HomeMy WebLinkAbout2001-06-11 City Council (2)TO:
FROM:
BUDGET
’00-’01 City of Palo Alto
City Manager’s Report
HONORABLE CITY COUNCIL 7
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:JUNE 11, 2001 CMR: 266:01
SUBJECT:ANNUAL ADOPTION OF THE CITY’S INVESTMENT POLICY
RECOMMENDATION
Staff recommends that Council approve the City of Palo Alto’s Statement of Investment
Policy, including the following changes:
Approve the. requirement that a master repurchase agreement be signed with the bank
or dealer prior to purchasing a short-term repurchase agreement (Attachment A, Page
6).
Add a glossary in order to assist the public, as well as the City Council, in
understanding specialized investment terms (Attachment A, Page 15).
DISCUSSION
Customarily, staff presents annual changes in the Investment Policy to the Finance
Committee. Since there are no significant or material changes to the policy and in order to
expedite the review process, staff is presenting its recommendations directly to .the full
Council.
The Municipal Treasurer’s Association (MTA) U.S. and California provide professional
guidance and assistance to public sector organizations in developing and improving
investment policies. Based on MTA’s recommendations, the following’ changes are
recommended for strengthening the City’s Investment Policy and enhancing the public’s
understanding of the policy:
A master repurchase agreement must be signed with the bank or dealer prior to
purchasing short-term repurchase agreements. This is a written contract that covers all
future transactions between the parties entering a repurchase agreements that establishes
each party’s rights in the transactions. The agreement will often specify, among other
CMR: 266:01 Page lof 2
¯ things, the right of the buyer (lender) to liquidate the underlying securities in the event
of default by the seller (borrower). Currently, the City has no repurchase agreements in
its portfolio. ,
Since the Investment Policy is available to the public, as well as its governing body, the
City Council, a glossary will be added to include common investment terms.
ATTACHMENT
1. Proposed 2001-02 Investment Policy with highlights of new language (Attachment A).
2. Proposed 2001-02 Investment Policy with no highlights (Attachment B). ~
PREPARED BY:
Senior Financial Analyst
DEPARTMENTAL APPROVAL:
CITY MANAGER APPROVAL:
Director, Ad~trative Services
"t~MILY HARRISON
Assistant City Manager
CMR: 266:01 Page 2 of 2
ATTACHMENT A
PROPOSED 2001-02 CITY OF PALO ALTO
Investment Policy
With Changes Highlighted
INTRODUCTION
The City of Palo Alto invests its pooled idle cash according to State of Califomia law and the charter
of the City of Palo Alto. In particular, the City follows "The Prudent Expert Standard" cited in the
State Government Code (Section 53600.3). Under this standard, all governing bodies Of local
agencies orpersons authorized to make investment decisions on behalf of the City are trustees and
therefore fiduciaries Subject to the prudent investor standard. When investing, reinvesting,
purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care,
skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to
the general economic conditions and the anticipated needs of the agency, that a prudent person acting
in a like capacity and familiarity with those matters would use in the conduct of funds of a like
character and with like aims, to safeguard the principal and maintain the liquidity needs of the
agency.
INVESTMENT PHILOSOPHY
The basic principles underlying Palo Alto’s investment philosophy isto ensure the safety of public
funds; provide that sufficient money is always available to meet current expenditures; and achieve
a reasonable rate of return on its investments.
The City’s preferred and chief practice is to buy securities and to hold them to their date of maturity
rather than to trade or sell securities prior to maturity. The City may, however, elect to sell a security
prior to its maturity should there be a significant financial need. If securities are purchased and held
to their maturity date, then any changes in the market value of those securities during their life will
have no effect on their principal value. Under a buy and hold philosophy, the City is able to protect
its invested principal. The economy, the money markets, and various financial institutions (such as
the Federal Reserve System) are monitored carefully to make prudent investments and to assess the
condition of the City’s portfolio.
INVESTMENT OBJECTIVES
The primary objectives, in priority order, ofinvestrnent activities shall be safety, liquidity, and yield:
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 objective will 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.
