SR-204-001 (13)
1~
FEB 2 .2 2005
F:\Budget\Share\ST AFF REPORTS\invpoI5.doc
Council Meeting: February 22, 2005
Santa Monica, California
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Revision to City Investment Policy, Continuation of Delegation of
Investment Authority to Director of Finance/City Treasurer, and Resolution
Authorizing the Establishment and Use of Bank and Brokerage Accounts
and Updating the List of Persons Authorized to Conduct Transactions with
the State Local Agency Investment Fund
INTRODUCTION
This report recommends City Council approve a revised City Investment Policy, extend
the delegation of investment authority to the Director of Finance/City Treasurer from
March 1, 2005 through February 28, 2006, and update the list of persons authorized to
conduct transactions with the State Local Agency Investment Fund (LAIF).
BACKGROUND
State law requires that the City adopt an investment policy (Attachment 1) and that the
City Council annually consider the policy at a public meeting. Section 711 of the Santa
Monica City Charter delegates to the City Treasurer authority for investing City funds.
State law requires the Council delegate investment authority to the City Treasurer for a
one-year period, renewable annually. The current delegation of authority carries
through February 28, 2005.
Resolution No. 9931 (CCS), approved February 24,2004 designates the City position
titles as well as the specific individuals authorized to conduct investment transactions
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FEB .2 2 Z005
with LAIF. While the specific individuals have not changed since last year, certain
position titles have changed due to reorganization of the Finance Department. Council
authorization of the specific new titles is required.
DISCUSSION
City investments are made only in those instruments specifically authorized by
California State laws, primarily Sections 53601, 16429.1, and 53684 et seq. of the
Government Code. Within these legal guidelines, the three primary objectives of the
City's Investment Policy, in priority order are:
Safety
Safety of principal is the foremost objective of the City's investment program. City
investments shall be undertaken in a manner that seeks to ensure the preservation
of capital in the overall portfolio by diversifying its investments among a variety of
securities offering independent returns.
Liquiditv
City investments are kept sufficiently liquid to enable the City to meet all operating
requirements which might be reasonably anticipated by structuring the portfolio so
that securities mature concurrent with anticipated cash needs to the extent
possible. Investments are primarily made in securities with active secondary or
resale markets. Additionally, an adequate liquidity buffer is maintained for
extraordinary circumstances.
Yield
The City's investment portfolio is designed with the objective of attaining a
benchmark rate of return throughout budgetary and economic cycles taking into
account safety and liquidity requirements. The benchmark may vary from time to
time depending the economic and budgetary conditions present.
The City continues to abide by the highest professional standards in the management of
public funds. In February 2004, the City made changes to the Investment Policy to
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adhere to the Association of Public Treasurers United States & Canada (APT) model
investment policy standards. In August 2004, the City's policy was certified by the APT.
Only minor changes to the policy primarily related to the title changes in the Finance
Department are proposed at this time. Upon approval of these changes by Council, the
policy will be submitted to the APT for re-certification.
Section 53607 of the State of California Government Code limits the authorization of the
legislative body to delegate investment authority to a one-year period, renewable
annually. The current delegation to the Finance Director/City Treasurer runs through
February 28, 2005. Staff requests that Council extend the delegation from March 1,
2004 through February 28, 2005.
The current approved Investment Policy allows the Director of Finance/City Treasurer to
delegate investment authority to the Assistant City Treasurer. The Assistant City
Treasurer position was eliminated during the Finance Department reorganization. The
proposed revised Investment Policy allows the Director of Finance/City Treasurer to
delegate investment authority to the replacement position, Principal Budget Analyst-
Investments. Authority is also designated to the Assistant City Manager and City
Manager in the rare instances when the Director of Finance/City Treasurer and Principal
Budget Analyst-Investments are not available.
The attached resolution continues the delegation of authority to invest, as well as to
establish and use bank and brokerage accounts, to the Director of Finance/City
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Treasurer.
BUDGET/FINANCIAL IMPACT
There are no budget or financial impacts resulting from this staff report.
RECOMMENDATION
Staff recommends that Council approve the attached Investment Policy, extend
delegation of investment authority to the Director of Finance/City Treasurer for the
period March 1, 2005 through February 28, 2006, and approve and adopt the attached
resolution.
Prepared by: Steve Stark, Director of Finance/City Treasurer
David R. Carr, Principal Budget Analyst-Investments
Attachments: Attachment 1 - Revised City Investment Policy ("red-line")
Attachment 2 - Revised City Investment Policy
Attachment 3 - Resolution
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Revised 2/Q405
ATTACHMENT 1
INVESTMENT POLICY FOR THE CITY OF SANTA MONICA
1. POLICY
. It is the policy of the City of Santa Monica to invest public funds in a manner which will
safely preserve portfolio principal, provide adequate liquidity to meet the City's cash flow
needs, and optimize returns while conforming to all federal, state, and local statutes
governing the investment of public funds.
2. SCOPE
This investment policy applies to all cash and financial investments of the various funds of
the City of Santa Monica as identified in the City's Comprehensive Annual Financial
Report, with the exception of those financial assets explicitly excluded from coverage by
the Investment Policy for legal or operational reasons. All City Funds are listed in
Attachment A and all cash and financial investments excluded from coverage by this
investment policy are identified in Attachment B. The Investment Policy will also apply to
all new funds created unless specifically exempted.
Investment income will be allocated to the various funds based on their respective
participation and in accordance with generally accepted accounting principles. Interest is
allocated on a quarterly basis.
3. PRUDENCE
Investments shall be made with judgment and care, under circumstances then prevailing,
which persons of prudence, discretion, and intelligence exercise in 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.
The standard of prudence to be used by investment officials shall be the "prudent
person" and/or "prudent investor" standard and shall be applied in the context of
managing an overall portfolio. Investment officers acting in accordance with written
procedures and the investment policy and exercising due diligence shall be relieved of
personal responsibility for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion and appropriate
action is taken to control adverse developments.
4. INVESTMENT OBJECTIVES
The primary objective of all City investments, in priority order, shall be:
4.1 SAFETY
Safety of principal is the foremost objective of the investment program. City
investments shall be undertaken in a manner that seeks to ensure the preservation
of capital in the overall portfolio. To attain this, the City will diversify its investments
by investing funds among a variety of securities offering independent returns and
financial institutions.
4.2 LIQUIDITY
Liquidity is the ability to change an investment into its cash equivalent on short
notice at its prevailing market value. The City's investment portfolio shall remain
sufficiently liquid to enable the City to meet all operating requirements which might
be reasonably anticipated. This is accomplished by structuring the portfolio so that
securities mature concurrent with anticipated cash needs. Since all possible cash
demands cannot be anticipated, the portfolio will maintain a liquidity "buffer" and
invest primarily in securities with active secondary or resale markets.
4.3 RETURN
The City's investment portfolio shall be designed with the objective of attaining a
benchmark rate of return throughout budgetary and economic cycles, taking into
account safety and liquidity requirements. The benchmark may vary from time to
time depending the economic and budgetary conditions present. At no time shall
funds be invested in any security that could result in zero interest accrual if held to
maturity.
5. INVESTMENT AUTHORITY DELEGATION
In accordance with the Santa Monica City Charter, Section 711, the City Council
delegates to the City Treasurer the authority to invest City funds. The Director of
Finance/City Treasurer may delegate this authority to the Assist:mt City Tro3suror
Principal Budget Analyst-Investments. In the absence of the Director of Finance/City
Treasurer and the ^ssist3nt City Tro3suror Principal Budget Analyst-Investments,
authority to invest City funds will be delegated to the Assistant City Manager and/or City
Manager. Section 53607 of the State of California Government Code limits the
authorization of the legislative body to delegate investment authority to a one-year period,
renewable annually.
5.1 INVESTMENT PROCEDURES
The Director of Finance/City Treasurer is responsible for conducting and reporting
on all City investments. To facilitate this function, the Director of Finance/City
Treasurer will prepare and maintain an Investment Procedures Manual detailing
procedures for the operation of the investment program consistent with this policy.
