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HomeMy WebLinkAboutStaff Report 3.C 01/23/2006&C CITY OF PETALUMA, CALIFORNIA January 23, 2006 AGENDA BILL Agenda Title: Meeting Date: Resolution Approving the 2006 Investment Policy January 23, 2006 Meeting Time: © 3:00 PM ❑ 7:00 PM Category (check one): ® Consent Calendar ❑ Public Hearing ❑X New Business ❑ Unfinished Business ❑ Presentation Department: I Director: Contact Person: Phone Number: Administrative Services I Steven Carmichael Cinde Rubaloff 778-4357 Cost of Proposal: Not Applicable Amount Budgeted: Not applicable Account Number: N/A Name of Fund: N/A Attachments to Agenda Packet Item: 1. Resolution Approving the 2006 Investment Policy 2. Exhibit A to Resolution— The Investment Policy 3. Government Code Sections 53600 through 53609 and Sections 53630 through 53686 (THESE ARE NOT PROVIDED WITH PACKET AS THEY CONSIST OF 55 PAGES - THEY ARE AVAILABLE FOR REVIEW IN THE FINANCE DEPARTMENT) Summary Statement: State law requires all local agencies to develop an annual investment policy that must be considered by the City Council at a public meeting. A good investment policy drives the cash, treasury and investment management of the City. It serves as a guide for setting and achieving program objectives, defines rules and establishes benchmarks while reducing the exposure to liability of both the City staff and the City Council. Recommended Citv Council Action/Suggested Motion: Adopt the resolution approving the 2006 Investment Policy Reviewed by Admin Services Director: lvi y, 4 Dat e Tj�e(�1 lvv�-6G Todav's Date: December 21, 2005 Reviewed by City Attornev: Date: Revision # and Date Revised: Approved by City Manager: Date: File Code: CITY OF PETALUMA, CALIFORNIA JANUARY 23, 2006 AGENDA REPORT FOR RESOLUTION APPROVING THE 2006 INVESTMENT POLICY EXECUTIVE SUMMARY: State law requires all local agencies to develop an annual investment policy that must be considered by the City Coimcil at a public meeting. A good investment policy drives the cash, treasury and investment management of the City. It serves as a guide for setting and achieving program objectives, defines rules and establishes benchmarks while reducing the exposure to liability of both the City staff and the City Council. 2. BACKGROUND: o The Investment Policy provides valuable information on how to properly manage public funds. The proposed Investment Policy for the year 2006 is the same as the 2005 Investment policy. 0 ALTERNATIVES: Add to or amend the Investment Policy within the limits of State law. 4. FINANCIAL IMPACTS: Developing the Investment Policy and administering it while investing idle funds takes approximately 200 hours of staff time with an estimated cost of $12,000. This cost is regularly budgeted in the Finance Department's salaries and benefits accounts. 5. CONCLUSION: The City's Investment Policy has been changed to comply with existing laws and provides additional protection for the City in some of the permitted investments. 6. OUTCOMES OR PERFORMANCE MEASUREMENTS THAT WILL IDENTIFY SUCCESS OR COMPLETION: The approval of the proposed resolution will adopt the 2006 Investment Policy that governs investments of public funds by the City Treasurer. RECOMMENDATION: Adopt the resolution approving the 2006 Investment Policy. RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PETALUMA APPROVING THE INVESTMENT POLICY FOR 2006 WHEREAS, the City Treasurer has annually rendered to the City Council a Statement of Investment Policy, and; WHEREAS, the City Treasurer has the responsibility to invest the pooled idle cash from all of the City's fiords, and; WHEREAS, the City Treasurer has developed a Statement of Investment Policy and submitted said Policy to the City Council for review. NOW, THEREFORE BE IT RESOLVED, that the City Council approves the 2006 Investment Policy as shown in Exhibit A attached. EXHIBIT A TO THE RESOLUTION CITY OF PETALUMA, CALIFORNIA 2006 STATEMENT OF INVESTMENT POLICY Steven Carmichael Administrative Services Director/City Treasurer I 2 CITY OF PETALUMA, CALIFORNIA 3 2006 STATEMENT OF INVESTMENT POLICY 5 POLICY 6 7 It is the policy of the City of Petahmia, CA (the "City") to invest public funds in a manner that 8 will provide the highest investment return with the maximum security while meeting the daily 9 cash flow demands of the entity and conforming to all state and local statutes governing the 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 investment of public funds. SCOPE This investment policy applies to all financial assets of the City. These funds