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City Of City ~®un~'oe~ '~ep®~
Santa Monica -
City Council Meeting: February 24, 2009
Agenda Item: l '"' D
To: Mayor and City Council, and Redevelopment Agency
From: Carol Swindell, Director of Finance
Subject: Annual Update on City Investment Policy
Recommended Action
Staff recommends that the City Council approve a revised City Investment Policy;
extend the delegation of investment authority to the Director of Finance, as City
Treasurer, from March 1, 2009, through February 28, 2010; and adopt the resolution
updating the list of persons authorized to conduct transactions with the State Local
Agency Investment Fund (LAIF). Staff also recommends that the Redevelopment
Agency adopt a resolution establishing a new account with the State focal Agency
Investment Fund (LAIF).
Executive Summary
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. The Santa Monica City
Charter delegates the authority for investing City funds to the Director of Finance as the
City Treasurer. State law requires that the Council delegate investment authority to the
City Treasurer for aone-year period, renewable annually. The current delegation of
authority carries through February 29, 2009.
Resolution No. 10271 (CCS), approved February 12, 2008, designates the City position
titles as well as the specific individuals authorized to conduct investment transactions
with LAIF. Council authorization to add the Assistant Finance Director to and delete
other personnel who no longer work in the Finance Department from the list of
authorized individuals is required at this time.
The City currently has one account with LAIF. Deposits in the account are limited to a
maximum of $40 million. To create additional flexibility when making investment
decisions, it is recommended that an additional account for the Redevelopment Agency
be established. LAIF regulations require a resolution approved by the governing board
of the agency to add an account and designate individuals authorized to conduct
business with LAIF.
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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 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 proposed changes are redlined and for the most part reflect adding
the position of Assistant Finance Director to the Investment Committee and to the list of
persons delegated investment authority from the City Treasurer. There are also some
minor wording changes. 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 APT guidelines.
LAIF regulations limit the City to one account with a maximum $40 million balance.
Since LAIF has often offered yields greater than that of other short. term investments
such as money market mutual funds, establishment of a LAIF account for the
Redevelopment Agency will add flexibility to the investment process and increase short
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term returns while maintaining the primary objectives of safety and liquidity of RDA
funds.
Previous Council Actions
Per State law, City Council annually considers and approves the City's Investment
Policy (Attachment 1) and delegates investment authority to the City Treasurer for a
one-year period, renewable annually. The current delegation of authority carries
through February 28, 2009. Also; Santa Monica City Charter Section 711 delegates the
authority to invest City funds to the City Treasurer.
Financial Impacts & Budget Actions
Interest earnings from the City's pooled investment portfolio are allocated to the various
City funds based upon each fund's share of total City cash and investments. The
projected .revenues for each fund are already included in the FY2008/09 budget, so no
budget action is required by this report.
Prepared by:
David Carr, Principal Budget Analyst-Investments
Carol SwindellV
Director of Finance
Attachments: 1 -Updated City Investment Policy
2 -Resolution designating City employees authorized to conduct
business with LAIF
3 -Resolution establishing a LAIF account for the Redevelopment
Agency
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Approved:. Forwarded to Council:
Revised 2109
ATTACHMENT1
INVESTMENT POLICY FOR THE CITY OF SANTA MONICA
1. POLICY
It is the policy of the City of Santa Monica to invest publicfunds in a manner which
will safely preserve portfolio principal, provide adequate liquidity to meet the City's
cash flow needs, and. optimize returns while conforming to all federal, state, and
local statutes governing the investment of public funds.
2. SCOPE
This investment policy applies to all cash and financial investments of the various
funds of the City of Santa Monica as identified in the City's Comprehensive Annual
Financial Report, with the exception of those financial assets explicitly excluded
from coverage by the Investment Policy for legal or operational reasons. All City
Funds are listed in Attachment 1-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.
3. PRUDENCE
Investments shall be made with judgment and care, under circumstances then
prevailing, .which. persons of prudence, discretion, and intelligence exercise in
management of their own affairs, not for speculation, but for investment
considering the probable safety of their capital as well as the probable income to
be derived.