The manual should include reference to safekeeping, banking services contracts,
collateral/depository agreements, and repurchase agreements. The manual shall,
also include explicit delegation of authority to persons responsible for investment
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transactions. No person may engage in investment transactions except as provided
under the terms of this policy and the procedures established by the Director of
Finance/City Treasurer. Additionally, the manual will explicitly include a current
listing of all City of Santa Monica financial institution deposit and investment
accounts, a current list of all financial institutions with which the City currently is
authorized to conduct investment transactions, a current copy of State laws pertinent
to City investments, a description of specific controls to ensure the proper execution
of the City Investment Policy, and copies, with instructions, of all investment reports
required by law or by City Investment Policy.
5.2 INVESTMENT COMMITTEE
An Investment Committee (the Committee) shall be established consisting of the
City Manager, Assistant City Manager, Director of Finance/City Treasurer, and the
Assistant City Treasurer Principal Budget Analyst-Investments. In addition, the
Committee will include one other department head serving one-year terms on a
rotating basis. The purpose of the Committee is to provide general oversight and act
in an advisory capacity. The Committee will meet at least once each calendar
quarter to review and evaluate previous investment activity, to review the current
status of all funds held by the City, to discuss anticipated cash requirements and
investment activity for the next quarter, and to discuss investment strategy with the
Director of Finance/City Treasurer.
6. ETHICS AND CONFLICTS OF INTEREST
The Director of Finance/City Treasurer and other employees involved in the investment
process shall refrain from personal business activity that could conflict with proper
execution of the investment program, or which could impair their ability to make impartial
investment decisions. The Director of Finance/City Treasurer and other employees
involved in the investment process shall disclose any material interests in financial
institutions with which they conduct business within their jurisdiction, and they shall further
disclose any material personal financial/investment positions that could be related to the
performance of the City's investment portfolio and shall refrain from personal investment
transactions with the same individual with whom business is conducted on behalf of the
City.
The Director of Finance/City Treasurer and other employees involved in the investment
process are required to file annual disclosure statements as required by the Fair Political
Practices Commission. During the course of the year, if there is an event subject to
disclosure that could impair the ability of the Director of Finance/City Treasurer or
investment employees to make impartial decisions, the City Council will be notified, in
writing, within ten (10) days of the event.
7. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The City shall transact business only with issuers, barlks, savings and loans, and
registered securities dealers. The purchase of any investment, other than those
purchased directly from the issuer, shall be purchased from either an institution licensed
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by the State as a broker/dealer as defined in Section 25004 of the Corporation Code, who
is a member of the National Association of Securities Dealers, or a member of a federally
regulated securities exchange, a national or state chartered bank, a federal or state
association (as defined by Section 5102 of the Financial Code, or a brokerage firm
designated as a primary dealer by the Federal Reserve Bank.
The Director of Finance/City Treasurer's staff shall investigate all institutions that wish to
do business with the City in order to determine if they are adequately capitalized, make
markets in securities appropriate to the City's needs, and agree to abide by the City's
Investment Policy. All financial institutions that desire to become qualified bidders for
investment transactions must complete City's "Broker/Dealer Request for Information"
and "Broker/Dealer Certification".
The Director of Finance/City Treasurer shall conduct an annual review of the financial
condition and other qualifications of all approved financial institutions and broker/dealers
to determine if they continue to meet the City's guidelines for qualification as defined in
this section. Additionally, the City shall keep the current audited financial statements on
file for each approved financial institution and broker dealer with which the City does
business.
8. AUTHORIZED AND SUITABLE INVESTMENTS
Investments shall be made only in those instruments specifically authorized by California
State laws, primarily Sections 53601, 16429.1, and 53684 et sq.of the Government Code
and to no greater an extent than authorized by those laws. These laws are summarized
in Attachment C. Additional City guidelines are as follows:
Instruments
Additional City Guidelines
U.S. Federal Agencies
Banker's Acceptances (BA)
Negotiable Certificates of Deposit (NCD)
Commercial Paper (CP)
No more than 50% of portfolio, per agency.
Maximum of 10% of portfolio per issuer.
Maximum of 10% of portfolio per issuer.
Maximum of 15% of portfolio.
In addition to following all legal guidelines, the portfolio will preserve principal, maintain
adequate liquidity to meet all City obligations, contain an appropriate level of interest rate
risk, and be diversified across types of investments, maturities, and institutions to
minimize credit risk and maintain an appropriate return.
8.1 REPURCHASE AGREEMENTS
Investments in repurchase agreements are allowable and shall be made only with
financial institutions with which the City has an executed master repurchase
agreement. The financial institution must be a primary dealer of the Federal
Reserve Bank of New York.
8.2 PROHIBITED INVESTMENTS AND TRANSACTIONS
Prohibited investments include as inverse floaters, range notes, interest only strips
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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.
8.3 INVESTMENTS HELD AND/OR MANAGED BY FISCAL AGENTS
Investments of bond proceeds held by fiscal agents will be made in accordance with
Government Code Section 53601 (I), which states that money from bond proceeds
should be invested as specified by bond documents. In most cases these
investments will be made under the same guidelines as other City investments.
Cemetery and Mausoleum Perpetual Care Funds are private funds held in trust and
managed by the City. These funds do not fall under the guidelines of the
Government Code sections noted in Section 8.0 of this Policy, but are invested
under guidelines established by the City Council.
9. INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of any pooled investments funds, including mutual funds, is
required prior to investing, and on a continual basis. To accomplish this, a questionnaire
will be used to evaluate the suitability of the pooled fund. The questionnaire will answer
the following general questions:
. A description of eligible investment securities, and a written statement of investment
policies and objectives.
. A description of interest calculations and how it is distributed, and how gains and
losses are treated.
. A description of how the securities are safeguarded (including the settlement
processes), and how often the securities are priced and the program audited.
. A description of who may invest in the program, how often, and what size deposit and
withdrawal are allowed.
. A schedule for receiving statements and portfolio listings.
. Are reserves, retained earnings, etc. utilized by the pool/fund?
. A fee schedule, and when and how fees are assessed.
. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
10. COLLATERALlZATION
California Government Code Sections 53652, et seq. requires depositories to post certain
types of collateral for public funds above the Federal Deposit Insurance Corporation
(FDIC) insurance amounts. The collateral requirements apply to bank deposits, both
active (checking and savings accounts) and inactive (non-negotiable certificates of
deposit).
Collateralization is also required for repurchase agreements. In order to anticipate market
changes and provide a level of security for all funds, the collateralization level will be
102% of the market value of principal and accrued interest, and the value shall be
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adjusted no less than quarterly. Collateral will be in the form of U.S. Treasury Obligations
or U.S. Agency Securities.
Collateral will always be held by an independent third party with whom the entity has a
current custodial arrangement. A clearly marked evidence of ownership (safekeeping
receipt) must be supplied to the City and retained. The right of collateral substitution is
granted.
11. SAFEKEEPING AND CUSTODY
In accordance with California Government Code Section 53601, all securities owned by
the City shall be held in safekeeping by the City's custodial bank or a third party bank
trust department, acting as an agent for the City under terms of the custody agreement.
Collateral for repurchase agreements will be held by a third party custodian under terms
of the Master Repurchase Agreement.
All securities will be received and delivered using a delivery vs. payment basis, which
ensures that securities are deposited with the third party custodian prior to the release of
funds. Securities will be held by a third party custodian as evidenced by safekeeping
receipts. Investments in the State Pool or money market mutual funds are undeliverable
and are not subject to delivery or third party safekeeping.
Investment trades shall be verified against bank transactions and broker confirmation
tickets. On a monthly basis, the custodial asset statement shall be reconciled with the
month-end portfolio holdings.
12. DIVERSIFICATION
The City will diversify its investments by security type, institution, and maturity date.
Concentration limits are discussed in Section 8.0 (Authorized and Suitable Investments)
and in Attachment C.
13. MAXIMUM MATURITIES
In order to minimize the impact of market risk, it is intended that all investments be held to
maturity.