are accoimted for in the City Comprehensive Annual Financial Report and include: General Fund Special Revenue Funds Debt Service Funds Capital Project Funds Enterprise Funds Internal Service Funds Permanent and Private Purpose Trust Funds This Policy shall also apply to funds of the Petaluma Community Development Commission (PCDC), Petaluma Public Financing Authority, City of Petaluma Public Financing Corporation and any other fund under the control of the City Treasurer. PRUDENCE Investments shall be made 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 City, 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 City. OBJECTIVE The primary objective in priority order, of the City's investment activities shall be: 1. Safety: Safety of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. 2. Liquidity: The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. 3. Return on Investments: The City's investments shall be designed with the objective of attaining a rate of return throughout budgetary and economic cycles, coniinensurate with the City's investment risk constraints and the cash flow characteristics of the portfolio. DELEGATION OF AUTHORITY Under the City Charter Section 24, the City Treasurer is appointed by the City Manager with the approval of the City Council. The City Treasurer is also the City's Finance Director. Pursuant to the Government Code, the City Council delegates the authority to invest or to reinvest finds, or to sell or exchange securities so purchased, to the City Treasurer for a one-year period. The City Treasurer is charged with the responsibility for carrying out the policies of the City Council and shall assume full responsibility for investment transactions until the delegation of authority is revoked or expires. I The daily cash management, investment transactions and account reconciliation's are the primary 2 responsibilities of the City Treasurer. These activities are also carried out by other members of 3 the Finance Department under the direction of the City Treasurer. The City Treasurer shall 4 establish procedures for the operation consistent with this investment policy. 5 6 The City Treasurer and authorized individuals acting in accordance with written procedures and 7 the investment policy and exercising due diligence shall be relieved of personal responsibility for 8 an individual security's credit risk or market price changes, provided deviations from 9 expectations are reported in a timely fashion and appropriate action is taken to control adverse 10 developments. 11 12 ETHICS AND CONFLICT OF INTEREST 13 14 Officers and employees involved in the investment process shall refrain from personal business 15 activities that could conflict with proper execution of the investment program or which could 16 impair their ability to make impartial decisions. Officers and employees involved in the 17 investment process shall abide by the Conflict of Interest Code, (California Government Code 18 Section 1090 et seq.) and the California Political Reform Act (California Government Code 19 Section 81000 et seq.). 20 21 PERMITTED INVESTMENTS 22 23 California Government Code Sections53601 et. seq. governs the investments permitted for 24 purchase by the City. Within the investments permitted by the Code, the City seeks to further 25 restrict eligible investments to the investments listed below. 26 27 Percentage limitations, where indicated, apply at the time of the purchase. Rating requirements 28 were indicated; apply at the time of purchase. In the event a security held by the City is subject 29 to a rating change that brings it below the minimum specified rating requirement, the City 30 Treasurer shall notify the City Council of the change. The course of action to be followed will 31 then be decided on a case-by-case basis, considering such factors as the reason for the rate drop, 32 prognosis for recovery or farther rate drops, and the market price of the security. Investment 33 maturities shall be based on review of cash flow forecasts. Maturities will be scheduled so as to 34 permit the City to meet all projected obligations. 35 36 No investment shall be made in any security, other than a security underlying a repurchase or 37 reverse repurchase agreement, that at the time of the investment has a term remaining to maturity 38 in excess of five years, unless the City Council has granted express authority to make that 39 investment no les than three months prior to the investment. 40 41 ELIGIBLE INVESTMENTS 42 43 A. State of California Local Aeenev Investment Fund ("LAIF"l. The City may invest in 44 LAIF. A maximum of $40 million may be invested in this category. 