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 portfolio will consist of securities with active secondary or resale markets should the
need to sell a security prior to maturity arises.
SCOPE
Yield: Yield on the City’s portfolio is last in priority among investment objectives.
The investment portfolio shall be designed to obtain a market rate of return that reflects
the authorized investments, risk constraints, and liquidity needs outlined in the City’s
investment policy. Compared to similar sized cities, the City of Palo Alto should be
able to take advantage of its relatively large reserve balances to achieve higher yields
through long-term investments. In addition,the City will strive to maintain the level of
investment of idle funds as close to 1 O0 percent as possible.
This investment policy shall apply to all financial assets of the City of Palo Alto as accounted
for in the Comprehensive Annual Financial Report (CAFR), including but not limited to the
following funds:
1.General Fund
2.Special Revenue Funds
3.Debt Service Funds
4.Capital Project Fund
5.Enterprise Funds
6.Internal Service Funds
7.Trust and Agency Funds
B.The policy does not cover funds held by the Public Employees Retirement System or funds of
the Deferred Compensation program. ~
C.Investments of bond proceeds shall be governed by the provisions of the related bond
indentures.
GENERAL INVESTMENT GUIDELINES
1.The maximum stated final maturity of individual securities in the portfolio should be ten
years.
2.A maximum of 30 percent of the par value of the portfolio shall be invested in securities
with maturities beyond five years.
3.The City shall maintain a minimum of one month’s cash needs in short term
investments.
4. At least $50 million shall be maintained in securities maturing in less than 2 years.
Should the ratio of the market value of the portfolio to the book value of the portfolio
fall below 95 percent, the Administrative Services Department will report this fact to the
City Council within a reasonable time frame and evaluate whether there is any risk of
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. ’
o 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.
AUTHORIZED INVESTMENTS
The California Government Code( Sections 53600 et seq.) governs investment Of City funds. The
following investment are authorized:
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.
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 of these 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.
Certificates of Deposit (CD) - A debt instrument issued by a bank for a specified
period of time at a specified rate of interest.
a)May not exceed 20 percent of the par value of the portfolio.
b)No more than 10 percent of the par value of the portfolio in
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o
. collateralized CDs in any institution.
c)Purchase collateralized deposits only from federally insured large banks
that are rated by Moody’s or Standard and Poors..
d)For non-rated banks, deposit should be limited to amounts federally
insured (FDIC).
e)Rollovers are not permitted without specific instruction from authorized
City staff.
Banker’s Acceptance Notes (BA) - Bills of exchange or time drafts drawn on and
accepted by commercial banks. Purchase of banker’s acceptances are limited to:
a) No more than 30 percent of-the par value of the portfolio.
b) Not to exceed 270 days maturity.
c) No more than $5 million with any one institution.
Commercial Paper Short-term unsecured obligations issued by banks,
corporations, and other borrowers. Purchases of commercial paper are limited to:
a)Having highest letter or numerical rating from Moody’s or Standard and
Poor’s
b) No more than 15 percent of the par value of the portfolio.
c) Not to exceed 180 days maturity.
d) No more than $3 million with any one institution.
Local Agency Investment Fund (LAIF) - A State of Califomia managed
investment pool may be used up to the maximum (current maximum is $30 million)
permitted by Califomia State Law.
Short-Term Repurchase Agreements (REPO) - A contractual agreement between
a seller and a buyer, usually of U.S. government securities, whereby the seller agrees
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.
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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 $1.00 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 of the portfolio.
b) No more than 10 percent of the par value with any one institution.
11.Negotiable Certificates of Deposit (NCD) issued by nationally or state chartered banks
and state or federal savings institutions. 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 any one 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 Mo0dy’s and/or Standard & Poor’s rating service.
c) No more than 10 percent of the par value of the portfolio.
d)No more than $5 million of the par value may be invested in securities of
any single issuer, other than the U.S. Government, its agencies and
instrumentality.
e)If securities owned by the City are d~wngraded by either Moody’s or
Standard & Poors to a level below AA it shall be the City’s policy to
review the credit situation and make a determination as to whether to sell
or retain such securities in the portfolio.
