l a r i t a
STATEMENT
PTO
INVESTMENT POLICY
Prepared for:
City Council
Via George Caravalho, City Manager
Prepared by:
Steve Stark
Finance Director/City Treasurer
I•
I0
TABLE OF CONTENTS
I Statement of Objectives ............................. 1
II Investments .................................... 3
III Safekeeping of Securities ............................ 5
IV Structure and Responsibility .......................... 6
V Reporting ....................................... 7
VI Review of Investment Management .................... 7
VII Authority ........................................ 8
EXHIBIT A
(Prudent Man Rule)
EXHIBIT B
(Description of Investments)
EXHIBIT C
(List of Security Dealers)
EXHIBIT D
(Investment Policy Award)
THE TREASURER OF
CITY OF SANTA CLARITA'S •
INVESTMENT POLICY
STATEMENT OF OBJECTIVES
Temporarily idle or surplus funds of the City of Santa Clarita shall be invested in
accordance with principles of sound treasury management and in accordance with
the provisions of California Government Code Sections 53600, et seq., the Municipal
Code, guidelines established by the California Municipal Treasurer's Association and
the California Society of Municipal Finance Officers, and this Investment Policy
("Policy").
A. Overall Risk Profile
The three basic objectives of Santa Cladta's Investment Program are, in order
of priority:
1. Safety of invested funds;
2. Maintenance of sufficient liquidity to meet cash flow needs; and
3. Attainment of the maximum yield possible. consistent with the first two
objectives.
The achievement of these objectives shall be accomplished in the manner .
described below:
Safety of Invested Funds
The City shall insure the safety of its invested idle funds by limiting credit
and interest rate risks: Credit risk is the risk of loss due to the failure of
the security issuer or backer.
Interest rate risk is the risk that the market value portfolio securities will
fall due to an increase in general interest rates.
a. Credit risk will be mitigated by:
I) Limiting investments to the safest types of securities;
ii) By prequalifying the financial institutions with which it will do
business; and
iii) By diversifying the investment portfolio so that the failure of any
one issued or backer will not place an undue financial burden
on the City.
•
-1-
0
b. Interest rate risk will be mitigated by:
i) Structuring the City's portfolio so that securities mature to meet
the City's cash requirements for ongoing operations, thereby
avoiding the need to sell securities on the open ;market prior to
their maturation to meet those specific needs; and
ii) Investing primarily in shorter term securities.
2. Liquidity
The City's investment portfolio shall be structured in a manner which
strives to achieve that securities mature at the same time as cash is
needed to meet anticipated demands (static liquidity). Additionally, since
all possible cash demands cannot be anticipated, the portfolio should
consist largely of securities with active secondary or resale market
(dynamic liquidity). The specific percentage mix of different investment
instruments and maturities is described in Section II of this Policy.
3. Yield
Yield on the City's: investment portfolio is of secondary importance
compared to the safety and liquidity objectives described above.
Investments are limited to relatively low risk securities in anticipation of
earning a fair return relative to the risk being assumed. While it may
occasionally be necessary or strategically prudent of the City to sell a
security prior to maturity to either meet unanticipated cash needs or to
restructure the portfolio, this policy specifically prohibits trading securities
for the sole purpose of speculating on the future direction of interest rates.
specifically, "when, as an if issued" trading and open-ended portfolio
restructuring transactions are prohibited.
B. Time Frame for Investment Decisions
The City's investment portfolio shall be structured to provide that sufficient
funds from investments are available every month to meet the City's anticipated
cash needs. Subject to the safety provisions outlined above, the choice in
investment instruments and maturities shall be based upon an analysis of
anticipated cash needs, existing and anticipated revenues, interest rate trends,
and specific market opportunities. No investment should have a maturity of
more than five (5) years from its date of purchase without receiving prior City
Council approval.
-2-
C. Definition of Idle or Surplus Funds
Idle or surplus funds for the purpose of this policy are all City funds which are
available for investment at any one time, including the estimated checking
account float, excepting those minimum balances required by the City's banks
to compensate them for the cost of banking services. This policy also applies
to the idle or surplus funds of other entities for which the City of Santa Ciarita
personnel provide financial management services.
II. INVESTMENTS
This section of the Investment Policy identifies the types of instruments in which the
City will invest its idle funds.
A. Eligible Securities
The City of Santa Clarita operates its temporary pooled idle cash investments
under the Prudent Man Rule- (Civil code Section 2261, at seq.). See Exhibit A.