45 46 B. Sonoma Countv Investment Pool. The City may invest in the Sonoma County 47 Investment Pool. A maximum of $10 million may be invested in this category. 48 49 C. California Asset Management Trust. The City may invest in the shares in the 50 California Asset Management Trust, so long as the portfolio is rated among the top two 51 rating categories by one of the nationally recognized rating agencies. A maximum of $40 52 million may be invested in this category. 53 54 D. Certificates of Denosit. FDIC insured or frilly collateralized time certificates of deposit 55 in financial institutions located in California. Eligible investments are restricted to those 56 issuing instihrtions that have been in business at least five years. The maximum tenor for 57 deposits shall be one year. Investments in certificates of deposit are further limited to 58 20% of surplus funds. All time deposits Hurst be collateralized in accordance with 59 California Govenunent Code section 53561. The City, at its discretion, may waive the collateralization requirements for any portion of the deposit that is covered by federal insurance. 4 E. Negotiable Certificates of Denosit. Negotiable certificates of deposit issued by a 5 nationally or state chartered bards or a state or federal savings and loan association or by a 6 state -licensed branch of a foreign bails; provided that the senior debt obligations of the 7 issuing institution are rated "AA" or better by Moody's or Standard & Poor's. 8 Investments in negotiable certificates of deposit are limited to 20% of the portfolio. 9 10 F. 11 12 13 14 15 16 17 18 G 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 Banker's Accentances. Banker's acceptances issued by domestic or foreign banks, which are eligible for purchase by the Federal Reserve System. Purchases of banker's acceptances may not exceed 180 days maturity. Eligible banker's acceptances are restricted to issuing financial institutions with short-term paper rated in the highest category by one or more nationally recognized rating services. Investments in banker's acceptances are further limited to 40% of the portfolio with no more than 30% of surplus invested in the banker's acceptances of any one commercial bank. U.S. Government Issues. 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. H. Federal Agenev Securities. 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. Renurchase Agreements. Repurchase agreements are to be used solely as short-term investments not to exceed 30 days. The City may enter into repurchase agreements with primary government securities dealers rated "A" or better by two nationally recognized rating services. Counterparties should have (i.) a short-term credit rating of at least A - 1/P -1; (ii.) minimum assets and capital size of $25 billion in assets and $350 million in capital; (iii.) five years of acceptable audited financial results; and (iv.) a strong reputation among market participants. The following collateral restrictions will be observed: Only U.S. Treasury securities or Federal Agency securities will be acceptable collateral. All securities underlying repurchase agreements must be delivered to the City's custodian bank versus payment or be handled under a properly executed tri -party repurchase agreement. The total market value of all collateral for each repurchase agreement must equal or exceed 102 percent of the total dollar value of the money invested by the City for the term of the investment. For any repurchase agreement with a term of more than one day, the value of the underlying securities must be reviewed on an on-going basis according to market conditions. Market value must be calculated each time there is a substitution of collateral. The City or its trustee shall have perfected first security interest under the Uniform Commercial Code in all securities subject to repurchase agreement. The City shall have properly executed a Professional Services Agreement with each counter party with which it enters into repurchase agreements. J. Commercial Pager. Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provide for by a nationally recognized statistical - rating organization (NRSRO). The entity that, issues connnercial paper shall meet all of the following conditions in one of the following: 2 a. The entity meets the following criteria: 3 i. Is organized and operating within the United States as a general 4 corporation. 5 ii. Have total assets in excess of $500 million. 