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SR-6-Q (11) FINANCE CMD REB\INVPOL98 Council Meeting of February 24, 1998 (YQ sI-a,atM Santa Monica, California TO Mayor and City Council FROM City Staff SUBJECT RecommendatIon to RevIse City Investment Policy and Contrnue Delegation of Investment Authority to City Revenue ManagerfTreasurer INTRODUCTION ThIS report recommends that the CIty CouncIl approve the CIty's Investment PoliCY (including various technical revIsIons), and contmue to delegate Investment authorrty to the City Revenue ManagerfTreasurerfrom March 1, 1998 to February 28. 1999 The report also responds to a CounCil directive concerning the City's Investment Pohcy BACKGROUND State law requIres that a Clty's Investment polley and any matenal changes In the polley be approved by CounCil annually at a pubhc meeting Section 711 of the Santa Monica City Charter delegates to the Revenue ManagerlTreasurer authOrity for Investing City funds Section 53607 of the State of California Government Code limits the authOrization of the legislative body to delegate Investment authOrity to a one-year penod I renewable annually The Council last approved the Investment Polley and continued delegation to the City Revenue ManagerfTreasurer on February 11, 1997 The CIty's Investment poliCY has 1 (,-Q 2.f~ ''Ie been awarded the MUnicipal Treasurers' ASSOciation of the United States and Canada CertIfication of Excellence Award and continues to adhere to these standards DISCUSSION The followmg technical changes have been Incorporated Into the attached City's Investment Policy 1 Records and Reports Section G (2) of the Investment Polley has been added to Include a new reporting reqUIrement The Government Accountmg Standards Board (GASB). a non- profit body that sets accounting standards for government agencies, reqUires publrc agencies to report as of July 1. 1998 all Investments. with certain exceptions. at current fair market value rather than at onglnal purchase pnce The current fair market value and the unrealized gain or loss of a secunty do not affect Its actual purchase price, Yield, or maturity value. If held to maturity The monthly Investment report submitted to the Council has reported current market value of investments since July 1, 1997 It is City practice to hold Investments to maturity 2 Attachment A to Investment POlfCY The I1stlng of City of Santa Monica Funds has been updated to Include two funds approved by the CIty Council durrng the past year the Asset Seizure Fund and the Computer EqUIpment Replacement Fund 2 The shaded portions of the Investment Policy and Its attachments indicate where additions have been made. and the lined through portions Identify deletions OTHER RELEVANT ISSUES 1 The City's Investment Policy IS more conservative than reqUired by State law and actual Investment practices are somewhat more restrictive than the poliCY requires When the Investment PoliCY was last approved on February 11. 1997. CounCil asked staff to evaluate and report as part of the next annual update whether the City's Investment polICY should be changed to conform to actual Investment practIce As market conditions change, the flexibility and opportunity to further diverSify the portfolio to aVOId Investment risks provided for In the policy may be useful and no change ]s recommended at this time 2 The City's Investment PolICY Includes a restrrctlon against Investing In companies which conduct bUSiness In or with Burma or the military government of Burma Staff also follows "Informal" SOCially responsible Investmg gUIdelines which are currently being evaluated for IncluSion In the Investment Policy The gUidelines are as follows 1) Supports clean and healthy environment. Includmg the production of safe and environmentally sound practices 2) AvoIds tobacco or tobacco-related products 3) Avoids weapons, military systems, or nuclear power 4) Supports equality of rrghts regardless of sex, race, age, disabIlity. or sexual orrentatlon 5) Promotes community economic development Staff will recommend Incorporatmg appropriate SOCially responsible investing gUidelines to the Investment Policy at the next annual update The City's Investments consist of City pooled Investments. and Cemetery and Mausoleum Perpetual Care Investments The followmg discusses each of the groups of Investments In terms of SOCially responsible Investment A City Pooled Investments - These are funds which finance general City operations They are managed by the City'S Revenue ManagerfTreasurer. In accordance With the City's Investment Policy This $270 million portfolio IS prlmarrly Invested In U S Treasury and Federal Agency securrtles, With approximately 5%. or $13 million In the State's Local Agency Investment Fund (LAIF) The City uses LAIF because It IS very safe and provides high liqUidity and a good Investment return When needed. funds can be Withdrawn Within 24 hours This high liqUidity ensures that cash IS always readily aVailable to finance the Immediate needs of City operations LAIF began In 1977 as an Investment alternative for Callfornla's local governments and special