This affords the City a broad spectrum of investment opportunities as long as
the investment is deemed prudent and is allowable under current legislation of
the State of California (Government Code Section 53600, at seq.). (See
Exhibit B for definition of investments.)
o Insured Certificates of Deposit (CDs) of California banks and/or savings
and loan associations; and/or savings banks which mature in five (5)
years or less, provide that the City's investments shall not exceed One
Hundred Thousand Dollars ($100,00(y.00) per institution. If the investment
exceeds the insured $100,000.00,the funds are to be collateralized at
110% of the deposit in government securities or 150% in mortgages.
o Local Agency. Investment Fund (State Pool) Demand Deposits
o Securities of the U.S. Government, or its agencies
o Negotiable Certificates of deposit placed with federal and state savings
and loan associations and federal and state chartered banks with an office
in the State of California (limited to 30% of portfolio)
--- "' ,11a& 11i nrvastment ... property for e
benefit of another, a trustee shall exercise the judgment and care, under the
circumstances then prevailing, which men of prudence, discretion, and intelligence
exercise in the management of their own affairs ..."
n
LJ
-3-
o Bankers Acceptances (limited to 40% of portfolio)
• o Commercial paper (limited to 30% of portfolio)
o Passbook Savings or Money Market Demand Deposits
o Los Angeles County Treasurer's Investment Pool
o Money Market Mutual Fund (with $1 net asset value)
B. Qualification of Brokers. Dealers. and Financial Institutions
United States Treasury issue transactions will be conducted only with primary
dealers from the list of Government Security dealers reporting to the Markets
Reports Division of the Federal Reserve Bank of New York (Exhibit C).
C. Collateralization Requirements
Uninsured Time Deposits with banks and savings and loans shall be
collateralized in the manner prescribed by law for depositories accepting
municipal investment funds.
D. Preformatted Wire Transfers
• Wherever possible, the City will use preformatted wire transfers to restrict the
transfer of funds to preauthorized.accounts only. When transferring funds to
an account not previously approved, the bank is required to.call back a second
employee for confirmation that the transfer is authorized.
E. Notice of Dealers
The City shall annually send a copy of the current edition of the Policy and its
enabling Resolution to all institutions which are approved to handle City of
Santa Clarita investments. Receipt of the policy and Resolution, including
confirmation that it has been received by persons handling the City's account,
shall be acknowledged in writing within thirty (30) days.
F. Diversification
The portfolio should consist of a mix of various types of securities, issues and
maturities.
G. Confirmation
Receipts for confirmation of purchase of authorized securities should include
• the following information: trade date, par value, rate, price, yield, settlement
date, description of securities purchased, agency's name, net amount due, third
party custodial information. These are minimum information requirements.
-4-
H. GASB 3
The Governmental Accounting Standards Board issued GASB 3 in April 1986,
and the local entity's investments must be categorized into three levels of credit
risk, as follows:
Securities that are insured or registered, or for which the securities are
held by public units or its agent in the units;
2. Securities that are uninsured and unregistered and are held by the
broker's or dealer's trust department or agent in the unit's name;
3. Securities that are uninsured and unregistered and are held by the broker
or dealer, or by its trust department or agent, but not in the unit's name
The carrying amount and market value of all types of investments must be
disclosed in total and for each type of investment.
Governmental Accounting Standards Board 3 exempts mutual funds and LAW
investments from the mandatory risk categorization.
III. SAFEKEEPING OF SECURITIES
A. Safekeeping Agreement .
The City shall contract with a bank or banks for the safekeeping of securities
which are owned by the City as a part of its investment portfolio or transferred
to the City under the terms of any repurchase agreements.
B. Handling of City -owned Securities and Time Deposit Collateral
All securities owned by the City shall be held by its safekeeping agent, except
the collateral for time deposits in banks, savings banks, and savings and loans.
The collateral for time deposits in savings and loans is held by the Federal
Home Loan Bank. The collateral for time deposits in banks is held in the City's
name in the bank's trust department, (if a safekeeping agreement has been
executed) or, alternatively, in the San Francisco Federal Reserve Bank.
C. Security Transfers
The authorization to release City's securities will be telephoned to the
appropriate bank by a Finance Department member other than the person who
initiated the transaction. A written confirmation outlining details. for the
transaction and confirming the telephone instructions will be sent to the bank
within five (5) working days.
-5-
D. Verification of Security
Securities transferred to the City as collateral securing time deposits which are
being held in safekeeping for the City will be verified in writing and examined
on a surprise basis during the year by the City's independent auditors as part
of the City's annual independent audit.
IV. STRUCTURE AND RESPONSIBILITY
This section of the Policy defines the overall structure of the investment
management program.
