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.
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/
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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
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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.
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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~
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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.
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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.
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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.
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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:
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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.
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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.
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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.
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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.