SR-204-001 (14)
F:\Budget\Share\STAFF REPORTS\invpol6.doc
Council Meeting: February 28, 2006 Santa Monica, California
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Annual Update of City Investment Policy, Continuation of Delegation of
Investment Authority, and Resolution Authorizing the Establishment and
Use of Bank and Brokerage Accounts and Updating the List of Persons
Authorized to Conduct Transactions with the State Local Agency
Investment Fund
INTRODUCTION
This report recommends City Council approve a revised City Investment Policy, extend
the delegation of investment authority to the Chief Financial Officer from March 1, 2006,
through February 28, 2007, and update the list of persons authorized to conduct
transactions with the State Local Agency Investment Fund (LAIF). Council and the
community receive monthly reports on the investments of the City governed by the
investment policy.
The report also modifies the existing policy based on new State guidelines effective
January 1, 2006, and a minor title change.
BACKGROUND
State law requires that the City adopt an investment policy (Attachment 1) and that the
City Council annually consider the policy at a public meeting. Section 711 of the Santa
Monica City Charter delegates to the City Treasurer authority for investing City funds.
State law requires the Council delegate investment authority to the City Treasurer for a
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one-year period, renewable annually. The current delegation of authority carries
through February 28, 2006.
Resolution No. 10018 (CCS), approved February 22, 2005, designates the City position
titles as well as the specific individuals authorized to conduct investment transactions
with LAIF. Council authorization to add the new City Manager as well as approval of the
title change of the Director of Finance/City Treasurer to the Chief Financial Officer are
required.
DISCUSSION
City investments are made only in those instruments specifically authorized by
California State laws, primarily Sections 53601, 16429.1, and 53684 et seq. of the
Government Code. Within these legal guidelines, the three primary objectives of the
City’s Investment Policy, in priority order are:
Safety
Safety of principal is the foremost objective of the City’s investment program. City
investments shall be undertaken in a manner that seeks to ensure the preservation
of capital in the overall portfolio by diversifying its investments among a variety of
securities offering independent returns.
Liquidity
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
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that securities mature concurrently with anticipated cash needs to the extent
possible. Investments are primarily made in securities with active secondary or
resale markets. Additionally, an adequate liquidity buffer is maintained for
extraordinary circumstances.
Rate of Return
The City’s investment portfolio is designed with the objective of attaining a
benchmark rate of return throughout budgetary and economic cycles taking into
account safety and liquidity requirements. The benchmark may vary from time to
time depending on the economic and budgetary conditions present.
The City continues to abide by the highest professional standards in the management of
public funds. The City’s Investment Policy has been certified the last two years by the
Association of Public Treasurers United States and Canada (APT). Several minor
legislative changes related to maximum holdings of certain investment categories were
enacted by the State of California, effective January 1, 2006. These changes are
reflected in the proposed updated City Policy. The other proposed changes to the
policy relate to the title change in the Finance Department. Upon approval of these
changes by Council, the policy will be submitted to the APT for re-certification.
Section 53607 of the State of California Government Code limits the authorization of the
legislative body to delegate investment authority to a one-year period, renewable
annually. The current delegation to the Finance Director/City Treasurer runs through
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February 28, 2006. Staff requests that Council extend the delegation from March 1,
2006 through February 28, 2007.
The current approved Investment Policy allows the Chief Financial Officer (Director of
Finance/City Treasurer) to delegate investment authority to the Principal Budget
Analyst-Investments. Authority is also designated to the City Manager and the
Assistant City Manager in the rare instances when the Director of Finance/City
Treasurer and Principal Budget Analyst-Investments are not available.
The attached resolution continues the delegation of authority to invest, as well as to
establish and use bank and brokerage accounts, to the City’s Chief Financial Officer.
BUDGET/FINANCIAL IMPACT
There are no budget or financial impacts resulting from this staff report.
RECOMMENDATION
Staff recommends that Council:
1. Approve the attached Investment Policy.
2. Extend delegation of investment authority to the Chief Financial Officer for the
period March 1, 2006, through February 28, 2007.
3. Approve and adopt the attached resolution.
Prepared by: Steve Stark, Chief Financial Officer
David R. Carr, Principal Budget Analyst-Investments
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Attachments: Attachment 1 – Updated City Investment Policy
Attachment 2 – Resolution
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Revised 2/06
ATTACHMENT 1
INVESTMENT POLICY FOR THE CITY OF SANTA MONICA
POLICY
1.
It is the policy of the City of Santa Monica to invest public funds in a manner
which will safely preserve portfolio principal, provide adequate liquidity to meet
the City’s cash flow needs, and optimize returns while conforming to all federal,
state, and local statutes governing the investment of public funds.