6 iii. Has debt other than commercial paper, if any, that is rated "A" or higher 7 by a nationally recognized statistical -rating organization (NRSRO). 8 9 (or) 10 11 b. The entity meets the following criteria: 12 i. Is organized within the United States as a special purpose corporation, 13 trust, or limited liability company. 14 ii. Has program wide credit enhancements including, but not limited to, over 15 collateralization, letters of credit, or surety bond. 16 17 Investments in commercial paper are limited to a maximum of 25% of the portfolio. 18 Purchases shall not exceed 10 percent of the outstanding paper of the issuing corporation. 19 The maximum investment maturity is restricted to 270 days. 20 21 K. Monev Market Funds. Shares of beneficial interest issued by diversified management 22 companies that are money market funds registered with the Securities and Exchange 23 Commission (SEC) under the Investment Company Act of 1940 (15 U.S.C., Sec. 80a-1, 24 et seq.). 25 26 The City may invest in shares of beneficial interest issued by company shall have met 27 either of the following criteria: 28 29 a. Attained the highest ranking or the highest letter and numerical rating provided by 30 not less than two nationally recognized rating services. 31 32 (or) 33 34 b. Retained an investment adviser registered or exempt from registration with the 35 SEC with not less than five years experience in managing money market mutual 36 funds with assets under management in excess of five hundred million dollars 37 ($500,000,000). 38 39 The purchase price of shares of beneficial interest purchased pursuant to this subdivision 40 shall not include any commission that the companies may charge. Investments in Money 41 Market Funds are further limited to 20% of the portfolio. 42 43 ELIGIBLE INVESTMENTS FOR BOND PROCEEDS 44 45 Bond Proceeds shall be invested in securities permitted by the applicable bond documents. If the 46 bond documents are silent as to the permitted investments, bond proceeds will be invested in 47 securities permitted by this Policy. 48 49 With respect to maximum maturities, the Policy authorizes investing bond reserve fund proceeds 50 beyond the five years if prudent in the opinion of the City Treasurer. 51 52 INELIGIBLE INVESTMENTS 53 54 As provided in California Govenunent Code section 53601.6, the City shall not invest any funds 55 in inverse floaters, range notes, mortgage derived interest -only strips or in any security that could 56 result in zero interest accrual if held to maturity. 57 58 The purchase of any security not listed above, but pennitted by the California Government Code, 59 is prohibited unless the City Council approves the investment either specifically or as a part of an 60 investment program approved by the Board. 1 2 3 4 5 6 7 8 9 to 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 BROKERS In selecting securities brokers, the City Treasurer shall conduct credit and capitalization analysis to determine that firms are adequately financed to conduct public business. LOCAL INVESTMENT POOL POLICIES AND REPORTS To the extent there are investments in the State, Sonoma County, or CAMP investment pools, the City Treasurer shall review and maintain current copies of the adopted investment policies of the State, Sonoma County, and CAMP. The policies shall be reviewed for concurrence with the investment policy of the City. SAFEKEEPING AND CUSTODY All security transactions entered into by the City of Petaluma, CA shall be conducted on a delivery -versus payment basis. A third party custodian designated by the City Treasurer and evidenced by safekeeping receipts will hold securities. The only exceptions to the foregoing are Local Agency Investment Pools, Certificates of Deposit, and money market funds since the purchased securities are not deliverable. In all cases, purchased securities shall be held in the City's name. INTERNAL CONTROL The City 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. PERFORMANCE STANDARDS The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The City will measure the portfolio's performance against a market benchmark that is commensurate with the City's investment risk constraints and the cash flow characteristics of the portfolio. 