HomeMy WebLinkAboutStaff Report 3.A 01/22/2007I
CITY OF PETALUMA, CALIFORNIA
AGENDA BILL
Agenda Title:
Resolution Approving the 2007 Investment Policy
Categoa: D Presentation ~ Consent Calendar 0 Public Hearing
Del!artment: Director: Contact Person:
Administrative Services Steven Carmichael Cinde Rubaloff
Cost of Prol!osal: not applicable
Amount Budgeted: not applicable
Attachments to Agenda Packet Item:
1. Resolution Approving the 2007 Investment Policy
2. Exhibit A-Investment Policy
Summaa Statement:
3.A
7 January 22/ 200
Meeting Date:
January 22, 2007
Meeting Time: IZl 3:00PM
D 7:00PM
D Unfinished Business 0 New Business
Phone Number:
778-4357
Account Number:
na
Name of Fund:
na
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.
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Recommended City Council Action/Suggested Motion:
Adopt the resolution approving the 2007 Investment Policy
Reviewed bv Admin. Svcs. Dir:~, Reviewed by Citv Attorney: AnorovedMCitv Manae:er: .J' (I · i /
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CITY OF PETALUMA, CALIFORNIA
_JANUARY 22,2007
AGENDA REPORT FOR
Approval of 2007 Investment Policy
1. EXECUTIVE SUMMARY:
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.
2. BACKGROUND:
The Investment Policy provides valuable information on how to properly manage public funds.
The proposed Investment Policy for the year 2007 has been updated for changes in State laws.
Effective January 1, 2007, AB 2011 adds new sections to the Government Code, 53601.8 nad
53635.8. These sections explicitly allow local agency, until January 1, 2012, to utilize placement
services for Time Certificates of Deposit purchases. The Bill also places 30% overall limitation
on CDs purchased under this subdivision along with negotiable CDs purchased under 5360l(h).
Effective January 1, 2007 AB 1794 revised Code 53601.7 and 53635. The revision are very
narrow in scope and do not impact this City.
The following sections of the City of Petaluma's Investment Policy have been updated for the
new legislative changes to Eligible Investments:
page 3, section D-Certificates of Deposit, section E-Negotiable Certificates of Deposit
page 5, section L-Medium Term Notes
3. 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.
4. 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 2007 Investment Policy that governs
investments of public funds by the City Treasurer.
7. RECOMMENDATION:
Adopt the resolution approving the 2007 Investment Policy: .
RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF PETALUMA APPROVING THE
INVESTMENT POLICY FOR 2007
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 funds, 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 2007
Investment Policy as shown in Exhibit A attached.
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EXHIBIT A TO THE RESOLUTION
CITY OF PETALUMA, CALIFORNIA
2007 STATEMENT OF INVESTMENT POLICY
Steven Carmichael
Administrative Services Director/City Treasurer
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CITY OF PETALUMA, CALIFORNIA
2007 STATEMENT OF INVESTMENT POLICY
5 POLICY
6
7 It is the policy of the City of Petaluma, CA (the "City") to invest public funds in a manner that will
8 provide the highest investment return with the maximum security while meeting the daily cash flow
9 demands of the entity and conforming to all state and local statutes governing the investment of
I o public funds.
II
12 SCOPE
13
14 This investment policy applies to all financial assets of the City. These funds are accounted for in
15 the City Comprehensive Annual Financial Report and include:
16
17 General Fund
18 Special Revenue Funds
19 Debt Service Funds
20 Capital Project Funds
21 Enterprise Funds
22 Internal Service Funds
23 Permanent and Private Purpose Trust Funds
24
25 This Policy shall also apply to funds of the Petaluma Community Development Co=ission
26 (PCDC), Petaluma Public Financing Authority, City of Petaluma Public Financing Corporation and
27 any other fund under the control of the City Treasurer.
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29 PRUDENCE
30
31 Investments shall be made with care, skill, prudence, and diligence under the circumstances then
32 prevailing, including, but not limited to, the general economic conditions and the anticipated needs
33 of the City, that a prudent person acting in a like capacity and familiarity with those matters would
34 use in the conduct of funds of a like character and with like aims, to safeguard the principal and
35 maintain the liquidity needs of the City.
