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CC - Item 4H - Annual Adoption of City's Investment Policy r M\ staff eport TO: HONORABLE MAYOR AND MEMBERS ROSEMEAD CITY COUNCIL FROM: FRANK G. TRIPEPI, CITY MANAG .. DATE: NOVEMBER 3, 1999 RE: ANNUAL ADOPTION OF CITY'S INVESTMENT POLICY The City's Auditor,McGladrey &Pullen,LLP is now requiring that the City Council approve, on an 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- I have also included the staff report from that meeting as well as the minutes. RECOMMENDATION It is recommended that the City Council adopt the attached policy. �G;VinNCI ate.--. i NOV - 91999 ITEM Na - e-,y 2 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 snorificing 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 18D 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 or 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. Flie 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 rr:quires 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 agencies 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: 1. 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. l.. 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 Agericy 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 $5,000. The notes are issued with maturities of less htan CI e year and interest is paid at maturity. the bonds are issued at various maturities :and carry semi-annual coupons. Interest is computed on a 30 day month, 360 day year basis. There is a strong secondary market in these securities. The City invests periodically in FHLB's. :FCB'$ (Federal Farm Credit Bank) are debt instruments to finance the short and ntermediate 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 firm) 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 30/360 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 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. hlo.wordlhan%niso nvestporicy.doc(11-02-99) \, staff eport 1 TO: HONORABLE MAYOR AND MEMBERS ROSEMEAD CITY COUNCIL FROM: , FRANK G. TRIPEPI, CITY MANAGE C DATE: SEPTEMBER 28, 1995 RE: CITY FINANCE COMMIT IEE After discussing this issue with the City Treasurer, staff drafted the attached document which is basically the City of Lakewood's investment policy without the following investment options: the County of Los Angeles Pooled Fund, Repurchase Agreements, Reverse Repurchase Agreements and Financial Futures and Options. Since the City already has an Investment Committee, as defined in Section 2207 of the RMC, the attached policy would serve as a guideline for that Committee. RECOMMENDATION It is recommended that after making any changes, the Rosemead City Council approve the attached policy and direct the City Treasurer to implement that policy. COUNCIL AGENDA 0 0 T -3 1995 ITEM No. t • FGT:djw djw:ccsd(5]) • CFAPTSR 2 - ✓-]l CERS 2200 Assessor and Tax. Collector. Pursuant to the authority granted by S= _tion 51501 0: the Government C= State of California , the assessment and tax collection =r :. =s Deriormed by the City Assessor and Tax C>ll =^'or ser=by are tans=erred to the Assessor and Tax of the County of Los A teles 6-c -599 Collector 2250 . 1 Same . tolcshment of Offices . The J_fi Assissor and Tar. Coll offices o' City Collector hereby are abolished. 1 6-4_59 2200 . 2 Sam= . Trans=e- or Duties Pursuant to ranted by Sect . the authority c - aDn 51507 0` lite Gove.nmens Cod= State of California , the sss the es of theCdty esduties, other than assessing J== duties _n Cop=r-y and the duties of the max Collector , other than the -olio--ion of a hereby are grans=c__c.: taxes , City Cl = -0 and shall be Performed by the k , or such o`=; _-_ of authorized to pe__ the County of Los 3.r,-=leg perform such duties . , g_d_,, - _201 City Clerk .DDties . Any - - ; � _ -ppiications z=_ uired to be - ed warn t^ City - ' or _==_s -=cu; red to be pas City , pursuant to the - - - d to the - provrsrpns of this Cod= shall be `41ed with or paid to - __ City C tler , unless otherwise by this Code pr>vi The CityClerk shell also be the eAssistant Treasurer. 3-4-59 0 460 12-12-782201 . 1 _ v c1=rk 3ond. Th= City Clerk upon t sets as of o_f!ce shall ehe entry to nts •. = a bond to the City in _>n=ormity with bonds of publiJ o=-; - fverrr.ment Code of and Co con- _f -t't the =2:01,4 =40 .5 r >d the Government ormiy ..=_ stet= of Cali`o_ri _ r=1 =-in of $5 , 000 . ..g thereto, in amount 1 8-44 -5-5 9 2202 City Treasur_. _._ and serve at _ e leasCity r__ as uthe shall beu oil :appointed by _he plans ur==p= the City Cduo oil City Treasurer shall - Tn= .._-�_ inz 'dll owing duties : (a) �eceive and have c asy0 sy rc all mor =vsit _ 1 _ - 3y " r4ty from any source ; (n) Deposit =11 ...00eys `= d y _ositories as may be r " in such of - d=5si` = _ by CcSJILL_ on of th= City Council ; 2ndit6 ') Disburse moneys on demands ProoerlV_ approved in the d `.. manner provided or; (d) Prepare and submi- - lo the City dis-Y, month . u_ tten reports of all ' dis- bursements and `fund balances , cop esJ of , hic- _ts shall be copies of age - ?'