A. Responsibilities of the Finance Department
The Finance Department is charged with responsibility for maintaining custody
of all public funds and securities belonging to or under the control of the City
and for the deposit and investment of those funds in accordance with principles
of sound treasury management and in accordance with applicable laws and
ordinances.
B. Responsibilities of the Finance Director
The Finance Director is appointed by the City Manager and is subject to his or
• her direction and supervision. The Finance Director is charged with the
responsibility for the conduct of all Finance Department functions, including the
custody and investment of City funds, and the development of procedures to
implement this investment policy. The Finance Director is further responsible
for the duties and powers imposed by the general laws of the State of
California upon City Treasurer, City Assessors and City Tax Collectors.
C. Responsibilities of the City Manager
The City Manager is responsible for directing and supervising the Director of
Finance. He or she is responsible further to keep the City Council fully advised
as to the financial condition of the City.
D. Responsibilities of the City Council
The City Council shall.consider and adopt a written investment policy. As
provided in that policy, the Council shall receive, review, and accept monthly
investment reports.
•
-6-
E. Resoonsibilities of the Investment Committee
There shall be an Investment Committee consisting of the City Manager,
Assistant City Manager, the Director of Finance/City Treasurer. The Committee
shall meet bi-monthly to discuss cash flow requirements, the monthly
investment reports, investment strategy, investment and banking procedures,
and significant investment related work projects being undertaken in each
department which will affect the cash flow management of the City Treasurer.
This will require timely reports from the department heads to the City Treasurer
concerning significant future cash flow requirements. The Committee's
meetings will be summarized in minutes that are distributed to the City Council.
V. REPORTING
The Director of Finance shall prepare a monthly investment report, including a
succinct management summary that provides a clear picture of the status of the
current investment portfolio and transactions made over the past month. This
management summary will be prepared in a manner which will allow the City
Manager and City Council to ascertain whether investment activities during the
reporting period have deviated from the City's investment policy.
The monthly investment report will include the following:
A. A listing of individual securities held at the end of the reporting month. •
B. Unrealized gain or loss resulting from appreciation or depreciation by listing the
cost and market value of securities over one year in duration.
C. A description of the current investment strategy and the assumptions upon
which it is based.
D. Average rate of return on City's investments.
E. Maturity aging by type of investments.
VI. REVIEW OF INVESTMENT MANAGEMENT
A. Policy Review
This investment policy shall be reviewed annually by the City Council in
accordance with state law to insure its consistency with respect to the overall
objectives of safety, liquidity, and yield. Proposed amendments to the Policy
shall be prepared by the Treasurer and after review by the Investment
Committee and City Attorney be forwarded to the City Council for
consideration.
E
-7-
Exhibit B
U
DESCRIPTION OF INVESTMENTS
The City of Santa Clarita's investments are placed in those securities as outlined below;
the balance between the various investment instruments may change in order to give the
City of Santa Clarita the best combination of safety, liquidity and high yield. Surplus
funds of local agencies may only be invested in certain eligible securities. The City of
Santa Clarita invests only in those allowable securities under the State of California
Statutes (Government Code Section 53601, at seg, .
CERTIFICATES OF DEPOSIT
Certificates of deposit allow the City to select the exact amount and day of maturity as
well as the exact depository. Certificates of deposit are issued in any amount for periods
of time as short as 14 days and as long as several years. At any given time, the City
may have certificates of deposit in numerous financial institutions in the future.
The Treasurer may at his discretion waive security for that portion of a deposit which is
insured pursuant to federal law. Currently, the first $100,000 of a deposit is federally
insured by FSLIC or FDIC. It may be to the City's advantage to waive this collateral
requirement for the first $100,000 because the City may receive a higher interest rate.
If funds are to be collateralized, the collateral will be 110% of the deposit in government
securities or mortgages of 150%. At purchase, institutions must not show an operating
loss. Banks must have an equity to asset ratio of at least 6%. Savings and loan
associations and savings banks must have an equity to asset ratio of at least 3%.
LOCAL AGENCY INVESTMENT FUND
Local Agency Investment Fund of the State of California offers high liquidity because
deposits can be wired to the City/Agency checking account in twenty-four hours. Interest
is computed on a daily basis.
This is a special fund in the State Treasury which local agencies may use to deposit
funds for investment. There is no minimum investment period and the minimum
transaction is $5,000 in multiples of $1,000 above that, with a maximum of $15,000,000
for any agency. It offers high liquidity because deposits can be converted to cash in
twenty-four hours and no interest is lost. All interest is distributed to those agencies
participating on a proportionate share determined by the amounts deposited and the
length of time they are deposited. Interest is paid quarterly via a check or warrant.