1114WOMWIM, The City Treasurer shall provide a monthly investment report to the City Council, which provides a clear picture of the status of the current investment portfolio, including transactions. This report will be formally submitted to the City Council each quarter at a public meeting. Schedules in the quarterly Treasurer's Report will include the following: ■ A list of individual securities held at the end of the reporting period by authorized investment category • Average life and final maturity of all investments ■ Earnings rate on an annualized basis • Market value, par value and amortized book value ■ Percentage of the portfolio by investment category The quarterly report shall state compliance of the portfolio to the investment policy, or marmer in which the portfolio is not in compliance. The quarterly report shall also include a statement denoting the ability of the City to meet its expenditure requirements for the next six months, or provide an explanation as to why sufficient money shall, or may, not be available. POLICY REVIEw 5 2 The investment policy shall be adopted by resolution of the City Council on, at minimum, an 3 annual basis. The investment policy shall be reviewed at least annually to ensure its consistency 4 with the overall objectives of preservation of principal, liquidity and yield, and its relevance to 5 current law and financial and economic trends. Any amendments to the policy shall be 6 forwarded to the City Council for approval. 1 CITY OF PETALUMA 2 2006 STATEMENT OF INVESTMENT POLICY 4 GLOSSARY OF TYPES OF INVESTMENTS 5 AVAILABLE TO LOCAL GOVERNMENTS 6 7 8 STATE INVESTMENT POOL (LAIF) 9 10 The Local Agency Investment Fund (LAIF), a voluntary program created by statute, began in 11 1977 as an investment alternative for California's local governments and special districts and 12 continues today under the State of California Treasurer's office. The enabling legislation for the 13 LAIF is Section 16429.1,2,3 of the California Government Code. 14 This program offers participating agencies the opportunity to participate in a major portfolio 15 which daily invests hundreds of millions of dollars, using the investment expertise of the 16 Treasurer's Office Investment staff at no additional cost to the taxpayer. This in-house 17 management team is comprised of civil servants who have individually worked for the State is Treasurer's Office for over 20 years. 19 The LAIF is part of the Pooled Money Investment Account (PMIA). The PMIA began in 1953 20 and has oversight provided by the Pooled Money Investment Board (PM1B) and an in-house 21 Investment Committee. The PMIB Board members are the State Treasurer, Director of Finance, 22 and State Controller. 23 The LAIF has oversight by the Local Investment Advisory Board (LIAB). The Board consists of 24 five members as designated by Statute. The Chairman is the State Treasurer, or his designated 25 representative. Two members qualified by training and experience in the field of investment or 26 finance, and the State Treasurer appoints two members who are Treasurers, finance or fiscal 27 officers or business managers employed by any County, City or local district or Municipal 28 Corporation of this state. The term of each appointment is two years or at the pleasure of the 29 appointing authority. 30 All securities are purchased under the authority of the Government Code Section 16430 and 31 16480.4. The State Treasurer's Office takes delivery of all securities purchased on a delivery 32 versus payment basis using a third party custodian. All investments are purchased at market, and 33 market valuation is conducted monthly. 34 Additionally, the PMIA has Policies, Goals, and Objectives for the portfolio to make certain that 35 our goals of Safety, Liquidity and Yield are not jeopardized and that prudent management 36 prevails. These policies are formulated by investment staff and reviewed by both the PMIB and 37 the LIAB on an annual basis. 38 The Bureau of State Audits on an annual basis audits the State Treasurer's Office. The resulting 39 opinion is included in the subsequent PMIB monthly report following its publication. The Bureau 40 of State Audits also has a continuing audit process throughout the year. The State Controller's 41 Office as well as an in-house audit process involving three separate divisions audit all investment 42 and LAIF claims on a daily basis. 43 It has been detennined that the State of California cannot declare bankruptcy tinder Federal 44 regulations, thereby allowing the Government Code Section 16429.3 to stand. This Section states 45 "money placed with the State Treasurer for deposit in the LAIF shall not be subject to 46 innpoundment or seizure by any State official or State agency." The LAIF has grown from 293 participants and $468 million in 1977 to 3,039 participants and $19.9 billion in 2002. 