Loading...
HomeMy WebLinkAbout04 - Council Policy F-1 Investment Policy RevisionCITY OF NEWPORT BEACH City Council Staff Report Agenda Item No. 4 August 13, 2013 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Finance Department Dan Matusiewicz, Finance Director 949 - 644 -3123, dmatusiewicz @newportbeachca.gov PREPARED BY: Steve Montano, Deputy Finance Director APPROVED:G TITLE: Amend and Reaffirm Council Investment Policy (F -1) ABSTRACT: Council Policy (F -1), Statement of Investment Policy, must be reviewed annually to ensure its consistency with the overall investment objectives and market conditions. The policy was reviewed by staff, investment advisors and Finance Committee. With the Finance Committee and City Manager's consent, Council is being asked to adopt the attached Investment Policy as amended. The submitted changes better align the policy with California Government Code, allow for more flexibility to achieve greater investment diversification, and provide greater clarity to the advisors while still achieving the paramount objectives of safety and liquidity. These changes do not materially affect, and are in furtherance of, the City's investment objectives. The recommendations do include changes to the maximum credit concentration, credit quality and allowable investments to provide more flexibility to diversify investments across asset classes. The Finance Committee reviewed the written Statement of Investment Policy at its July 22, 2013 meeting and found consistency with the stated objectives. RECOMMENDATION: Adopt Resolution No. 2013- 63 , approving proposed amendments to, and reaffirming Council Policy (F -1) Statement of Investment Policy as presented. FUNDING REQUIREMENTS: There are no funding requirements related to this item Annual Investment Policy Review and Update August 13, 2013 Page 2 DISCUSSION: Pursuant to California Government Code Section 53600.5, when investing, reinvesting, purchasing, acquiring, exchanging, selling or managing public funds, the primary objective of the City Treasurer shall be to safeguard the principal of the funds under his /her control. The secondary objective shall be to meet the liquidity needs of the City. The third objective shall be to achieve a return on the funds under his /her control. The City's universe of available investments is appropriately restrictive by State Code. The City's Investment Policy is even more conservative than State Code by imposing higher credit quality standards and further limiting the maximum exposure to individual issuers of permissible securities. As required by Council Policy (F -1), the City's Investment Policy was reviewed to ensure its consistency with the overall investment objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. In fulfilling this due diligence requirement, Finance staff met with representatives from each of the City's financial investment advisory firms to solicit suggested improvements to the Investment Policy. There is consensus among the advisors that the universe of suitable investment opportunities in agency securities and other investment grade securities are diminishing. This is largely due to the Federal Government's anticipated orderly transition of the mortgage market to private capital through a winding down of Fannie Mae, Freddie Mac and Federal Agency obligations becoming more expensive due to a shrinking supply. In consultation with the City's investment advisors, staff is recommending several changes to the Investment Policy to compensate for the shrinking supply of suitable investment opportunities. The proposed changes will allow for greater flexibility to diversify the City's investment portfolio to the extent permissible by State Code. Other changes simply provide greater clarity to the investment advisors or remove obsolete language. On July 22, 2013, the Finance Committee met and reviewed the proposed changes to the Investment Policy and found them consistent with the City's investment objectives. Below is an outline highlighting the more substantive proposed changes to the Policy. Section C.3. Delegation of Authority — Finance staff proposes that the policy explicitly require the City's investment advisors be registered under the Investment Advisors Act of 1940 as promulgated by the Securities and Exchange Commission. Section F. Safekeeping and Custody of Assets — Finance staff proposes to eliminate the reference to the physical delivery of securities since the City's bank custodian now only keeps electronic records of security certificates on the City's behalf. 2 Pa Annual Investment Policy Review and Update August 13, 2013 Page 3 Section G. Authorized Investments — Finance staff proposes to add language that in the event that an apparent discrepancy is found between this Policy and the Government Code, the more restrictive parameter(s) will take precedence. Additional proposed changes are as follows:. Proposed Change Explanation Section G.1.a: Proposed language explicitly Provides greater clarity. states no limits to percentage invested in US treasury bills. Section G.1.b: Proposed language explicitly Provides greater clarity. states no limits to the percentage of the portfolio that can be invested in federal instrumentality investments. Section G.1.c: Proposed language explicitly states no limits to the percentage of the portfolio that can be invested in this category. Also strikes and re- categorizes certain language from G.1.c to Section G.1.d relating to mortgage backed securities and debentures. Section GA.d: Consistent with State. Code, the proposed change explicitly allows investment in collateralized mortgage obligation (CMOs). Section G.1.e: Proposed language extends maturities of medium term notes from four to five years and strikes authorization of AAA rated FDIC guaranteed corporate bonds due to expiration of Total Liquidity Guarantee Program (TLGP ). Section G.1.f: Proposed change allows for investment of notes or bonds of any of the 50 states, and increases limit from 15% to 30% of portfolio allowed to be invested in this category. Also allows for a minimum credit exposure of A as opposed to AA. Provides greater clarity. Provides greater clarity. Provides for more flexibility to achieve greater investment diversification and opportunity. Deletes reference to expired TLGP program. Provides for more flexibility to achieve greater diversification and investment opportunity. This change is allowed under State Code and provides better alignment with the policy constraints on a corporate medium -term note. Proposed Change Section GAA Proposed change provides authorization to invest negotiable certificates of deposit in federally or state licensed foreign savings institutions with senior long- term debt rated at least A or short -term debt rated at least A -1. Annual Investment Policy Review and Update August 13, 2013 Page 4 Explanation Change is allowed under State Code and provides for more flexibility to achieve greater diversification and investment opportunity. Section GA J: Proposed additional language Specificity adds greater clarity for to clarify acceptable rating of A -1 or advisors. equivalent for prime commercial paper investments. Section G.1.j: Proposed increase to the maximum allocation in bankers' acceptances from 20% to 40% of the City's total portfolio. Section G.1.n: Proposed change allows up to 10% (maximum allowable by law) of total portfolio be invested in any individual money market fund. Section H. Investment Parameters Section 1: Proposed change in diversification language more clearly specifies the types of issues that are excepted from the 5% portfolio exposure limitation. These exceptions include: governmental issuers, investment pools and money market funds. Changes are permissible by State Code and allow for more flexibility to achieve greater diversification and investment opportunity. Changes are permissible by State Code and allow for more flexibility to achieve greater diversification and liquidity. Makes language consistent with State Code and provides greater clarity. Section 3: Proposed change more clearly Specificity adds greater clarity for specifies that advisors will monitor their own advisors. portfolios and not that of the other investment advisors. Section 4: Proposed change allows for less Specificity adds greater clarity for than three quotes for competitive advisors when three quotes are not transactions when it is not possible to obtain obtainable. three quotes. Annual Investment Policy Review and Update August 13, 2013 Page 5 Section I. Portfolio Performance — To better evaluate the City's investment portfolio performance to a benchmark that more closely resembles the City's current investment mix, staff recommends revising