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SR-204-001 (15)~..r . . ~ C~ty Council Report ~ CiCy vf . Santa Monica~ Gity Council Meeting: February 27, 2047 Agenda Item: ~ To; Mayor and City Council From: Carol Swindell, Director of Finance Subject: Annual Update af City Investment Policy, Continuation of Delegation af Investrnent Ruthority, and Resolution Authorizing the Estabfishment and Use of Bank and Brokerage Accounts and Adoption of a Resolutian Updating the List of Persons Authorized to Conduct Transactions with the State Loca( Agency Inves#ment Fund Recommended Actian Staff recommends Gity Council apprave a revised City Ir~vestment Policy, extend the delegation of investment autharity to the Director of Finance, as City Treasurer, from March 1, 2007, through February 29, 2008, and adapt the resolution updating the list of persons authorized to conduct transactions with the State I~ocal Agency Investment Fund (LAIF}. Executive Summary State law requires that the Gity adopt an investment policy {Attachment 1) and that the City Council annually consider the policy at a public meeting. The Santa Monica City Cha~ter delegates the authority for investing City funds ta the Gity Treasurer. State law requires that the Council delegate investment authority to the City Treasurer for a one- year period, renewable annually. That current delegation of autharity carries through February 28, 2007. 1 / , Resolution Na. 10115 (CC~), approved February 28, 20Q6, designates the City position titles as well as the specific individuals authorized to conduct investment transactions with LAIF. Council autharization to add the new Director of Finance and C}eputy City Manager to the list of authorized individuals is required at this time. Discussion City investments are made only in those instruments specifically authorized by Califorr~ia State laws, primarily Sections 53~01, 1 fi429.1, and 53684 et seq. of the Gav~rnment Code. Within these legal guidelines, the three primary objectives of the City's Investment Policy, ir~ priority arder are: Sa_ fetv Safety of principal is the foremost objective of the City's investment pr.ogram. City investmen#s shall be undertaken in a manner that seeks to ensure the preservation of capital in the averall portfolio by diversifying its investments among a variety of securities affering independent return5. ~~ ~~a~tx 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 concurrently with anticipafied cash needs to the extent possible. Irtvestments are primarily made in securities with ac#ive secondary or 2 resale markets. Additionally, an adequate liquidity buffer is maintained for extraordinary circumstances. Rate of Retu rn The City's investment portfolio is designed with the objective of attaining a b~nchmark rate of return throughout budgetary and economic cycles taking into account safety and liguidity requiremen#s. The benchmark may vary firom time to time depending c~n the econamic and budgetary conditions present. The City continues to abide by the highest professianal standards in the management of public funds. The proposed changes to the policy relate to a personrtel change in the Finance Department and the addition of the Deputy City Manager position to the list ofi individuals delegated it~vestment autharity, as well as several minor wording changes. These include adding a statement to ~ection 8.3 of #he Policy noting that the Cemetery and Nlausoleum Perpetual Care Funds are managed by an autside investment manager. The use of an outside manager is required since these are private funds held in trust by the City and can be invested in instruments in which that City stafiF cannot legally invest, such as stocks. Sectiort 13 of the Policy has been reorganized for cfarity, but no actual change to the content was made. Attachment 1-A was updated to reflect the current City fund structure, and a definition for "duration" was added to Attachment 1-C {Gfossary). The City's Investment Policy has been certified by the Association of Public Treasurers United States and Canada (APT) and is periodically submitted for recertification per RPT guidelir~es. 3 Previous Council Actions Per State law, City Council annually considers anc! approves the City's Investment Policy (Attachment 1) and delegates investment authority to the City Treasurer for a one-year period, renew~ble ~rtnu~lly. The current delegation of authority carries through February 28, 20p7, Also, ~anta Monica City Charter Section 711 delegates the authority to invest Gity funds ~o the City Treasurer. BudqetlFinar~cial Impac# lnterest earnings from the City's pooled investment portfQlio are allocated to the various Cifiy funds based upan each fund's share of tatal City cash and investments. The projected revenues for each fund are already included in the FY2006/07 budget, sa no budget action is required by this report. Prepared by: David Carr, Principal Budge~ Analyst-Irtvestments Approved: Forwarded to Cauncil: ~ . Carol Swindel~` Director of Finance ~~f.