The standard of prudence to be used by investment officials shall be the "prudent
person" and/or "prudent investor" standard and shall be applied in the context
of managing an overall portfolio. Investment officers acting in accordance with
written procedures and the investment pclicy and exercising due diligence shall be
relieved of personal responsibility for an individual security's credit risk or market
price changes, provided deviations from expectations are reported in a timely
fashion and appropriate action is taken to control adverse developments.
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4. INVESTMENT OBJECTIVES
The primary objective of all City investments, in priority order, shall be:
4.1 SAFETY
Safety of principal is the foremost objective of the investment program. City
investments shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio. To attain this, the City will
diversify its investments by investing funds among a variety of securities
offering independent returns and financial institutions.
4.2 LIQUIDITY
Liquidity is the ability to change an investment into its cash equivalent on
short notice at its prevailing market value. The City's investment portfolio
shall remain sufficiently liquid to enable the City to meet all operating
requirements which might be reasonably anticipated. This is accomplished
by structuring the portfolio so that securities mature 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.
5. INVESTMENT AUTHORITY DELEGATION
In accordance with the Santa Monica City Charter, Section 711, the City Council
delegates to the City Treasurer the authority to invest City funds. The Director of
Finance, as City Treasurer, delegates this authority to the Principal Budget
Analyst-Investments and the Assistant Finance Director. In the absence of the
Director of Finance, the Principal Budget Analyst-Investments and the Assistant
Finance Director, authority to invest City funds will be delegated to the Deputy City
Manager, the Assistant City Manager and/or the 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.
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5.1 INVESTMENT PROCEDURES
The Director of Finance is responsible for conducting and reporting on all City
investments. To facilitate this function, the Director of Finance or their
designee 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 Director of Finance. 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, the Assistant. City Manager, the Deputy City Manager, the
Director of Finance, the Assistant Finance Director, 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.
6. ETHICS AND CONFLICTS OF INTEREST
The Director of Finance and other employees involved in the investment process
shall refrain from personal business activity that could conflict with proper
execution of the investment program, or which could impair their ability to make
impartial investment decisions. The Director of Finance 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 or firm with whom
business is conducted on behalf of the City.
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The Director of Finance and other employees involved in the investment process
are required to file annual disclosure statements as required by the Fair Political
Practices Commission. During the course of the year, if there is an event subject
to disclosure that could impair the ability of the Director of Finance or investment
employees to make impartial decisions, the City Council will be notified in writing
within ten (10) days of the event.
7. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The City shall transact business only with issuers, banks, savings and loans, and
registered securities. dealers. The purchase of any investment, other than those
purchased directly from the issuer, shall be purchased from either an institution
licensed by the State as a brokeddealer as defined in Section 25004 of the
Corporation Code, who is a member of the National Association of Securities
Dealers, or a member of a federally regulated securities exchange, a national or
state chartered bank, a federal or state association (as defined by Section 5102 of
the Financial Code), or a brokerage firm designated as a primary dealer by the
Federal Reserve Bank.
The Director of Finance's staff shall investigate all institutions that wish to do
business with the City in order to determine if they are adequately capitalized,
make markets in securities appropriate to the City's needs, and agree to abide by
the City's Investment Policy. All financial institutions that desire to become
qualified bidders for investment transactions must complete City's "Broker/Dealer
Request for Information" and "Broker/Dealer Certification".
The Director of Finance shall conduct an annual review of the financial condition
and other qualifications of all approved financial institutions and broker/dealers to
determine if they continue to meet the City's guidelines for qualification as defined
in this section. Additionally, the City .shall keep the current audited financial
statements on file for each approved. financial institution and broker/dealer with
which the City does business.
8. AUTHORIZED AND SUITABLE INVESTMENTS
Investments shall be made only in-those instruments specifically authorized by
California State laws, primarily Sections 53601, 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 1-B. Additional City
guidelines are as follows:
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Instruments
U.S. Federal Agencies
Banker's Acceptances (BA)
Negotiable Certificates of Deposit
(NCD)
Commercial Paper (CP)
Additional City Guidelines
No more than 50% of portfolio, per agency
Maximum of 10% of portfolio per issuer
Maximum of 10% of portfolio per issuer
Maximum of 15% of portfolio
In addition to following all legal .guidelines, the portfolio will preserve principal,
maintain adequate liquidity to meet all City obligations, contain an appropriate level
of interest rate risk, and be diversified across types of investments; maturities, and
institutions to minimize credit risk and maintain an appropriate return.
