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
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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.
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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