districts and IS part of the State's Pooled Money Investment Account (PMIA) which IS under the admlmstratlon of the State 4 Treasurer's Office LAIF has approximately 2,500 partJclpants With Investments totaling almost 511.000.000,000 The State Treasurer's Office makes Investments for the PMIA In accordance With an Investment policy which accordmg to statute must give pnorlty to (1) safety/diversification. (2) liqUidity and (3) Yield Social concerns are not factored Into Investment deCISions Staff has not Identified Investment alternatives to LAI F which provide the same degree of safety, liqUidity and Yield B Cemetery and Mausoleum Perpetual Care Funds - These are funds which are legally restricted for the perpetual care of the City's Cemetery and Mausoleum Since they can be Invested In ways m which general City funds cannot be Invested, such as stocks, they are managed by a professional Investment firm. RNC Capital Management Company (RNC) RNC Invests these funds consistent With the City's Investment PolIcy and "Informar g U1delmes for socially responsible investing BUDGET/FINANCIAL IMPACT There are no budget or financial Impacts resultmg from thiS staff report RECOMMENDATION Staff recommends that Council approve the attached Investment Policy. and delegate to the City Revenue ManagerlTreasurer mvestment authonty for March 1. 1998 through February 28. 1999 5 Prepared by Mike Dennis, Director of Finance Ralph Bursey, City Revenue ManagerfTreasurer Attachment Revised City Investment Policy 6 Revised 2/98 INVESTMENT POLICY for the CITY OF SANTA MONICA A PURPOSE The purpose of establishing a formal Investment policy IS to set broad gUidelines within which the City Treasurer IS to lawfully Invest City funds These gUidelines do not supersede applicable State laws and City codes B SCOPE This Investment policy applies to all cash and financial Investments of the vanous funds of the City of Santa Monica as Identified In the Clty's Comprehensive Annual Financial Report, with the exception of those financial assets explicitly excluded from coverage by these policies for legal or operational reasons All City Funds are listed In Attachment A and all cash and financial Investments which are excluded from coverage by thiS Investment poliCY are IdentIfied In Attachment B C ADMINISTRATION An Investment Committee shall be established consisting of the Director of Finance, City Treasurer/Revenue Manager, and a representative from the City Manager's Office 2 The Investment Committee Will meet at least once each calendar quarter to review and evaluate prevIous Investment activity and Yield, 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 recommend Investment strategy to the City Treasurer 3 All Investment poliCies and all changes to those poliCies must be approved by a maJonty of the Investment Committee 4 Any two members of the Committee may call a special meeting, and three members shall constitute a quorum 5 Minutes Will be published of all Investment Committee meetings 6 The Investment Committee will meet at least annually With the City'S outSide auditors to review accounting controls and to design adequate audit procedures to Identify any non- compliance With the City Investment policy 7 The City Investment poilcy Will be reviewed annually by the Investment Committee and submitted annually to the City Council D INVESTMENT OBJECTIVES The pnmary objective of all City Investments shall be safety The secondary objective shall be liqUidity The third objective shall be to achieve a return - 1 - ,/ "Safety" means that the overall value of City funds shall not be diminished In the process of securing and Investing those funds or over the duration of the Investments 2 LiqUidity means that funds shall be made available to meet all anticipated City obligations and a prudent reserve shall be kept available to meet unanticipated cash requirements AvailabIlity has two aspects, liqUidity and the scheduling of cash flows LiqUidity IS the ability to change an Investment Into Its cash equivalent on short notice at Its prevailing market value Scheduling of cash flows means that Investments are to mature or are to be converted Into cash In tandem With the City'S anticipated cash reqUIrements 3 Achieve a return means to earn the optimum Interest Income from City funds commensurate With the objectives of safety and availability of the prinCiple Invested At no time shall funds be Invested In any security that could result In zero Interest accrual If held to maturity E INVESTMENT AUTHORITY DELEGATION In accordance With the Santa Monica City Charter, Section 711, the City Treasurer IS responsIble for conducting the City's Investment transactions The Treasurer may delegate thiS authOrity to the ASSistant Treasurer or, In extraordinary Circumstances, to the Director of Finance F PRUDENCE Investments shall be made With Judgment, care, Skill, prudence, and diligence under circumstances then prevailing, whIch persons of prudence acting In a like capacity and familiarity With those matters would use In the conduct of funds of a like character and With like alms, to safeguard the