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HomeMy WebLinkAboutItem 3b - Investment Policy FY 2014-15DATE: June 3, 2014 TO: FROM: Mayor and City Council STAFF REPORT Administrative Services Department Hue C. Quach, Administrative Services Director Shannon Huang, Financial Services Manager /City Treasurer SUBJECT: STATEMENT OF INVESTMENT POLICY FOR FISCAL YEAR 2014 -15 Recommendation: Approve SUMMARY In compliance with the California Government Code Section 53646(a)(2), and in meeting the requirement in the City's Statement of Investment Policy to delegate investment responsibility and to adopt the policy annually, it is recommended that the City Council approve the current Investment Policy without any revisions for Fiscal Year 2014 -15. DISCUSSION The Statement of Investment Policy is intended to provide guidelines for the prudent investment of City funds and to outline procedures for maximizing the efficiency of the City's cash management system. In addition to being in compliance with all applicable City resolutions, California statutes, and Federal regulations, this Statement's ultimate goal is to enhance the economic status of the City while protecting its invested funds. The Statement of Investment Policy includes: • The investment objectives: • Preservation of capital and protection of investment principal. • Maintenance of sufficient liquidity to meet anticipated cash flows. o Attainment of a market rate of return. • Diversification to avoid incurring unreasonable market risks. • Compliance with the City's Municipal Code and with all applicable City resolutions, California statutes, and Federal regulations. • The management responsibility for the City's investment program is delegated annually by the City Council to the City Treasurer. Statement of Investment Policy for FY2014 -15 June 3, 2014 Page 2 of 8 • The City Treasurer shall submit to the City Council a report of the investment earnings including weighted average rate of return and performance results of the City's investment portfolio monthly. The report shall include the following information: • Investment type, issuer, date of maturity, par value, and dollar amount invested in all securities, investments, and monies held by the City; • A description of the funds, investments and programs; • A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; • A statement of compliance with the investment policy or an explanation for non - compliance; and • A statement of the ability to meet expenditure requirements for six months, and an explanation of why money will not be available if that is the case. • Authorized investment types with restrictions on maturity and percentage of holdings: • Treasury Bills, Notes or Bonds • Federal Instrumentality Debentures and Securities • Repurchase Agreements • Prime Commercial Paper • Eligible Bankers Acceptances o Medium Term Notes • Non - negotiable Certificates of Deposit • State of California's Local Agency Investment Fund (LAIF) • Money Market Funds • Municipal & State Obligations • The Investment Policy shall be adopted annually by the Council. The City's Statement of Investment policy has been carefully reviewed and determined that there are no revisions required at this time. It is recommended that the City Council adopt the current investment policy as is for Fiscal Year 2014 -15. A copy of the City's current Statement of Investment Policy is attached. Statement of Investment Policy for FY2014 -15 June 3, 2014 Page 3 of 8 FISCAL IMPACT A sound Investment Policy will ensure that the City's funds have the greatest potential for generating interest earnings while minimizing the risk for loss of the principal amounts invested. RECOMMENDATION It is recommended that the City Council approve the Statement of Investment Policy for Fiscal Year 2014 -15. Approved: Dominic Lazzar t City Manager Attachment: Statement of Investment Policy for Fiscal Year 2014 -15 City of Arcadia Statement of Investment Policy Fiscal Year 2014 -15 The City of Arcadia (the "City "), incorporated in1903 is located approximately 20 miles northeast of downtown Los Angeles in the San Gabriel Valley, at the base of the San Gabriel Mountains. It is the site of the Santa Anita Park racetrack and home to the Los Angeles County Arboretum and Botanic Garden. The City is a charter city and operates under a council /manager form of government (Charter Section 300). The City is governed by a city council (the "Council ") of five members elected at -large (Charter Section 400), whom selects the City Manager (Charter Section 600). The Arcadia Redevelopment Agency is a component unit of the City, which was established in 1968 and governed by the same Council and City Manager. The Redevelopment Agency was ceased in 2013 due to a change in state law; however, the City remains the custodian of funds and serves as the Successor Agency to the Arcadia Redevelopment Agency. Hereinafter the City and Successor Agency are collectively referenced as the "the City ". The Council has adopted this Investment Policy in order to establish the investment scope, objectives, delegation of authority, standards of prudence, reporting requirements, internal controls, eligible investments and transactions, diversification requirements, risk tolerance, and safekeeping and custodial procedures for the investment of the funds of the City. All City funds will be invested in accordance with this Investment Policy and with applicable sections of the California Government Code. This Investment Policy was endorsed and adopted by the City Council of the City of Arcadia on June 3, 2014. It