HomeMy WebLinkAboutStaff Report 280-05INVESTMENT OBJECTIVES
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
1. Safety: Safety of principal is the foremost objective of the investment program.
Investments shall be undertaken in a manner that seeks to ensure the preservation of
capital in the overall portfolio. The objectivewill be to mitigate credit risk and interest
rate risk.
a) Credit risk is the risk that an obligation will not be paid and a loss will result.
The City will seek to minimize this risk by:
• Limiting investment to the safest types of securities as listed in the
"Authorized Investment" section.
• Diversifying its investments among the types of securities that are
authorized under this investment policy.
b) Interest rate risk is the risk that changes in interest rates will adversely affect the
value of an investor's portfolio. For example, an investor with large holdings in
long-term bonds has assumed significant interest rate risk because the value of
the bonds will fall if interest rates rise. The City can minimize this risk by:
• Buying and holding its securities until maturity.
• Structuring the investment portfolio so that securities mature to meet cash
flow requirements.
To further achieve the objective of safety, the amount that can be invested in all
investment categories, excluding obligations of the U.S. Government and its agencies, is
limited either as a percentage of the portfolio or by a specific dollar amount. These
limits are defined under the "Authorized Investments" section.
2. Liquidity: Liquidity is the second most important objective of the investment
program. The investment portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by maintaining a
portion of the portfolio in liquid money market mutual funds or local government
investment pools. In addition, the City will maintain one month's cash needs in short
term investments and at least $50 million shall be maintained in securities maturing in
less than two years. Since all possible cash demands cannot be anticipated, however,
the pOlifolio will consist of securities with active secondary or resale markets should the
need to sell a security prior to maturity arises.
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holding any of the securities to maturity.
6. Commitments to purchase securities newly introduced on the market shall be made no
more than three (3) working days before pricing.
7. Whenever possible, the City will obtain three or more quotations on the purchase or sale
of comparable securities and take the higher yield on purchase or higher price on sale.
This rule will not apply to new issues, which are purchased at market no more than three
(3) working days before pricing, as well as LAIF, City of Palo Alto bonds, money
market accounts and mutual funds, all of which shall be evaluated separately.
8. Where the Investment Policy specifies a percentage limitation for a partic.ular categm:y
of investment, that percentage is applicable only at the date of purchase. A later increase
Qr decreas~ir:LJLP_yL~entl:J-ge resul~ing frQl1L(lyhang~ in_th~J2m:1wlio'~1l~sets __ or v<11u~_§
shall not constitute a violation of that restriction. As soon as possible, percentage
limitations will be restored as investments mature in each category.
AUTHORIZED INVESTMENTS
The California Government Code( Sections 53600 et seq.) governs investment of City funds. The
following investment are authorized:
1. U.S. Government Securities (e.g. Treasury notes, bonds and bills) Securities that
are backed by the full faith and credit of the United States
a) There is no limit on purchase of these securities.
b) Securities will not exceed 10 years maturity.
2. U.S. Government Agency Securities -Obligations issued by the Federal
Government agencies (e.g. Federal National Mortgage Association).
a) There is no limit on purchase ofthese securities except for:
• Callable and Multi-step-up securities provided that:
-The potential call dates are known at the time of purchase;
-the interest rates at which they "step-up" are known at the
time of purchase; and
-the entire face value of the security is redeemed at the call
date.
-No more than 20 percent of the par value of the portfolio.
b) Securities will not exceed 10 years maturity.
3. Certificates of Deposit (CD) -A debt instrument issued by a bank for a specified
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to repurchase the securities at an agreed upon price and, usually, at a stated time.
a) Not to exceed 1 year.
b) Market value of securities that underlay a repurchase agreement shall be
valued at 102 percent or greater of the funds borrowed against those
securities.
c) A Master Repurchase agreement must be signed with the bank or dealer.
8. City of Palo Alto Bonds
9. Money Market Deposit Accounts -Liquid bank accounts which seek to maintain a net
asset value of $1.00.