~mont Ew II y Manager ATTACHMENTS: Attachments: Attachment 1- Updated City Investment Policy Attachment 2 - Resalutior~ 4 R~v~s~d ~ro7 ATTACHMENT '1 INVESTMENT PO~ICY FQR THE CITY OF SANTA MtJNICA '1. Pt~LICY It is the policy of the City of Santa Monica to invest public funds in a manner which will safely preserve portfolio principal, pravide adequate liquidity to meet the City's cash flow needs, and optimize returns while conforming to all federal, state, and local statutes gaverning 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 5anta Monica as identified in the City's Gomprehensive Annual Financial Report, with the exceptian af those financial assets explicitly excluded from coverage by the Investment Policy for legal or operational reasons. All City Funds are listed in Attachment ~-A. The Investment Policy will alsa 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 accardanc~ 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, discretian, and intelligence exercise in management of their own affairs, not for speculatian, but for investment cansidering the probable safety af their capital as well as the probable income to be derived. The standard af prudence to be used by investment officials shall be the "prudent person" andlor "prudent investor" startdard 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 exercESing due diligence shall be relieved of personal responsibility fiar an individual security's credit risk or market price changes, provided deviatiarts fram expectations are reported in a timely fashian and appropriate actian is taken to control adverse developments. 1 4. INVESTMENT OBJECTlVES The primary objective of all City investments, in priority order, shaEl be: 4.1 SAFETY Safe#y of principal is the foremost objective af the investment program. City investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfalio. To attain this, the City will diversify its investments by investing funds among a variety of securities offering independent returns and financial institutians. 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 parkfolio shall remain sufficiently liguid to er~able the City to meet all operating requirements which might be reasonably anticipated. This is accomplished by structuring fihe portfolio so that securities mature concurrently with anticipated cash needs. Since all passible cash cfemands cannot be anticipated, the portfalio will mait~tain a liquidity "buffer" and invest primarily ir~ securities with active secondary or resale markets. 4.3 RATE OF RETURN The City's investment portFolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and econamic cycles, taking into account safety and liquidity requirements. The benchmark may vary from time to time depending on the economic and budgetary conditions present. At no ~ime shall funds be invested in any security that could result in zero interest accrual if held to maturity. 5. INVESTMENT AUTHORITY DELEGATIQN In accordance with the Santa Monica City Charter, Section 711, the City Council delegates to the City Treasurer #he authority to invest City funds. The Director of Finance, as City Treasurer, delegates this authority to the Principai Budget Analyst-Investments. In the absence of the Director of Finance and the Principal Budget Artalyst-Investments, autharity ta invest City funds will be delegated to the Deputy Gity Manager, the Assistant City Manager andJor the City Manager. Section 53607 of the ~tate of California Government Code limits the authorization of the legislative body to delegate investment authority ta a ane-year periad, renewable anr~ually. 2 5.1 INVE~TMENT PROCEQURES The Director of Finance is responsible for conducting and reporting on all City investments. Ta facilitate this function, the Director of Finance will prepare and maintain an Investment Procedures Manual detailing procedures for the operatian af the investment pragram consistent with this policy. The manual shauld include reference to safekeeping, banking services contracts, collateralldepository agreements, and repurchase agreements. The manual shall also include explicit delegation of autharity to persons responsible for investment transactions. No person may engage in investment transactions except as provided under the terms of this palicy and the procedures established by the Director of Finance. Additionally, the manua! will explicitly include a current listing of aIM City of Santa Monica financial institution deposit and investment accounts, a current list af all financial institutions with which the Gity currently is authorized to conduct investment trar~sactions, 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 instructians, of all investment reports required by law ar by City Investment Palicy. 5.2 INVESTMENT COMMITTEE An Investrnent Committee (the Committee) shall be established consisting af the City Manager, the Assistant City Manager, the Qeputy City Manager, the Clirector of Finance, and the Principal Budget Analyst-Investments. 