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HomeMy WebLinkAbout2000-05-23 - AGENDA REPORTS - FY 2000/01 INVEST POLICY (2)CITY OF SANTA CLARITA AGENDA REPORT City Manager Approv Item to be presente by: Barbara Boswell CONSENT CALENDAR DATE: May 23, 2000 SUBJECT: CITY OF SANTA CLARITA'S FISCAL YEAR 2000-01 STATEMENT OF INVESTMENT POLICY DEPARTMENT: Administrative Services RECOMMENDED ACTION Adopt the City of Santa Clarita's Fiscal Year 2000-01 Statement of Investment Policy. BACKGROUND Per California Government Code Section 53646, 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. 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 various investment opportunities, as long as the investment is deemed prudent under the Prudent Person Rule (Civil Code Section 2261, et seq.) and is allowable under the current legislation of the State of California (Government Code Section 53600, et seq.). The Policy's guidelines emphasize the importance of safety and liquidity first. The yield on the City's investment portfolio is secondary to these first two objectives. Minor revisions to the current Investment Policy have been recommended by staff, based on comments received from the Municipal Treasurer's Association and on suggestions made by the Government Finance Officers Association. These changes include specifying a benchmark to compare our portfolio's performance and a provision for an annual review of our approved financial institutions, dealers, and brokers. Two additions being recommended to the City's Statement of Investment Policy include how to handle temporary inbalances in the structure of the portfolio and how to deal with a credit downgrade. ALTERNATIVE ACTION Other actions as determined by the City Council Adopted: A 3 Iten. \ 2000/01 STATEMENT OF INVESTMENT POLICY May 23, 2000 — Page 2 FISCAL IMPACT None by this action. ATTACHMENTS City of Santa Clarita's Fiscal Year 2000-01 Statement of Investment Policy (Available in City Clerk's reading file.) BB:JM:hds comcfAinveet CITY OF SANTA CLARITA Statement of Investment Policy Fiscal Year 2000-01 TABLE OF CONTENTS I. POLICY ................................................ 1 II. SCOPE ................................................. 1 III. DELEGATION OF AUTHORITY ............................... 1 IV. PRUDENCE .............................................. 2 V. OBJECTIVES .............. VI. ETHICS AND CONFLICTS OF INTEREST ...................... 4 VII. SAFEKEEPING OF SECURITIES ............................. 5 VIII. REPORTING ............................................. 5 IX. INTERNAL CONTROLS ..................... 7 X. EXTERNAL CONTROLS ..................................... 6 XI. QUALIFIED DEALERS AND INSTITUTIONS .................... 7 XII. COLLATERAL REQUIREMENTS ............................... 7 XIII. AUTHORIZED INVESTMENTS ................................ 7 XIV. INVESTMENT PARAMETERS ................................. 14 XV. INVESTMENT POOLS ...................................... 15 XVI. PROHIBITED INVESTMENTS AND TRANSACTIONS ............... 15 XVII. POLICY REVIEW ......................................... 15 XVIII.POLICY ADOPTION ....................................... 15 ATTACHMENT `A' (GLOSSARY OF TERMS) ATTACHMENT `B' (BANK/SAVINGS AND LOAN QUESTIONNAIRE AND CERTIFICATION) ATTACHMENT `C' (BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION) ATTACHMENT `D' (LIST OF PRIMARY DEALERS) ATTACHMENT `E' (INVESTMENT POOL QUESTIONNAIRE) CITY OF SANTA CLARITA Statement of Investment Policy Fiscal Year 2000-01 I. POLICY It is the policy of the City of Santa Clarita (the •City")to meet the short and long term cash flow demands of the City in a manner which will provide for the safety of principal and sufficient liquidity, while providing an investment return. The purpose of this Statement of Investment Policy (hereinafter, this "Investment Policy") is to outline a process of the investment of City funds in a prudent manner in order to meet City objectives. II. SCOPE This investment policy applies to all investment activities and financial assets of the City (hereinafter, the "Funds") excluding funds invested in accordance with the City -established employee deferred compensation plans as defined by the Federal Income Tax Code Sections 457 and 401(a) which are invested according to employee directions and are not considered part of the Funds nor subject to this Investment Policy except for Section VIII with regards to reporting requirements. Pension funds for eligible City employees are administered and invested by the State of California Public Employees Retirement System and are not subject to this investment policy. Bond proceeds shall be invested in accordance with the requirements and restrictions outlined in the bond documents and are not considered part of the Funds nor subject to this Investment Policy except for Section VIII with regards to reporting requirements. The following funds are covered by this Investment Policy and are accounted for in the City's Comprehensive Annual Financial Report: (a) General Fund (b) Special Revenue Funds (c) Debt Service Funds (d) Capital Project Funds (e) Enterprise Funds (f) Internal Services Funds (g) Trust and Agency Funds (h) Any new funds created by III- DELEGATION OF ADTHORITY the City Council Pursuant to City of Santa Clarita Ordinance 87-2 (Sec. 2.15.030 Santa Clarita Municipal Code), the Treasurer is authorized to invest the City's Funds in accordance with California Government Code Sections 53600, 16429.1 and 53684 ZI sea.v In the absence of the City Treasurer (hereinafter, the "Treasurer"), the investment of the Funds will be delegated to the City Manager. In the absence of the City Treasurer and the City Manager, the investment of the Funds will be delegated to the Assistant City Manager. Prior to investing in securities, the City Manager or the Assistant City Manager will consider the cash flow requirements of the City and invest in securities that will not adversely affect the liquidity of the investment portfolio. IV" PRUDENCE Investments shall be made in the context of the "Prudent Investor" standard pursuant to Government Code Section 53600.3 which states that: "When investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, 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 agency. Within the limitations of this section and considering individual investments as part of an overall strategy, a trustee is authorized to acquire investments as authorized by law." All investments purchased shall have daily liquidity or a final stated maturity date, upon which the full principal value of the security will be received. Although the investment will mature at full principal value, it is recognized that the market value will vary throughout the life of the security. In a diversified YAll subsequent references to code sections refer to the California Government Code unless otherwise indicated. 