HomeMy WebLinkAbout01-19-2000 Agenda Items 7.ASARATOGA CITY COUNCIL
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EXECUTIVE SUMMARY NO. AGENDA ITEr
MEETING DATE: January 19, 2000 CITY MANAG
ORIGINATING DEPT: Administrative Services DEPT. HEAD:
SUBJECT: Annual Review of the City of Saratoga Investment Policy
RECOMMENDED ACTION(S):
Approve the City of Saratoga Investment Policy.
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 March 17, 1999 City Council meeting, staff recommended minor changes to the
Investment Policy from the previous year, and the City Council approved the Investment Policy
in its current version.
This year, staff is recommending a number of changes to further strengthen and clarify the
Policy, but none which significantly changes the Policy. The Finance Commission reviewed the
draft Policy at their January 10, 2000 meeting, and recommended forwarding the draft Policy on
to the City Council.
. As mentioned, many of the recommended changes to the Policy are "housekeeping" items.
There are a few changes which are noteworthy, however.
Section 4.1 Description of credit risk and market risk has been added.
Section 6.0 Deleted phrase regarding disclosure requirements with was unclear and
redundant. ~ '
Section 8.0 List of Eligible Securities and Criteria has been refined to ensure compliance
with the Government Code, and to clarify the maximum term to maturity.
Section 9.0 Collateralization level has been changed to 110% to be in compliance with the
Government Code. Also, securities eligible as collateral have been identified.
Section 11.0 Modified to be in compliance with the changes made in Section 8.0.
Section 14.0 Modified to identify the one-year U.S. Treasury Bill as a benchmark.
Glossary Expanded.
Please note that the recommended changes which are being added to the Policy are highlighted in
italics, and the phrases which are recommended for deletion are written in "strikethrough" mode.
FISCAL IMPACTS:
None
CONSEQUENCES OF NOT FOLLOWING RECOMMENDED ACTION(S):
Staff would receive direction from the City Council and resubmit the Investment Policy for
approval at the next regularly scheduled City Council meeting.
ALTERNATIVE ACTION(S):
None.
FOLLOW UP ACTION(S):
Issue updated Investment Policy (with new adoption date) to interested parties.
ADVERTISING, NOTICING AND PUBLIC CONTACT:
Nothing additional.
ATTACHMENTS:
City of Saratoga Investment Policy
CITY OF SARATOGA INVESTMENT POLICY
LAST ADOPTED 3/17/99
REVISED
1.0
2.0
Policy:
It is the poliuy 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 entity and conforming to all state and local statutes governing the
investment of public funds.
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:
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
2.2 Exceptions: 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 are placed in accordance
with bond indenture provisions.
2.2.3 Notes and Loans-Investments are authorized by separate agreements
approved by City Council.
3.0 Prudence•
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.
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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.
4.0 Objectives:
The primary objectives, in priority order, of the City of Saratoga's investment activities shall
be:
4.1 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
a. Credit risl~ 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 investmentportfolio 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 securitiesprior 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 Saragota's investment risk constraints
and the cash flow characteristics ofthe portfolio.
5.0 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
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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.
6.0 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. #~s
*'~° *~m° ^f ,,,,,.^''°°°° °^~' °°'°°. Employees and investment officials shall refrain from
undertaking personal investment transactions with individuals with whom business is
conducted on behalf of the City of Saratoga.
7.0 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.
8.0 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 types of securities:
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ELIGIBLE SECURITIES AND CRITERIA
Maximum
Term to
Type Guarantee Limits Maturi
LAIF State Fund $20,000,000 Demand
U.S. TreasuryBills U.S. Treasury No limit One year
U.S. Treasury Notes U.S. Treasury No limit -1-te-5 years
U.S. Govt. Agency Federal Agencies No limit 6-noes:-5 years
issues (e.g. FNMA,
GNMA)
Certificatesof FDIC or FSLIC 20%/portfolio 3 years
Deposit (Calif. per institution;
Banks or Savings & 30%/total portfolio
Loan Co.)
Negotiable Issuing l 20%/portfolio '^
Certificatesof Institution per institution; er-ev~
Deposit 30%/total portfolio S years
Investment-grade Public entity 20%/portfolio ~-te 5 years
obligations of California, per institution
or its local governments
or public al~e~igs entit ies
Money market Fund 28°10%/portfolio Demand
mutual funds per institution
20%/total portfolio
Passbook Savings Issuing Bank Minimum Demand
Account and necessary
Demand Deposits for current
cash flow
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 h°•~° ^^ ~"^ ~~ ° `~~ -°`~ "' Section 4.1 of this policy. Examples of
these instruments are options and future contracts.
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The City shall not invest in "derivatives".
See Glossary for description of above securities.
9.0 Collateralization:
Collateralizationwill 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
collateralizationlevel will be ~e 110% of market value of principal and accrued interest,
in accordance California GovernmentCode Section 53651 and 53652.
The City of Saratoga chooses to limit collateral to *~° f^~~^«^r^: those 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 substitutionmay be granted.
10.0 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 receipts.
11.0 Diversification:
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 ~8°~e 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.
12.0 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 a maturity of one
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year or less shall always 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.
13.0 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 members.
• Written confirmation of transactions for investments and wire transfers.
• Development of a wire transfer agreement with the lead bank and third-party
custodian.
14.0 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 the investment
risk constraints and cash flow needs.
14.1 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 a-~~ the one year U.S. Treasury Bill.
15.0 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 incompliance with California Government Code Section 53646.
16.0 Investment Policy Adoption:
The City of Saratoga's investment policy shall be adopted by the City Council. Annually,
the policy shall be reviewed an~ally by the Finance Commission and aedi€isa~ier~s
approved by the City Council.
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GLOSSARY
Broker
Someone who brings buyers and sellers together and is compensated for his/her service.
ComprehensiveAnnual 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 deposits 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
Li uidi
An asset that can easily and rapidly be converted into cash without significant loss of value.
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'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 $~9 $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.
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. 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.
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 AdministrationLoans.
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