_1=_c with - - Finance Director and City Councils Manager and 7107 • (e) Discharge any other financial duties which Cont 'd may from time to time be assigned by the City Manager whether the same pertains to the normal duties of a City Treasurer or not ; (f) Serve as Chairman of the Investment Company (g) Review and sign all investment documents to verify ify chat they are in compliance with s and regulations . 1 8-4-50 458101-25- 77p1e 7203 . Removal of Papers or Documents from Cit the Cit y 'a or No per- son unless authorized by s Clerk, menor City Attorney, shall remove any papers or documents from the City 'all . '704 . Office of Director - - of Finance and Purchasing Office-. Pursuant to Section 40805 . 5 of the State of Calif" fic Government Code of prniz , the Office of Director of Fi- nance is reby established, and the duties provided Government for in rnment Code Sections 4D802 , 40803 , 40804 and 40805 are hereby transferred from rm for City Cance to the Director of Finance The ,rector of Finace shell also be the Purchasing Officer End shall pen ep- f pointed by the City Manager on the basis of his pro- fessional and administrative qualifications led ureL the shall serve as a Department dead ea `> the City `tanager . t the pleasure of With the approval of the City Council , the City Manager may be appointed the Director pfiaznte the functions thereof , _ ind perform deputy or deputieincluding the appointment otternt of ez pu` s and the deleg of thes _ atioa to other employee fen ctioas o: the of`ic= . l04 8-12-05 658 10-25_77 2205 . P480 480 12- 2- ower h8 and Duties or Director of Finance . The Director of Finance shall be vested and charged with powers , duties and responsibilities : the following • (a) To have charge of the administration of the financial affairs of the City ; (b) To assist the City Manager annual budget soth. preparing cil for fstb alter on to the City Council and to administer - - - � atter adoption ; , (c) To keep the City Manager full the financial condition and needs informed ds of the City ; (d) To serve as the Accounting Officer of the City and maintain records readily reflecting financial condition of the the City ; (e) To prepare for presentation to the City Council at the of end of each fiscal year a summary statement thea _pts and disbursements by departments and Tunes , including opening sury; '_lt & cling ing fend balances in the t e2_ / ,107 The investment Commie- There shall be an -- L Co-mitten which shalt -'. of teen -i� yeCoe as an advisory bodrto the City Treasurer and City Council . ( a) Duxes . The Investment ComMittee shall meet on a regular basis , -not less than once each month , o determine investments , apnrooriate depository amount and allocation o activern mattebanks , the the methods matters nad ec=ertine , of deans' ; , and all other mits n=rtinen; to the investment. and. cash -`lox' of the City of Rosemead. The Investment Commiztee shall advyse the Treasurer and report, from time to time Citystatus - , d>"ase fw Council or. of the in vestment and czsh-=low r the City. eovireme n-s of the (b) Members of T,vestment Commitsee Committee shill - _ T The anvestment consist of the _ -e asurer , who scall be its chairman , the City zlzaa-ser, and the Director of finance . 458 10-25-77 'f -16- 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 ae_nerated 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 Aoency Investment Fund of the State of California offers high liquidity because our deposits can be wired to our checking account within twenty-four 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 of 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 active secondary market to provide liquidity. MutualFunds 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-hearing 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 FHL3, even though the state statutes allow municipalities to accept them. 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. City of Rosemead Investment Policy Paoe 3 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 hastwo 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 days and as long as several years. Interest must be calculated on a 36D 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 one 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. "Me 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 160 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). Passbook savings account is similar to an inactive deposit except not for a fixed term. The savinos account allows us flexibility. Funds can be deposited and withdrawn according to our daily needs. City of Rosemead Investment Policy Page 4 - INVESTMENT VEHICLES AS THEY RELATE TO THE CITY OF ROSEMEAD Lecal Constraints Surplus funds of local agencies 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, other than a security underlying a repurchase or reverse repurchase agreement authorized bythis 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, he following requirements must be met: 1 . 