HomeMy WebLinkAboutStaff Report 4.D 06/18/2012 jg5
DATE: June 18 2012
TO: Honorable Mayor and Members of the City Council through City Manager
FROM: William Mushallo, Finance Director
SUBJECT: Resolution to Approve.the City of Petaluma Investment Policy and Delegate
Investment Authority to the City Treasurer For Fiscal Years 2011-2012 and 2012-
2013
RECOMMENDATION
It is recommended.that the City Council adopt the attached resolution approving the City of
Petaluma Investment Policy and delegating investment authority to the City Treasurer for Fiscal
Years 2011-2012 and 2012-2013.
BACKGROUND
In compliance with.State law, the City Treasurer may annually render to the City Council a
Statement of Investment Policy, which the City Council shall consider at a public meeting. The
investments set forth in this policy are pursuant to Sections 53601 and 53635 of the California
Government Code.
DISCUSSION
A good investment policy provides the framework for the cash, treasury and investment
management of the City. The City of Petaluma requires that investments of City funds be
compliant with its Investment Policy. This policy, brought to the Council for review and
consideration, includes the following changes:
• Increases the maximum maturity of investments to five years as allowed by California
Government Code
• Allows investment in negotiable CDs and commercial paper
• Provides recommended guidelines for socially responsible investing
• Affirms that the City's registered investment advisory firm may continue to conduct
investment transactions on the City's behalf using their own list of approved broker/dealers
and financial institutions
Agenda Review:
City Attorney Finance Director _City Manager_
The above mentioned allowed investments were included in past investment policies. The
current policy in place was changed dramatically due to the philosophy in place at that time,
along with concerns regarding cash flow. Cash flow concerns did not materialize and remain a
non-issue. The above allowed investments are included in approximately 85% of California
municipalities and are also included in Santa Rosa's and Novato's current investment policies.
The changes will allow the City to optimize_the return on funds'not immediately needed for cash
flow purposes.
We are also adding verbiage related to socially responsible investing to the policy. Investments
will be encouraged in entities that support community well-being through safe and
environmentally sound practices and fair labor practices. Investments are also encouraged in
entities that support quality of,rights regardless of sex, race, age, disability or sexual orientation.
Investments will be discouraged in. entities that manufacture tobacco products. In addition,
investments are encouraged in entities that offer banking products to serve all members of the
local community, and investments are discouraged in entities that have had past criminal or
regulatory violations.
The management of the City's investment portfolio requires daily analysis of the City's cash
flow needs, which include not only day-to-day operating requirements, but also the funding of
large capital projects. This requires the City to keep substantial funds in very liquid investments
such as Local Agency Investment. Fund (LAIF) and California Asset Management Program
(CAMP). These are low risk investments and do not earn a substantial amount of interest. These
funds are managed internally by the City Treasurer.
The primary objectives of this investment policy are, to comply with state laws, safeguard the
principal of funds, meet daily cash flow requirements and achieve a reasonable rate of return.
The policy has been updated to reflect current market conditions. The maximum maturity of
investments has been increased to five years to take advantage of a steep yield curve, whereby,
longer-maturity investments pay substantially more than their shorter-maturity counterparts.
Negotiable CDs and commercial paper have been added to the list of allowable investments.
These changes were made after considering official advice of PFM Asset Management, the
City's investment advisor. The corporate sector was the best performing sector in the bond
market for the past two years, but missed by the City because of the past restrictions.
The investment= policy has for some time provided that the City Council delegate investment
authority to the City Treasurer for a one year period. The proposed resolution adds delegation
language to conform to the policy.
FINANCIAL IMPACTS
The above mentioned policy changes will allow the City to optimize investment return on funds.
While the financial impact is not immediately known, interest earned should definitely increase
vs. leaving the policy'in the current form.