To the extent possible, the City will attempt to match its investments with anticipated cash
flow requirements. Unless matched to a specific cash flow, the City will not directly invest
in securities with a final stated maturity date of more than five (5) years. Any investment
of more than five years requires the advance approval of the City Council, in accordance
with State law, and the City Manager. Further maturity limitations are shown in
Attachment C. The weighted average maturity of the investment portfolio will be three
years or less. Investments may be sold prior to maturity for cash flow needs, appreciation
purposes, or in order to limit losses. However, no investment shall be made based solely
on earning anticipated from capital gains. Due to the uncertain nature of cash flow
requirements, a portion of the portfolio should be continually invested in readily available
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funds.
14. INTERNAL CONTROLS
The Director of Finance/City Treasurer shall be responsible for ensuring that all
investment transactions comply with the City's Investment Policy and for establishing
internal controls that are designed to prevent losses due to fraud, negligence, and third-
party misrepresentation
The Director of Finance/City Treasurer will also establish internal control procedures
addressing wire transfer controls, separation of duties and administrative controls,
avoidance of collusion, separation of transaction authority from accounting procedures,
documentation of investment transactions, and monitoring of results.
As part of its annual audit of the City, the City's external auditor will review compliance
with statutes, policies, and procedures.
15. PERFORMANCE STANDARDS
The portfolio shall be designed with the objective of obtaining a rate of return throughout
budgetary and economic cycles, commensurate with investment risk constraints and cash
flow needs.
15.1 MARKET YIELD (Benchmark)
The City's investment strategy is passive. Given this strategy, the basis used by the
Director of Finance/City Treasurer to determine whether appropriate and suitable
market yields are being achieved shall be to identify a comparable benchmark to the
portfolio's investment duration, e.g. the Constant Maturing Two Year Treasury bill
index. Benchmarks may change over time depending on the portfolio's duration.
16. REPORTING
In accordance with State law and the City Charter, monthly reports will be made to the
City Council and the City Manager describing the present status of City investments and
monies held by the City, as well as summarizing all investment transactions for the
month. Schedules in the monthly report should include the following:
. The type of the investment, name of the issuer, maturity date, par value, book value,
and market value
. The source of market value data
. The weighted average maturity of the portfolio
. Coupon, discount, or earnings rate for each security
. Percentage of portfolio represented by each investment category
. A certification of compliance with the Investment Policy
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. A statement denoting the City's ability to meet its anticipated expenditures
requirements for the next six months
· Benchmark comparison
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Records of all investment transactions will be kept and filed in the Treasurer's office.
The Director of Finance/City Treasurer will provide copies of the June and December
monthly cash and investment report to the California Debt and Investment Advisory
Commission, as well as the City's Investment Policy subsequent to the Council's annual
review.
17 . SOCIALLY RESPONSIBLE INVESTING
RESTRICTIONS - The direct investment of City funds are restricted as follows:
a. Investments are to be made in entities that support clean and healthy environment,
including following safe and environmentally sound practices.
b. No investments are to be made in tobacco or tobacco-related products.
c. No investments are to be made to support the production of weapons, military
systems, or nuclear power.
d. Investments are to be made in entities that support equality of rights regardless of sex,
race, age, disability or sexual orientation.
e. Investments are to be made in entities that promote community economic
development.
Prior to making investments, Director of Finance/City Treasurer shall verify compliance
with the guidelines either through direct contact with company or with Investors
Responsibility Research Center.
18. COMMUNITY REINVESTMENT ACT (CRA)
The City will deposit funds only in those financial institutions, which have a CRA rating (as
determined by the appropriate regulatory body) of "Outstanding" or "Satisfactory".
19. INVESTMENT POLICY ADOPTION
The City's investment policy shall be reviewed and adopted by the City Council annually.
The Investment Committee will review the policy periodically to ensure its consistency
with the overall objectives of preservation of principal, liquidity, and return, and its
conformance with current law, financial and economic trends, and cash flow needs of the
City.
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ATTACHMENT 1-A
City of Santa Monica Funds for Cash Pooling
The following listed City of Santa Monica funds shall have their cash balances pooled for
investment purposes except for any fund or portion of one or more funds which is specifically
identified for exclusion in Attachment B of the City Investment Policy:
FUND NUMBER
01
04
11
12
13
14
15
16
17
18
19
20
21
22
23
25
27
29
30
31
32
33
34
37
41
42
43
44
51
52
53
54
55
56
57
58
59
77
80
82
85
89
FUND NAME
GENERAL FUND
SPECIAL REVENUE SOURCE FUND
BEACH RECREATION FUND
HOUSING AUTHORITY FUND
DISASTER RELIEF FUND
TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT FUND
LOW/MODERATE INCOME HOUSING FUND
REDEVELOPMENT~DOWNTOWN PROJECT FUND
REDEVELOPMENT~EARTHQUAKE RECOVERY PROJECT FUND
REDEVELOPMENT~OCEAN PARK PROJECT FUND
COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG) FUND
MISCELLANEOUS GRANTS FUND
ASSET SEIZURE FUND
CITIZENS OPTION FOR PUBLIC SAFETY FUND
DISASTER FUND
WATER FUND
SOLID WASTE MANAGEMENT FUND
RENT CONTROL FUND
PIER FUND
WASTEWATER FUND
CIVIC AUDITORIUM FUND
AIRPORT FUND
STORMWATER MANAGEMENT FUND
CEMETERY FUND
BIG BLUE BUS FUND
TRAFFIC SAFETY FUND
GAS TAX FUND
SCAQMD FUND
CABLE COMMUNICATIONS FUND
SPECIAL AVIATION FUND
PARKS AND RECREATIONAL FUND
VEHICLE MANAGEMENT FUND
COMPUTER EQUIPMENT REPLACEMENT FUND
SELF INSURANCE-COMPREHENSIVE FUND
SELF INSURANCE-BUS FUND
SELF INSURANCE-AUTO FUND
SELF INSURANCE WORKERS-COMPENSATION FUND
PARKING AUTHORITY FUND
GENERAL TRUST FUND
CEMETERY PERPETUAL CARE FUND
DEBT SERVICE FUND
MAUSOLEUM PERPETUAL CARE FUND
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ATTACHMENT 1-8
Summary of State of California Statutes Applicable to Municipal Investments
The following investments are authorized by California State Code, Title 5, Division 2, Sections
53600,53601,53631.5 and 53635. See code sections for complete descriptions.
Authorized Investment
Local Agency Bonds
U.S. Treasury Obligations
State of California
Obligations
California Local Agency
Obligations
U.S. Agencies
Bankers Acceptance
Commercial Paper
Negotiable Certificates of
Deposit
Repurchase Agreement
Legal
Limit (%)
No limit
No limit
No limit
No limit
No limit
40%
15%/30%
30%
No limit
Other Constraints
Maximum maturity 5 years.
Maximum maturity 5 years.
Maximum maturity 5 years.
Maximum maturity 5 years.
Maximum maturity 5 years.
Eligible for purchase by the Federal Reserve
System and not to exceed 180 days to maturity.
No more than 30% may be in bankers
acceptances of anyone commercial bank.
"Prime" quality; U.S. corporate assets over
$500,000,000; "A" debt rating; purchases may
not represent more than 10% of outstanding
paper and may not exceed 270 days to maturity.
The maximum limit on commercial paper is 25%
of all investments
Maximum maturity 5 years. State and Federally
chartered banks and savings institutions,
including U.S. branches of foreign banks
regulated by State regulatory authorities
("Yankee CD").
Maximum maturity 1 year. Securities used as
collateral for repo's must be investments
allowable under Govt. Code (i.e., T-bills,
Agencies, BAs, CDs, etc.); must be
collateralized at 102% of market value or
greater; securities must be safekept by third
party.
Reverse Repurchase
Agreements
Securities Lending
Agreements
Medium-Term Corporate
Notes
Shares of beneficial
interest issued by
diversified management
companies
(mutual funds)
Money Market Funds
20%*
20%*
30%
20%
20%
Must be made with primary dealers of the
Federal Reserve Bank of New York and the
securities used for the agreement must have
been held by the local agency for at least 30
days. The maximum maturity is 92 days.