36
37 OBJECTIVE
38
39 The primary objective in priority order, of the City's investment activities shall be:
40
41 1. Safety: Safety of principal is the foremost objective of the investment program. Investments
42 of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in
43 the overall portfolio.
44 2. Liquidity: The City's investment portfolio will remain sufficiently liquid to enable tl1e City
45 to meet all operating requirements which might be reasonably anticipated.
46 3. Return on Investments: The City's investments shall be designed with the objective of
4 7 attaining a rate of return throughout budgetary and economic cycles, commensurate with the
48 City's investment risk constraints and the cash flow characteristics of the portfolio.
49
50 DELEGATION OF AUTHORITY
51
52 Under the City Charter Section 24, the City Treasurer is appointed by the City Manager with the
53 approval of the City Council. The City Treasurer is also the City's Finance Director. Pursuant to the
54 Government Code, the City Council delegates the authority to invest or to reinvest funds, or to sell or
55 exchange securities so purchased, to the City Treasurer for a one-year period. The City Treasurer is
56 charged with the responsibility for carrying out the policies of the City Council and shall assume full
57 responsibility for investment transactions until the delegation of authority is revoked or expires.
58 The daily cash management, investment transactions and account reconciliation's are the primary
59 responsibilities of the City Treasurer. These activities are also carried out by other members of the
60 Finance Department under the direction of the City Treasurer. The City Treasurer shall establish
61 procedures for the operation consistent with this investment policy.
2 5
2 The City Treasurer and authorized individuals acting in accordance with written procedures and the
3 investment policy and exercising due diligence shall be relieved of personal responsibility for an
4 individual security's credit risk or market price changes, provided deviations from expectations are
5 reported in a timely fashion and appropriate action is taken to control adverse developments.
6
7 ETHICS AND CONFLICT OF INTEREST
8
9 Officers and employees involved in the investment process shall refrain from personal business
I o activities that could conflict with proper execution of the investment program or which could impair
11 their ability to make impartial decisions. Officers and employees involved in the investment process
12 shall abide by the Conflict of Interest Code, (California Govermnent Code Section 1090 et seq.) and
13 the California Political Reform Act (California Govermnent Code Section 81000 et seq.).
14
15 PERMITTED INVESTMENTS
16
17 California Govermnent Code Sections53601 et. seq. governs the investments permitted for purchase
18 by the City. Within the investments permitted by the Code, the City seeks to further restrict eligible
19 investments to the investments listed below.
20
21 Percentage limitations, where indicated, apply at the time of the purchase. Rating requirements were
22 indicated; apply at the time of purchase. In the event a security held by the City is subject to a rating
23 change that brings it below the minimum specified rating requirement, the City Treasurer shall notii'y
24 the City Council of the change. The course of action to be followed will then be decided on a case-
25 by-case basis, considering such factors as the reason for the rate drop, prognosis for recovery or
26 further rate drops, and the market price of the security. Investment maturities shall be based on
27 review of cash flow forecasts. Maturities will be scheduled so as to permit the City to meet all
28 projected obligations.
29
30 No investment shall be made in any security, other than a security underlying a repurchase or reverse
31 repurchase agreement, that at the time of the investment has a term remaining to maturity in excess
32 of five years, unless the City Council has granted express authority to make that investment no les
33 than three months prior to the investment.
34
35 ELIGIBLE iNVESTMENTS
36
37 A. State of California Local Agency Investment Fund ("LAIF"). The City may invest in
38 LAIF. A maximum of$40 million may be invested in this category.
39
40 B. Sonoma Countv Investment Pool. The City may invest in the Sonoma County Investment
41 Pool. A maximum of$10 million may be invested in this category.
42
43 C. California Asset Management Trust. The City may invest in the shares in the California
44 Asset Management Trust, so long as the portfolio is rated among the top two rating
45 categories by one of the nationally recognized rating agencies. A maximum of $40 million
46 may be invested in this category.
