SR 02-26-2019 3F
City Council
Redevelopment Successor Agency
Report
City Council Meeting: February 26, 2019
Agenda Item: 3.F
1 of 3
To: Redevelopment Successor Agency, Mayor and City Council
From: Gigi Decavalles-Hughes, Director, Finance Department, Revenue
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 and
2. Extend the delegation of investment authority to the Director of Finance, as City
Treasurer, from March 1, 2019 through February 29, 2020.
Staff also recommends that the Successor Agency Governing Board:
1. Review and approve the City Investment Policy f or Successor Agency
Investments and
2. Extend investment authority to the Treasurer of the Successor Agency, from
March 1, 2019 through February 29, 2020.
Summary
Per State law, the treasurer or chief fiscal officer of a local agency may annually render
an investment policy to its governing body for consideration at a public meeting. While
not required, staff believes that it is important to follow best practices and provide
transparency by submitting the City’s Investmen t Policy (Attachments A and B) to
Council annually for consideration and approval at a public meeting. No substantive
changes are proposed this year. The Santa Monica City Charter designates the Director
of Finance as the City Treasurer and the custodian of all public funds. Additionally,
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, 2019.
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
2 of 3
Government Code. Within these legal requirements, the three primary objectives of the
City’s Investment Policy and Investment practices, 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 and economic conditions, the legal and policy requirements governing these
investment decisions remain relatively static. In addition, the City Investment Policy
includes socially responsible investment principles. In recent years, the City has
added divestment from fossil fuels and from banks providing funding to fossil fuel
companies to these principles.
On an on-going basis, staff also reviews public agency investment best practices and
regulatory or legal changes to ensure City compliance. Staff has reviewed the latest
Local Agency Investment Guidelines Report issued by the California Debt and
Investment Advisory Commission. There is one statutory change made in 2018
regarding the maximum maturity requirements and issuer credit ratings for asset
backed securities. The City’s Investment Policy has been updated to reflect these
3 of 3
changes. However, since the City does not currently invest in asset backed
securities, this change will have no practical impact on the City’s inves tment portfolio.
Additionally, minor revisions reflecting staffing changes in the investment process are
included.
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
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 2018-19 Revised Budget. No budget
action is required at this time.
Prepared By: David Carr, Assistant City Treasurer
Approved
Forwarded to Council
Attachments:
A. Annual Update on City Investment Policy-final
B. Annual Update on City Investment Policy-redlined
1
Revised 2/19
ATT ACHMENT 1
INVESTMENT POLICY FOR THE CITY OF SANT A MONIC A
1. POLICY
It is the policy of the City of Santa Monica (City) to invest public funds in a manner
which will saf ely 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 f unds 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 princip les.
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 saf ety of their capital as well as the probable income to be derived.
The standard of prudence to be used by investment officials shall be the “prudent
person” and/or “prudent investor” standard and shall be applied in the context of
managing an overall portfolio. Investment officers acting in accordance with written
procedures and the investment policy and exercising due diligence shall be relieved
2
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
diversif y 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 may be delegated to the Senior Treasury
Analyst. 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.
3
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.
6. ETHICS AND CONFLICTS OF INTEREST
The Director of Finance and other employees involved in the investment process
shall refrain f rom 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
f inancial institutions with which they conduct business within their jurisdiction, and
they shall further disclose any material personal financial/investment positions
that could be related to the performance of the City’s investment portfolio and
shall refrain f rom personal investment transactions with the same individual or
f irm with whom business is conducted on behalf of the City.
The Director of Finance and other employees involved in the investment process
4
are required to file annual disclosure statements as required by the Fair Political
Practices Commission. During the course of the year, if there is an event subject
to disclosure that could impair the ability of the Director of Finance or investment
employees to make impartial decisions, the City Council will be notified in writing
within ten (10) days of the event.
7. AUTHORIZED FIN ANCIAL DE ALERS AND INSTITUTIONS
The City shall transact business only with issuers, banks, savings and loans, and
registered securities dealers. The purchase of any investment, other than
those purchased directly from the issuer, shall be purchased from either an
institution licensed by the State as a 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 periodically conduct a “Request for
Qualifications” process to investigate broker/dealers 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 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
f inancial statements on file for each approved f inancial 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 h ard copies of the statements.