1n addition, the Gommittee will include one ather department head serving one- year terms an 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 investmenfi activity, to review the current status of ail funds held by the Gity, #o discuss anticipated cash requirements and investment activity far the next quarter, and to discuss investment strategy. 6. ETHICS AND CONF~ICTS OF INTEREST T~e Director of Finance and other employees involved in the investment process shall refrain from personal business activity that cauld carrflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. The Director of Finance and other employees involved in the investment process shail disclose any material interests in financial insti#utions with which they conduct business within their jurisdiction, and they shall further disclose any material personal finarrcial/investmer~t positions that could be related to the perFormance of the City's investment portfalio and shall refrain from personal investment transactions with the same individual or firm with whom business is conducted an behalf of the City. 3 The Directar of Finance and other employees involved in the investment pracess are required to file annual disclosure statements as required by the Fair PoCitical Practiees Commission. During the course of the year, if there is an even# subject to disclasure that could impair the ability of the Director of Finance or investment emplayees to make impartial decisians, the City CounciC will be notified ir~ writing within ten (10) days of the event. 7. AUTHtJRIZED FINANCIAL DEALERS AND INSTITUTIC}NS The Ci#y shall transact business only with issuers, banks, savings an~d loans, and registered securities dealers. The purchase of any investment, other than thcase purchased directly from the issuer, shall be purchased from either an institution licensed by the Stafie 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 ar state chartered bank, a federal or sta#e association (as defined by Section 51 q2 af the Financial ~ode}, or a brolcerage firm designated as a primary dealer by the Federal Reserve Bank. The Director of Finance's staff shall investigate all institutions thafi wish to da 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 inves~ment transactians must camplete City's "Broker/Dealer Request far Information'° and "Broker/Dealer Certification". The Directar of Finance shall conduct an annual review of the financial condition and other qualifications of all approved financia! institutions and brokerldealers to determine if they continue to meet the City's guidelines for qualification as defined in this sectian. Additionally, the City shall keep the current audited financial statements on file for each approved financial institutian and broker/dealer with which the City does business. 8. AUTHt~RIZED AND SUITABLE INVESTMENTS Investments shall be made only in those ins#ruments specificaEly authorized by California State laws, primarily Sectians 53601, 53601.6, 53601.7, 1 fi429.1, and 53684 et sq. of the Gavernment Gode and to no greater an extent than authorized by those laws. These laws are summarized in Attachment 1-B. Additional City guidelines are as fallows: 4 Instruments U.S. Federal Agencies Banker's Acceptances {BA) Negotiable Certificates of Deposit {NCD) Cammercial Paper {CP) Rdditional City Guidelines No mare than 50% of portfolio, per agency Maximum of 10°l~ af portfolio per issuer Maximum of 10°lo af portfolio per issuer Maximum of 15°l~ of partfolio In addition to following all ~egal 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 irtvestments, maturiiies, and institutions to minimize credit risk and maintain an appropriate return. 8.1 REPURCHASE AGREEMENTS investments in repurchase agreements are allowable and shakl be made only with financial institutians with which the City has an executed master repurchase agreement. The financial institution must be a primary dealer af the Federal Fteserve Bank of New York. $.2 PR4HlBITED INVESTMENTS AND TRANSACTIONS Prohibited investments include as inverse floaters, range notes, interest only strips derived from a pool of mortgages (collateralized mortgage abligations}, and any security that could result in zero interest accrual if held to maturity, as specified in Section 53fi41.6. 8.3 INVESTMENTS HELD AND/OR MANAGED BY FISCAL AGENTS Investments of band proceeds held by fiscal agents will be made in accordanee wi#h Government Code Seetion 53~01 (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 heid in trust and managed by the City. These funds da not fall under the guidelines of the Gavernmer~t Code sections r~oted in Section 8.4 af this Policy, but are invested by an outside investment manager under guidelines established by the City ~ouncil. 