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HomeMy WebLinkAboutItem 2s - Statement of Investment Policy for Fiscal Year 2017-18 DATE: June 20, 2017 TO:Honorable Mayor and City Council FROM:Hue Quach, Administrative Services Director Shannon Huang, Financial Services Manager/Treasurer SUBJECT:STATEMENT OF INVESTMENT POLICY FOR FISCAL YEAR 2017-18 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 required for the City Council toapprove the Statement of Investment Policy annually. The recommended revisionsreflect updates in the California Government Code and changes imposed by the Money Market Fund Reformimplemented in 2016, in addition to providingmore investment options for portfolio diversification. DISCUSSION Through an RFP process, PFM Asset Managementwasselected for the City’s investment advisory servicesin September 2016. Staff has worked with PFM closely to complete this annual review of the Statement of Investment Policy.In addition to the changes to reflect updates in the California Government Code andrevisions imposed by the recently implemented Money Market Fund Reform, the proposed Policy broadens the range of investmentsto provide more opportunities for diversificationand to reduce the portfolio’s exposure to any one type of security.On the other hand, the per issuer holding limit is modified to be applied across investment types, which would limit the credit risk ofone single issuerand further diversify the portfolio. Federal Agency Bonds havebeen the City’s largest investment holding, ranging between 40-50%of the City’s portfolio, but its supply has declined significantly in the recent years. In 2008, Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”)were placed into conservatorship, and part of the conservatorship agreement requires them to shrink the amount of mortgages held on their balance sheets, which resulted inFederal Agency debt decliningfrom its Statement of Investment Policyfor Fiscal Year 2017-18 June 20, 2017 Page 2of 7 more than $3 trillion level in 2008 to less than $2 trillion now. The decline in supply has also reducedthe additional yield offered by Agency debtsover U.S. Treasuries.In some cases, the difference is only a few basis points, which makes it unjustifiable to invest in Agency Bondsbecauseof its additional risksover Treasuries. The following charts demonstrate the decline in the supply of Federal Agency debt and the reduction in the additional yield over Treasuries. Federal Agency Debt Outstanding 3.5 3.0 2.5 2.0 1.5 $ Trillions 1.0 0.5 0.0 2008200920102011201220132014201520162017 Q1 Fannie MaeFreddie MacFarm Credit FHLBFarmer MacTVA Difference in Yield Between Federal Agencies and Treasuries January 2009 -April 2017 100 90 80 70 60 50 40 30 20 10 Yield Spread (basis points) 0 200920102011201220132014201520162017 Statement of Investment Policyfor Fiscal Year 2017-18 June 20, 2017 Page 3of 7 The following proposed changeswill provide additional investment options to replace Agency Bonds and to furtherdiversify the City’s portfolio: Add Supranational Obligations as permitted investment Add Asset-Backed Securitiesas permitted investment Allow deposits with Local Government Investment Pools (“LGIP”) IncreasePercentage Holding Limit for corporate securities to match what is permitted in the California GovernmentCode but apply the 5% per issuer limit across the security types More descriptionon each of the changesare outlinedbelow: Supranational Obligations Supranational bonds were included as permitted investment by Assembly Bill 1933 in Section 53601 effective January 1, 2015. They are issued by multi- nationalfinancial institutions established by agreements among nationswho also make capital contributionsand participate in management. The purpose of the financing isgenerally for promoting economic and infrastructure development, environmental protection, poverty reduction, and renewable energy around the globe. The Government Code allows investment in obligations issued or unconditionally guaranteed by the following institutions with a maximum remaining maturity of five years or less. Although all of the permitted bondsare rated “AAA” currently, theGovernment Code allows investment in Supranationals with“AA” or better, andthe total holding may not exceed 30% of the portfolio. International Bank for Reconstruction and Development (World Bank) International Finance Corporation Inter-American Development Bank Asset-Backed Securities (“ABS”) Asset-Backed Securities are backed bycollateralized assets,including pools of loans, leases, or receivables, and the principal and interest on which are used to pay for the debts. Securities eligible for investment under this section shall be issued by an issuer rated in a rating category of “A” or better, and the securities shall have aminimum rating of“AA”. Its holding maynot exceed 20% of the portfolio. As the universe of ABS issuers is different fromother typesof corporate securities, the inclusion of ABS as permitted investment would enhance opportunities for portfolio diversification. Because of its uniquecredit characteristics, PFM established a separate sub-committee exclusively for Statement of Investment Policyfor Fiscal Year 2017-18 June 20, 2017 Page 4of 7 evaluating and monitoring ABS. Currently, all of the ABS programs on PFM’s approved list have a“AAA”rating. Local Government Investment Pools (“LGIP”) The addition of Local Government Investment Pools (“LGIP”)as permitted investment will add flexibility for the City’s short-term investment and overnight deposit. LGIP invests in only the securities and obligations authorized in California Government Code, and it has become a more attractive investment option following Money Market Fund Reformthatessentially eliminated institutional prime money market funds. There are two LGIPsavailable in California,Investment Trust of California (“CalTrust”) and California Asset Management Program (“CAMP”).Although both programs are governed by a Board of Trustees made up local treasurers and investment officers, it is recommended that the City Policy permit deposits only with an LGIPthat maintains a stable net asset value to protect the principal. CAMPis the only eligible investment among the two, which maintains a dollar-weighted average portfolio maturing in 60 days or less, and has an“AAA” rating by Standard & Poor’s. Although LAIF is still a valid option for short-term cash investing, and its yield has increased significantly alongside the short-term interest rate market recently, CAMP could provide extra returns over LAIF in this rising interest rate market because of its ultra-shortduration. Increase Percentage Holding Limit For Corporate Securities To Match What Is Permitted In The California Government Code But Apply The 5% Per Issuer Limit Across The Security Types It is recommended that the City revise the percentage holding limits for corporate securitiesaccording to the California Government Codeto provide additional investment flexibility. The table below summarizes the proposed changes: Percentage Holding Limit Permitted Security OldNew Supranational Obligations030% Corporate Bonds/Medium Notes20%30% Asset-Backed Securities020% Negotiable Cerfiticates of Deposit20%30% As the City addsmore securities typesto the permitted investment list, it is prudent to restrict concentration on per issuer base, and minimize the credit risk Statement of Investment Policyfor Fiscal Year 2017-18 June 20, 2017 Page 5of 7 associated with any single issuer. As an issuer can issue multiple types of securities, it is appropriate that the 5% per issuer limit appliesacross investment types to ensure per issuer diversification. It isrecommended that the City remove the per issuer limits from the policy’s descriptions of individual investment types and consolidate the 5% requirement across allsecurity types. It is important to note that the City’s InvestmentPolicy still maintainsamore restricted credit rating requirementthan what is permitted by the California Government Code. The City can only invest in corporate securities with the required credit ratingsfrom at least two Nationally Recognized Statistical Rating Organization (“NRSROs”).Any corporate securities with only one credit rating would not be eligible for investment. In addition to more opportunities for greater diversification, the proposed new securities are expected to provide slightly better returnsfor the City’s portfoliobased on their average yields shown below. ABS consistently offer higher yields than Agency securities, and Supranationalsprovide the earningsequivalent or higher than the Agency bondsdepending on market conditions. Total Return SectorYieldPast YearPast 5 Years US Treasury1.27%0.25%0.64% Federal Agency1.37%0.41%0.73% Supranational (AAA)1.50%0.41%0.82% Asset-Backed (AAA)1.71%1.60%1.21% Corporate (AAA-A)1.92%1.32%1.67% As of March 31, 2017, all security are 0-3 Year of maturity The following are revisions to clarify or reflect changes in the California Government Code orMoney Market Fund Reform: Scope The section is revised to indicate that the retirement funds and bank deposits are explicitly excluded from the Policy’s requirements to avoid any inadvertent compliance issues. Authorized Securities and Transactions It isrecommended the City incorporate into the Policy the provision from California GovernmentCode Section 53601 that specifies percentage holding limits apply at the time of purchase.For consistency, the application of the credit rating requirement shall also be identified as at the time of purchase. Statement of Investment Policyfor Fiscal Year 2017-18 June 20, 2017 Page 6of 7 Furthermore, the Policy’s credit downgrade provisions are consolidated into the introductory paragraph to keep similar requirements together. Treasury Securities For consistency with other permitted investment sections, it is recommended that the City revise the Policy to state there is no limitation as to how much the City’s portfoliomay be investedin Treasuries. Federal Agency Securities The permitted investment language is revised to match the Government Code’s language rather than limiting purchases to only certain Federal Agencies. Certificate of Deposits It is recommended that the Policy separate the different types of Certificatesof Deposit (“CD”s) as follows, as they each have different requirements and risk characteristics. Negotiable CDs Non-Negotiable CDs Placement Service Deposits State of California’s Local Agency Investment Fund (“LAIF”) For consistency with other permitted investment sections, this sectionis modified tolist theholding limit imposed by LAIF, which is currently $40 million per general account. Money Markets Fund As mentioned earlier, the Money Market Fund Reform implemented in late 2016 essentially eliminated institutional prime money market funds.Therefore, the Policy shall be revisedto allow investmentsonly in government money market fundsthat maintain stable net asset value. Reporting Although the reporting requirementsare already included in the currently Policy, it is recommended the City add a monthly report of transactions to the list of required reports as stated inSection 53607of the Government Code. In addition to the proposed changes outlined above, the attached red-lined Statement of Investment Policy also contains minor changes for fine-tuning the language. Statement of Investment Policyfor Fiscal Year 2017-18 June 20, 2017 Page 7of 7 FISCAL IMPACT Adoption of the Statement of Investment Policy with the recommended changes is expected to increasethe investment yieldwithout significantly impacting risk.As the higher yield securities are limited to a small portion of the City’s portfolio, and the amount of the additional yield varies depending on the market condition, it is expected that only a slight improvement in the overall yield will be achieved. RECOMMENDATION It is recommended the City Council approve the revised Statement of Investment Policy for Fiscal Year 2017-18. Attachments:Proposed Statement of Investment Policyfor Fiscal Year 2027-18 City of Arcadia Statement of Investment Policy Fiscal Year 20162017-1718 The City of Arcadia (the “City”), incorporated in 1903 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 21, 2016. 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, except for retirement funds held in trusts. Deposits with banks under the provision California Government Code’s “Deposit of Funds” provisions are excluded from this Policy’s requirements. 