SR-02-25-2014-3HCity Council Meeting: February 25, 2014
Agenda Item:
To: Successor Agency Governing Board, Mayor and City Council
From: Gigi Decavalles- Hughes, Director of Finance
Subject: Annual Update on City Investment Policy
Recommended Action
Staff recommends that the City Council:
1. Review and approve the City's revised Investment Policy;
2. Extend the delegation of investment authority to the Director of Finance, as City
Treasurer, from March 1, 2014 through February 28, 2015; and
3. Adopt the attached resolution updating the list of persons authorized to conduct
transactions with the State Local Agency Investment Fund (LAIF) on behalf of the
City.
Staff also recommends that the Successor Agency Governing Board:
1. Review and approve the City Investment Policy for Successor Agency
Investments;
2. Extend investment authority to the Treasurer of the Successor Agency, from
March 1, 2014 through February 28, 2015; and
3. Adopt the attached resolution authorizing the establishment of bank and
brokerage accounts and approving the list of persons authorized to conduct
transactions with the State Local Agency Investment Fund (LAIF) on behalf of the
Successor Agency.
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 a one -year period, renewable annually. The current delegation of
authority carries through February 28, 2014.
Staff also recommends that the City Council and Successor Agency adopt the attached
resolutions updating the list of persons authorized to conduct transactions with LAIF due
to a position title change.
Background
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, 2014. In addition, Santa Monica City Charter Section 711
delegates the authority to invest City funds to the City Treasurer.
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. While the investment strategy is flexible and can change based on market
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and economic conditions, the legal and policy guidelines governing these investment
decisions remain relatively static. Staff has reviewed the latest Local Agency
Investment Guidelines Report issued by the California Debt and Investment Advisory
Commission. There are no statutory changes requiring revisions to the City's
Investment Policy. Only minor wording revisions are included in this year's update. In
addition, one additional staff position has been delegated certain investment authority in
the absence of the Treasurer (Director of Finance) and Assistant City Treasurer to add
redundancy to the process. 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 accounts are subject to a maximum deposit balance of $50 million (per account)
per LAIF regulations. LAIF accounts provide flexibility to the investment process and
increase short term returns while maintaining the primary objectives of safety and
liquidity of City funds.
Divestment from Fossil Fuels Update
At the February 26, 2013 meeting, Council added divestment from fossil fuel companies
to the Investment Policy's socially responsible investment guidelines. At the time, the
City portfolio did not have any current investments in fossil fuel companies, and no such
investments have been made since. However, the Cemetery and Mausoleum Perpetual
Care Funds — funds paid by customers at the time of internment held in trust by the City
— had approximately 10% of their portfolios invested in fossil fuel companies. Although
these funds are not truly City funds, Council is responsible for setting the guidelines for
their investment. Investments have followed and continue to follow the City's guidelines
for socially responsible investing.
Per Council's direction, complete divestment was to be made within two years
(February 2015) to minimize the fiscal impact on the funds. Since that time, no new
investments have been made in fossil fuel companies. However, the Perpetual Care
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funds still include a small amount of such investments. Full divestment will occur by the
February 2015 deadline.
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended actions. Staff provides monthly reports 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. 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. Projected investment
earnings for each fund are included in the FY 2013 -14 Revised Budget. No budget
action is required at this time.
Prepared by: David Carr, Assistant City Treasurer
Approved:
AQ *IItq�
igi Decavalles- ghes
Director of Finance
Forwarded to Council:
Rod Gould
City Manager
Attachments:
1. Updated City Investment Policy
2. Resolution designating City employees authorized to conduct business with LAIF
for the City account
3. Resolution designating Successor Agency employees authorized to conduct
business with LAIF for the City account
• •- •- 9111LIOL9191
Revised 2/14
It is the policy of the City of Santa Monica (City) 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.
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. 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.
All City funds are listed in Attachment 1 -A. The Investment Policy will also apply to
all new funds created unless specifically exempted.
Except as otherwise noted, City funds are pooled for investment purposes.
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
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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 reported in a timely
fashion and appropriate action is taken to control adverse developments.
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 in securities of various types and
from various issuers offering independent returns.
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 Assistant City Treasurer.
In the absence of the Director of Finance and the Assistant City Treasurer,
authority to invest City funds will be delegated to the Principal Budget Analyst.
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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 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 Director of Finance, the
Assistant Finance Director, and the Assistant City Treasurer. 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 actin 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
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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.
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.
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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 FINRA (Financial Industry Regulatory
Authority, 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 periodic reviews 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 conducts investment transactions.
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
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guidelines are as follows:
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
It is recognized that legal or other events may occur that could require revision of
certain guidelines.