ATTACHMENTS
I. Resolution Approving the City of Petaluma Investment Policy and Delegating Investment
Authority-to the City Treasurer For Fiscal Year 2011-2012 and 2012-2013
2. City of Petaluma Investment Policy For Fiscal'Years 2011-2012 and 2012-13
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ATTACHMENT I
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PETALUMA
APPROVING THE CITY OF PETALUMA INVESTMENT POLICY AND
DELEGATING INVESTMENT AUTHORITY TO THE CITY TREASURER FOR
FISCAL YEARS 2011-2012 AND 2012-2013
WHEREAS, the City Treasurer has rendered to the'CityCouncil a Statement of
Investment Policy; and
WHEREAS, the City Treasurer has the responsibility to.invest the pooled idle cash from
all City funds pursuant to California Government Code Sections 53601 and 53635; 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 City of
Petaluma Investment Policy and delegates investment authority to the City Treasurer for Fiscal
Years 2011-2012 and 2012'-2013 as shown in Exhibit A attached.
ATTACHMENT 2
EXHIBIT A TO THE RESOLUTION
CITY OF PETALUMA, CALIFORNIA
STATEMENT OF INVESTMENT POLICY
For Fiscal Years 2011-2012 and 2012-2013
William Mushallo
Finance Director/City Treasurer
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CITY OF,PETALUMA, CALIFORNIA
STATEMENT OF INVESTMENT POLICY FOR FISCAL YEARS 2011-
2012 AND 2012-2013
POLICY
It is the policy of the City.of Petaluma, CA (the `City") to manage public funds in a=manner
consistent with the following objectives: comply with all laws of the State of California
pertaining to the investment of public funds; safeguard the principal of funds under its control,
meet the daily cash flow requirements and to achieve a reasonable rate of return with the
maximum security.
SCOPE
This investment policy applies to all financial assets of the City. These funds are accounted 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), City acting in its capacity as Successor Agency, 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 circumstancesithen
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.
The City Treasurer and authorized individuals acting in accordance with written procedures and
the investment;policy and exercising due diligence shall be relieved of personal responsibility for
an individual security's credit risk or market price changes, provided deviations from
expectations are reported in a timely fashion and appropriate action is taken to control adverse
developments.
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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, commensurate 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 funds, 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. No person may engage in an investment;transaction except as provided under
the limits of this Investment Policy.
The daily cash management, investment transactions and account reconciliations are the primary
responsibilities of the City Treasurer. These activities are also carried out by other members of
the Finance Department under the direction of the City Treasurer. The City Treasurer shall
establish procedures for the operation consistent with this investment policy.
ETHICS AND CONFLICT OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business
activities that could conflict with proper execution of the investment program or which could
impair their ability to make impartial decisions. Officers and employees involved in the
investment process shall abide by the Conflict of Interest Code, (California Government Code
Section 1090 et seq.) and the California Political Reform Act (California Government Code
Section 81000 et seq.).
SOCIALLY RESPONSIBLE INVESTING
Investments are encouraged in entities that support community well-being through safe and
environmentally sound practices and fair labor practices. Investments are encouraged in entities
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that support quality of rights regardless,of sex,race, age, disability or sexual orientation.
Investments are discouraged in entities that manufacture tobacco products. In addition,
investments are encouraged in entities that offer banking products to serve all members of the
local community, and investments are discouraged in entities that have had past criminal or
regulatory violations.
PERMITTED INVESTMENTS
California Government Code Sections 53601 et. seq., and 53635 govern the investments
permitted for purchase by the City. Within the investments permitted by the Code, the City seeks
to further restrict eligible investments to the investments listed below.
Percentage limitations, where indicated, apply at the time of the purchase. Rating requirements
where indicated apply at the time of purchase. In the event a security held by the City is subject
to a rating change that brings it below the minimum specified rating requirement, the City
Treasurer shall notify the City Council of the change. The course of action to be followed will
then be decided on a case-by-case basis, considering such factors as the reason for the rate drop,
prognosis for recovery or further rate drops, and the market price of the security. Investment
maturities shall be based on review of,cash flow forecasts. Maturities will be scheduled so as to
permit the City to meet all projected obligations.