SCOPE
2.
This investment policy applies to all cash and financial investments of the various
funds of the City of Santa Monica as identified in the City's Comprehensive
Annual Financial Report, with the exception of those financial assets explicitly
excluded from coverage by the Investment Policy for legal or operational
reasons. All City Funds are listed in Attachment A. The Investment Policy will
also apply to all new funds created unless specifically exempted.
Investment income will be allocated to the various funds based on their
respective participation and in accordance with generally accepted accounting
principles. Interest is allocated on a quarterly basis.
PRUDENCE
3.
Investments shall be made with judgment and care, under circumstances then
prevailing, which persons of prudence, discretion, and intelligence exercise in
management of their own affairs, not for speculation, but for investment
considering the probable safety of their capital as well as the probable income to
be derived.
The standard of prudence to be used by investment officials shall be the
prudent person” “prudent investor”
“and/or standard and shall be applied in
the context of managing an overall portfolio. Investment officers acting in
accordance with written procedures and the investment policy and exercising due
diligence shall be relieved of personal responsibility for an individual security’s
credit risk or market price changes, provided deviations from expectations are
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reported in a timely fashion and appropriate action is taken to control adverse
developments.
INVESTMENT OBJECTIVES
4.
The primary objective of all City investments, in priority order, shall be:
4.1 SAFETY
Safety of principal is the foremost objective of the investment program. City
investments shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio. To attain this, the City will diversify
its investments by investing funds among a variety of securities offering
independent returns and financial institutions.
4.2 LIQUIDITY
Liquidity is the ability to change an investment into its cash equivalent on short
notice at its prevailing market value. The City’s investment portfolio shall remain
sufficiently liquid to enable the City to meet all operating requirements which
might be reasonably anticipated. This is accomplished by structuring the
portfolio so that securities mature concurrently with anticipated cash needs.
Since all possible cash demands cannot be anticipated, the portfolio will maintain
a liquidity “buffer” and invest primarily in securities with active secondary or
resale markets.
4.3 RATE OF RETURN
The City’s investment portfolio shall be designed with the objective of attaining a
benchmark rate of return throughout budgetary and economic cycles, taking into
account safety and liquidity requirements. The benchmark may vary from time to
time depending on the economic and budgetary conditions present. At no time
shall funds be invested in any security that could result in zero interest accrual if
held to maturity.
INVESTMENT AUTHORITY DELEGATION
5.
In accordance with the Santa Monica City Charter, Section 711, the City Council
delegates to the City Treasurer the authority to invest City funds. The Chief
Financial Officer, as City Treasurer, delegates this authority to the Principal
Budget Analyst-Investments. In the absence of the Chief Financial Officer,
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authority to invest City funds will be delegated to the Assistant City Manager
and/or City Manager. Section 53607 of the State of California Government Code
limits the authorization of the legislative body to delegate investment authority to
a one-year period, renewable annually.
5.1 INVESTMENT PROCEDURES
The Chief Financial Officer is responsible for conducting and reporting on all City
investments. To facilitate this function, the Chief Financial Officer will prepare
and maintain an Investment Procedures Manual detailing procedures for the
operation of the investment program consistent with this policy. The manual
should include reference to safekeeping, banking services contracts,
collateral/depository agreements, and repurchase agreements. The manual shall
also include explicit delegation of authority to persons responsible for investment
transactions. No person may engage in investment transactions except as
provided under the terms of this policy and the procedures established by the
Chief Financial Officer. Additionally, the manual will explicitly include a current
listing of all City of Santa Monica financial institution deposit and investment
accounts, a current list of all financial institutions with which the City currently is
authorized to conduct investment transactions, a current copy of State laws
pertinent to City investments, a description of specific controls to ensure the
proper execution of the City Investment Policy, and copies, with instructions, of
all investment reports required by law or by City Investment Policy.
5.2 INVESTMENT COMMITTEE
An Investment Committee (the Committee) shall be established consisting of the
City Manager, Assistant City Manager, Chief Financial Officer, and the Principal
Budget Analyst-Investments. In addition, the Committee will include one other
department head serving one-year terms on a rotating basis. The purpose of the
Committee is to provide general oversight and act in an advisory capacity. The
Committee will meet at least once each calendar quarter to review and evaluate
previous investment activity, to review the current status of all funds held by the
City, to discuss anticipated cash requirements and investment activity for the
next quarter, and to discuss investment strategy.
ETHICS AND CONFLICTS OF INTEREST
6.