47
48 D. Certificates of Deposit. FDIC insured or fully collateralized time certificates of deposit in
49 financial institutions located in California. Collateralized certificates of deposit shall be
50 handled in accordance with California Govermnent Code section 53561. The City, at its
51 discretion, may waive the collateralization requirements for any portion of the deposit that is
52 covered by federal deposit insurance. The City may also invest in fully insured certificates of
53 deposit utilizing a placement service, as provided under California Govermnent Code section
54 53601.8. Purchases of certificates of deposit are restricted to those issuing institutions that
55 have been in business at least five years. The maximum term for certificates of deposit shall
56 be one year. Investments in certificates of deposit are further limited to 20% of surplus
57 funds. The amount invested in certificates of deposit in combination with negotiable
58 certificates of deposit shall not exceed 30 percent of surplus funds.
59
60 E. Negotiable Certificates of Deposit. Negotiable certificates of deposit issued by a nationally
61 or state chartered bank or a state or federal savings and loan association or by a state-licensed
3
branch of a foreign bank; provided that the senior debt obligations of the issuing institution
2 are rated "AA" or better by a nationally recognized statistical ratings organization (NRSRO).
3 Investments in negotiable certificates of deposit are limited to 20% of the portfolio. The
4 amount invested in negotiable certificates of deposit in combination with certificates of
5 deposit shall not exceed 30 percent of surplus funds.
6
7 F. Banker's Acceptances. Banker's acceptances issued by domestic or foreign banks, which
8 are eligible for purchase by the Federal Reserve System. Purchases of banker's acceptances
9 may not exceed 180 days maturity. Eligible banker's acceptances are restricted to issuing
10 financial institutions with short-term paper rated in the highest category by one or more
II nationally recognized rating services. Investments in banker's acceptances are further limited
12 to 40% of the portfolio with no more than 30% of surplus invested in the banker's
13 acceptances of any one commercial bank.
14
15 G. U.S. Government Issues. United States Treasury notes, bonds, bills, or certificates of
16 indebtedness, or those for which the faith and credit of the United States are pledged for the
17 payment of principal and interest.
18
19 H. Federal Agency Securities. Federal agency or United States government-sponsored
20 enterprise obligations, participations, or other instruments, including those issued by or fully
21 guaranteed as to principal and interest by federal agencies or United States government-
22 sponsored enterprises.
23
24 I. Repurchase Agreements. Repurchase agreements are to be used solely as short-term
25 investments not to exceed 30 days. The City may enter into repurchase agreements with
26 primary government securities dealers rated "A" or better by two nationally recognized rating
27 services. Counterparties should have (i.) a short-term credit rating of at least A-1/P-1; (ii.)
28 minimum assets and capital size of $25 billion in assets and $350 million in capital; (iii.) five
29 years of acceptable audited financial results; and (iv.) a strong reputation among market
30 participants.
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32 The following collateral restrictions will be observed:
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34 Only U.S. Treasury securities or Federal Agency secur1t1es will be acceptable
35 collateral. All securities underlying repurchase agreements must be delivered to the
36 City's custodian bank versus payment or be handled under a properly executed tri-
37 party repurchase agreement. The total market value of all collateral for each
3 8 repurchase agreement must equal or exceed 102 percent of the total dollar value of the
39 money invested by the City for the term of the investment. For any repurchase
40 agreement with a term of more than one day, the value of the underlying securities
41 ri:mst be reviewed on an on-going basis according to market conditions. Market value
42 must be calculated each time there is a substitution of collateral.
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44 The City or its trustee shall have perfected first security interest under the Uniform
45 Commercial Code in all securities subject to repurchase agreement. The City shall
46 have properly executed a Professional Services Agreement with each counter party
4 7 with which it enters into repurchase agreements.
48
49 J. Commercial Paper. Commercial paper of "prime" quality of the highest ranking or of the
50 highest letter and number rating as provide for by a nationally recognized statistical-rating
51 organization (NRSRO). The entity that, issues commercial paper shall meet all of the
52 following conditions in one of the following:
53
54 a. The entity meets the following criteria:
55 i. Is organized and operating within the United States as a general corporation.
56 n. Have total assets in excess of $500 million.
57 m. Has debt other than commercial paper, if any, that is rated "A" or higher by a
58 nationally recognized statistical-rating organization (NRSRO).