The State keepsan amount for reasonable costs of making the investments, not to
exceed one-quarter of one percent of the eamings.
• The interest rates are fairly high because of the pooling of the State surplus cash with the
surplus cash deposited by local governments. This creates a multi -billion dollar money
pool and allows diversified investments. In a high interest rate market, we do better than
LAIF, but in times of low interest rates, tAIF yields are higher.
U.S. TREASURY SECURITIES
U.S. Treasury securities are highly liquid in addition to being considered the safest of all
investments.
U.S. TREASURY BILLS are direct obligations of the United States Government.
They are issued weekly with maturity dates up to one year. They are issued and
traded on a discount basis and the interest is figured on a 360 day basis, actual
number of days. They are issued in amounts of $10,000 and up, in multiples of
$5,000. They are highly liquid security.
U.S. TREASURY NOTES are direct obligations of the United States Government.
They are issued throughout the year with maturities of 2, 3, 4, 5, 7, 10 years. Notes
are coupon securities paying interest every six months. The City will not invest In
notes having maturities longer than five years.
FEDERAL AGENCY SECURITIES
Federal Agency Securities are highly liquid and considered riskless.
Federal Agency issues are guaranteed directly or indirectly by the United States
Government. All agency obligations qualify as legal investments and are acceptable as
security for public deposits. They usually provide higher yields than regular Treasury
issues with all of the same advantages. Examples are:
FNMA's (Federal National Mortgage Association) are used to assist the home
mortgage market by purchasing mortgages insured by the Federal Housing
Administration and the Farmers Home Administration, as well as those guaranteed
by the Veterans Administration.
FHLB's (Federal Home Loan Bank Notes and Bonds) are issued by the Federal
Home Loan Bank System to help finance the housing industry. The notes and
bonds provide liquidity and home mortgage credit to savings and loan associations,
mutual savings banks, cooperative banks, insurance companies and mortgage -
lending institutions.
Some other federal agency issues are Federal Intermediate Credit Banks
Debentures (FICB), Federal Farm Credit Bank (FFCB), Federal Land Bank Bonds
(FLB), Small Business Administration notes (SBA's), Govemment National Mortgage
• Association notes (FNMA's), Tennessee Valley Authority notes (TVA's), and Student
Loan Association notes (SALLIE MAE's). These investments will occasionally be
used.
-2-
NEGOTIABLE CERTIFICATES OF DEPOSIT
Negotiable certificates of deposit are high grade instruments, paying a higher interest rate •
than regular certificates of deposit. They are liquid because they can be traded in the
secondary market.
Negotiable Certificates of Deposit (NCD's) are unsecured obligations of the financial
institution, bank or savings and loan, bought at par value with promise to pay face value
plus accrued interest at maturity. The primary market issuance is in multiples of
$1 million, the secondary market usually trades in denominations of $500,000 although
smaller lots are occasionally available. Local agencies may not invest more than 30%
of their surplus money in negotiable certificates of deposit. NCD's will only be placed with
the largest and most financially sound institutions.
BANKERS ACCEPTANCES
Bankers Acceptances are frequently the highest in yield, are safe investments and are
highly liquid.
Bankers acceptances are a short-term credit arrangement to enable businesses to obtain
funds to finance commercial transactions. They are time drafts drawn on a bank by an
exporter or importer to obtain funds to pay for specific merchandise.- By its acceptance,
the bank becomes primarily liable for the payment of the draft at its maturity. An
acceptance is a high grade negotiable instrument. Acceptances are purchased in various •
denominations for 30, 60 or 90 days but no longer than 270 days. The interest is
calculated on a 360 day discount basis similar to Treasury Bills. Local agencies may not
invest more than forty -percent of their surplus money in bankers acceptances.
COMMERCIAL PAPER
Commercial paper allows the investment of large amounts of money for one to seven
days at rates higher than we can earn from our savings account. Commercial paper is
a short-term unsecured promissory note issued by a corporation to raise working capital.
These negotiable instruments are purchased at a discount to par value. Commercial
paper is issued by corporations such as Shearson -American Express, International
Business Machines (IBM) and Pacific Gas and Electric Company, etc.
Local agencies are permitted by state law to invest in commercial paper of "prime" quality
of the highest ranking or of the highest letter and numerical rating as provided by Moody's
Investor's Service, Inc. or Standard and Poor's Corporation. Purchases of eligible
commercial paper may not exceed 180 days maturity nor exceed thirty percent of the
local agency's surplus funds.
