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HomeMy WebLinkAboutRES 2003-401 RESOLUTION NO: 2003- 40 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DIAMOND EAR , COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, ADOPTING THE STATEMENT OF INVESTMENT and WHEREAS, it is the City's policy to annually adopt the City investment alicy, NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF DIAMOND BAR HEREBY RESOLVES, that the attached Statement of Investment Policy (Exhibit ) be adopted as presented herein. PASSED, ADOPTED AND APPROVED THIS 7th day of , 2003 Carol H. Herrera, Mayor I, LINDA C. LOWRY, City Clerk of the City of Diamond Bar, do hereby certify tha the foregoing Resolution was passed, approved and adopted at a meeting of the city Council of the City of Diamond Bar held on the jjjLh day of June , 200 3, by the following vote: AYES: COUNCIL MEMBERS: Chang, O'Connor, Zirbes, MP /Huff, M/Herrera NOES: COUNCIL MEMBERS: None ABSENT: COUNCIL MEMBERS: None ABSTAIN: COUNCIL MEMBERS: None ATTEST Linda C.Lowry City Clerk of the City of Diam nd Bar 2003+40 EXHIBIT A CITY OF DIAMOND BAR INVESTMENT POLICY - FY 2003-04 PURPOSE This Statement is intended to provide guidelines for the prudent investment of the City's temporarily idle cash and to outline the policies for maximizing the efficiency of the City's cash management system. The ultimate goal is to enhance the economic status of the City while protecting it's accumulated cash. it is the policy of the City Council to review, update and adopt the City's Investment Policy on an annual basis. INVESTMENT OBJECTIVE The investment of funds of the City of Diamond Bar is directed to the goals of safety, liquidity and yield. The authority governing investments for municipal governments is set forth in the Government Code, Sections 53601; et. seq. 1. Safely. Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. The City will operate only in those investments that are considered very safe. A. Credit Risk is the risk of loss due to the failure of the security issuer or backer. Credit risk will be mitigated by: Limiting investments to the safest types of securities; Pre -qualifying the broker-dealers with which the City will do business. This will be done via a competitive bid and the response on a questionnaire (Appendix B) submitted by the prospective institution. In addition broker- dealers should be primary, registered investment securities dealers; Diversifying the investment portfolio in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. B. Interest Rate Risk is the risk that the market value of portfolio securities will fall due to a change in general interest rates. Interest rate risk will be mitigated by: Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to their maturation to meet specific operational needs; Operating funds will be invested primarily in shorter term securities. 2003-40 PAGE 2 - Investment Policy 2. Liguldity. The investment portfolio will remain sufficiently liquid to meet all ope ating requirements which might be reasonably anticipated. This is accDmplishell by structuring the portfolio so that securities mature at the same time as cash is needed to meet anticipated demands. Additionally, since all possible cash demar ds cannot be anticipated, the portfolio will consist largely of securities with active secon ary or resale markets. 3. Yield. Yield is the potential dollar earnings an investment can provide and sometimes is described as the rate of return. The primary objective of the invest nent policy of the City of Diamond Bar is SAFETY. Investments shall be ndertak(n to ensure the preservation of capital in the overall portfolio. The investment portfolio 3hall be designed with the objective of attaining a market rate of return throughout budgi tary and economic cycles, taking into account the investment risk constraints and cash flow characteristics of the portfolio. Return on investment is of least importance compar d to the safety and liquidity objectives described above. investments are limited to relat vely low risk securities in anticipation of earning a fair return relative tote risk b ing assumed. Securities shall not be sold prior to maturity unless one of the follo conditions exists: 1) a declining credit security could be sold early to mi imize loss _ing of principal; 2) a security swap would improve the quality of yield in the portfolio; cr 3) liquidity needs of the portfolio require that a security be sold. POLICY As a General Law city, Diamond Bar operates its accumulated idle cash investments under the prudent man rule. This insures that "...investment shall be made with the exercise of that degree of judgement and care, under circumstances then which persons of prudence, discretion and intelligence exercise in the prevail ng, ma their own affairs, not for speculation but for investment considering the probable ageme sa t of ety of their capital as well as the probable income to be derived." (CC #2261) This aff rds the City a broad spectrum of investment opportunities, so long as the i6vestment is deemed prudent and is allowable under current law of the State of Calif o nia and the regulations of the City of Diamond Bar. The City of Diamond Bar strives to maintain the level of investment of all f L nds as n gar 100% as