10. Mutual Funds which seek to maintain a net asset value of$I.00 and which are limited
essentially to the above investments and further defined in note 9 of Appendix A.
a) No more than 20 percent of the par value ofthe portfolio.
b) No more than 10 percent of the par value with anyone institution.
11. Negotiable Certificates of Deposit (NCD) issued by nationally or state chartered banks
and state or federal savings institutions and further defined in note 11 of Appendix A.
Purchases of negotiable certificates of deposit:
a) May not exceed 10 percent of the par value of the portfolio.
b) No more than $5 million in anyone institution.
12. Medium-Term Corporate Notes -Issued by corporation organized and operating
within the United States or by depository institutions licensed by the United States or
any state and operating with the United States.
a) Not to exceed 5 years maturity.
b) Securities eligible for investment shall have a minimum rating of AA
from ~LmtH_01illnY r~@1illiz.&_qI~mI1~J:>~rviQ~(~,g,_ Moody's and! or Standard
& Poor'sl rating servic&.
c) No more than 10 percent of the par value of the portfolio.
d) No more than $5 million ofthe par value may be invested in securities of
any single issuer, other than the U.S. Government, its agencies and
instrumentality.
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In all circumstances, approval from the Director of Administrative Services is required before selling
securities from the City's portfolio. The Analyst may also transfer no more than a total of$5 million
a day from the City's general account to anyone financial institution, without the prior approval of
the Assistant or Deputy Director of Administrative Services.
No other person has authority to make investment transactions without the written authority of the
Assistant or Deputy Director of Administrative Services.
USE OF BROKERS AND DEALERS
The Administrative Services Department maintains a list of acceptable dealers. A dealer acts as a
principal in security transactions, selling securities from and buying securities for their own position.
A dealer must have
a) At least three years experience operating with California municipalities;
b) Maintain an inventory of trading securities of at least, $1 0 million; and
c) Be approved by the Assistant or Deputy Administrative Services Director before
being added to the City's list of approved dealers. In addition, individual traders
or agents representing a dealer:
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• must have a minimum of one year of experience operating with California
municipalities.
A dealer will be removed from the list should there develop a history of problems to include: failure
to deliver securities as promised, failure to honor transactions as quoted, or failure to provide
reasonable or accurate information.
SAFEKEEPING AND CUSTODY
All securities shall be delivered to the City's safekeeping custodian and held in the name of the City
of Palo Alto, with the exception of the following investments:
a) Certificates of deposit, which will be held by the City itself.
b) City shares in pooled investment funds, under contract.
c) Mutual funds
d) Local Agency Investment Fund (LAIF)
POLICY REVIEW AND REPORTING ON INVESTMENTS
Monthly, the Administrative Services Department will review performance in relation to-Council-
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definition, these commodities are readily marketable. The sale of the underlying goods
generates the necessary funds to liquidate the indebtedness.
BAs enjoy marketability since the Federal Reserve Bank is authorized to buy and sell prime
BAs with maturities of up to nine months. The Federal Reserve Bank enters into repurchase
agreements in the normal course of open market operations with BA dealers.
As are sold at a discount from par. An acceptance is tied to a specific loan transaction;
therefore, the amount and maturity of the acceptance is fixed.
5. Commercial Paper -Commercial paper notes are unsecured promissory notes of industrial
corporations, utilities, and bank holding companies. Interest is discounted from'par and
calculated using actual number of days on a 360-day year. _The notes are in bearer form, with
maturities up to 270 days selected by the purchaser, and denominations generally start at
$100,000. There is a small secondary market for commercial paper notes and an investor
may sell a note prior to maturity.
Commercial paper notes are backed by unused lines of credit from major banks. Some
issuer's notes are insured, while some are backed by irrevocable letters of credit from major
banks. State law limits a City to investments in United States corporations having assets in
excess of five hundred million dollars with an "A" or higher rating by a nationally recognized
rating service for the issuer's debentures. Cities may not invest more than 253-0 percent of
idle cash in commercial paper.
