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HomeMy WebLinkAboutItem L yl4 J 9, 1999 I 40)2 „Q�STAFF REPORT L) v TO: Mayor and City Council Members FROM: Elizabeth Stoddard, Director of Administrative Services/Treasurer SUBJECT: 1999/2000 INVESTMENT POLICY AND INVESTMENT GUIDELINES SUMMARY OF REQUEST: Approve the 1999/2000 City of Seal Beach Investment Policy and Investment Guidelines for investing public funds. DISCUSSION: In 1987,the State Assembly passed AB 1073, which mandated that cities adopt an Investment Policy Resolution which outlines the type of investments into which a city may place its idle funds. Additionally, as a result of the Orange County bankruptcy, legislation in the form of Senate Bills 564 and 866 reinforces that a local agency treasurer must file an annual investment policy with the governing body, and requires the treasurer to file a quarterly report on investments. The City of Seal Beach has elected to prepare Investment Reports on a monthly basis and will continue to do so. Senate Bill 566 says that the treasurer investing public funds is a trustee and has a fiduciary responsibility to the Prudent Man Rule which states "Investment shall be made with judgement and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs,not for speculation,but for investment, considering the probable safety of their capital as well as the probable income to be derived.” The Resolution for Council approval has been prepared in accordance with Government Code Sections 53646(a) and 53600, 53600.5, 53601, and 53635 and guidelines published by the California Municipal Treasurer's Association. The Resolution provides for safety and liquidity in maximizing the City's investment portfolio. Agenda Item 1999/2000 Investment Policy and Investment Guidelines July 9, 1999 Page-2- RECOMMENDATION: Approve a Resolution adopting the 1999/2000 Investment Policy and Investment Guidelines pursuant to Senate Bills 564 and 866. )(A-i-kkth Elizabet toddard Director f Administrative Services/Treasurer Keith Till City Manager F:\Users\Liiinostpol CITY OF SEAL BEACH STATEMENT OF INVESTMENT POLICY 1999/2000 INTRODUCTION: This statement is intended to outline the policies for prudent investment of idle City funds by providing guidelines for suitable investments while maximizing the efficiency of the City's Cash Management Program. The responsibility for the day to day investment of the City's funds is the responsibility of the Director of Administrative Services/Treasurer. The investment policy applies to all financial assets of the city and is pooled in a managed portfolio. The investment pool or portfolio will be referred to as the "Fund" throughout this document. The City's Cash Management Program is designed to accurately monitor and forecast expenditures and revenues,thus enabling the investment of funds to the fullest extent possible. Maturities are matched as close as possible to coincide with cash requirements. Length of maturities is based on consideration of the yield curve and estimate of future interest rate movement. The investment policies and practices of the City of Seal Beach are based upon Federal, State and Local law and prudent money management. The primary goals of these policies are: 1. To assure compliance with all Federal, State and Local law governing the investment of moneys; 2. To protect the principal moneys of the City; 3. To generate the maximum amount of investment income within the parameters of this Statement of Investment Policy and the Investment Portfolio Guidelines. OBJECTIVES: 1. SAFETY OF PRINCIPAL - Safety of principal is the foremost objective of the City of Seal Beach. Each investment transaction shall seek to ensure that capital losses are avoided. 2 . LIQUIDITY - Liquidity is the second most important objective of the City of Seal Beach. It is important that the portfolio contain investments, which provide the ability of being easily sold at any time with minimal risk of loss of principal or interest. 1 3 . YIELD - The City's Fund shall be designed to attain a market-average rate of return through economic cycles. The market-average rate of return is defined as the average return on three-month U.S. Treasury Bills. The City strives to maintain 100% investment of idle funds after consideration for a compensating balance to cover the cost of services provided by the bank. The funds available for investments are determined by cash flow projections updated daily. Investments are monitored so those legal limits on types of investments are not exceeded. AUTHORIZED INVESTMENTS: Seal Beach invests idle funds under the "Prudent Man Rule" which states that: "Investment shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived." The City is governed by the California Government Code, Sections 53600 et seq. Within the context of these limitations,the following investments are authorized, reflected by the advantages of each: U.S. Treasury securities are highly liquid in addition to being considered the safest of all investments. Federal Agency securities are highly liquid and considered riskless. Bankers Acceptances are frequently the highest in yield, are safe investments, and are highly liquid. Commercial Paper issued by prime rated industrial and financial institutions allows the investment of money for one to 180 days at rates higher than we can earn from the previously listed securities. Certificates of Deposits allow the City to select the exact amount and day of maturity as well as the exact depository. There are penalties for withdrawal of finds prior to the original maturity date. 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. 