8.1 REPURCHASE AGREEMENTS
Investments in repurchase agreements are allowable and shall be made only
with financial institutions with which the City has an executed master
repurchase agreement. The financial institution must be a primary dealer of
the Federal Reserve Bank of New York.
8.2 PROHIBITED INVESTMENTS AND TRANSACTIONS
Prohibited investments include as inverse floaters, range notes, interest only
strips derived from a pool of mortgages (collateralized mortgage obligations),
and any security that could result in zero interest accrual if held to maturity, as
specified in Section 53601.6..
8.3 INVESTMENTS HELD AND/OF2 MANAGED BY FISCAL AGENTS
In addition the main pooled portfolio, the City may hold and invest certain
other funds that are restricted as to use. One example is bond proceeds held
by fiscal agents. Investments of bond proceeds will be made in accordance
with Government Code Section 53601 (I), which states that money from bond
proceeds should be invested as specified by bond documents.. In most cases
these investments will be made under the same guidelines as other City
investments.. Another example is funds received from legal settlements that
are restricted for a certain purpose, which may be invested in accordance
with legal or escrow agreements that are more restrictive than the City's
Policy.
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 by an outside investment manager under guidelines established by
the City Council.
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9. INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of any pooled investments funds, including mutual funds,
is required prior to investing, and on a continual basis. To accomplish this, a
questiohnaire 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.
10. COLLATERALIZATION
California Government Code Sections 53652, et seq: requires depositories to post
certain types of collateral for public funds above the Federal Deposit Insurance
Corporation (FDIC) insurance amounts. The collateral requirements apply to bank
deposits, both active (checking and savings accounts) and inactive (non-negotiable
certificates of deposit).
Collateralization is also required for repurchase agreements. In order to anticipate
market changes and provide a level of security for all funds, the collateralization
level will be 102% of the market value of principal and accrued interest, and the
value shall be adjusted no less than quarterly. Collateral will be in the form of U.S.
Treasury Obligations or U.S. Agency Securities.
Collateral will always be held by an independent third-party with whom the entity
has a current custodial arrangement. A clearly marked evidence of ownership
(safekeeping receipt) must be supplied to the City and retained. The right of
collateral substitution is granted.
11. SAFEKEEPING AND CUSTODY
In accordance with California Government Code Section 53601, all securities
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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 brgker
confirmation tickets. On a monthly basis, the custodial asset statement shall be
reconciled with the month-end portfolio holdings.
12. DIVERSIFICATION
The City will diversify its investments by security type,. institution, and maturity
date. Concentration limits are discussed in Section 8.0 (Authorized and Suitable
Investments) and in Attachment B.
13. MAXIMUM MATURITIES
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.
In order to minimize the impact of market risk, most investments will be held to
maturity. 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.
14. INTERNAL CONTROLS
The Director of Finance shall be responsible for ensuring that all investment
transactions comply with the City's Investment Policy and for establishing internal
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controls that are designed to prevent losses due to fraud, negligence, and third-
party misrepresentation.
The Director of Finance will also establish internal control procedures addressing
wire transfer controls, separation of duties and administrative controls, avoidance
of collusion, separation of transaction authority from accounting procedures,
documentation of investment transactions, and monitoring of results.
As part of its annual audit of the City, the City's external auditor will review
compliance with statutes, policies, and procedures.
15. PERFORMANCE STANDARDS
The portfolio shall be designed with the objective of obtaining a rate of return
throughout budgetary and economic cycles, commensurate with investment risk
constraints and cash flow needs.
15.1 MARKET YIELD (Benchmark)
The City's investment strategy is passive. Given this strategy, the basis used
by the Director of Finance to determine whether appropriate and suitable
market yields are being achieved shall be to identify a comparable benchmark
to the portfolio's investment duration, e.g. the Constant Maturing Two Year
Treasury bill index. Benchmarks may change over time depending on the
portfolio's duration.
