SR 02-23-2016 3O
City Council
Redevelopment Successor Agency
Report
City Council Meeting: February 23, 2016
Agenda Item: 3.O
To: Redevelopment Successor Agency, Mayor and City Council
From: Gigi Decavalles-Hughes, Director, Finance Department, Treasury Division
Subject: Annual Update on City Investment Policy
Recommended Action
Staff recommends that the City Council:
1. Review a
2. Extend the delegation of investment authority to the Director of Finance, as City
Treasurer, from March 1, 2016 through February 28, 2017; and
3. Adopt the attached resolution updating the list of persons authorized to conduct
transactions with the State Local Agency Investment Fund 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, 2016 through February 28, 2017; and
Adopt the attached resolution authorizing the establishment of bank and
3.
brokerage accounts and approving the list of persons authorized to conduct
transactions with the State Local Agency Investment Fund on behalf of the
Successor Agency.
Executive Summary
State law requires that the City adopt an investment policy 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 29, 2016. Staff is requesting to extend the
delegation of investment authority to the Director of Finance, as City Treasurer, from
March 1, 2016 through February 28, 2017. Staff has revised the policy to add a citizen
the City Council and Successor Agency adopt the attached resolutions updating the list
of persons authorized to conduct transactions with the State Local Agency Investment
Fund (LAIF).
Background
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Investment Policy
(Attachment A) and delegates investment authority to the City Treasurer for a one-year
period, renewable annually. The current delegation of authority carries through
February 29, 2016. 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
:
Safety
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
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
and economic conditions, the legal and policy guidelines governing these investment
decisions remain relatively static.
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This investment policy extends the delegation of investment authority to the Director of
Finance, as City Treasurer, from March 1, 2016 through February 28, 2017.
In addition to several minor wording changes, the proposed policy reflects a statutory
change regarding investing funds with placement services and a regulatory change
modifying the maximum investment in LAIF. These changes are summarized below:
As of August 12, 2015, the Governor signed AB283 extending the existing
temporary authority for using placement services for deposits from January 1,
2017 to January 1, 2021. For the use of placement services for certificates of
deposit, the sunset date has been removed. Additionally, the limit on the
percentage of local agency funds that may be invested in certificates of deposit
by one private placement service has been removed. The City does not currently
use a placement service for the investment and/or deposit of City funds.
As of January 1, 2016, the State Treasurer increased the LAIF deposit limit for regular
accounts from the current $50 million to $65 million. This change was based on the
needs voiced by local government participants and comments from the Local
Investment Advisory Board. The last time the State Treasurer increased the LAIF
deposit limit for regular accounts was November 16, 2009, when the limit went from $40
million to the current $50 million. 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.
y has been certified by the Association of Public Treasurers
United States and Canada (APT) and is periodically submitted for recertification per
APT guidelines.
Investment Committee
vide general
oversight and act in an advisory capacity. The Committee meets quarterly to evaluate
investment portfolio, and to discuss anticipated cash requirements and the proposed
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investment strategy for the next and future quarters. The Committee currently consists
of the City Manager, the Assistant City Manager, the Director of Finance, the Assistant
City Treasurer, and one other department head serving a one-year term on a rotating
acknowledging that having the ability to access additional expertise and perspective
would be a benefit to any investment committee, staff is proposing to add a citizen
representative to the Committee. Staff proposes that the citizen representative be
appointed by the City Manager for a one year term and should possess strong skills and
knowledge in the areas of finance and economics.
Financial Impacts and 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
jected investment
earnings for each fund are included in the FY 2015-16 Revised Budget. No budget
action is required at this time.
Prepared By:
David Carr, Assistant City Treasurer
Approved Forwarded to Council
Attachments:
A. Investment Policy for the City of Santa Monica
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B. Resolution Local Agency Investment Fund (City)
C. Resolution Local Agency Investment Fund (Successor Agency)
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Revised 2/16
ATTACHMENT A
INVESTMENT POLICY FOR THE CITY OF SANTA MONICA
POLICY
1.
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
and local statutes governing the investment of public funds.
SCOPE
2.
This investment policy applies to all cash and financial investments of the various
funds of the City of Santa Monica as identified in the City's Comprehensive Annual
Financial Report, with the exception of those financial assets explicitly excluded from
coverage by the Investment Policy for legal or operational reasons. 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 A-1. 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.
PRUDENCE
3.
Investments shall be made with judgment and care, under circumstances then
prevailing, which persons of prudence, discretion, and intelligence exercise in
management of their own affairs, not for speculation, but for investment considering
the probable safety of their capital as well as the probable income to be derived.
prudent
and/or standard and shall be applied in the context of
managing an overall portfolio. Investment officers acting in accordance with written
procedures and the investment policy and exercising due diligence shall be relieved
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of personal responsibility for an ind
changes, provided deviations from expectations are reported in a timely fashion and
appropriate action is taken to control adverse developments.
INVESTMENT OBJECTIVES
4.
The primary objective of all City investments, in priority order, shall be:
4.1 SAFETY
Safety of principal is the foremost objective of the investment program. City
investments shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio. To attain this, the City will
diversify its investments by investing funds 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
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
secondary or resale markets.
4.3 RATE OF RETURN
a benchmark rate of return throughout budgetary and economic cycles, taking
into account safety and liquidity requirements. The benchmark may vary from
time to time depending on the economic and budgetary conditions present. At
no time shall funds be invested in any security that could result in zero interest
accrual if held to maturity.
INVESTMENT AUTHORITY DELEGATION
5.
