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CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
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From: David Kennedy, City Treasnrer
Subject: 1997 Investment Policy
Dept: Treasnrer
c. :IGINAl:N 26 1997
Date: Jnne 6 1997
Synopsis of Previous Council action:
Resolution #96-148 adopted 6/6/96.
Resolution #95-153 adopted 5/17/95.
Resolution #94-32 adopted 2/22/94.
Recommended motion:
Adopt Resolution
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Signatltte b
Contact person:
David Kennedv. City Treasurer
Phone:
exl. 5221
Supporting data attached:
Ward:
FUNDING REQUIREMENTS:
Amount:
Source: (Acet. No.)
(AceL Description)
Finance:
Council Notes:
Res 97- .;zIP'
Agenda Item No.
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.CI:rV OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
STAFF REPORT
The city Treasurer annually files a statement of Investment Policy
with the Mayor and Common council. This agenda item would request
acknowledgment of receipt and filing of the Annual Investment
Policy by the City Treasurer for the Year 1997.
changes is this year's policy are as follows:
1. MATURITY MATRIX (PAGE 2)
The suggested percentages of the portfolio in particular
maturity sectors:
FROM
TO
7-180 DAYS
180-360
1 Yr to 2 Yrs
2 Yrs to 3 Yrs
3 Yrs to 4 Yrs
4 Yrs to 5 Yrs
10-30%
10-30%
10-25%
0-25%
0-25%
0-25%
10-50%
10-50%
10-50%
10-40%
0-40%
0-40%
2. AUTHORIZED INVESTMENTS (PAGE 6)
Maximum percentage limit of total pooled funds held in U. S.
Government Agency Callables changed from 0-25% to 0-50%.
3. ETHICS AND CONFLICTS OF INTEREST (PAGE 3)
Deputy city Treasurer is no longer required to annually file
financial disclosure per FPPC.
Previous Investment Policy was filed in June 1996 for the year
1996, Resolution No. 96-148 adopted 6/6/96.
75-0264
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CITY OF SAN BERNARDINO
INVESTMENT POLICY
POLICY
In accordance with the Charter of the City of San Bernardino and under authority granted by the City
Council, the City Treasurer is responsible for investing the unexpended cash in the City Treasury.
The investment of the funds of the City of San Bernardino is directed to the goals of safety, liquidity and
yield. The authority governing investments for municipal governments is set forth in the California
Government Code, Sections 53601 through 53659.
The primary objective of the investment policy of the City of San Bernardino is SAFETY OF
PRINCIPAL. Investments shall be placed in those securities as outlined by tYpe and maturity sector in
this document. Effective cash flow management and resulting cash investment practices are recognized
as essential to good fiscal management and control. The City's portfolio shall be designed and managed
in a manner responsive to the public trust and consistent with state and local law. Portfolio management
requires continual analysis and as a result the balance between the various investments and maturities
may change in order to give the City of San Bernardino the optimum combination of necessary liquidity
and optimal yield based on cash flow projections.
SCOPE
The Investment policy applies to all financial assets of the City of San Bernardino as accounted for in the
Comprehensive Annual Financial Report (CAFR). Policy statements outlined in this document focus on
the City of San Bernardino's pooled funds, but will also apply to all other funds under the City
Treasurer's span of control unless specifically exempted by statue or ordinance.
One exception does exist regarding the investment of bond reserve funds. If, in the opinion of the City
Treasurer, matching the segregated investment portfolio of the bond reserve fund with the maturity
schedule of an individual bond issue is prudent given current economic analysis, the investment policy
authorizes extending beyond the five year maturity limitation as outlined in this document.
PRUDENCE
The standard to be used by investment officials shall be that of a "prudent person" and shall be applied in
the context of managing all aspects of the overall portfolio. Investments shall be made with judgment
and care, under circumstances then prevailing, which persons of prudence, direction and intelligence
would 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.
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.