16. REPORTING
In accordance with State law and the City Charter, monthly reports will be made to
the City Council and the City Manager describing the present status of City
investments and monies held by the City, as well as summarizing all investment
transactions for the month. Schedules in the monthly report should include the
following:
• The type of the investment, name of the issuer, maturity date, par value, book
value, and market value
• The source of market value data
• The weighted average maturity of the portfolio
• Coupon, discount, or earnings rate for each security
• Percentage of portfolio represented by each investment category
• A certification of compliance with the Investment Policy
• A statement denoting the City's ability to meet its anticipated expenditures
requirements for the next six months
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Benchmark comparison
Records of all investment transactions will be kept and filed in the Finance
Department.
17. SOCIALLY RESPONSIBLE INVESTING
RESTRICTIONS -The direct investment of City funds are restricted as follows:
a. Investments are to be made in entities that support clean and healthy
environment, including following safe and environmentally sound practices.
b. No investments are to be made in tobacco ortobacco-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.
The Director of Finance shall periodically verify compliance with the guidelines
either through direct contact with company or with Investors Responsibility
Research Center.
18. COMMUNITY REINVESTMENT ACT (CRA)
The City will deposit funds only in those financial institutions, which have a CRA
rating (as determined by the appropriate regulatory body) of "Outstanding": or
"Satisfactory".
19. INVESTMENT POLICY ADOPTION
The City's investment policy shall be reviewed and adopted by the City Council
annually. The Investment_Committee will review the policy periodically to ensure
its consistency with the overall objectives of preservation of principal, liquidity, and
return, and its conformance with current law, financial and economic trends, and
cash flow needs of the City.
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ATTACHMENT 1-A
City of Santa Monica Funds for Cash Pooling
The following listed City of Santa Monica funds shall have their cash balances pooled
for investment purposes except for any fund or portion of one or more funds which is
specifically identified for exclusion in Attachment B of the City Investment Policy:
FUND NUMBER FUND NAME
01 GENERAL FUND
04 SPECIAL REVENUE SOURCE FUND
05 CHARNOCK FUND
06 CLEAN BEACHES AND OCEAN PARK PARCEL TAX FUND
11 BEACH RECREATION FUND
12 HOUSING AUTHORITY FUND
13 DISASTER RELIEF FUND
14 TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT
15 LOW/MODERATE INCOME HOUSING FUND
16 REDEVELOPMENT-DOWNTOWN PROJECT FUND
17 REDEVELOPMENT-EARTHQUAKE RECOVERY PROJECT
18 REDEVELOPMENT-OCEAN PARK PROJECT FUND
19 COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG) FUND
20 MISCELLANEOUS GRANTS FUND
21 ASSET SEIZURE FUND
22 CITIZENS OPTION FOR PUBLIC SAFETY FUND
23 DISASTER FUND
24 ANNENBERG 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
52 SPECIAL AVIATION FUND
53 PARKS AND RECREATION FACILITIES FUND
A-1
FUND NUMBER FUND NAME
54 VEHICLE MANAGEMENT FUND
55 INFORMATION TECHNOLOGY REPLACEMENT AND
SERVICES 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 MunicipaF 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
Authorized Investment Limit % Other Constraints
Local Agency Bonds No limit Maximum maturity 5 years.
U.S. Treasury Obligations No limit Maximum maturity 5 years..
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 maturity5 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 of 30% Maximum maturity 5 years. State and
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 investments
allowable under Govt. Code (i.e., T-bills,
B-1
Legal
Authorized Investment Limit % Other Constraints
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 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% 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 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.
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
B-2
Legal
Authorized Investment Limit % Other Constraints
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 Certificate No limit Maximum maturity 5 years. Banks: deposit
of 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 Investment $ 40 Monies are invested in pooled state fund
Fund (LAIF) million managed by State Treasurer. Maximum 15
transactions per month.
County Pooled No limit
Investment Funds
X20% for reverse repurchase agreements and securities lending agreements combined.
Bond Proceeds
Bond proceeds may be invested in accordance with the State Code provisions.
B-3
ATTACHMENT 1-C
GLOSSARY
AGENCIES:. Federal agency securities and/or Government Sponsored Enterprises
(GSE's).
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill of exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the
issuer.
BASIS POINT: A basis point equals one one-hundredth of 1 % (.01 %).