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 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. Investment Vehicles U.S. TREASURY's are direct obligations of the United States Government. U.S. i--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. • • City of Rosemead Investment Policy Page 5 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 S1 ,000. Federal Agency issues are guaranteed directly or indirectly by the United States Government. All agency obligations qualify as legal investments and are acceptable as security for public deposits. They usually provide higher yields than 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 Veterans 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 than 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 3D 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. hese issues enjoy an established secondary market. The City invests in these securities from time to time. iVA'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 30/360 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 these outlines above. City of Rosemead Investment Policy Page 6 Bankers Acceptances Bankers Acceptances are a short-term credit arrangement to enable busin sses to obtain funds to finance commercial transactions. They are time drafts drawn o a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its cceptance, the bank becomes primarily liable for the payment of the draft at its maturity. acceptance is a high grade negotiable instrument. Acceptances are purchased in various d/ n enominations for original issue terms of 3D to 180 days but no longer than 270 days. The int I rest is calculated on a 360 day discount basis similar to Treasury Bills. Local agencies ma not invest more than forty percent of their surplus money in bankers acceptances. The City nvests in bankers acceptances; -c-c.. • • irty-nv- .- . _ —•.e' .•I a. investmo _ - . . . o L _. . i n Assn Local Asencv 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 if 55,000, in multiples of 51,000 above that, with a maximum of 520,000,000 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 Page 7 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 State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one percent of the earnings. 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. Negotiable Cercates of Deposit Negotiable Cert- ates of Deposit (NCR's) an , secured obligations of the financial institution, bank or savin and loan, bought ,..r value with promise to pay face value plus accrued interest at maturity. ey are h' grade negotiable instruments. The primary market issuance is in multiples of S1 mi kr , the secondary market usually trades in denominations of 5500,000 although smaller .ts are •ncasionally available. The City invests periodically in negotiable CD's, althou.• as a matter of ponly with the largest U.S. Banks (i.e., Bank - of America, Citibank hase Manhattan, etc.) r e a secondary market is established for entinued liquidity. Local agencies me not invest more than 30% of their i s City of Rosemead Investment Policy Page 7 funds in NCD's. TbreLty . - ....y---, -ese. 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. Local agencies are restricted by the Government Code to investments in corporations rated in the top three note categories by a nationally-recognized rating service. Further restrictions are a maximum term of five years to maturity and total investments in MTN's may not exceed thirty percent of the local agency's surplus money. Mutual .Funds Mutual Funds e referred to in the Government -we, Section 536601 , L, as "shares of beneficial interests iss by diversified manage..cnt companies". The Mutual Fund must be restricted by its by-laws to •e same inve - ents as the local agency. These investment are Treasury issues, Agency iss :; -te of California and City (within California) debt obligations, Commercial Paper, Cern rates of Deposit, Negotiable Certificates of Deposit, and Medium Term Corporate . es. The • ality rating and percentage restrictions in each investment category a • 'cable to the local .t ncy also applies to the Mutual Fund. A further r- Motion is that the purchase price o - ares of the mutual funds shall not include any —les commission. Investments in mutual fun. .' all not exceed fifteen percent of the lo -I agency's surplus money. wp:agenda:13 • APPROVED CITY OE ROSEMEAD DATE /// 21/Fr— MINUTES OF THE ADJOURNED REGULAR MEETING+, ( � ROSEMEAD CITY COUNCIL OCTOBER 