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HomeMy WebLinkAbout101-2007/08 Annual Investment Policy.pdf SARATOGA CITY COUNCIL MEETING DATE: AGENDA ITEM: June 20, 2007 ORIGINATINGCITY MANAGER: Finance &Administrative DEPT: ServicesDave Anderson PREPARED BY:DEPT HEAD: Mary Furey Mary Furey SUBJECT: Annual Approval of the City’s Investment Policy for Fiscal Year 2007/08 RECOMMENDED ACTION The City Council approves the Investment Policy for Fiscal Year 2007/08. REPORT SUMMARY California Government Code Section 53600 et seq., City of Saratoga Municipal Code Section 2-20.035, and Section 16.0 of the City of Saratoga Investment Policy require the City Council to annually review and approve the City’s Investment Policy. The Investment Policy lays the foundation for the City’s investment management functions. It serves as a guide for setting and achieving investment objectives, defines rules and established benchmarks, prohibits and/or restricts investment instruments and reduces the exposure to liability of both staff and City Council. Compliance with the Policy is an element of fiscal discipline considered by the City’s auditors and rating agencies during their respective reviews. Last year, at the June 21, 2006 Council Meeting, the City Council approved the Investment Policy in its current version, there are no changes recommended to that investment policy. The policy is modeled on the policy approved by the Association of Public Treasurers of the United States and Canada (APT US&C) in August 2002. FISCAL IMPACTS None. CONSEQUENCES OF NOT FOLLOWING RECOMMENDED ACTION The City would not be in compliance with State and Local regulations. ALTERNATIVE ACTION Direct Staff to make changes to the Investment Policy and return at the next meeting. FOLLOW UP ACTION N/A ADVERTISING, NOTICING AND PUBLIC CONTACT N/A ATTACHMENTS A: Investment Policy Attachment A City of Saratoga INVESTMENT POLICY FOR THE FISCAL YEAR 2007/08 1.0Policy: It is the policy of the City of Saratoga to invest public funds in a manner which will provide the maximum security with the highest investment return, while meeting the daily cash flow demands of the City and conforming to all state and local statutes governing the investment of public funds. 2.0Scope: This investment policy applies to all financial assets of the City of Saratoga. These funds are accounted for in the City of Saratoga's Comprehensive Annual Financial Report and include: 2.1 Funds: 2.1.1 General Fund 2.1.2 Special Revenue Funds 2.1.3 Capital Project Funds 2.1.4 Debt Service Funds 2.1.5 Trust and Agency Funds 2.1.6 Any new fund, unless specifically exempted 2.2Exceptions : The following financial assets are excluded: 2.2.1 Deferred Compensation Plans-Investments are directed by the individual plan participants. 2.2.2 Debt Service Funds Held by Trustees-Investments is placed in accordance with bond indenture provisions. 2.2.3 Notes and Loans-Investments are authorized by separate agreements approved by City Council. 3.0Prudence: Investments shall be made with judgment and care--under circumstances then prevailing--which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investments, considering the probable safety of their capital as well as the probable income to be derived. 3.1 The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and this investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. Page 1 of 7 4.0Objectives: The primary objectives, in priority order, of the City of Saratoga's investment activities shall be: 4.1Safety: Safety of principal is the foremost objective of the investment program. Investments of the City of Saratoga shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objectives will be tomitigate credit risk and market risk. a. Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing only in investment grade securities and by diversifying the investment portfolio so that potential losses on individual securities will have a minimal impact on the portfolio. b. Market risk, defined as market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by limiting the average maturity of the City’s investment portfolio to two years and the maximum maturity of any one security to five years, and by structuring the portfolio based on cash flow analysis so as to avoid the need to sell securities prior to maturity. 4.2 Liquidity: The City of Saratoga's investment portfolio will remain sufficiently liquid to enable the City of Saratoga to meet all operating requirements, which might be reasonably anticipated. 4.3 Return on Investments: The City of Saratoga's investment portfolio shall be designed with the objective of attaining a rate of return throughout budgetary and economic cycles, commensurate with the City of Saratoga's investment risk constraints and the cash flow characteristics of the portfolio. 