prinCipal and maintain the liqUidity needs of the City ThiS standard of prudence shall be applied In the context of managing an overall portfoliO Investment officers acting In accordance With written procedures and exercIsing due dilIgence shall be relieved of personal responSibility for an IndiVidual security's credit risk or market prrce changes. proVided that deViatIOns from expectations are reported In writing to the Director of Finance In a timely fashion, and appropriate action IS taken to control adverse developments 2 Investment officers shall aVOId any transactions that might Impair public confidence In the Santa Monica City government 3 Where It IS otherWise consistent With the JudiCiary and statutory obligatIOns of the City Revenue Manager/Treasurer, preference In selecting Investments shall be given to those finanCial Institutions which have demonstrated Involvement In the development or rehabilitatIOn of lOW-income affordable hOUSing 4 Investments In repurchase agreements 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 G RECORDS AND REPORTS Records of all Investment transactIOns Will be kept, and monthly reports will be made to the Investment Committee and the City Manager detailing and summarizing all transactions and stating the present status of City Investments - 2 - 2 The Revenue Manager/Treasurer Will report aU Investments, with certain exceptions, at faIT market value rather than onglnal purchase pnce, In the Monthly Cash & Investment Report as reqUired by the Government Accounting Standards Board (GASB) Statement No. 31. z3 As of the end of the fiscal year, the City Revenue Manager/Treasurer Will make a report to the Director of Finance detailing the present status of City Investments, as required by the Government Accounting Standards Board (GASB) statement No 3 H DIVERSIFICATION 1 All City funds which are not required for Immediate cash expenditures or to maintain required compensating cash balances shall be Invested In Interest bearing Investments or accounts 2 To reduce overall portfolio risk while attempting to attain market rates of return consistent With the primary objectives of safety and availability of funds, Investments shall be diverSified across types of Investments, maturities of those Investments, and institutions In which those Investments are made Generally, the portfolio IS to be Invested In U S Treasury and Federal Agency seCUrities With a modest addition of BAs and CDs a Investment Instruments Investments shall be made only In those Instruments speCifically authOrIZed by California State laws, and to no greater an extent than authOrIZed by those laws Said laws are summarized In Attachment C Additional CIty gUidelines are as follows Instruments AdditIOnal City GUidelines 33 1/3% of portfolio, maximum for each agency U S Federal Agencies' Banker's Acceptances (BA) Certificate of DepOSit (CD), Commercial Paper (CP) 10% max per Issuer, 40% max overall 10% max per Issuer, 30% max all (CPl, 15% max overall (CP) NOTES * Fedl National Mortgage Assn (FNMA), Fedl Home Loan Mortgage Corp (FHLMC), Fedl Home Loan Bank(FHLB), Student Loan Marketing Assn (SLMA), Tennessee Valley AuthOrity (TV A), and any other U S Federal agency or Instrumentality b Maturities MatUrities of indiVidual Investments shall be diverSified to meet the follOWing objectives No Investment Will be purchased which matures more than three years from the date of purchase unless speCifically recommended by a unanimous vote of the Investment Committee No Investment will be purchased which matures more than five years from the date of purchase Without the additional approval of the City Manager and the prior approval of the City Council - 3 - II The average weighted maturity of all pooled City Investments shall not exceed 18 months (547 days) III To minimize the risk of haVing to make unusually large Investments at times when mterest rates are temporarily very low, Investments will be scheduled to mature so that dUring any given month there Will be a comparable magnitude of funds to be reinvested These Investible funds Will be estimated based on scheduled matUrities plus anticipated revenues minus anticipated expenses IV To the maximum extent practical, monthly operational cash requirements Will be met by uSing anticipated revenues and maturing Investments However, as an aspect of active portfolio management, It may be finanCially benefiCial to the City to sell Investments from time to time v To reduce the market and Interest rate risks which would result from the excess concentration of assets In a specific matunty, a specific Issue or a specific class of SeCUrities, no more than 5 0% of the City's Investible funds may be Invested In any Single Issue matUring In a given month The only exceptions are U S Treasury securities, to which an alternate lImit of 10% Will apply c Institutions To minimize the nsk to the City's overall Investment portfolro from the default by a Single Institution In which City funds are on depOSit or Invested, the follOWing poliCies shall be observed City funds shall only be deposited In a finanCial Institution