3, 1995 The adjourned regular meeting of the Rosemead City Council was called to order by Mayor Vasquez at 7:50 p.m. in the Conference Room of the City Hall, 5838 E. Valley Boulevard, Rosemead, California. The Pledge to the Flag was led by Councilmember Taylor The Invocation was delivered by Councilmember Bruesch ROLL CALL OF OFFICERS: Present: Councilmembers Bruesch, Imperial (arrived at 7:55 p.m.), Taylor, Mayor Pro Tern Clark (arrived at 7:55 p.m.), and Mayor Vasquez Absent: None 1. A STUDY SESSION TO DISCUSS THE CITY FINANCE COMMITTEE Councilmember Taylor defined the makeup of the current Investment Committee as consisting of the Treasurer, the City Manager, and the Finance Director and asked what has changed since the problem we had after the last bond sale to prevent it from recurring. Frank Tripepi, City Manager, responded that the Council has set a very specific policy that says we will not deal with brokerage houses, get into the stock market, securities, or the long bond market as investment vehicles. Mr. Tripepi stated he believed the purpose of this meeting was to define the proper investments. Councilmember Taylor asked what caused the problem with the bond proceeds and who will be responsible for understanding the restrictions and regulations to prevent this from happening again. Mr. Tripepi explained that the oversight was caused by a lack of understanding by Merrill Lynch of what were viable and/or legal investment vehicles that the City or Agency could invest in, and that the City Treasurer, working with the Finance Committee members will follow policy set by Council to invest funds at the highest yield rate possible within legal boundaries. Councilmember Taylor inquired if the three members of the Investment Committee were aware or not of the regulations. Mr. Tripepi responded that some were and some weren't. Councilmember Taylor responded that if there was an oversight and it was missed, at that point what protection would we have that that doesn't happen again. Mr. Tripepi responded that there needs to be a better understanding between the Treasurer and the other members as to what those investments will be prior to the time they are made. Councilmember Taylor then asked who would be sure the oversight wouldn't happen again and determined that the Treasurer apparently has that responsibility. Hugh Foutz, City Treasurer, said that he was fully aware that long term bonds were not to be invested in without specific approval, but that since he had been doing it for twenty years, he felt that that was a kind of approval. After some discussion about fluctuating interest rates, he felt that the loss could have been prevented if we had held on to the securities. CC 10-3-95 Page 1 Mr. Tripepi pointed out that the policy which states that purchases more then five years cannot be done without Council approval. Peter Wallin, City Attorney, stated that the problem was that Mr. Foutz had invested in long term securities. Mr. Foutz stated that he did not hold anything long term and always had cash reserve to cover any of the forecast cash flow. Councilmember Imperial stated that there was no use pointing fingers at who was wrong and stated that an investment policy and finance committee needs to be formed in order to prevent future problems from occurring. Mr. Imperial continued that this should never have happened, but that he thought we had a safety system in place and apparently it wasn't good enough and that we need to move forward. Mayor Pro Tern Clark stated that if there is no admission of what went wrong, then we may fall into the same situation again and added that investments longer than five years should require Council approval. She also stated that in addition to the long term investment, another problem was the type of investments which weren't legal anymore. Mr. Wallin affirmed that the legal restrictions applicable to City money were not the same as for Agency money. The Redevelopment Agency did not have a limitation on five year investments asthe City did,and Bond Counsel opined that several of the Agency investments, although they may be legal under redevelopment law, they not legal under the bond covenants. Mayor Pro Tem Clark stated that the third problem was the fact of arbitrage -that even if you make more money on your investments than the rate you borrowed the money at, the Federal government says you cannot keep the profit. Mr. Foutz stated that since you are not through with the investment for thirty years, he would want to make a good profit on the investment and that it is after thirty years that you measure whether you made a profit. Mayor Pro Tern Clark repeated her concern that since the government makes you pay back any profit you make, why are we taking the risk of investing in securities that can fluctuate? Mr. Wallin and Mr. Tripepi confirmed