The Chief Financial Officer and other employees involved in the investment
process shall refrain from personal business activity that could conflict with
proper execution of the investment program, or which could impair their ability to
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make impartial investment decisions. The Chief Financial Officer and other
employees involved in the investment process shall disclose any material
interests in financial institutions with which they conduct business within their
jurisdiction, and they shall further disclose any material personal
financial/investment positions that could be related to the performance of the
City’s investment portfolio and shall refrain from personal investment transactions
with the same individual with whom business is conducted on behalf of the City.
The Chief Financial Officer and other employees involved in the investment
process are required to file annual disclosure statements as required by the Fair
Political Practices Commission. During the course of the year, if there is an
event subject to disclosure that could impair the ability of the Chief Financial
Officer or investment employees to make impartial decisions, the City Council will
be notified in writing within ten (10) days of the event.
AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
7.
The City shall transact business only with issuers, banks, savings and loans, and
registered securities dealers. The purchase of any investment, other than those
purchased directly from the issuer, shall be purchased from either an institution
licensed by the State as a broker/dealer as defined in Section 25004 of the
Corporation Code, who is a member of the National Association of Securities
Dealers, or a member of a federally regulated securities exchange, a national or
state chartered bank, a federal or state association (as defined by Section 5102
of the Financial Code), or a brokerage firm designated as a primary dealer by the
Federal Reserve Bank.
The Chief Financial Officer’s staff shall investigate all institutions that wish to do
business with the City in order to determine if they are adequately capitalized,
make markets in securities appropriate to the City’s needs, and agree to abide by
the City’s Investment Policy. All financial institutions that desire to become
qualified bidders for investment transactions must complete City’s “Broker/Dealer
Request for Information” and “Broker/Dealer Certification”.
The Chief Financial Officer shall conduct an annual review of the financial
condition and other qualifications of all approved financial institutions and
broker/dealers to determine if they continue to meet the City’s guidelines for
qualification as defined in this section. Additionally, the City shall keep the current
audited financial statements on file for each approved financial institution and
broker/dealer with which the City does business.
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AUTHORIZED AND SUITABLE INVESTMENTS
8.
Investments shall be made only in those instruments specifically authorized by
California State laws, primarily Sections 53601, 53601.6, 53601.7, 16429.1, and
53684 et sq. of the Government Code and to no greater an extent than
authorized by those laws. These laws are summarized in Attachment B.
Additional City guidelines are as follows:
Instruments Additional City Guidelines
U.S. Federal Agencies No more than 50% of portfolio, per agency
Banker's Acceptances (BA) Maximum of 10% of portfolio per issuer
Negotiable Certificates of Deposit Maximum of 10% of portfolio per issuer
(NCD)
Commercial Paper (CP) Maximum of 15% of portfolio
In addition to following all legal guidelines, the portfolio will preserve principal,
maintain adequate liquidity to meet all City obligations, contain an appropriate
level of interest rate risk, and be diversified across types of investments,
maturities, and institutions to minimize credit risk and maintain an appropriate
return.
8.1 REPURCHASE AGREEMENTS
Investments in repurchase agreements are allowable and shall be made only
with financial institutions with which the City has an executed master repurchase
agreement. The financial institution must be a primary dealer of the Federal
Reserve Bank of New York.
8.2 PROHIBITED INVESTMENTS AND TRANSACTIONS
Prohibited investments include as inverse floaters, range notes, interest only
strips derived from a pool of mortgages (collateralized mortgage obligations), and
any security that could result in zero interest accrual if held to maturity, as
specified in Section 53601.6.
8.3 INVESTMENTS HELD AND/OR MANAGED BY FISCAL
AGENTS
Investments of bond proceeds held by fiscal agents will be made in accordance
with Government Code Section 53601 (l), which states that money from bond
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proceeds should be invested as specified by bond documents. In most cases
these investments will be made under the same guidelines as other City
investments.
Cemetery and Mausoleum Perpetual Care Funds are private funds held in trust
and managed by the City. These funds do not fall under the guidelines of the
Government Code sections noted in Section 8.0 of this Policy, but are invested
under guidelines established by the City Council.
INVESTMENT POOLS/MUTUAL FUNDS
9.
A thorough investigation of any pooled investments funds, including mutual
funds, is required prior to investing, and on a continual basis. To accomplish
this, a questionnaire will be used to evaluate the suitability of the pooled fund.
The questionnaire will answer the following general questions:
?
A description of eligible investment securities, and a written statement of
investment policies and objectives.
?
A description of interest calculations and how it is distributed, and how
gains and losses are treated.
?