4 The Local Agency Investment Fund (LAIF) was created by statute in 1977 and provides an 5 investment alternative for local agencies. The program offers participating agencies to 6 participate in a major portfolio, which invests hundreds of millions of dollars a day. The deposits 7 and withdrawals are done by electronic transfers of funds (wire transfers) and deposits earn 8 interest on a daily basis. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 There is a limitation of $40 million per legal entity within an agency. There is also a maximum of fifteen transactions, deposits or withdrawals per month. SONOMA COUNTY INVESTMENT POOL The Sonoma County Treasurer maintains an investment pool in which the County, Schools, Special Districts and Cities can participate. This investment pool operates in the same manner as the State pool. The County Treasurer is subject to the same State Government Code regarding investments as the City. As with the State investment fund, City funds can be withdrawn at any time and are protected by State Law from seizure or impoundment by any County Officer. The City does not participate in this pool but retains the option to do so. CALIFORNIA ASSET MANAGEMENT PROGRAM (CAMP) CAMP provides California public agencies, together with any bond trustee acting on behalf of such public agency, assistance with the investment of and accounting for bond proceeds and surplus funds. For bond proceeds, the objective of CAMP is to invest and account of such proceeds in compliance with arbitrage management and rebate requirements of the Internal Revenue Service. The program includes the California Asset Management Trust, a California common law trust organized in 1989. The Trust currently offers a professionally managed money market investment portfolio, the Cash Reserve Portfolio, to provide public agencies with a convenient method of pooling funds for temporary investment pending their expenditure. The Trust also provides record keeping, custodial and arbitrage rebate calculation services for bond proceeds. As part of the program, public agencies may also establish individual, professionally managed investment accounts. The Pool seeks to attain as high a level of current income as is consistent with the preservation of principal. The Pool purchases only investments of the type in which public agencies are permitted by statute to invest surplus funds and proceeds of their own bonds. CERTIFICATES OF DEPOSITS (CD) Certificates of Deposits, sometimes known as "Jumbo Accounts" or "Fixed CD's" are savings accounts with Banks or Savings and Loans. These accounts are for a specific amount, have a set interest rate, and set maturity date. There is a substantial interest penalty if the CD is withdrawn prior to the maturity date. The State law requires Public Fund CD's to be collateralized by the financial institution at 110% with US Government notes/bonds or at 150% with quality First Trust Deeds. This collateral can be waived if Federal Insurance (FDIC) is available. These federal agencies will insure each account up to $100,000. The City generally waives the collateralization requirements for the FDIC insurance. The waiver of collateral is a wide spread practice and will generally generate higher interest rates and provide the greatest security for the funds from the Federal Insurance Agencies. For deposits in excess of $100,000, the collateralization requirements are not waived. NEGOTIABLE CERTIFICATE OF DEPOSIT (NCD) I This investment is similar to the Fixed CD's above. However, the NCD can be sold through a 2 broker on a "secondary market" prior to the maturity date. Normally, NCD's are issued in 3 $500,000 and $1,000,000 amounts. The State Code limits NCD's to not more than 30% of the 4 local agency's portfolio and to a five-year maximum term. The security is the credit worthiness 5 of the issuer. These deposits are uninsured and uncollateralized promissory notes. 6 7 BANKER'S ACCEPTANCES (BA) 8 9 A Banker's Acceptance is a time draft of invested finds, which has been drawn on and accepted 10 for repayment by a bank. This financial instrument is generally used for short term (30 and 180 11 days) financing of export, import, or storage of goods. By accepting the draft (investment of City 12 funds), the bank is liable for the payment at maturity. This bank liability makes the Banker's 13 Acceptance a marketable investment. The State Code limits BA's to not more than 180 days to 14 maturity and 40% of the local agency's portfolio. In addition, not more than 30% of the local 15 agency's portfolio may be placed in any one bank. 16 17 US TREASURY BILLS 18 19 Commonly referred to as T -Bills, these are short-term marketable securities sold as obligations of 20 the US Government. They are offered in three month, six month, nine month and one-year 21 maturities. T -Bills do not accrue interest but are sold at a discount, and pay the face value at 22 maturity. 