that it is not at the end of thirty years, it is every year that bond counsel computes the arbitrage. You cannot invest at a higher yield than you borrowed at. Mr. Tripepi confirmed that this information comes from the Bond Counsel and independent city auditors. Mr. Foutz stated that he has conflicting advice about arbitrage from many sources, but that he must abide by our Bond Counsel. Councilmember Imperial stated that this was "water under the bridge" and we need to move on. Councilmember Bruesch explained that the public is more aware of City's finances,that laws are being changed and tightened and Council needs to move forward and become more knowledgeable and start overseeing Rosemead's finances and investments. Discussion ensued as to who would be on the Finance Committee and receiving quarterly reports from the City Treasurer. MOTION BY COUNCILMEMBER BRUESCH, SECOND BY MAYOR PROTEM CLARK that the Council receive quarterly reports and Minutes from the Finance Committee meetings. Before vote could occur, more discussion ensued. CC 10-3-95 Page 2 Councilmember Taylor emphasized that this motion does not change anything and what guarantee is there that somebody is keeping current and aware of all state and federal regulations. Mr. Taylor continued that while Mr. Foutz has done a good job, someone else needs to be accountable also, such as the City Manager and Finance Director if they can keep abreast of all the changes and reflect those changes in the minutes. Councilmember Imperial suggested that a Councilmember be involved in the committee. Councilmember Taylor responded that a professional familiar with the rule and changes would be more suitable. Mr. Tripepi stated that the California Society of Municipal Finance Officers (CSMFO) publication and the California Municipal Treasurer's Association (CMTA) have meetings and publications discussing guidelines regarding legal investments and that the Finance Committee meetings should consist mainly of making decisions as to what to do with investments rolling over and where should it go to maximize the investments. Councilmember Bruesch stated his motion again that the Council receive quarterly reports and minutes from the City Finance Committee, and that the minutes be placed on the City's Consent Calendar. Before vote could result, more discussion ensued. Mr. Tripepi explained that there may be times when there will not be a meeting, for example, when the money is already invested and does not require any decisions. After discussion, it was agreed that the Finance Committee should meet quarterly regardless. Councilmember Taylor said that his only problem with Mr. Foutz' investments over thn yearstted been the legal regulationsA regarding long—term investments over 5—years. have Mr. Tripepi stated that other members of the Council did not feel taxpayers dollars should be played in a volatile market such as the bond market. He heard this expressed by Mayor Pro Tern Clark and Councilmember Bruesch. Mayor Pro Tern Clark asked what would happen if there was not a unanimous consent among the Finance Committee members. Peter Wallin, City Attorney, responded that if the committee serves as-advisor to the Treasurer, then the Treasurer has the power to do investments. Mayor Pro Tern Clark named the three areas that she considered were wrong; (1) the investments in question had emphasized yield over safety and liquidity and there was no rational basis for such en investment policy, when in any event, yield was limited by arbitrage restrictions; (2) the Agency investments in bonds issued by utility companies did not appear to be authorized by the bond covenants or state law; and (3) the investment of City funds in bonds that matured in more than five years had, as pointed out in the letter from the City auditor, violated legal restraints on City investments. Mayor Pro Tern Clark than asked Mr. Foutz whether the City Manager had pointed out to him what was wrong with these investments. - Mr. Foutz stated that no one pointed them out until Frank had the proposal with Structured Finance. Councilmember Bruesch again asked Mr. Foutz that since he had not been attending the Treasurers' meetings whether he was privy to the information concerning these regulations? Mr. Foutz stated that arbitrage is a grey area and that Bond Counsel was unclear about it even at the meeting. CC 10-3-95 Page 3 Mayor Pro Tern Clark disagreed and stated that it had been made very clear. She reiterated her concern that if local governments cannot keep the money they make on higher interest rates, then why are we investing in risky investments. Mr Foutz countered as to why we seek lower borrowing rates in the first place? Mr. Tripepi explained that you borrow at the lowest rate possible, similar to a home buyer, and that the purpose of borrowing the money is to do projects, not