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(or)
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b. The entity meets the following criteria:
i. Is organized within the United States as a special purpose corporation, trust, or
limited liability company.
n. Has program wide credit enhancements including, but not limited to, over
collateralization, letters of credit, or surety bond.
m. C) Has commercial paper that is rated "A-1" or higher, or the equivalent, by a
nationally recognized statistical-rating organization (NRSRO).
Investments in commercial paper are limited to a maximum of 25% of the portfolio.
Purchases shall not exceed 10 percent of the outstanding paper of the issuing corporation.
The maximum investment maturity is restricted to 270 days.
13 K. Money Market Funds. Shares of beneficial interest issued by diversified management
14 companies that are money market funds registered with the Securities and Exchange
15 Commission (SEC) under the Investment Company Act of 1940 (15 U.S.C., Sec. 80a-l, et
16 seq.).
17
18 The City may invest in shares of beneficial interest issued by company shall have met either
19 of the following criteria:
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21 a. Attained the highest ranking or the highest letter and numerical rating provided by not
22 less than two nationally recognized rating services.
(or)
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b. Retained an investment adviser registered or exempt from registration with the SEC
with not less than five years experience in managing money market mutual funds with
assets under management in excess of five hundred million dollars ($500,000,000).
30 The purchase price of shares of beneficial interest purchased pursuant to this subdivision
31 shall not include any co=ission that the companies may charge. Investments in Money
32 Market Funds are further limited to 20% of the portfolio.
33
34 L. Medium Term Notes. defined as all corporate and depository institution debt securities with
35 a maximum remaining maturity of five years or less, issued by corporations organized and
36 operating within the United States or by depository institutions licensed by the United States
37 or any state and operating within the United States. Notes eligible for investment under this
38 subdivision shall be rated "AA'' or better by a nationally recognized statistical rating
39 organization (NRSRO). Purchases of medium-term notes shall not include other instruments
40 authorized by this section and may not exceed 30 percent of the agency's money that may be
41 invested pursuant to this section.
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43
44 ELTGIBLE INVESTMENTS FOR BOND PROCEEDS
45
46 Bond Proceeds shall be invested in securities permitted by the applicable bond documents. If the
47 bond documents are silent as to the permitted investments, bond proceeds will be invested in
48 securities permitted by this Policy.
49
50 With respect to maximum maturities, the Policy authorizes investing bond reserve fund proceeds
51 beyond the five years if prudent in the opinion of the City Treasurer.
52
53 INELIGIBLE INVESTMENTS
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55 As provided in California Government Code section 53601.6, the City shall not invest any funds in
56 inverse floaters, range notes, mortgage derived interest -only strips or in any security that could result
57 in zero interest accrual if held to maturity.
58
59 The purchase of any security not listed above, but permitted by the California Government Code, is
60 prohibited unless the City Council approves the investment either specifically or as a part of an
61 investment program approved by the Board.
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2 BROKERS
3 To provide for the optimum yield in the City's portfolio, the City's procedures shall be designed to
4 encourage competitive bidding on transactions from an approved list of broker/dealers.
5
6 The City Treasurer, or the City's investment advisor, shall maintain a list of authorized
7 broker/dealers and financial institutions that are approved for investment purposes. This list will be
8 developed after a comprehensive credit and capitalization analysis indicates the firm is adequately
9 financed to conduct business with public entities. It shall be the policy of the City to purchase
1 o securities only from those authorized institutions or firms.
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12 LOCAL INVESTMENT POOL POLICIES AND REPORTS
13
14 To the extent there are investments in the State, Sonoma County, or CAMP investment pools, the
15 City Treasurer shall review and maintain current copies of the adopted investment policies of the
16 State, Sonoma County, and CAMP. The policies shall be reviewed for concurrence with the
17 investment policy of the City.
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19 SAFEKEEPING AND CUSTODY
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21 All security transactions entered into by the City of Petaluma, CA shall be conducted on a delivery-
22 versus payment basis. A third party custodian designated by the City Treasurer and evidenced by
23 safekeeping receipts will hold securities.
24
25 The only exceptions to the foregoing are Local Agency Investment Pools, Certificates of Deposit,
26 and money market funds since the purchased securities are not deliverable. In all cases, purchased
27 securities shall be held in the City's name.