5
8. AUTHORIZED AND SUITABLE INVESTMENTS
Investments shall be made only in those instruments specifically authorized by
California State laws, primarily Sections 53601, 53601.6, 53601.8, 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 1-B. Additional City
guidelines are as follows:
Instruments Additional City Guidelines
U.S. Federal Agencies No more than 50% of portfolio, per agency
Banker's Acceptances (BA) Maximum of 10% of portfolio per issuer
Negotiable Certificates of Deposit Maximum of 10% of portfolio per issuer
(NCD)
Commercial Paper (CP) Maximum of 15% of portfolio
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 f rom 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
6
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
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. The Director of Finance’s staff monitors
all investment activity of these funds to ensure guidelines are followed.
9. INVESTMENT POOLS/MUTU AL FUNDS
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/f und eligible for bond proceeds and/or will it accept such proceeds?
For mutual funds, a fund prospectus can substitute for the questionnaire.
7
10. COLLATER ALIZ ATION
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 inac tive (non-negotiable
certif icates 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 alwa ys 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
retained. The right of collateral substitution is granted.
11. S AFEKEEPING 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.
8
13. MAXIMUM M ATURITIES
To the extent possible, the City will attempt to match its investments with anticipated
cash f low requirements. Unless matched to a specific cash flow, the City will not
directly in vest 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 f low requirements, a portion of the portfolio should be continually invested
in readily available funds.
14. INTERNAL CONTROLS
The Director of Finance shall be responsible for ensuring that all investment
transactions comply with the City’s Investment Policy and for establishing internal
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 transf er 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 STAND ARDS
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
9
Maturing Two Year Treasury bill index. Benchmarks may change over time
depending on the portfolio’s duration.
16. REPORTING
In accordance with State law and the City Charter, monthly reports will be made to
the City Council and the City Manager describing the present s tatus of City
investments and monies held by the City, as well as summarizing all investment
transactions f or 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
Coupon, discount, or earnings rate for each security
Percentage of portfolio represented by each investment category
A certif ication of compliance with the Investment Policy
A statement denoting the City’s ability to meet its anticipated expenditure s
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.
10
17. SOCI ALLY 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 Fossil Free Indexes or in banking institutions that provide financing
to said companies.
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 (CR A)
The City will deposit funds only in those financial institutions, which have a CRA
rating (as determined by the appropriate regulatory body) of "Outstanding" or
"Satisfactory".
19. INVESTMENT POLICY ADOPTION
The City’s investment policy shall be reviewed and adopted by the City Council
annually. The Investment Committee will review the policy periodically to ensure its
consistency with the overall objectives of preservation of principal, liquidity, and
return, and its conformance with current law, financial and economic trends, and
cash f low needs of the City.
A-1
ATT ACHMENT 1-A
City of Santa Monica Funds for Cash Pooling
The f ollowing listed City of Santa Monica funds shall have their cash balances
pooled for investment purposes.
FUND
NUMBER FUND NAME
1 GENERAL FUND
10 SPECIAL REVENUE SOURCE FUND
11 BEACH RECREATION FUND
12 HOUSING AUTHORITY FUND
14 TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT
16 CLEAN BEACHES AND OCEAN PARK PARCEL TAX FUND
17 TRAFFIC SAFETY FUND
18 SCAQMD AB2766 FUND
19 COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG) FUND
20 MISCELLANEOUS GRANTS FUND
21 ASSET SEIZURE FUND
22 CITIZENS OPTION FOR PUBLIC SAFETY FUND
25 RENT CONTROL FUND
26 GAS TAX FUND
27 LOCAL RETURN FUND
28 PARKS AND RECREATION FACILITIES FUND
41 LOW/MODERATE INCOME HOUSING ASSET FUND
50 WATER FUND
51 WASTEWATER FUND
52 STORMWATER MANAGEMENT FUND
53 PIER FUND
54 SOLID WASTE MANAGEMENT FUND
55 COMMUNITY BROADBAND FUND
57 AIRPORT FUND
59 CEMETERY FUND
60 BIG BLUE BUS FUND
61 PARKING AUTHORITY FUND
70 VEHICLE MANAGEMENT FUND
71 INFORMATION TECHNOLOGY REPLACEMENT & SERVICES FUND
72 SELF INSURANCE-GENERAL LIAB/AUTO FUND
73 SELF INSURANCE-BUS FUND
74 SELF INSURANCE WORKERS-COMPENSATION FUND
75 SELF INSURANCE-ADMIN FUND
80 GENERAL TRUST FUND
81 CEMETERY PERPETUAL CARE FUND
82 MAUSOLEUM
B-1
ATT ACHMENT 1-B
Summary of State of California Statutes Applicable to Municipal Investments
The f ollowing 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.