the policy to include language that allows for using comparative benchmark indexes that more closely correspond to the portfolio's duration, universe of allowable securities, risk profile and other relevant characteristics. These indexes will be used as reference points to assess the performance of the City's investment portfolio. Section J. Reporting — Finance staff proposes additional language that requires the inclusion of investment buy /sell transactions to the monthly treasury report. This will provide a greater level of transparency. q MOVAIAriTS Staff recommends the City Council find that the adoption of this resolution is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. NOTICING: This agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item). Submitted by: Dan M et Finance e Director Attachments: A. Resolution No. 2013 -63 B. Council Redline Investment (F -1) Policy C. Comparison of CA Code with Proposed Changes to Authorized Investments ATTACH Mf NT A RESOLUTION NO. 2013 -63 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH FINDING CONSISTENCY WITH STATED INVESTMENT OBJECTIVES AND AMENDING CITY COUNCIL POLICY F -1, STATEMENT OF INVESTMENT POLICY, TO ALIGN POLICY WITH STATE CODE, ALLOW FOR GREATER INVESTMENT DIVERSIFICATION, AND PROVIDE GREATER CLARITY TO THE INVESTMENT ADVISORS WHEREAS, the City Council of the City of Newport Beach ( "City ") through City Council Policy F -1 adopted a Statement of Investment Policy; and WHEREAS, City Council Policy F -1 requires the Director of Finance/Treasurer to review the Investment Policy with the Finance Committee at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends; and WHEREAS, the Finance Committee reviewed changes to the written Statement of Investment Policy at its July 22, 2013 meeting and found consistency with the stated objectives; and WHEREAS, the Finance Director shall review the Investment Policy with the City Council at a public meeting if there are changes recommended to the Investment Policy; and WHEREAS, the Director of Finance/Treasurer has reviewed the written Statement of Investment Policy and recommends changes to better align policy with State Code, allow for greater investment diversification, and provide greater clarity to the investment advisors; and WHEREAS, the City Manager reviewed the recommended revisions suggested by the Director of Finance/Treasurer and recommends the City Council amend the City's written Statement of Investment Policy. NOW, THEREFORE, the City Council of the City of Newport Beach resolves as follows: Section 1: After considering the City's written Statement of Investment Policy at a public meeting, and reviewing all associated written and oral testimony, the City Council finds the City's written Statement of Investment Policy is consistent with the overall objectives of preservation of principal, liquidity and return, and is relevant to current law and financial and economic trends. 0 Section 2: City Council Policy F -1, Statement of Investment Policy is hereby amended in its entirety and replaced with the attached Statement of Investment Policy, which is incorporated by reference into this resolution. This amendment will align the policy with State Code, allow for greater investment diversification, and provide greater clarity to the investment advisors. Section 3: The City Council finds this action is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. Section 4: This resolution shall take effect immediately upon its adoption by the City Council, and the City Clerk shall certify the vote adopting the resolution. ADOPTED this 13th day of August 2013. Keith Curry, Mayor ATTEST: Leilani Brown, City Clerk Attachment: Amended Statement of Investment Policy N F -1 STATEMENT OF INVESTMENT POLICY PURPOSE: The City Council has adopted this Investment Policy (the Policy) in order to establish the scope of the investment policy, investment objectives, standards of care, authorized investments, investment parameters, reporting, investment policy compliance and adoption, and the safekeeping and custody of assets. This Policy is organized in the following sections: A. Scope of Investment Policy 1. Pooling of Funds 2. Funds Included in the Policy 3. Funds Excluded from the Policy B. Investment Objectives 1. Safety 2. Liquidity 3. Yield C. Standards of Care 1. Prudence 2. Ethics and Conflicts of Interest 3. Delegation of Authority 4. Internal Controls D. Banking Services E. Broker /Dealers F. Safekeeping and Custody of Assets G. Authorized Investments 1. Investments Specifically Permitted 2. Investments Specifically Not Permitted 3. Exceptions to Prohibited and Restricted Investments H. Investment Parameters 1. Diversification 2. Maximum Maturities 3. Credit Quality 4. Competitive Transactions I. Portfolio Performance J. Reporting K. Investment Policy Compliance and Adoption 1. Compliance 2. Adoption 1 0 F -1 A. SCOPE OF INVESTMENT POLICY 1. Pooling of Funds All cash shall be pooled for investment purposes. The investment income derived from the pooled investment shall be allocated to the contributing funds, net of all banking and investing expenses, based upon the proportion of the respective average balances relative to the total pooled balance. Investment income shall be distributed to the individual funds not less than annually. 2. Funds Included in the Policy The provisions of this Policy shall apply to all financial assets of the City as accounted for in the City's Comprehensive Annual Financial Report, including, a) General Fund b) Special Revenue Funds c) Capital Project Funds d) Enterprise Funds e) Internal Service Funds f) Trust and Agency Funds g) Permanent Endowment Funds h) Any new fund created unless specifically exempted If the City invests funds on behalf of another agency and, if that agency does not have its own investment policy, this Policy shall govern the agency's investments. 3. Funds Excluded from this Policy Bond Proceeds - Investment of bond proceeds will be made in accordance with applicable bond indentures. B. INVESTMENT OBJECTIVES The City's funds shall be invested in accordance with all applicable City policies and codes, State statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1. Safety Preservation of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective shall be to mitigate credit risk and interest rate risk. To attain this 2 E F -1 objective, the City shall diversify its investments by investing funds among several financial institutions and a variety of securities offering independent returns. a) Credit Risk The City shall minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: • Limiting investments in securities that have higher credit risks, pre- qualifying the financial institutions, broker /dealers, intermediaries, and advisors with which the City will do business • Diversifying the investment portfolio so as to minimize the impact any one industry/ investment class can have on the portfolio b) Interest Rate Risk To minimize the negative impact of material changes in the market value of securities in the portfolio, the City shall: Structure the investment portfolio so that securities mature concurrent with cash needs to meet anticipated demands, thereby avoiding the need to sell securities on the open market prior to maturity Invest u1 securities of varying maturities 2. Liquidity The City's investment portfolio shall remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated without requiring a sale of securities. Since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets. A portion of the portfolio also may be placed in money market mutual funds or LAIF which offer same -day liquidity for short -term funds. 3. Yield The City's investment portfolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and economic cycles, commensurate with the City's investment risk constraints and the liquidity characteristics of the portfolio. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. 3 `[e] F -1 C. STANDARDS OF CARE 1. Prudence The standard of prudence to be used for managing the City's investment program is California Government Code Section 53600.3, the prudent investor standard, which states that "when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency." The City's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that no investment is totally without risk and that the investment activities of the City are a matter of public record. Accordingly, the City recognizes that occasional measured losses may occur in a diversified portfolio and shall be considered within the context of the overall portfolio's return, provided that adequate diversification has been implemented and that the sale of a security is in the best long -term interest of the City. The Finance Director and authorized investment personnel acting in accordance with established procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that deviations from expectations are reported in a timely fashion to the City Council and appropriate action is taken to control adverse developments. 