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29 INTERNAL CONTROL
30
31 The City Treasurer shall establish an annual process of independent review by an external auditor.
32 This review will provide internal control by assuring compliance with policies and procedures.
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34 PERFORMANCESTANDARDS
35
36 The investment portfolio shall be designed with the objective of obtaining a rate of return throughout
37 budgetary and economic cycles, co=ensurate with the investment risk constraints and the cash
38 flow needs.
39
40 The City will measure the portfolio's performance against a market benchmark that is commensurate
41 with the City's investment risk constraints and the cash flow characteristics of the portfolio.
42
43 REPORTING
44
45 The City Treasurer shall provide a monthly investment report to the City Council, which provides a
46 clear picture of the status of the current investment portfolio, including transactions. This report will
4 7 be formally submitted to the City Council each quarter at a public meeting.
48
49 Schedules in the quarterly Treasurer's Report will include the following:
50
51 • A list of individual securities held at the end of the reporting period by authorized investment
52 category
53 • Average life and final maturity of all investments
54 • Earnings rate on an annualized basis
55 • Market value, par value and amortized book value
56 • Percentage of the portfolio by investment category
57
58 The quarterly report shall state compliance of the portfolio to the investment policy, or manner in
59 which the portfolio is not in compliance. The quarterly report shall also include a statement denoting
60 the ability of the City to meet its expenditure requirements for the next six months, or provide an
61 explanation as to why sufficient money shall, or may, not be available.
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2 POLICY REVIEW
3
4 The investment policy shall be adopted by resolution of the City Council on, at minimum, an annual
5 basis. The investment policy shall be reviewed at least annually to ensure its consistency with the
6 overall objectives of preservation of principal, liquidity and yield, and its relevance to current law
7 and financial and economic trends. Any amendments to the policy shall be forwarded to the City
8 Council for approval.
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CITY OF PETALUMA
2006 STATEMENT OF INVESTMENT POLICY
GLOSSARY OF TYPES OF INVESTMENTS
AVAILABLE TO LOCAL GOVERNMENTS
8 STATE INVESTMENT POOL (LAIF)
9
10 The Local Agency Investment Fund (LAIF), a voluntary program created by statute, began in 1977 as
II an investment alternative for California's local governments and special districts and continues today
12 under the State of California Treasurer's office. The enabling legislation for the LAIF is Section
13 16429.1,2,3 of the California Government Code.
14 This program offers participating agencies the opportunity to participate in a major portfolio which
15 daily invests hundreds of millions of dollars, using the investment expertise of the Treasurer's Office
16 Investment staff at no additional cost to the taxpayer. This in-house management team is comprised
17 of civil servants who have individually worked for the State Treasurer's Office for over 20 years.
18 The LAIF is part of the Pooled Money Investment Account (PMIA). The PMIA began in 1953 and
19 has oversight provided by the Pooled Money Investment Board (PMIB) and an in-house Investment
20 Committee. The PMIB Board members are the State Treasurer, Director of Finance, and State
21 Controller.
22 The LAIF has oversight by the Local Investment Advisory Board (LIAB). The Board consists of five
23 members as designated by Statute. The Chairman is the State Treasurer, or his designated
24 representative. Two members qualified by training and experience in the field of investment or
25 finance, and the State Treasurer appoints two members who are Treasurers, finance or fiscal officers
26 or business managers employed by any County, City or local district or Municipal Corporation of
27 this state. The term of each appointment is two years or at the pleasure of the appointing authority.
28 All securities are purchased under the authority of the Government Code Section 16430 and 16480.4.
29 The State Treasurer's Office takes delivery of all securities purchased on a delivery versus payment
30 basis using a third party custodian. All investments are purchased at market, and market valuation is
31 conducted monthly.
32 Additionally, the PMIA has Policies, Goals, and Objectives for the portfolio to make certain that our
33 goals of Safety, Liquidity and Yield are not jeopardized and that prudent management prevails.
34 These policies are formulated by investment staff and reviewed by both the PMIB and the LIAB on
35 an annual basis.
36 The Bureau of State Audits on an annual basis audits the State Treasurer's Office. The resulting
3 7 opinion is included in the subsequent PMIB monthly report following its publication. The Bureau of
38 State Audits also has a continuing audit process throughout the year. The State Controller's Office as
39 well as an in-house audit process involving three separate divisions audit all investment and LAIF
40 claims on a daily basis.