BENCHMARK: A comparative base for measuring the performance or risk tolerance of
an investment portfolio. The. benchmark should represent a close correlation to the
level of risk and the average duration of the portfolio.
BID: The price offered for securities.
BROKER: A broker brings buyers and sellers together for a commission
CALLABLE SECURITY: A security that can be redeemed by the issuer before the
scheduled maturity date.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by
a certificate. Large denomination CD's are typically negotiable:
COLLATERAL:. Securities, evidence of deposit or other property which a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to
secure deposits of public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report
for the City of Santa Monica. It includes basic financial statements for each individual
fund and account group prepared in conformity with GAAP. It also includes supporting
schedules necessary to demonstrate compliance with finance-related legal and
contractual provisions, extensive introductory material, and a detailed Statistical
Section.
COMMERCIAL PAPER (CP): An unsecured promissory note with a fixed maturity no
longer than 270 days. Usually sold in discount form.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the
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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.
DURATION: A measure of the timing of 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 on three variables: term to maturity, coupon rate, and yield to
maturity. The duration of a security is a useful indicator of its price volatility for given
changes in interest rates.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply
credit to various classes of institutions and individuals, e.g., S&L's, small business firms,
students, farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures bank deposits, currently up to $100,000 per deposit.
FEDERAL FUNDS: Non-interest bearing deposits held by member banks at the
Federal Reserve. Also used to denote "immediately available" funds in the clearing
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sense. "Fed Funds" also used to refer to these funds.
FEDERAL FUNDS RATE: The rate of interest at which private banks lend funds to
other private banks. The Federal Open Market Committee (FOMC) sets a target rate.
This actual 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 aseven-member Board of Governors in Washington, D.C.,
12 Regional Banks, and about 5,700 commercial banks that are members of the
system:
GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank credit guaranteed by GNMA and issued by
mortgage bankers, commercial banks, savings and loan associations and other
institutions. Security holder is protected by full faith and credit of the U.S. Government.
Ginnie Mae securities are backed by FHA, VA or FmHM mortgages. The term pass-
throughs is often used to describe Ginnie Maes.
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INVERSE FLOATERS: A structured note in which the coupon increase as interest rates
decline and decrease as rates rise.
LIQUIDITY: Liquidity. is the ability to change an investment into its cash equivalent on
short notice at its prevailirig market 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 6y 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 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
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known as the "reference rate."
PRINCIPAL: 1) the dollar cost of an issue excluding accrued interest. 2) The one who
takes ownership in a transaction, as opposed to brokering or acting as agent.
PRUDENT PERSON RULE: An investment standard. In some states the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected
by the state (the so-called legal list). In other states, the trustee may invest in a security
if it is one, which would be brought by a prudent person of discretion and intelligence
who is seeking a reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes
under the laws of this state, which has segregated for the benefit of the commission
eligible .collateral .having a value of not less than its. maximum liability and which has
been approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity on a bond or the
current income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed price on a
fixed date. The security "buyer" in effect. lends the "seller" money for the period of the
agreement, and the terms of the agreement are structured to compensate him for this.
Dealers use RP extensively to finance their positions. Exception: When the Fed is said
to be doing RP, •it is lending money, that is, increasing bank reserves.
REVERSE REPO: An agreement whereby the dealer agrees to buy securities and the
investor agrees to repurchase them at a later date.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults for
protection..
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
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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.
TLGP: Temporary Liquidity Guarantee Program is a temporary program established by
the Federal Deposit Insurance Corporation that guarantees debt issued by banks.
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: Anon-interest bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to mature in three months,
six months, or one year.
TREASURY BOND: Long-term coupon-bearing securities U.S. Treasury securities
issued as direct obligations of the U.S: Government and having initial maturities of more
than ten years.
TREASURY NOTES: Intermediate term coupon-bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial maturities of from
one to ten years.
UNIFORM CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as non-member broker-dealers in securities maintain a maximum
ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net
capital ratio. Indebtedness covers all money owed to a firm including margin loans and
commitments to purchase securities, one reason new public issues are spread among
members of underwriting syndicates: Liquid capital includes cash and assets easily
converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a
percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the
current market price 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
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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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Reference Resolution Nos.
10381 (CCS) and 515
(Ras)