replaces any previous investment policy or investment procedures of the City, unless otherwise directed by the City Council. SCOPE The provisions of this Investment Policy shall apply to all financial assets of the City as accounted for in the City's Comprehensive Annual Financial Report. All cash shall be pooled for investment purposes. The investment income derived from the pooled investment account shall be allocated to the contributing funds based upon the proportion of the respective balances relative to the total pooled balance in the investment portfolio. Investment income shall be distributed to the individual funds on a monthly basis. OBJECTIVES The City's funds shall be invested in accordance with the City Municipal Code, all applicable City resolutions, California statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1. Preservation of capital and protection of investment principal. 2. Maintenance of sufficient liquidity to meet anticipated cash flows. 3. Attainment of a market rate of return. 4. Diversification to avoid incurring unreasonable market risks. DELEGATION OF AUTHORITY The management responsibility for the City's investment program is delegated annually by the City Council to the City Treasurer pursuant to California Government Code Section 53607. The City's Financial Services Manager serves as the City Treasurer, who is appointed and supervised by the Administrative Services Director. The Administrative Services Director is delegated by the City Manager to oversee the City's investment and finance operation and has ultimate responsibility of the investment operation. The Administrative Services Director and City Treasurer may delegate the authority to conduct investment transactions and to manage the operation of the investment portfolio to other specifically authorized staff members. No person may engage in an investment transaction except as expressly provided under the terms of this Investment Policy. The City Treasurer shall maintain a system of internal controls, consistent with this Investment Policy, for the operation of the City's investment program. Such system shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the City. The City may engage the support services of outside investment advisors in regard to its investment program, so long as it can be clearly demonstrated that these services produce a net financial advantage or necessary financial protection of the City's financial resources. PRUDENCE The standard of prudence to be used for managing the City's investments shall be California Government Code Section 53600.3, the prudent investor standard, which states, When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. The City's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that no investment is totally without risk and that the investment activities of the City are a matter of public record. Accordingly, the City recognizes that occasional measured losses may be desirable in a diversified portfolio and shall be considered within the context of the overall portfolio's return, provided that adequate diversification has been implemented and that the sale of a security is in the best long -term interest of the City. The City Treasurer and authorized investment personnel acting in accordance with written procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes. ETHICS AND CONFLICTS OF INTEREST Elected officials and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the City's investment program or could impair or create the appearance of an impairment of their ability to make impartial investment decisions. Also, elected officials and employees involved in the investment process shall not participate in any decision on behalf of the City in which they have a financial interest as set forth in the Political Reform Act of the State of California and related regulations. The City Manager, the Administrative Services Director, City Treasurer, and any other staff authorized to engage in investment operation shall file a Statement of Economic Interests each year pursuant to California Government Code Section 87203 and regulations of the Fair Political Practices Commission. AUTHORIZED SECURITIES AND TRANSACTIONS All investments and deposits of the City shall be made in accordance with California Government Code Sections 16429.1, 53600 -53609 and 53630- 53686, except that, pursuant to California Government Code Section 5903(e), proceeds of bonds and any moneys set aside or pledged to secure payment of the bonds may be invested in securities or obligations described in the ordinance, resolution, indenture, agreement, or other instrument providing for the issuance of the bonds. Any revisions or extensions of these code sections will be assumed to be part of this Investment Policy immediately upon being enacted. The City has further restricted the eligible types of securities and transactions as follows: 1. United States Treasury bills, notes or bonds with a final maturity not exceeding five years from the date of trade settlement. 2. Federal Instrumentality (government sponsored enterprise) debentures, discount notes, callable and step -up securities, with a final maturity not exceeding five years from the date of trade settlement, issued by the following only: Federal Home Loan Banks (FHLB), Federal National Mortgage Association (FNMA), Federal Farm Credit Banks (FFCB) and Federal Home Loan Mortgage Corporation (FHLMC). 