whose performance has been reliable and whose safety rating, as determined by the Investment Committee or a reputable Independent rating service selected by the Investment Committee, IS In the upper 60% of ItS peer group These same standards apply to institutions In which securities owned by the City are held In safekeeping ExceptIons to these standards may be made on an IndiVidual baSIS If they are unanimously recommended by the Investment Committee II The City shall not depOSit, In the form of certificates of depOSit, time or demand depOSits, or Similar Instruments, In a Single InstitutIOn more than 10% of the City's investible funds III No Single Institution shall have, In cumulative total, as depOSits and Investments (other than safekept Investments) more than 50% of the City's investIble funds d 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 pnmary dealer of the Federal Reserve Bank of New York The market value (bid pnce plus accrued Interest] of the collateral shall be valued at 102% or greater of the funds borrowed agamst those seCUrities and the value shall be adjusted no less than quarterly The counterparty will deliver the underlYing secuntles to the City by book entry, phYSical delivery, or by third party custodial agreement The transfer of underlymg secuntles to the counter party bank's customer book-entry account may be used for book-entry delivery - 4 - RELATIONSHIPS WITH FINANCIAL INSTITUTIONS The City may only purchase statutorily authorized Investments, not purchased directly from the Issuer, from either an instItution licensed by the state as a broker! dealer, from a national or state chartered bank, from a federal or state savings institutIOn, from a brokerage firm deSignated as a pnmary government dealer by the Federal Reserve Bank, or from a member of a federally regulated securities exchange 2 All financial institutions With which the City conducts Investment actiVities must agree In writing to undertake reasonable efforts to prevent Illegal andior Imprudent transactions involVing City funds Should It come to the attention of the City Revenue ManageriTreasurer that City funds have been Involved In Illegal and/or Imprudent transactions, thiS Will be reported to the City CounCil along With options for dealing With the Situation 3 Primary government seCUrities dealers which report to the New York Federal Reserve are preferred for conducting transactions of all eligible securities other than non-negotiable certifIcates of depOSit Other security dealers who WIsh to engage In transactions With the City must meet the City's requirements for reliability and safety, and any purchases made by the City from such secondary sources shall require third party safekeeping or delivery of the securities to the City 4 To ensure Yields consistent With thiS poliCY and to prOVide for the objective Investment of City funds, the City's Investment procedures shall be deSigned to Include transactions With several firms that compete directly for public bUSiness, and to encourage competitive bidding on transactions Such bids shall be on file With the City Treasurer's Office and copies shall be prOVided to the Director of Finance monthly J SOCIALLY RESPONSIBLE INVESTING BURMA POLICY - In accordance With the City of Santa MOnica CounCil Resolution No 8966 CCS (11/28/95), the Investment of City funds are restricted as follows 1 No Investments are to be made In banker's acceptances which are connected With the military government of Burma, Its agenCies, or pnvate Burma corporations 2 No Investments are to be made In commerCial paper or equities of United States corporations which have direct Investments In Burma or With the military government of Burma 3 FinanCial transactions shall only be done With banking! financial institutions that do not make loans to the military government of Burma or ItS agencies K COMMUNITY REINVESTMENT ACT (CRAl The City will Invest funds only In those financial institutIOns which have a CRA rating (as determined by the appropnate regulatory body) of "Outstanding" or "Satisfactory" L CUSTODY AND SAFEKEEPING OF SECURITIES AND CITY FUNDS - 5 - Wherever practical, all City Investments shall have the City of Santa Monica as the registered owner, and all Interest and pnnclpal payments and withdrawals shall indicate the City of Santa Monica as the payee All securities shall be safekept with the City Itself or with a qualified financial institution, contracted by the City as a third party All secuntles shall be acquired by the safekeeping institution on a "dellvery-vs-payment" (DVP) baSIS In other words, the secunty must be delivered before funds are released The DVP baSIS for delivery applies also to the delIvery and safekeeping of repurchase agreement collateral 2 Original caples of non-negotiable certificates of depOSit and confirming caples of all other Investment transactions must be delivered to the CIty M PERFORMANCE STANDARDS The Investment portfolio Will be deSigned to obtain at least a market level rate of return, given budgetary and economic cycles (3 or more years) cycles and given the City's Investment nsk and