41 It has been determined that the State of California cannot declare bankruptcy under Federal
42 regulations, thereby allowing the Government Code Section 16429.3 to stand. This Section states
43 "money placed with the State Treasurer for deposit in the LAIF shall not be subject to impoundment
44 or seizure by any State official or State agency."
45 The LAIF has grown from 293 participants and $468 million in 1977 to 3,039 participants and $19.9
46 billion in 2002.
47
8 II
The Local Agency Investment Fund (LAIF) was created by statute in 1977 and provides an
2 investment alternative for local agencies. The program offers participating agencies to participate in
3 a major portfolio, which invests hundreds of millions of dollars a day. The deposits and withdrawals
4 are done by electronic transfers of funds (wire transfers) and deposits earn interest on a daily basis.
5
6 There is a limitation of $40 million per legal entity within an agency. There is also a maximum of
7 fifteen transactions, deposits or withdrawals per month.
8
9 SONOMA COUNTY INVESTMENT POOL
10
II The Sonoma County Treasurer maintains an investment pool in which the County, Schools, Special
12 Districts and Cities can participate. This investment pool operates in the same manner as the State
13 pool. The County Treasurer is subject to the same State Government Code regarding investments as
14 the City. As with the State investment fund, City funds can be withdrawn at any time and are
15 protected by State Law from seizure or impoundment by any County Officer. The City does not
16 participate in this pool but retains the option to do so.
17
18 CALIFORNIA ASSET MANAGEMENT PROGRAM (CAMP)
19
20 CAMP provides California public agencies, together with any bond trustee acting on behalf of such
21 public agency, assistance with the investment of and accounting for bond proceeds and surplus
22 funds. For bond proceeds, the objective of CAMP is to invest and account of such proceeds in
23 compliance with arbitrage management and rebate requirements of the Internal Revenue Service.
24 The program includes the California Asset Management Trust, a California co=on law trust
25 organized in 1989. The Trust currently offers a professionally managed money market investment
26 portfolio, the Cash Reserve Portfolio, to provide public agencies with a convenient method of
27 pooling funds for temporary investment pending their expenditure. The Trust also provides record
28 keeping, custodial and arbitrage rebate calculation services for bond proceeds. As part of the
29 program, public agencies may also establish individual, professionally managed investment accounts.
30
31 The Pool seeks to attain as high a level of current income as is consistent with the preservation of
32 principal. The Pool purchases only investments of the type in which public agencies are permitted
33 by statute to invest surplus funds and proceeds of their own bonds.
34
35 CERTIFICATES OF DEPOSITS {CD)
36
37 Certificates of Deposits, sometimes known as "Jumbo Accounts" or "Fixed CD's" are savings
38 accounts with Banks or Savings and Loans. These accounts are for a specific amount, have a set
39 interest rate, and set maturity date. There is a substantial interest penalty if the CD is withdrawn
40 prior to the maturity date.
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The State law requires Public Fund CD's to be collateralized by the financial institution at II 0% witl1
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)
This investment is similar to the Fixed CO's above. However, the NCD can be sold through a broker
on a "secondary market" prior to the maturity date. Normally, NCD's are issued in $500,000 and
$1,000,000 amounts. The State Code limits NCO's to not more than 30% of the local agency's
portfolio and to a five-year maximum term. The security is the credit worthiness of the issuer.
These deposits are uninsured and uncollateralized promissory notes.
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BANKER'S ACCEPTANCES (BA)
2
3 A Banker's Acceptance is a time draft of invested funds, which has been drawn on and accepted for
4 repayment by a bank. This financial instrument is generally used for short term (30 and 180 days)
5 financing of export, import, or storage of goods. By accepting the draft (investment of City funds),
6 the bank is liable for the payment at maturity. This bank liability makes the Banker's Acceptance a
7 marketable investment. The State Code limits BA's to not more than 180 days to maturity and 40%
8 of the local agency's portfolio. In addition, not more than 30% of the local agency's portfolio may be
9 placed in any one bank.
