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HomeMy WebLinkAbout12-City Treasurer ,. CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION From: David C. Kennedy City Treasurer Subject: 2004/05 Investment Policy Dept: City Treasurer ORjGlNAl Date: June 17,2004 MICC Meeting Date: July 19, 2004 Synopsis of Previous Council Action: Resolution #2003-194 adopted July 21,2003 Resolution #2002-278 adopted August 21, 2002 Resolution #2001-52 adopted March 19,2001 Resolution #2000-295 adopted October 02, 2000 Recommended Motion: Adopt Resolution ~ r LBi~S~ c.~ Signature ~ Contact person:n:.vil'l ~ KAnnAl'ly. ~ity TrD.:acllrl:llr phnnA- Avt ~'?1 Supporting data attached: Ward: FUNDING REQUIREMENTS: Amount: Source: (Acct. No.) (A~rt n~~,..rirtinn) Finance: Council Notes: ~~2ocA-22-8 Agenda Item No. I~ 7/"/OY CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION Staff Report Subject: Resolution of the Mayor and Common Council of the City of San Bernardino acknowledging the receipt and filing of the annual Statement ofInvestment Policy for the period July I, 2004 through June 30, 2005. Background: The City Treasurer annually files a Statement ofInvestment Policy with the Mayor and Common Council. This agenda item requests acknowledgement of receipt and filing of the Annual Policy by the City Treasurer for the fiscal year 2004/2005 There are no changes to this year's Investment Policy. Financial Impact: None. Recommendation: Adopt Resolution. . ' c 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 c c ..tu~N\E){ RESOLUTION OF THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO ACKNOWLEDGING THE RECEIPT AND FILING OF THE ANNUAL STATEMENT OF INVESTMENT POLICY FOR THE PERIOD JULY 1,2004 THROUGH JUNE 30, 2005. BE IT RESOLVED BY THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO AS FOLLOWS: SECTION 1. Recitals. The City Treasurer of the City of San Bernardino declares the annual Statement ofInvestrnent Policy is as set forth in Exhibit "A", attached hereto and inco;porated herein by this Reference as though fully set forth at length. SECTION 2. Implementation. An annual Statement of Investment Policy for the City of San Bernardino has been filed by the City Treasurer for the period 7/1/2004 through 6/30/2005. 1 .# /;2. 7//9/t:~ o 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 o o RESOLUTION OF THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO ACKNOWLEDGING THE RECEIPT AND FILING OF THE ANNUAL STATEMENT OF INVESTMENT POLICY FOR THE PERIOD JULY 1,2004 THROUGH JUNE 30, 2005. I HEREBY CERTIFY that the foregoing resolution was duly adopted by the Mayor and Common Council of the City of San Bernardino at a meeting thereof, held on the _ day of , 2004, by the following vote to wit: COUNCIL MEMBERS AYES NAYS ESTRADA LIEN-LONGVILLE MCGINNIS DERRY KELLEY JOHNSON MCCAMMACK .~ The foregoing resolution is hereby approved this Approved as to form and legal content: JAMES F. PENMAN City Attorney 2 ABSTAIN ABSENT CITY CLERK day of ,2004. Judith Valles, Mayor City of San Bernardino c ,0 o ~..: , INVESTMENT POLICY 1.0 Policy It is the policy of the City of San Bernardino to invest public funds in a manner which provide the highest investment return with the maximum security safety, while meeting the daily cash flow demands of the City of San Bernardino. Investments will be made in conformity to the California Government Code, Sections 53601 through 53659 and approved by the City Council of the City of San Bernardino. 2.0 Scope The investment policy applies to all financial assets of the City of San Bernardino, as accounted for in the Comprehensive Annual Financial Report and include: Funds: Gerieral Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds Internal Service Funds Agency Funds ~..;; 3.0 Prudence Investments shall be made with judgment and care-under circumstances then prevailing-which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. 3.1 The standard of prudence to be used by investment officials shall be the "prudent person" and/or "prudent investor" standard and shall be applied in the context of managing an overall -1- o portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control' adverse developments. 3.2 It is the City's full intent, at the time of purchase, to hold all investments until maturity to ensure the return of all invested principal dollars. 4.0 Objectives o Pursuant to Government Code Sec. 53600.5 which states "When investing, reinvesting, purchasing, acquiring, exchanging, selling', or managing public funds, the primary objective of a trustee shall be to safeguard the principal of the funds under its control. The secondary objective shall be to meet the liquidity needs ofthe depositor. The third objective shall be to achieve a return on the funds under its control. 4.1 Safety: Safety of principal is the foremost objective of the City of San Bernardino. Each investment transaction shall seek to ensure that capital losses are avoided, whether frOlll seSl~rities default, broker-dealer default or erosion of market value. To attain this objective, the City of San Bernardino will diversify its investments by investing funds among a variety of securities offering independent returns and financial institutions. Further, City shall seek to preserve principal by mitigating these two types of risk- credit risk and market risk. 4.2 Liquidity: The City of San Bernardino's investment portfolio will remain sufficiently liquid to enable the City of San Bernardino to meet all operating requirements which might be reasonably anticipated. 5.0 Delegation of Authority o Authority to manage the City of San Bernardino's investment program is derived from Resolution No. 91-212 of the City of San Bernardino 2 c approved on June 4, 1991 and the Charter of the City of San Bernardino. Such authority is given to the City Treasurer. Daily management responsibility for the investment program is hereby delegated to the DeputY City Treasurer who shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials, and their procedures in the absence of the City Treasurer. 