2. Ethics and Conflicts of Interest Elected officials and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the City's investment program or could impair or create the appearance of an impairment of their ability to make impartial investment decisions. Employees and investment officials shall subordinate their personal investment transactions to those of the City. In addition, City Council members, the City Manager, and the Finance Director shall file a Statement of Economic Interests each year as required by California 4 11 F -1 Government Code Section 87203 and regulations of the Fair Political Practices Commission. 3. Delegation of Authority Authority to manage the City's investment program is derived from the Charter of the City of Newport Beach section 605 0). The Finance Director shall assume the title of and act as City Treasurer and with the approval of the City Manager appoint deputies annually as necessary to act under the provisions of any law requiring or permitting action by the City Treasurer. The Finance Director may then delegate the authority to conduct investment transactions and to manage the operation of the investment portfolio to other specifically authorized staff members. No person may engage in an investment transaction except as expressly provided under the terms of this Policy. The City may engage the support services of outside investment advisors with respect to its investment program, so long as it can be demonstrated that these services produce a net financial advantage or necessary financial protection of the City's financial resources. Such companies must be registered under the Investment Advisors Act of 1940, be well - established and exceptionally reputable. Members of the staff of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. These firms must insure that the portion of the portfolio under their management complies with various concentration and other constraints specified herein, and contractually agree to conform to all provisions of governing law and the collateralization and other requirements of this Policy. Selection and retention of broker /dealers by investment advisors shall be at their sole discretion and dependent upon selection and retention criteria as stated in the Uniform Application for Investment Advisor Registration and related Amendments (SEC Form ADV 2A). 4. Internal Controls The Finance Director is responsible for establishing and maintaining a system of internal controls. The internal controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets, or imprudent action by City employees and officers. The internal structure shall be designed to provide reasonable assurance that these 5 12 F -1 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 management. D. BANKING SERVICES Banking services for the City shall be provided by FDIC insured banks approved to provide depository and other banking services. To be eligible, a bank shall qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630.5 and shall secure deposits in excess of FDIC insurance coverage in accordance with California Government Code Section 53652. E. BROKER /DEALERS In the event that an investment advisor is not used to purchase securities, the City will select broker /dealers on the basis of their expertise in public cash management and their ability to provide service to the City's account. Each approved broker /dealer must possess an authorizing certificate from the California Commissioner of Corporations as required by Section 25210 of the California Corporations Code. To be eligible, a firm must meet at least one of the following criteria: 1. Be recognized as Primary Dealers by the Federal Reserve Bank of New York or have a primary dealer within their holding company structure, or 2. Report voluntarily to the Federal Reserve Bank of New York, or 3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3 -1 (Uniform Net Capital Rule). F. SAFEKEEPING AND CUSTODY OF ASSETS The Finance Director shall select one or more banks to provide safekeeping and custodial services for the City. A Safekeeping Agreement approved by the City shall be executed with each custodian bank prior to utilizing that bank's safekeeping services. Custodian banks will be selected on the basis of their ability to provide services for the City's account and the competitive pricing of their safekeeping related services. ri 13 F -1 The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. All securities shall be perfected in the name of the City. Sufficient evidence to title shall be consistent with modern investment, banking and commercial practices. All investment securities, except non - negotiable Certificates of Deposit, Money Market Funds and local government investment pools, purchased by the City will be delivered by book entry and will be held in third -party safekeeping by a City approved custodian bank, its correspondent bank or its Depository Trust Company (DTC) participant account. All Fed wireable book entry securities owned by the City shall be held in the Federal Reserve system in a customer account for the custodian bank which will name the City as "customer." All DTC eligible securities shall be held in the custodian bank's DTC participant account and the custodian bank shall provide evidence that the securities are held for the City as "customer." G. AUTHORIZED INVESTMENTS All investments and deposits of the City shall be made in accordance with California Government Code Sections 16429.1, 53600 -53609 and 53630- 53686. Any revisions or extensions of these code sections will be assumed to be part of this Policy immediately upon being enacted. The City has further restricted the eligible types of securities and transactions. The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be pre- approved by resolution of the City Council.. In the event an apparent discrepancy is found between this Policy and the Government Code, the more restrictive parameter(s) will take precedence. 1. Investments Specifically Permitted a) United States Treasury bills, notes, or bonds with a final maturity not exceeding five years from the date of trade settlement. There is no limitation as to the percentage of the City's portfolio that may be invested in this category. b) Federal Instrumentality (government- sponsored enterprise) debentures, discount notes, callable and step -up securities, with a final maturity not exceeding five years from the date of trade IFA FEN F -1 settlement. There is no limitation as to the percentage of the portfolio that can be invested in this category. c) Federal Agency Obligations for which the full faith and credit of the United States are pledged for the payment of principal and interest and which have a final maturity not exceeding five years from the date of trade settlement. There is no limitation as to the percentage of the portfolio that can be invested in this category. d) Mortgage- backed Securities, Collateralized Mortgage Obligation (CMO) and Asset - backed Securities limited to mortgage - backed pass- through securities issued by a US government agency, or consumer receivable pass- through certificates or bonds with a final maturity not exceeding five years from the date of trade settlement. Securities eligible for investment under this subdivision shall be issued by an issuer whose debt is rated at least "A or the equivalent by a Nationally Recognized Statistical Rating Organization (NRSRO). The security itself shall be rated at least "AAA" or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of mortgage - backed and asset - backed securities listed above, and the aggregate investment in mortgage - backed and asset - backed securities shall not exceed twenty percent (20 %) of the City's total portfolio. e) Medium -Tenn Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States, with a final maturity not exceeding five years from the date of trade settlement, and rated at least "A" or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of medium -term notes, and the aggregate investment in medium -term notes shall not exceed thirty percent (30 %) of the City's total portfolio. f) Municipal Bonds: including bonds issued by the City of Newport Beach, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the City or by a department; board, agency, or authority of the City. M W F -1 State of California registered warrants or treasury notes or bonds, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state. Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California. Bonds, notes, warrants, or other evidences of indebtedness of a local agency within California, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. In addition, these securities must be rated at least "A" or the equivalent by a NRSRO with maturities not exceeding five years from the date of trade settlement. No more than five percent (5 %) of the City's total portfolio shall be invested in any one municipal issuer. In addition, the aggregate investment in municipal bonds may not exceed thirty percent (30 %) of the portfolio. g) Non - negotiable Certificates of Deposit and savings deposits with a maturity not exceeding two years from the date of trade settlement, in FDIC insured state or nationally chartered banks or savings banks that qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630.5. Deposits exceeding the FDIC insured amount shall be secured pursuant to California Government Code Section 53652. No one issuer shall exceed more than five percent (5 %) of the portfolio, and investment in negotiable and nonnegotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. h) Negotiable Certificates of Deposit only with a nationally or state- chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state - licensed branch of a foreign bank whose senior long -term debt is rated at least 9 16 F -1 "A", or the equivalent, or short -term debt is rated at least "A -1" or the equivalent by an NRSRO and having assets in excess of $10 billion, so as to ensure security and a large, well - established secondary market. Ease of subsequent marketability should be further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than five percent (5 %) of the portfolio, and maturity shall not exceed two years. Investment in negotiable and non- negotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. i) Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement that is rated "A -1 "; or the equivalent; by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either sub- paragraph i. or sub- paragraph ii. below: i. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated at least "A" or the equivalent by an NRSRO. ii. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements; including; but not limited to, over collateralization, letters of credit or surety bond and (3) have commercial paper that is rated at least "A -1" or the equivalent, by an NRSRO. iii. No more than five percent (5 %) of the City's total portfolio shall be invested in the commercial paper of any one issuer, and the aggregate investment in commercial paper shall not exceed twenty five percent (25 %) of the City's total portfolio. j) Eligible Banker's Acceptances with a maturity not exceeding 180 days from the date of trade settlement, drawn on and accepted by a cormmercial bank whose senior long -term debt is rated at least "A" or the equivalent by an NRSRO at the time of purchase. Banker's Acceptances shall be rated at least "A -1 ", or the equivalent at the 10 FAA F -1 time of purchase by an NRSRO. If the bank has senior debt outstanding, it must be rated at least "A" or the equivalent by an NRSRO. The aggregate investment in banker's acceptances shall not exceed forty percent (40 %) of the City's total portfolio, and no more than five percent (5 %) of the City's total portfolio shall be invested in banker's acceptances of any one bank. k) Repurchase Agreements and Reverse Repurchase Agreements with a final termination date not exceeding 30 days collateralized by U.S. Treasury obligations or Federal Instrumentality securities listed in items 1 and 2 above with the maturity of the collateral not exceeding ten years. For the purpose of this section, the term collateral shall mean purchased securities under the terms of the City's approved Master Repurchase Agreement. The purchased securities shall have a minimum market value including accrued interest of one hundred and two percent (102 %) of the dollar value of the funds borrowed. Collateral shall be held in the City's custodian bank, as safekeeping agent, and the market value of the collateral securities shall be marked -to- the - market daily. Repurchase Agreements and Reverse Repurchase Agreements shall be entered into only with broker /dealers and who are recognized as Primary Dealers with the Federal Reserve Bank of New York, or with firms that have a Primary Dealer within their holding company structure. Primary Dealers approved as Repurchase Agreement counterparties shall have a short -term credit rating of at least "A -1" or the equivalent and a long -term credit rating of at least "A" or the equivalent. Repurchase agreement counterparties shall execute a City approved Master Repurchase Agreement with the City. The Finance Director shall maintain a copy of the City's approved Master Repurchase Agreement and a list of the broker/ dealers who have executed same. In addition, the City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than ten percent (10 %) of the portfolio can be involved in reverse repurchase agreements. 1) State of California's Local Agency Investment Fund (LAIF), pursuant to California Government Code Section 16429.1. 11 Ff.] F -1 m) County Investment Funds: Los Angeles County provides a service similar to LAIF for municipal and other government entities outside of Los Angeles County, including the City. Investment in this pool is intended to be used as a temporary repository for short - term funds used for liquidity purposes. The Finance Director shall maintain on file appropriate information concerning the county pool's current investment policies, practices, and performance, as well as its requirements for participation, including, but not limited to, limitations on deposits or withdrawals and the composition of the portfolio. At no time shall more than five percent (5 %) of the City's total investment portfolio be placed in this pool. n) Money Market Funds registered under the Investment Company Act of 1940 that (1) are "no- load" (meaning no commission or fee shall be charged on purchases or sales of shares); (2) have a constant net asset value per share of $1.00; (3) invest only in the securities and obligations authorized in the applicable California statutes and (4) have a rating of at least AAA or the equivalent by at least two NRSROs. The aggregate investment in money market funds shall not exceed twenty percent (20 %) of the City's total portfolio and no more than ten percent (10 %) of the City's total portfolio shall be invested in any one fund. 2. Investments Specifically Not Permitted Any security type or structure not specifically approved by this policy is hereby prohibited. Security types, which are thereby prohibited include, but are not limited to: "exotic" derivative structures such as range notes, dual index notes, inverse floating rate notes; leveraged or de- leveraged floating rate notes, interest only strips that are derived from a pool of mortgages and any security that could result in zero interest accrual if held to maturity, or any other complex, variable or structured note with an unusually high degree of volatility risk. The City shall not invest funds with the Orange County Pool. 3. Exceptions to Prohibited and Restricted Investments The City shall not be required to sell securities prohibited or restricted in this policy, or any .future policies, or prohibited or restricted by new State regulations, if purchased prior to their prohibition and /or restriction. Insofar as these securities provided no notable credit risk to the City, 12 FLO] F -1 holding of these securities until maturity is approved. At maturity or liquidation, such monies shall be reinvested as provided by this policy. H. INVESTMENT PARAMETERS 1. Diversification The City shall diversify its investments to avoid incurring unreasonable risks inherent in over - investing in specific instruments, individual financial institutions or maturities. As such, no more than five percent (5)%) of the City's portfolio may be invested in the instruments of any one issuer, except governmental issuers, investment pools and Money Market Funds. This restriction does not apply to any type of Federal Instrumentality or Federal Agency Security listed in Sections G1 b and G1 c above. Nevertheless, the asset allocation in the investment portfolio should be flexible depending upon the outlook for the economy, the securities markets and the City's anticipated cash flow needs. 2. Maximum Maturities To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. The City will not invest in securities maturing more than five years from the date of trade settlement, unless the City Council has by resolution granted authority to make such an investment at least three months prior to the date of investment. 