No investment shall be made in any security, other than a security underlying a repurchase or
reverse repurchase agreement, that at the time of the investment has a term remaining to maturity
in excess of five years (except,for bond proceeds), unless the City Council has granted express
authority to make that investment no less than three months prior to the investment.
ELIGIBLE INVESTMENTS
A. State of California Local Agency Investment Fund (LAIF). The City may invest in
LAIF up to statutory limits.
B. Sonoma County Investment Pool. The City may invest in the Sonoma County
Investment Pool. A maximum of$10 million may be invested in this category.
C. California Asset Management Program Trust (CAMP). The City may invest in the
shares in the California Asset Management Trust, so long as the portfolio is rated among
the top two rating categories by one of the nationally recognized rating agencies. A
maximum of$50 million may be invested in this category.
D. Certificates of Deposit. FDIC insured or fully collateralized time certificates of deposit
in financial institutions located in the United States including a Placement Service such
as Certificate of Deposit Account Registry Service (CDARS). Collateralized certificates
of deposit shall be handled in accordance with California Government Code section
53530 et seq. The City, at its discretion, may waive the collateralization requirements for
any portion of the deposit that is covered by federal deposit insurance. As noted above
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the City may also invest in fully insured certificates of deposit utilizing a placement
service such as CDARS, as provided under California Government Code section
53601.8. The maximum term for certificates:of deposit shall be two years. Investments
in certificates of deposit are further limited to 30% of surplus funds.
E. Banker's Acceptances: 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.
F. 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.
G. Federal Agency 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.
I-I. Repurchase 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 dealers of the Federal Reserve Bank of New York or with a nationally or state-
chartered bank that has or has had a significant banking relationship with the City as
definedin the California Government Code 53601 (j)(4)(A).
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
tni-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 timethere 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.
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1. Money. Market Funds. Shares of beneficial interest issued by diversified management
companies that are money market funds registered, with the Securities and Exchange
Commission (SEC) under the Investment Company,Act of 1940 (15 U.S.C., Sec: 80a-1,
et seq.).
The City may invest in shares of beneficial interest issued by a company which shall have
met either of the following criteria:
a. Attained the highest ranking or the highest letter and numerical rating provided by
not less than two nationally recognized rating services.
(or)
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).
The purchase price of shares of beneficial interest purchased pursuant to this subdivision
shall not include any commission that the companies may charge. Investments in Money
Market Funds are further limited to 20% of the portfolio.
J. Medium-Term Notes. Medium-term notes are defined,as all corporate and depository
institution debt securities with a maturity of not more than five years or less, issued by
corporations organized and operating within the United States or by depository
institutions licensed by the United States or any state, and operating within the United
States. Notes eligible for investment under this subdivision shall be rated "A" or better by
an NRSRO. Purchases of medium-term notes shall not exceed 20 percent of the City's
funds, and no more than 10% of the City's investment portfolio may be invested in the
securities of any one issuer.
K. Negotiable Certificates of Deposit (NCDs) issued by a nationally or state chartered bank
or a state or federal savings and loan association orbya state-licensed branch of a foreign
bank; provided that the senior debt obligations of the issuing institution are rated in one
of the two highest rating categories (without regard to any gradations within such
categories by numerical qualifier or otherwise) by a NRSRO. Nb more than 20% of
portfolio may be invested inNCDs.
L. Commercial Paper rated in the highest letter and number rating category by one or more
NRSROs. Commercial paper rated below the highest letter and number rating by one or
more NRSROs is not eligible for purchase for the City's portfolio. The corporation that
issues the commercial paper shall meet all of the following conditions in either paragraph
(1) or paragraph (2)
(I) The entity meets the following criteria: (a is organized and operating
within the United States, as(a) general corporation, (b) has total assets in excess of
five hundred million dollars ($500,000,000), and (c) has debt, other than
commercial paper, if any, that is rated in the highest rating category (without regard
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to any gradations within such categories by numerical qualifier or otherwise) by a
NRSRO.