5.1 Investment Procedures: The City Treasurer shall establisr written investment policy procedures for the operation ofthe investment program consistent with this policy. The procedures should include reference to safekeeping, wire transfer agreements, banking service contracts, and collateral/ depository agreements. Such procedures shall , include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the City Treasurer. o 6.0 Ethics and Conflicts of Interest: Officers . and employees involved in the investment process shall refrain from personal Qusiness activity that conflicts with proper execution of the investment program, or impairs their ability to make impartial investment decisions. A\iditionally, the City Treasurer is required to annually file applicabh::flnancial disclosures as required by the Fair Political Practices Commission (FPPC). 7.0 Authorized Financial Dealers and Institutions: c The City Treasurer will maintain a list of financial institutions and approved broker/dealers selected pursuant to Section 53601.5.,which states that any investment not purchased directly from the issuer, shall be purchased either from an institution licensed by the state as a broker/dealer, or from a member of a federally regulated securities exchange, from a national or state-chartered bank, from a federal or state association or from a brokerage firm designated as a primary government dealer by the Federal Reserve Bank. These may include "primary" dealers or regional dealers. No public deposit shall be made except in a qualified public depository as established by state Jaws. 3 o Additionally, all financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply ~he treasurer with the following: 7.1 Audited financial statements 7.2 Proof of National Association of Security Dealerscertification 7.3 Proof of state registration 7.4 Certification of having read entity's investment policy and depository contracts The Treasurer will conduct an annual review of the qualified bidders. 8.0 Authorized & Suitable Investments: The City of San Bernardino is empowered by statute to invest in the following securities: o 8.1 United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. Portfolio percentage: 100% 8.2 Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued hy orttiIy guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises, including callables. There is no percentage limitation of the portfolio, which can be invested in this category, although as-year maturity limitation is applicable. 8.3 Bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances. Purchases of banker's acceptances may not exceed 180 days to maturity nor exceed 40% of the agency's surplus funds, which may be invested pursuant to this section. However, no more than 30% of the agency's surplus funds may be invested in the banker's acceptances of anyone commercial bank pursuant to this section. 8.4 Commercial paper of "prime" quality of the highest ranking or of the highest letter and numerical rating as provided for by Moody's Investors Service, Inc., or Standard and Poor's Corporation. o 4 o Purchases of eligible commercial paper may not exceed 25% of the agency's surplus money. Purchases of eligible commercial paper may not,exceed 270 days to maturity. 8.5 Negotiable certificates of deposit issued by a nationally or state- chartered bank or a - savings association or federal association or a state or federal credit union or by a state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit may not exceed 30% of the agency's surplus money, which may be invested pursuant to this section. A maturity limitation of five years is applicable. - 8.6 Time deposits, non-negotiable and collateralized in accordance with the California Government Code, may be purchased through banks or savings and loan associations. Since time deposits are not . liquid, no more than 25% of the cash surplus may be invested in time deposits. 8.7 Medium-term notes, -defined as all corporate and depository institution debt securities with a maximum remaining maturity of 5 years or less, 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. Securities eligible for investment shall be rated AA or better by Moody's or Standard & Poor's rating services. Purchase of medium term notes may not exceed 30% of the surplus cash and no more than 15% of the market value of the portfolio may be ""'"'~. invested in notes issued by one corporation. Commercial paper holdings should also be included when calculating the 15% limitation. 8.8 Any 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 5 years maturity, having an "A" or higher rating for the issuer's debt and rated in a rating category of "AA" or equivalent or better by a nationally recognized rating service. Authorized securities may not exceed 20% of the agency's surplus money. 8.9 Various daily cash funds including short-term money market accounts administered for or by trustees, paying agents and custodian banks contracted by the City of San Bernardino may be purchased as allowed under State of California Government Code. o o 5 .....u~,,; o Only funds holding U. S. Treasury or government agency obligations can be utilized. 9.0 Local Agency Investment Fund (LAIF): State of California managed investment pool, may be used up to the, maximum permitted by California State Law. 10.0 Maximum Maturities: To the extent possible, the City of San Bernardino will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City of San Bernardino will not directly invest in securities maturing more than five years from the date of purchase. Such an investment will only be made with Council approval. o Reserve funds may be invested in securities exceeding five years if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds. ">'...., ~;;: 10.1 The city will attempt to balance maturities, at the time of investment, in accordance with the following guidelineg-:..c" Maturity Range 1 day to 364 days 1 year to 2 years 2 years to 3 years 3 years to 4 years 4 years to 5 years Percentage of Surplus Cash 10 to 50% o to 50% o to 50% o to 50% o to 50% 11.0 Diversification o The City of San Bernardino will diversify its investments by security type and institution. 6 o The following summary of maximum percentage limits, by instrument, are established for the City of San Bernardino's total portfolio: , Investment Type o , Local Agency Investment Fund U.S. Treasury Bonds/Notes/Bllls U. S. Government Agency Obligations U. S. Government Agency Callables Bankers' Acceptance Commercial Paper Negotiable Certificates of Deposit Time Certificates of Deposit Medium Term Corporate Notes . Cash.funds and Money Market accounts Passbook savings/demand deposits Mortgage Pass Through Securities 12.0 Safekeeping and Custody: $40,000,000 100% 100% 75% 40% 25% 30% 25% 30% 20% 20% 20% All security transactions entered into by the Oty of San Bernardino shall be conducted on a delivery-versus-payment (DVP) basis. Securities will be held by a third party custodian designated by the Treasurer and evidenced by safekeeping receipts. 