3. Credit Quality The City shall not purchase any security rated "Al" and / or "A +" or below if that security has been placed on "credit watch" for a possible downgrade by an NRSRO. Each investment manager will monitor the credit quality of the securities in their respective portfolio. In the event a security held by the City is the subject of a rating downgrade which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the Finance Director. The City shall not be required to immediately sell such securities. The course of action to be followed will then be decided on a case by case basis, considering such factors as the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action. 13 20 F -1 4. Competitive Transactions Investment advisors shall make best effort to price investment transactions on a competitive basis with broker /dealers selected consistent with their practices disclosed in form ADV 2A filed with the SEC. Where possible, at least three broker /dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, the investment advisor shall make their best efforts to document quotations for comparable or alternative securities. If qualitative characteristics of a transaction, including, but not limited to, complexity of the transaction; or sector expertise of the broker, prevent a competitive selection process, investment advisors shall use brokerage selection practices as described above. I. PORTFOLIO PERFORMANCE The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City's investments shall be compared to the total return of a benchmark that most closely corresponds to the portfolio's duration, universe of allowable securities, risk profile, and other relevant characteristics. When comparing the performance of the City's portfolio, its rate of return will be computed consistent with Global Investment Performance Standards (GIPS). J: REPORTING Monthly, the Finance Director shall produce a treasury report of the investment portfolio balances, transactions, risk characteristics, earnings, and performance results of the City's investment portfolio available to City Council and the public on the City's Website. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value and dollar amount invested in all securities, and investments and monies held by the City; 2. A description of the funds, investments and programs; 3. A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with this Policy or an explanation for non- compliance K. INVESTMENT POLICY COMPLIANCE AND ADOPTION 101 21 F -1 1. Compliance Any deviation from the policy shall be reported to Finance Committee as soon as practical, but no later than the next scheduled Finance Committee meeting. Upon recommendation of the Finance Committee, the Finance Director shall review deviations from policy with the City Council. 2. Adoption The Finance Director shall review the Investment Policy with the Finance Committee at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Finance Director shall review the Investment Policy with City Council at a public meeting if there are changes recommended to the Investment Policy. This Policy was endorsed and adopted by the City Council of the City of Newport Beach on October 9, 2012. It replaces any previous investment policy or investment procedures of the City. Adopted - April 6,1959 Amended - November 9,1970 Amended - February 11, 1974 Amended - February 9,1981 Amended - October 27,1986 Rewritten - October 22, 1990 Amended - January 28,1991 Amended - January 24,1994 Amended - January 9,1995 Amended - April 22,1996 Corrected - January 27, 1997 Amended - February 24,1997 Amended - May 26,1998 Reaffirmed - March 22,1999 Reaffirmed - March 14, 2000 Amended & Reaffirmed - May 8, 2001 Amended & Reaffirmed - April 23, 2002 Amended & Reaffirmed - April 8, 2003 Amended & Reaffirmed - April 13, 2004 Amended & Reaffirmed - September 13, 2005 15 22 Amended - August 11, 2009 Amended & Reaffirmed - August 10, 2010 Amended & Reaffirmed - September 28, 2010 Reaffirmed - June 28, 2011 Amended & Reaffirmed - October 9, 2012 F -1 16 23 ATTACHMENT B F -1 STATEMENT OF INVESTMENT POLICY PURPOSE: The City Council has adopted this Investment Policy (the Policy) in order to establish the scope of the investment policy, investment objectives, standards of care, authorized investments, investment parameters, reporting, investment policy compliance and adoption, and the safekeeping and custody of assets. This Policy is organized in the following sections: A. Scope of Investment Policy 1. Pooling of Funds 2. Funds Included in the Policy 3. Funds Excluded from the Policy B. Investment Objectives 1. Safety 2. Liquidity 3. Yield C. Standards of Care 1. Prudence 2. Ethics and Conflicts of Interest 3. Delegation of Authority 4. Internal Controls D. Banking Services E. Broker /Dealers F. Safekeeping and Custody of Assets G. Authorized Investments 1. Investments Specifically Permitted 2. Investments Specifically Not Permitted 3. Exceptions to Prohibited and Restricted Investments H. Investment Parameters 1. Diversification 2. Maximum Maturities 3. Credit Quality 4. Competitive Transactions I. Portfolio Performance J. Reporting K. Investment Policy Compliance and Adoption 1. Compliance 2. Adoption 1 24 F -1 A. SCOPE OF INVESTMENT POLICY 1. Pooling of Funds All cash shall be pooled for investment purposes. The investment income derived from the pooled investment shall be allocated to the contributing funds, net of all banking and investing expenses, based upon the proportion of the respective average balances relative to the total pooled balance. Investment income shall be distributed to the individual funds not less than annually. 2. Funds Included in the Policy The provisions of this Policy shall apply to all financial assets of the City as accounted for in the City's Comprehensive Annual Financial Report, including; a) General Fund b) Special Revenue Funds c) Capital Project Funds d) Enterprise Funds e) Internal Service Funds f) Trust and Agency Funds g) Permanent Endowment Funds h) Any new fund created unless specifically exempted If the City invests funds on behalf of another agency and, if that agency does not have its own investment policy, this Policy shall govern the agency's investments. 3. Funds Excluded from this Policy Bond Proceeds - Investment of bond proceeds will be made in accordance with applicable bond indentures. B. INVESTMENT OBJECTIVES The City's funds shall be invested in accordance with all applicable City policies and codes, State statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1. Safety Preservation of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective shall be to mitigate credit risk and interest rate risk. To attain this 2 25 F -1 objective, the City shall diversify its investments by investing funds among several financial institutions and a variety of securities offering independent returns. a) Credit Risk The City shall minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: • Limiting investments in securities that have higher credit risks, pre - qualifying the financial institutions, broker /dealers, intermediaries, and advisors with which the City will do business • Diversifying the investment portfolio so as to minimize the impact any one industry/ investment class can have on the portfolio b) Interest Rate Risk To minimize the negative impact of material changes in the market value of securities in the portfolio, the City shall: Structure the investment portfolio so that securities mature concurrent with cash needs to meet anticipated demands, thereby avoiding the need to sell securities on the open market prior to maturity Invest in securities of varying maturities 2. Liquidity The City's investment portfolio shall remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated without requiring a sale of securities. Since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets. A portion of the portfolio also may be placed in money market mutual funds or LAIF which offer same -day liquidity for short -term funds. 3. Yield The City's investment portfolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and economic cycles, commensurate with the City's investment risk constraints and the liquidity characteristics of the portfolio. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. 