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HomeMy WebLinkAboutRES 2002-431 RESOLUTION NO: 2002.43 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DIAMOND BAR , COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, ADOPTING THE STATEMENT OF INVESTMENT WHEREAS, it is the City's policy to annually adopt the City investment policy, and NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF DIAMOND BAR HEREBY RESOLVES, that the attached Statement of Investment Policy (Exhibit A) be adopted as presented herein. PASSED, ADOPTED AND APPROVED THIS 4th day of ,Tune , 2002 u Wen Chang, Mayor 1, LYNDA BURGESS, City Clerk of the City of Diamond Bar, do hereby certify that the foregoing Resolution was passed, approved and adopted at a meeting of the city Council of the City of Diamond Bar held on the a+-r, day of ,hone , 2002, by the following vote: AYES: COUNCILMEMBERS: Herrera, Huff, Zirbes, MPT/O'Connor, M/Chang NOES: COUNCIL MEMBERS: None ABSENT: COUNCIL MEMBERS: None ABSTAIN: COUNCIL MEMBERS: None ATTEST: ' �" Lyndi' Burgess City Clerk of the City of Diamond Bar 2002-43 EXHIBIT A CITY OF DIAMOND BAR i INVESTMENT POLICY - FY 2002-03 i PURPOSE This Statement -is intended to provide guidelines for the prudent investment of tYe 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 polio of the City Council to review, update and adopt the City's Inve tment Policy on an annual basis. INVESTMENT The investment df 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. Safety.! Safety of principal is the foremost objective of the invest 'ent 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 R sk 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 securiti;s dealers; Diversifying the investment portfolio in order that potential losses on individual securities do not exceed the inco�e generated from the remainder of the portfolio. B. InterestlRate Risk is the risk that the market value of portfolio securities will fall due to a change in general interestrates. Interest rate risk will be mitigated by: Structur ng the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open PAGE 2 - Investment Policy market prior to their maturation to meet specific operational needs; _ operating funds will be invested primarily in shorter term securities. 2. Liquidity. The investment portfolio will remain sufficiently liquid to meet all operating requirements which might be reasonably anticipated. This is accomplished 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 demands cannot be anticipated, the portfolio will consist largely of securities with active secondary 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 investment policy of the City of Diamond Bar is SAFETY. Investments shall be undertaken to ensure the preservation of capital in the overall portfolio. The investment portfolio shall he designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and cash flow characteristics of the portfolio. Return on investment is of least importance compared to the safety and liquidity objectives described above. Investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to maturity unless one of the following conditions exists: 1) a declining credit security could be sold early to minimize loss of principal; 2) a security swap would improve the quality of yield in the portfolio; or 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 prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation but for investment considering the probable safety of their capital as well as the probable income to be derived." (CC #2261) This affords the City a broad spectrum of investment opportunities, so long as the investment is deemed prudent and is allowable under current law of the State of California and the regulations of the City of Diamond Bar. The City of Diamond Bar strives to maintain the level of investment of all funds as near 100% as possible, through daily and projected cash flow determinations. Cash management and investment transactions are the responsibility of the Treasurer. PAGE 3 - Investment Policy Investments are allowed in the following media: i i United States t4easury bills, or securities issued by the obligation guaranteed as to States. I Local Agency Investment Fund bonds, notes or any other obligations United States treasury or any other principal and interest by the United (state pool) - Demand Deposits Certificates of; Deposit (or Time Deposits), placed with commercial banks and/or savings banks. Negotiable Certificates of Deposit Bankers Acceptances Commercial Pape Medium Term Corlorate Notes Passbook SavinaL Accounts Active Deposits! Money Market Fullds comprised of investments rated in the highest category by Moodiy's Investors Services Inc. or by Standard & Poor's Corporation. Repurchase Agregments 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 oE 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 to[rms 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 investmentIb are highly liquid, with the exception of collateralized a d insured certificates of deposit held by banks and savings ban} s. Maturities are selected to anticipate cash needs, thereby eliminating the need for forced liquidation. Effective Janua�y 1, 1989 the Government Code, Section 53601 states..."no invstment a security unde shall be lying a repurchase made in any security, other than 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 eith r specifically or as a part of an investment program approved no less than three months prior to the investment." Page 4 - Investment Policy 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 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 constraints. 