13.0 Internal Controls: The Treasurer shall establish an annual process of independent review by an external auditor. This review will provide internal control by assuring compliance with policies and procedures. 14.0 Reporting o The Treasurer shall provide the Mayor, City Administrator, Finance Director, City of San Bernardino Water Finance Director, City 7 c Attorney, City Clerk, and City Council quarterly investment reports which provide a clear picture of the status of the current investment portfolio. Schedules in the monthly report should include the following: . A listing of individual securities held at the end of the reporting period by authorized investment category. . Average life and final maturity of all investments listed. . Coupon, discount or earnings rate . Par value, Amortized Book Value and Market Value . Percentage of the Portfolio represented by each investment category 15.0 Investment Policy Adoption: c The City of San Bernardino's investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed annually by the City Council and any modifications made thereto must be approved by the City Council. 16.0 Portfolio Management Ac~.'jty: The City of San Bernardino's investment program shall seek to augment returns consistent with the intent of this policy, identified risk limitations and prudent investment principles. 17.0 Interest Earnings All moneys earned and collected from investments authorized in this policy shall be allocated monthly to various fund accounts based on the cash balance in each fund as a percentage of the entire pooled portfolio. o 8 GLOSSARY c . AGENCIES: and/or enterprises. Federal agency securities Government-sponsored ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): a draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. c BOND: An interest-bearing security issued by a corporation, government, governmental agency or other body, which can be executed through a bank or trust company. A bond is a fOrln of debt with an interest rate, maturity, and face value, and is usually secur~d by specific assets. Most. bonds have a maturity of greater than one year, and generally pay interest semi-annually. BROKER: A broker.b,':-!,,,, buyers and sellers together for a commIssion. CALLABLE: A feature which states a bond or preferred stock may be redeemed by the issuer prior to maturity under terms designated prior to issuance. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large- denomination CD's are typically negotiable. c COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COMMERCIAL PAPER: Short-term, unsecured, negotiable promissory notes issued by businesses. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of San Bernardino. It includes five combined statements for each individual fund and accpunt group prepared in conformity with GMP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. GLOSSARY c DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. DIVERSIFICATION: investment funds among Securities Dividing a variety of FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S & Us, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): a federal agency that insures bank deposits, currently up to $100,000 per deposit. o FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to '.... m!!'l""Jer commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLB is to liquefy the housing related assets of its members who must purchase stock in their district c FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely' payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (FOMe): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President. of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers;" " commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U. S. Government. Ginnie Mae securities are backed by the FHA, VA, or FmHA mortgages. .~ LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. 2 GLOSSARY c LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the >custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a. security is trading and could presumably be purchased or sold. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: which short-term (bills, commercial acceptances, ' etc.) traded. The market in debt instruments paper, bankers' are issued and OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer). o OPEN MARKET OPERATIONS: Purchases and sales of govermT\ent' and certain other securities in the open market by the New York Federal Reserve Bank as directed by the, FOMC in order to influence the volume of money artd credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. "~ PORTFOLIO: Collection of securities held by an investor. c PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC), registered securities broker-dealers, banks, and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a , list of securities selected by the custody state--he so-called legal list. In other . states the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valQrem taxes under the laws of this state, which as segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposit". RATE OF RETURN: I) The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return. 2) Income earned on an investment, expressed as a percentage of the cost of the inveStttlett+"". SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. STRUCTURED NOTES: Notes issued by government sponsored enterprises, 3 GLOSSARY . c (FHLB, FNMA, SLMA, etc.) and Corporations which have imbedded options (e.g. call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. the period from the date of purchase to the date of maturity of the bond. TREASURY BILLS: a non-interest bearing discount security issued by the U.S. Treasury to finance the National debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to ten years. o TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to ten years. UNIFORM NET CAPITAL RULE: Securities & Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. T.~;':'_ o YIELD: The rate of annual income return on an investment, expressed as a percentage. INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over 4