Authorized Investment
Legal Limit
(%)
Other Constraints
Local Agency Bonds No limit Maximum maturity 5 years.
U.S. Treasury Obligations No limit Maximum maturity 5 years.
State Obligations -
California and Others
No limit Maximum maturity 5 years.
California Local Agency
Obligations
No limit Maximum maturity 5 years.
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 – Non
Pooled Funds
25% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
purchases may not represent more than
10% of outstanding paper and may not
exceed 270 days to maturity
Commercial Paper –
Pooled Fund
40% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
purchases may not represent more than
10% of outstanding paper and may not
exceed 270 days to maturity.
B-2
Authorized Investment
Legal Limit
(%)
Other Constraints
Negotiable Certificates of
Deposit
30% Maximum maturity 5 years. State and
Federally chartered banks and savings
institutions, including U.S. branches of
foreign banks regulated by State
regulatory authorities (“Yankee CD”).
Deposit/CD Placement
Services
30% Maximum maturity 5 years. Deposits with
any one private sector placement service
are limited to 30% of the portfolio. This
limit does not apply to placement service-
assisted CD’s.
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
Agreements/Securities
Lending Agreements
20% Must be made with primary dealers of the
Federal Reserve Bank of New York and
the securities used for the agreement
must have been held by the local agency
for at least 30 days. The maximum
maturity is 92 days.
Medium-Term Corporate
Notes
30% Maximum maturity 5 years; bonds must
be rated minimum of “A” by a nationally
recognized rating service.
Mutual Funds and Money
Market Mutual Funds
20% No more than 10% may be invested in
any 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.
B-3
Authorized Investment
Legal Limit
(%)
Other Constraints
Supra Nationals
(International Bank f or
Reconstruction and
Development.
International Finance
Corporation, Inter-
American Development
Bank
30% Maximum maturity 5 years. Must be
rated AA or better by a nationally
recognized rating service. Must be
senior unsubordinate obligations
denominated in U.S. Dollars.
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 Certif icate
of Deposit
No limit Maximum maturity 5 years. Banks:
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 remaining maturity of 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.
Bank/Time Deposits No limit Maximum maturity of 5 years
B-4
Authorized Investment
Legal Limit
(%)
Other Constraints
Local Agency Investment
Fund (LAIF)
$ 65
million**
Monies are invested in pooled state fund
managed by State Treasurer. Maximum
15 transactions per month.
Joint Powers Authority
Pool
No limit
County Pooled
Investment Funds
No limit
** 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.
C-1
ATT ACHMENT 1-C
GLOSSARY
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 off ered 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 certif icate. 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.
C-2
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. Delive ry
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 derive d
f rom, 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 ra tes,
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, f arm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures bank deposits, currently up to $250,000 per deposit.
C-3
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 th rough 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, a nd 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 wil l
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 W ashington, D.C.,
12 Regional Banks, and about 5,700 commercial banks that are members of th e system.
GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities inf luencing 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 m ortgages. 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.
C-4
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 (W hen 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 inf luence 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 f lexible 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
Bank of New York and are subject to its informal oversight. Primary dealers inclu de
Securities and Exchange Commission (SEC) registered securities broker-dealers, banks,
and a few unregulated f irms.
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.
C-5
PRUDENT PERSON RULE: An investment standard. In some states the law requires
that a f iduciary, 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 f rom 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 f ixed 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: W hen the Fed is said
to be doing RP, it is lending money that is increasing bank reserves.
REVERSE REPO: An agreement whereby the dealer agrees to buy securities and the
investor agrees to repurchase them at a later date.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities
and valuables of all types and descriptions are held in the bank's vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SEC RULE 15C3-1: See uniform net capital rule.