possible, through daily and projected cash flow deterrminatill ns. Cash management and investment transactions are the responsibility of the Treasurer. Investments are allowed in the following media: United States treasury bills, bonds, notes or any other obligations or securities issued by the United States treasury or any other obligation guaranteed as to principal End interest by the United States. Local Agency Investment Fund (state pool) - Demand Deposits Certificates of Deposit (or Time Deposits), placed with commercial bE savings banks. nks an or , Negotiable Certificates of Deposit Bankers Acceptances Commercial Paper 2003-I40 PAGE 3 - Investment Policy Medium Term Corporate Notes Passbook Savings Accounts Active Deposits Money Market Funds comprised of investments rated in the highest category by Moody's Investors Services Inc. or by Standard & Poor's Corporation. Repurchase Agreements Prohibited investments include securities not listed above(unless authorized pursuant to section 53601 (L)), as well as inverse floaters, range notes, interest only strips derived from a pool of mortgages (Collateralized Mortgage Obligations), and any security that could result in zero interest accrual if held to maturity, as specified in Section 53601.6. (Zero interest accrual means the security has the potential to realize zero interest depending upon the structure of the security. Zero coupon bonds and similar investments that start at a level below the face value are legal because their value does increase.) Government and agency paper are the highest quality investments available in terms of safety and liquidity. Certificates of deposit and savings accounts are insured or collateralized. Only commercial paper, with A-1 Moody's and P-1 Standard & Poor's ratings, is authorized for purchase. Most investments are highly,liquid, with the exception of collateralized and insured �--- certificates of deposit held by banks and savings banks. Maturities are selected to anticipate cash needs, thereby eliminating the need for forced liquidation. Effective January 1, 1989 the Government Code, Section 53601 sttes... "no investment a shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement authorized by this section, which at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved no less than three months prior to the investment." Therefore longer-term investments (over one year) are limited to maturities of five years or less unless specifically approved by the City Council Diamond Bar attempts to obtain the highest yield possible_ when selecting investments, provided that the criteria for safety and liquidity are met. Ordinarily, through a positive yield curve, (i.e., longer term investment rates are higher than those of shorter term maturities), the City attempts to Ladder its maturities to meet anticipated cash needs in such a way that longer term investments carry a higher rate than is available in the extremely short term market of 30 days or less. The City is authorized to invest in the Local Agency Investment Fund based upon periodic reviews of the book to market value of the investment pool and an annual review of the goals and strategies of the investment board. If there are changes in the management of the Local Agency Investment Fund, and there is a conflict with the City's investment goals, the City may elect to discontinue investment in LAIF. It should be noted that, per LAIF's investment policy, no more than- 10% of its portfolio may be invested in Reverse Repurchase Agreements. Since these types of investments are extremely sophisticated, the City of Diamond Bar chooses not to individually invest in these types of securities but will participate LAIF's investment in 2003-40 Page 4 - Investment Policy these as long as the percentage of the portfolio remains at 10% or less. POLICY CONSTRAINTS The City operates its investment pool with many State and self-imposed cc nstraints The City does not purchase or sell securities on margin. The City does not buy stocks or deal in futures or options. The City does not use Reverse Repurchase Agreements for the investment of funds The City does not invest in Guaranteed Small Business Administration (SBA.) Notes. SAFEKEEPING OF SECURITIES The City of Diamond Bar will adopt the operational practice of having all purc securities physically delivered, versus payment to a safekeeping- account at the depository bank. It is recognized this will be to a third party independc nt cus under contractual agreement made with the Security Services Division o the c bank. Investment transactions will be authorized by the City Treasurer and executed by e' her the Finance Director or the Assistant City Clerk. The transactions will be verified via monthly reconciliations by the Senior Accountant. REPORTING A monthly report of investments will be provided to the City Manager. he requ elements of this report are as follows: II a) Type of investment b) Institution c) Date of Maturity d) Amount of deposit or cost of security e) Current market value of securities with maturity in excess of twelve months f) Statement relating the report to the Statement of Investment Policy g) Rate of interest h) Statement that there are sufficient funds to meet the next six months obligations The basic premise underlying the