9 INVESTMENT POOLSIMUTUAL FUND~ A thorough investigation of any paoled investments funds, ir~cluding mutual funds, is required prior to investing, and on a continuaC basis. To accomplish this, a 5 questionnaire will be ~ased to evaluate the suitability of the paoled fund. The questionnaire will answer the following general questions: * A description of eligible investment securities, and a written statement of investmer~t policies and abjectives. • A descrip#ion of interest calculations and how it is distributed, and t~aw gains and losses are treated. • A description of how the securities are safeguarded {including the settlement processes}, and how often tt~e securities are priced and the program audited. • A descriptian of who may invest in the program, how often, and what size depasit and withdrawal are allowed. • A schedule for receiving statements and portfolio listings. • Are reserves, retained earnings, etc., utilized by the poalJfund? • A fee schedule, and when and how fees are assessed. • Is the poal/fund eligible for bond praceeds and/or will it accept such praceeds? Far mutual funds, a fund prospectus can substitute for the questionnaire. 10. COL~ATERALlZATION Califarnia Government Code Sec#ions 53652, et seq. requires depositories to post certain types of collateral for public funds above the Federal Deposit Ir~surance Corporation ~FDIC} insurance amounts. The collateral requirements apply to bank deposits, both active (checking and savings accounts) and inactive (non-negatiable certificates of deposit). Collateralization is alsa required for repurchase agreements. ln order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102°la of the market value of principal and accrued interest, and the value shall be adjusted no less than quarterly. Gollafieral will be in the form af U.S. Treasury Obligations ar U.S. Agency Securities. Gollateral 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 receipfi} must be supplied to the City and retained. The right of collateral substitution is granted. 1 '~ . SAFEKEEPING AND CUSTODY In accordance with Caiifornia Government Cade Section 536Q1, all securities owned by the City shall be held in safekeeping by the City's custodial bartk ar a third party bank trust department, acting as an agent for the City under terms c~f the custody agreement. Collateral far repurchase agreements will be held by a third party custodian under terms af the Master Repurchase Agreement. 6 All securities will be received and delivered using a delivery vs. payment basis, which ensures that securities are depasited 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 confirma#ion tickets. t~n a monthly basis, the custodial asset statement shall be reconci[ed with the monfih-end portfolio holdings. 12. DlVERSIFIGATION The City will diversify its investments by security type, institution, and maturity date. Concentration limits are discussed in Sectian 8A (Authorized and Suitable Investments} and in Attachment B. 13, MAXIMUM MATURITIES To #he e~ctent possible, the City will attempt ta match its ir~vestments with anticipated cash flow requirements. Unless matched to a specific cash flaw, the Gity 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. Furkher maturity limitations are shown in Attachment B. The weighted average maturity of the investment portFolia will be three years or less. In order to minimize the impact af market risk, most investments will be held to maturity. Investments may be sold prior ta maturity for cash flow needs, portfolio appreciation purpases, or in order to limit losses. Hawever, na 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 si~ould be continually invested in readily available funds. 14. INTERNA~ CONTRC}LS The Director of Finance shafl be respansible 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 misrepreser~tation. The Director of Finance will also establish internal contro[ procedures addressing 7 wire transfer controls, separatian of duties and administrative controls, avoidance of collusian, separation of transaction autharity from accounting procedures, documentation af investment transactions, and monitoring of results. As part of its annual audit of the Gity, the City's external auditor will review compliance with statutes, policies, and procedures. 15, PERFORMANCE STANDARDS The pc~rtfolio shaN be designed with the objective af obtaining a rate of return thraughout 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 to determine whe#her appropriate and suitable market yields are being achieved shall be to identify a comparable benchmark to the portfolio's investment duration, e.g. tt~e ~onstant Maturing Two Year Treasury bill index. Benchmarks may change over time depending on the partfolio's duration. 