SECURITIES AND EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transaction by administering securities legislation.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB,
FNMA, SLMA, etc.) and Corporations which have embedded options (e.g. call features,
step-up coupons, floating rate coupons, derivative based returns) into their debt 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.
C-6
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 f unds. 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
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.
C-7
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.
1
Revised 2/198
ATT ACHMENT 1
INVESTMENT POLICY FOR THE CITY OF SANT A MONIC A
1. POLICY
It is the policy of the City of Santa Monica (City) to invest public funds in a manner
which will saf ely 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 f unds 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 princip les.
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 saf ety of their capital as well as the probable income to be derived.
The standard of prudence to be used by investment officials shall be the “prudent
person” and/or “prudent investor” standard and shall be applied in the context of
managing an overall portfolio. Investment officers acting in accordance with written
procedures and the investment policy and exercising due diligence shall be relieved
2
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
Saf ety 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
f rom 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
portf olio 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 in vestment 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 f unds be invested in any security that could result in zero interest
accrual if held to maturity.
3
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 f unds may be delegated to the Treasury Administrator or Senior
Treasury Analyst. Section 53607 of the State of California Government Code limits
4
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 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 f or a one-year term, who possesses strong skills and knowledge in the
areas of f inance 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.
5
6. ETHICS AND CONFLICTS OF INTEREST
The Director of Finance and other employees involved in the investment process
shall ref rain f rom personal business activity that could conflict with proper execution
of the investment program, or which could impair their ability to make impartial
investment decisions. The Director of Finance and other employees involved in the
investment process shall disclose any material interests in financial institutions with
which they conduct business within their jurisdiction, and they shall further disclose
any material personal financial/investment positions that could be related to the
performance of the City’s investment portfolio and shall refrain from personal
6
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.
7. AUTHORIZED FIN ANCIAL DE ALERS AND INSTITUTIONS
The City shall transact business only with issuers, banks, savings and loans, and
registered securities dealers. The purchase of any investment, other than
those purchased directly from the issuer, shall be purchased from either an
institution licensed by the State as a 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 periodically conduct a “Request for
Qualifications” process to investigate broker/dealers 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 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
f inancial statements on file for each approved f inancial 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 h ard copies of the statements.
8. AUTHORIZED AND SUITABLE INVESTMENTS
Investments shall be made only in those instruments specifically authorized by
California State laws, primarily Sections 53601, 53601.6, 53601.8, 16429.1, and
53684 et sq. of the Government Code and to no greater an extent than authorized
7
by those laws. These laws
are summarized in Attachment 1-B. Additional City
guidelines are as follows:
Instruments Additional City Guidelines
U.S. Federal Agencies No more than 50% of portfolio, per agency
Banker's Acceptances (BA) Maximum of 10% of portfolio per issuer
Negotiable Certificates of Deposit Maximum of 10% of portfolio per issuer
(NCD)
Commercial Paper (CP) Maximum of 15% of portfolio
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
8.3 INVESTMENTS HELDINVESTMENTS ANDHELD AND /OR
MANAGEDOR BYMANAGED FISCALBY AGENTSFISCAL
ANDAGENTS 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 restrictive than the City’s Policy.
9
As noted previously in this Policy, Cemetery and Mausoleum Perpetual Care
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. The Director of Finance’s staff monitors
all investment activity of these funds to ensure guidelines are followed.
9. INVESTMENT POOLS/MUTU AL FUNDS
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/f und eligible for bond proceeds and/or will it accept such proceeds?
For mutual funds, a fund prospectus can substitute for the questionnaire.
10
10. COLLATER ALIZ ATION
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 inac tive (non-negotiable
certif icates 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
11
a current custodial arrangement. A clearly marked evidence of ownership
(safekeeping receipt) must be available to be supplied to the City, if requested, and
retained. The right of collateral substitution is granted.
11. S AFEKEEPING 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.
12
13
13. MAXIMUM M ATURITIES
To the extent possible, the City will attempt to match its investments with anticipated
cash f low requirements. Unless matched to a specific cash flow, the City will not
directly in vest 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
14
nature of cash flow requirements, a portion of the portfolio should be continually
invested in readily available funds.