City of Diamond Bar's investment philophy is to insure that money is always available when needed. Attachment: Appendix A - Description of Investments Appendix B - Broker Dealer Questionnaire Appendix C Local Agency Investment Fund Description L' da C. Lowry City Manager 2003-40 Appendix A Description of Investments U.S. Treasury Issues are direct obligations of the United States Government. These issues are called bills, notes and bonds. The maturity range of new issues is from 13 weeks (T -Bills) to 30 years (T -Bonds). These are highly liquid and are considered the safest investment security. Federal Agency Securities are issued by direct U.S. Government agencies or quasi - government agencies. Many of these issues are guaranteed directly or indirectly by the United States Government. Examples of these securities are Federal Home Loan Bank (FHLB) notes, Federal National Mortgage Associations (FNMA) notes, Federal Farm Credit Bank (FFCB) notes, Small Business Administration (SBA) notes, Government National Bank (GNMA) notes, Federal Home Loan Mortgage Credit (FHLMC) notes and Student Loan Association (SALLMAE) notes. Investment in these types of securities is limited to 20% of the portfolio. Local Agency Investment Fund (LAIF) is a special fund in the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum of $30 million for any agency. It offers high liquidity because deposits can be converted to cash in twenty-four hours and no interest is lost. All interest is distributed to those agencies participating on a proportionate share determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly via direct deposit into the agency's LAIF account. The State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one percent of the earnings. Certificates of Deposit are investments for inactive funds issued by banks, savings and loans and credit unions. Investments of $100,000 are insured respectively by Federal Deposit Insurance Corporation (FDIC), Federal Savings and Loan Insurance Corporation (FSLIC) and the National Credit Union Share Insurance Fund (NCUSIF). Certificates of Deposit can be issued from 14 days to several years in maturity allowing the City of Diamond .Bar's investment of funds to be matched to cash flow needs. For deposits exceeding $100,000 the financial institution is required to collateralize with 110% government securities collateral. City of Diamond Bar does not accept 150% Collateral (First Trust Deeds) or 105% Letters of Credit (L.C.). Section 53635.2 of, the Government Code prohibits investments in certificates of deposits of state or federal credit unions if any member of the city's governing or managing officers(Council, City manager, Fiscal officers)serves on the credit union board or key committee positions. Negotiable Certificates of Deposit are unsecured obligations of the financial institution. These securities are generally issued in bearer form and pay interest at maturity. Although negotiable, a strong secondary market exists only in the NCD's issued by the largest United States banks. Examples of large banks include Bank of America, Citibank, Chase Manhattan, Manufacturers:Hanover, etc. These securities generally trade with minimum amounts of $1 million per trade with the average trade in the secondary market of $5 million. 2003-40 Page 2 - Appendix A Investment in Negotiable Certificates of Deposit is limited to 30% of tile invest ent portfolio per Government Code Section 53601. Bankers Acceptances are short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a ank by an exporter or importer to obtain funds to pay for specific merchandise. Ey its acceptance, the bank becomes primarily liable for the payment of the draft at mat irity. An acceptance is a high grade negotiable instrument. Acceptances are purchased in various denominations for 30 to 180 days but no longer than 180 days. I he interE st is calculated on a 360 day discount basis similar to Treasury Bills. Investment in Banker's Acceptances is limited to 40% of the investmeni portfolio per Government Code Section 53601. Commercial Paper is a short term unsecured promissory note issued by a torpor ition to raise working capital. These negotiable instruments may be purchased at a disc unt to par value or interest bearing. Commercial paper is issued by corporations suc 1 as General Motors Acceptance Corporation (GMAC), Shearson American Express, E ank of America, Wells Fargo Bank, etc. Local agencies are permitted by state law to invest in commercial pap r of "prime" quality of the highest ranking or of the highest letter and numerical rating a provided by Moody's Investor's Service, Inc. or Standard & Poors Corporation. Purchac es of eligible commercial paper may not exceed 270 days maturity nor exceed twenty fie percent of the local agency's total investemnts. Investment in Commercial Paper is limited to 25% of the total investment bortfolio 10% of the issuing corporation per Government Code Section 53601. II Medium Term Corporate Notes are unsecured promissory notes is -sued by a corporation organized and operating in the United States. These are negoti ble instruments and are traded in the secondary market. Medium Term Notes ( TN) car be defined as extended maturity commercial paper. Corporations use these M N's to rise capital. Examples