2 COMMERCIAL PAPER ranked "P1" by Moody's Investor Services or "Al" by Standard and Poor's, and issued by a domestic corporation having assets in excess of$500,000,000 and having an "A" or better rating on indebtedness other than commercial paper and be organized and operating within the United States. Commercial Paper may not exceed 180 days to maturity. No more than 30% of the city's idle funds may be invested in commercial paper. NEGOTIABLE CERTIFICATES OF DEPOSITS issued by a Nationally or State-Chartered Bank or a State or Federal Savings and Loan Association. Only certificates issued by the 20 largest banks or savings and loan association will be considered. No more than 30% of the city's idle funds may be invested in Negotiable Certificates of Deposits. REPURCHASE AGREEMENTS with banks and dealers with which the city has entered into a master repurchase contract, which specifies terms and conditions of repurchase agreements. The maturity of repurchase agreements shall not exceed 90 days. The market value of securities used as collateral for repurchase agreements shall be monitored daily by the Director of Administrative Services and will not be allowed to fall below 100% of the value of the repurchase agreement. In order to conform with provisions of the Federal Bankruptcy Code which provides for the liquidation of securities held as collateral for repurchase agreements, the only securities acceptable as collateral shall be eligible negotiable certificates of deposit, eligible banker's acceptances, or securities that are direct obligations of, or that are fully guaranteed as to principal and interest by the United States or any agency of the United States. The use of Repurchase Agreements is limited to the extent they are investment vehicles periodically used by the Local Agency Investment Fund (LAIF) and not a direct purchase by the City of Seal Beach. LOCAL AGENCY INVESTMENT FUND established by the State Treasurer for the benefit of local agencies up to the maximum permitted by State Law. 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. No more than 30% of the Fund may be invested in medium term notes. MUTUAL FUNDS or shares of beneficial interest issued by diversified management companies as defined in Section 23701(m) of the Revenue and Taxation Code, investing in the securities and obligations as authorized by subdivisions (A) to (L), inclusive, of that section and which comply with the investment restrictions (California Government Code, commencing with Section 53630), 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, and 2) Have an investment adviser registered with the Securities and Exchange Commission with not less than five years experience investing in securities and obligations as authorized by subdivisions (a) to (m), inclusive and with assets under management in excess of$500,000,000. The purchase price of shares of beneficial interest, (mutual funds) purchase pursuant to this subdivision shall not include any 3 commission that these companies may charge. No more than 15% of the Funds may be invested in mutual funds. GUARANTEED INVESTMENT CONTRACTS are investment agreements approved by the Credit Provider which are with investment institutions having long-term obligations which are rates "AA-"or higher by S& P and"Aa3"or higher by Moody's as to long term instruments are rated in the highest rating category by S &P and Moody's; provided that if such rating falls below the two highest rating categories, the investment agreement shall require the Trustee to replace such financial institution or shall provide for the investment agreement to be collateralized at levels and under such conditions as are appropriate for the maintenance of the rating of the bonds. Investments not described herein, including but not limited to common stocks are prohibited from use in this Fund. 4 CITY OF SEAL BEACH INVESTMENT PORTFOLIO GUIDELINES 1999/2000 These guidelines are established to direct and control investment activities in such a manner to assure that the goals established in the Investment Policy are attained. CASH FORECAST. The cash flow of the City shall be analyzed with the receipt of revenues and maturity of investments scheduled so that adequate cash will be available to meet the disbursement requirements. POOLED CASH. Whenever practical, the City's cash should be consolidated into one bank account and invested on a pooled concept basis. Interest earnings may be allocated according to fund cash and investment balances. LONG TERM MATURITIES. As a general rule, long term maturities should not represent a significant percentage of the total Fund, as the principal risk involved can outweigh the potential for higher earnings. No more than 15% of the total Fund nay be invested in securities with maturities greater than three years. DIVERSIFICATION. The Fund should consist of a mix of various types of securities, issuers, and maturities. COMPETITIVE BIDS.Purchase and sale of securities shall be made on the basis of competitive bids and offers with a minimum of two quotes being obtained,when practical. SAFEKEEPING. Securities purchased from broker/dealers shall be held in third party safekeeping by the Trust Department of the Bank designated by the Director of Administrative Services. Said Securities shall be held in the name of the City of Seal Beach with the trustee executing transactions as directed by the Director of Administrative Services. STRATEGY. Strategy refers to the plan of action for managing financial resources in the most advantageous manner. The Director of Administrative Services uses the following elements in developing strategy. Economic Forecasts. Economic forecast information developed by economists and financial experts and obtained through bankers and brokers is used to assist with the formulation of an investment strategy for the City. Investment Implementing. Execute only investment transactions which conform with anticipated cash flow requirements, economic condition and interest rate trends and are consistent with the established Investment Policy Statement. 