A description of how the securities are safeguarded (including the
settlement processes), and how often the securities are priced and the
program audited.
?
A description of who may invest in the program, how often, and what size
deposit and withdrawal are allowed.
?
A schedule for receiving statements and portfolio listings.
?
Are reserves, retained earnings, etc., utilized by the pool/fund?
?
A fee schedule, and when and how fees are assessed.
?
Is the pool/fund eligible for bond proceeds and/or will it accept such
proceeds?
For mutual funds, a fund prospectus can substitute for the questionnaire.
COLLATERALIZATION
10.
California Government Code Sections 53652, et seq. requires depositories to
post certain types of collateral for public funds above the Federal Deposit
Insurance Corporation (FDIC) insurance amounts. The collateral requirements
apply to bank deposits, both active (checking and savings accounts) and inactive
(non-negotiable certificates of deposit).
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Collateralization is also required for repurchase agreements. In order to
anticipate market changes and provide a level of security for all funds, the
collateralization level will be 102% of the market value of principal and accrued
interest, and the value shall be adjusted no less than quarterly. Collateral will be
in the form of U.S. Treasury Obligations or U.S. Agency Securities.
Collateral will always be held by an independent third party with whom the entity
has a current custodial arrangement. A clearly marked evidence of ownership
(safekeeping receipt) must be supplied to the City and retained. The right of
collateral substitution is granted.
SAFEKEEPING AND CUSTODY
11.
In accordance with California Government Code Section 53601, all securities
owned by the City shall be held in safekeeping by the City’s custodial bank or a
third party bank trust department, acting as an agent for the City under terms of
the custody agreement. Collateral for repurchase agreements will be held by a
third party custodian under terms of the Master Repurchase Agreement.
All securities will be received and delivered using a delivery vs. payment basis,
which ensures that securities are deposited with the third party custodian prior to
the release of funds. Securities will be held by a third party custodian as
evidenced by safekeeping receipts. Investments in the State Pool or money
market mutual funds are undeliverable and are not subject to delivery or third
party safekeeping.
Investment trades shall be verified against bank transactions and broker
confirmation tickets. On a monthly basis, the custodial asset statement shall be
reconciled with the month-end portfolio holdings.
DIVERSIFICATION
12.
The City will diversify its investments by security type, institution, and maturity
date. Concentration limits are discussed in Section 8.0 (Authorized and Suitable
Investments) and in Attachment B.
MAXIMUM MATURITIES
13.
In order to minimize the impact of market risk, it is intended that all investments
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be held to maturity.
To the extent possible, the City will attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the
City will not directly invest in securities with a final stated maturity date of more
than five (5) years. Any investment of more than five years requires the advance
approval of the City Council, in accordance with State law, and the City Manager.
Further maturity limitations are shown in Attachment B. The weighted average
maturity of the investment portfolio will be three years or less. Investments may
be sold prior to maturity for cash flow needs, portfolio appreciation purposes, or
in order to limit losses. However, no investment shall be made based solely on
earning anticipated from capital gains. Due to the uncertain nature of cash flow
requirements, a portion of the portfolio should be continually invested in readily
available funds.
INTERNAL CONTROLS
14.
The Chief Financial Officer shall be responsible for ensuring that all investment
transactions comply with the City’s Investment Policy and for establishing internal
controls that are designed to prevent losses due to fraud, negligence, and third-
party misrepresentation
The Chief Financial Officer will also establish internal control procedures
addressing wire transfer controls, separation of duties and administrative
controls, avoidance of collusion, separation of transaction authority from
accounting procedures, documentation of investment transactions, and
monitoring of results.
As part of its annual audit of the City, the City’s external auditor will review
compliance with statutes, policies, and procedures.
PERFORMANCE STANDARDS
15.
The portfolio shall be designed with the objective of obtaining a rate of return
throughout budgetary and economic cycles, commensurate with investment risk
constraints and cash flow needs.
15.1 MARKET YIELD (Benchmark)
The City’s investment strategy is passive. Given this strategy, the basis used by
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the Chief Financial Officer to determine whether appropriate and suitable market
yields are being achieved shall be to identify a comparable benchmark to the
portfolio’s investment duration, e.g. the Constant Maturing Two Year Treasury bill
index. Benchmarks may change over time depending on the portfolio’s duration.
REPORTING
16.
In accordance with State law and the City Charter, monthly reports will be made
to the City Council and the City Manager describing the present status of City
investments and monies held by the City, as well as summarizing all investment
transactions for the month. Schedules in the monthly report should include the
following:
?
The type of the investment, name of the issuer, maturity date, par value,
book value, and market value
?
