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HomeMy WebLinkAboutS1- Treasurer CITY OF SAN BERNARDINO REQUEST FOR COUNCIL ACTION From: DAVID KENNEDY Subject: 1996 INVESTMENT POLICY CITY TREASURER Dept: ORIGINAL TREASURER Date: MAY 29, 1996 Synopsis of Previous Council action: RESOLUTION #95-153 adopted 5/17/95 RESOLUTION #94-32 adopted 2/22/94 HAY 29'96 PM x_24 Recommended motion: ADOPT RESOLUTION Signature Contact person: DAVID KENNEDY, CITY TREASURER Phone: ext. 5221 Supporting data attached: Ward: FUNDING REQUIREMENTS: Amount: Source: (Acct. No.) (Acct. Description) Finance: Council Notes: 75-0262 Anonrlo 1*— AI.. aJ CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION STAFF REPORT 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 1996 . Previous Investment Policy was filed in May 1995 for the year 1995, Resolution No. 95-153 adopted 5/17/95 . ATTACHMENT A 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 Treasurers' 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 . 1 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 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 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 two and one half years, the maximum maturity of any one security to five years, structuring the 2 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 1 day to 7 days 10 to 500 7 days to 180 days 10 to 30% 180 days to 360 days 10 to 300 1 year to 2 years 10 to 250 2 years to 3 years 0 to 250 3 years to 4 years 0 to 25% 4 years to 5 years 0 to 250 Over 5 years 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 . 3 MEMOMMMMOM 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 and the Deputy Treasurer are 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 cash 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 . 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. 4 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 10201 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 . 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 investment 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 . Investments detailed in items 3 through 11 are further restricted to percentage of the cost value of the portfolio in any one issuer name to a maximum of 15% . The total value invested in any one issuer shall not exceed 50 of the issuers net worth. Again, a five year maximum maturity limitation is applicable unless further restricted by this policy. 3 . Bills of exchange or time drafts drawn on and accepted by commercial banks, otherwise known as banker' s acceptances . Banker' s acceptances purchased may not exceed 270 days to maturity or 400 of the cost value of the portfolio. 4 . Commercial paper ranked P1 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 5 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. S . 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 . 6 . 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. 7 . 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 . 8 . Local Agency Investment Fund (LAIF) which is a State of California managed investment pool may be used up to the maximum permitted by California State Law. 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. 6 11 . 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. 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 Type Percentage Repurchase Agreements 0 to 1000 Local Agency Investment Fund $20, 000, OOOper acct . US Treasury Bonds/Notes/Bills 0 to 100% US Government Agency Obligations 0 to 100% US Government Agency Callable 0 to 2501 Bankers' Acceptances 0 to 401 Commercial Paper 0 to 15% Negotiable Certificates of Deposit 0 to 30% Time Certificates of Deposit 0 to 25% Medium Term Corporate Notes 0 to 30% Cash funds and Money Mkt Accts . 0 to 20% Reverse Repurchase Agreements 0 to 20% Passbook savings acct demand deposits 0 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 . 7 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 : 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 Management 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 Management 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 Swaps 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 . 8 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 . 9