cash flow needs The City's portfolio management approach IS active, necessitating penodlc restructuring of the portfolio to take advantage of current and antiCipated Interest rate movements In addition, the portfoliO IS pnmanly Invested m U S Treasury and Federal Agency secuntles Given thiS strategy, the performance benchmarks shall be the rolling average of 6- month and 12-month U S Treasury bills, traded on the secondary market as reported m the Federal Reserve System's monthly report of mterest rates N IMPLEMENTATION The City Treasurer IS responSible for conductmg and reporting on all City Investments To faCilitate thiS function, the Treasurer Will prepare and maintain an Investment Procedures Manual to detail operating procedures to be practiced by the Treasury In investing City funds All such procedures shall be In accordance With applicable State laws, City codes and the Investment polICies set by the Investment Committee All procedures Will be subject to review and approval by the Investment Committee The manual Will expliCitly Include a current Iistmg of all City of Santa MOnica finanCial Institution depOSit and mvestment accounts, a current list of all finanCial institutions With which the City currently IS authonzed to conduct Investment transactions, a current copy of State laws pertinent to City Investments, a descnptlOn of speCifiC controls to ensure the proper execution of the City Investment Policy, and caples, With Instructions, of all Investment reports required by law or by City Investment policy o INDEMNIFICATION OF INVESTMENT OFFICIALS Any Investment officer exercIsing hiS or her authority With due diligence and prudence, and In accordance With the City of Santa Monica Investment POliCY, Will not be held personally liable for any mdlvldual Investment losses or for total portfolio losses - 6 - ATTACHMENT 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 11 12 13 14 15 16 17 18 19 20 21 22 25 27 29 30 31 32 33 34 37 41 42 43 51 52 53 54 55 56 57 58 59 77 80 81 82 84 85 89 99 FUND NAME GENERAL FUND BEACH RECREATION FUND HOUSING AUTHORITY FUND DISASTER RELIEF FUND TORCA FUND LOW/MODERATE INCOME HOUSING FUND REDEVELOPMENT-DOWNTOWN FUND REDEVELOPMENT-EARTHQUAKE RECOVERY REDEVELOPMENT-OCEAN PARK FUND COMM DEV BLOCK GRANT FUND MISCELLANEOUS GRANTS FUND ASSET SEIZURE FUND CITIZENS OPTION FOR PUBLIC SAFETY FUND WATER FUND SOLID WASTE MANAGEMENT FUND RENT CONTROL FUND PIER FUND WASTEWATER FUND AUDITORIUM FUND AI RPORT FUND STORMWATER FUND CEMETERY FUND TRANSPORTATION FUND TRAFFIC SAFETY FUND GAS TAX FUND CABLE COMMUNICATIONS FUND SPECIAL AVIATION FUND PARKS AND RECREATIONAL FUND VEHICLE MANAGEMENT FUND COMPUTER REPLACEMENT FUND SELF INS-COMPRE FUND SELF INS-BUS FUND SELF INS-AUTO FUND SELF INS-W/C FUND PARKING AUTHORITY FUND GENERAL TRUST FUND DEFERRED COMP FUND CEMETERY PERPETUAL CARE FUND FED REV SHARING FUND DEBT SERVICE FUND MAUSOLEUM ENDOWMENT FUND GENERAL SERVICE FUND - 7 - ATTACHMENT B City of Santa Monica Fmanclal Assets Excluded from the Coverage of the City Investment Policy The follOWing listed Ctty of Santa MOnica finanCial assets are specifically excluded from coverage of the City Investment PoliCY ThiS exclusion does not exempt the administrators of these exempted assets from exercIsing due diligence and prudence In the management of the assets Almort Certificates of ParticipatIOn - Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent (U S Trust Company of California) for the City of Santa Monica CertifIcates of Participation (COP's) (1995 Airport Facilities Refundmg Senes A and Senes Bl, certain specific funds must be held by the fiscal agent, to (i) refund the City of Santa Monica Certificate of Participation (Airport FacIlities) (the "Pnor Certificates"), (Ill fund a reserve fund for the Certificates, and (1I1l pay the costs Incurred In connection with the execution and delivery of the Certificates Audltonum Box Office Trust - Established by City Council Resolution 4243 to hold In trust Santa Monica CIVIC Audltoflum box office operation receipts for each mdlvldual permittee Fund held In thiS trust are managed by the Audltonum through a checkmg account at Wells Fargo Bank and are accounted for In Fund 32, the Audltonum Fund These funds are not Invested Cemetery Perpetual Care Fund Investments - The City Council authonzed the Investment consulting firm of RNC Capital Management to manage these mvestments In accordance with parameters approved by the Council They are accounted for In Fund 82, the Cemetery Perpetual Care Fund CltV Emoloyees Deferred Comoensatlon - Established by City Council Resolution 6759 and authonzed under contract No 5697, these funds are managed under contract by the Public Employees Benefit Services Corporation (PEBSCOL and are accounted for In Fund 81, the Deferred Compensation Fund Downtown Redevelopment Lease Revenue Bonds - Under the terms of the trust agreement between the Redevelopment Agency of the City of Santa Monica for Lease Revenue Bonds, 1992, and First Trust of California (fiscal agent) certain speCifiC funds must be held by the fiscal agent, for payment of pnnclpal and