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 AND
TRUSTEES
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 or loan proceeds will be made in
accordance with Government Code Section 53601 (1), 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 will be
invested in accordance with legal or escrow agreements that may be more
restrictive than the City's Policy.
As noted previously in this Policy, Cemetery and Mausoleum Perpetual Care
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Funds are private funds held in trust by the City. These funds are invested by
an outside investment manager under guidelines adopted by the City Council
and do not fall under the guidelines of the Government Code sections noted
in Section 8.0 of this Policy.
it
A thorough investigation of any pooled investment 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.
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 co I lateral ization
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 available to be supplied to the City, if requested, and
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retained. The right of collateral substitution is granted.
11. SAFEKEEPING AND CUSTODY
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 (DVP)
basis, which ensures that securities are deposited with the third party custodian
prior to the release of funds. Securities held by the third party custodian will be
evidenced by safekeeping receipts and /or bank statements. Investments in the
State Local Agency Investment Fund (LAIF) 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.
12. DIVERSIFICATION
The City will diversify its investments by security type, institution, and maturity
date. Concentration limits are set by the State Government Code (see Attachment
B) and Section 8.0 (Authorized and Suitable Investments) of this policy.
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 from the date of purchase settlement. 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
rebalancing and /or appreciation purposes, or in order to mitigate portfolio risk by
limiting potential 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
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available funds.
The Director of Finance 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 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 overall 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.
.�.
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:
• A complete list of investments including 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 and yield to maturity of the portfolio
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• 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 Finance
Department in accordance with legal guidelines and records retention policies.
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 will be made in fossil fuel companies as defined by the
organization 350.org.
c. No investments are to be made in tobacco or tobacco - related products
d. No investments are to be made to support the production of weapons, military
systems, or nuclear power.
e. Investments are to be made in entities that support equality of rights regardless
of sex, race, age, disability or sexual orientation.
f. Investments are to be made in entities that promote community economic
development.
Funds invested with trustee and /or outside investment managers such as the
Cemetery and Mausoleum Perpetual Care Funds will comply with this section of
the policy.
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
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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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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
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 ASSET 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
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 AB2766 FUND
52 SPECIAL AVIATION FUND
53 PARKS AND RECREATION FACILITIES FUND
54 VEHICLE MANAGEMENT FUND
55 INFORMATION TECHNOLOGY REPLACEMENT AND
SERVICES FUND
56 SELF INSURANCE - GENERAL LIAB /AUTO FUND
57 SELF INSURANCE -BUS FUND
A -1
FUND NUMBER FUND NAME
58
SELF INSURANCE -ADMIN 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
Summary of State of California Statutes Applicable to Municipal Investments
The following investments are authorized by California State Code, Title 5, Division 2,
and 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 Obligations - No limit Maximum maturity 5 years.
California and Others
California Local Agency
No limit Maximum maturity 5 years.
Obligations
U.S. Agency Obligations
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
Select Agencies
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.
Commercial Paper —
40% "A -1 /P - 1/F - 1" rating; if the issuer has
Other Agencies
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.
GPI
Legal
Authorized Investment Limit % Other Constraints
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 ").
CD Placement Services 30% Maximum maturity 5 years.
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,
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 /Securities
Federal Reserve Bank of New York and the
Lending Agreements
securities used for the agreement must have
been held by the local agency for at least 30
days. The maximum maturity is 92 days.
Medium -Term Corporate
30% Maximum maturity 5 years; bonds must.be
Notes
rated minimum of "A" 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.
IN
mm
Legal
Authorized Investment
Limit % 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 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.
Bank/Time Deposits
No Limit Maximum maturity of 5 years
Local Agency Investment
$ 50 Monies are invested in pooled state fund
Fund (LAIF)
million" managed by State Treasurer. Maximum 15
transactions per month.
Joint Powers Authority
No limit
Pool
mm
Legal
Authorized Investment Limit % Other Constraints
County Pooled No limit
Investment Funds
** Per LAIF account. Separate accounts can be established for different legal entities.
Bond Proceeds
Bond proceeds may be invested in accordance with the State Code and bond indenture
provisions.
RE,
ATTACHMENT 1 -C
AGENCIES: Federal agency securities and /or Government Sponsored Enterprises
(GSE's).
ASKED: The price at which securities are offered for sale.
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.
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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, commercial paper, Agency discount notes).
DIVERSIFICATION: Dividing investment funds among a variety of securities, issuers,
and maturity dates 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 $250,000 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 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. Also referred to as "Freddie Mac ".
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: Liquidity is the ability to change an investment into its cash equivalent on
short notice at its prevailing 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 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 market operations are the Federal
Reserve's most important and most flexible monetary policy tool.
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PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALERS: 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
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.
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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.
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: A non - 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.
IMP
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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Reference:
Resolution No. 1082
(CCS) &Successor Agency No.
19 (SA)