Appendix A provides a more detailed description of each investment vehicle and its security and
liquidity features. Most of the City’s short-term investments will be in securities which pay principal
upon maturity, while long-term investments may be in securities which periodically repay principal,
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as well as interest. Most of the City’s investments will be at a fixed rate. However, some of the
investments may be at a variable rate, so long as that rate changes on specified dates in pre-
determined increments.
PROHIBITED INVESTMENTS:
Includes all investments not specified above, and in particular:
Reverse.repurchase agreements
Derivatives, as defined in Appendix B
Appendix B provides a more detailed description of each investment, which is prohibited, for City
investment.
AUTHORIZED INVESTMENT PERSONNEL
Idle cash management and investment transactions are the responsibility of the Administrative
Services Department. The Administrative Services Department is under the control of the Director
of Administrative Service~ (Director), as treasurer, who is subject to the direction and supervision
of the City Manager.
The Assistant Director of Administrative Services, who reports to the Director, is authorized to make
all investment transactions allowed by the Statement of Investment Policy.. He or she may authorize
the Manager, Investments, Debt and Projects (Manager), or Senior Financial Analyst/Investments
(Analyst) to enter into investments within clearly specified parameters.
The Investment function is under the supervision of the Manager, who is subject to the direction and
supervision of the Assistant Director of Administrative Services. The Manager is charged with the
responsibility to manage the investment program (portfolio), which includes developing and
monitoring the City’s cash flow model and developing long-term revenue and financing strategies
and forecasts.
The Analyst is subject to the direction and supervision of the Manager, The Analyst assists the
Manager, in the purchase and sale of securities. The Analyst also. prepares the quarterly report, and
records daily all investment transactions as to the type of investment, amount, yield, and maturity.
Cash flow projections are prepared as needed.
In all circumstances, approval from the Director of Administrative Services is required before selling
securities from the City’s portfolio. The Manager and the Analyst may also transfer no more than a
total of $5 million a day from the City’s general account to any one financial institution, without the
prior approval of the Assistant Director of Administrative Services.
No other person has authority to make investment transactions without the written authority of the
Assistant Director of Administrative Services.
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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)
b)
c)
At least three years experience operating with California municipalities;
Maintain an inventory of trading securities of at least. $10 million; and
Be approved by the Assistant Administrative Services Director before being
added to the City’s list of approved dealers. In addition, individual traders or
agents representing a dealer:
must have a minimum of one year of experience operating with Califomia
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)
b)
c)
d)
Certificates of deposit, which will be held by the City itself.
City shares in pooled investment funds, Under contract.
Mutual funds
Local Agency Investment Fund (LAIF)
POLICY REVIEW AND REPORTING ON INVESTMENTS
Monthly, the Administrative Services Department will review performance in relation to-Council-
adopted Policy. Quarterly, the Department will report to Council on: its performance in comparison
to policy, explain any variances from policy, provide any recommendations for policy changes, and
discuss overall compliance with the City’s Investment Policy. In addition, the Department will
provide Council with:
a) A detailed list of all securities, investments and monies held by the City, and
b) . Report on the City’s ability to meet expenditure requirements over the next six months.
Annually, the Administrative Services Department will present a Proposed Statement of Investment
Policy, to include the delegation of investment authority, to the City Council for review during the
annual budget process. All proposed changes in policy must be approved by the Council prior to
implementation.
Adopted by City Council October 22, 1984.Amended by City Council
Monthly reporting effective January 1985.Amended by City Council
Amended and Adopted by City Council June 24, 1985.Amended by City Council
Amended by City Council December 2, 1985.Amended by City Council
Amended by City Council June 23, 1986.Amended by City Council
Amended by City Council June 22, 1987.Amended by City Council
Amended by City Council August 8, 1988 Amended by City Council
Amended by City Council November 28, 1988.Amended by City Council
Amended by City Council June 26, 1989.Amended by City Council
Amended by City Council May 14, 1990.Amended by City Council
Amended by City Council June 24, 1991.Amended by City Council
June 22, 1992.