10
II US TREASURY BILLS
12
13 Commonly referred toasT-Bills, these are short-term marketable securities sold as obligations of the
14 US Government. They are offered in three month, six month, nine month and one-year maturities.
15 T-Bills do not accrue interest but are sold at a discount, and pay the face value at maturity.
16
17 US TREASURY NOTES
18
19 These are marketable, interest-bearing securities sold as obligations of the US Government with
20 original maturities of one to ten years. Interest is paid semi-annually.
21
22 US TREASURY BONDS
23
24 These are the same as US Treasury Notes except they have original maturities of ten years or longer.
25
26 FEDERAL AGENCY ISSUES
27
28 Many Federal Government Agencies are authorized to issue short term and long term obligations that
29 are used to finance various programs such as home loans, business loans, farm loans, etc. These
30 Agencies were created by the Federal Government in the 1930's and have since become independent
31 quasi-public agencies. The security for their issues is the guarantee of the Agency to pay. The
32 Federal Government has only an implied liability to the extent that the Agency has an open credit
33 line to borrow from the U.S. Treasury. It is widely accepted that Federal Agency issues are almost as
34 secure as U.S. Government notes.
35
36 There is an active secondary market available to sell these issues prior to maturity. The issues are
37 fairly liquid depending on the prevailing market interest rates at the time of sale.
38 Some of the more common agency notes are issued by the Federal National Mortgage Association
39 (Fannie Mae), Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (Freddie Mac),
40 and the Federal Farm Credit Banks.
41
42 REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS (REPOS)
43
44 A Repurchase Agreement is a short-term investment agreement to loan City funds for a fixed period
45 in return for a fixed interest rate and secured collateral, such as U.S. Treasuries or Agency Notes.
46 This type of investment is usually done for overnight or very short term (7 days) investment of funds
47 left in the general operating checking account. Reverse Repurchase agreements is a short-term
48 investment, which is used to take advantage of market interest rate changes and increase the size of
49 the portfolio. State law was amended in 1996 to limit the use of both repurchase and reverse
50 repurchase agreements.
51
52 COMMERCIAL PAPER (CP)
53
54 Commercial Paper is unsecured promissory notes of industrial corporations, utilities and bank
55 holding companies. The notes are in bearer form in amounts starting at $100,000. State law limits
56 the City to investments in United States corporations having assets in excess of five hundred million
57 dollars with an "A" or higher rating. State Law also permits cities to invest in Asset Back
58 Commercial Paper (ABCP) from issuers organized within the United States as a special purpose
59 corporation, trust or limited liability company. ABCP issuers must have program wide credit
60 enhancements including, but not limited to, over collateralization, letters of credit, or surety bond.
61 Cities may not invest more than 25% of the portfolio in commercial paper nor purchase more than 10
10 13
percent of the outstanding commercial paper of any single issuer. The maximum maturity of the
2 commercial paper may not exceed a term of 270 days.
3
4 MEDIUM TERM NOTES (MTN)
5
6 Debt securities issued by a corporation or depository institution with a maturity ranging for nine
7 months to five years. The term "medium-term note" refers to the time it takes for an obligation to
8 mature and includes other corporate securities originally issued for maturities longer than five years,
9 but which have now fallen within the five year maturity range. MTNs issued by banks are also
1 o called bank notes.
11
12 MUTUAL FUNDS
13
14 An investment company that pools money and can invest in a variety of securities, including fixed-
IS income securities and money market instruments, cities may invest in Mutual Funds or Money
16 Market funds that receive the highest ranking or the highest letter and numerical rating by two of the
17 three largest nationally recognized rating services. The Mutual Funds must abide by the same
18 investment restrictions and regulations that apply to public agencies in California. Money Market
19 Funds must follow regulations specified the Security and Exchange Connission under the
20 Investment Company Act of 1940. Mutual Funds have floating Net Asset Values (NAV), which
21 means the amount received at redemption may be more or less than the amount originally invested.
22 Money Market Funds strive to maintain a constant NA V.
23
24 GUARANTEED INVESTMENT CONTRACT (GIC)
25
26 This is an agreement acknowledging receipt of fuods for deposit, specifYing terms for withdrawal
27 and guaranteeing a rate of interest to be paid. The investment follows all state laws for the
28 investment of public fuods. GIC' s are only permitted for bond proceeds
II 14-'