The source of market value data
?
The weighted average maturity of the portfolio
?
Coupon, discount, or earnings rate for each security
?
Percentage of portfolio represented by each investment category
?
A certification of compliance with the Investment Policy
?
A statement denoting the City’s ability to meet its anticipated expenditures
requirements for the next six months
?
Benchmark comparison
Records of all investment transactions will be kept and filed in the Treasurer’s
office.
The Chief Financial Officer will provide copies of the June and December
monthly cash and investment report to the California Debt and Investment
Advisory Commission, as well as the City’s Investment Policy subsequent to the
Council’s annual review.
SOCIALLY RESPONSIBLE INVESTING
17.
RESTRICTIONS
– The direct investment of City funds are restricted as follows:
a. Investments are to be made in entities that support clean and
healthy environment, including following safe and environmentally sound
practices.
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b. No investments are to be made in tobacco or tobacco-related
products.
c. No investments are to be made to support the production of
weapons, military systems, or nuclear power.
d. Investments are to be made in entities that support equality of
rights regardless of sex, race, age, disability or sexual orientation.
e. Investments are to be made in entities that promote community
economic development.
Director of Finance/City Treasurer shall periodically verify compliance with the
guidelines either through direct contact with company or with Investors
Responsibility Research Center.
COMMUNITY REINVESTMENT ACT (CRA)
18.
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".
INVESTMENT POLICY ADOPTION
19.
The City’s investment policy shall be reviewed and adopted by the City Council
annually. The Investment Committee will review the policy periodically to ensure
its consistency with the overall objectives of preservation of principal, liquidity,
and return, and its conformance with current law, financial and economic trends,
and cash flow needs of the City.
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AMENDMENT FUND FUND PROJECT FUND
ATTACHMENT 1-A
City of Santa Monica Funds for Cash Pooling
The following listed City of Santa Monica funds shall have their cash balances
pooled for investment purposes except for any fund or portion of one or more
funds which is specifically identified for exclusion in Attachment B of the City
Investment Policy:
FUND FUND NAME
NUMBER
01 GENERAL FUND
04 SPECIAL REVENUE SOURCE FUND
11 BEACH RECREATION FUND
12 HOUSING AUTHORITY FUND
13 DISASTER RELIEF FUND
14 TENANT OWNERSHIP RIGHTS CHARTER
15 LOW/MODERATE INCOME HOUSING FUND
16 REDEVELOPMENT-DOWNTOWN PROJECT FUND
17 REDEVELOPMENT-EARTHQUAKE RECOVERY
18 REDEVELOPMENT-OCEAN PARK PROJECT FUND
19 COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG)
20 MISCELLANEOUS GRANTS FUND
21 ASSET SEIZURE FUND
22 CITIZENS OPTION FOR PUBLIC SAFETY FUND
23 DISASTER FUND
25 WATER FUND
27 SOLID WASTE MANAGEMENT FUND
29 RENT CONTROL FUND
30 PIER FUND
31 WASTEWATER FUND
32 CIVIC AUDITORIUM FUND
33 AIRPORT FUND
34 STORMWATER MANAGEMENT FUND
37 CEMETERY FUND
41 BIG BLUE BUS FUND
42 TRAFFIC SAFETY FUND
43 GAS TAX FUND
44 SCAQMD FUND
51 CABLE COMMUNICATIONS FUND
52 SPECIAL AVIATION FUND
53 PARKS AND RECREATIONAL FUND
A-1
FUND FUND NAME
NUMBER
54 VEHICLE MANAGEMENT FUND
55 COMPUTER EQUIPMENT REPLACEMENT FUND
56 SELF INSURANCE-COMPREHENSIVE FUND
57 SELF INSURANCE-BUS FUND
58 SELF INSURANCE-AUTO FUND
59 SELF INSURANCE WORKERS-COMPENSATION FUND
77 PARKING AUTHORITY FUND
80 GENERAL TRUST FUND
82 CEMETERY PERPETUAL CARE FUND
85 DEBT SERVICE FUND
89 MAUSOLEUM 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, Sections 53600, 53601, 53631.5 and 53635. See code sections for
complete descriptions.
Legal
Limit
(%)
Authorized Investment Other Constraints
Local Agency Bonds No limit Maximum maturity 5 years.
U.S. Treasury No limit Maximum maturity 5 years.
Obligations
State of California No limit Maximum maturity 5 years.
Obligations
California Local Agency No limit Maximum maturity 5 years.
Obligations
U.S. Agencies No limit Maximum maturity 5 years.