June 23,1993.
November18,1993.
June 20, 1994.
June 19,1995.
June 24,1996
June 23,1997
January26,1998
June 22,1998
June 28, 1999
June 19, 2000
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APPENDIX A
EXPLANATION OF PERMITTED INVESTMENTS
U.S. Government Securities - United States Treasury notes, bonds, bills, or certificates of
indebtedness or those for which the faith and credit of the United States are pledged for the
payment of principal and interest.
U.S. Government Agency Securities - U.S. Government Agency Obligations include the
securities of the Federal National Mortgage Association (FNMA), Federal Land Banks
(FLB), Federal Intermediate Credit Banks (FICB), banks for cooperatives, Federal Home
Loan Banks (FHLB), Government National Mortgage Association (GNMA), Federal Home
Loan Mortgage Corporation (FHLMC), Student Loan Marketing Association (SLMA), Small
Business Administration (SBA), Federal Farm Credit (FFC) and Tennessee Valley Authority
(TVA). Federal Agency securities are debt obligations that essentially result from lending
programs of the Government. Federal agency securities differ from other types of securities,
as well as among themselves. Their characteristics depend on the issuing agency. It is
possible to distinguish three types of issues: (A) participation certificates (pooled securities),
(B) Certificates of interest (pooled loans), (C) notes, bonds, and debentures. The securities
of a few agencies are explicitly backed by the full faith and credit of the U.S. Government.
All issues, however, have de facto backing from the federal government, and it is highly
unlikely that the government would let any agency default on its obligations.
Certificates of Deposit - A certificate of deposit (CDs) is a receipt for funds deposited in a
bank, savings bank, or savings and loan association for a specified period of time at a
specified rate of interest. Denominations are $100,000 and up. The first $100,000 of a
certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC), if
the deposit is with a bank or savings bank, or the Savings Association Insurance Fund
(SAIF), if the deposit is with a savings and loan. CDs with a face value in excess of
$100,000 can be collateralized by U.S. Government Agency and Treasury Department
securities or first mortgage loans. Government securities must be at least 110 percent of the
face value of the CD collateralized in excess of the first $100,000. The value of first
mortgages must be at least 150 percent of the face value of the CD balance insured in excess
of the first $100,000. Generally, CDs are issued for more than 30 days and the maturity can
be selected by the purchaser.
Bankers’ Acceptance - A Banker’s acceptance (BA) is a negotiable time draft or bill of
exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably
obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually
created to finance the import and export of goods, the shipment of goods within the United
States and storage of readily marketable staple commodities. In over 70 years of usage in
the United States, there has been no known instance of principal loss to any investor in BAs.
In addition to the guarantee by the accepting bank, the transaction is identified with a
specific commodity. Warehouse receipts verify that the pledged commodities exist, and, by
10
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 Fedcral 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.
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 180 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 for the issuer’s
debentures. Cities may not invest more than 30 percent of idle cash in commercial paper.
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 of the amount allowed by LAIF (currently
$30 million). LAIF has been particularly beneficial to those jurisdictions with small
portfolios. Palo Alto uses this fund for short-term investment; liquidity, and yield.
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 run 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, amounts are $500,000 or more, but some REPOS can be smaller.
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 comparable 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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10.
Mutual Funds - Mutual funds are shares of beneficial interest issued by diversified
management companies, as defined by section 23701 M of the Revenue and Taxation Code.
