HomeMy WebLinkAbout(2010, 08/10) - F-1 - AmendedF -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:
1. Scope of Investment Policy
a) Pooling of Funds
b) Funds Included in the Policy
c) Funds Excluded from this Policy
2. Investment Objectives
a) Safety
b) Liquidity
c) Yield
3. Standards of Care
a) Prudence
b) Ethics and Conflicts of Interest
c) Delegation of Authority
d) Internal Controls
4. Safekeeping and Custody of Assets
5. Authorized Investments
a) Investments Specifically Permitted
b) Investments Specifically Not Permitted
c) Exceptions to Prohibited and Restricted Investments
6. Investment Parameters
a) Diversification
b) Maximum Maturities
c) Credit Quality
7. Reporting
8. Investment Policy Compliance and Adoption
a) Compliance
b) Adoption
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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 listed
below. If the City invests funds on behalf of another agency and, if that
agency does not have its own investment policy, the City's Policy shall
govern the agency's investments.
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
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 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
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the security issuer or backer, by:
Limiting investments in securities that have higher credit risks, Pre -
qualifying the financial institutions, broker /dealers, intermediaries,
and advisers 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.
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."
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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 Director of Finance 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 Director of Finance shall file a
Statement of Economic Interests each year as required by California
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 Director of Finance
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 Director of Finance 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
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protection of the City's financial resources. Such companies must 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.
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 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. SAFEKEEPING AND CUSTODY OF ASSETS
The Director of Finance 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.
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 physical 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.
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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."
E. 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.
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.
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 settlement.
c) Federal Agency mortgage- backed securities and debentures with a final
maturity not exceeding five years from the date of trade settlement.
d) Mortgage- backed Securities 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 a NRSRO. The aggregate
investment in mortgage- backed and asset - backed securities shall not
exceed 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
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final maturity not exceeding four years from the date of trade settlement,
and rated at least A or the equivalent by a NRSRO. The aggregate
investment in medium -term notes shall not exceed 30% of the City's total
portfolio. In addition, AAA rated FDIC - guaranteed corporate bonds are
herein authorized, within the aforementioned diversification and maturity
requirements.
f) Municipal Bonds: General and Revenue obligations of the State of
California and local agencies within the State. Municipal bonds must be
rated at least AA by two NRSROs with maturities not exceeding three
years. The aggregate investment in municipal bonds shall not exceed 15%
of the City's total 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.
h) Negotiable Certificates of Deposit only with U.S. Banks whose underlying
securities are rated A -1 or the equivalent by a NRSRO and having assets
in excess of $10 billion, so as to insure security and a large, well -
established secondary market. Ease of subsequent marketability is 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 10 percent of the portfolio, and maturity
shall not exceed two years. The California Government Code Section
53601 limits investment in negotiable certificates of deposit to 30 percent
of the portfolio.
i) Prime Commercial Paper with a maturity not exceeding 270 days from the
date of trade settlement with the highest letter and number rating as
provided for by a NRSRO. The entity that issues the commercial paper
shall meet all of the following conditions in either sub - paragraph A. or
sub - paragraph B. 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 a NRSRO.
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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 a
NRSRO.
iii. No more than 10% 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 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 commercial
bank whose senior long -term debt is rated at least A or the equivalent by a
NRSRO at the time of purchase. Banker's Acceptances shall be rated at
least A -1, P -1 or the equivalent at the time of purchase by a NRSRO. If the
bank has senior debt outstanding, it must be rated at least A or the
equivalent by a NRSRO. The aggregate investment in banker's
acceptances shall not exceed 20% of the City's total portfolio, and no more
than 10% 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 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
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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 10% of the portfolio can be involved in reverse repos.
1) State of California's Local Agency Investment Fund (LAIF) pursuant to
California Government Code Section 16429.1.
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 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 20% of the City's total
portfolio.
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
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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 on as provided by this policy.
F. 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. 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 a
NRSRO.
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 Director of Finance. 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.
G. REPORTING
Monthly, the Director of Finance shall submit to the City Council a report of the
investment earnings and performance results of the City's investment portfolio.
The report shall include the following information:
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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
H. INVESTMENT POLICY COMPLIANCE AND ADOPTION
1. Compliance
Any deviation from the policy shall be reported to Finance Committee at the
next scheduled meeting and to City Council as part of the monthly review of
the portfolio. The Director of Finance shall promptly notify Finance
Committee and City Council of any material change in the policy and any
modifications to the policy must be approved by Finance Committee and City
Council.
2. Adoption
The Treasurer shall render a written Statement of Investment Policy that shall
be reviewed at least annually by Finance Committee and City Council 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. City Council shall consider the annual Statement of
Investment Policy and any changes therein at a public meeting.
This Policy was endorsed and adopted by the City Council of the City of
Newport Beach on August 10, 2010. 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
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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
Amended - August 11, 2009
Amended & Reaffirmed August 10, 2010
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