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HomeMy WebLinkAbout07. 2011 Investment Policy AGENDA MEMO DATE: February 8, 2011 TO: Mayor and Members of the City Council FROM: Office of the City Manager By: John Michicoff, Director of Finance SUBJECT: 2011 Investment Policy RECOMMENDATION That the City Council adopt the attached Investment Policy for public funds of the City of Downey and its related entities. DISCUSSION Pursuant to Government Code 53646 (a)(2), local agencies may annually adopt a statement of investment policy. The attached investment policy satisfies this requirement. Since the existing investment policy provides sufficient guidelines and is in compliance with the Government Code, there are no changes to the existing policy. FISCAL IMPACT Depending on market conditions, liquidity levels and financial demands the amount of staff time spent implementing this policy varies from day to day. However on a monthly basis, staff collectively allocates approximately 30 hours to the implementation, monitoring and reconciliation of this policy. S:\Agenda Memos CC 2011\02-08-11\2011 Inv Policy Agenda.doc CITY OF DOWNEY, CALIFORNIA City of Downey Investment Policy Purpose This statement of investment policy is intended to provide guidelines for the prudent investment of the City of Downey's cash, and outlines the policies for maximizing the efficiency of its cash management system. The ultimate goal is to enhance the financial strength of the City while protecting its pooled cash. Definitions For purposes of administering this policy, the term “liquidity” shall mean the ease with which assets are converted to cash. Thus, “liquid assets” shall be interpreted to mean cash or those assets that are the equivalent of (or easily converted to) cash, such as demand deposits. The term “investment” shall be interpreted to mean the use of the City’s idle cash assets so as to secure profitable returns, typically in the form of interest or income. Scope This investment policy applies to all financial assets of the City of Downey, and its related entities, segregated into three categories, for investment purposes: Cash & liquid assets-instruments with maturities of 90 days or less Short-Term Investments-instruments with maturities of 2 years or less Long-Term Investments-instruments with maturities of more than 2 years but less than 5 years Overall Investment Objective Interest income has, and will continue to be a major source of revenue for the City. It is recognized that investment programs have a certain amount of associated risk. This risk will range from the loss of potential interest income to the actual loss of principal. The loss of potential interest income can and will occur as a result of day-to-day investment decisions. Regardless of investment strategies or the sophistication of staff, no one can foresee the market place so as to always maximize yield on the portfolio. Staff has, however, attempted to maximize the City's return through a combination of diversification in investments by staying current on market conditions and economic trends. The second risk, the loss of principal, is by far the more serious. Because of the nature of the monies being invested (public funds), the State Legislature has sought to minimize this risk by restricting investment alternatives. Sections 53601, 56301.1 and 53638 of the Government Code of the State of California specifically identifies the types of investments, and in certain cases, how much may be invested by the local public agencies. The City attempts to obtain the highest yield obtainable, as long as investments meet the criteria established for safety and liquidity. The City strives to maintain a level of investment of all funds as near 100% as possible. The criteria for selecting investments, in order of priority are: Safety. The safety and risk associated with an investment refers to the potential loss of principal, interest or a combination of these amounts. Liquidity. This refers to the ability to “cash in” at any moment in time with a minimal chance of losing some portion of principal or interest. Liquidity is an important investment quality, especially when the need for funds occurs, . unexpectedly Yield. Yield is the potential dollar earnings an investment can provide, and sometimes is described as interest income and the rate of return. Investment officials recognize that the investment portfolio is subject to public review and evaluation. The overall program shall be designed and managed with a degree of professionalism worthy of the public trust. The City Council, however recognizes that in a diversified portfolio occasional measured losses are inevitable and must be considered within the context of the portfolio’s overall investment return, provided adequate diversification has been implemented. City funds may be invested long-term in securities that reasonably can be expected to produce enough income to offset inflation.However such funds should only be exposed to minimal market price and default risks. Generally, losses are acceptable on a sale before maturity and should be taken if the reinvested proceeds will earn an income flow greater than what would have been earned by the old investment, considering any capital loss or foregone interest on the original investment. Delegation of Authority The ultimate responsibility for investment activity shall reside with the City Council. It is the policy of the City for the Director of Finance to direct the investment activity of the funds of the City. The City Manager and the Treasurer shall supervise the activities of the Director of Finance. Monitoring and Adjusting the Portfolio The Director of Finance, City Manager and Treasurer shall routinely monitor the contents of the portfolio for which they are responsible, the available markets and the relative values of competing instruments, and shall adjust the portfolio accordingly. In accordance with Government Code Section 53646(b)(1), the Director of Finance may render a quarterly investment report to the City Council, City Manager and Treasurer. The report shall encompass all investments and include the following: Type of investment Term Interest rate Maturity date Principal (par value) Dollar amount invested on all securities (book value) Current market value on all securities (including the source of this valuation) A statement that the portfolio is in compliance with the Investment Policy or the manner in which it is not in compliance A statement that the City has the ability to meet its expenditure requirements for the next six months or an explanation as to why sufficient money may not be available Competitive Selection of Investment Instruments Before an investment