However, it is realized that market prices of securities will vary depending on economic and interest rate
conditions at any point in time. It is further recognized, that in a well diversified investment portfolio,
occasional measured losses are inevitable due to economic, bond market or individual security credit
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analysis. These occasional losses must be considered within the context of the overall investment
program objectives and the resultant long-term rate of return.
The City Treasurer and other individuals assigned to manage the investment portfolio, acting within the
intent and scope of the investment policy and other written procedures and exercising due diligence,
shall be relieved of personal responsibility and liability for an individual security's credit risk or market
price changes, provided deviations from expectations are reported in a timely manner and appropriate
action is taken to control adverse developments.
OBJECTIVES
Safety of Principal
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 from securities default, broker-dealer default
or erosion of market value. The City shall seek to preserve principal by mitigating the two types of risk,
credit risk and market risk.
Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated
by investing in investment grade securities and by diversifying the investment portfolio so that
the failure of any one issuer does not unduly harm the City's capital base and cash flow.
Market risk, defined as market value fluctuations due to overall changes in the general level of
interest rates, shall be mitigated by limiting the average maturity of the City's investment
portfolio to three years, the maximum maturity of anyone security to five years, structuring the
portfolio based on historic and current cash flow analysis eliminating .the need to sell securities
prior to maturity, and avoiding the purchase of long term securities for the sole purpose of short
term speculation.
Liquidity
Historical cash flow trends are compared to current cash flow requirements on an ongoing basis in an
effort to ensure that the City's investment portfolio will remain sufficiently liquid to enable the City to
meet all reasonably anticipated operating requirements.
MATURITY MATRIX
Maturities of investments will be selected based on liquidity requirements to minimize interest rate risk
and maximize earnings. Current and expected yield curve analysis will be monitored and the portfolio
will be invested accordingly. The weighted average maturity of the pooled portfolio should not exceed
two and one half years and the following percentages of the portfolio should be invested in the following
maturity sectors:
Maturity Range
Suggested Percentage
I day to 7 days
7 days to 180 days
180 days to 360 days
I year to 2 years
10 to 50%
10 to 50%
10 to 50%
10 to 50%
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2 years to 3 years
3 years to 4 years
4 years to 5 years
Over 5 years
. .Ot040%
o to 40%
o to 40%
Council Authorization required
PERFORMANCE EVALUATION
Investment performance is continually monitored and evaluated by the City Treasurer. Investment
performance statistics and activity reports are generated on a monthly basis for presentation to the City
Administrator and City Council.
DELEGATION OF AUTHORITY
The Charter of the City of San Bernardino and the authority granted by City Council assigned the
responsibility of investing unexpended cash to the City Treasurer. Daily management responsibility of
the investment program has been delegated to the Deputy Treasurer, who shall establish procedures for
the operation consistent with this investment policy. In the City Treasurer's and Deputy Treasurer's
absence, the Administrative Operations Supervisor is authorized to initiate investment transactions.
ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business activity
that conflicts with proper execution of the investment program, or impairs their ability to make impartial
investment decisions. Additionally the City Treasurer is required to annually file applicable financial
disclosures as required by the Fair Political Practices Commission (FPPC).
SAFEKEEPING AND SECURITIES
To protect against fraud or embezzlement or losses caused by collapse of an individual securities dealer,
all securities owned by the City shall be held in safekeeping by a third party bank trust department,
acting as agent for the City under the terms of a custody agreement or PSA agreement (repurchase
agreement collateral). All trades executed by a dealer will settle delivery Vs payment (DVP) through
the City's safekeeping agent.
Securities held in custody for the City shall be independently audited on an annual basis to verify
investment holdings.
All exceptions to this safekeeping policy must be approved by the City TreaSurer in written form and
included in monthly reporting to City Council.
REPORTING
The City Treasurer shall review and render monthly reports to the City Administrator and City Council
which shall include the face amount of each investment, the classification of the investment, the name of
the institution or entity, the rate of interest, the maturity date, the current market value and accrued
interest due for all securities. The report shall also detail all repurchase agreements and reverse
repurchase positions and associated liabilities.
