HomeMy WebLinkAboutRES 97-52RESOLUTION NO. 97-52
A RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF DIAMOND BAR, COUNTY OF
LOS ANGELES, STATE OF CALIFORNIA,
ADOPTING THE STATEMENT OF INVESTMENT POLICY
WHEREAS, it is the City's policy to annually adopt the
City investment policy, and
NOW, THEREFORE, BE IT RESOLVED by the City Council of the
City of Diamond Bar that the attached Statement of Investment
Policy (Exhibit A) be adopted as presented herein.
PASSED, ADOPTED and APPROVED by the City of Council of
the City of Diamond Bar, California, this 1st day of July, 1997.
Ma
I, LYNDA BURGESS, City Clerk of the City of Diamond Bar,
do hereby certify that the foregoing Resolution was passed, adopted
and approved at a regular meeting of the City Council of the City
Council of Diamond Bar held on the Ist day of July 1997,
by the following vote:
AYES: COUNCIL MEMBERS: Ansari, Harmony, Werner,
MPT/Herrera, M/Huff
NOES: COUNCIL MEMBERS: None
ABSENT: COUNCIL MEMBERS: None
ABSTAINED: COUNCIL MEMBERS: None
City Clerk
97-52
EXHIBIT A
CITY OF DIAMOND BAR
INVESTMENT POLICY - FY 1997-98
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. Safety. 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
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PAGE 2 - Investment Policy
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 be 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.
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PAGE 3 - Investment Policy
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 and
interest by the United States.
Local Agency Investment Fund (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 Paper
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
states..."no investment 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." Page
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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 in Guaranteed Small Business Administration
(SBA) Notes.
SAFEKEEPING OF SECURITIES
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 ani
executed by either the Accounting Manager or the Deputy City Cler
The transactions will be verified via monthly reconciliations by t'
Senior Accountant.
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Page 5 - Investment Policy
DS 0x14 R+TATY!
A monthly report of investments will be provided to the City
Manager. The required elements of this report are as follows:
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
philosophy 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
{ tC�
&"AA,-
"I'errence L. Belange
City Manager
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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 $20 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.) .
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
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Page 2 - Appendix A
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 270 days. The interest is calculated on a 360 day
discount basis similar to Treasury Bills.
Investment in Banker's Acceptances is limited to 40% 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 180 days maturity nor
exceed fifteen percent of the local agency's surplus funds. An
additional fifteen percent (for a total of 30%) can be invested in
Commercial Paper provided the average maturity of invested funds in
Commercial Paper does not exceed 30 days.
Investment in Commercial Paper is limited to 300 of the 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 30% of the investment portfolio per Government Code
53601. Notes must be rated "A" or better.
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Page 3 - Appendix A
Passbook Savings Account is a certificate of deposit issued in any
amount for a non 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 are referred to in the Government Code, Section 53601,
K, as "shares of beneficial interest issued by diversified
management companies". The Mutual Fund must be restricted by its
by-laws to the same investments as the local agency by the
Government Code. These investments are Treasury issues, Federal
Agency issues, State 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 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 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 Fund -s
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
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Page 4 - Appendix A
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.
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APPENDIX B
CITY OF DIAMOND BAR
BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION
1. Name of Firm:
2. Address:
3. Telephone: ( ) ( )
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
securities to City employees (attach resume)
Name:
Title:
Telephone: ( ) ( )
7. Which of the above personnel have read the City's investment
policy?
8. Is your firm a primary dealer in United States Government
Securities? Yes No
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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
Treasury Notes/Bonds
BA's (domestic)
BA's (foreign)
Commercial Paper
Agencies (specify):
CMO 's
Bank CD's
S & L CD'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
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CITY OF DIAMOND BAR
Broker/Dealer Questionnaire and Certification
Name of Firm:
Page Three
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.
13. Has your local office ever subject to a regulatory or
state/federal agency investigation for alleged improper,
fraudulent, disreputable or unfair activities 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
responsible for investment losses? If so, explain.
15. Explain your normal custody and delivery process. Who audits
these fiduciary systems? Can you meet safekeeping
requirements?
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CITY OF DIAMOND BAR
Broker/Dealer Questionnaire and Certification
Name of Firm:
Page Four
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, explain.
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
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CITY OF DIAMOND BAR
Broker/Dealer Questionnaire and Certification
Name of Firm:
Page Five
22. Please enclose the following:
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.
***CERTIFICATION***
I hereby certify that I have personally read the Statement of
Investment Policy of the City of Diamond Bar, and have implemented
reasonable procedures 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
Title
Date
Countersignature* Date
Title
* Company president or person in charge of government securities
operations.
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Appendix B
THE LOCAL AGENCY INVESTMENT FUND
The Local Agency Investment Fund (LAIF), a
voluntary program, created by statute, began under the
Jesse Unruh Administration in 1977 as an investment alternative
for California's local governments and special districts.
The enabling legislation for the LAIF is Section 16429.1,2,3.
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.
The LAW 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. The LAIF 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
or 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.
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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 to a third party custodian. All
investments are purchased at market, and a market valuation is
conducted quarterly.
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 prudent management
prevails. These policies are formulated by investment staff and
reviewed by both the PMIS and the Local Investment Advisory
Board on an annual basis.
The State Treasurer's Office is audited by the Department
of Audits on an annual basis. Department of Audits also has a
continuing audit process throughout the year. All investment
and LAW claims are audited on a daily basis by the State
Controller's Office as well as an in-house audit process
involving three separate divisions.
It has been determined that the State of California cannot
declare bankruptcy under Federal -regulations, thereby allowing
the Government Code Section 16429.3 to stand. This Section
states that "money placed with the state treasurer for deposit in
the LAW shall not be subject to impoundment or seizure by any
state official or state agency."
The LAW has grown from 293 participants and
$468 million in 1977 to 2,200 participants and
$8.9 billion in 1995.
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