2 Portfolio it must be further recognized that occasional measured losses are inevitable due to economic conditions, bond market, or individual security credit analysis. These occasional losses must be evaluated and considered within the context of the overall investment return. The "Prudent Investor" standard shall be applied in the context of managing the Funds. The Treasurer and other investment employees, acting within the intent and scope of the investment policy and other written procedures and exercising due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments. V. QEOQT m The objective of the investment portfolio is to meet the short- and long-term cash flow demands of the City. To achieve this objective, the portfolio will be structured to provide Safety of Principal as first priority and Liquidity as second priority, while then providing a Return on Investments. A. Safety of Principal Investments of the City shall be undertaken in a manner that seeks to ensure that capital losses are minimized, whether from institution default, broker/dealer default, or erosion of the market value of securities. The City shall seek to preserve principal by mitigating the two types of risk in order of importance: credit risk and market risk. 1. Credit Risk. Credit risk, defined as the risk of loss due to failure of an issuer of a security, shall be mitigated by purchasing Treasuries or high-grade securities. All investments beyond Treasury securities will be diversified so that the failure of any one issuer would not unduly harm the City's cash flow. Credit risk shall also be mitigated by pre -qualifying financial institutions, broker/dealers, intermediaries and advisors with which the City does business. 2.Market or Interest Rate Risk. Interest rate risk is the risk that the market value of securities in the Portfolio will fall due to changes in general interest rates. Interest rate risk may be mitigated by structuring the Funds so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to 3 sell securities on the open market prior to maturity, and by investing operating funds primarily in shorter -term securities. The cash flow is updated on a daily basis and will be considered prior to the investment of securities, which will reduce the necessity to sell investments for liquidity purposes. Long-term securities shall not be purchased for the sole purpose of short-term speculation. Securities shall not be sold prior to maturity with the following exceptions: 1) a declining credit security would be sold early to minimize loss of principal, 2) a security swap would improve the quality, yield, or target duration in the portfolio, or 3) liquidity needs of the portfolio require that the security be sold. B. Liquidity The Funds shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the Funds will maintain a liquidity buffer and invest primarily in securities with active secondary or resale markets (dynamic liquidity). C. Return on Investments The Funds shall be designed to attain a return on investments through budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. VI. BTBICS AND CONFLICTS OF INTEREST The Treasurer and other employees involved in the investment process shall refrain 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. The Treasurer and investment employees shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio and shall refrain from 4 undertaking personal investment transactions with the same individual with whom business is conducted on behalf of their entity. The Treasurer and investment employees are required to file annual disclosure statements as required by the Fair Political Practices Commission ("FPPC"). During the course of the year, if there is an event subject to disclosure that could impair the ability of the Treasurer or investment employees to make impartial decisions, the City Council will be notified in writing within 10 days of the event. VII" BAFMMEPING OF SECURITIES To protect against fraud, embezzlement, or losses caused by collapse of individual securities dealers, all securities owned by the City shall be held in safekeeping by the City,s custodial bank, a third party bank trust department, acting as agent for the City under the terms of a custody agreement. Such custodial bank must be a federal or state association (as defined by Section 5102 of the Financial Code), a trust company or a state or national bank located within this state or with the Federal Reserve Bank of San Francisco or any branch thereof within this state, or with any Federal Reserve bank or with any state or national bank located in any city designated as a reserve city by the Board of Governors of the Federal Reserve System. Collateral for repurchase agreements will be held by a third party custodian under the terms of a Public Securities Association ("PSA") master repurchase agreement. All securities will be received and delivered using standard delivery versus payment ("DVP") procedures which ensures that securities are deposited with the third party custodian prior to the release of funds. Securities will be held by a third party custodian as evidenced by safekeeping receipts. Investments in the State or County Pool (as described in Section XIII.(o) & (p) of this Investment Policy) or money market mutual funds (as described in Section XIII.