of MTN issuers are General Electric, GMAC, Citibank, ells F go Bank, etc. Investment in Medium Term Corporate Notes is limited to 30% of the investment portfolio per Government Code 53601. Notes must be rated "A" or better. Passbook Savings Account is a certificate of deposit issued in any amount fora non specified amount of time. Interest rate is much lower than CD's but the savi gs acco nt allows flexibility. Funds can be deposited and withdrawn according to daily fleeds. Mutual Funds are referred to in the Government Code, Section 53601, K, as "share of beneficial interest issued by diversified management companies". The Mutual FL nd must be restricted by its by-laws to the same investments as the local agency by he Government Code. These investments are Treasury issues, Federal Agency issu s, State of California and City (within California) debt obligations, Certificates of Dep o it, Repurchase Agreements, Reverse Repurchase Agreements, Financial Futures nd Financial Options and Medium Term Corporate Notes. The quality rating d percentage restrictions in each investment category, which are applicable o the to al 2003-140 agency also, apply to the Mutual Fund. Additional limitations apply to such management companies or their investment advisors. The City may not invest in a mutual fund, which invests in derivative types of products. The purchase price of shares of mutual funds shall not include any sales commission. Investments in mutual funds shall not exceed fifteen percent of the local agency's investment portfolio. Active Deposits are demand or checking accounts which receive revenues and pay disbursements. Money Market Funds are comprised of short term government securities, certificates of deposit and highly rated commercial paper. Average length of maturity is twenty to fifty days. Money Market Funds are 100% liquid at any time. Repurchase Agreements and Reverse Repurchase Agreements are short term investment transactions. Banks buy temporarily idle funds from a customer by selling him U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date. Repurchase agreements are typically one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the, prevailing demand for Federal Funds and the maturity of the REPO. Some banks will execute repurchase agreements for a minimum of $100,000, but most banks have a minimum of $500,000. A reverse -repurchase agreement (reverse -repo) is exactly what the name implies. The City of Diamond Bar does NOT invest in Reverse Repurchase Agreements. Financial Futures and Financial Options are forward contracts for securities. The government code states that a local agency may incur future contracts/options in any of the investment securities enumerated in Section 53501 A -N. Due to the volatility of trading in financial futures the City of Diamond Bar does NOT invest in financial futures of financial options. Derivative Products are structured products, which limits, through imbedded options, the flow of principal and or interest to the note holder. This limitation could be on how fast payments are received, how much principal is returned, or how high or low a coupon can move. Derivative is also a broad term referring to any security which derives its value from another underlying asset. The City of Diamond Bar does NOT invest in derivative products. 2003-40 1 APPENDIX B CITY OF DIAMOND BAR BROKER/DEALER QUESTIONNAIRE AND CERTIFICATI 1. Name of Firm: 2. Address: 3. Telephone:(- 4. elephone: 4. Broker's Representative to the City (attach resume): Name: Title: Telephone:( 5. Manager/Partner-in-Charge (attach resume) Name: Title: Telephone:( 6. List all personnel who will be trading with or quoting employees (attach resume) Name: Title: Telephone: 7. Which of the above personnel have read the City's 1 to 8. Is your firm a primary dealer in United Stales Government ecuriti Yes No 20031-40 CITY OF DIAMOND BAR Broker/Dealer Questionnaire and Certification Name of Firm: i Page Two 9. List the total volume of United States Government and Agency Securities for the last calendar year. Firm -wide $ No. of Transactions Your local office $ No. of Transactions 10. Which instruments are offered regularly by your local off lee? Treasury Bills Treasury Notes/Bonds BA's (domestic) _ BA's (foreign) _ Commercial Paper Agencies (specify): CMO's Bank CD's S&LCD's Repos Reverse Repos Other (specify): 11. References -- Please identify your most directly comparable public sector clients in our geographical area. Entity Contact Telephone Client Since 12. Have any of your clients ever sustained a loss on a securities transaction arising from a misunderstanding or misrepresentation of the risk characteristics of the instrument? If so, explain. 2003--40 i 1 CITY OF DIAMOND BAR Broker/Dealer Questionnaire and Certification Name of Firm: age Three 13. Has your local office ever subject to a regulatory or state/federal agency investigation for alleged improper, fraudulent, disreputable or unfair act related to the sale of securities? Have any of your employees been so investigated? If so explain 14. Has a client ever claimed in writing that your firm was losses? If so, explain. for 15. Explain your normal custody and delivery process. Who and is these fiduciary systems? Can you meet safekeeping requirements?. 