is made, to the best extent possible, the City may obtain at least two quotes. If a specific maturity date is required, either for cash flow purposes or for conformance to maturity guidelines, quotes will be requested for instruments that meet the maturity requirement. If no specific maturity is required, a market trend (yield curve) analysis shall be conducted to determine which maturities are most advantageous. Quotes will be requested for various options with regard to term and instrument. The City shall accept the bid quote that provides the highest rate of return within the parameters of this policy. Safekeeping & Collateralization Collateralization shallbe required on demand deposits, certificates of deposit, and repurchase agreements. In order to anticipate market changes and provide a level of security for all funds, a minimum collateralization level is required. Neither the City's demand deposits nor certificates of deposit can exceed the amount of the bank’s or savings and loan’s paid-up capital and surplus. The bank or savings and loan must secure public funds deposits with eligible securities having a market value of 110% of the total amount of the deposits. State law also allows as an eligible security, first trust deeds having a value of 150% of the total amount of the deposits. The Citymay waive security for that portion of a deposit which is insured pursuant to Federal law. Currently the first $250,000 is required to be collateralized as indicated, above. Securities purchased from brokers/dealers shall be held in third-party safekeeping by a designated third-party trust, in the City's name and control, whenever possible. INVESTMENT POLICIES: General The City operates its investments under the prudent investment standard, (Government Code Section 53600.3) except where more specifically restricted. Investments shall be made with care, skill, prudence and diligence under circumstances then prevailing that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of the investment.This affords the City a broad spectrum of investments, so long as the investment is deemed prudent and is allowable under current legislation of the State of California (Government Code Section 53600, et. Seq.) and applicable City trust agreements, if any. If there were to be a change in the law affecting the City's investments, these changes shall automatically be incorporated into the City's investment policy. Prohibited Investments: NOT City funds may be invested in the following instruments unless prior Council approval has been obtained: Inverse Floaters (Securities with interest rates that vary inversely to a prescribed index) Interest only strips (mortgage backed) Equity-Linked securities Options, futures, or swaps Reverse Repurchase Agreements There shall be no buying on margin, no buying futures, and no speculative buying. Permitted Investments – Cash/Liquid Assets: In order to secure optimal returns and simultaneously meet liquidity requirements, the City may place funds needed to meet current or expected obligations in the following cash instruments: Checking Account Demand Deposits Passbook Savings Account Demand Deposits Money Market Mutual Funds Local Agency Investment Fund (CA State Pool) Demand Deposits Permitted Investments Short-Term and Long-Term: City funds may be invested in the following instruments: Securities and Direct obligations of the U.S. Government or its agencies Federal Agency obligations Small Business Administration Loans Municipal Securities (California cities and local agencies) rated "A" or better by one or more nationally recognized statistical rating organizations (NRSRO). Certificates of Deposit (or Time Deposits) placed with commercial banks and/or savings and loan companies. Negotiable Certificates of Deposit, Federally insured with the issuer, rated “A” or better, issued by a nationally or state-chartered bank or a state or federal savings and loan association or by a state-licensed branch of a foreign bank; provided that the senior debt obligations of the issuing institution are rated “AA” or better by one or more NRSRO. Purchase of Negotiable Certificates of Deposit may not exceed 30% of the City's investment portfolio. Medium-term notes, issued by corporations organized and operating within the United States or depository institutions licensed by the United States or any state and operating within the United States. Notes purchased shall be rated "A" or better by one or more NRSRO with a maximum remaining maturity of five years or less and may not exceed 30% of the City's investment portfolio. Banker’s Acceptances, issued by domestic or foreign banks, which are eligible for purchase by the Federal Reserve System, the short-term paper of which is rated at least “A-1”, or its equivalent by a NRSRO. Purchases of Banker’s Acceptances may not exceed 180 days maturity or 20% of the City's investment portfolio. No more than 10% of the investment portfolio may be invested in the Banker’s Acceptances of any one commercial bank. Commercial Paper, rated in the highest short-term rating category as provided by one or more nationally recognized rating serviceprovided that the issuing corporation is organized and operating within the United Sates, has total assets in excess of $500 million and has an “A” or higher rating for its long-term debt, if any, as provided by one or more NRSRO. Purchases of eligible Commercial Paper may not exceed 270 days maturity nor represent more than 10% of the outstanding paper of an issuing corporation. Purchases of Commercial Paper may not exceed 15% of the City's investment portfolio. An additional 10%, or a total of 25% of the investment portfolio may be invested in Commercial Paper, but only if the dollar weighted average of the entire amount does not exceed 31 days. Repurchase Agreements (Repos) used solely as short-term investments not to exceed 30 days. Collateral restrictions will be observed for repurchase agreements as set forth in Government Code Section 53601. All securities underlying the Repurchase Agreements must be delivered to the City's custodian bank versus payment or be handled by a tri-party repurchase agreement. The City may enter into Repurchase Agreements with (1) primary dealers in U.S. Government securities who are eligible to transact business with, and who report to, the Federal Reserve Bank of New York, and (2) California and non-California banking institutions having assets in excess of $1 billion and in the highest short- term rating category as provided by one or more NRSRO. Bonds issued by any city, county, or local agency in California or by the State of California, rated “A” or better by one or more nationally recognized statistical rating organizations.