23 24 US TREASURY NOTES 25 26 These are marketable, interest-bearing securities sold as obligations of the US Government with 27 original maturities of one to ten years. Interest is paid semi-annually. 28 29 US TREASURY BONDS 30 31 These are the same as US Treasury Notes except they have original maturities of ten years or 32 longer. 33 34 FEDERAL AGENCY ISSUES 35 36 Many Federal Government Agencies are authorized to issue short term and long term obligations 37 that are used to finance various programs such as home loans, business loans, farm loans, etc. 38 These Agencies were created by the Federal Government in the 1930's and have since become 39 independent quasi -public agencies. The security for their issues is the guarantee of the Agency to 40 pay. The Federal Government has only an implied liability to the extent that the Agency has an 41 open credit line to borrow from the U.S. Treasury. It is widely accepted that Federal Agency 42 issues are almost as secure as U.S. Government notes. 43 44 There is an active secondary market available to sell these issues prior to maturity. The issues 45 are fairly liquid depending on the prevailing market interest rates at the time of sale. 46 Some of the more common agency notes are issued by the Federal National Mortgage 47 Association (Fannie Mae), Federal Home Loan Banks, Federal Home Loan Mortgage 48 Corporation (Freddie Mac), and the Federal Farm Credit Banks. 49 50 REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS (REPOS) 51 52 A Repurchase Agreement is a short -tens investment agreement to loan City fiords for a fixed 53 period in return for a fixed interest rate and secured collateral, such as U.S. Treasuries or Agency 54 Notes. This type of investment is usually done for overnight or very short term (7 days) 55 investment of funds left in the general operating checking account. Reverse Repurchase 56 agreements is a short -tens investment, which is used to take advantage of market interest rate 57 changes and increase the size of the portfolio. State law was amended in 1996 to limit the use of 58 both repurchase and reverse repurchase agreements. 59 60 COMMERCIAL PAPER (CP) 2 Commercial Paper is unsecured promissory notes of industrial corporations, utilities and bank 3 holding companies. The notes are in bearer form in amounts starting at $100,000. State law 4 limits the City to investments in United States corporations having assets in excess of five 5 hundred million dollars with an "A" or higher rating. State Law also permits cities to invest in 6 Asset Back Commercial Paper (ABCP) from issuers organized within the United States as a 7 special purpose corporation, trust or limited liability company. ABCP issuers must have program 8 wide credit enhancements including, but not limited to, over collateralization, letters of credit, or 9 surety bond. Cities may not invest more than 25% of the portfolio in commercial paper nor 10 purchase more than 10 percent of the outstanding commercial paper of any single issuer. The 11 maximum maturity of the commercial paper may not exceed a term of 270 days. ,12 13 MUTUAL FUNDS 14 15 An investment company that pools money and can invest in a variety of securities, including 16 fixed-income securities and money market instruments, cities may invest in Mutual Funds or 17 Money Market funds that receive the highest ranking or the highest letter and numerical rating by 18 two of the three largest nationally recognized rating services. The Mutual Funds must abide by 19 the same investment restrictions and regulations that apply to public agencies in California. 20 Money Market Funds must follow regulations specified the Security and Exchange Commission 21 under the Investment Company Act of 1940. Mutual Funds have floating Net Asset Values 22 (NAV), which means the amount received at redemption may be more or less than the amount 23 originally invested. Money Market Funds strive to maintain a constant NAV. 24 25 GUARANTEED INVESTMENT CONTRACT (GIC) 26 27 This is an agreement acknowledging receipt of funds for deposit, specifying terms for withdrawal 28 and guaranteeing a rate of interest to be paid. The investment follows all state laws for the 29 investment of public funds. GIC's are only permitted for bond proceeds ■