Loading...
CC - Item IV.CC-G - Annual Adoption Of City's Investment Policy�* \\ staf "➢FPoNI.R0 �9� TO: HONORABLE MAYOR AND MEMBERS ROSEMEAD CITY COUNCIL FROM: NK G. TRIPEPI, CITY MANAGER DATE: • AUGUST 30, 2000 RE: ANNUAL ADOPTION OF CITY'S INVESTMENT POLICY The City's Auditor, McGladrey & Pullen, LLP requires the City Council to approve on annual basis the City's Investment Policy. Attached is a copy of the City's Investment Policy approved by the City Council at the Adjourned Meeting of October 3, 1995. Also included is the staff report from that meeting as well as the minutes. RECOMMENDATION It is recommended that the City Council adopt the attached policy. klo:word\bankmisc�n estpolicyag.doc (0 8-30 -2000) ' COUNCIL SEP 122000 ITEM No. epor CITY OF ROSEMEAD INVESTMENT POLICY The investment of the funds of the City of Rosemead is directed to the goals of safety, liquidity and yield. The authority governing investments for municipal governments is set forth in the Government Code, Sections 53601, et seq. The primary objective of the investment policy of the City of Rosemead is SAFETY. Our investments are placed in those securities as outlined below; the balance between the various investment instruments may change in order to give the City the best combination of liquidity and additional yield. LOCAL INVESTMENT VS. DIRECT MARKET INVESTMENT As a matter of public policy, one of the goals of a public agency's investment program may be local economic development. Placing funds in local banks is one method of promoting this goal. It can be argued that the total return to the government from keeping the money at "home" is the sum of the direct yield on the time deposits and the indirect yield that comes from the added tax revenues generated by local economic growth. In general, however, it is hard to measure the costs and benefits of such a policy. Private financial institutions that receive public funds can allocate those funds to many different assets. Bank credit is mobile and can be directed to areas and uses that meet the banking institution's preferences. Probably banks invest in whatever assets will realize the greatest income to them. The City of Rosemead places investments in local banks to the extent one can without sacrificing the other goals of our investment policy, i.e., safety, liquidity and yield. A VARIED INVESTMENT PROGRAM The City of Rosemead uses a varied investment program to accomplish all of our goals- safety, liquidity and yield as well as local investment. Following are the types of investments the City makes and some of the advantages of each: The local Agency Investment Fund of the State of California offers high liquidity because our deposits can be wired to our checking account within twenty -four (24) hours. Interest is computed on a daily basis. Our savings account allows us to transfer money from checking to savings and earn short-term interest on odd amounts of money. U.S. treasury securities are highly liquid in addition to being considered the safest of all investments. City of Rosemead Investment Policy, Page 2 Federal Agency securities are high liquid and considered riskless Bankers Acceptances are frequently the highest in yield, and are safe investments are highly liquid. Commercial paper issued by prime rated industrial and financial institutions allows the investment of money for one to 180 days at rates higher than we can earn from' the previously listed securities. These are also collateralized. Certificates of deposit allow the City to select the exact amount and day to maturity as well as the exact depository. There are penalties for withdrawal of funds prior to the original maturity date. These are also collateralized. Negotiable certificates of deposit are high grade instruments, paying a higher interest rate than regular certificates of deposit. They are liquid because they can be traded in the secondary market. Medium Term Corporate Notes offer a competitive alternative to Negotiable Certificates of Deposits and standard Certificates of Deposits. These securities enjoy an actibve secondary market to provide liquidity. Mutual Funds or "beneficial shares" is another authorized investment allowing the City to maintain liquidity and receive money market rates. DEPOSITORY SERVICES AS THEY RELATE TO THE CITY OF ROSEMEAD Legal Constraints Money must be deposited in state or national banks, state or federal savings associations or state or federal credit unions in the state. It may be in inactive deposits, active deposits or interest - bearing active deposits. The deposits cannot exceed the amount of the bank's paid up capital and surplus. The bank must secure the active and inactive deposits with eligible securities having a market value of 110% of the total amount of the deposits. State law also allows as an eligible security, first trust deeds having a value of 150% of the total amount of the deposits. A third class of collateral is letters of credit drawn on the Federal Home Loan Bank (FHLB). As a matter of policy, the City does not accept 150% collateral in first trust deeds or 105% Letters of Credit drawn on the FHLB, even though the state statutes allow municipalities to accept them. City of Rosemead Investment Policy, Page 3 The treasurer may, at his discretion, waive security for that portion of a deposit which is insured pursuant to federal law. Currently, the