3. Repurchase Agreements with a final termination date not exceeding 30 days collateralized by U.S. Treasury obligations or Federal Instrumentality securities listed in items 1 and 2 above with the maturity of the collateral not exceeding five years. For the purpose of this section, the term collateral shall mean purchased securities under the terms of the City's approved Master Repurchase Agreement. The purchased securities shall have a minimum market value including accrued interest of 102% of the dollar value of the funds borrowed. Collateral shall be held in the City's custodian bank, as safekeeping agent, and the market value of the collateral securities shall be marked -to- the - market daily. Repurchase Agreements shall be entered into only with broker /dealers who are recognized as Primary Dealers with the Federal Reserve Bank of New York, or with firms that have a Primary Dealer within their holding company structure. Repurchase agreement counterparties shall execute a City approved Master Repurchase Agreement with the City. The City Treasurer shall maintain a copy of the City's approved Master Repurchase Agreement and a list of the broker /dealers who have executed same. 4. Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement with the highest ranking or of the highest letter and number rating as provided for by two Nationally Recognized Statistical Rating Organizations (NRSROs). The entity that issues the commercial paper shall meet all of the following conditions in either Subparagraph A or B below: A. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of five hundred million dollars ($500,000,000) and (3) have debt other than commercial paper, if any, that is rated at least "A" or the equivalent by two NRSROs. B. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements, including, but not limited to, over collateral ization, letters of credit or surety bond, and (3) have commercial paper that is rated at least "A -1" or the equivalent, by two NRSROs. Purchases of eligible commercial paper may not represent more than 10% of the outstanding commercial paper of any single corporate issuer. No more than 5% of the City's total portfolio shall be invested in the commercial paper of any one issuer, and the aggregate investment in commercial paper shall not exceed 25% of the City's total portfolio. 5. Eligible Bankers Acceptances with a maturity not exceeding 180 days from the date of trade settlement, issued by a national bank with combined capital and surplus of at least $250 million, whose deposits are insured by the FDIC, and whose senior long- term debt is rated at least "A" or the equivalent by two NRSROs at the time of purchase. The aggregate investment in banker's acceptances shall not exceed 15% of the City's total portfolio, and no more than the lesser of 5% of the City's total portfolio or $3 million shall be invested in banker's acceptances of any one bank. 6. Medium Term Notes 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. Medium Term Notes with a final maturity not exceeding three years from the date of trade settlement must be rated at least "A" or the equivalent by two NRSROs at the time of purchase and may not exceed 5% of the City's total portfolio. Medium Term Notes with a final maturity not exceeding five years from the date of trade settlement must be rated at least "AA" or the equivalent by two NRSROs at the time of purchase and may not exceed 20% of the City's total portfolio. In addition, no more than 5% of the City's total portfolio shall be invested in the medium term notes of any one corporation, and the aggregate investment in medium term notes may not exceed 20% of the City's portfolio. 7. Certificates of Deposit with a final maturity not exceeding five years from the date of trade settlement. The aggregate investment in certificates of deposit shall not exceed 20% of the City's portfolio, and no more than 5% of the portfolio shall be held in any one deposit or allocated to any one issuer. Certificates of Deposit shall be- issued by a nationally or state - chartered bank or a state or federal savings and loan association or by a state - licensed branch of a foreign bank or by a federally licensed branch of a foreign bank provided that the senior debt obligations of the issuing institution are rated at least "A" or the equivalent by two NRSROs. Negotiable certificates of deposit issued by a nationally or state - chartered bank, or by a federally licensed or state - licensed branch of a foreign bank. Purchases of negotiable certificates of deposits are subject to the limitations of Section 53601(1), shall be fully insured by the FDIC with a corresponding FDIC certification number, and shall be delivered through the Depository Trust Company. Non - Negotiable certificates of deposit issued by a nationally or state - chartered bank, or by a federally licensed or state - licensed branch of a foreign bank. Purchases of non - negotiable certificates of deposits are subject to the limitations of Sections 53601(n) and 53638 and shall be fully insured by the FDIC with a corresponding FDIC certification number. Private sector entities may be used to place certificates of deposit subject to the limitations of Sections 53601.8. 8. State of California's Local Agency Investment Fund (LAIF), pursuant to California Government Code Section 16429.1. 9. Money Market Funds registered under the Investment Company Act of 1940 that (1) are "no -load" (meaning no commission or fee shall be charged on purchases or sales of shares); (2) have a constant net asset value per share of $1.00; (3) invest only in the securities and obligations authorized by state statute; and (4) have a rating of at least AAA or the equivalent by two NRSROs. The aggregate investment in money market funds shall not exceed 20% of the City's total portfolio. 