3 Ply F -1 C. STANDARDS OF CARE 1. Prudence The standard of prudence to be used for managing the City's investment program is California Government Code Section 53600.3, the prudent investor standard, which states that "when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to; the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency." The City's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that no investment is totally without risk and that the investment activities of the City are a matter of public record. Accordingly, the City recognizes that occasional measured losses may occur in a diversified portfolio and shall be considered within the context of the overall portfolio's return, provided that adequate diversification has been implemented and that the sale of a security is in the best long -term interest of the City. The Finance Director and authorized investment personnel acting in accordance with established procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that deviations from expectations are reported in a timely fashion to the City Council and appropriate action is taken to control adverse developments. 2. Ethics and Conflicts of Interest Elected officials and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the City's investment program or could impair or create the appearance of an impairment of their ability to make impartial investment decisions. Employees and investment officials shall subordinate their personal investment transactions to those of the City. In addition, City Council members, the City Manager, and the Finance. Director shall file a Statement of Economic Interests each year as required by California 4 W F -1 Government Code Section 87203 and regulations of the Fair Political Practices Commission. 3. Delegation of Authority Authority to manage the City's investment program is derived from the Charter of the City of Newport Beach section 605 0). The Finance Director shall assume the title of and act as City Treasurer and with the approval of the City Manager appoint deputies annually as necessary to act under the provisions of any law requiring or permitting action by the City Treasurer. The Finance Director may then delegate the authority to conduct investment transactions and to manage the operation of the investment portfolio to other specifically authorized staff members. No person may engage in an investment transaction except as expressly provided under the terms of this Policy. The City may engage the support services of outside investment advisors with respect to its investment program, so long as it can be demonstrated that these services produce a net financial advantage or necessary financial protection of the City's financial resources. Such companies must be registered under the Investment Advisors Act of 1940, be well - established and exceptionally reputable. Members of the staff of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. These firms must insure that the portion of the portfolio under their management complies with various concentration and other constraints specified herein, and contractually agree to conform to all provisions of governing law and the collateralization and other requirements of this Policy. Selection and retention of broker /dealers by investment advisors shall be at their sole discretion and dependent upon selection and retention criteria as stated in the Uniform Application for Investment Advisor Registration and related Amendments (SEC Form ADV 2A). 4. Internal Controls The Finance Director is responsible for establishing and maintaining a system of internal controls. The internal controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets, or imprudent action by City employees and officers. The internal structure shall be designed to provide reasonable assurance that these 5 W-1 F -1 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 management. D. BANKING SERVICES Banking services for the City shall be provided by FDIC insured banks approved to provide depository and other banking services. To be eligible, a bank shall qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630.5 and shall secure deposits in excess of FDIC insurance coverage in accordance with California Government Code Section 53652. E. BROKER /DEALERS In the event that an investment advisor is not used to purchase securities, the City will select broker /dealers on the basis of their expertise in public cash management and their ability to provide service to the City's account. Each approved broker /dealer must possess an authorizing certificate from the California Commissioner of Corporations as required by Section 25210 of the California Corporations Code. To be eligible, a firm must meet at least one of the following criteria 1. Be recognized as Primary Dealers by the Federal Reserve Bank of New York or have a primary dealer within their holding company structure, or 2. Report voluntarily to the Federal Reserve Bank of New York, or 3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3 -1 (Uniform Net Capital Rule). F. SAFEKEEPING AND CUSTODY OF ASSETS The Finance Director shall select one or more banks to provide safekeeping and custodial services for the City. A Safekeeping Agreement approved by the City shall be executed with each custodian bank prior to utilizing that bank's safekeeping services. Custodian banks will be selected on the basis of their ability to provide services for the City's account and the competitive pricing of their safekeeping related services. I PI!] F -1 The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. All securities shall be perfected in the name of the City. Sufficient evidence to title shall be consistent with modern investment, banking and commercial practices. All investment securities, except non - negotiable Certificates of Deposit, Money Market Funds and local government investment pools, purchased by the City will be delivered by either—book entry or physic-°' delivery and will be held in third -party safekeeping by a City approved custodian bank, its correspondent bank or its Depository Trust Company (DTC) participant account. All Fed wireable book entry securities owned by the City shall be held in the Federal Reserve system in a customer account for the custodian bank which will name the City as "customer." All DTC eligible securities shall be held in the custodian bank's DTC participant account and the custodian bank shall provide evidence that the securities are held for the City as "customer." G. AUTHORIZED INVESTMENTS All investments and deposits of the City shall be made in accordance with California Government Code Sections 16429.1, 53600 -53609 and 53630- 53686. Any revisions or extensions of these code sections will be assumed to be part of this Policy immediately upon being enacted. The City has further restricted the eligible types of securities and transactions. The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be pre- approved by resolution of the City Council. In the event an apparent discrepancy is found between this Policy and the Government Code, the more restrictive parameter(s) will take precedence. 1. Investments Specifically Permitted a) United States Treasury bills, notes, or bonds with a final maturity not exceeding five years from the date of trade settlement. There is no limitation as to the percentage of the City's portfolio that may be invested in this category. b) Federal Instrumentality (government - sponsored enterprise) debentures, discount notes, callable and step -up securities, with a final maturity not exceeding five years from the date of trade 7 30 F -1 settlement. There is no limitation as to the percentage of the portfolio that can be invested in this category. c) Federal Agency Obligations for which the full faith and credit of the United States are pledged for the payment of principal and interest and which have a del-h... Nar-es; %4h a final maturity ..,,E „ .,,,, ing five years C..em the date Af ... -a^ gettl,...entfinal maturity not exceeding five years from the date of trade settlement. There is no limitation as to the percentage of the portfolio that can be invested in this category. d) Mortgage- backed Securities, Collateralized Mortgage Obligation C( MO) and Asset- backed Securities limited to mortgage- backed pass - through securities issued by a US government agency, or consumer receivable pass - through certificates or bonds with a final maturity not exceeding five years from the date of trade settlement. Securities eligible for investment under this subdivision shall be issued by an issuer whose debt is rated at least "A" or the equivalent by a Nationally Recognized Statistical Rating Organization (NRSRO). The security itself shall be rated at least "AAA" or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of mortgage- backed and asset - backed securities listed above, and the aggregate investment in mortgage- backed and asset- backed securities shall not exceed twenty percent (20 %) of the City's total portfolio. e) Medium -Term Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States, with a final maturity not exceeding feur—five years from the date of trade settlement, and rated at least "A" or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of medium - term notes, and the aggregate investment in medium -term notes shall not exceed thirty percent (30 %) of the City's total portfolio. 