Must be made with primary dealers of the
Federal Reserve Bank of New York; the
securities used for the agreement must have
been held by the local agency for at least 30
days. Securities used as collateral must be
investments allowable under Govt. Code (i.e.
U.S. Treasury obligations, Agencies, BA's CDs,
etc.); both the securities and the collateral are to
be held by a third party. Maximum maturity 92
days.
Maximum maturity 5 years; bonds must be rated
in top three rating categories by a nationally
recognized rating service.
No more than 10% may be invested in anyone
mutual fund. Funds are invested in securities
and obligations authorized by sub-divisions (a)
through (m) of Section 53601 and 53635, (any of
the authorized investments for local agencies)
the investment company must be in highest
ranking provided by not less than two of the
three largest nationally recognized rating
services OR must have the investment advisor
registered with the SEC with no less than 5 yrs.
experience and have assets under mgmt. in
excess of $500 million.
The money market funds must have an average
weighted maturity of 90 days or less and abide
by SEC regulations; funds must receive the
highest ranking by 2 of the 3 largest nationally
recognized rating agencies OR retain an
investment advisor who is registered, or exempt
from registration, with the SEC and has at least
5 years experience managing money market
funds in excess of $500 million.
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Collateralized Certificate
of Deposit
Mortgage Securities
Local Agency
Investment Fund
(LAI F)
County Pooled
Investment Funds
*20% for reverse
repurchase agreements
and securities lending
agreements combined.
Bond Proceeds
No limit
20%
$ 40
million
No limit
Maximum maturity 5 years. Banks: deposit not
to exceed the total of paid-in capital surplus.
S&Ls: deposit not to exceed the greater of total
net worth or $500,000. State and Federal credit
unions: deposit shall not exceed the greater of
the total of unpaired capital and surplus or
$500,000. Must be collateralized to 110% of the
CD value by other eligible securities.
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 is
prohibited.
Maximum maturity 5 years; bonds must be rated
in top two rating categories by a nationally
recognized rating service. Shall not exceed 95%
of the mortgage security's fair market value.
Monies are invested in pooled state fund
managed by State :rreasurer. Maximum, 15
transactions per month.
Bond proceeds may be invested in accordance with the State Code provisions.
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ATTACHMENT 1-C
GLOSSARY
AGENCIES: Federal agency securities and/or Government Sponsored Enterprises (GSE's)".
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill of exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
BASIS POINT: A basis point equals one one-hundredth of 1% (.01%).
BENCHMARK: A comparative base for measuring the performance or risk tolerance of an
investment portfolio. The benchmark should represent a close correlation to the level of risk
and the average duration of the portfolio.
BID: The price offered for securities.
BROKER: A broker brings buyers and sellers together for a commission.
CALLABLE SECURITY: A security that can be redeemed by the issuer before the scheduled
maturity date.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a
certificate. Large denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to
secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of
public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the
City of Santa Monica. It includes basic financial statements for each individual fund and
account group prepared in conformity with GAAP. It also includes supporting schedules
necessary to demonstrate compliance with finance-related legal and contractual provisions,
extensive introductory material, and a detailed Statistical Section.
COMMERCIAL PAPER (CP): An unsecured promissory note with a fixed maturity no longer
than 270 days. Usually sold in discount form.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder
on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a
payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and
selling for his own account.
DELIVERY VERSUS PAYMENT (DVP): There are two methods of delivery of securities:
4
delivery versus payment and delivery versus receipt (also called free). Delivery versus
payment is delivery of securities with an exchange of money for the securities. Delivery versus
receipt is delivery of securities with an exchange of a signed receipt for the securities.
DEBENTURE: A bond secured only by the general credit of the issuer.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the
movement of one or more underlying indices or securities, and may include a leveraging
factor, or (2) financial contracts based on notional amounts whose value is derived from an
underlying index or security (interest rates, foreign exchange rates, equities, or commodities).
DISCOUNT: The difference between the cost price of a security and its value at maturity when
quoted at lower than face value. A security selling below original offering price shortly after
sale also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued at
a discount and redeemed at maturity for full face value (e.g., U.S. Treasury bills).
DIVERSIFICATION: Dividing investment funds among a variety of securities and issuers
offering independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit
to various classes of institutions and individuals, e.g., S&L's, small business firms, students,
farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures
bank deposits, currently up to $100,000 per deposit.
FEDERAL FUNDS: Non-interest bearing deposits held by member banks at the Federal
Reserve. Also used to denote "immediately available" funds in the clearing sense. "Fed
Funds" also used to refer to these funds.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently
12 regional banks) which lend funds and provide correspondent banking services to member
commercial banks, thrift institutions, credit unions, and insurance companies. The mission of
the FHLB's is to liquefy the housing related assets of members who must purchase stock in
their district Bank.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): A Government Sponsored
Enterprise that provides liquidity to the mortgage markets, much like FNMA and FHLB.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was
chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing & Urban Development,
H.U.D. It is the largest single provider of residential mortgage funds in the United States.
Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The
corporation's purchases include a variety of adjustable mortgages and second loans in
5
addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely
accepted. FNMA assumes and guarantees that all security holders will receive timely payment
of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal
Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a permanent member while the other Presidents serve on
a rotating basis. The Committee periodically meets to set Federal Reserve guidelines
regarding purchases and sales of Government Securities in the open market as a means of
influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress
and consisting of a seven-member Board of Governors in Washington, D.C., 12 Regional
Banks and about 5,700 commercial banks that are members of the system.
GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage
bankers, commercial banks, savings and loan associations and other institutions. Security
holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are
backed by FHA, VA or FmHM mortgages. The term pass-throughs is often used to describe
Ginnie Maes.
INVERSE FLOATERS: A structured note in which the coupon increase as interest rates
decline and decrease as rates rise.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. In the money market, a security is said to be liquid if the spread
between bid and asked prices is narrow and reasonable size can be done at those quotes.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from political
subdivisions that are placed in the custody of the State Treasurer for investment and
reinvestment.
MARKET VALUE: The price at which a security is trading and could presumably be purchased
or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions
between the parties to repurchase-reverse repurchase agreements that establishes each
party's rights in the transactions. A master agreement will otten specify, among other things,
the right of the buyer-lender to liquidate the underlying securities in the event of default by the
seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes due
and payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper,
bankers' acceptances, etc.) are issued and traded.
OFFER: The price asked by a seller of securities (When you are buying securities, you ask for
an offer). See ASKED AND BID.
6
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank, as directed by the
FOMC, in order to influence the volume of money and credit in the economy. Purchases inject
reserves into the bank system and stimulate growth of money and credit; sales have the
opposite effect. Open market operations are the Federal Reserve's most important and most
flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers that submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve Bank of
New York and are subject to its informal oversight. Primary dealers include Securities and
Exchange Commission (SEC) registered securities broker-dealers, banks, and a few
unregulated firms.
PRIME RATE: The rate at which banks lend to their best or "prime" customers. Also known
as the "reference rate."
PRINCIPAL: 1) the dollar cost of an issue excluding accrued interest. 2) The one who takes
ownership in a transaction, as opposed to brokering or acting as agent.
PRUDENT PERSON RULE: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the state
(the so-called legal list). In other states, the trustee may invest in a security if it is one, which
would be brought by a prudent person of discretion and intelligence who is seeking a
reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption
from the payment of any sales or compensating use or ad valorem taxes under the laws of this
state, which has segregated for the benefit of the commission eligible collateral having a value
of not less than its maximum liability and which has been approved by the Public Deposit
Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its
current market price. This may be the amortized yield to maturity on a bond or the current
income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to
an investor with an agreement to repurchase them at a fixed price on a fixed date. The
security "buyer" in effect lends the "seller" money for the period of the agreement, and the
terms of the agreement are structured to compensate him for this. Dealers use RP extensively
to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money,
that is, increasing bank reserves.
REVERSE REPO: An agreement whereby the dealer agrees to buy securities and the
investor agrees to repurchase them at a later date.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank's vaults for protection.