5.0Delegation of Authority: Authority to manage the City of Saratoga's investment program is derived from the following: California Government Code Section 53600 et seq. and Saratoga Municipal Code Section 2-20.035. Management responsibility for the investment program is hereby delegated to the City Manager who shall be responsible for supervising all treasury activities of the Administrative Services Director and who shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include reference to: safekeeping, delivery vs. payment, investmentaccounting, wire transfer agreements, banking service contracts and collateral/depository agreements. Such procedures shall include explicit delegations 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 City Manager. The City Manager shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 6.0Ethics and Conflicts of Interest: Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. These officers andemployees involved in the investment process shall disclose to the City Manager any material financial interests in financial institutions that conduct business with the City. Employees and investment officials shall refrain from undertaking personal investment transactions with individuals with who business is conducted on behalf of the City of Saratoga. 7.0Authorized Financial Dealers and Institutions: Page 2 of 7 The City Manager will maintain a list of financial institutions authorized to provide investment services to the City. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness and who are authorized to provide investment services in the State of California. These may include "primary" dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3-1 (uniform net capital rule). No public deposit shall be made except in a qualified public depository as established by state laws. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the City Manager with the following: personal interview, firm description and audited financial statements, proof of National Associationof Securities Dealers (NASD) certification, proof of State of California registration, completed broker/dealer questionnaire and certification of having read the City of Saratoga's investment policy and applicable depository contracts. An annual review of the financial condition and registrations of qualified bidders will be conducted by the City Manager. A current audited financial statement is required to be on file for each financial institution and broker/dealer with which the City of Saratoga invests prior to any transaction. 8.0Authorized and Suitable Investments: The City of Saratoga is empowered by Government Code Section 53601, and further limited by this investment policy, to invest in the following types of securities: Term to TypeGuaranteeLimits Maturity LAIFState Fund $40,000,000On Demand U.S. Treasury Bills U.S. Treasury No Limit 1 Year U.S. Treasury Notes U.S. Treasury No Limit 5 Years U.S. Govt. Agency Issues (e.g. FNMA, FederalNo Limit 5 Years GNMA) Agencies Certificates of Deposit (California Bank FDIC/FSLIC20% portfolio per institution; 3 Years or Savings & Loan Companies) and Collateral 30% total portfolio Negotiable Certificates of Deposit Issuing 20% portfolio per institution; 5 Years Institution 30% total portfolio Investment Grade Obligations of Public Entity 20% portfolio per institution; 5 Years California, or Local Governments, or 30% total portfolio Public Agencies Money Market Mutual FundsFund10% portfolio per institution; On Demand 20% total portfolio Passbook Savings Account and Demand Issuing Bank Minimum necessary for On Demand current cash flow Deposit Page 3 of 7 The City shall not engage in leveraged investing, such as margin accounts, or any form of borrowing for the purpose of investing. The City shall not invest in instruments whose principal and interest could be at riskcontrary to Section 4.1 of this policy. Examples of these instruments are options and future contracts. The City shall not invest in "derivatives". See Glossary for description of above securities. 9.0Collateralization: Collateralization will be required on certificates of deposit and other deposit-type securities. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110% of market value of principal and accrued interest, inaccordance with California Government Code Section 53651 and 53652. The City of Saratoga chooses to limit collateral tothose listed in Section 8.0. Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the City of Saratoga and retained. The right of collateral substitution may be granted. 10.0Safekeeping and Custody: All security transactions entered into by the City of Saratoga shall be conducted on a delivery-versus- payment (DVP)basis. Securities will be held by a third party custodian, in the City of Saratoga's name and control, designated by the City Manager and evidenced by safekeeping receipts. 11.0Diversification: The City of Saratoga will diversify its investments by security type and institution. Limits are provided for in Section 8.0. With the exception of U.S. Treasury securities and authorized pools, no more than 30% of the City of Saratoga's total investment portfolio will be invested in a single security type or 20% with a single financial institution. 12.0Maximum Maturities: To the extent possible, the City of Saratoga will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City of Saratoga will not directly invest in securities maturing more than five (5) years from the date of purchase. However, the City of Saratoga may collateralize its certificates of deposits using longer-dated investments not to exceed ten (10) years to maturity. Debt reserve funds may be invested in securities exceeding five (5) years if the maturities of such investments coincide as nearly as practicable with the expected use of the funds. The City of Saratoga will retain a general operating reserve adopted annually by the City Council. The amount of active deposits and inactive investments with maturity of one year or less shall always Page 4 of 7 be equal to or greater than the required general operating reserve. The report discussed in Section 15.0 shall demonstrate this policy is in effect. 