1.0 autherized, within the afereR+entiened diversifiEation and maturity requirements. F1 31 F -1 Municipal Bonds: including bonds issued by the City of Newport Beach, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the City or by a department, board, agency, or authority of the City leEal agenEies within the State. Municipal bonds Enust be rated at ... - -_.,. 1.t.. .Y....., iL -.- L:..., .- .,.. -,.. -i /CO /\ ._L State of California registered warrants or treasury notes or bonds, including bonds onds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state. Registered treasury notes or bonds of anv of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue producing12roperty owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California. Bonds, notes, warrants, or other evidences of indebtedness of a local agency within California, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. In addition, these securities must be rated at least "A" or the equivalent by a NRSRO with maturities not exceeding five years from the date of trade settlement. No more than five percent (5 %) of the City's total portfolio shall be invested in any one municipal issuer. In addition, the aggregate investment in municipal bonds may not exceed thirty percent (30 %) of the portfolio. Non - negotiable Certificates of Deposit and savings deposits with a maturity not exceeding two years from the date of trade settlement, in FDIC insured state or nationally chartered banks or savings banks that qualify as a depository of public funds in the State of California as defined in California Government Code Section 0 32 F -1 53630.5. Deposits exceeding the FDIC insured amount shall be secured pursuant to California Government Code Section 53652. No one issuer shall exceed more than five percent (5 %) of the portfolio, and investment in negotiable and nonnegotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. P Negotiable Certificates of Deposit only with a nationally or state - chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state - licensed branch of a foreign bank U Ss-whose senior long -term debt is rated at least "A ", or the equivalent, or short -term debt is rated at least "A -1" or the equivalent by an NRSRO and having assets in excess of $10 billion, so as to insuFe ensure security and a large, well - established secondary market. Ease of subsequent marketability is- should be further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than five percent (5 %) of the portfolio, and maturity shall not exceed two years. Investment in negotiable and non - negotiable — certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. ', Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement that is rated "A -1 ", or the equivalent, with the highest letter euid nufabef rating as pfay €ef-by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either sub - paragraph i. or sub - paragraph ii. below: i. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated at least "A" or the equivalent by an NRSRO. ii. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements, including, but not limited to, over collateralization, letters of 10 33 F -1 credit or surety bond and (3) have commercial paper that is rated at least "A -1" or the equivalent, by an NRSRO. iii. No more than five percent (5 %) of the City's total portfolio shall be invested in the commercial paper of any one issuer, and the aggregate investment in commercial paper ,shall not exceed twenty five percent (25 %) of the City's total portfolio. i)Il Eligible Banker's Acceptances with a maturity not exceeding 180 days from the date of trade settlement, drawn on and accepted by a commercial bank whose senior long -term debt is rated at least "A" or the equivalent by an NRSRO at the time of purchase. Banker's Acceptances shall be rated at least "A -1 ", Poor the equivalent at the time of purchase by an NRSRO. If the bank has senior debt outstanding, it must be rated at least "A" or the equivalent by an NRSRO. The aggregate investment in banker's acceptances shall not exceed for percent (240 %) of the City's total portfolio, and no more than five percent (5 %) of the City's total portfolio shall be invested in banker's acceptances of any one bank. Repurchase Agreements and Reverse Repurchase Agreements with a final termination date not exceeding 30 days collateralized by U.S. Treasury obligations or Federal Instrumentality securities listed in items 1 and 2 above with the maturity of the collateral not exceeding ten years. For the purpose of this section, the term collateral shall mean purchased securities under the terms of the City's approved Master Repurchase. Agreement. The purchased securities shall have a minimum market value including accrued interest of one hundred and two percent (102 %) of the dollar value of the funds borrowed. Collateral shall be held in the City's custodian bank, as safekeeping agent, and the market value of the collateral securities shall be marked -to- the - market daily. Repurchase Agreements and Reverse Repurchase Agreements shall be entered into only with broker /dealers and who are recognized as Primary Dealers with the Federal Reserve Bank of New York; or with firms that have a Primary Dealer within their holding company structure. Primary Dealers approved as Repurchase Agreement counterparties shall have a short -term credit rating of at least "A -1" or the equivalent and a long -term credit rating of at least "A" or the equivalent. Repurchase agreement counterparties ifl [elf F -1 shall execute a City approved Master Repurchase Agreement with the City. The Finance Director shall maintain a copy of the City's approved Master Repurchase Agreement and a list of the broker /dealers who have executed same. In addition, the City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than ten percent (10 %) of the portfolio can be involved in reverse repurchase agreements. k)1) _ State of California's Local Agency Investment Fund (LAIF), pursuant to California Government Code Section 16429.1. 1)ni) County Investment Funds: Los Angeles County provides a service similar to LAIF for municipal and other government entities outside of Los Angeles County, including the City. Investment in this pool is intended to be used as a temporary repository for short - term funds used for liquidity purposes. The Finance Director shall maintain on file appropriate information concerning the county pool's current investment policies, practices, and performance, as well as its requirements for participation, including, but not limited to, limitations on deposits or withdrawals and the composition of the portfolio. At no time shall more than five percent (5%) of the City's total investment portfolio be placed in this pool. Money Market Funds registered under the Investment Company Act of 1940 that (1) are "no- load" (meaning no commission or fee shall be charged on purchases or sales of shares); (2) have a constant net asset value per share of $1.00; (3) invest only in the securities and obligations authorized in the applicable California statutes and (4) have a rating of at least AAA or the equivalent by at least two NRSROs. The aggregate investment in money market funds shall not exceed twenty percent (20 %) of the City's total portfolio and no more than ten percent (10 %) of the City's total portfolio shall be invested in any one fund. 2. Investments Specifically Not Permitted Any security type or structure not specifically approved by this policy is hereby prohibited. Security types, which are thereby prohibited include, but are not limited to: "exotic" derivative structures such as range notes, dual index notes, inverse floating rate notes, leveraged or de- leveraged 12 35 F -1 floating rate notes, interest only strips that are derived from a pool of mortgages and any security that could result in zero interest accrual if held to maturity, or any other complex variable or structured note with an unusually high degree of volatility risk. The City shall not invest funds with the Orange County Pool. 3. Exceptions to Prohibited and Restricted Investments The City shall not be required to sell securities prohibited or restricted in this policy, or any future policies, or prohibited or restricted by new State regulations, if purchased prior to their prohibition and /or restriction. Insofar as these securities provided no notable credit risk to the City, holding of these securities until maturity is approved. At maturity or liquidation, such monies shall be reinvested as provided by this policy. H. INVESTMENT PARAMETERS 1. Diversification The City shall diversify its investments to avoid incurring unreasonable risks inherent in over - investing in specific instruments, individual financial institutions or maturities. As such, no more than five percent (5 %) of the City's portfolio may be invested in the instruments of any one nen geverp&nen al issuer, exceet eovernmental issuers, investment pools and Money Market Funds. This restriction does not apply to any type of Federal Instrumentality or Federal Agency Security listed in Sections Gl b and Gl c above. Nevertheless, the asset allocation in the investment portfolio should be flexible depending upon the outlook for the economy, the securities markets and the City's anticipated cash flow needs. 