(2) The entity meeis the following,criteria: (a) is organized within the United
States as a special purpose corporation, trust or limited liability company, (b) has
program-wide credit enhancements including, but not limited to over
collateralization, letters of credit, or surety bond. and (c) has commercial paper that
is rated "A-1" or higher, or the equivalent by a NRSRO.
Eligible commercial.paper shall have a maximum maturity of 270 days or less.
No more than 15% of City's portfolio may be invested in eligible commercial paper. No
more than 10% of the outstanding commercial paper of any single corporate issuer may
be purchased by the local agency.
ELIGIBLE INVESTMENTS.FOR BOND PROCEEDS
Bond Proceeds shall be invested in securities permitted by the applicable bond documents. If
the bond documents are silent as to the permitted investments, bond proceeds will be invested
in securities permitted by this Policy.
With respect to maximum maturities, the Policy authorizes investing bond reserve fund proceeds
beyond the five years if prudent in the opinion of the City Treasurer.
INELIGIBLE INVESTMENTS
As provided in California Government Code section 53601.6.and this policy, the City shall not
invest any funds in:
• Inverse Floaters
• Range Notes
• Mortgage Derived Interest-Only Strips
• Any security that could result in zero interest accrual if to maturity.
The purchase-of any security not listed above, but permitted by the California Government Code,
is prohibited unless the City Council approves the investment either specifically or as a part of an
investment program approved by the Board. Exclusion of these investment vehicles is consistent
with the City's overall objectives of achieving reasonable returns on public funds while
minimizing risk and capital losses. Although the potential exists for greater yields with these
vehicles, there is the potential level of risk that can exceed their benefits.
BROKERS
To provide for the optimum yield in the City's portfolio, the City's procedures shall be designed
to encourage competitive bidding on transactions from an approved list of broker/dealers.
The City Treasurer, or the City's investment advisor, shall maintain a list of authorized
broker/dealers and financial institutions that are approved for investment purposes. This list will
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be developed after a comprehensive credit and capitalization analysis indicates the firm is
adequately financed to conduct business with public entities. It shall be the policy of the City to
purchase securities only from those authorized institutions,or+firn s.
If the City has engaged the services of a registered investment advisory tirm, the firm is
authorized to conduct investment transactions on the City's behalf with their own list of
approved broker/dealers and financial institutions. The>investment advisor's approved listmust
be made available to the City .
SAFEKEEPING AND CUSTODY
All security transactions entered into by the City of Petaluma, CA shall be conducted on a
delivery-versus-payment (DVP) basis. This procedure ensures that securities are deposited with
the third-party custodian.prior to the release of funds. 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 the Statement of
Investment Policy and procedures.
PERFORMANCE STANDARD'
TANDARDS
The investment portfolio shall be designed with the objective of obtaining a reasonable 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.
REPORTING
The City Treasurer shall provide a quarterly 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 after each,quarter at a public meeting.
Schedules in the quarterly Treasurer's Report will include the following:
• Listing of individual securities held at the end of the reporting period.
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• Realized and unrealized'gains or,losses resulting from,appreeiation or depreciation by listing
the cost and market value of,securities over one-year duration'that°are not intended to be held
until maturity (in accordance with Governmental Accounting Standards Board(GASB)
requirements).
• Average weighted yield to maturity of portfolio on investments as compared to applicable
benchmarks.
• Listing of investment by maturity date.
• Percentage of the total portfolio which each type of investment represents.
The quarterly report shall state compliance of the portfolio to the investment policy, or manner in
which the portfolio is not in compliance. The quarterly report shall also include a statement
certifying the ability of the City to meet its expenditure requirements for the next six months.
POLICY REVIEW
The 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. The investment policy shall be adopted by resolution of the
City Council on an annual basis. Any amendments to the policy shall be forwarded to the City
Council for approval.