To be eligible for investment, these funds must:
a)Attain the highest ranking in the highest letter and numerical rating provided by
not less than two of the three largest nationally recognized rating services; or
b)Have an investment advisor registered with the Securities and Exchange
Commission with not less than five years experience investing in the securities
and obligations, as. authorized by subdivisions (a) to (n), inclusive, of Section
53601 of the California Government Code, and with assets under management
in excess of five hundred million dollars; and
c)Invest solely in those securities and obligations authorized by Sections 53601
and53635 of the California Government Code. Where the Investment Policy of
the City of Palo Alto may be more restrictive than the State Code, the Policy
authorizes investments in mutual funds which shall have minimal investment in
securities otherwise restricted by the City’s Policy. Minimal investment is
defined as less than 5 percent of the mutual fund portfolio; and
d)The purchase price of shares of beneficial interest purchased shall not include
any commission that these companies may charge.
e) Have anet asset value of $1.00.
Callable Securities and Multi-Step.ups: Callable securities are defined as fixed interest rate
government agency securities, that give the issuing agency the option of returning the
invested funds at a specific point in time to the purchaser. Multi-step-ups are government
agency securities in which the interest rate increases ("steps-up") at preset intervals, and
which also have a callable option that allows the issuing agency to retum the invested funds
¯ at a preset interval. Callable and multi-step-ups are permitted, 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 ofpu,rchase; and
¯ the entire face value of the security is redeemed at the call date.
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11.Negotiable Certificates of Deposit (NCD). NCDs are large-dollar-amount, short-term
certificate of dep.osit. Such certificates are issued by large banks and bought mainly by
.corporations and institutional investors. They are payable either to the bearer or to the order
of the depositor, and, being negotiable, they enjoy an active secondary market, where they
trade in round lots of $5 million. Although they can be issued in any denomination from
$100,000 up, the typical amount is $1 million. They have a minimum original maturity of
14 days; most original maturities are under six months. Also called a Jumbo Certificate of
Deposit.
12.Medium-Term Corporate Notes: Notes of a maximum of five years maturity issued by
corporations organized and operating with the United States or by depository institutions
licensed by the United States or any state and operating with the United States. According
to California Code Section 53601, "Notes eligible for inve.stmentunder this subdivision shall
be rated in the rating category of"A" or its equivalent or better by a nationally recognized
rating service. Purchase of medium-term notes may not exceed 30 percent of the agency’s
surplus money which may be invested pursuant to this section."
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APPENDIX B
EXPLANATION OF PROHIBITED INVESTMENTS
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 of time, at an agreed-upon interest rate. During the period of the agreement, the local
agency may use this cash for any purpose. At maturity, the securities are repurchased from
the bank or dealer, plus interest.
Califomia law contains a number of restrictions on the use of Reverse REPOS by local
agencies.
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 6r 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, productsthat 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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DE~ER: ,A d~al~r, aS opposed ,t5 a brok~r~ acts as,a pnnc~pal mal!transac~ons,btiy~ngand
selling for his ~acc0u~: ...............................................
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purchases inelud~
16
PRIMARY DEALE i~£mk~daiiy/r~o~ts Of
market acti posif!onsi:and~onth lio~tat s,~~Resenie
York, and:aresubjeCt to-its informal oVer~ight: :~ ~m~:tl~al~ SecUrities ge
Commission (SEC)2; registered~I securities broker~dealem, :b~s,-, and ’a= few unreg~lated:iirms, .
17
RATE OF RET~:~ ~e yieiffobtaifiabl~bna:securitybased-6n itspurchase price.or its Curr~nt
market pricei
TREASURY BILLS i ~A!n6fiziht SeC !i,SI U:S, Treasury
~of’man tiona! debt, ~MostT-biii -:i0..matt~e~ months, l,gix months~ or one
year. -
18
19
ATTACHMENT B
PROPOSED 2001-02 CITY OF PAsO ALTO
Investment Policy
INTRODUCTION
The City of Palo Alto invests its pooled idle cash according to State of California law and the charter
of the City of Palo Alto. In particular, the City follows "The Prudent Expert Standard" cited in the
State Government Code (Section 53600.3). Under this standard, all governing bodies of local
agencies or persons authorized to make investment decisions on behalf of the City are trustees and
therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting,
purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care,
skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to
the general economic conditions and the anticipated needs of the agency, that a prudent person acting
¯ in a like capacity and familiarity with those matters would use in the conduct of funds of a like
character and with like aims; to safeguard the principal and maintain the liquidity needs of the
agency.