14. INTERNAL CONTROLS
The Director of Finance shall be responsible for ensuring that all investment
transactions comply with the City’s Investment Policy and for establishing internal
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 transf er 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 STAND ARDS
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.
16. REPORTING
In accordance with State law and the City Charter, monthly reports will be made to
the City Council and the City Manager describing the present s tatus of City
investments and monies held by the City, as well as summarizing all investment
transactions f or 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
15
issuer, maturity date, par value, book value, and market value
The source of market value data
16
The weighted average maturity and yield to maturity of the portfolio
Coupon, discount, or earnings rate for each security
Percentage of portfolio represented by each investment category
A certif ication of compliance with the Investment Policy
A statement denoting the City’s ability to meet its anticipated expenditure s
requirements for the next six months
A statement denoting the City’s ability to meet its anticipated expenditures
requirements f or 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
17. SOCI ALLY 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 Fossil Free Indexes 350.org or in banking institutions that provide
financing to said companies.
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 are to beto 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 (CR A)
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".
18
19. INVESTMENT POLICY ADOPTION
The City’s investment policy shall be reviewed and adopted by the City Council
annually. The Investment Committee will review the policy periodically to ensure its
consistency with the overall objectives of preservation of principal, liquidity, and
return, and its conformance with current law, financial and economic trends, and
cash f low needs of the City.
A-111
ATT ACHMENT 1-A C
City of Santa Monica Funds for Cash Pooling
The f ollowing listed City of Santa Monica funds shall have their cash balances pooled for
investment purposes.
FUND
NUMBER FUND NAME
1 GENERAL FUND
10 SPECIAL REVENUE SOURCE FUND
11 BEACH RECREATION FUND
12 HOUSING AUTHORITY FUND
14 TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT
16 CLEAN BEACHES AND OCEAN PARK PARCEL TAX FUND
17 TRAFFIC SAFETY FUND
18 SCAQMD AB2766 FUND
19 COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG) FUND
20 MISCELLANEOUS GRANTS FUND
21 ASSET SEIZURE FUND
22 CITIZENS OPTION FOR PUBLIC SAFETY FUND
25 RENT CONTROL FUND
26 GAS TAX FUND
27 LOCAL RETURN FUND
28 PARKS AND RECREATION FACILITIES FUND
41 LOW/MODERATE INCOME HOUSING ASSET FUND
50 WATER FUND
51 WASTEWATER FUND
52 STORMWATER MANAGEMENT FUND
53 PIER FUND
54 SOLID WASTE MANAGEMENT FUND
55 COMMUNITY BROADBAND FUND
57 AIRPORT FUND
59 CEMETERY FUND
60 BIG BLUE BUS FUND
61 PARKING AUTHORITY FUND
70 VEHICLE MANAGEMENT FUND
71 INFORMATION TECHNOLOGY REPLACEMENT & SERVICES FUND
72 SELF INSURANCE-GENERAL LIAB/AUTO FUND
73 SELF INSURANCE-BUS FUND
74 SELF INSURANCE WORKERS-COMPENSATION FUND
75 SELF INSURANCE-ADMIN FUND
80 GENERAL TRUST FUND
81 CEMETERY PERPETUAL CARE FUND
A-111
82 MAUSOLEUM
FUND NUMBER FUND NAME
01 GENERAL FUND
1004 SPECIAL REVENUE SOURCE FUND
106 CLEAN BEACHES AND OCEAN PARK PARCEL TAX FUND
11 BEACH RECREATION FUND
12 HOUSING AUTHORITY FUND
14 TENANT OW NERSHIP RIGHTS CHARTER AMENDMENT
4115 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
5025 W ATER FUND
5427 SOLID W ASTE MANAGEMENT FUND
5528 COMMUNITY BROADBAND FUND
259 RENT CONTROL FUND
5330 PIER FUND
5131 W ASTEW ATER FUND
5733 AIRPORT FUND
5234 STORMW ATER MANAGEMENT FUND
5937 CEMETERY FUND
6041 BIG BLUE BUS FUND
1742 TRAFFIC SAFETY FUND
2643 GAS TAX FUND
1844 SCAQMD AB2766 FUND
2745 LOCAL RETURN FUND
2853 PARKS AND RECREATION FACILITIES FUND
7054 VEHICLE MANAGEMENT FUND
7155 INFORMATION TECHNOLOGY REPLACEMENT AND
SERVICES FUND
7256 SELF INSURANCE-GENERAL LIAB/AUTO FUND
7357 SELF INSURANCE-BUS FUND
7558 SELF INSURANCE-ADMIN FUND
7459 SELF INSURANCE W ORKERS-COMPENSATION FUND
6177 PARKING AUTHORITY FUND
A-111
FUND NUMBER FUND NAME
80 GENERAL TRUST FUND
812 CEMETERY PERPETUAL CARE FUND
829 MAUSOLEUM PERPETUAL CARE FUND
B-1
ATT ACHMENT 1-B
Summary of State of California Statutes Applicable to Municipal Investments
The f ollowing 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.
