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HomeMy WebLinkAboutCity Council Resolution 23-060, FY 2023-24 Investment Policy RESOLUTION NO. 23-060 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SARATOGA ADOPTING THE CITY'S INVESTMENT POLICY FOR FISCAL YEAR 2023-24 WHEREAS, investment policies guide staff for all investment activities on behalf of cities; and WHEREAS, those investment activities are primarily governed by the individual city's adopted investment policies and by California state law (Government Code sections 53600- 53610); and WHEREAS, the Investment Policy for the City of Saratoga is consistent with state law and, for the purpose of added safety and liquidity, is more restrictive than state law; and WHEREAS, Government Code section 53646 requires annual review and approval of a city's investment policy only if there are changes, however, it encourages cities to conduct an annual review and approval process even if there are no proposed changes; and WHEREAS, the Finance Committee considered staff-recommended updates to the investment policy that included clarifications to reflect current practice, LAIF's dep�sit cap, and the addition of Joint Powers Authority Investment Pools(JPA), as permitted by Government Code 53601(p), as an expanded opportunity to invest public funds consistent with current policy and investment objectives; and WHEREAS, the Finance Committee concurs with staff's recommendation to adopt the 2023-24 Investment Policy as amended. NOW, THEREFORE BE IT RESOLVED, the City Council of the City of Saratoga adopts the 2023-24 Investment Policy as provided in Exhibit A. The above and foregoing resolution was passed and adopted at a regular meeting of the Saratoga City Council held on the 21 S� day of June 2023 by the following vote: AYES: COUNCIL MEMBERS AFTAB, PAGE, WALIA, VICE MAYOR ZHAO, MAYOR FITZSIMMONS NOES: NONE ABSENT: NONE ABSTAIN: NONE � �i `�._ - ����-�, —t I�'�l)�rl YvE,� � Kookie Fitzsimmons, Mayor ��TTEST: . j , �.--��:��-�. �_,��.=�_ i�ritt Avrit, MMC, City Clerk Resolution No. 23-060 Page 2 Exhibit A P€��I�'�' ��"�L�; INVESTMENT POLICY - for Fiscal Year 2023-24 {�E�U��a�.'� ��f�F��.I�(���: California Government Code Section - 53600 et seq., City of Saratoga Municipal Code Section - 2-20.035, City of Saratoga Investment Policy - Section XVI P��I��° ���E�`���r'� C3���: July 1, 2023 �MENC����T�: Annual adoption ��T�° Ct��€��.��. �a€������1,��: June 21, 2023 I. POLICY: 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. II. SCOPE: 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: A. Funds 1. General Fund 2. Special Revenue Funds 3. Internal Service Funds 4. Capital Project Funds 5. Debt Service Funds 6. Trust and Agency Funds 7. Any new fund, unless specifically exempted B. Exceptions 1. Deferred Compensation Plans - Investments are directed by the individual plan participants. 2. Debt Service Funds held by trustees - Investments are placed in accordance with bond indenture provisions. 3. Notes and Loans - Investments are authorized by separate agreements approved by City Council. Resolution No. 23-060 Page 3 III. PRUDENCE Investments shall be made with judgment and care, under circumstances then prevailing, with prudence, discretion and intelligence not for speculation, but for investments, considering the probable safety of capital as well as the probable income to be derived. A. The standard of prudence to be used by investment officials 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. IV. 0B7ECTIVES The primary objectives, in priority order, of the City of Saratoga's investment activities shall be: A. Safety 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 to mitigate credit risk and market risk. 1. 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. 2. 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. B. 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. Resolution No. 23-060 Page 4 C. 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. V. DELEGATION 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, investment accounting, 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. VI. ETHICS 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 and employees 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 who conduct business on behalf of the City of Saratoga. Resolution No. 23-060 Page 5 VII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS 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 Association of 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. Resolution No. 23-060 Page 6 VIII. AUTHORIZED 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 t es of securities: Term to T e Guarantee Limits Maturit Limit State of California Local $65,000,000 On Demand Agency Investment None Fund LAIF U.S. Treasury Bills Guaranteed by No Limit 1 Year the US Treasury U.S. Treasury Notes Guaranteed by No Limit 5 Years US Treasury U.S. Govt. Agency Implied No Limit 5 Years Issues (e.g. FNMA, Guarantee by GNMA US Government FDIC Insured $250,000 per 5 Years Certificates of Deposit FDIC institution; 30% total portfolio FDIC Insured $250,000 per 5 Years Negotiable Certificates FDIC institution; 30% of Deposit total portfolio Investment Grade 20% portfolio 5 Years Obligations of None per institution; California, or