first $100,000 of a deposit is federally insured. It is to the City's advantage to not waive this collateral requirement for the first $100,000. If funds are to be collateralized, the collateral we accept is 110% of the deposit in government securities.. Depository Services Active deposits are demand or checking accounts which receive revenues and pay disbursements. The City of Rosemead has three demand accounts: General checking account Payroll checking account Redevelopment Agency bond proceeds checking account Interest - bearing active deposits are money market accounts at a financial institution (i.e., bank, savings and loan, credit union). These accounts are demand accounts (i.e., checking accounts) with restricted transaction activity. The City of Rosemead has two accounts of this nature for the Rosemead Redevelopment Agency. Inactive deposits are Certificates of Deposit issued in any amount for periods of time as short as fourteen (14) days and as long as several years. Interest must be calculated on a 360 day basis, actual number of days. At any given time, the City may have certificates of deposit in several financial institutions. As a matter of policy, we do not invest in CD's for longer than on year. We require that each financial institution submit current financial statements which are evaluated by staff prior to investment of funds. We use the following criteria: The institution must have been in business at least three years. The institution must submit audited financial statements. The institution must have assets of at least $50 million and a net worth to liability ratio of 3.5 to 1. For calculations, net worth does not include subordinated debt and Reserves for Allowance for Loan Losses. City investments of less than 180 days to maturity can use a net worth to asset ration of 3.0 to 1. Whenever possible, the use of several years' financial data is evaluated to present a trend of activity in the institution. We also require that interest be paid to the City on a monthly basis (current state law only requires quarterly payment). City of Rosemead Investment Policy, Page 4 Passbook savings account is similar to an inactive deposit except not for a fixed term. The savings account allows us flexibility. Funds can be deposited and withdrawn according to our daily needs. INVESTMENT VEHICLES AS THEY RELATE TO THE CITY OF ROSEMEAD Legal Constraints Surplus funds of local agericies may only be invested in certain eligible securities. The City of Rosemead invests only in these securities. See Government Code,•Section 53601, a- m, Investment of Surplus Funds. Effective January 1, 1989, the Government Code, Section 53601 states: "no investment shall be made in any security underlying a repurchase or reverse repurchase agreement authorized by this section, which at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment." The investment strategy for the City of Rosemead is similar to administer an operational portfolio. A definition of an operational portfolio is to have adequate funds available at all times to meet appropriated and projected cashflow requirements for the City of Rosemead. From time to time, the investment strategy may wish to capture high yields with the purchase of safe, low risk, highly liquid investments. For purchases greater than five years, the following requirements must be met: The security must be a U.S. Treasury Note or bond, a Federal National Mortgage Association (FNMA) debenture of Federal Home Loan Bank (FHLB) debenture. 2. A maximum of twenty -five (25) percent of the City's funds can be invested in securities with maturities between five and seven years. 3. No securities can be purchased for the City of Rosemead or the Rosemead Redevelopment Agency with a maturity greater than five years, without the Committee approval and Council consent. The City of Rosemead does not purchase or sell securities on MARGIN. City of Rosemead Investment Policy, Page 5 Investment Vehicles U.S. TREASURY's are direct obligations of the United States Government. U.S. T -BILLS are issued weekly with maturity dates up to one year. They are issued and traded on a discount basis and the interest is figured on a 360 day basis, actual number of days. They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly liquid security. U.S. T -NOTES are initially issued with two to ten year, maturities. They are actively traded in a large secondary market and are very liquid. The Treasury may issue bond issues with a minimum of $1,000. Federal Agency issues are guaranteed directly or indirectly by the United States Government. All agency obligations quality as legal investments and are acceptable as security for public deposits. They usually provide higher yield then regular Treasury issues with all of the same advantages. Examples are: FNMA's (Federal National Mortgage Association) are used to assist the home mortgage market by purchasing mortgages insured by the Federal Housing Administration and the Farmers Home Administration, as well as those guaranteed by the Veteran's Administration. They are issued for various maturities from a few months to twenty years in denominations of $10,000 minimum. The notes are issued with maturities of less than one year and interest is paid at maturity. The bonds are issued at various maturities and interest is paid.semi - annually. Interest is computed on a 30 day month, 360 