Interest and for reserve requirements The amount of funds held by the fiscal agent vanes from year to year as the bonds mature The funds are accounted for In the 85 Fund, the Debt Service Fund Llbrarv Book Purchase Account - Established by City Council Resolution 5088 to facilitate book purchases, these funds are managed by the Library through a checking account With Wells Fargo Bank There IS a $100 00 limit per transaction Funds are accounted for In Fund 01, the General Fund These funds are not Invested Main Library Improvements Prolect G 0 Bonds - Under the terms of the trust agreement between the City of Santa MOnica and the fiscal agent (First Trust of California) for the City of Santa MOnica General Obligation Bonds (Main Library Improvements Project), Series 1990, certain speCIfiC funds must be held by First Trust of California for the acquISition of certain real property, for construction and Improvement needs, for pnnclpal and Interest payments, and for reserve reqUirements The funds are accounted for In Fund 01, the General Fund and Fund 85, the Debt Service Fund Mausoleum Perpetual Care Fund Investments - On July 8, 1986, the City Council amended the MUniCipal Code, Section 7300 et al , to create the new Mausoleum Perpetual Care Fund RNC Capital Management, the Investment counselor for the Cemetery Perpetual Care Fund, was also deSignated to manage these funds In accordance With parameters approved by the Council These funds are accounted for In Fund 89, the Mausoleum Perpetual Care Fund - 8 - Ocean Park RedeveloDment Prolects - Under the terms of the trust agreement between the Redevelopment Agency of the City of Santa MOnica and the Fiscal Agent (First Trust of California) for the Redevelopment Agency of the City of Santa Monica Ocean Park Redevelopment Projects Tax Allocation Refunding Bonds, Series 1992, certain specific funds must be held by the fiscal agent, to (I) refund the Agency's Ocean Park Redevelopment Projects Tax Allocation Refunding Bonds, Series 1988A, (II) refund the Agency's Ocean Park Redevelopment Project Tax Allocation RefinanCing Bonds, Serres 1988B, (Ill) provIde funds to repay a portIOn of certain promissory notes of the Agency, {Iv} fund a reserve account for the Refunding Bonds, and (v) pay the costs of Issuance Incurred with the Issuance of the Refunding Bonds The funds are accounted for In Fund 85, the Debt SerVIce Fund Parking Authorltv Lease Revenue Bonds - Under the terms of the trust agreement between the Parking Authority and the fiscal agent (First Trust of California) for the Parking Authority of the City of Santa Monica Lease Revenue Bonds, 1992, certain speCifiC funds must be held by the fiscal agent, for construction and Improvement needs, for principal and Interest payments, and for reserve requirements The funds are accounted for In Fund 85, the Debt Service Fund Pettv Cash - Section 1 513 of the City Charter proVides for the establishment of petty cas h funds for use by department heads to make cash expenditures of a minor nature Petty cash funds are managed by each Individual department and are accounted for In each department's fmanclal records These funds are not Invested Santa Monica Rehabilitation Loan Funds - These funds were established by City Council ResolutIOn to promote low cost housmg by prOViding loans to rehabIlitate homes These funds are held In trust by the First Federal Savings Bank of California, and are administered by the Resource Management Department and the Finance Department The funds are accounted for In Fund 19, the Community Development Block Grant Fund Wastewater Enterprise Revenue Bonds - Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent, (First Trust of California), for the City of Santa Monica Wastewater Enterprise Revenue bonds (Hyperlon Project), 1993 Refunding Serres, certain speCIfiC funds must be held by the fiscal agent for payment of principal and Interest and for reserve requirements The funds are accounted for In the 31 Fund, the Wastewater Enterprise Fund Workers' Compensation Account - ThiS checking account was established at First Interstate Bank (now Wells Fargo Bank) In accordance With City CounCil Resolution 6692 to prOVide a means to administer the City's contract With the workers' compensation Insurance adjusters It IS administered by the Risk Management DIVISion of the City Manager's Office and Finance departments and account for In Fund 59, the Self-Insurance Workers' Compensation Fund These funds are not Invested The follOWing accounts for the City of Santa Monica appear on the books for accounting purposes, but are not City assets and are excluded from coverage of the City Investment PoliCY Bail Bond Account - ThiS IS a clearrng account established at Wells Fargo Bank for the operational convenience of the courts and the Police Department In processing ball bond payments It IS administered by the Police Department and the Finance Department Downtown Redevelopment Lease Revenue Bonds Escrow Account - As a result of the Issuance of the Downtown Redevelopment Lease Revenue Bonds, Series 1992 (Downtown Redevelopment Refunding Project