1 • Rapport. A close working relationship with City Departments having a significant impact on cash flow is maintained in order to maximize the efficiency of the City's cash management system and establish cash flow requirements. Yield Enhancement. Utilize investment techniques to increase yield and to maintain a fully invested position. Preserve Portfolio Value. Develop yield standards in order to maintain earnings consistent with the market average rate of return to preserve the value of the portfolio. INVESTMENT VEHICLES. The following parameters are outlined for authorized investments as provided in the Statement of Investment Policy. U.S. TREASURY's are direct obligations for which the full faith and credit of the United States Government are pledged for payment of principal and interest. There is no limitation as to the percentage of the portfolio that can be invested in this category,as they are both safe and liquid. The U.S. TREASURY BILLS, U.S. TREASURY NOTES and U.S. TREASURY BONDS. FEDERAL AGENCY ISSUES or obligations qualify as legal investments and are acceptable as security for public deposits. They usually provide higher yields than treasury issues with all of the same advantages. Federal Agency Issues include, but are not limited to GNMA (Government National Mortgage Association), FFCB (Federal Farm Credit Bank), FHLB (Federal Home Loan Bank Board), FHLMC (Federal Home Loan Mortgage Corporation), FNMA (Federal National Mortgage Association), SLMA (Student Loan Mortgage Administration), REFCORP (Resolution Funding Corporation), FHA (Federal Housing Administration) and TVA (Tennessee Valley Authority). Although there is no percentage limitation on these issues, the "prudent investor" rule shall apply for a single agency name as U.S. Government backing is implied rather than guaranteed. BANKERS' ACCEPTANCES or bills of exchange or time drafts drawn on and accepted by a commercial bank. Banker's Acceptances purchased may not exceed 270 days to maturity or 40% of the city's surplus funds. No more than 30% of the city's surplus funds may be invested in banker's acceptances issued by any one bank. CERTIFICATE OF DEPOSIT shall be evaluated in terms of Federal Deposit Insurance Corporation (FDIC) coverage. For deposits in excess of the insured maximum of$100,000, approved collateral at the percentage above market value as specified by law shall be required. The Director of Administrative Services may at their discretion waive security for that portion of a deposit that is insured pursuant to federal law. 2 Repurchase Agreements allow us to invest large amounts of money for less than thirty days at rates higher than we can earn from other short-term investments. The City will not invest in Repurchase Agreements. The authorization shall limit Repurchase Agreements to those investment vehicles purchased only through the Local Agency Investment Fund(LAIF). The Local Agency Investment Fund of the State of California offers high liquidity because our deposits can be wired to our checking account within twenty-four hours. Interest is computed on a daily basis. Medium Term Corporate Notes offer a competitive alternative to Negotiable Certificates of Deposits and standard Certificates of Deposits. These securities enjoy an active secondary Market to provide liquidity. Mutual Funds is another authorized investment allowing the City to maintain liquidity and receive money market rates. Guaranteed Investment Contracts(GIC's). DEPOSITORY SERVICES Money must be deposited in state or national banks, state or federal savings associations or state or federal credit unions in the state. It may be in inactive deposits, active deposits or interest-bearing active deposits. The deposits cannot exceed the amount of the bank's or savings and loan's paid up capital and surplus. The bank or savings and loan must secure the active and inactive deposits with eligible securities having a market value of 110% of the total amount of the deposits. State law also allows as an eligible security, first trust deeds having a value of 150% of the total amount of the deposits. A third class of collateral is letters of credit drawn on the Federal Home Loan Bank(FHLB). The treasurer may at their 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. It is to the City's advantage to waive this collateral requirement for the first $100,000 because we receive a higher interest rate. QUALIFIED DEALERS AND INSTITUTIONS: The City shall transact business only with banks, savings and loans and registered investment securities dealers. The purchase by the City 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 Corporations 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 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 City Treasurer shall 3 investigate all institutions which 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 the City of Seal Beach's Investment Policy and Investment Portfolio Guidelines. This will be done annually by having the Financial Institutions complete and return the appropriate questionnaire, and an audited Financial Statement must be provided within 120 days of the Institution's fiscal year end. SAFEKEEPING OF SECURITIES: To protect against potential losses caused by collapse of individual securities dealers, all securities owned by the City except securities used as collateral for repurchase agreements, shall be kept in safekeeping by a third party bank trust department, acting as agent for the City under the terms of a custody agreement executed by the bank and by the City. All securities will be received and delivered using standard delivery versus payment procedures. REPORTING: The Treasurer shall render a monthly report to the City Council showing the type of investment, institution, date of maturity, amount of deposit, current market value for all securities with a maturity of more than twelve months, rate of interest,and such data as may be required by the City Council. POLICY REVIEW: This investment policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of PRINCIPAL, LIQUIDITY, AND YIELD and its relevance to current law,financial and economic trends,and to meet the needs of the City of Seal Beach. L ,drhagh-4— Elizabet Stoddard, Direct of Administrative Services/Treasurer 4