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. FY2016FY2017-17 18 Statement of Investment Policy 1 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. FY2016FY2017-17 18 Statement of Investment Policy 2 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. Percentage holding limits listed in this Policy apply at the time the security is purchased. To promote diversification, no more than 5% of the portfolio may be invested in the securities of any one issuer, regardless of security type; excluding U.S. Treasuries, federal agencies, supranationals, and pooled investments such as LAIF, money market funds, or local government investment pools. Credit ratings, where shown, specify the minimum credit rating category required at purchase. Securities that have been downgraded after purchase 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. : 1. United States Treasury bills, notes or bonds with a final maturity not exceeding five years from the date of trade settlement. There is no limitation as to the percentage of the City’s portfolio that may be invested in this category. 2. Federal Instrumentality Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises. There is no limitation as to the percentage of the City’s portfolio that may be invested in this category.(government sponsored enterprise) debentures, discount notes, callable and step-up securities, with a final FY2016FY2017-17 18 Statement of Investment Policy 3 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. Supranational Obligations United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by two Nationally Recognized Statistical Rating Organizations (“NRSRO”). A maximum of 30% the City’s portfolio may be invested in this category. 4.5. 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 in a rating category of at least “A” or the equivalent or higher 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 collateralization, letters of credit or surety bond, and (3) have commercial paper that is rated at least “A-1” or the equivalent, by two NRSROs. FY2016FY2017-17 18 Statement of Investment Policy 4 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 tThe aggregate investment in commercial paper shall not exceed 25% of the City’s total portfolio. 5.6. 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 in a rating category of at least “A” or the equivalent or higher 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. 7. 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 in a rating category ofat least “A” or the equivalent or higher 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 2030% of the City’s total portfolio. 6.8. Asset-Backed Securities Aa mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease- backed certificate, consumer receivable passthrough 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 rated in a rating category of “A” or its equivalent or better for the issuer’s debt as provided by an NRSRO and rated in a rating category of “AA” or its equivalent or better by two NRSROs. A maximum of 20% the City’s portfolio may be invested in this category.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. 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. 7.9. Negotiable Ccertificates of dDeposit - 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 FY2016FY2017-17 18 Statement of Investment Policy 5 Section 53601(i), shall be fully insured by the FDIC with a corresponding FDIC certification number, and shall be delivered through the Depository Trust Company. 8.10. Non-Negotiable certificates Certificates of deposit 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 requirements of Sections 53601(n) and 53638 and shall be fully insured by the FDIC with a corresponding FDIC certification number. A maximum of 20% the City’s portfolio may be invested in this category. 9.11. Placement Service ertificates of DepositsDs Private sector entities may be used to place certificates of bank deposits subject to the limitations of Sections 53601.8. All deposits shall be fully insured by the FDIC. A maximum of 20% the City’s portfolio may be invested in this category. 10.12. State of California’s Local Agency Investment Fund (LAIF), pursuant to California Government Code Section 16429.1. The maximum amount of the City’s portfolio that may be invested in this category is subject to LAIF’s limit for general accounts. 11.13. 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) are Government Money Market Fundshave a constant net asset value per share of $1.00; (3) invest only in the securities and obligations authorized by state statute; and (43) 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. 14. Local Government Investment Pools Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in Government Code. The City will limit investments to LGIPs that seek to maintain a stable net asset value and have a rating of AAA or the equivalent by an NRSRO. 12.15. 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 in a rating category ofat least “A” or the equivalent or higher 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. FY2016FY2017-17 18 Statement of Investment Policy 6 In addition, tThe 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. The City may engage the services of investment advisory firms to assist in the management of the portfolio and investment advisors may utilize their own list of approved Broker/Dealers. Such Broker/Dealers will be licensed by the State of California as a broker/dealer as defined in Section 25004 of the California Corporations Code and the list of approved firms shall be provided to the City on an annual basis or upon request. The investment advisory firms shall perform due diligence review on all of the brokers included on their list, and ensure all purchases are allowable by this investment policy. 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. FY2016FY2017-17 18 Statement of Investment Policy 7 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 book entry and will be held in third-party safekeeping by a City approved custodian 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. FY2016FY2017-17 18 Statement of Investment Policy 8 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; 2.3. A monthly report of investment transactions; 3.4. 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; 4.5. A statement of compliance with the investment policy or an explanation for non- compliance; and 5.6. 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. FY2016FY2017-17 18 Statement of Investment Policy 9