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e QUALIFIED BROKER/DEALERS
The City shall transact business only with banks, savings and loans, and with broker/dealers. The
broker/dealers should be primary dealers regularly reporting to the New York Federal Reserve Bank.
Exceptions will be made only upon written authorization by the City Treasurer. Investment staff shall
investigate dealers which wish to do business with the City to determine if they are adequately
capitalized, and make markets in the securities appropriate to the City's needs.
The City Treasurer shall annually send a copy of the current investment policy to all broker/dealers
approved to do business with the City. Confirmation of receipt of this policy shall be considered
evidence that the dealer understands the City's investment policies and intends to sell the City only
appropriate investments authorized by this investment policy.
COLLATERAL REQUIREMENTS
Collateral is required for investments in certificates of deposit, repurchase agreements and reverse
repurchase agreements. In order to reduce market risk, the collateral level will be at least 102% of
market value of principal and accrued interest.
In order to conform with the provisions of the Federal Bankruptcy Code which provides for liquidation
of securities held as collateral, the only securities acceptable as collateral shall be certificates of deposit,
commercial paper, eligible banker's acceptances, medium term notes or securities that are the direct
obligations of, or are fully guaranteed as to principal and interest by, the United States or any agency of
the United States.
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AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code Sections 53600 et seq. Within
the context of the limitations, the following investments are authorized, as further limited herein:
1. United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of the
United States are pledged for payment of principal and interest. There is no percentage limitation of
the portfolio which can be invested in this category, although a five year maturity limitation is
applicable.
2. Obligations issued by the Government National Mortgage Association (GNMA), the Federal Farm
Credit System (FFCB), the Federal Home Loan Bank Board (FHLB), the Federal National Mortgage
Association (FNMA), the Student Loan Marketing Association (SLMA), and the Federal Home Loan
Mortgage Association (FHLMC). There is no percentage limitation of the portfolio which can be
invested in this category, although a five year maturity limitation is applicable.
3. Local Agency Investment Fund (LAlF) which is a State of California managed investment pool may
be used up to the maximum permitted by California State Law.
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Investments detailed in items 4 through II are further restricted to percentage of the cost value of the
portfolio in anyone issuer name to a maximum of 15%. The total value invested in anyone issuer shall
not exceed 5% of the issuers net worth. Again, a five year maximum maturity limitation is applicable
unless further restricted by this policy.
4. Bills of exchange or time drafts drawn on and accepted by commercial banks, otherwise known as
bankers acceptances. Banker's acceptances purchased may not exceed 270 days to maturity or 40%
ofthe cost value ofthe portfolio.
5. Commercial paper ranked PI by Moody's Investor Services or A1+ by Standard & Poors, and issued
by domestic corporations having assets in excess of $500,000,000 and having an AA or better rating
on its' long term debentures as provided by Moody's or Standard & Poors. Purchases of eligible
commercial paper may not exceed 180 days to maturity nor represent more than 10% of the
outstanding paper of the issuing corporation. Purchases of commercial paper may not exceed 15% of
the cost value of the portfolio.
6. Negotiable Certificates of deposit issued by nationally or state chartered banks or state or federal
savings institutions. Purchases of negotiable certificates of deposit may not exceed 30% of total
portfolio. A maturity limitation of five years is applicable.
7. Repurchase agreements which specify terms and conditions may be transacted with banks and broker
dealers. The maturity of the repurchase agreements shall not exceed 90 days. The market value of
the securities used as collateral for the repurchase agreements shall be monitored by the investment
staff and shall not be allowed to fall below 102% of the value of the repurchase agreement. A PSA
Master Repurchase Agreement is required between the City of San Bernardino and the broker dealer
or financial institution for all repurchase agreements transacted.
8. Reverse repurchase agreements which specifies terms and conditions may be transacted with broker
dealers and financial institutions but can not exceed 20% of the portfolio value on the date entered
into. The City may enter into reverse repurchase agreements only to fund short term liquidity needs.