6. Local Agency Investment Fund Demand Deposit -The Local Agency Investment Fund
LAIF) was established by the State to enable treasurers to place funds in a pool for
investments. The City is limited to an investment ofthe amount allowed by LAIF (currently
$1D.W million). LAIF has been particularly beneficial to those jurisdictions with small
portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield.
7. Repurchase Agreements -A Repurchase Agreement (REPOS) is not a security, but a
contractual arrangement between a financial institution or dealer and an investor. The
agreement normally can rut?-for one or more days. The investor puts up funds for a certain
number of days at a stated yield. In return, the investor takes title to a given block of
securities as collateral. At maturity, the securities are repurchased and the funds repaid, plus
interest. Usually, aniounts are $500,000 or more, but some REPOS can be smaller.
8. Money Market Deposit Accounts -Money Market Deposit Accounts are market-sensitive
bank accounts, which are available to depositors at any time, without penalty. The interest
rate is generally coinparable to rates on money market mutual funds, though any individual
bank's rate may be higher or lower. These accounts are insured by the Federal Deposit
Insurance Corporation or the Savings Association Insurance Fund.
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APPENDIXB
EXPLANATION OF PROHIBITED INVESTMENTS
1. Reverse Repurchase Agreements: A Reverse Repurchase Agreement (Reverse REPO) is a
contractual agreement by the investor (e.g. local agency) to post a security it owns as
collateral, and a bank: or dealer temporarily exchanges cash for this collateral, for a specific
period oftime, at an agreed-upon interest rate. During the period ofthe agreement, the local
agency may use this cash for any purpose. At maturity, the securities are repurchased from
the bank or dealer, plus interest.
California law contains a number of restrictions on the use of Reverse REPOS by local
agencies.
2. Derivatives: A derivative is a financial instrument created from, or whose value depends on
(is derived from), the value of one or more underlying assets or indices. The term
"derivative" refers to instruments or features, such as collateralized mortgage obligations,
forwards, futures, currency and interest rate swaps, options, caps and floors. Except for those
callable and multi-step-up securities as described under Permitted Investments, derivatives
are prohibited.
Certain derivative products have characteristics which could include high price volatility,
liquid markets, products that are not market-tested, products that are highly leveraged,
products requiring a high degree of sophistication to manage, and products that are difficult .
to value.
According to California law, a local agency shall not invest any funds in inverse floaters,
range notes, or interest-only strips that are derived from a pool of mortgages.
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independent returns.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION ("FAMC" or "FMAC"): A
federal agencv established in 1988 to provide a secondary market for [ann mortgage loans.
Informa1ly callc(} Farmer ivIac.
FEDERAL CREDIT AGENCIES: Agencies of the Federal Government that were established to
supply credit to various classes of institutions and individuals (e.g., S&Ls, small business firms,
students, farmers, farm cooperatives, and exporters).
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"): A federal agency that insures
bank deposits, currently up to $100,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve through open-market operations;
FEDERAL HOME LOAN BANKS ("FHLB"): Government-sponsored wholesale banks
(currently 12 regional banks) which lend funds and provide correspondent banking services to
member commercial banks, thrift institutions, credit unions, and insurance companies. The mission
of the FHLBs is to liquefy the housing-related assets of its members, who must purchase stock in
their District Bank.
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA"): FNMA, like GNMA, was
chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing and Urban Development
(RUD). It is the largest single provider of residential mortgage funds in the United States. Fannie
Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation's
purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate
mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE ("FOMC"): The FOMC consists of seven
members of the Federal Reserve Board and five of the 12 Federal Reserve Bank Presidents. The
President of the New York Federal Reserve Bank is a permanent member, while the other Presidents
serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines
regarding purchases and sales of government securities in the open market, as a means of influencing
the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and
consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks, and
about 5,700 commercial banks that are members of the system.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA" or "Ginnie Mae"):
Securities that influence the volume of bank credit that is guaranteed by GNMA and issued by
mortgage bankers, commercial banks, savings and loan associations, and other institutions. A
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