PASSBOOK SAVINGS OR MONEY MARKET ACCOUNT
Passbook savings account allows us to transfer money from checking to savings and ear
short-term on odd amounts of money which are not available for longer investment.
-3-
The savings account is similar to an inactive deposit except not for a fixed term. The
. interest rate is much lower than CD's, but the savings account allows flexibility. Funds
can be deposited and withdrawn according to daily needs. The City of Santa Clarita has
one money market demand account.
•
LOS ANGELES COUNTY POOLED FUND
Los Angeles County Pooled Fund is similar to the State of California Local Agency
Investment Funds. The County fund provides protection, liquidity and higher than market
rates for short-term securities.
The County Pooled Fund is similar to the State of California Local Agency. Investment
Fund (LAIF). Los Angeles County has an existing pooled fund with current assets of
$3.5 billion serving school districts and other special districts. This pooled fund is
managed by the county Treasurer and interestis competitive to money market rates.
There are no restrictions to number. of transactions or dollar amount of deposits. The
funds deposited by a local agency in the County Pooled Fund cannot be attached by the
County.
All interest is distributed to those agencies participating on a proportionate share
determined by the amounts deposited and the length of time they are deposited. Interest
is paid quarterly via a check or warrant. The County keeps an amount for reasonable
administrative costs of the pool. The Los Angeles County Treasurer has stated the range
of administrative costs is 14 to 18 basic points (approximately 0.14% to 0.18% of the pool
fund average daily balance).
MUTUAL FUND
Mutual Fund is another authorized investment allowing the City to maintain liquidity and
receive money market rates.
Mutual Funds are referred to in the Government Code, Section 53601,L, as "shares of
beneficial interests issued by diversified management companies." The Mutual Fund
must be restricted by its by-laws to the same investments as the local agency. These
investments are Treasury issues, Agency issues, Bankers Acceptance, Commercial
Paper, Certificates of Deposit, and Negotiable Certificates of Deposit. The quality rating
and percentage restrictions in each investment category applicable to the local agency
also applies to the Mutual Fund.
A further restriction is that the purchase price of shares of the mutual funds shall not
include any sales commission. Investments in mutual funds shall not exceed fifteen
percent of the local agency's surplus money.
-4-
Exhibit C
LIST OF THE PRIMARY GOVERNMENT SECURITIES DEALERS
REPORTING TO THE MARKET REPORTS DIVISION OF THE
FEDERAL RESERVE BANK OF NEW YORK
Bank of America NT & SA
Barclays del Zoete Wedd Securities Inc.
Bear, Steams & Co. Inc.
BNY Securities, Inc.
BT Securities Corporation
Carroll McEntee & McGinley Incorporated
Chase Securities, Inc.
Chemical Securities Inc.
Citicorp Securities Markets, Inc.
Continental Bank, National Association
CRT Government Securities, Ltd.
Daiwa Securities America Inc.
Dean Witter Reynolds Inc.
Dillon, Read & Co. Inc.
Discount Corporation of New York
Donaldson, Lufkin & Jenrette Securities Corp.
The First Boston Corporation
First Chicago Capital Markets, Inc.
Fuji Securities Inc.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
Hams Government Securities Inc.
Kidder, Peabody & Co., Inc.
Aubrey G. Lanston & Co., Inc.
Manufacturers Hanover Securities Corporation
Merrill Lynch Government Securities Inc.
Midland Montagu Securities Inc.
J.P. Morgan Securities, Inc.
Morgan Stanley & Co. Inc.
The Nikko Securities Co. International, Inc.
Nomura Securities International, Inc.
Paine Webber Incorporated
Prudential-Bache Securities, Inc.
Salomon Brothers Inc.
Sanwa-BGK Securities Co., L.P.
Security Pacific National Bank
Shearson Lehman Hutton Government Securities Inc.
U
LJ
Smith Barney, Harris Upham & Co., Inc.
SBC Government Securities Inc.
UBS Securities Inc.
® S.G. Harburg & Co., Inc.
Wertheim Schroder & Co., Inc.
Yamaichi International (America), Inc.
NOTE: This list has been compiled and made available for statistical purposes only
and has no significance with respect to other relationships between dealers and the
Federal Reserve Bank of New York. Qualifications for the reporting list is based on the
achievement and maintenance of reasonable standards of activity.
Market Reports Division
Federal Reserve Bank of New York
June 28, 1990
Cl
0
CERTIFICATION OF EXCELLENCE AWARD
Cift of , innta Clarita, (11aftfornifta
1391
The investment policy submittod for review meets this
standards established by the Municipal Treasurers'Association
of the United States and Canada