16. REPC}RTING In accordance with State law and the City Gharter, monthly reports will be made to the Gity Council and the City Manager describing the present status of City investments and monies held by the City, as well as summarizing a!I investmer~t transactions for the month. Schedules in the monthly report should include the foflowing: • The type of the investmer~t, name of the issuer, maturity date, par value, book value, and market value • The source of marfcefi value data • The weighted average maturity of the portfc~lio • Coupon, discount, ar earnings rate for each security • Percentage of portfolio represented by each investment category • A certification of compliance with the Ir~vestment Policy • A statement denoting the City's ability to meet its anticipated expenditures requirements for the ne}ct six months • Benchmark comparison $ Records of al! investment transactions will be kept and filed in the Finance Department. The Director of Finance will provide capies af the June and December monthly cash and investment report to the California Debt and Investment Advisory Commission, as well as the City's Investment Palicy subsequent to the Gouncil's annual review. 17'. SCtC1AL~Y RESPONSIBLE INVESTING RESTRICTI~NS - The direct investment of City fur~ds are r~stricted as follows: a. Investments ~re ta be made in entities that support clean and healthy environrnent, including fallowing safe and environmenfially sound practices. b. Na investmen#s are to be made in tobacco or tobacco-related products. c. No investments are to be made to support the produc#ion of weapons, militar}r systems, or nuclear power. d. Investments are ta be made in en#ities that support equality of rights regardless of sex, race, age, disability or sexual orientation. e. Investments are to be made in entities that promate community economic development. The Director of Finance shall periodically verify compliance with the guidelines either through direct cantact with company or with Investors Respansibili#y Research Center. 1$. CI~MMUNITY REINVESTMENT ACT iCRA) The City will deposit funds only in those financial institutions, which have a CRA rating {as determined by the appropriate regulatory body} of "Outstanding" or "Satisfactory" 19, INVESTMENT POLlCY ADOPTION The Gity's investment policy shall be reviewed and adopted by the City Council annually. The Investment Committee will review the policy periodically to ensure its consistency with the overall objectives of preservation o# principal, liquidity, and return, and its conformance with current law, financial and econamic trends, and cash flow needs of the City. 9 ATTACHMENT 1-A City of Santa Monica Funds far Cash Pooling The following listed City of Santa Monica funds shall have their cash balances pooled for investment purposes except far any fund or portion of on~ or more funds which is specifically identified for exclusion in Attachment B of the City Investment Palicy: FUND NUMBER FU~JD NAME t}1 GENERAL FUND C}4 SPEGIAL REVENUE SOURCE FUND 45 CHARNOCKFUND 11 BEACH RECREATIQN FUND 12 NOUSING AUTHORITY FUND 13 DISASTER RELIEF FUND 14 TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT 15 LOW/MC?DERATE INCOME NQUSING FUND 16 REDEVELQPMENT-DQWNTQWN PROJECT FUNQ 17 REDEVELOPMEf~T-EARTNQl1AKE RECQVERY PROJECT 98 REDEVELOPMENT-4CEAN PARK PROJECT FUND 19 GC3MMUNITY DEVELC}PMENT B~C1CK GRANT {CBDG) FUND 2C} MlSCE~LANE(~US GRANTS FUND 2'! ASSET SEIZURE FUND 22 CITIZENS OPTION FOR PUBLCC SAFETY FUND 23 DISASTER FUND 24 RNNENBERG FUND 25 WATER FIJND 27 ~OLID WASTE MANAGEMENT FIJND 29 RENT CQNTROL FUND 30 PIER FUND 31 WASTEWATER FUND 32 CIVIG AUDITC}RIUM FUND 33 AIRPORT FUND 34 STORMWATER MA~lAGEMENT FUND ~ 37 CEMETERY FUND 41 BIG BLUE BUS FUND 42 TRAFFIC SAFETY FUND 43 GAS TAX F U N D 44 SCAQMD FUNQ 52 SPECIAL AVIATIQN FUND 53 PARKS AND RECREATION FACILITIES FUND 54 VEHIC~.E MANAGEMENT FUND A-1 FUND NUMBER FUND NAME 55 ENF(3RMATIC7N TECHNQ~aGY REPLACEMENT AND SERVICES FUND 56 SELF INSURANCE-COMPREHENSIVE FUND 57 ~ELF IN~URANCE-BUS FUND 5$ SE~F INSl1RANCE-AUT(J FUND 59 SE~F INSURANCE WC}RKERS-COMPENSATION FUND 77 PARKING AUTH4RITY FUND 80 GENERA~ TRUST FUND 82 CEMETERY PERPETUAL CARE FUND 85 DEBT SEFtVICE FUNQ 89 MAUSC~LEUM PERPETUAL CARE FUND A-2 ATTACHMENT 1-B Summary of State of California Statutes Applicable to Municipal Investments The following investments are authorized by California State Code, Title 5, Division 2, Sectians 53600, 53~01, 53631.5 and 53635. See code sections for complete descriptions. ~egal Authorized Investment ~imit °~ tJther Constraints Local Agency Bonds No limit Maximum maturity 5 years. U.S. Treasury ~bligations No limit Maximum maturity 5 years. State af Califarnia Na limifi Maximurn maturity 5 years. Obligations California ~ocal Agency No limifi Maximum maturity 5 years. Obligations U.S. Agencies No limit Maximum maturity 5 years. Bankers Acceptance 40°lo Eligible for purchase by the Federal Reserve System and nat to exceed 18Q days to maturity. No more than 30°la may be in bankers' acceptances of any one commercial bank. Commercial Paper 25°l0 "A -1 1P - 1/F - 1" rating; if the issuer has lang-term debt, it must rated "A"; U.S. corparate assets over $500,004,oao; purchases may not represent more than 10°1a of outstanding paper and may not exceed 270 days to maturity. The maximum limit on commercial paper is 25°!0 of all investments. Negatiable Certificates of 3Q°lo Maximum ma#urity 5 years. State and Deposit Federal[y chartered banks and savirtgs institutions, including U.S. branches of foreign banks regulated by State regulatory authorities ("Yankee CD"'). Repurchase Agreement No limit Maximum maturity 1 year. Securities used as collateral for repa's must be investments allowable under Govt. Code {i.e., T-bills, &1 Lega1 Authorized Investment L.imit % Other Constraints Agencies, BAs, CDs, etc.