13.0Internal Control: The City of Saratoga is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by the City Manager and staff. Accordingly, the City shall establish an annual process of independent review by an external auditor. This review will provide internal control by assuring compliance with policies and procedures.The internal controls shall address the following points: Control of collusion. Separation of transaction authority from accounting and recordkeeping. Custodial safekeeping. Avoidance of physical delivery of securities. Clear delegation of authority to subordinate staff members. Written confirmation of transactions for investments and wire transfers. Development of a wire transfer agreement with the lead bank and third-party custodian. 14.0Performance Standards: The investment portfolio shall be designed with the objective of obtaining a reasonable rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and cash flow needs. 14.1Market Yield (Benchmark): The City’s investment strategy is passive. Given this strategy, the benchmark used by the City of Saratoga to determine whether market yields are being achieved shall be the one year U.S. Treasury Bill. 15.0Reporting: The City Manager is charged with the responsibility of including a market report on investment activity and returns in the City of Saratoga's Cash and Investment Report. The report will be in compliance with California Government Code Section 53646. 16.0Investment Policy Adoption: The City of Saratoga's investment policy shall be reviewed and adopted by the City Council annually. Page 5 of 7 GLOSSARY Broker Someone who brings buyers and sellers together and is compensated for his/her service. Comprehensive Annual Financial Report (CAFR) The City’s annual financial statements and footnotes, along with an executive summary, financial outlook, statistical information, and other financial information. Certificates of Deposit Commonly called time deposit certificates or time deposit open accounts. These are nonnegotiable. Collateralization Process by which a borrower pledges securities, property or other deposits for the purpose of securing the repayment of a loan and/or security. Also refers to securities pledged by a bank to secure deposits of public monies. Custodian A bank or other financial institution that keeps custody of stock certificates and other assets. Dealer Someone who acts as a principal in all transactions, including buying and selling from his/her own account. Delivery vs. Payment The preferred method of delivering securities, with an exchange of money for the securities. Demand Deposits A deposit of monies which are payable by the bank upon demand of the depositor. Derivative Securities that are based on, or derived from, some underlying asset, reference date, or index. FDIC Federal Depository Insurance Corporation FSLIC Federal Savings and Loans Insurance Corporation Liquidity An asset that can easily and rapidly be converted into cash without significant loss of value. Local Agency Investment Fund (LAIF) The LAIF was established by the State of California to enable treasurers to place funds in a pool for investments. There is a limitation of $30 million per agency subject to a maximum of ten (10) total transactions per month. The City uses this fund when market interest rates are declining as well as for short- term investments and liquidity. Money market mutual funds Mutual funds that invest in short term securities and strive to maintain a share price of $1. Page 6 of 7 Negotiable certificates of deposit A bank deposit issued in negotiable form (i.e., one that can be bought or sold in the open market). Passive Investment Strategy An approach to managing the investment portfolio, which entails a “buy and hold” strategy in which investments are generally held until they mature. Portfolio Combined holding of more than one stock, bond, commodity, cash equivalent or other asset. Thepurpose of a portfolio is to reduce risk through diversification. Primary Dealer A group of government securities dealers that submit daily reports of market activity and security positions held to the Federal Reserve Bank of New York and are subject to its oversight. Regional Dealer A dealer who is not a primary dealer, and therefore not monitored by the Federal Reserve, but is registered with the Securities and Exchange Commission. Safekeeping Offers storage and protection of assets provided by an institution serving as an agent U.S. Treasury Bills Commonly referred to as T-Bills these are short-term marketable securities sold as obligations of the U.S. Government. They are offered in three-month, six-month and one-year maturities. T-Bills do not accrue interest but are sold at a discount to pay face value at maturity. U.S. Treasury Notes These are marketable, interest-bearing securities sold as obligations of the U.S. Government with original maturities of one to ten years. Interest is paid semi-annually. U.S. Government Agency Issues Include securities, which fall into this category. Issues, which are unconditionally, backed by the full faith and credit of the United States, e.g. Small Business Administration Loans. Page 7 of 7