(k) of this Investment Policy) are undeliverable and are not subject to delivery or third party safekeeping. The Treasurer shall not be responsible for securities delivered to and receipted for by a financial institution until they are withdrawn from the financial institution by the Treasurer. Investment trades, as they occur but no more than daily, shall be verified against the bank transactions and broker confirmation tickets to ensure accuracy. On a monthly basis, the custodial asset statement shall be reconciled with the month-end portfolio holdings. On an annual basis, the external auditor confirms investment holdings. VIII REPORT] In accordance with amended Section 53646 of the Government Code, effective January 1, 1996, the Treasurer will annually render to the City Council and the Investment Committee (consisting of the City Manager, Assistant City Manager, and the Director of Administrative Services/City Treasurer) a statement of investment policy which the City Council shall consider at a public meeting. The policy shall be reviewed on an annual basis by the Treasurer and the Investment Committee. Any investment held at the time this Investment Policy is adopted that does not meet the guidelines of this policy shall be exempted from the requirements of this policy. At maturity or liquidation, however, such moneys shall be reinvested only as provided by this policy. Pursuant to Section 53607 and Section 53646 of the Government Code, the Treasurer shall render a report (the "Report") to the City Council, City Manager, the Investment Committee and the internal auditor (if any) containing detailed information on all securities, investments, and moneys of the City. The Report will be submitted on a monthly basis for information available monthly or on a quarterly basis for information available quarterly and be provided to the Council within 30 days following the end of the month or quarter, as applicable. The Report will contain the following information: 1) the type of investment, name of the issuer, date of maturity, the weighted average maturity, the par, and cost of all funds invested subject to this policy, 2) the market value with the source of the market valuation for all securities held by the City, and under management of any outside party that is not also a local agency or the State of California Local Agency Investment Fund, 3) a description of any investments, including loans and security lending programs, that are under the management of contracted parties, 4) a description of the compliance with the statement of investment policy, or manner in which the portfolio is not in compliance, and 5) a statement denoting the City's ability to meet its pool's expenditure requirements for the next six months, or an explanation as to why sufficient money shall, or may, not be available. The investment portfolio will be managed in accordance with the parameters specified within this policy and is con inual�� monitored and ev luated by the Citv Treasurer and the Investment Comma *pe. The portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. _ ----- • In order to nrnvi Ac n r....i i... --...L: IX INTERNAL CONTROLS AND INygS MENT PLRQCEDMff The external auditor, serving as an independent reviewer, will review and verify the City's investment activity, holdings and compliance with this Investment Policy on an annual basis and submit a report to the City Council relating thereto. The external auditor shall maintain errors and omissions insurance coverage. SI QUALIFIED DEALERS AND INSTITUTIONS The City shall transact business only with banks, savings and loans, and registered investment securities dealers. The purchase of any investment, other than those purchased directly from the issuer, shall be purchased either from an institution licensed by the State as a broker-dealer, as defined in Section 25004 of the Corporation Code, who is a member of the National Association of Securities Dealers, or a member of a Federally regulated securities exchange, a National or State -Chartered Bank, a Federal or State 7 Rem The external auditor, serving as an independent reviewer, will review and verify the City's investment activity, holdings and compliance with this Investment Policy on an annual basis and submit a report to the City Council relating thereto. The external auditor shall maintain errors and omissions insurance coverage. SI QUALIFIED DEALERS AND INSTITUTIONS The City shall transact business only with banks, savings and loans, and registered investment securities dealers. The purchase of any investment, other than those purchased directly from the issuer, shall be purchased either from an institution licensed by the State as a broker-dealer, as defined in Section 25004 of the Corporation Code, who is a member of the National Association of Securities Dealers, or a member of a Federally regulated securities exchange, a National or State -Chartered Bank, a Federal or State 7 Association (as defined by Section 5102 of the Financial Code), or a brokerage firm designated as a Primary Government Dealer by the Federal Reserve Bank. The Treasurer's staff shall investigate all institutions that wish to do business with the City, in order to determine if they are adequately capitalized, make markets in securities appropriate to the City's needs, and agree to abide by the conditions set forth in this Investment Policy. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must provide a current audited financial statement and complete the appropriate City questionnaire (See Attachment "B" and Attachment "C"). XII COLLATERAL REQUIREMENTS California Government Code, Sections 53652 through 53667 requires depositories to post certain types and levels of collateral for Public funds above the Federal Deposit Insurance Corporation ("FDIC") insurance amounts. The collateral requirements apply to bank deposits, both active (checking and savings accounts) and inactive (non-negotiable time certificates of deposit). Collateral is also required for repurchase agreements. The collateral level shall be valued daily and must be maintained at a level of 102% for the life of the repurchase agreement. XIII AUTHORIZED IMATMENTS The investments set forth in this section are authorized investments pursuant to Section 53601 of the Government Code and are authorized investments for the City subject, however, to the prohibitions set forth in Section XIV of this Investment Policy. (a) CITY SONDE: Bonds issued by the City, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the City or by a department, board, agency, or authority of the City. (b) TREASURIES: United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. (c) STATE BONDS: Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue- producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state. (d) 7�UNSCIPAL BONDS: Bonds, notes, warrants, or other evidences of indebtedness of any local agency within the state of California, including bonds payable solely out of the revenues from a revenue- producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. (e) FEDERAL