}; must be collateralized at 102°la of market value or greater; securities must be safe kept by third party. Reverse Repurchase 20%* Must be made wi#h primary dealers of the Agreements Federal Reserve Bank of New York and the securities used for the agreement must have been held by the lacal agency for at least 30 days. The maximum maturity is 92 days. Securities ~ending 20°14~` Must be made with primary dealers of the Agreements Federal Reserve Bank of New York; the securities used for the agreement must have been held by the lacal agency for at least 3a days. Securities used as coNateral must be investments allowable under Govt. Code (i.e. U.S. Treasury obligatians, Agencies, BA's CDs, etc.); both the securities and the collateral are ta be held by a third party. Maximurn maturity 92 days. Medium-Term Corporate 30°!~ Maximum maturity 5 years; bonds must be Notes rated in top three rating categories by a nationally recognized rating service. Mutual Funds and Money 20% No more than 10°lo may be invested in any Market Mutual Funds 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 investm~ents for local agencies) the investment company must be in highest ranking pravided by not less than two of the three largest nafiionally 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. Money Market Fur~ds 2Q°lo The maney market fiunds musfi have an average weighfied maturity of 90 days or less and a~ide by SEC regulations; funds must receive the highest ranking by 2 of the 3 largest nationally recognized rating agencies B-2 ~egal Authorized Investment Limit % Other Constraints OR retain an investment advisar wha is registered, or exempt from registration, with the SEC and has at least 5 years experience managir-g money market funds ir- excess of $500 millian. ~ Collateralized Certificate No limit Maximum maturity 5 years. Banks: deposit of Deposit not to exceed the totaE of paid-in capital surplus. S&~s: depasit not to exceed the greater of total rret worth or $50{},Q00. State and Federal credit unions: deposit shall not exceed the greater of the total af unpaired capital and surpfus or $5C}O,OQO. Must be collateralized to 1'I C}°lo o# the CD value by ather eligible securities. Investments in certificates of deposits af state or federal credit unians if any member of the city's governing or managing afficers (caur~cil, city manager, fiscal officers} serves on the credit union board ar key committee positions is prohibited. Mortgage Pass-Through 20°lo Maximum maturity 5 years; bonds must be rated in top two rating categories by a nationally recognized rating service. Shall not exceed 95°l0 of the mortgage security's fair market value. Issuer must have rating of "A" or higher on issuer's debt. Time Deposits No I~imit Maximum matiarity of 5 years Local Agency lnvestment $ 40 Monies are invested in pooled sfiate fund Fund (~AIF) million managed by State Treasurer. Maximum 15 transactior~s per manth. County Pooled No limit Inves#ment Funds Joint Powers Authority Pool *24°lo for reverse repurchase agreements and securities lending agreemer~ts combined. Bond Proceeds Bor~d proceeds may be invested in accordance with the State Cade provisions. B-3 ATTACHMENT "1-G G~QSSARY AGENCIES: Federal agency securities andlar Gavernment S~onsored Enterprises {GSE's). ASKED: The price at which securities are ofFered. BANKERS' ACGEPTANCE {BA): A draft or biil af exchange accepted by a bank or trusfi company, The accepting institution guarantees payment of the bili, as well as the issuer_ BASIS PQfNT: A basis point equals one one-hundredth of 1%(.01 °fo). 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 affered for securities. BROKER: A broker brings buyers and sellers #ogether for a commission. GAL~ABLE SECURITY: A security that can be redeemed by the iss~er before the scheduled maturity date. CERTIFICATE 4F DEPC>SIT {CD): A time deposit with a specific maturity evidenced by a ce~kificate. Large denominatian CD's are typically negotiable. CCILLATERAL: Securities, evidence of deposit or other praperty which a borrawer pledges to secure repayment of a loan. Also refers to securities pledged by a bank ta secure deposits of public monies. COMPREHEN5IVE ANNUAL FINANCIAL REPORT (CAFR}: The official annual report for the City af Santa Monica. It includes basic financial statements for each individual f~nd