7
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SEC RULE 15C3-1: See uniform net capital rule.
SECURITIES AND EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transaction by administering securities legislation.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA,
SLMA, etc.) and Corporations which have embedded options (e.g. call features, step-up
coupons, floating rate coupons, derivative based returns) into their debt structure. Their
market performance is impacted by the fluctuation of interest rates, the volatility of the
imbedded options, and shifts in the shape of the yield curve.
STUDENT LOAN MARKETING ASSOCIATION (SLMA): A U.S. Corporation and
instrumentality of the U.S. government. Through its borrowings, funds are targeted for loans to
students in higher education institutions. SLMA's securities are highly liquid and are widely
accepted.
SETTLEMENT DATE: The date on which a trade is cleared by delivery of securities against
funds. This date may be the same as the trade date or later.
TENNESSEE VALLEY AUTHORITY (TVA): A U.S. Corporation created in the 1930's, to
electrify the Tennessee Valley area; currently a major utility headquartered in Knoxville
Tennessee. TVA's securities are highly liquid and are widely accepted.
TRADE DATE: The date on which the buyer and seller agree to a transaction. The trade date
mayor may not be the date on which the securities and money changes hands (settlement
date ).
TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to
finance the national debt. Most bills are issued to mature in three months, six months, or one
year.
TREASURY BOND: Long-term coupon-bearing securities U.S. Treasury securities issued as
direct obligations of the U.S. Government and having initial maturities of more than ten years.
TREASURY NOTES: Intermediate term coupon-bearing U.S. Treasury securities issued as
direct obligations of the U.S. Government and having initial maturities of from one to ten years.
UNIFORM CAPITAL RULE: Securities and Exchange Commission requirement that member
firms as well as non-member broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm including margin loans and commitments to
purchase securities, one reason new public issues are spread among members of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a percentage. (a)
INCOME YIELD is obtained by dividing the current dollar income by the current market price
8
for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus
any premium above par or plus any discount from par in purchase price with the adjustment
spread over the period from the date of purchase to the date of maturity of the bond.
YIELD TO MATURITY: The rate of return yielded by a debt security held to maturity when
both interest payments and the investor's capital gain or loss on the security are taken into
account.
9
Revised 2/05
ATTACHMENT 2
INVESTMENT POLICY FOR THE CITY OF SANTA MONICA
1. POLICY
It is the policy of the City of Santa Monica to invest public funds in a manner which will
safely preserve portfolio principal, provide adequate liquidity to meet the City's cash flow
needs, and optimize returns while conforming to all federal, state, and local statutes
governing the investment of public funds.
2. SCOPE
This investment policy applies to all cash and financial investments of the various funds of
the City of Santa Monica as identified in the City's Comprehensive Annual Financial
Report, with the exception of those financial assets explicitly excluded from coverage by
the Investment Policy for legal or operational reasons. All City Funds are listed in
Attachment A and all cash and financial investments excluded from coverage by this
investment policy are identified in Attachment B. The Investment Policy will also apply to
all new funds created unless specifically exempted.
Investment income will be allocated to the various funds based on their respective
participation and in accordance with generally accepted accounting principles. Interest is
allocated on a quarterly basis.
3. PRUDENCE
Investments shall be made with judgment and care, under circumstances then prevailing,
which persons of prudence, discretion, and intelligence exercise in 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.
The standard of prudence to be used by investment officials shall be the "prudent
person" and/or "prudent investor" standard and shall be applied in the context of
managing an overall portfolio. Investment officers acting in accordance with written
procedures and the investment policy and exercising due diligence shall be relieved of
personal responsibility for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion and appropriate
action is taken to control adverse developments.
4. INVESTMENT OBJECTIVES
The primary objective of all City investments, in priority order, shall be:
4.1 SAFETY
Safety of principal is the foremost objective of the investment program. City
investments shall be undertaken in a manner that seeks to ensure the preservation
of capital in the overall portfolio. To attain this, the City will diversify its investments
by investing funds among a variety of securities offering independent returns and
financial institutions.
4.2 LIQUIDITY
Liquidity is the ability to change an investment into its cash equivalent on short
notice at its prevailing market value. The City's investment portfolio shall remain
sufficiently liquid to enable the City to meet all operating requirements which might
be reasonably anticipated. This is accomplished by structuring the portfolio so that
securities mature concurrent with anticipated cash needs. Since all possible cash
demands cannot be anticipated, the portfolio will maintain a liquidity "buffer" and
invest primarily in securities with active secondary or resale markets.
4.3 RETURN
The City's investment portfolio shall be designed with the objective of attaining a
benchmark rate of return throughout budgetary and economic cycles, taking into
account safety and liquidity requirements. The benchmark may vary from time to
time depending the economic and budgetary conditions present. At no time shall
funds be invested in 'any security that could result in zero interest accrual if held to
maturity.
5. INVESTMENT AUTHORITY DELEGATION
In accordance with the Santa Monica City Charter, Section 711, the City Council
delegates to the City Treasurer the authority to invest City funds. The Director of
Finance/City Treasurer may delegate this authority to the Principal Budget Analyst-
Investments. In the absence of the Director of Finance/City Treasurer and the Principal
Budget Analyst-Investments, authority to invest City funds will be delegated to the
Assistant City Manager and/or City Manager. Section 53607 of the State of California
Government Code limits the authorization of the legislative body to delegate investment
authority to a one-year period, renewable annually.
5.1 INVESTMENT PROCEDURES
The Director of Finance/City Treasurer is responsible for conducting and reporting
on all City investments. To facilitate this function, the Director of Finance/City
Treasurer will prepare and maintain an Investment Procedures Manual detailing
procedures for the operation of the investment program consistent with this policy.
The manual should include reference to safekeeping, banking services contracts,
collateral/depository agreements, and repurchase agreements. The manual shall
also include explicit delegation of authority to persons responsible for investment
transactions. No person may engage in investment transactions except as provided
2
under the terms of this policy and the procedures established by the Director of
Finance/City Treasurer. Additionally, the manual will explicitly include a current
listing of all City of Santa Monica financial institution deposit and investment
accounts, a current list of all financial institutions with which the City currently is
authorized to conduct investment transactions, a current copy of State laws pertinent
to City investments, a description of specific controls to ensure the proper execution
of the City Investment Policy, al1d copies, with instructions, of all investment reports
required by law or by City Investment Policy.
5.2 INVESTMENT COMMITTEE
An Investment Committee (the Committee) shall be established consisting of the
City Manager, Assistant City Manager, Director of Finance/City Treasurer, and the
Principal Budget Analyst-Investments. In addition, the Committee will include one
other department head serving one-year terms on a rotating basis. The purpose of
the Committee is to provide general oversight and act in an advisory capacity. The
Committee will meet at least once each calendar quarter to review and evaluate
previous investment activity, to review the current status of all funds held by the City,
to discuss anticipated cash requirements and investment activity for the next quarter,
and to discuss investment strategy with the Director of Finance/City Treasurer.
6. ETHICS AND CONFLICTS OF INTEREST
The Director of Finance/City Treasurer and other employees involved in the investment
process shall refrain from personal business activity that could conflict with proper
execution of the investment program, or which could impair their ability to make impartial
investment decisions. The Director of Finance/City Treasurer and other employees
involved in the investment process shall disclose any material interests in financial
institutions with which they conduct business within their jurisdiction, and they shall further
disclose any material personal financial/investment positions that could be related to the
performance of the City's investment portfolio and shall refrain from personal investment.
transactions with the same individual with whom business is conducted on behalf of the
City.
The Director of Finance/City Treasurer and other employees involved in the investment
process are required to file annual disclosure statements as required by the Fair Political
Practices Commission. During the course of the year, if there is an event subject to
disclosure that could impair the ability of the Director of Finance/City Treasurer or
investment employees to make impartial decisions, the City Council will be notified, in
writing, within ten (10) days of the event.
7. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The City shall transact business only with issuers, banks, savings and loans, and
registered securities dealers. The purchase of any investment, other than those
purchased directly from the issuer, shall be purchased from either an institution licensed
by the State as a broker/dealer as defined in Section 25004 of the Corporation Code, who
is a member of the National Association of Securities Dealers, or a member of a federally
3
regulated securities exchange, a national or state chartered bank, a federal or state
association (as defined by Section 5102 of the Financial Code, or a brokerage firm
designated as a primary dealer by the Federal Reserve Bank.
The Director of Finance/City Treasurer's staff shall investigate all institutions that wish to
do business with the City in order to determine if they are adequately capitalized, make
markets in securities appropriate to the City's needs, and agree to abide by the City's
Investment Policy. All financial institutions that desire to become qualified bidders for
investment transactions must complete City's "Broker/Dealer Request for Information"
and "Broker/Dealer Certification".
The Director of Finance/City Treasurer shall conduct an annual review of the financial
condition and other qualifications of all approved financial institutions and broker/dealers
to determine if they continue to meet the City's guidelines for qualification as defined in
this section. Additionally, the City shall keep the current audited financial statements on
file for each approved financial institution and broker dealer with which the City does
business.
8. AUTHORIZED AND SUITABLE INVESTMENTS
Investments shall be made only in those instruments specifically authorized by California
State laws, primarily Sections 53601, 16429.1, and 53684 et sq.of the Government Code
and to no greater an extent than authorized by those laws. These laws are summarized
in Attachment C. Additional City guidelines are as follows:
Instruments
Additional City Guidelines
U.S. Federal Agencies
Banker's Acceptances (BA)
Negotiable Certificates of Deposit (NCD)
Commercial Paper (CP)
No more than 50% of portfolio, per agency.
Maximum of 10% of portfolio per issuer.
Maximum of 10% of portfolio per issuer.
Maximum of 15% of portfolio.
In addition to following all legal guidelines, the portfolio will preserve principal, maintain
adequate liquidity to meet all City obligations, contain an appropriate level of interest rate
risk, and be diversified across types of investments, maturities, and institutions to
minimize credit risk and maintain an appropriate return.
8.1 REPURCHASE AGREEMENTS
Investments in repurchase agreements are allowable and shall be made only with
financial institutions with which the City has an executed master repurchase
agreement. The financial institution must be a primary dealer of the Federal
Reserve Bank of New York.
8.2 PROHIBITED INVESTMENTS AND TRANSACTIONS
Prohibited investments include 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 jf held to maturity, as specified in
4
Section 53601.6.
8.3 INVESTMENTS HELD AND/OR MANAGED BY FISCAL AGENTS
Investments of bond proceeds held by fiscal agents will be made in accordance with
Government Code Section 53601 (I), which states that money from bond proceeds
should be invested as specified by bond documents. In most cases these
investments will be made under the same guidelines as other City investments.
Cemetery and Mausoleum Perpetual Care Funds are private funds held in trust and
managed by the City. These funds do not fall under the guidelines of the
Government Code sections noted in Section 8.0 of this Policy, but are invested
under guidelines established by the City Council.
9. INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of any pooled investments funds, including mutual funds, is
required prior to investing, and on a continual basis. To accomplish this, a questionnaire
will be used to evaluate the suitability of the pooled fund. The questionnaire will answer
the following general questions:
. A description of eligible investment securities, and a written statement of investment
policies and objectives.
. A description of interest calculations and how it is distributed, and how gains and
losses are treated.
. A description of how the securities are safeguarded (including the settlement
processes), and how often the securities are priced and the program audited.
. A description of who may invest in the program, how often, and what size deposit and
withdrawal are allowed.
. A schedule for receiving statements and portfolio listings.
. Are reserves, retained earnings, etc. utilized by the pool/fund?
. A fee schedule, and when and how fees are assessed.
. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
10. COLLATERALlZATION
California Government Code Sections 53652, et seq. requires depositories to post certain
types of collateral for public funds above the Federal Deposit Insurance Corporation
(FDIC) insurance amounts. The collateral requirements apply to bank deposits, both
active (checking and savings accounts) and inactive (non-negotiable certificates of
deposit).
Collateralization is also required for repurchase agreements. In order to anticipate market
changes and provide a level of security for all funds, the collateralization level will be
102% of the market value of principal and accrued interest, and the value shall be
adjusted no less than quarterly. Collateral will be in the form of U.S. Treasury Obligations
or U.S. Agency Securities.
5
Collateral will always be held by an independent third party with whom the entity has a
current custodial arrangement. A clearly marked evidence of ownership (safekeeping
receipt) must be supplied to the City and retained. The right of collateral substitution is
granted.
11. SAFEKEEPING AND CUSTODY
In accordance with California Government Code Section 53601, all securities owned by
the City shall be held in safekeeping by the City's custodial bank or a third party bank
trust department, acting as an agent for the City under terms of the custody agreement.
Collateral for repurchase agreements will be held by a third party custodian under terms
of the Master Repurchase Agreement.
All securities will be received and delivered using a delivery vs. payment basis, which
ensures that securities are deposited with the third party custodian prior to the release of
funds. Securities will be held by a third party custodian as evidenced by safekeeping
receipts. Investments in the State Pool or money market mutual funds are undeliverable
and are not subject to delivery or third party safekeeping.
Investment trades shall be verified against bank transactions and broker confirmation
tickets. On a monthly basis, the custodial asset statement shall be reconciled with the
month-end portfolio holdings.
12. DIVERSIFICATION
The City will diversify its investments by security type, institution, and maturity date.
Concentration limits are discussed in Section 8.0 (Authorized and Suitable Investments)
and in Attachment C.
13. MAXIMUM MATURITIES
In order to minimize the impact of market risk, it is intended that all investments be held to
matu rity.
To the extent possible, the City will attempt to match its investments with anticipated cash
flow requirements. Unless matched to a specific cash flow, the City will not directly invest
in securities with a final stated maturity date of more than five (5) years. Any investment
of more than five years requires the advance approval of the City Council, in accordance
with State law, and the City Manager. Further maturity limitations are shown in
Attachment C. The weighted average maturity of the investment portfolio will be three
years or less. Investments may be sold prior to maturity for cash flow needs, appreciation
purposes, or in order to limit losses. However, no investment shall be made based solely
on earning anticipated from capital gains. Due to the uncertain nature of cash flow
requirements, a portion of the portfolio should be continually invested in readily available
funds.
6
14. INTERNAL CONTROLS
The Director of Finance/City Treasurer shall be responsible for ensuring that all
investment transactions comply with the City's Investment Policy and for establishing
internal controls that are designed to prevent losses due to fraud, negligence, and third-
party misrepresentation
The Director of Finance/City Treasurer will also establish internal control procedures
addressing wire transfer controls, separation of duties and administrative controls,
avoidance of collusion, separation of transaction authority from accounting procedures,
documentation of investment transactions, and monitoring of results.
As part of its annual audit of the City, the City's external auditor will review compliance
with statutes, policies, and procedures.
15. PERFORMANCE STANDARDS
The portfolio shall be designed with the objective of obtaining a rate of return throughout
budgetary and economic cycles, commensurate with investment risk constraints and cash
flow needs.
15.1 MARKET YIELD (Benchmark)
The City's investment strategy is passive. Given this strategy, the basis used by the
Director of Finance/City Treasurer to determine whether appropriate and suitable
market yields are being achieved shall be to identify a comparable benchmark to the
portfolio's investment duration, e.g. the Constant Maturing Two Year Treasury bill
index. Benchmarks may change over time depending on the portfolio's duration.
16. REPORTING
In accordance with State law and the City Charter, monthly reports will be made to the
City Council and the City Manager describing the present status of City investments and
monies held by the City, as well as summarizing all investment transactions for the
month. Schedules in the monthly report should include the following:
. The type of the investment, name of the issuer, maturity date, par value, book value,
and market value
. The source of market value data
. The weighted average maturity of the portfolio
. Coupon, discount, or earnings rate for each security
. Percentage of portfolio represented by each investment category
. A certification of compliance with the Investment Policy
. A statement denoting the City's ability to meet its anticipated expenditures
requirements for the next six months
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. Benchmark comparison
Records of all investment transactions will be kept and filed in the Treasurer's office.