Local 30% total Governments, or Public portfolio A encies Money Market Mutual 10% portfolio On Demand Funds None per institution; 20% total ortfolio Passbook Savings Minimum On Demand Account and Demand 110% Collateral necessary for Deposit current cash flow ]oint Powers Authority None 20% portfolio 3 years Investment Pools as per pool; 20% authorized by total portfolio Government Code 53601 Resolution No. 23-060 Page 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 risk contrary to Section IV.A of this policy. Examples of these instruments are options and future contracts. Additionally, the City shall not invest in "derivatives". See Glossary for description of above securities. IX. COLLATERALIZATION Collateralization will be required on certificates of deposit and other deposit-type securities balances in excess of the FDIC insured limits. 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, in accordance with California Government Code Section 53651 and 53652. The City of Saratoga chooses to limit collateral to those listed in Section VIII. 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. X. SAFEKEEPING 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 recei pts. DIVERSIFICATION The City of Saratoga will diversify its investments by security type and institution. Limits are provided for in Section VIII. 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. Resolution No. 23-060 Page 8 XI. MAXIMUM 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 be equal to or greater than the required general operating reserve. The report discussed in Section XV shall demonstrate this policy is in effect. XII. INTERNAL 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 inembers. • Written confirmation of transactions for investments and wire transfers. • Development of a wire transfer agreement with the lead bank and third-party custodian. Resolution No. 23-060 Page 9 XIII. PERFORMANCE STANDARDS The investment portfolio shall be designed with the objective of obtaining a reasonable rate of return throughout budgetary and economic cycles, commensurate with investment risk constraints and cash flow needs. A. Market 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. XIV. REPORTING 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. XV. INVESTMENT POLICY ADOPTION The City of Saratoga's Investment Policy shall be reviewed and adopted by the City Council annually. Resolution No. 23-060 Page 10 G LOSSARY Asset Allocation Refers to the division of holdings in a portfolio by asset class. A common strategy is to hold assets that perform or react differently with the objective to limit or reduce risk. Benchmark A point of reference that serves as a standard for performance to be measured against. Broker A person or entity registered with the National Association of Security Dealers and provides investment services and/or execution of services in exchange for compensation. Annual Comprehensive Financial Report (ACFR) 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. Resolution No. 23-060 Page 11 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. Dividend A share of the income divided amongst shareholders of a company. FDIC Federal Depository Insurance Corporation Index A tool used to statistically measure the progress of a group of assets that share characteristics. This can include a group of stocks, a group of bonds, or a group of other assets. Internal Rate of Return (IRR) The discount rate at which the present value of future cash flows of an investment equals the cost of the investment. It is determined when the net present value of the cash outflows (the cost of the investment) and the cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR 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 $65 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. Negotiable certificates of deposit A bank deposit issued in negotiable form (i.e., one that can be bought or sold in the open market). Resolution No. 23-060 Page 12 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. The purpose 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. Rate of Return The total income received over a period of time, including interest income, accretion of discount, amortization of premium, and change of market value; usually expressed as a percentage or in decimal format. 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. The principal investment and interest earned from Treasury Bills are guaranteed by the full faith and credit of the United States, if held to 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. The principal investment and interest earned from Treasury Bills are guaranteed by the full faith and credit of the United States, if held to maturity. Resolution No. 23-060 Page 13 U.S. Government Agency Issues A U.S. Government Agency Issue is a security issued by a government- sponsored enterprise (GSE) or a federal government department other than the U.S. Treasury. The principal investment in GSE Issues has an implicit guarantee by the United States government; however, they are not fully guaranteed, similar to U.S. Treasury-issued securities. Yield The yield refers to the interest on a bond or the dividends paid on a stock or mutual fund. Yield also includes expected capital gain or loss.