and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-rela~ed legal and contractual provisions, extensive introductory material, and a detailed ~tatistical Section. COMMERCIAL PAPER (CP}: An unsecured promissory note with a fixed maturity no longer than 27Q days. Usually sold in discount form. CflUPON: (a} The annual ra#e of interest that a bond's issuer promises to pay the B-4 bondholc#er 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 transactior~s, buying and selling far his own account. DE~IVERY VERSUS PAYMENT (DVP): There are two methods of delivery of securities: delivery versus payment and delivery versus receipt ~also calied 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. DERIVATIVE~: {~ ) Financial instruments whose return profile is linked to, ar derived from, the movement of one or more underlying incEices ar securifiies, and may include a leveraging factor, or {2) financial contracts based on national amounts whose value is derived fram an underlying index ar security (interest rates, foreigr~ exchange rates, equities, or commodities). DISGOUNT: The difference between the cost price of a security and its value at maturity wher~ quo#ed at lower than face value. A security selling below original offering price shortly after sale also is consideree# to be at a discount. DISCt7UNT SECURITIES. Nan-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}. DIVERSIFICATI4N: Dividing investrnent funds among a variety af securities and issuers offering independent returns. DURATt{JN: A measure of the timing af the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based orr three variables: term to maturi#y, coupon rate, ar-d yield ta maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates. FEDERAL CFtEDIT AGE~JCIE~: Agencies of the Federal gavernment set up to supply credit to various classes of institutions and individuals, e.g., S&L's, small business firms, students, farmers, farm caoperatives, and exporters. FEDERAL DEPOSIT IN~URANCE CORPORATIaN (FDIC}: A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERA~ FUNDS: Non-interest bearing deposits heid by member banks at the Federal Reserve. Alsa used to denote °immediately available" funds in the clearing B-5 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 currenfly pegged by the Federal Reserve through open-rnarket operatiar~s. FEDERAL HC?ME ~UAN BANKS {FH~B): Government sponsored wholesale banks (currently 12 regionaf banks) which lend fur~ds and provide correspondent banking services to member commercial banks, #hrift institutions, credit unions, and insurance companies. The missian of the FHLB's is ta liquefy the housing related assets of members who must purchase stock in their district Bank. FEDERA~ HOME LOAN M4RTGAGE CC}RPORATION {FHLMC~: A Government Sponsored Enterprise that provides liquidity to the mortgage markets, much iike FNMA and FHLB. FEDERA~ NATIONA~ MORTGAGE ASSflCIATION {FNMA~: FNMA, like GNMA was chartered under the Federal Na#ional Mortgage Association Act in 1938. FNMA is a federai corporation working under the auspices af 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 carporation is called, is a private stockhalder- owned corporation. The corporation's purchases include a variety of adjustable mortgages and second laans in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNNIA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERA~ OPEN MARKET C4MMITTEE (FOMC}: Consists of seven members of the Federal Reserve Board and fiive af the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member while the other Presidents serve an 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. FEDERA~ RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven-member Board of Gavernars in Washington, D.C., 12 Regianal Banks, and about 5,700 commercial banks that are members of the system. GOVER~JMENTAL ~JATIONAL MORTGAGE ASSOCIATIO~J (GNMA ar Ginnie Mae): Securities influencing #he volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations and other insfiitutions. Security halder is protected by full fai#h and credit of the U.S. Government. Ginnie Mae securities are bac[ced by FHA, VA or FmNM mor~gages. The term pass- throughs is often used to describe Ginnie Maes. INVERSE FLOATERS: A structured note in which the coupan increase as interest rates decline and decrease as rates rise. B-6 L.IQUIDITY: A liquid asset is one that can be canverted easily and rapidly into cash without a substat~tial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narraw and reasanable size can be dane at those quotes. L.OGA~ AGENCY INVESTMENT FUND {~AIF): The aggregate of afl funds from poCitical subdivisions that are placed in the custody of the State Treasurer far investment and reinvestment. NIARKET VA~UE: The price at which a security is tradir~g and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactians between the parties ta repurchase-reverse repurchase agreements that establishes each