The Director of Finance/City Treasurer will provide copies of the June and December
monthly cash and investment report to the California Debt and Investment Advisory
Commission, as well as the City's Investment Policy subsequent to the Council's annual
review.
17. SOCIALLY RESPONSIBLE INVESTING
RESTRICTIONS - The direct investment of City funds are restricted as follows:
a. Investments are to be made in entities that support clean and healthy environment,
including following safe and environmentally sound practices.
b. No investments are to be made in tobacco or tobacco-related products.
c. No investments are to be made to support the production of weapons, military
systems, or nuclear power.
d. Investments are to be made in entities that support equality of rights regardless of sex,
race, age, disability or sexual orientation.
e. Investments are to be made in entities that promote community economic
development.
Prior to making investments, Director of Finance/City Treasurer shall verify compliance
with the guidelines either through direct contact with company or with Investors
Responsibility Research Center.
18. COMMUNITY REINVESTMENT ACT (CRA)
The City will deposit funds only in those financial institutions, which have a CRA rating (as
determined by the appropriate regulatory body) of "Outstanding" or "Satisfactory".
19. INVESTMENT POLICY ADOPTION
The City's investment policy shall be reviewed and adopted by the City Council annually.
The Investment Committee will review the policy periodically to ensure its consistency
with the overall objectives of preservation of principal, liquidity, and return, and its
conformance with current law, financial and economic trends, and cash flow needs of the
City.
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ATTACHMENT 1-A
City of Santa Monica Funds for Cash Pooling
The following listed City of Santa Monica funds shall have their cash balances pooled for
investment purposes except for any fund or portion of one or more funds which is specifically
identified for exclusion in Attachment B of the City Investment Policy:
FUND NUMBER
01
04
11
12
13
14
15
16
17
18
19
20
21
22
23
25
27
29
30
31
32
33
34
37
41
42
43
44
51
52
53
54
55
56
57
58
59
77
80
82
85
89
FUND NAME
GENERAL FUND
SPECIAL REVENUE SOURCE FUND
BEACH RECREATION FUND
HOUSING AUTHORITY FUND
DISASTER RELIEF FUND
TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT FUND
LOW/MODERATE INCOME HOUSING FUND
REDEVELOPMENT-DOWNTOWN PROJECT FUND
REDEVELOPMENT-EARTHQUAKE RECOVERY PROJECT FUND
REDEVELOPMENT-OCEAN PARK PROJECT FUND
COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG) FUND
MISCELLANEOUS GRANTS FUND
ASSET SEIZURE FUND
CITIZENS OPTION FOR PUBLIC SAFETY FUND
DISASTER FUND
WATER FUND
SOLID WASTE MANAGEMENT FUND
RENT CONTROL FUND
PIER FUND
WASTEWATER FUND
CIVIC AUDITORIUM FUND
AIRPORT FUND
STORMWATER MANAGEMENT FUND
CEMETERY FUND
BIG BLUE BUS FUND
TRAFFIC SAFETY FUND
GAS TAX FUND
SCAQMD FUND
CABLE COMMUNICATIONS FUND
SPECIAL AVIATION FUND
PARKS AND RECREATIONAL FUND
VEHICLE MANAGEMENT FUND
COMPUTER EQUIPMENT REPLACEMENT FUND
SELF INSURANCE-COMPREHENSIVE FUND
SELF INSURANCE-BUS FUND
SELF INSURANCE-AUTO FUND
SELF INSURANCE WORKERS-COMPENSATION FUND
PARKING AUTHORITY FUND
GENERAL TRUST FUND
CEMETERY PERPETUAL CARE FUND
DEBT SERVICE FUND
MAUSOLEUM PERPETUAL CARE FUND
9
ATTACHMENT 1-8
Summary of State of California Statutes Applicable to Municipal Investments
The following investments are authorized by California State Code, Title 5, Division 2, Sections
53600,53601,53631.5 and 53635. See code sections for complete descriptions.
Authorized Investment
Local Agency Bonds
U.S. Treasury Obligations
State of California
Obligations
California Local Agency
Obligations
U.S. Agencies
Bankers Acceptance
Commercial Paper
Negotiable Certificates of
Deposit
Repurchase Agreement
Legal
Limit (%)
No limit
No limit
No limit
No limit
No limit
40%
15%/30%
30%
No limit
Other Constraints
Maximum maturity 5 years.
Maximum maturity 5 years.
Maximum maturity 5 years.
Maximum maturity 5 years.
Maximum maturity 5 years.
Eligible for purchase by the Federal Reserve
System and not to exceed 180 days to maturity.
No more than 30% may be in bankers'
acceptances of anyone commercial bank.
"Prime" quality; U.S. corporate assets over
$500,000,000; "A" debt rating; purchases may
not represent more than 10% of outstanding
paper and may not exceed 270 days to maturity.
The maximum limit on commercial paper is 25%
of all investments
Maximum maturity 5 years. State and Federally
chartered banks and savings institutions,
including U.S. branches of foreign banks
regulated by State regulatory authorities
("Yankee CD").
Maximum maturity 1 year. Securities used as
collateral for repo's must be investments
allowable under Govt. Code (i.e., T-bills,
Agencies, BAs, CDs, etc.); must be
collateralized at 102% of market value or
greater; securities must be safekept by third
party.
Reverse Repurchase
Agreements
Securities Lending
Agreements
Medium-Term Corporate
Notes
Shares of beneficial
interest issued by
diversified management
companies
(mutual funds)
Money Market Funds
20%*
20%*
30%
20%
20%
Must be made with primary dealers of the
Federal Reserve Bank of New York and the
securities used for the agreement must have
been held by the local agency for at least 30
days. The maximum maturity is 92 days.
Must be made with primary dealers of the
Federal Reserve Bank of New York; the
securities used for the agreement must have
been held by the local agency for at least 30
days. Securities used as collateral must be
investments allowable under Govt. Code (i.e.
U.S. Treasury obligations, Agencies, BA's CDs,
etc.); both the securities and the collateral are to
be held by a third party. Maximum maturity 92
days.
Maximum maturity 5 years; bonds must be rated
in top three rating categories by a nationally
recognized rating service.
No more than 10% may be invested in anyone
mutual fund. Funds are invested in securities
and obligations authorized by sub-divisions (a)
through (m) of Section 53601 and 53635, (any of
the authorized investments for local agencies)
the investment company must be in highest
ranking provided by not less than two of the
three largest nationally recognized rating
services OR must have the investment advisor
registered with the SEC with no less than 5 yrs.
experience and have assets under mgmt. in
excess of $500 million.
The money market funds must have an average
weighted maturity of 90 days or less and abide
by SEC regulations; funds must receive the
highest ranking by 2 of the 3 largest nationally
recognized rating agencies OR retain an
investment advisor who is registered, or exempt
from registration, with the SEe and has at least
5 years experience managing money market
funds in excess of $500 million.
2
Collateralized Certificate
of Deposit
Mortgage Securities
Local Agency
Investment Fund
(LAI F)
Cou nty Pooled
Investment Funds
*20% for reverse
repurchase agreements
and securities lending
agreements combined.
Bond Proceeds
No limit
20%
$ 40
million
No limit
Maximum maturity 5 years. Banks: deposit not
to exceed the total of paid-in capital surplus.
S&Ls: deposit not to exceed the greater of total
net worth or $500,000. State and Federal credit
unions: deposit shall not exceed the greater of
the total of unpaired capital and surplus or
$500,000. Must be collateralized to 110% of the
CD value by other eligible securities.
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 is
prohibited.
Maximum maturity 5 years; bonds must be rated
in top two rating categories by a nationally
recognized rating service. Shall not exceed 95%
of the mortgage security's fair market value.
Monies are invested in pooled state fund
managed by State Treasurer. Maximum, 15
transactions per month.
Bond proceeds may be invested in accordance with the State Code provisions.