Authorized Investment
Legal Limit
(%)
Other Constraints
Local Agency Bonds No limit Maximum maturity 5 years.
U.S. Treasury Obligations No limit Maximum maturity 5 years.
State Obligations -
California and Others
No limit Maximum maturity 5 years.
California Local Agency
Obligations
No limit Maximum maturity 5 years.
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 – Non
Pooled Funds
25% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
purchases may not represent more than
10% of outstanding paper and may not
exceed 270 days to maturity
Commercial Paper –
Pooled Fund
40% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
purchases may not represent more than
10% of outstanding paper and may not
exceed 270 days to maturity.
B-2
Authorized Investment
Legal Limit
(%)
Other Constraints
Negotiable Certificates of
Deposit
30% Maximum maturity 5 years. State and
Federally chartered banks and savings
institutions, including U.S. branches of
foreign banks regulated by State regulatory
authorities (“Yankee CD”).
Deposit/CD Placement
Services
30% Maximum maturity 5 years. Deposits with
any one private sector placement service
are limited to 30% of the portfolio. This
limit does not apply to placement service-
assisted CD’s.
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
Agreements/Securities
Lending Agreements
20% Must be made with primary dealers of the
Federal Reserve Bank of New York and
the securities used for the agreement must
have been held by the local agency for at
least 30 days. The maximum maturity is
92 days.
Medium-Term Corporate
Notes
30% Maximum maturity 5 years; bonds must be
rated minimum of “A” by a nationally
recognized rating service.
Mutual Funds and Money
Market Mutual Funds
20% No more than 10% may be invested in
any 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.
B-3
Authorized Investment
Legal Limit
(%)
Other Constraints
Supra Nationals
(International Bank f or
Reconstruction and
Development. International
Finance Corporation, Inter-
American Development
Bank
30% Maximum maturity 5 years. Must be rated
AA or better by a nationally recognized
rating service. Must be senior
unsubordinate obligations denominated in
U.S. Dollars.
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 Certif icate of
Deposit
No limit Maximum maturity 5 years. Banks:
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 remaining maturity of 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.
Bank/Time Deposits No limit Maximum maturity of 5 years
B-4
Authorized Investment
Legal Limit
(%)
Other Constraints
Local Agency Investment
Fund (LAIF)
$ 65
million**
Monies are invested in pooled state fund
managed by State Treasurer. Maximum
15 transactions per month.
Joint Powers Authority
Pool
No limit
County Pooled
Investment Funds
No limit
Authorized Investment
Legal
Limit (%) Other Constraints
Local Agency Bonds No limit Maximum maturity 5 years.
U.S. Treasury Obligations No limit Maximum maturity 5 years.
State Obligations -
California and Others
No limit Maximum maturity 5 years.
California Local Agency
Obligations
No limit Maximum maturity 5 years.
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 – Non
Pooled Funds
25% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
purchases may not represent more than 10%
of outstanding paper and may not exceed 270
days to maturity
Commercial Paper –
Pooled Fund
40% "A -1 /P - 1/F - 1" rating; if the issuer has
long-term debt, it must rated “A”; U.S.
corporate assets over $500,000,000;
B-5
purchases
may not
represent
more than 10% of outstanding paper and may
not exceed 270 days to maturity.