of 1992), an escrow fund was established With Union Bank for purposes of payment of prinCipal of and, premium and Interest payments With respect to the 1978 Lease Revenue Bonds, Serres 1992 (Downtown Redevelopment Project of 1978) - 9 - Ocean Park RedeveloDment Prolects Tax Allocation Bonds Escrow Accounts (Refundmg Bonds, Series 1988A and Reflnancmg Bonds. Series 1988B) - As a result of the Issuance of the Ocean Park Redevelopment Projects Tax Allocation Refunding Bonds, Series 1992, escrow funds were established With Bank of America (now WIth First Trust of California) for purposes of payment of II) the princIpal of and accrued Interest on the 1988 Bonds coming due on and prior to the Redemption Data and, (II) the Redemption Price for the 1 988 Bonds on the Redemption Date Parking Authorltv Bonds Escrow Fund - As a result of the Issuance of the City of Santa MOnica Certificates of Participation (Third Street Mall Project), 1986, the Parking AuthOrity Revenue Bonds of 1966 were placed In "defeasance" With the fiscal agent, Bank of America The Investment seCUrities held are suffiCient to proVide for the balance of the revenue bond's principal and Interest payments The defeasance of these bonds was accounted for In Fund 77 r the Parking AuthOrity Fund Third Street Mall Certificates of PartlclDatlon Escrow Account - As a result of the Issuance of the Parking AuthOrity Lease Revenue Bonds, Series 1992 (City of Santa Monica Refunding Improvements Project of 1992), an escrow fund was established With First Interstate Bank (now Wells Fargo Bank) for purposes of payment of prinCipal and, premium and Interest payments With respect to 1986 Third Street Mall Certificates of Participation coming due after the Issuance of the refunding bonds Wastewater Enterorlse Revenue Bonds Escrow Account - As a result of the Issuance of the City of Santa Monica Wastewater Enterprise Revenue Bonds (Hype non Project), 1993 Refunding Series, an escrow fund was established With Bank of America (now With First Trust of California) for purposes of payment of prinCipal of and, premIum and Interest payments With respect to the Wastewater Enterpnse Revenue Bonds, 1 991 Series A through the date that the bonds are redeemed - 10 - ATTACHMENT C 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 AuthOrized Investment Legal Limit (%\ Local Agency Bonds U S Treasury Obligations No limit No limit State of California Obligations California Local Agency Obligations U S Agencies No limit No limit No limit Bankers Acceptance 40% CommerCial Paper 15%/30% Negotiable Certificates of DepOSit 30% Repurchase Agreement No limit Reverse Repurchase Agreements 20% 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 270 days to matunty 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 180 days to maturity The maximum limit on commerCial paper IS 15%, except that an additional 15% may be purchased as long as the dollar-weighted average maturity of "all" commerCial paper held does not exceed 31 days MaXimum maturity 5 years State and Federally chartered banks and savings Institutions, including U S branches of foreign banks regulated by State regulatory authontles ("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 ), seCUrities must be safe kept by third party Must be made With pnmary dealers of the Federal Reserve Bank of New York and the securities used for the agreement must have been held by the Issuer for at least 30 days The maximum maturity IS 92 days - 11 - Authorized Investment Medium-Term Corporate Notes Shares of beneficial Interest Issued by diversified management companies (mutual funds) Money Market Funds Collateralized Certificate of Deposit Mortgage Securities Local Agency Investment Fund (LAIF) County Pooled Investment Funds Legal Limit (%) 30% 20% 20% No limit 20% $ 20 million No limit Other Constraints Maximum maturity 5 years, bonds must be rated In top three rating categories by a nationally recognized rating services No more than 10% may be Invested In any one 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 SEe 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' expenence managing money market funds In excess of $500 million 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 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 Momes are Invested In pooled state fund managed by State Treasurer MaXimum, 10 transactions per month - 12 - Prohibited Investments Include seCUrities not listed above, 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 Bond Proceeds Bond proceeds may be Invested In accordance with the State Code provIsions - 13 - GLOSSARY AGENCIES Federal agency seCUrities 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 %l BID The price offered for securities BOOK ENTRY SECURITIES All U S Treasury and Federal AgenCies are maintained on computerized records at the Federal Reserve now known as "Wlreable" securities BROKER A broker brings buyers and sellers together for a commisSion paid by the initIator of the transaction or by both Sides, he does not position In the money market, brokers are active In markets In which banks buy and