16. How many and what percentage of your transactions failed Last month? Last year? 17. Describe the capital line and trading limits of the office that would conduct business with the City of Diamond Bar. 18. Does your firm participate in the S.I.P.C. insurance program if not, I explain. 2003-4 CITY OF DIAMOND BAR Broker/Dealer Questionnaire and Certification Name of Firm: Page Four 19. What portfolio information, if any, do you require from your clients? 20. What reports, transactions, confirmations and paper trail will the City receive? 21. Does your firm offer investment training to your clients? Yes No 22. Please enclose the following: T Latest audited financial statements. Samples of reports, transactions, and confirmations the City will receive. Samples of research reports and/or publications that your firm regularly provides to clients. Complete schedule of fees and charges for various transactions. CITY OF DIAMOND BAR roker/Dealer Questionnaire and Certification ame of Firm: age Five ***CERTIFICATION*** 1, hereby certify that I have personally read the Statement of Investment P licy of Diamond Bar, and have implemented reasonable procedures and a s stem designed to preclude imprudent investment activities arising out of transactions between our firm and the City of Diamond Bar. All sales personnel will be routine of the City's investment objectives, horizons, outlooks, strategies an risk whenever we are so advised by the City. We pledge to exercise due diligen a in ini City of Diamond Bar of all foreseeable risks associated with financial trans actions with our firm. Under penalties of perjury, the responses to this question aire al accurate to the best of my knowledge. Signed Title Date Countersignature* Date title * Company president or person in charge of government securities operations. 1 ie City of controls inducted informed nstraints ming the )nducted true and 200-4a Exhibit B LOCAL AGENCY INVESTMENT FUND The Local Agency Investment Fund was established by Chapter 730, Statutes of 1976. This fund enables local government agencies or trustees to remit money not required for immediate needs to the State Treasurer for the purpose of investment. In order to derive the maximum rate of return possible, the State Treasurer has elected to invest these monies as apart of the Pooled Money Investment Account. Each participating agency determines the length of time its money will be on deposit with the State Treasurer with the exception of bond proceeds, which must remain for a minimum of 30 days. As the end of each calendar quarter, all earnings derived from investments are distributed by the State Controller to the participating government agencies in proportion to each agency's respective amounts deposited in the Fund and the length of time such amounts remained therein. Prior to distribution, the State's reasonable costs of administering this program are deducted from the earnings. This program offers local 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 Investments 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 Has oversight by the Local Agency Investment Advisory Board. The Board consists of five members as designated by statute. The Chairman is the State Treasurer or his designated representative. Two members qualified by training and experience in the field of investment or finance, and two members who are treasurers, finance or fiscal officers or business managers employed by any County, City of local district or municipal corporation of this State, are appointed by the State Treasurer. The term of each appointment is two years or at the pleasure of the appointing authority. All securities are purchased under the authority of 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 the goals of Safety, Liquidity and Yield are not jeopardized and that prudent management prevails. These policies are formulated by investment staff and reviewed by both the PMIB and the LAW Board on an annual basis. The State Treasurer's Office is audited by the Bureau of State Audits on an annual basis. The resulting opinion is included in the subsequent Pooled Money monthly report following its publications. 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. 1 1 EXHIBIT B Local Agency Investment Fund - continued It has been determined that the State of California cannot declare bankruptcy undel Federal regulations, thereby allowing the Government Code Section 16429.3 to stand. This Secti ns states that "money placed with the State Treasurer for deposit in the LAIF shall not be subject to e either: (a) transfer or loan pursuant to Sections 16310, 16312, or 16313, or (b) impoundme t or seiz re by any state official or state agency." During the 2002 session, California Government Code 16429.4 was addec to the UdPs enabling legislation. The Section states that "the right of a city, county, city and c unty, special district, nonprofit corporation, or qualified quasi -governmental agency, to withdrav r its depo iced money from the LA1F upon demand may not be altered, impaired, or denied in an way by state official or state agency based upon the State's failure to adopt a State Budget by my of e h new fiscal year." The LAW has grown from 293 participants and $468 million in 1977 to 303 participants and $21.8 billion in 2003. 2003-40