10. Municipal & State Obligations: A. Municipal bonds including registered notes or bonds of any of the 50 states, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the 50 states. B. In addition, bonds, notes, warrants, or other evidences of indebtedness of any local agency in 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. Municipal bonds must be rated at least "A" or the equivalent by two NRSROs with maturities not exceeding five years from the date of trade settlement. No more than 5% of the City's total portfolio shall be invested in "A" rated bonds or in the bonds of any one municipality. In addition, the aggregate investment in municipal bonds may not exceed 20% of the portfolio. The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be preapproved by resolution of the City Council. Securities that have been downgraded to a level that is below the minimum ratings described herein may be sold or held at the City's discretion. The portfolio will be brought back into compliance with Investment Policy guidelines as soon as is practical. SELECTION OF BROKER /DEALERS The City Treasurer, after review and approval by the Administrative Services Director and City Manager, shall maintain a list of broker /dealers approved for investment purposes, and it shall be the policy of the City to purchase securities only from those authorized firms. To be eligible, a firm must be licensed by the State of California as a broker /dealer as defined in Section 25004 of the California Corporations Code. Broker /dealers will be selected on the basis of their expertise in public cash management and their ability to provide service to the City's account. In the event that an external investment advisor is not used in the process of recommending a particular transaction in the City's portfolio, authorized broker /dealers shall attest in writing that they have received and reviewed a copy of this Policy. The City may purchase commercial paper from direct issuers even though they are not on the approved broker /dealer list as long as they meet the criteria outlined in Item 4 of the Authorized Securities and Transactions section of this Investment Policy. PORTFOLIO MATURITIES AND LIQUIDITY To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. The City will not invest in securities maturing more than five years from the date of trade settlement. COMPETITIVE TRANSACTIONS All investment transactions shall be conducted competitively with authorized broker /dealers. At least three broker /dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If the City is offered a security for which there is no other readily available competitive offering, then City Treasurer will document quotations for comparable or alternative securities. SAFEKEEPING AND CUSTODY The City Treasurer, after review and approval by the Administrative Services Director and City Manager, shall select one or more banks to provide safekeeping and custodial services for the City, in accordance with the provisions of Section 53608 of the California Government Code. A Safekeeping Agreement approved by the City shall be executed with each custodian bank prior to utilizing that bank's safekeeping services. Custodian banks will be selected on the basis of their ability to provide services for the City's account and the competitive pricing of their safekeeping related services. The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. All securities shall be perfected in the name of the City. Sufficient evidence to title shall be consistent with modern investment, banking and commercial practices. All investment securities purchased by the City will be delivered by either book entry or physical delivery and will be held in third -party safekeeping by a City approved custodian bank, its correspondent bank or its Depository Trust Company (DTC) participant account. All Fed wireable book entry securities owned by the City shall be held in the Federal Reserve system in a customer account for the custodian bank which will name the City as "customer." All DTC eligible securities shall be held in the custodian bank's DTC participant account and the custodian bank shall provide evidence that the securities are held for the City as "customer." PORTFOLIO PERFORMANCE The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City's investments shall be compared to the average yield on the U.S. Treasury security that most closely corresponds to the portfolio's weighted average effective maturity. REPORTING Monthly, the City Treasurer shall submit to the Administrative Services Director, the City Manager, and the City Council a report of the investment earnings including weighted average rate of return and performance results of the City's investment portfolio. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value, and dollar amount invested in all securities, investments, and monies held by the City; 2. A description of the funds, investments, and programs; 3. A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with the investment policy or an explanation for non- compliance; and 5. A statement of the ability to meet expenditure requirements for six months, and an explanation of why money will not be available if that is the case. POLICY REVIEW This Investment Policy shall be adopted annually by the City Council. It shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, yield, and diversification and its relevance to current law and economic trends. Amendments to this Investment Policy shall be approved by the Council.