party's rights ir~ the transactions. A master agreement will often specify, among other things, the right ofi the buyer-lender to Ciquidate the underlying securities in the event of default by the seller-borrower. MATURITY: The date upon which fihe principal ar stated value of an investment becames due and payable. M4NEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. CtFFER: The price asked by a selEer of securities (When you are buying securities, you ask for an offer). See ASKED AND BID, OPEN MARKET UPERATI(JNS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank, as directed by the F4MC, in order ta 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. C}pen market operations are the Federal Reserve's most important and most flexible monetary policy toal. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: A group of goverr~ment securities dealers that submit daily reparts of market activity ar~d positions and monthly financial statements ta the Fecleral Reserve Bank of New Yark and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission {SEC} regis#ered securities braker-dealers, banks, and a few unregulated firms. PRIME FtATE: The rate at which banks lend to their best or "prime" customers. Also knawn as the "'reference rate." &7 PRINClPA~: 1) the dallar cost af an issue ~xcluding accrued interest. 2) The one who takes ownership in a transaction, as oppased to brokering or acting as agent. PRUDENT PER~ON 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}. !n other states, the trustee may invest in a security if it is one, which would be ~rought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. QUALIFIED PUBLiC DEPC}SITORIES: A finar~cial institutian which does not claim exemption from the payment of any sales nr compensating use ar ad valorem taxes under the laws of this sta~e, 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 F~ETURN: The yield obtainable on a security based on its purchase price or its currer~t market price. This may be the amortized yieCd 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 an a fixed date. The security "buyer" in effect lends the "seller" maney for the period of the agreement, and the fierms 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 daing RP, it is lending maney, 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 iater 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SEC RULE 15C3-'I : 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: No#e~ issued by Government Sponsored Ertterprises (FHLB, FNMA, S~MA, etc.) and Carporations which have embedded options (e.g. cail features, step-up coupons, floating rate coupans, derivative based returns) into their debt structure. Their market performance is impacted by the fluctuation of ir~terest rates, the volatility af the imbedded options, and shifts in the shape of the yield curve. B-$ STUDENT LOAN MARKETING ASSOCIATIC}N (SLMA): A U.~. Corparation and instrumentality of the U.S. government. ThraUgh its borrowings, funds are targeted for loans to students in higher education institutions. ~LMA'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 VA~LEY AUTH{JRITY (TVA}: A U.S. Corporation created in the 1930's, ta electrify the Tennessee Valley area; currentiy a major utility headquartered in Knoxvi!!e Tennessee. TVA's securities are high[y liquid and are widely accepted. TRADE DATE: The date on which the buyer and seller agree to a transaction. The trade date may or may not be the date on whic~ the securities and maney char~ges hands ~settlement date}. TREASURY BILLS: A non-interest bearing discaunt securi#y issued by the U.S. Treasury to finance the national dek~t. Most bills are issued to mature in three months, six months, or one year. TREASURY B(JND: ~ong-term coupon-bearir-g securities U,S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than ten years. TREASURY NQTES: Intermediate term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities af from one to ten years. UNlFORM CAPITA~ RULE: Securities and Exchange Comrnissian requirement that member firms as well as non-member broker-dealers in securities maintain a maximum ratia of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all mor-ey owed to a firm including margin loans and commitments to purchase securities, ane 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 invesfiment, expressed as a percentage. {a) INCOME YIELD is obtained by dividing the current dallar income by the current market price for the sec~rity. (b} NET YIE~D or YIELD TO MATURITY is the current incame yield minus ar~y premium above par ar plus any discaunt fram par in purchase price with the adjustment spread over the period from the date of purchase to the date of maturity af the boncf. YIE~D TO MATURITY: The rate of return yieided by a debt security held to maturity when both interest payments artd the investar's capital gain or loss on the security are B-9 taken into account. B-10 e erence eso u ~ o n o.