to reinvest the money. Councilmember Imperial repeated that he felt we should not be going over this again. Mayor Pro Tern Clark stated again-that if there is not an admission of mistakes made, the same problem will occur again, and that is why she is asking for a unanimous agreement among the committee, and if an admission is not made, then we have a serious problem. Mrs. Clark continued that it was her understanding that Mr. Tripepi had warned Mr. Foutz concerning the investments and asked if that was true. Mr. Foutz said that it was "over his shoulder, walking into his office", saying he wanted to do...the 3.68% when it first came out Councilmember Taylor commented that it would be the responsibility of the Finance Committee to be aware of the three items that Mrs. Clark mentioned. Mr. Taylor stated that basically it was not a question of poor investment but of not following regulations, such.as the TVA. While it was a good investment, it was a violation of utility and long-term investment regulations. Mayor Pro Tern Clark stated that if one member of the committee informs the Treasurer of a violation, then that item would have to go to Council to resolve. Councilmembers Taylor and Imperial concurred. Councilmember Bruesch requested that a clause be added to the Investment Committee of the RMC, Section 2207, (c) to read that any decision of the Finance Committee be of unanimous consent. Mr. Tripepi stated that he had no problem with taking on an additional duty. He stated that Structured Finance was not new to this City and that when we sold all those long term bonds, Structured Finance had given Mr. Foutz a schedule of investments of all the money. Mr. Foutz had objected to Mr. Tripepi getting involved and stated he would do the investments. Mr. Tripepi stayed out of it with the exception of the escrow fund overage, which stayed with Structured, which has been perfectly legal, not triggered by the audit, and has been a fine investment. Mr. Foutz took the bond proceeds and put them with Merrill Lynch. That was not Mr. Tripepi's choice. He reiterated that Mr. Foutz had meet Structured Finance early on in the bond deal. Mr. Foutz stated that he felt that was an oversimplification of what had taken place. Councilmember Bruesch called for the question. Discussion ensued that that would be a policy change. Mr. Wallin added that a policy change, such as taking away the power of the City Treasurer and investing it in a committee of the three, would require an ordinance. COUNCILMEMBER BRUESCH requested that his MOTION include the unanimous consent clause as part of the Investment Committee section of the Rosemead Municipal Code. COUNCILMEMBER TAYLOR bifurcated that MOTION to vote first on the submittal of quarterly reports and the updating of regulations. Councilmember Bruesch called for the question. CC 10-3-95 Page 4 Mayor Pro Tern Clark requested clarification on the motion and the unanimous consent clause and stated that she does not want to vote on the Investment Committee without that clause as it is germane to the effectiveness of the committee. • Mr. Wallin clarified that there is a Motion and a Second on the floor that the Finance Committee provide Council with quarterly reports of their meetings, and there is nothing before the Council at this time on how the committee makes their decisions. Mayor Pro Tern Clark asked what procedure is necessary to include that policy decision. Mr. Wallin responded that such a decision could be included in the investment policy, or by adopting a resolution, or by minute action. Mr. Tripepi stated that the committee is already in place and this motion assures that the committee will meet on a regular basis and provide reports. Councilmember Bruesch confirmed that anything that changes the duties of the committee would have to be done by ordinance. Mr. Wallin added that the Council can adopt a motion to instruct staff to return with an ordinance to that effect. Councilmember Bruesch stated that would be the next step. MOTION BY COUNCILMEMBER BRUESCH, to amend the previous motion calling for unanimous consent and directed staff to develop a policy that 2207 (c) of the Rosemead Municipal Code state that the committee will provide Council with quarterly reports and minutes of the meetings. Mayor Pro Tern Clark stated that she will not second the amended motion without the inclusion of the unanimous consent statement. MOTION BY COUNCILMEMBER TAYLOR, SECOND BY COUNCILMEMBER BRUESCH to table the previous motion and that the new motion include under 2207 (c) Rosemead Municipal Code that the Finance Committee meet quarterly and provide Council with reports of those meetings. Vote resulted: Yes: Bruesch, Vasquez, Imperial, Taylor No: Clark Absent: None Abstain: None The Mayor declared such motion duly carried and so ordered. • MOTION BY COUNCILMEMBER