AGENCIES: Obligations issued by banks for cooperatives, federal land banks, federal intermediate credit banks, federal home loan banks, the Federal Home Loan Bank Board, the Tennessee Valley Authority, or obligations, participation, or other instruments of, or issued by, or fully guaranteed as to principal and interest by, the Federal National Mortgage Association; or guaranteed portions of Small Business Administration notes; or obligations, participation, or other instruments of, or issued by, a federal agency or a United States government-sponsored enterprise. (f) B1KERS ACCEPTANCES: Bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances. Purchases of bankers acceptances may not exceed 270 days maturity and must be limited to 40 percent of the City's surplus money that may be invested pursuant to this section. However, no more than 30 percent of the City's surplus funds may be invested in the bankers acceptances of any one commercial bank pursuant to this section. (g) COMMERCIAL PAPER: Commercial paper of %prime^ quality of the highest ranking or of the highest letter and numerical rating as provided for by Moody's Investors Service, Inc., or Standard and Poor's Corporation. Eligible paper is further limited to issuing corporations that are organized and operating within the United States and having 0 total assets in excess of five hundred million dollars ($500,000,000) and having an "A" or higher rating for the issuer's debt, other than commercial paper, if any, as provided for by Moody's Investors Service, Inc., or Standard and Poor's Corporation. Purchases of eligible commercial paper may not exceed 180 days maturity nor represent more than 10 percent of the outstanding paper of an issuing corporation. Purchases of commercial paper may not exceed 15 percent of the City's surplus money that may be invested pursuant to this section. An additional 15 percent, or a total of 30 percent of the City's surplus money, may be invested pursuant to this subdivision. The additional 15 percent may be so invested only if the dollar -weighted average maturity of the entire amount does not exceed 31 days. "Dollar -weighted average maturity" means the sum of the amount of each outstanding commercial paper investment multiplied by the number of days to maturity, divided by the total amount of outstanding commercial paper. (h) CERTIFICATES Z DEPOSIT: Negotiable certificates of deposits issued by a nationally or state -chartered bank or a state or federal association (as defined by Section 5102 of the Financial Code) or by a state -licensed branch of a foreign bank. Purchases of negotiable certificates of deposit may not exceed 30 percent of the City's surplus money which may be invested pursuant to this section. For purposes of this section, negotiable certificates of deposits do not come within Article 2 (commencing with Section 53630), except that the amount so invested shall be subject to the limitations of Section 53638. REPOS: Investments in repurchase agreements or reverse repurchase agreements of any securities authorized by this section, so long as the agreements are subject to this subdivision, including, the delivery requirements specified in this section. All transactions in repurchase agreements or reverse repurchase agreements shall require a master repurchase agreement executed by the contra -party. (2) Investments in repurchase agreements may be made, on any investment authorized in this section, when the term of the agreement does not exceed one year. The market value of securities that underlies a 10 repurchase agreement must be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than Quarterly. (3) Reverse repurchase agreements may be utilized only when either of the following conditions are met: (A) The security was owned or specifically committed to purchase, by the City, prior to December 31, 1994, and was sold using a reverse repurchase agreement on December 31, 1994. (B) The security to be sold on reverse repurchase agreement has been owned and fully paid for by the City for a minimum of 30 days prior to sale; the total of all reverse repurchase agreements on investments owned by the City not purchased or committed to purchase, prior to December 31, 1994, does not exceed 20 percent of the base value of the portfolio; and the agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement and the final maturity date of the same security. (4) After December 31, 1994, a reverse repurchase agreement may not be entered into with securities not sold on a reverse repurchase agreement and purchased, or committed to purchase, prior to that date, as a means of financing or paying for the security sold on a reverse repurchase agreement, but may only be entered into with securities owned and previously paid for a minimum of 30 days prior to the settlement of the reverse repurchase agreement, in order to supplement the yield on securities owned and previously paid for or to provide funds for the immediate payment of a City obligation. Funds obtained or funds with the pool of an equivalent amount to that obtained from selling a security to a counter -party by way of a reverse repurchase agreement on securities originally purchased subsequent to December 31, 1994, shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement, unless the reverse repurchase 11 agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement and the final maturity date of the same security. Reverse repurchase agreements specified in sub -paragraph (B) of paragraph (3) may not be entered into unless the percentage restrictions specified in that subparagraph are met, including the total of any reverse repurchase agreements specified in subparagraph (A) of paragraph (3). (5) Investments in reverse repurchase agreements or similar investments in which the City sells securities prior to purchase, may only be made upon prior approval of the City Council. (6) (A) "Repurchase agreement" means a purchase of securities by the City pursuant to an agreement by which the counter -party seller will repurchase the securities on or before a specified date and for a specified amount and the counter -party will deliver the underlying securities to the City by book entry, physical delivery, or by third party custodial agreement. The transfer of underlying securities to the counter -party bank's customer book -entry account may be used for book -entry delivery. (C) "Securities," for purpose of repurchase under this subdivision, means securities of the same issuer, description, issue date, and maturity. (D) "Reverse repurchase agreement" means a sale of securities by the City pursuant to an agreement by which the City will repurchase the securities on or before a specified date and includes other comparable agreements. (E) For purposes of this section, the base value of the City's pool portfolio shall be that dollar amount obtained by totaling all cash balances placed in the pool by all pool participants, excluding any amounts obtained through selling securities by way of reverse repurchase agreements or other similar borrowing methods. (F) For purposes of this section, the spread is the difference between the cost of funds 12 obtained using the reverse repurchase agreement and the earnings obtained on the reinvestment of the funds. (G) Repurchase agreements and reverse repurchase agreements shall only be made with primary dealers of the Federal Reserve Bank of New York. (J) CORPORATE NOTES: Medium-term notes of a maximum of five years maturity issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Notes eligible for investment under this subdivision shall be rated in a rating category of "A" or its equivalent or better by a nationally recognized rating service. Purchases of medium- term notes may not exceed 30 percent of the City's surplus money which may be invested pursuant to this section. (k)MONEY MARKET JV=AL jS Shares of beneficial interest issued by diversified management companies (otherwise known as "mutual funds"), as defined in Section 23701 of the Revenue and Taxation Code, investing in the securities and obligations as authorized by subdivisions (a) to (p), inclusive, of this section and that comply with the investment restrictions of Article 1 (commencing with Section 53600) and Article 2 (commencing with Section 53630). To be eligible for investment pursuant to this subdivision, these companies shall either: (1) Attain the highest ranking or the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services. (2) Commission with not less than five years' experience investing in the securities and obligations as authorized by subdivisions (a) to (p), inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000). The purchase price of shares of beneficial interest purchased pursuant to this subdivision shall not include any commission that these companies may charge and shall not exceed 15 percent of the City's surplus money that may be invested pursuant to this section. 13 (1) Notwithstanding anything to the contrary contained in this section, Section 53635, or any other provision of law, moneys held by a trustee or fiscal agent and pledged to the payment or security of bonds or other indebtedness, or obligations under a lease, installment sale, or other agreement of the City, or certificates of participation in those bonds, indebtedness, or lease installment sale, or other agreements, may be invested in accordance with the statutory provisions governing the issuance of those bonds, indebtedness, or lease installment sale, or other agreement, or to the extent not inconsistent therewith or if there are no specific statutory provisions, in accordance with the ordinance, resolution, indenture, or Collateral agreement of the City providing for the issuance. (m) COLLATERALIZED CERTIFICATES OF DEPOSIT: Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by Section 53651 as eligible securities for the purpose of securing City deposits having a market value at least equal to that required by Section 53652 for the purpose of securing City deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank which is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted. (n) ASSET HACKED: Any mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay -through bond, equipment lease -backed certificate, consumer receivable pass-through certificate, or consumer receivable -backed bond of a maximum of five years maturity. Securities eligible for investment under this subdivision shall be issued by an issuer having an "A" or higher rating for the issuer's debt as provided by a nationally recognized rating service and rated in a rating category of "AA" or its equivalent or better by a nationally recognized rating service. Purchase of securities authorized by this subdivision may not exceed 20 percent of the City's 14 surplus money that may be invested pursuant to this section. (o) LAID State managed Local Agency Investment Fund("LAIF") pursuant to Government Code Section 16429.1 and Resolution No. 88-95 of the City Council of the City of Santa Clarita. The maximum amount an agency may invest in LAIF is $30,000,000. (P) LACPXFs Los Angeles County Treasury Pooled Investment Fund ("LACPIF")pursuant to Government Code Section 53684 and Resolution No. 91-185 of the City Council of the City of Santa Clarita. XIV INVESTMENT PARAMETERS 1. Diversification The investments shall be diversified by: 1) limiting investments to avoid over -concentration in securities from a specific issuer or business sector (excluding U.S. Treasury securities), 2) limiting investments in securities that have higher credit risks, 3) investing in securities with varying maturities, and 4) continuously investing a portion of the portfolio in readily available funds such as local government investment pools, money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. 2. Maximum Maturities To the extent possible, the City shall attempt to match its investments with anticipated cash flow requirements. The weighted average maturity of the investment portfolio will be limited to three years or less. Purchases of any one security will be restricted to securities with a final stated maturity not to exceed five years unless the City Council has granted express authority to do so no less than three months prior to making the investment. A thorough investigation of any pooled investment funds, including mutual funds as defined in section XIII(k)above, is required prior to investing, and on a continual basis. To accomplish this, a questionnaire (see Attachment D) is to be used to evaluate the suitability of the pooled fund. XVI PROHIBITED INVESTMENTS AND IRAN ACTIONS 15 (a) The City shall not invest any funds in inverse floaters, range notes, or interest -only strips that are derived from a pool of mortgages. (b) The City shall not invest