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 Administration (SBA) Notes. SAFEKEEPING OF SECURITIES in Guaranteed Small Business The City of Diamond Bar will adopt the operational practice of having all purchased securities physically delivered, versus payment to a safekeeping account at the City's depository bank. It is recognized this will be to a third party independent custodian under contractual agreement made with the Security Services Division of the chosen bank. Investment transactions will be authorized by the City Treasurer and executed by either the Finance Director or the Assistant City Clerk. The transactions will be verified via monthly reconciliations by the Senior Accountant. The basic premie underlying the City of Diamond Bar's investment philosophy is toj 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 1 Litida C. Lowry City Manager 1 i i i Page 5 - Invest�ent Policy REPORTING A monthly repott of investments will be provided to the City Manager. The rea i;uired elements of this report are as follows: I a) Type of investment b) Institution c) Date of Maturity d) Amount of ideposit or cost of security e) Current market value of securities with maturity in excess of twelve months f) Statement irelating 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 premie underlying the City of Diamond Bar's investment philosophy is toj 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 1 Litida C. Lowry City Manager 1 Appendix A Description of Investments 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 Ban (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 tlfiese types of securities is limited to 20% of the portfolio. U.S. Treasury Issues Deposit are investments for inactive funds issued are direct obligations of the United States Treasury which Government. Th se issues are called bills, notes and bonds. The is no minimum investment period and the minimum maturity range of new issues is from 13 weeks (T -Bills) to 30 years (T -Bonds). Thee are highly liquid and are considered the safest 1998 for any agency. investment security. offers high liquidity because deposits can ds to be matched to cash flow needs_ For deposits be converted to 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 Ban (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 tlfiese types of securities is limited to 20% of the portfolio. The State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one percent of the earnings. Local Agency Investment Deposit are investments for inactive funds issued Fund (LAIF) is a special fund in the State by banks, savin Treasury which local agencies may use to deposit funds for respectively by Federal Deposit Insurance investment. There is no minimum investment period and the minimum ), Federal Savings and Loan Insurance Corporation transaction is 5,000, in multiples of $1,000 above that, with a maximum of $20 illion and increasing to $30 million on July 1, several years in 1998 for any agency. It offers high liquidity because deposits can ds to be matched to cash flow needs_ For deposits be converted to cash in twenty-four hours and no interest is lost. All interest iE distributed to those agencies participating on a proportionate share determined by the amounts deposited and the length of time t ey are deposited. Interest is paid quarterly via federal credit 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, savin s and loans and credit unions. Investments of $100,000 are insured respectively by Federal Deposit Insurance Corporation (FDI ), 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 f ds 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 105% Letters of not accept 150% Collateral (First Trust Deeds) or 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. Page 2 - Appendix A 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. Investment in Negotiable Certificates of Deposit is limited to 30% of the investment 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 bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at maturity. 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. The interest is calculated on a 360 day discount basis similar to Treasury Bills. Investment in Banker's Acceptances is limited to 400 of the investment portfolio per Government Code Section 53601. Commercial Paper is a short term unsecured promissory note issued by a corporation to raise working capital. These negotiable instruments may be purchased at a discount to par value or interest bearing. Commercial paper is issued by corporations such as General Motors Acceptance Corporation (GMAC), Shearson American Express, Bank of America, Wells Fargo Bank, etc. Local agencies are permitted by state law to invest in commercial paper of "prime" quality of the highest ranking or of the highest letter and numerical rating as provided by Moody's Investor's Service, Inc. or Standard & Poors Corporation. Purchases of eligible commercial paper may not exceed 270 days maturity nor exceed twenty five percent of the local agency's total investemnts. Investment in Commercial Paper is limited to 250 of the total investment portfolio and 10% of the issuing corporation per Government Code Section 53601. Medium Term Corporate Notes are unsecured promissory notes issued by a corporation organized and operating in the United States. These are negotiable instruments and are traded in the secondary market. Medium Term Notes (MTN) can be defined as extended maturity commercial paper. Corporations use these MTN's to raise capital. Examples of MTN issuers are General Electric, GMAC, Citibank, Wells Fargo Bank, etc. Investment in