The term of reverse repurchase agreements may not exceed 90 days.
9. 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 investment portfolio may be invested in this investment type.
10. Medium Term Corporate Notes, with a maximum maturity of five years may be purchased.
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 market value of the
portfolio 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.
II. 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. Only funds holding U.S. Treasury
or Government agency obligations can be utilized.
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Ineligible investments are those that are not described herein, including but not limited to, common
stocks and long term (over five years in maturity) notes and bonds are prohibited from use in this
portfolio. It is noted that special circumstances arise that necessitate the purchase of securities beyond
the five year limitation. On such occasions, requests must be approved by city council prior to purchase.
The following summary of maximum percentage limits, by instrument, are established for the City's
total pooled funds portfolio:
Investment Tvne
Percentage
Repurchase Agreements
Local Agency Investment Fund
US Treasury Bonds/Notes/Bills
US Government Agency Obligations
US Government Agency Callable
Bankers' Acceptances
Commercial Paper
Negotiable Certificates of Deposit
Time Certificates of Deposit
Medium Term Corporate Notes
Cash funds and Money Mkt Accts.
Reverse Repurchase Agreements
Passbook savings acct demand deposits
o to 100%
$20,000,000 per acct.
o to 100%
o to 100%
o to 50%
o to 40%
o to 15%
o to 30%
o to 25%
o to 30%
o to 20%
o to 20%
o to 20%
DERIVATIVE INVESTMENTS
Derivatives are investments whose value is "derived" from a benchmark or index. That benchmark can
be almost any financial measure from interest rates to commodity and stock prices. When appropriate,
limited use of derivative investments tied solely to interest rate structures are allowable. However, any
investment of this type must receive prior approval from the City Treasurer. Securities or investments
classified as derivatives must be issued by an agency or entity authorized by this investment policy.
LEGISLATIVE CHANGES
Any State of California legislative action, that further restricts allowable maturities, investment type or
percentage allocations, will be incorporated into the City of San Bernardino's Investment Policy and
supersede any and all previously applicable language.
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.
LIMITING MARKET VALUE EROSION
The longer the maturity of securities, the greater their market price volatility. Therefore, it is the general
policy of the City to limit the potential effects from erosion in market values by adhering to the
following guidelines:
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All immediate and anticipated liquidity requirements will be addressed prior to purchasing all
investments.
Maturity dates for long-term investments will coincide with significant cash flow requirements
where possible, to assist with short term cash requirements at maturity.
All long-term securities will be purchased with the intent to hold all investments to maturity
under then prevailing economic conditions. However, economic or market conditions may
change, making it in the City's best interest to sell or trade a security prior to maturity.
PORTFOLIO MANAGEMENT ACTIVITY
The investment program shall seek to augment returns consistent with the intent of this policy, identified
risk limitations and prudent investment principals. This objective will be achieved by use of the
following strategies:
Active Portfolio Manal!ement Through active fund and cash flow management taking advantage
of current economic and interest rate trends, the portfolio yield may be enhanced with limited
and measurable increases in risk by extending the weighted maturity of the total portfolio.
Portfolio Maturity Manal!ement When structuring the maturity composition of the portfolio, the
City shall evaluate current and expected interest rate yields and necessary cash flow
requirements. It is recognized that in normal market conditions longer maturities produce higher
yields. However, the securities with longer maturities also experience greater price fluctuations
when the level of interest rates change.
Security Swaos The City may take advantage of security swap opportunities to improve the
overall portfolio yield. A swap which improves the portfolio yield may be selected even if the
transactions result in an accounting loss. Documentation for swaps will be included in the City's
permanent investment file documents.
POLICY REVIEW
The City of San Bernardino investment policy shall be adopted by resolution of the City council on an
annual basis. This investment policy shall be reviewed at least annually to ensure its consistency with
the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law
and financial and economic trends. Any amendments to the policy shall be forwarded to City Council
for approval.
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