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CITY OF PETALUMA_
STATEMENT OF INVESTMENT POLICY'F.OR FISCAL YEARS
2011-12 AND 201243
GLOSSARY OF TYPES OF INVESTMENTS
AVAILABLE TO LOCAL GOVERNMENTS
STATE INVESTMENT POOL (LAIF)
The Local Agency Investment Fund(LAIF), a voluntary program created by statute, began in
1977 as an investment alternative for California's local governments and special districts and
continues today under the State of California Treasurer's office. The enabling legislation for the
LAIF is Section 16429.1,2,3 of the California Government Code..
This program offers participating agencies the opportunity to participate in a major portfolio
which daily invests hundreds of millions of dollars, using the investment expertise of the
Treasurer's Office Investment staff at no additional cost to the taxpayer. This in-house
management team is comprised of civil servants who have individually worked for the State
Treasurer's Office for over 20 years:
The LAIF is part of the Pooled Money Investment Account (PMIA). The PMIA began in 1953
and has oversight.provided by the Pooled Money Investment Board (PMIB) and an in-house
Investment Committee. The PMIB Board members are the State Treasurer, Director of Finance,
and State Controller.
The LAIF has oversight by the Local Investment Advisory Board (LIAB). The Board consists of
five members as designated by Statute. The Chairman is the State:Treasurer, or his designated
representative. Two members qualifi'ed.by training and experience'-in the field of investment or
finance, and'the,State Treasurer appoints two members who are Treasurers, finance or fiscal
officers or business managers employed by any County,City or local district or Municipal
Corporation of this state. The term of each appointment is two years or at the pleasure of the
appointing authority.
All securities are purchased,under the authority of the Government Code Section 16430 and
16480.4. The State Treasurer's Office takes delivery of all securities purchased on a delivery
versus payment basis using a third party custodian. All investments are purchased at market, and
market valuation is conducted monthly.
Additionally, The PMIA has Policies, Goals, and Objectives for the portfolio to make certain that
our goals of Safety, Liquidity and.Yield are not jeopardized'and that prudent management
prevails.Thesepolicies are cfonnulated by investment staff and reviewed by both the PMIB and
the LIAB on an annual basis.
The Bureau of State Audits on an annual basis audits:the State Treasurer's Office. The resulting
opinion is included in the subsequent PMIB monthly report following its publication. The Bureau
• of State Audits also has a continuing.;audit process throughout the year. The State Controller's
Office as well as an in-house audit process involving three separate divisions audit all investment
and LAIF claims on a daily basis.
There is a limitation of$50 million per legal entity within an agency. There is also a maximum
of fifteen transactions, deposits or withdrawals per month.
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SONOMA COUNTY INVESTNIENT 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 1.10%
with US Goverriinent 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, ($250,000 through December 2012)
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, ($250,000 through December 2012), the col lateralization requirements are not waived.
it ��
A Placement Service such as Certificate of Deposit-Account Registry Service (CDARS) is a
combination of Certifieates of Deposits managed by a single bank that can access multi-million
dollars in FDIC coverage on CD investments made through a single bank relationship. The
single bank relationship means avoiding>tfaeking:collateral on"an-ongoing-basis, requiring surety
bonds, or working directly with multiple banks.
BANKER'S ACCEPTANCES(BA)
A Banker's Acceptance is a time draft of invested funds, which has been drawn on and accepted
for repayment by a bank. This financial instrument is generally used for short term (30 and 180
days) financing of export, import, or storage of goods. By accepting the draft (investment of City
funds), the bank is liable for the payment at maturity. This bank liability makes the Banker's
Acceptance a marketable investment. The State Code limits BA's to not more than 180 days to
maturity and 40% of the local agency's portfolio. In addition, not more than 30% of the local
agency's portfolio may be placed in any one bank.
US TREASURY BILLS
Commonly referred to as T-Bills, these are short-term marketable securities sold as obligations of
the US Government. They are offered in three month, six month, nine month and one-year
maturities. T-Bills do not accrue interest but are sold at a discount, and pay the face value at
maturity.
US TREASURY NOTES
These are marketable, interest-bearing securities sold as obligations of the US Government with
original maturities of one to ten years. Interest is paid semi-annually.