Medium Term Corporate Notes is limited to 300 of the investment portfolio per Government Code 53601. Notes must be rated "A3l or better. i i i Page 3 - Append4x A I Passbook SavingsI Account is a certificate of deposit issued in any amount for a norI. specified amount of time. Interest rate is much lower than CD's!but the savings account allows flexibility. Funds can be deposited and withdrawn according to daily needs. Mutual Funds arel referred to in the Government Code, Section 53501, K, as "shares 1of beneficial interest issued by diversified management comp4nies". The Mutual Fund must be restricted by its by-laws to they same investments as the local agency by the Government Code These investments are Treasury issues, Federal Agency issues, 3tate of California and City (within California) debt obligations, Certificates of Deposit, Repurchase Agreements, Reverse Repurchase Agreements, Financial Futures and Financial Options and Medium Term Corporate Notes. The quality rating and percentage restrictions. in each investment category which are applicable to the local agency also applies to the Mutual Fund. Additional limitations apply to such management companies or their investment advisors. The City may 2.ot invest in a mutual fund which invests in derivative typed of products. The purchase pri e of shares of mutual funds shall not include any sales commissio Investments in m tual funds shall not exceed fifteen percent of the local agency's investment portfolio. Active Deposits are demand or checking accounts which receive revenues and pa disbursements. Money Market ads 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 1000 liquid at any time. Repurchase Agre 'eats 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. Te customer receives interest from the bank. The interest rate re lects 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 Di and Bar does NOT invest in Reverse Repurchase Agreements. Financial Future14 and Financial Options are forward contracts for securities. Thejgovernment code states that a local agency may Page 4 - Appendix A incur future contracts/options in any of the investment securities enumerated in Section 53601 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. �1 G APPENDIX B BROKER/30 1. Name of Firm: 2. Address: CITY OF DIAMOND BAR QUESTIONNAIRE AND CERTIFICATION 3. Telephone: ( ) ( ) 4. Broker's Representative to the City (attach resume): Name: Title: Telephone: ( ) 5. Manager/Par ner-in-Charge (attach resume) Name: Title: Telephone: { ) 6. List all pe sonnel who will be trading with or quoting securities to City employees (attach resume) Name: Title: Telephone: 7. which of policy? above personnel have read the City's investment 8. Is your f irm a primary dealer in United States Government Securities? Yes No CITY OF DIAMOND BAR Broker/Dealer Questionnaire and Certification Name of Firm,: 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 office? Treasury Bills CMO's Treasury Notes/Bonds Bank CD's BA's (domestic) S & L CD's BA's (foreign) Repos Commercial Paper Reverse Repos Agencies (specify): Other (specify): 11. References -- Please identify your most directly comparable public sector clients in our geographical area. Entity Contact Telephone ( ) ( ) Client Since 1 G CITY OF DIAMOND Broker/Dealer Questionnaire Name of Firm: Page Three 12. Have any of transactioz misreprese instrument BAR and Certification your clients ever sustained a loss on a securities arising from a misunderstanding or tation of the risk characteristics of the If so, explain. 13. Has your 1 state/federal fraudulent sale of securities? investigated? cal office ever subject to a regulatory or al agency investigation for alleged improper, disreputable or unfair activities related to the Have any of your employees been so If so, explain. 14. Has a clie responsible t ever claimed in writing that your firm was for investment losses? If so, explain. L5. Explain your these fiduciary requirement normal custody and delivery process. Who audits systems? Can you meet safekeeping ? i CITY OF DIAMOND BAR Broker/Dealer Questionnaire and Certification Name of Firm: Page Four 15. 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, explain. 19. What portfolio information, if any, do you require from your clients? 24. What reports, transactions, confirmations and paper trail will the City receive? 21. Does your firm offer investment training to your clients? Yes No CITY OF DIAMOND!BAR Broker/Dealer Questionnaire and Certification Name of Firm: Page Five 22. Please enclose the following: Latest audited financial statements. Sampl s of reports, transactions, and confirmations the City ill receive. SamplIs of research reports and/or publications that your firm egularly provides to clients. Compl:te schedule of fees and charges for various trans ctions. ***CERTIFICATION*** I hereby certifI that I have personally read the Statement of Investment Polic of the City of Diamond Bar, and have implemented reasonable proce ores and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the City of Diamond Bar. All sales personnel will be routinely informed of the City's investment objectives, horizons, outlooks, strategies and risk constraints whenever we are so advised by the City. We pledge to exercise due diligence in informing the City of Diamond Bar of all foreseeable risks associated. with financial transactions conducted with our firm. Under penalties of perjury, the responses to this questionnaire are true and accurate to the best of my knowledge. Signed Date Title Countersignaturek Date Title * Company president or person in charge of government securities operations. i