INVESTMENT PHILOSOPHY
The basic principles underlying Palo Alto’s investment philosophy is to ensure the safety of public
funds; provide that sufficient money is always available to meet current expenditures; and achieve
a reasonable rate of return on its investments.
The City’s preferred and chief practice is to buy securities and to hold them to their date of maturity
rather than to trade or sell securities prior to maturity. The City may, however, elect to sell a security
prior to its maturity should there be a significant financial need. If securities are purchased and held
to their maturity date, then any changes in the market value of those securities during their life will
have no effect on their principal value. Under a buy and hold philosophy, the City is able to protect
its invested principal. The economy, the money markets; and various financial institutions (such as
the Federal Reserve System) are monitored carefully to make prudent investments and to assess the
condition of the City’s portfolio.
INVESTMENT OBJECTIVES
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
Safe~: 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 objective will be to mitigate credit risk and interest
rate risk.
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 orby a specific dollar amount. These
limits are defined under the "Authorized Investments" section.
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 portfolio will consist of securities with active secondary or resale markets should the
need to sell a security prior to maturity arises.
2
SCOPE
Yield: Yield on the City’s portfolio is last in priority among investment objectives.
The investment portfolio shall be designed to Obtain a market rate of return that reflects
the authorized investments, risk constraints, and liquidity needs outlined in the City’s
investment policy. Compared to similar sized cities, the City of Palo Alto should be
able to take advantage of its relatively large reserve balances to achieve higher yields
through long-term investments. In addition, the City will strive to maintain the level of
investment of idle funds as close to 100 percent as possible.
This investment policy shall apply to all financial assets of the City of Palo Alto as accounted
for in the Comprehensive Annual Financial Report (CAFR), including but not limited to the
following funds:
1.General Fund
2.Special Revenue Funds
3.Debt Service Funds
4.Capital Project Fund
5.Enterprise Funds
6.Internal Service Funds
7.Trust and Agency Funds
Bo The policy does not cover funds held by the Public Employees Retirement System or funds of
the Deferred Compensation program.
C.Investments of bond proceeds shall be governed by the provisions of the related bond
indentures.
GENERAL INVESTMENT GUIDELINES
1.The maximum stated final maturity of individual securities in the portfolio should be ten
years.
2.A maximum of 30 percent of the par value of the portfolio shall be invested in securities
with maturities beyond five years.
3.The City shall maintain a minimum of one month’s cash needs in short term
investments.
4. At least $50 million shall be maintained in securities maturing in less than 2 years.
5.Should the ratio of the market value of the portfolio to the book value of the portfolio
fall below 95¯percent, the Administrative Services Department will report this fact to the
City Council within a reasonable time frame and evaluate whether there is any risk of
3
holding any of the securities to maturity.
Commitments to purchase securities newly introduced on the market shall be made no
more than three (3) working days before pricing.
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.
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 agenc!es (e.g. Federal National Mortgage Association).
a) There is no limit on purchase of these 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.
Certificates of Deposit (CD) - A debt instrument issued by a bank for a specified
period of time at a specified rate of interest.
a)May not exceed 20 percent of the par value of the portfolio.
b)No more than 10 percent of the par value of the portfolio in
4
o ¯
collateralized CDs in any institution.
c)Purchase collateralized deposits only from federally insured large banks
that are rated by Moody’s or Standard and Poors.
d)For non-rated banks, deposit should be limited to amounts federally
insured (FDIC).
e)Rollovers are not permitted without specific instruction from authorized
City staff.
Banker’s Acceptance Notes (BA) - Bills of exchange or time drafts drawn on and
accepted by commercial banks. Purchase of banker’s acceptances are limited to:
a) No more than 30 percent of the par value of the portfolio.
b) Not to exceed 270 days maturity.
c) No more than $5 million with any one institution.