3
ATTACHMENT 1-C
GLOSSARY
AGENCIES: Federal agency securities and/or Government Sponsored Enterprises (GSE's).
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill of exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
BASIS POINT: A basis point equals one one-hundredth of 1 % (.01 %).
BENCHMARK: A comparative base for measuring the performance or risk tolerance of an
investment portfolio. The benchmark should represent a close correlation to the level of risk
and the average duration of the portfolio.
BID: The price offered for securities.
BROKER: A broker brings buyers and sellers together for a commission.
CALLABLE SECURITY: A security that can be redeemed by the issuer before the scheduled
maturity date.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a
certificate. Large denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to
secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of
public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the
City of Santa Monica. It includes basic financial statements for each indiVidual fund and
account group prepared in conformity with GAAP. It also includes supporting schedules
necessary to demonstrate compliance with finance-related legal and contractual provisions,
extensive introductory material, and a detailed Statistical Section.
COMMERCIAL PAPER (CP): An unsecured promissory note with a fixed maturity no longer
than 270 days. Usually sold in discount form.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder
on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a
payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and
selling for his own account.
DELIVERY VERSUS PAYMENT (DVP): There are two methods of delivery of securities:
4
delivery versus payment and delivery versus receipt (also called free). Delivery versus
payment is delivery of securities with an exchange of money for the securities. Delivery versus
receipt is delivery of securities with an exchange of a signed receipt for the securities.
DEBENTURE: A bond secured only by the general credit of the issuer.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the
movement of one or more underlying indices or securities, and may include a leveraging
factor, or (2) financial contracts based on notional amounts whose value is derived from an
underlying index or security (interest rates, foreign exchange rates, equities, or commodities).
DISCOUNT: The difference between the cost price of a security and its value at maturity when
quoted at lower than face value. A security selling below original offering price shortly after
sale also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued at
a discount and redeemed at maturity for full face value (e.g., U.S. Treasury bills).
DIVERSIFICATION: Dividing investment funds among a variety of securities and issuers
offering independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit
to various classes of institutions and individuals, e.g., S&L's, small business firms, students,
farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures
bank deposits, currently up to $100,000 per deposit.
FEDERAL FUNDS: Non-interest bearing deposits held by member banks at the Federal
Reserve. Also used to denote "immediately available" funds in the clearing sense. "Fed
Funds" also used to refer to these funds.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently
12 regional banks) which lend funds and provide correspondent banking services to member
commercial banks, thrift institutions, credit unions, and insurance companies. The mission of
the FHLB's is to liquefy the housing related assets of members who must purchase stock in
their district Bank.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): A Government Sponsored
Enterprise that provides liquidity to the mortgage markets, much like FNMA and FHLB.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was
chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing & Urban Development,
H.U.D. It is the largest single provider of residential mortgage funds in the United States.
Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The
corporation's purchases include a variety of adjustable mortgages and second loans in
5
addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely
accepted. FNMA assumes and guarantees that all security holders will receive timely payment
of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal
Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a permanent member while the other Presidents serve on
a rotating basis. The Committee periodically meets to set Federal Reserve guidelines
regarding purchases and sales of Government Securities in the open market as a means of
influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress
and consisting of a seven-member Board of Governors in Washington, D.C., 12 Regional
Banks and about 5,700 commercial banks that are members of the system.
GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage
bankers, commercial banks, savings and loan associations and other institutions. Security
holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are
backed by FHA, VA or FmHM mortgages. The term pass-throughs is often used to describe
Ginnie Maes.
INVERSE FLOATERS: A structured note in which the coupon increase as interest rates
decline and decrease as rates rise.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. In the money market, a security is said to be liquid if the spread
between bid and asked prices is narrow and reasonable size can be done at those quotes.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from political
subdivisions that are placed in the custody of the State Treasurer for investment and
reinvestment.
MARKET VALUE: The price at which a security is trading and could presumably be purchased
or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions
between the parties to repurchase-reverse repurchase agreements that establishes each
party's rights in the transactions. A master agreement will often specify, among other things,
the right of the buyer-lender to liquidate the underlying securities in the event of default by the
seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes due
and payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper,
bankers' acceptances, etc.) are issued and traded.
OFFER: The price asked by a seller of securities (When you are buying securities, you ask for
an offer). See ASKED AND BID.
6
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank, as directed by the
FOMC, in order to influence the volume of money and credit in the economy. Purchases inject
reserves into the bank system and stimulate growth of money and credit; sales have the
opposite effect. Open market operations are the Federal Reserve's most important and most
flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers that submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve Bank of
New York and are subject to its informal oversight. Primary dealers include Securities and
Exchange Commission (SEC) registered securities broker-dealers, banks, and a few
unregulated firms.
PRIME RATE: The rate at which banks lend to their best or "prime" customers. Also known
as the "reference rate."
PRINCIPAL: 1) the dollar cost of an issue excluding accrued interest. 2) The one who takes
ownership in a transaction, as opposed to brokering or acting as agent.
PRUDENT PERSON RULE: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the state
(the so-called legal list). In other states, the trustee may invest in a security if it is one, which
would be brought by a prudent person of discretion and intelligence who is seeking a
reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption
from the payment of any sales or compensating use or ad valorem taxes under the laws of this
state, which has segregated for the benefit of the commission eligible collateral having a value
of not less than its maximum liability and which has been approved by the Public Deposit
Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its
current market price. This may be the amortized yield to maturity on a bond or the current
income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to
an investor with an agreement to repurchase them at a fixed price on a fixed date. The
security "buyer" in effect lends the "seller" money for the period of the agreement, and the
terms of the agreement are structured to compensate him for this. Dealers use RP extensively
to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money,
that is, increasing bank reserves.
REVERSE REPO: An agreement whereby the dealer agrees to buy securities and the
investor agrees to repurchase them at a later date.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank's vaults for protection.
7
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SEC RULE 15C3-1: See uniform net capital rule.
SECURITIES AND EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transaction by administering securities legislation.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA,
SLMA, etc.) and Corporations which have embedded options (e.g. call features, step-up
coupons, floating rate coupons, derivative based returns) into their debt structure. Their
market performance is impacted by the fluctuation of interest rates, the. volatility of the
imbedded options, and shifts in the shape of the yield curve.
STUDENT LOAN MARKETING ASSOCIATION (SLMA): A U.S. Corporation and
instrumentality of the U.S. government. Through its borrowings, funds are targeted for loans to
students in higher education institutions. SLMA's securities are highly liquid and are widely
accepted.
SETTLEMENT DATE: The date on which a trade is cleared by delivery of securities against
funds. This date may be the same as the trade date or later.
TENNESSEE VALLEY AUTHORITY (TVA): A U.S. Corporation created in the 1930's, to
electrify the Tennessee Valley area; currently a major utility headquartered in Knoxville
Tennessee. TVA's securities are highly liquid and are widely accepted.
TRADE DATE: The date on which the buyer and seller agree to a transaction. The trade date
mayor may not be the date on which the securities and money changes hands (settlement
date).
TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to
finance the national debt. Most bills are issued to mature in three months, six months, or one
year.
TREASURY BOND: Long-term coupon-bearing securities U.S. Treasury securities issued as
direct obligations of the U.S. Government and having initial maturities of more than ten years.
TREASURY NOTES: Intermediate term coupon-bearing U.S. Treasury securities issued as
direct obligations of the U.S. Government and having initial maturities of from one to ten years.
UNIFORM CAPITAL RULE: Securities and Exchange Commission requirement that member
firms as well as non-member broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm including margin loans and commitments to
purchase securities, one reason new public issues are spread among members of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a percentage. (a)
INCOME YIELD is obtained by dividing the current dollar income by the current market price
8
for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus
any premium above par or plus any discount from par in purchase price with the adjustment
spread over the period from the date of purchase to the date of maturity of the bond.
YIELD TO MATURITY: The rate of return yielded by a debt security held to maturity when
both interest payments and the investor's capital gain or loss on the security are taken into
account.
9
Attachment 3
See Adopted Resolution No. 10018 (CCS)