Negotiable Certif icates of
Deposit
30% Maximum maturity 5 years. State and
Federally chartered banks and savings institutions,
including U.S. branches of foreign
B-6
Authorized Investment
Legal
Limit (%) Other Constraints
banks regulated by State regulatory authorities ("Yankee CD").
Negotiable Certificates
of Deposit
30% Maximum maturity 5 years. State and
Federally chartered banks and savings
institutions, including U.S. branches of
foreign banks regulated by State regulatory
authorities (“Yankee CD”).
Deposit/CD Placement
Services
30% Maximum maturity 5 years. Deposits with any
one private sector placement service are
limited to 30% of the portfolio. This limit does
not apply to placement service-assisted CD’s.
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
Agreements/Securities
Lending Agreements
20% Must be made with primary dealers of the
Federal Reserve Bank of New York and the
securities used for the agreement must have
been held by the local agency for at least 30
days. The maximum maturity is 92 days.
Medium-Term Corporate
Notes
30% Maximum maturity 5 years; bonds must be
rated minimum of “A” by a nationally
recognized rating service.
Mutual Funds and Money
Market Mutual Funds
20% No more than 10% may be invested in any
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.
B-7
Authorized Investment
Legal
Limit (%) Other Constraints
Supra Nationals
(International Bank f or
Reconstruction and
Development.
International Finance
Corporation, Inter-
American Development
Bank
30% Maximum maturity 5 years. Must be rated AA
or better by a nationally recognized rating
service. Must be senior unsubordinate
obligations denominated in U.S. Dollars.
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 Certif icate
of Deposit
No limit Maximum maturity 5 years. Banks: 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 remaining maturity of 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.
B-8
Bank/Time Deposits No Limit Maximum maturity of 5 years
B-9
Authorized Investment
Legal
Limit (%) Other Constraints
Local Agency Investment
Fund (LAIF)
$ 65
million**
Monies are invested in pooled state fund
managed by State Treasurer. Maximum 15
transactions per month.
Joint Powers Authority
Pool
No limit
County Pooled
Investment Funds
No limit
** 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.
C-1
ATT ACHMENT 1-C
GLOSSARY
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 off ered 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 certif icate. Large denomination CD’s are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to
secure deposits of public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report
for the City of Santa Monica. It includes basic financial statements for each individual
fund and account group prepared in conformity with GAAP. It also includes supporting
schedules necessary to demonstrate compliance with finance -related legal and
contractual provisions, extensive introductory material, and a detailed Statistical Section.
COMMERCIAL PAPER (CP): An unsecured promissory note with a fixed maturity no
longer than 270 days. Usually sold in discount form.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the
bondholder on the bond's face value. (b) A certificate attached to a bond evidencing
C-2
COUPON: (a)interest due on a payment date. 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. Delive ry
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 derive d
f rom, 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 ra tes,
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, f arm 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
C-3
Reserve. Also used to denote "immediately available" funds in the clearing sense. "Fed
C-4
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 th rough 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, a nd 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 wil l
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 W ashington, D.C.,
12 Regional Banks, and about 5,700 commercial banks that are members of th e system.
GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities inf luencing 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 m ortgages. 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.
C-5
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 (W hen 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 inf luence 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 f lexible 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
Bank of New York and are subject to its informal oversight. Primary dealers inclu de
Securities and Exchange Commission (SEC) registered securities broker-dealers, banks,
and a few unregulated f irms.
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.
C-6
PRUDENT PERSON RULE: An investment standard. In some states the law requires
that a f iduciary, 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 f rom 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 f ixed 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: W hen the Fed is said
to be doing RP, it is lending money, thatmoney that is, increasing bank reserves.
REVERSE REPO: An agreement whereby the dealer agrees to buy securities and the
investor agrees to repurchase them at a later date.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities
and valuables of all types and descriptions are held in the bank's vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SEC RULE 15C3-1: See uniform net capital rule.
SECURITIES AND EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transaction by administering securities legislation.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB,
FNMA, SLMA, etc.) and Corporations which have embedded options (e.g. call features,
step-up coupons, floating rate coupons, derivative based returns) into their debt 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
C-7
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 f unds. 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
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.
C-8
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
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.
C-9
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.