Commercial Paper Short-term unsecured obligations issued by banks,
corporations, and other borrowers. Purchases of commercial paper are limited to:
a)Having highest letter or numerical rating from Moody’s or Standard and
Poor’s
b) No more than 15 percent of the par value of the portfolio.
c) Not to exceed 180 days maturity.
d) No more than $3 million with any one institution.
Local Agency Investment Fund (LAIF) - A State of California managed
investment pool may be used up to the maximum (current maximum is $30 million)
permitted by California State Law.
Short-Term Repurchase Agreements (REPO)- A contractual agreement between
a seller and a buyer, usually of U.S. government securities, whereby the seller agrees
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.Ci~ of Palo Alto Bonds
9.Mone~, 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 $1.00 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 of the portfolio.
b) No more than 10 percent of the par value with any one institution.
11.Negotiable Certificates of Deposit (NCD) issued by nationally or state chartered banks
and state or federal savings institutions. 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 ariy one 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 Moody’s and/or Standard & Poor’s rating service.
c) No more than 10 percent of the par value of the portfolio.
d) No more than $5 million of the par value may be invested in securities of
any single issuer, other than the U.S. Government, its agencies and
instrumentality.
e) If securities owned by the City are downgraded by either Moody’s or
Standard & Poors to a level below AA it shall be the City’s policy to
review the credit Situation and make a determination as to whether to sell
or retain such securities in the portfolio.
Appendix A provides a more detailed description of each investment vehicle and its security and
liquidity features. Most of the City’s short-term investments will be in securities which pay principal
upon maturity, while long-term investments may be in securities which periodically repay principal,
6
as well as interest. Most of the City’s investments will be at a fixed rate. However, some of the
investments may be at a variable rate, so long as that rate changes on specified dates in pre-
determined increments.
PROHIBITED INVESTMENTS:
Includes all investments not specified above, and in particular:
1.Reverse repurchase agreements
2.Derivatives, as defined in Appendix B
Appendix B provides a more detailed description of each investment, which is prohibited, for City
investment.
AUTHORIZED INVESTMENT PERSONNEL
Idle cash management and investment transactions are the responsibility of the Administrative
Services Department. The Administrative Services Department is under the control of the Director
of Administrative Services (Director), as treasurer, who is subject t° the direction and supervision
of the City Manager.
The Assistant Director of Administrative Services, who reports to the Director, is authorized to make
all investment transactions allowed by the Statement of Investment Policy. He or she may authorize
the Manager, Investments, Debt and Projects (Manage0, or Senior Financial Analyst/Investments
(Analyst) to enter into investments within clearly specified parameters.
The Investment function is under the supervision of the Manager, who is subject to the direction and
supervision of the Assistant Director of Administrative Services. The Manager is charged with the
responsibility to manage the investment program (portfolio), which includes developing and
monitoring the City’s cash flow model and developing long-term revenue and financing strategies
and forecasts.
The Analyst is subject to the direction and supervision of the Manager. The Analyst assists the
Manager, in the purchase and sale of securities. The Analyst also prepares the quarterly report, and
records daily all investment transactions as to the type of investment, amount, yield, and maturity.
Cash flow projections are prepared as needed.
In all circumstances, approval from the Director of Administrative Services is required before selling
securities from the City’s portfolio. The Manager and the Analyst may also transfer no more than a
total of $5 million a day from the City’s general account to any one financial institution, without the
prior approval of the Assistant Director of Administrative Services.
No other person has authority to make investment transactions without the written authority of the
Assistant Director of Administrative Services.
7
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 $10 million; and
c)Be approved by the Assistant Administrative Services Director before being
added to the City’s list of approved dealers. In addition, individual traders or
agents representing a dealer:
¯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-
adopted Policy. Quarterly, the Department will report to Council on: its performance in comparison
to policy, explain any variances from policy, provide any recommendations for policy changes, and
discuss overall compliance with the City’s Investment Policy. In addition, the Department will
provide Council with:
a)A detailed list of all securities, investments and monies held by the City, and
b)Report on the City’s ability to meet expenditure requirements over the next six months.