day year basis. There is a strong secondary market in these securities. The City invests periodically in FNMA's. FHLB's (Federal Home Loan Bank) are issued by the Federal Home Loan Bank System to help finance the housing industry. The notes and bonds provide liquidity and home mortgage credit to savings and loan associations, mutual savings banks, cooperative banks, insurance companies and mortgage- lending institutions. The minimum denomination is $5,000. The notes are issued with maturities of less htan one year and interest is paid at maturity. the bonds are issued at various maturities and carry semi - annual coupons. Interest is computed on a 30 day month, 360 day year basis. There is a strong secondary market in these securities. The City invests periodically in FHLB's. FFCB's (Federal Farm Credit Bank) are debt instruments to finance the short and intermediate term needs of farmers and the national agricultural industry. They are issued monthly with 3 and 6 month maturities. The FFCB also issues discount notes with maturities less than one year purchased at a discount with interest paid at maturity. FFCB term issues longer than one year pay interest semi- annually on a 30/360 basis. These issues enjoy an established secondary market. The City invests in these securities from time to time. City of Rosemead Investment Policy, Page 6 TVA's (Tennessee Valley Authority) are loans to finance the capital acquisitions of the Authority. These issues are issued in intermediate and long term maturities. All issues are fully guaranteed by the U.S. Government against default. Interest is payable semi - annually and at maturity and is calculated on a 301360 basis. Other federal agency issues are Small Business Administration notes (SBA's) and Government National Mortgage Association notes (GNMA's). As a matter of policy, the City does not invest in these issues because they do not suit our purpose as well as those outline above. Bankers Acceptances Bankers Acceptances are a short-term credit arrangement to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at its maturity. An acceptance is a high grade negotiable instrument. Acceptances are purchased in various denominations for original issue terms of 30 to 180 days but no longer than 270 days. The interest is calculated on a 360 day discount basis similar to Treasury Bills. Local agencies may not invest more than forty percent of their surplus money in bankers acceptances. The City may invests in bankers acceptances. Local Agency Investment Fund This is a special fund in the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum of $20,000,000 for any agency. The City is restricted to a maximum of ten transactions per month. L.A.I.F. offers high liquidity because deposits can be converted to cash within twenty -four hours. All City of Rosemead Investment Policy interest is distributed to those agencies participating on a proportionate share determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly via a check or direct deposit to Agency's L.A.I.F. account. The interest rates are fairly high because of the pooling of the State surplus cash with the surplus cash deposited by local governments. This creates a multi - billion dollar money pool and allows diversified investments. In a high interest rate market, we do better than L.A.I.F., but in times of low interest rates, L.A.I.F. yields are higher. The City continually invests in the Local Agency Investment Fund. The State keeps an amount for reasonable costs of making the investments, not to exceed one - quarter of one percent of the earnings. City of Rosemead Investment Policy, Page 7 The interest rates are fairly high because of the pooling of the State surplus cash with the surplus cash deposited by local governments. This creates a multi- billion dollar money pool and allows diversified investments. In a high interest rate market, we do better than L.A. I. F., but in times of low interest rates, L.A.I. F. yields are higher. The City continually invests in the Local Agency Investment Fund. Commercial Paper Commercial Paper is a short term unsecured promissory note issued by a corporation to raise working capital. These negotiable instruments are purchased at a discount to par value or at par value with interest bearing. Commercial paper is issued by corporations such as General Motors Acceptance Corporation (GMAC), Shearson - American Express, Bank of America, Wells Fargo Bank, etc. Local agencies are permitted by state law to invest in commercial paper of "prime" quality of the highest ranking or of the highest letter and numerical rating as provided by Moody's Investor's Service, Inc., or Standard and Poor's Corporation. Purchases of eligible commercial paper may not exceed fifteen percent of the local agency's surplus funds. Medium Term Corporate Notes Medium Term Corporate Notes are unsecured promissory notes issued by a corporation organized and operating in the United States. These are negotiable instruments and traded in the secondary. market. Medium Term Corporate Notes can be defined as extended maturity Commercial Paper. Corporations use these medium term debt securities to raise capital. Examples of corporate medium term notes (MTN's) are General Electric, Shearson- American Express, GMAC, Wells Fargo Bank, Citibank, Southern California Edison, etc. klo :word\bankmisclnvestpolicy.doc (11- 02 -99)