In accordance with the Santa Monica City Charter, Section 711, the City Council
delegates to the City Treasurer the authority to invest City funds. The 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 may be delegated to the Principal Treasury Analyst. Section
53607 of the State of California Government Code limits the authorization of the
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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 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 City Treasurer, one other department head serving one-year terms
on a rotating basis and one qualified citizen representative, appointed by the
City Manager for a one-year term, who possesses strong skills and knowledge
in the areas of finance and economics. The purpose of the Committee is to
provide general oversight and act in an advisory capacity. The Committee will
meet once each calendar quarter to review and evaluate previous investment
activity, to review the current status of all funds held by the City, to discuss
anticipated cash requirements and investment activity for the next quarter, and
to discuss investment strategy.
ETHICS AND CONFLICTS OF INTEREST
6.
The 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
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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.
AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
7.
The City shall transact business only with issuers, banks, savings and loans, and
registered securities dealers. The purchase of any investment, other than those
purchased directly from the issuer, shall be purchased from either an institution
licensed by the State as a broker/dealer as defined in Section 25004 of the
Corporation Code, who is a member 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 Financestaff shall
investigate all institutions that wish to do business with the
City in order to determine if they are adequately capitalized, make markets in
Investment Policy. All financial institutions that desire to become qualified bidders
The Director of Finance shall conduct periodic reviews of the financial condition and
other qualifications of all approved financial institutions and broker/dealers to
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. A listing of websites where these
financial statements may be viewed may substitute for physical hard copies of the
statements.
AUTHORIZED AND SUITABLE INVESTMENTS
8.
Investments shall be made only in those instruments specifically authorized by
California State laws, primarily Sections 53601, 53601.6, 53601.8, 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 A-2. Additional City
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guidelines are as follows:
Instruments Additional City Guidelines
U.S. Federal Agencies No more than 50% of portfolio, per agency
Banker's Acceptances (BA) Maximum of 10% of portfolio per issuer
Negotiable Certificates of Deposit Maximum of 10% of portfolio per issuer
(NCD)
Commercial Paper (CP) Maximum of 15% of portfolio
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 (m), which states that
money from bond proceeds should be invested as specified by bond
documents, and in accordance with specific bond covenants. 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 re
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.
investment activity of these funds to ensure guidelines are followed.
INVESTMENT POOLS/MUTUAL FUNDS
9.
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.
COLLATERALIZATION
10.
California Government Code Sections 53652, et seq. requires depositories to post
certain types of collateral for public funds above the Federal Deposit Insurance
Corporation (FDIC) insurance amounts. The collateral requirements apply to bank
deposits, both active (checking and savings accounts) and inactive (non-negotiable
certificates of deposit).
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
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(safekeeping receipt) must be available to be supplied to the City, if requested, and
retained. The right of collateral substitution is granted.
SAFEKEEPING AND CUSTODY
11.
In accordance with California Government Code Section 53601, all securities owned
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.
DIVERSIFICATION
12.
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.
MAXIMUM MATURITIES
13.
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 should be three years or less.
In order to minimize the impact of market risk, most investments will be purchased
with the intent to hold 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 earnings anticipated from capital gains. Due to the uncertain
nature of cash flow requirements, a portion of the portfolio should be continually
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invested in readily available funds.
INTERNAL CONTROLS
14.
The Director of Finance shall be responsible for ensuring that all investment
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.
compliance with statutes, policies, and procedures.
PERFORMANCE STANDARDS
15.
The portfolio shall be designed with the objective of obtaining a rate of return
throughout budgetary and economic cycles, commensurate with investment risk
constraints and cash flow needs.
15.1 MARKET YIELD (Benchmark)
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
Year
Treasury bill index. Benchmarks may change over time depending on the
REPORTING
16.
In accordance with State law and the City Charter, monthly reports will be made to
the City Council and the City Manager describing the present status of City
investments and monies held by the City, as well as summarizing all investment
transactions for the month. Schedules in the monthly report should include the
following:
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
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.
SOCIALLY RESPONSIBLE INVESTING
17.
RESTRICTIONS
The direct investment of City funds are restricted as follows:
a. Investments are to be made in entities that support clean and healthy
environment, including following safe and environmentally sound practices.
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.
COMMUNITY REINVESTMENT ACT (CRA)
18.
The City will deposit funds only in those financial institutions, which have a CRA
rating (as determined by the appropriate regulatory body) of "Outstanding" or
"Satisfactory".
INVESTMENT POLICY ADOPTION
19.
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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 A-1
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
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
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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
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ATTACHMENT 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-; 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-; 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.
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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").
Deposit/CD Placement 30% Maximum maturity 5 years with a sunset date
Services of January 1, 2021 for deposits; no sunset
. Deposits with any one private
sector placement service are limited to 30% of
the portfolio. This limit does not apply to
placement service-
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 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.
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Legal
Authorized Investment Limit (%) Other Constraints
Supra Nationals 30% Maximum maturity 5 years. Must be rated AA
(International Bank for or better by a nationally recognized rating
Reconstruction and service. Must be senior unsubordinate
Development. obligations denominated in U.S. Dollars.
International Finance
Corporation, Inter-
American Development
Bank
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
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.
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Legal
Authorized Investment Limit (%) Other Constraints
Bank/Time Deposits No Limit Maximum maturity of 5 years
Local Agency Investment $ 65 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
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.
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ATTACHMENT A-3
GLOSSARY
AGENCIES: Federal agency securities and/or Government Sponsored Enterprises
ASKED: The price at which securities are offered for sale.
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
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
bondholder on the bond's face value. (b) A certificate attached to a bond evidencing
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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.
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
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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 mi
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. M
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
ses 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.
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.
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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.
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
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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.
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.
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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.
SUPRA NATIONALS For purposes of this investment policy - obligations issued by the
International Bank for Reconstruction and Development, International Finance
Corporation, or Inter-American Development Bank.
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.
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
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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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