any funds in any security that could result in zero interest accrual if held to maturity. However, the City may hold prohibited instruments until their maturity dates. The limitation in this subdivision shall not apply to City investments in shares of beneficial interest issued by diversified management companies registered under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, and following) that are authorized for investment pursuant to subdivision (k) of Section XIII, above. ILMI PORTFOLIO REBALANCING XVIII CREDIT DGMGRADING XIX POLICY REVIEW This Investment Policy shall be reviewed at least annually by the Treasurer and City Council to ensure its consistency with the overall objectives of preservation of principal, liquidity, and 16 return, and its relevance to current law, financial and economic trends, and to meet the needs of the City. This City's investment policy shall be adopted by the City's legislative authority. The policy shall be reviewed annually by the City Council and any modifications made thereto must be approved by the City Council. SUBMITTED BY: X Steve Stark, Director of Admin. Svc./ Date City Treasurer 17 ATTACHMENT "A" GLOSSARY OF TERMS ACCRUED INTEREST: the interest owed to the seller of a coupon bearing issue from the last coupon date up to the sale date. AGENCIES: securities issued by government-sponsored corporations such as Federal Home Loan Banks or Federal Land Banks. BANKERS" ACCEPTANCE (BA): a draft of bill of exchange accepted by a bank evidencing a loan created by the accepting bank. BASIS POINT: 1/100 of one percent (decimally, .0001) BID: the price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See OFFER. BROKER: a middleman who brings a buyer and a seller together in a transaction. The initiator in the transaction, usually pays a commission to the broker. "Give -up name" or "anonymous" describe whether or not the buyer and seller know each other as party to the transaction. The broker does not assume ownership of the securities. CALLABLE BOND: a bond that can be bought back from a holder by the issuer at a specific price after a specific date prior to the maturity date. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity and interest rate. CD's of $100,000 or more can be negotiable. CMO (COLLATERALIZED MORTGAGE OBLIGATION): mortgage-backed bond that separates mortgage pools into short-, medium-, and long-term portions. COLLATERAL: asset pledged to a lender until a loan is repaid. If the borrower defaults, the lender has the legal right to seize the collateral and sell it to pay off the loan. COMMERCIAL PAPER (CP): an unsecured promissory note issued by a corporation. Maturities may not exceed 270 days. Usually sold in discount form. COUPON: a) the annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value, b) a certificate attached to a bond evidencing interest due on a payment date. DEALER: a firm acting as principal in its transactions and actually taking ownership of the securities it deals in (as opposed to brokering or acting as an agent). 1 DEFAULT: failure of a debtor to make timely payments of interest and principal as they come due or to meet some other provision of a bond indenture. DELIVERY VERSUS PAYMENT (DVP): the delivery of securities sold is made to the buying customer's bank in exchange for payment, usually in the form of cash. DERIVATIVE: a financial instrument created from or whose value depends on the value of one or more underlying assets or indexes of asset values. Examples of derivatives include collateralized mortgage obligations (CMO's), interest -only (IO's), and principal - only (PO's), forwards, futures, currency and interest rate swaps, options, floaters/inverse floaters, and caps/floors/collars. DISCOUNTED SECURITIES: issues that carry no coupon rate but come to market at a dollar price below par. Trade in terms of an annualized rate of discount. Redeemed at face value at maturity. DIVERSIFICATION: spreading of risk by putting assets in several categories of investments. INVERSE FLOATER/ a structured note in which the coupon increases as rates decline and decrease as rates rise. 10 (INTEREST ONLY): a class of mortgage derivative in which the cash flow consists solely of the interest payments from a CMO. LIQUIDITY: a liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. MARKT PRICE: in general business, the price agreed upon by buyers and sellers of a product or service, as determined by supply and demand. MARKET VALUE: current market price of a security. MATURITY: the date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKT: the market in which issues one year and under in maturity trade. NEGOTIABLE CERTIFICATES OF DEPOSIT: large denomination interest bearing deposits with a fixed maturity date that may be sold in the money market. OFFER: the price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See BID. 2 PAR: 1) 1008 of the face amount of an issue. 2) the principal amount a holder will receive at the maturity of an issue. PREMIUM: 1) the amount by which the market price of an issue exceeds par. 2) the amount in excess of par that an issuer must pay to call in its bonds. 3) in the money market, the rate higher than the norm that one bank must pay to attract CD depositors. PRIMARY DEALER: dealers authorized to buy and sell government securities in direct dealings with the Federal Reserve Bank of New York. Such dealers must be qualified in terms of reputation, capacity, and adequacy of staff and facilities. PRIME RATE: the loan rate for the best customers of a bank. PRINCIPAL: 1) the dollar cost of an issue excluding accrued interest. 2) one who takes ownership in a transaction, as opposed to brokering or acting as agent. RANGE NOTE: a structured note, also called "range accruals,' "accrual notes,' that pays a coupon rate as long as the reference rate is between specified levels (collars) or below a specified level, otherwise pays 0 percent. REPURCHASE AGREEMENTS: the transaction in which a dealer gives a client securities as collateral and borrows money from the client at a fixed rate for a fixed period of time. Common use indicates that the dealer's point of view be used to describe this transaction. REVERSE REPURCHASE AGREEMENTS: the transaction in which a dealer takes in securities as collateral from a client and loans the client money at a fixed rate for a fixed period of time. Common use indicates that the dealer's point of view be used to describe this transaction. SAFEKEEPING: the service provided by banks for clients when the bank stores the securities, takes in coupon payment, and redeems issues at maturity. SPREAD: 1) the yield or price difference between the bid and offer on an issue. 