Bankers Acceptance 40% Eligible for purchase by the Federal
Reserve System and not to exceed 180
days to maturity. No more than 30% may
be in bankers' acceptances of any one
commercial bank.
Commercial Paper 25% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
purchases may not represent more than
10% of outstanding paper and may not
exceed 270 days to maturity. The
maximum limit on commercial paper is
25% of all investments.
Negotiable Certificates 30% Maximum maturity 5 years. State and
of Deposit Federally chartered banks and savings
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 repo's must be
1
Legal
Limit
Authorized Investment (%) Other Constraints
investments allowable under Govt. Code
(i.e., T-bills, Agencies, BAs, CDs, etc.);
must be collateralized at 102% of market
value or greater; securities must be safe
kept by third party.
Reverse Repurchase 20%* Must be made with primary dealers of the
Agreements Federal Reserve Bank of New York and
the securities used for the agreement must
have been held by the local agency for at
least 30 days. The maximum maturity is
92 days.
Securities Lending 20%* 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 local agency for at
least 30 days. Securities used as
collateral must be investments allowable
under Govt. Code (i.e. U.S. Treasury
obligations, Agencies, BA’s CDs, etc.);
both the securities and the collateral are to
be held by a third party. Maximum
maturity 92 days.
Medium-Term 30% Maximum maturity 5 years; bonds must be
Corporate Notes rated in top three rating categories by a
nationally recognized rating service.
Mutual Funds and 20% No more than 10% may be invested in any
Money Market Mutual one mutual fund. Funds are invested in
Funds securities and obligations authorized by
sub-divisions (a) through (m) of Section
53601 and 53635, (any of the authorized
investments for local agencies) the
investment company must be in highest
ranking provided by not less than two of
the three largest nationally recognized
rating services OR must have the
investment advisor registered with the
SEC with no less than 5 yrs. experience
and have assets under mgmt. in excess of
$500 million.
2
Legal
Limit
Authorized Investment (%) Other Constraints
Money Market Funds 20% The money market funds must have an
average weighted maturity of 90 days or
less and abide by SEC regulations; funds
must receive the highest ranking by 2 of
the 3 largest nationally recognized rating
agencies OR retain an investment advisor
who is registered, or exempt from
registration, with the SEC and has at least
5 years experience managing money
market funds in excess of $500 million.
Collateralized No limit Maximum maturity 5 years. Banks:
Certificate of Deposit deposit not to exceed the total of paid-in
capital surplus. S&Ls: deposit not to
exceed the greater of total net worth or
$500,000. State and Federal credit
unions: deposit shall not exceed the
greater of the total of unpaired capital and
surplus or $500,000. Must be
collateralized to 110% of the CD value by
other eligible securities. Investments in
certificates of deposits of state or federal
credit unions if any member of the city’s
governing or managing officers (council,
city manager, fiscal officers) serves on the
credit union board or key committee
positions is prohibited.
Mortgage Pass-Through 20% Maximum maturity 5 years; bonds must be
rated in top two rating categories by a
nationally recognized rating service. Shall
not exceed 95% of the mortgage security's
fair market value. Issuer must have rating
of “A” or higher on issuer’s debt.
Time Deposits No Limit Maximum maturity of 5 years
Local Agency $ 40 Monies are invested in pooled state fund
Investment Fund (LAIF) million managed by State Treasurer. Maximum
15 transactions per month.
County Pooled No limit
Investment Funds
Joint Powers Authority Pool
3
Legal
Limit
Authorized Investment (%) Other Constraints
*20% for reverse repurchase agreements and securities lending agreements
combined.
Bond Proceeds
Bond proceeds may be invested in accordance with the State Code provisions.
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ATTACHMENT 1-C
GLOSSARY
AGENCIES: Federal agency securities and/or Government Sponsored
Enterprises (GSE’s).
ASKED: The price at which securities are offered.
BANKERS’ ACCEPTANCE (BA): A draft or bill of exchange accepted by a bank
or trust company. The accepting institution guarantees payment of the bill, as
well as the issuer.
BASIS POINT: A basis point equals one one-hundredth of 1% (.01%).
BENCHMARK: A comparative base for measuring the performance or risk
tolerance of an investment portfolio. The benchmark should represent a close
correlation to the level of risk and the average duration of the portfolio.
BID: The price offered for securities.
BROKER: A broker brings buyers and sellers together for a commission.