BRUESCH,SECOND BY MAYOR PRO TEM CLARK that 2207 (d) state that all investment policies be by unanimous consent of the members of the Investment Committee and any non-unanimous decisions be brought before the Council. Before vote could result, more discussion ensued. Mr. Tripepi pointed out that if investments come due after a Finance Committee meeting, would a special meeting of the Council have to be called as to where to invest that money. • Mr. Wallin asked if every investment would have to come before the Finance Committee, for example, if on a Friday afternoon and Mr. Foutz is not available, can Mr. Tripepi invest $500,000 available into a short term fund investment to earn $2,000 over the weekend. CC 10-3-95 Page 5 • Councilmember Bruesch suggested a proviso can be added whereby only major decisions regarding the amount and length of investments come before the Council. Mr. Tripepi explained that that would be taking power away from the Treasurer and that the Treasurer has to be given the responsibility to do those short term repurchase investments, with his alternate as backup when he is out of town. Councilmember Taylor stated that there have not been any problems with the investments made by the Treasurer in the past, and with the Finance Committee in place providing quarterly reports, the Council will have a financial overview without having to become involved in the day-by-day operations. Mr. Foutz stated there have not been any disagreements over the years with his investments except this one occasion and this situation came about largely due to the Orange County fiasco. Mayor Pro Tern Clark agreed that the Council should not micro-manage either, but there were investments made in the past that were not proper and wants assurance that this does not occur again. Mrs. Clark stated that she did not feel we had solved the problem. Also discussed and agreed upon was the willingness and ability of the City Treasurer and City Manager to work together on the Finance Committee to follow Council's policy. • Councilmember Taylor called for the question. Vote resulted: Yes: Bruesch, Clark No: Vasquez, Imperial, Taylor Absent: None Abstain: None The Motion failed to pass. Councilmember Taylor clarified for Mr. Foutz that the Motion was that the committee had to be unanimous in everything it did for the investments and the vote was No; therefore, they are to continue as they have been. Thu next topic discussed for contextual purposes was the City's Investment Policy. Councilmember Bruesch asked if banks have a local investment policy. Mr. Tripepi responded that that is not necessary because federal banking laws under the Community Reinvestment Act requires local banks to put a percentage of money back into the community that they get by way of investments. Councilmember Taylor inquired about another law or regulation that requires investing our n ..ncy in banks that earn the highest return for the taxpayers. Mr. Tripepi responded that the City or Agency has to buy the Certificate of Deposits from the bank that has the highest return. Councilmember Bruesch requested that the Investment Policy include investing in local banks as much as possible. Mayor Pro Tern Clark inquired about the Negotiable Certificates of Deposit (NCR's) section relating to unsecured obligations. M . Foutz responded that the City does not use NCD's and the C.D's invested in has a 110% guarantee, and he will not invest money in a bank without collateral. MOTION BY MAYOR PRO TEM CLARK, SECOND BY COUNCILMEMBER TAYLOR that the entire paragraph relating to Negotiable Certificates of Deposit of the Investment Policy be deleted. Vote resulted: CC 10-3-95 Page 6 Aye: Bruesch, Clark, Vasquez, Imperial, Taylor No: None Absent: None Abstain: None The Mayor declared said motion duly carried and so ordered. MOTION BY COUNCILMEMBER BRUESCH, SECOND BY COUNCILMEMBER TAYLOR that the entire paragraph relating to Mutual Funds of the Investment Policy be deleted. Vote resulted: Aye: Bruesch, Clark, Vasquez, Imperial, Taylor No: None Absent: None Abstain: None The Mayor declared said motion duly carried and so ordered. Mayor Pro Tern Clark requested confirmation from the City Treasurer, City Manager, and Finance Director that the items remaining in the Investment Policy are safe investments. The response was affirmative. MOTION BY COUNCILMEMBER TAYLOR, SECOND BY COUNCILMEMBER IMPERIAL that the Council approve the amended Investment Policy. Vote resulted: Aye: Bruesch, Clark, Vasquez, Imperial, Taylor No: None Absent: None Abstain: None The Mayor declared said motion duly carried and so ordered. II. ADJOURNMENT • There being no further action at this time, the meeting was adjourned at 9:20 p.m. The next regular meeting will be held on October 10, 1995, at 8:00 p.m. Respectfully submitted: APPROVED: City CClerk' aaA OR Li 7 CC 10-3-95 Page 7