US TREASURY BONDS
These are the same as US Treasury Notes except they have original maturities of ten years or
longer.
FEDERAL AGENCY.ISSUES
Many Federal Government Agencies are authorized to issue short term and long term obligations
that are used to finance various programs such as home loans, business loans, farm loans, etc.
These Agencies were created by the Federal Government in the 1930's and have since become
independent quasi-public agencies. The security for their issues is the guarantee of the Agency to
pay. The Federal Government has only an implied liability to the extent that the Agency has an
open credit line to borrow from the U.S. Treasury. It is widely accepted that Federal Agency
issues are almost as secure as U.S. Government notes.
There is an active secondary market available to sell these issues prior to maturity. The issues
are fairly liquid depending on the prevailing market interest rates at the time of sale. Some of the
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more common agency notes, are issued by the Federal National Mortgage Association (Fannie
Mae), Federal Home Loan Banks; Federal Home Loan Mortgage Corporation (Freddie Mac), and
the Federal Farm Credit Banks.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS(REPOS)
A Repurchase Agreement is a short-term investment agreement to loan City funds for a fixed
period:in return for a fixed interest rate and secured collateral, such as U.S. Treasuries or Agency
Notes. This type of investment is usually done for overnight or very short term (7 days)
investment of funds left in the general operating checking account. Reverse Repurchase
agreements is a short-term investment, which is used to take advantage of market interest rate
changes and increase the size of the portfolio. State law was amended in 1996 to limit the use of
both repurchase and reverse repurchase agreements.
COMMERCIAL PAPER(CP)
Commercial Paper is defined as an unsecured promissory note of industrial corporations, utilities
and bank holding companies. The notes are in bearer form in amounts starting at $100,000.
State law limits the City to investments in United States corporations having assets in excess of
five hundred million dollars with an "A" or higher rating. State Law also permits cities to invest
in Asset Back Commercial Paper (ABCP) from issuers organized within the United States as a
special purpose corporation; trust or limited liability company. ABCP issuers must have program
wide credit enhancements including, but not limited to, over collateralization, letters of credit, or
surety bond. Cities may not invest more than 25% of the portfolio in commercial paper nor
purchase more than 10 percent of the outstanding commercial paper of any single issuer. The
maximum maturity of the commercial paper may not exceed a term of 270 days.
MEDIUM TERM NOTES(MTN)
Debt securities issued by a corporation or depository institution with a maturity ranging for nine
months to five years. The term "medium-term note" refers to the time it takes for an obligation
to mature and includes other corporate securities originally issued for maturities longer than five
years, but which have now fallen Within the five year maturity range. MTNs issued by banks are
also:called bank-notes.
MUTUAL FUNDS
An investment company that pools money and can invest in a variety of securities, including
fixed-income securities and money market instruments, cities may invest in Mutual Funds or
Money Market funds that receive the highest ranking or the highest letter and numerical rating by
two of the three largest nationally recognized rating services. The Mutual Funds must abide by
the same investment restrictions and regulations that apply to public agencies in California.
Money Market Funds must follow regulations specified the Security and Exchange Commission
under the Investment Company Act of 1940. Mutual Funds have floating Net Asset Values
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(NAV), whieh means the amount received at redemption may be more or less than the amount
.originally invested. Money Market Funds strive to maintain a.constant NAV.
GUARANTEED INVESTMENT CONTRACT(GIC)
This is,an agreement acknowledging receipt of funds for deposit, specifying terms for withdrawal
and guaranteeing a rate of interest to be paid. The investment follows all state laws for the
investment of public funds. GIC's are only permitted for bond proceeds.
Negotiable Certificates of Deposit
Unsecured obligations of the financial institution, bank or savings and loan, bought at par value
with the promise to pay face value plus accrued interest at maturity. They are investment grade
negotiable instruments, paying a higher interest rate than regular certificates of deposit. The
primary market issuance is in multiples of$1 million, the secondary market usually trades is
denominations of$500,000.
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