CALLABLE SECURITY: A security that can be redeemed by the issuer before
the scheduled maturity date.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity
evidenced by a certificate. Large denomination CD’s are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a
borrower pledges to secure repayment of a loan. Also refers to securities
pledged by a bank to secure deposits of public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
report for the City of Santa Monica. It includes basic financial statements for
each individual fund and account group prepared in conformity with GAAP. It
also includes supporting schedules necessary to demonstrate compliance with
finance-related legal and contractual provisions, extensive introductory material,
and a detailed Statistical Section.
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COMMERCIAL PAPER (CP): An unsecured promissory note with a fixed
maturity no longer than 270 days. Usually sold in discount form.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay
the bondholder on the bond's face value. (b) A certificate attached to a bond
evidencing interest due on a payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all
transactions, buying and selling for his own account.
DELIVERY VERSUS PAYMENT (DVP): There are two methods of delivery of
securities: delivery versus payment and delivery versus receipt (also called free).
Delivery versus payment is delivery of securities with an exchange of money for
the securities. Delivery versus receipt is delivery of securities with an exchange
of a signed receipt for the securities.
DEBENTURE: A bond secured only by the general credit of the issuer.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or
derived from, the movement of one or more underlying indices or securities, and
may include a leveraging factor, or (2) financial contracts based on notional
amounts whose value is derived from an underlying index or security (interest
rates, foreign exchange rates, equities, or commodities).
DISCOUNT: The difference between the cost price of a security and its value at
maturity when quoted at lower than face value. A security selling below original
offering price shortly after sale also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that
are issued at a discount and redeemed at maturity for full face value (e.g., U.S.
Treasury bills).
DIVERSIFICATION: Dividing investment funds among a variety of securities and
issuers offering independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to
supply credit to various classes of institutions and individuals, e.g., S&L's, small
business firms, students, farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency
that insures bank deposits, currently up to $100,000 per deposit.
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FEDERAL FUNDS: Non-interest bearing deposits held by member banks at the
Federal Reserve. Also used to denote "immediately available" funds in the
clearing sense. "Fed Funds" also used to refer to these funds.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded.
This rate is currently pegged by the Federal Reserve through open-market
operations.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale
banks (currently 12 regional banks) which lend funds and provide correspondent
banking services to member commercial banks, thrift institutions, credit unions,
and insurance companies. The mission of the FHLB’s is to liquefy the housing
related assets of members who must purchase stock in their district Bank.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): A
Government Sponsored Enterprise that provides liquidity to the mortgage
markets, much like FNMA and FHLB.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA
was chartered under the Federal National Mortgage Association Act in 1938.
FNMA is a federal corporation working under the auspices of the Department of
Housing & Urban Development, H.U.D. It is the largest single provider of
residential mortgage funds in the United States. Fannie Mae, as the corporation
is called, is a private stockholder-owned corporation. The corporation’s
purchases include a variety of adjustable mortgages and second loans in
addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are
widely accepted. FNMA assumes and guarantees that all security holders will
receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members
of the Federal Reserve Board and five of the twelve Federal Reserve Bank
Presidents. The President of the New York Federal Reserve Bank is a
permanent member while the other Presidents serve on a rotating basis. The
Committee periodically meets to set Federal Reserve guidelines regarding
purchases and sales of Government Securities in the open market as a means of
influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created
by Congress and consisting of a seven-member Board of Governors in
Washington, D.C., 12 Regional Banks, and about 5,700 commercial banks that
are members of the system.
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GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie
Mae): Securities influencing the volume of bank credit guaranteed by GNMA and
issued by mortgage bankers, commercial banks, savings and loan associations
and other institutions. Security holder is protected by full faith and credit of the
U.S. Government. Ginnie Mae securities are backed by FHA, VA or FmHM
mortgages. The term pass-throughs is often used to describe Ginnie Maes.
INVERSE FLOATERS: A structured note in which the coupon increase as
interest rates decline and decrease as rates rise.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into
cash without a substantial loss of value. In the money market, a security is said
to be liquid if the spread between bid and asked prices is narrow and reasonable
size can be done at those quotes.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from
political subdivisions that are placed in the custody of the State Treasurer for
investment and reinvestment.
MARKET VALUE: The price at which a security is trading and could presumably
be purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase-reverse repurchase agreements
that establishes each party's rights in the transactions. A master agreement will
often specify, among other things, the right of the buyer-lender to liquidate the
underlying securities in the event of default by the seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment
becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (bills,
commercial paper, bankers' acceptances, etc.) are issued and traded.
OFFER: The price asked by a seller of securities (When you are buying
securities, you ask for an offer). See ASKED AND BID.
