HomeMy WebLinkAboutRES 2014-19RESOLUTION NO. 2014- 19
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
WHEREAS, the Investment Policy 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.
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, APPROVED, AND ADOPTED this 20th day of May, 2014.
&�� X4AAL,6L--
Carol Herrera, Mayor
I, Tommye A. Cribbins, City Clerk of the City of Diamond Bar, California, do hereby
certify that the foregoing Resolution No. 2014-19 was duly and regularly passed and
adopted by the City Council of the City of Diamond Bar, California, at its adjourned
regular meeting held on the 20th day of May, 2014, by the following vote, to wit:
AYES: COUNCILMEMBERS: Tanaka, MPT/Tye, M/Herrera
NOES: COUNCILMEMBERS: Chang
ABSENT: COUNCILMEMBERS: Lyons
ABSTAIN: COUNCILMEMBERS. Non i
�r
Tommye A. Cribbins, City Clerk
2014-19
CITY OF DIAMOND BAR
INVESTMENT POLICY— FY 2014-2015
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 its 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 review of experience and qualifications, and the
response on a questionnaire (Appendix A) 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.
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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) liquidityneeds 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 judgment 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 but are
administered by the Finance Director under the authority of the Treasurer.
Investments are allowed in the following media:
1. 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.
2. Federal agency or United States government-sponsored enterprise obligations,
participations or other instruments, including those issued by or fully guaranteed
as to principal and interest by federal agencies or United States government-
sponsored enterprises.
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3. Local Agency Investment Fund (state pool) — Demand Deposits. A more
descriptive definition of LAIF is attached as Appendix B
4. Certificates of Deposit (or Time Deposits), placed with commercial banks and/or
savings banks.
5. Negotiable Certificates of Deposit
6. Bankers Acceptances
7. Commercial Paper
8. Medium Term Corporate Notes
9. Passbook Savings Accounts
10. Active Deposits
11. Money Market Funds comprised of investments rated in the highest category by
Moody's Investors Services Inc. or by Standard & Poor's Corporation.
A more detailed description of each of the City's investment instruments is attached in
Appendix C.
Repurchase Agreements
Prohibited investments include securities not listed above(unless authorized pursuant to
section 53601), 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 must be 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."
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 U -e City's..
investment goals, the City may elect to discontinue investment in LAIR
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 in LAIF's investment pool 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 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 Deputy City Manager. 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. The required
elements of this report are as follows:
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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.
Attachments: Appendix A - Broker Dealer Questionnaire
Appendix. B - Description of Investments
Appendix C - Local Agency Investment Fund Description
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APPENDIX A
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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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
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?
h
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, explain.
19. What portfolio information, if any, do you require from your clients?
2 0. What reports, transactions, confirmations and paper trail will the City receive?
21. Does your firm offer investment training to your clients?
Yes No
2 2. 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***
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
Countersignature*
Title
Date
Date
* Company president or person in charge of government securities operations.
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Appendix B
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 30
days (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, and Federal Home Loan Mortgage Credit (FHLMC) notes.
Investment in these types of securities is limited to 40% 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 $40 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 $250,000 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 $250,000 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
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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 40% of the investment portfolio per
Govemment 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 investments.
Investment in Commercial Paper is limited to 25% 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 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 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,
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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, which are applicable to the local 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 anytime.
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 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 C
Local Agency Investment Fund
Program Description
The Local Agency Investment Fund (LAIF) is a voluntary program created by statute in
1977 as an investment alternative for California's local governments and special districts
and it continues today under Treasurer Bill Lockyer's administration. The enabling
legislation for the LAIF is Section 16429.1 et seq. of the California Government Code.
This program offers local agencies the opportunity to participate in a major portfolio
which invests hundreds of millions of dollars, using the investment expertise of the
Treasurer's Office investment staff at no additional cost to the taxpayer. This in-house
management team is comprised of civil servants who have each worked for the State
Treasurer's Office for an average of 20 years.
The LAIF is part of the Pooled Money Investment Account (PIMA). The PMIA began in
1955 and oversight is provided by the Pooled Money Investment Board (PMIB) and an
in-house Investment Committee. The PMIB members are the State Treasurer, Director
of Finance and State Controller.
The Local Investment Advisory Board (LIAB) provides oversight for LAIR 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 the State Treasurer appoints two
members who are treasurers, finance or fiscal officers or business managers employed
by any county, city or local district or municipal corporation of this state. The term of
each appointment is two years or at the pleasure of the appointing authority.
All securities are purchased under the authority of 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 a market valuation is conducted monthly.
Additionally, the PMIA has Policies, Goals, and Objectives for the portfolio to make
certain that our goals of Safety, Liquidity and Yield are not jeopardized and that prudent
management prevails. These policies are formulated by investment staff and reviewed
by both the PMIB and the LIAB on an annual basis.
The State Treasurer's Office is audited by the Bureau of State Audits on an annual
basis and the resulting opinion is posted to the STO website following its publication.
The Bureau of State Audits also has a continuing audit process throughout the year. All
investments 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.
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Under Federal Law, the State of California cannot declare bankruptcy, thereby allowing
the Government Code Section 16429.3 to stand. This Section states that "moneys
placed with the Treasurer for deposit in the LAIF by cities, counties, special districts,
nonprofit corporations, or qualified quasi -governmental agencies shall not be subject to
either of the following: (a) transfer or loan pursuant to Sections 16310, 16312, or 16313,
or (b) impoundment or seizure by any state official or state agency."
During the 2002 legislative session, California Government Code Section 16429.4 was
added to the LAIF's enabling legislation. The Section states that "right of a city, county,
city and county, special district, nonprofit corporation, or qualified quasi -governmental
agency to withdraw its deposited moneys from the LAIF, upon demand, may not be
altered, impaired, or denied in any way, by any state official or state agency based upon
the state's failure to adopt a State Budget by duly 1 of each new fiscal year."
The LAIF has grown from 293 participants and $468 million in 1977 to 2,540 participants
and $21.1 million at the end of April 2014.
State Treasurer's Office
Local Agency Investment Fund
P.O. Box 942809
Sacramento, CA 94209-0001
(916)653-3001
httpalwww.treasurer.ca.gov/pmia-laif
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