2) the yield or price difference between different issues. SWAP: the sale of one issue and the simultaneous purchase of another for some perceived advantage. TRADE DATE: the date on which the buyer and seller agree to a transaction. The trade date may or may not be the day on which the securities and money changes hands (settlement date). 3 TREASURY HILLS: short-term securities that are negotiable debt obligations of the U.S. government, secured by its full faith and credit, with maturities of one year or less issued at a discount from face value. TREASURY BONDS: long-term debt instruments that are negotiable debt obligations of the U.S. government, secured by its full faith and credit, with maturities of 10 years of longer. TREASURY NOTES: intermediate securities that are negotiable debt obligations of the U.S. government, secured by its full faith and credit, with maturities of 1 to 10 years. YIELD TO MATURITY: the final block of money, or future value of an investment, expressed by a rate at which that money is being valued presently. ATTACHMENT "B" 1 2 3 4 5 CITY OF SANTA CLARITA OFFICE OF THE CITY TREASURER, RANK/SAVINGS AND LOAN QUESTIONNAIRE AND CERTIFICATION Name of Firm: Address: Telephone No. ( ) ( ) (Local) (Nat. Headquarters) Primary Representative: Manager: Name: Name: Title: Title: Tel. No. ( ) Tel. No. ( ) What is your Community Reinvestment Act ("CRA") Rating? 6 What are the Total Assets of the Bank/Savings and Loan? 7 What is the current Net Worth Ratio of your institution? 8 What was the Net Worth Ratio for the Previous Year? 9 What is your required Capital Ratios? A. Tangible Capital Ratio B. Core Capital Ratio C. Risk -Based Capital Ratio 10 What are your Ratings (i.e., S&P, Moody's, Thompson)? 11 What is the date of your Fiscal Year -End? A. Has there been a year during the past three years in which the Bank/Savings and Loan did not make a profit? 01 12 Have you read the California Government Code Section 53630 through 53684 pertaining to the State's requirements governing the deposit of monies by Local Agencies which includes Cities? [ ) YES [ ) NO 13 Amounts above the FDIC insurance coverage must be collateralized as specified in the Government Code. Where is the collateral for Deposits held? Has there ever been a failure to fully collateralize? If Yes, please attach explanation. 14 What is the education level of the Primary Contact(s)? 15 How many years of related experience does the Primary Contact(s) have? 16 What other banking services would you be interested in providing the City of Santa Clarita? 17 What transaction documents and reports would we receive? 18 What information would you provide to our City Treasurer? 19 Describe the precautions taken by your Bank/Savings and Loan to protect the interest of the public when dealing with government agencies as depositors or investors. 20 Please provide your Contract of Deposit of Moneys pre -signed and sealed by your institution, as well as, any signature cards that you may require. 21 Please provide your Wiring Instructions: K 22 Please provide your Bank/Savings certified financial statement. In financial statement must be provided fiscal year-end. and Loan most recent addition, an audited within 120 days of your I hereby certify that I have personally read City of Santa Clarita's Investment Policy and the California Government Codes pertaining to the investments and deposits of the City of Santa Clarita, and have implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the City of Santa Clarita. I understand however, that our firm is not obligated to monitor the percentage limits on the investments as described in the policy. All sales personnel will be routinely informed of City of Santa Clarita investment objectives, horizon, outlook, strategies and risk constraints whenever we are so advised. We pledge to exercise due diligence in informing City of Santa Clarita Investment Officers of all foreseeable risks associated with financial transactions conducted with our firm. I attest to the accuracy of our responses to your questionnaire. NOTES Completion of Questionnaire is only Dart of City of Santa Clarita's Certification process and DOES NOT guarantee that the applicant will be approved to do business with the City of Santa Clarita. SIGNED: PRINT YOUR NAME AND TITLE COUNTERSIGNED: PRINT YOUR NAME AND TITLE: DATE: DATE: ATTACHMENT "C" CITY OF SANTA CLARITA OFFICE OF THE CITY TREASURER BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION 1 Name of Firm 2 Address 3 Tel. No. ( ) (Local (Local) 4 Primary Representative: (Nat. Headquarters) Tel. No. ( ) (Nat. Headquarters) Manager/Partner-in-Charge: Name: Name: Title: Title: Tel. No. ( ) Tel. No. ( ) No. of Years in Institutional No. of Years in Institutional Sales: Sales: No. of Years with Firm; No. of Years with Firm: 5 Are you a Primary Dealer in U.S. Government Securities? I YES [ l NO 6 Are you a Regional Dealer U.S. Government Securities? I YES ( l NO 7 Are you a Broker instead of a Dealer, i.e., You p4 NOT own positions of securities? I YES [ ] NO 8 Are you NASD certified and licensed to sell in California municipalities? I YES [ l NO 9 what is the net capitalization of your firm? 10 What is the date of your Firm s fiscal year-end? 11 Is your Firm owned by a Holding Company? If so, what is its name and net capitalization? 12 Please provide your Wiring and Delivery Instructions: H 13 Which of the following instruments are offered reaularly by your local desk? [ ] T -Sills [ ] Treasury Notes/Bonds [ ] Discount Notes [ ] NCD'S [ ] Agencies (specify) [ ] BAs (Domestic) [ ]BAs (Foreign) [ ] Mid -Term Notes [ l Commercial Paper [ ] Repurchase Agreements [ l Reverse Agreements 14 Which of the above does your Firm specialize in marketing? 15 Please identify your most directly comparable City Local Agency clients in our geographical area. Entity Contact Person Telephone No. Client Since 16 What reports, transactions, confirmations and paper trail would we receive? 17 Please include samples of research reports or market information that your Firm regularly provides to local agency clients. 18 What precautions are taken by your Firm to protect the interest of the public when dealing with government agencies as investors? 