sell money and In Interdealer markets 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 five combined statements and 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 flnance- related legal and contractual prOVISions, extensive Introductory material, and a detailed Statistical Section CERTIFICATE OF DEPOSIT (CD) A time depOSit with a specifiC maturity eVidenced by a certificate Large-denomination CD's are tYPically negotiable COMMERCIAL PAPER (CP) An unsecured promissory note with a fixed maturrty no longer than 270 days Public offerings are exempt from SEC registration The largest Issuers Include General Motors Acceptance CorporatIOn (GMAC), General ElectriC Capital Corporation (GECC) and other major corporations 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 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 - 14 - DISCOUNT The difference between the cost price of a securrty 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 9 r U S Treasury bills) DIVERSIFICATION Dlvldmg 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 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 1$ currently pegged by the Federal Reserve through open-market operations 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, DC, 12 RegJOnal Banks and about 5,700 commercial banks that are members of the system FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) A federal agency that Insures finanCial institutions' depOSits, currently up to $100,000 per depOSit FEDERAL HOME LOAN BANKS (FHLB) The institution that formerly regulated and lent to savings and loan aSSOCiations The Federal Home Loan Banks played a role analogous to that played by the Federal Reserve Banks Vis-a-VIS member commerCial banks However, those responsibilities have been assumed by the Office of Thrift SuperVISIOn and the FDIC FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) AU S Corporation and Instrumentality of the U S government Through Its purchases of conventional mortgages, It proVides liqUidity to the mortgage markets, much like FNMA FHLMC'S Securities are highly liqUid and Widely accepted FHLMC assumes and guarantees that all security holders Will receive timely payment of principal and Interest 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 Unrted States Fannie Mae, as the corporation IS called, IS a private stockholder- owned corporation The corporations purchases Include a variety of adjustable mortgages and second loans In addition to fixed-rate mortgages FNMA's seCUrities are - 15 - also highly liquid and are widely accepted FNMA assumes and guarantees that all securrty holders will receive timely payment of prinCipal and Interest GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae) Securities 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 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 covenng all future transactions between the parties to repurchase--reverse 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 pnnclpal 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 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 dally 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 (SEe) 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 11 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 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 - 16 - 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 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 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 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 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 SECURITIES & EXCHANGE COMMISSION Agency created by Congress to protect Investors In seCUrities transactions by administering securities legIslatIOn 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 TREASURY BI LLS the national debt A non-Interest bearing discount security Issued by the U S Treasury to finance Most bills are Issued to mature In three months, SIX months, or one year TREASURY BOND years Long-term U S Treasury seCUrities haVing initial maturities of more than ten TREASURY NOTES Intermediate term coupon bearing U'S Treasury seCUrities haVing initial maturities of from one to ten years 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 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 UNIFORM NET CAPITAL RULE Securities and Exchange CommiSSion requirement that member firms as well as nonmember broker-dealers In seCUrities maintain a maximum ratio of Indebtedness to liqUid capital of 1 5 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 - 17 - public Issues are spread among members of underwriting syndicates Liquid capital Includes cash and assets easily converted Into cash TRADE DATE The date on which a transaction IS Initiated or entered Into by the buyer and seller WHEN-ISSUED TRADES TYPically, there IS a lay between the time a new bond IS announced and sold, and the time when It IS actually Issued During thiS Interval, the security trades "WI", "when, as, and If Issued " 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 G'FINANCE'.TREAS'.Sf-iARE'.INVEST2 POL - 18 -