2. Maximum Maturities To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. The City will not invest in securities maturing more than five years from the date of trade settlement, unless the City Council has by resolution granted authority to make such an investment at least three months prior to the date of investment. 3. Credit Quality The City shall not purchase any security rated "Al" and / or "A +" or below if that security has been placed on "credit watch" for a possible downgrade by an NRSRO. 13 36 F -1 Each investment manager will monitor the credit quality of the securities in their respective portfolio. In the event a security held by the City is the subject of a rating downgrade which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the Finance Director. The City shall not be required to immediately sell such securities. The course of action to be followed will then be decided on a case by case basis, considering such factors as the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action. 4. Competitive Transactions Investment advisors shall make best effort to price investment transactions —on a competitive basis with broker /dealers selected consistent with their practices disclosed in form ADV 2A filed with the SEC. Where possible, Aat least three broker /dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, the investment advisor shall make their best efforts to document quotations for comparable or alternative securities. If qualitative characteristics of a transaction, including, but not limited to, complexity of the transaction, or sector expertise of the broker, prevent a competitive selection process, investment advisors shall use brokerage selection practices as described above. I. PORTFOLIO PERFORMANCE The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City's investments shall be compared to the total return of a benchmark that most closely corresponds to the Rortfolio's duration, universe of allowable securities, risk profile, and other relevant characteristics. the average yield on the U.S. Treasufy seettrity that mast eleseiy earrespends te When comparing the performance of the City's portfolio, its rate of return will be computed consistent with Global Investment Performance Standards (GIPS). J. REPORTING 14 37 F -1 Monthly, the Finance Director shall produce a treasury report of the investment portfolio balances, transactions, risk characteristics, earnings, and performance results of the City's investment portfolio available to City Council and the public on the City's Website. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value and dollar amount invested in all securities, and investments and monies held by the City; 2. A description of the funds, investments and programs; 3. A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with this Policy or an explanation for non- compliance 15 m F -1 K. INVESTMENT POLICY COMPLIANCE AND ADOPTION 1. Compliance Any deviation from the policy shall be reported to Finance Committee as soon as practical, but no later than the next scheduled Finance Committee meeting. Upon recommendation of the Finance Committee, the Finance Director shall review deviations from policy with the City Council. 2. Adoption The Finance Director shall review the Investment Policy with the Finance Committee at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Finance Director shall review the Investment Policy with City Council at a public meeting if there are changes recommended to the Investment Policy. This Policy was endorsed and adopted by the City Council of the City of Newport Beach on October 9, 2012. It replaces any previous investment policy or investment procedures of the City. Adopted - April 6,19-39 Amended - November 9,1970 Amended - February 11, 1974 Amended - February 9,1981 Amended - October 27,1986 Rewritten - October 22,1990 Amended - January 28,1991 Amended - January 24,1994 Amended - January 9,1995 Amended - April 22,1996 Corrected - January 27,1997 Amended - February 24,1997 Amended - May 26,1998 Reaffirmed - March 22,1999 Reaffirmed - March 14, 2000 Amended & Reaffirmed - May 8, 2001 Amended & Reaffirmed - April 23, 2002 16 39 Amended & Reaffirmed - April 8, 2003 Amended & Reaffirmed - April 13, 2004 Amended & Reaffirmed - September 13, 2005 Amended - August 11, 2009 Amended & Reaffirmed - August 10, 2010 Amended & Reaffirmed - September 28, 2010 Reaffirmed - June 28, 2011 Amended & Reaffirmed - October 9, 2012 F -1 17 M City of Newport Beach Attachment C CA Gov. Code & Proposed Changes to Authorized Investments July, 2013 NB Policy Ref. INVESTMENT TYPE CA GOV. CODE CURRENT NEWPORT BEACH POLICY PROPOSED CHANGES TO CNB POLICY G.1. a) U.S. TREASURY OBLIGATIONS 5 YEARS MAX MATURITY 5 YEARS MAX MATURITY NO MAX %OF PORTFOLIO NOT STATED NO MAX % PORTFOLIO NO MAX %OF ONE ISSUER NOTSTATED NO MAX % ONE ISSUER b) FEDERAL INSTRUMENTALITY 5 YEARS MAX MATURITY 5 YEARS MAX MATURITY NO MAX % PORTFOLIO NOTSTATED NO MAX % PORTFOLIO NO MAX %OF ONE ISSUER NOT STATED NO MAX % ONE ISSUER C) FEDERAL AGENCY OBLIGATIONS 5 YEARS MAX MATURITY 5 YEARS MAX MATURITY NO MAX % PORTFOLIO NOT STATED NO MAX % PORTFOLIO NO MAX %OF ONE ISSUER NOT STATED NO MAX % ONE ISSUER d) MORTAGE PASS - THROUGH SECURITIES 5 YEARS MAX MATURITY 5 YEARS MAX MATURITY Clarification that investments in collateralized mortgage obligation (CMOs) - permissible under Cal Gov Code Sect 53601(o) 20% MAX OF PORTFOLIO 20% MAX OF PORTFOLIO NO MAX %OF ONE ISSUER 5% MAX ONE ISSUER RATED AT LEAST AA RATED AT LEAST AAA e) MEDIUM -TERM NOTES 5 YEARS MAX MATURITY 4 YEARS MAX MATURITY 5 YEARS MAX MATURITY 30% MAX OF PORTFOLIO 30% MAX OF PORTFOLIO NO MAX %.OF ONE ISSUER 5 % MAX .ONE ISSUER RATED AT LEAST A RATED AT LEAST A f) LOCAL. AGENCY BONDS 5 YEARS MAX MATURITY 3 YEARS MAX MATURITY NO MAX % PORTFOLIO 15% MAX OF PORTFOLIO 30% MAX OF PORTFOLIO NO MAX %OF ONE ISSUER 5 %. MAX ONE ISSUER ANY OFTHE 50 STATES NO MIN CREDIT QUALITY RATED AT LEAST AA RATED AT LEAST A g) NON- NEGOTIABLE CERTIFICATES OF DEPOSIT S YEARS MAX MATURITY 2 YEARS MAX. MATURITY NO MAX %OF PORTFOLIO 30% MAX OF PORTFOLIO NO MAX %OFONE ISSUER 5% MAX ONE ISSUER h) NEGOTIABLE CERTIFICATES OF DEPOSIT /CD PLACEMENT SERVICE 5 YEARS MAX MATURITY 2 YEARS MAX MATURITY Authorization to invest in licensed foreign saving institutions vv/ senior long -term debt rated at least A or short term debt rated at least A -1- permissible under Cal Gov Code Sect 53601(i) 30% MAX OF PORTFOLIO 30% MAX OF PORTFOLIO NO MAX %OF ONE ISSUER 5% MAX ONE ISSUER NO MIN CREDIT QUALITY RATED AT LEAST A -1 1) PRIME COMMERCIAL PAPER 270 DAYS MAX MATURITY 270 DAYS MAX MATURITY Clarifies acceptable rating of A-1 or equivalent for prime commercial paper investments. 25% MAX OF PORTFOLIO 10% MAX ONE ISSUER. 25% MAX OF PORTFOLIO 5 %. MAX ONE ISSUER RATED AT LEAST A -1 RATED AT LEAST A -1 1) BANKERS' ACCEPTANCES 180 DAYS MAX MATURITY 180 DAYS MAX MATURITY 40% MAX OF PORTFOLIO 20% MAX OF PORTFOLIOS 40% MAX OF PORTFOLIO 30% MAX ONE ISSUER 5% MAX ONE ISSUER NO MIN CREDIT QUALITY RATED AT LEAST A -1 k) REPURCHASE AGREEMENTS 1 YEAR MAX MATURITY 30 DAYS MAX MATURITY NO MAX %OF PORTFOLIO NOTSTATED NO MAX %OF ONE ISSUER NOTSTATED NO MIN CREDIT QUALITY SHORTTERM AT LEAST A -1 NO MIN CREDIT QUALITY LONG TERM AT LEAST REVERSE REPURCHASE AGREEMENTS 92 DAYS MAX MATURITY 30 DAYS MAX MATURITY 20% MAX OF PORTFOLIO 10% MAX OF PORTFOLIO NO MAX %OFONE ISSUER NOT STATED NO MIN CREDIT QUALITY NOT STATED I) LOCAL AGENCY INVESTMENT FUND (LATE) N/A N/A NO MAX % PORTFOLIO NO MAX %OF PORTFOLIO N/A N/A M) LA COUNTY POOLED INVESTMENT FUNDS N/A SHORTTERM NO MAX %.OF PORTFOLIO 5% MAX OF PORTFOLIO N/A N/A OC COUNTY POOLED INVESTMENT FUNDS N/A N/A NO MAX %OF PORTFOLIO PROHIBITED N/A N/A n) MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS N/A N/A 20% MAX OF PORTFOLIO 20%M X OF PORTFOLIO 10% MAX ONE ISSUER NOTSTATED 10% MAX ONE ISSUER RATED AAA RATED AAA 41