19 Have you or your Firm been censured or punished by a Regulatory State or Federal Agency for improper or fraudulent activities, related to the sale of securities? I ] YES [ ] NO 20 If yes, please explain. 21 Attach certified documentation of your capital adequacy and financial solvency. In addition, an audited financial statement must be provided within 120 days of your fiscal year-end. - CERTIFICATION - 2 I hereby certify that I have personally read City of Santa Clarita Investment Policy and the California Government Codes pertaining to the investments and deposits of the City of Santa Clarita, and have implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the City of Santa Clarita. I understand however, that our firm is not obligated to monitor the percentage limits on the investments as described in the policy. All sales personnel will be routinely informed of City of Santa Clarita investment objectives, horizon, outlook, strategies and risk constraints whenever we are so advised. We pledge to exercise due diligence in informing City of Santa Clarita Investment Officers of all foreseeable risks associated with financial transactions conducted with our firm. I attest to the accuracy of our responses to your questionnaire. NOTES Completion of Questionnaire is clarita's Certification process applicant will be approved to do Clarita. SIGNED: PRINT YOUR NAME AND TITLE: only part of City of Santa and DOES NOT guarantee that the business with the City of Santa DATE: COUNTERSIGNED: DATE: (Person in charge of government securities operations.) PRINT YOUR NAME AND TITLE: 3 ATTACHMENT "D" List of the Primary Government Securities Dealers Reporting to the Market Reports Division of the rederal Reserve Bank of New York ABN AMBO Incorporated Banc of America Securities LLC Banc One Capital Markets, Inc. Barclarys Capital Inc. Bear, Stearns & Co., Inc. Chase Securities Inc. CIBC Oppenheimer Corp Credit Suisse First Boston Corporation Daiwa Securities America Inc. Deutsche Bank Securities Inc. Donaldson, Lufkin & Jenrette Securities Corporation Dresdner Kleinwort Benson North America LLC. Fuji Securities Inc. Goldman, Sachs & Co. Greenwich Capital Markets, Inc. HSBC Securities (USA) Inc. J.P. Morgan Securities, Inc. Lehman Brothers Inc. Merrill Lynch Government Securities Inc. Morgan Stanley & Co. Incorporated Nesbitt Burns Securities Inc. Nomura Securities International, Inc. Paine Webber Incorporated Paribas Corporation Prudential Securities Incorporated SG Cowen Securities Corporation Salomon Smith Barney Inc. Warburg Dillon Read Inc. Zions First National Bank 1 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. Qualification for the reporting list is based on the achievement and maintenance of the standards outlined in the Federal Reserve Bank of New York's memorandum of Tanuary 22 1992, Effective April 20, 2000 Federal Reserve Bank of New York ATTACHMENT"E" CITY OF SANTA CLARITA OFFICE OF THE CITY TREASURER INVESTMENT POOL QUESTIONNAIRE 1. Does the pool provide a written statement of investment policy and objectives? 2. Does the statement contain: a a description of eligible investment instruments? b. the credit standards of investments? c. the allowable maturity range of investments? d. the maximum allowable dollar weighted average portfolio maturity? e. the limits of portfolio concentration permitted for each type of security? L the policy on reverse repos? 3. Are changes in the policies communicated to the pool participants? INTEREST 4. Does the pool disclose the following about yield calculations? a. Which methodology is used to calculate interest? (simple maturity, yield to maturity, etc.) b. What is the frequency of interest payments? c. How is interest paid? (credited to principal at the end of the month, each quarter, mailed?) d. How are gains/losses reported? (factored monthly or only when realized?) 5. How often is the yield reported to participants of the pool? 6. Are expenses of the pool deducted before quoting the yield? If not, please explain. Is the yield generally in line with the market yields for securities in which you usually invest? SECURITY 8. Does the pool disclose safekeeping practices? (If yes, what are they?) 9. Is the pool subject to audit by an independent auditor? 10. Is the copy of the audit available to participants? 11. Who makes the portfolio decisions? 12. How does the manager monitor the credit risk of the securities in the pool? 13. Is the pool monitored by someone on the board or a separate, neutral party external to the investment function to ensure compliance with written policies. 14. Does the pool have specific policies with regard to repurchase agreements? a. What are those policies? 15. Does the pool report the portfolio's market value? 16. Does the pool disclose the following about portfolio valuations? a. The frequency with which the portfolio securities are valued? b. The method used to value the portfolio (cost, current value, or some other mednd)'1 STATEMENTS 17. Are statements for each account sent to participants? a. Do statements show balances, transactions and yield? 18. Does the pool distribute detailed reports of its holdings? (regularly or on request only?) FEES 19. Is there a written schedule of administrative costs? a. What are the fees? b. How often are they assessed? c. How are they paid? d. Are there additional fees for wiring funds? 20. Are expenses deducted before quoting the yield? OPERATIONS 21. Does the pool limit eligible participants? a. What entities are permitted to invest in the pool? 22. Does the pool allow multiple accounts and subaccounts? 23. Is there a minimum or maximum account size? If so, what is it? 24. What is the number of transactions permitted each month? 25. Is there a limit on transaction amounts for withdrawals and deposits? a. What is the minimum and maximum withdrawal amount permitted? b. What is the minimum and maximum deposit amount permitted? 26. Does the pool inquire one or more days notice for deposits and/or withdrawals? 27. Is there a cutoff time for deposits and withdrawals? If so, what is it? 28. Are the funds 100% withdrawable at any time? 29. Are there procedures for making deposits and withdrawals? a. What is the paperwork required, if any? 4 b. What is the wiring procedure? 30. Can an account remain open with zero balance? 31. Are confirmations sent following transactions?