OPEN MARKET OPERATIONS: Purchases and sales of government and
certain other securities in the open market by the New York Federal Reserve
Bank, as directed by the FOMC, in order to influence the volume of money and
credit in the economy. Purchases inject reserves into the bank system and
stimulate growth of money and credit; sales have the opposite effect. Open
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market operations are the Federal Reserve's most important and most flexible
monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers that submit daily
reports of market activity and positions and monthly financial statements to the
Federal Reserve Bank of New York and are subject to its informal oversight.
Primary dealers include Securities and Exchange Commission (SEC) registered
securities broker-dealers, banks, and a few unregulated firms.
PRIME RATE: The rate at which banks lend to their best or "prime" customers.
Also known as the "reference rate."
PRINCIPAL: 1) the dollar cost of an issue excluding accrued interest. 2) The
one who takes ownership in a transaction, as opposed to brokering or acting as
agent.
PRUDENT PERSON RULE: An investment standard. In some states the law
requires that a fiduciary, such as a trustee, may invest money only in a list of
securities selected by the state (the so-called legal list). In other states, the
trustee may invest in a security if it is one, which would be brought by a prudent
person of discretion and intelligence who is seeking a reasonable income and
preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not
claim exemption from the payment of any sales or compensating use or ad
valorem taxes under the laws of this state, which has segregated for the benefit
of the commission eligible collateral having a value of not less than its maximum
liability and which has been approved by the Public Deposit Protection
Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase
price or its current market price. This may be the amortized yield to maturity on a
bond or the current income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed price
on a fixed date. The security "buyer" in effect lends the "seller" money for the
period of the agreement, and the terms of the agreement are structured to
compensate him for this. Dealers use RP extensively to finance their positions.
Exception: When the Fed is said to be doing RP, it is lending money, that is,
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increasing bank reserves.
REVERSE REPO: An agreement whereby the dealer agrees to buy securities
and the investor agrees to repurchase them at a later date.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults
for protection.
SECONDARY MARKET: A market made for the purchase and sale of
outstanding issues following the initial distribution.
SEC RULE 15C3-1: See uniform net capital rule.
SECURITIES AND EXCHANGE COMMISSION: Agency created by Congress to
protect investors in securities transaction by administering securities legislation.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises
(FHLB, FNMA, SLMA, etc.) and Corporations which have embedded options
(e.g. call features, step-up coupons, floating rate coupons, derivative based
returns) into their debt structure. Their market performance is impacted by the
fluctuation of interest rates, the volatility of the imbedded options, and shifts in
the shape of the yield curve.
STUDENT LOAN MARKETING ASSOCIATION (SLMA): A U.S. Corporation and
instrumentality of the U.S. government. Through its borrowings, funds are
targeted for loans to students in higher education institutions. SLMA's securities
are highly liquid and are widely accepted.
SETTLEMENT DATE: The date on which a trade is cleared by delivery of
securities against funds. This date may be the same as the trade date or later.
TENNESSEE VALLEY AUTHORITY (TVA): A U.S. Corporation created in the
1930's, to electrify the Tennessee Valley area; currently a major utility
headquartered in Knoxville Tennessee. TVA's securities are highly liquid and are
widely accepted.
TRADE DATE: The date on which the buyer and seller agree to a transaction.
The trade date may or may not be the date on which the securities and money
changes hands (settlement date).
TREASURY BILLS: A non-interest bearing discount security issued by the U.S.
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Treasury to finance the national debt. Most bills are issued to mature in three
months, six months, or one year.
TREASURY BOND: Long-term coupon-bearing securities U.S. Treasury
securities issued as direct obligations of the U.S. Government and having initial
maturities of more than ten years.
TREASURY NOTES: Intermediate term coupon-bearing U.S. Treasury
securities issued as direct obligations of the U.S. Government and having initial
maturities of from one to ten years.
UNIFORM CAPITAL RULE: Securities and Exchange Commission requirement
that member firms as well as non-member broker-dealers in securities maintain a
maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital
rule and net capital ratio. Indebtedness covers all money owed to a firm
including margin loans and commitments to purchase securities, one reason new
public issues are spread among members of underwriting syndicates. Liquid
capital includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a
percentage. (a) INCOME YIELD is obtained by dividing the current dollar income
by the current market price for the security. (b) NET YIELD or YIELD TO
MATURITY is the current income yield minus any premium above par or plus any
discount from par in purchase price with the adjustment spread over the period
from the date of purchase to the date of maturity of the bond.
YIELD TO MATURITY: The rate of return yielded by a debt security held to
maturity when both interest payments and the investor's capital gain or loss on
the security are taken into account.
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Attachment 2
See Adopted
Resolutions No.
10115 (CCS)
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