Annually, the Administrative Services Department will present a Proposed Statement of Investment
Policy, to include the delegation of investment authority, to the City Council for review during the
annual budget process. All proposed changes in policy must be approved by the Council prior to
implementation.
Adopted by City Council October 22, 1984.Amended by City Council June 22, 1992.
Monthly reporting effective January 1985.Amended by City Council June 23, 1993.
Amended and Adopted by City Council June 24, 1985.Amended by City Council November 18, 1993.
Amended by City Council December 2, 1985.Amended by City Council Jane 20, 1994.
Amended by City Council June 23, 1986.Amended by City Council June 19, 1995.
Amended by City Council June 22, 1987.Amended by City Council June 24, 1996
Amended by City Council August 8, 1988 Amended by City Council June 23, 1997
Amended by City Council November 28, 1988.Amended by City Council January 26, 1998
Amended by City Council June 26, 1989.Amended by City Council June 22, 1998
Amended by City Council May 14, 1990.Amended by City Council June 28, 1999
Amended by City Council June 24, 1991.Amended by City Council June 19, 2000
APPENDIX A
EXPLANATION OF PERMITTED INVESTMENTS
U.S. Government Securities - United States Treasury notes, bonds, bills, or certificates of
indebtedness or those for which the faith and credit of the United States are pledged for the
payment of principal and interest.
U.S. Government Agency Securities - U.S. Government Agency Obligations include the
securities of the Federal National Mortgage Association (FNMA), Federal Land Banks
(FLB), Federal Intermediate Credit Banks (FICB), banks for cooperatives, Federal Home
Loan Banks (FHLB), Govemment National Mortgage Association (GNMA), Federal Home
Loan Mortgage Corporation (FHLMC), Student Loan MarketingAssociation (SLMA), Small
Business Administration (SBA), Federal Farm Credit (FFC) and Tennessee Valley Authority
(TVA). Federal Agency securities are debt obligations that essentially result from lending
programs of the Government. Federal agency securities differ from other types of securities,
as well as among themselves.. Their characteristics depend on the issuing agency. It is
possible to distinguish three types.of issues: (A) participation certificates (pooled securities),
(B) Certificates of interest (pooled loans), (C) notes, bonds, and debentures. The securities
of a few agencies are explicitly backed by the full faith and credit of the U.S. Government.
All issues, however, have de facto backing from the federal government, and it is highly
unlikely that the government would let any agency default on its obligations.
Certificates of Deposit - A certificate of deposit (CDs) is a receipt for funds deposited in a
bank, savings bank, or savings and loan association for a specified period of time at a
specified rate of interest. Denominations are $100,000 and up. The first $100,000 of a
certificate of deposit is .guaranteed by the Federal Deposit Insurance Corporation (FDIC), if
the deposit is with a bank or savings bank, or the Savings Association Insurance Fund
(SAIF), if the deposit is with a savings-and loan. CDs with a face value in excess of
$100,000 can be collateralized by U.S. Government Agency and Treasury Department
securities or first mortgage loans. Government securities must be at least 110 percent of the
face value of the CD collateralized in excess of the first $100,000. The value of first
mortgages must be at least 150 percent of the face value of the CD balance insured in excess
of the first $100,000. Generally, CDs are issued for more than 30 days and the maturity can
be selected by the purchaser.
Bankers, Acceptance - A Banker’s acceptance (BA) is a negotiable time draft or bill of
exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably
obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually
created to finance the import and export of goods, the shipment of goods within the United
States and storage of readily marketable staple commodities. In over 70 years of usage in
the United States, there has been no known instance of principal loss to any investor in BAs.
In addition to the guarantee by the accepting bank, the transaction is identified with a
specific commodity. Warehouse receipts verify that the pledged commodities exist, and, by
10
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,
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 180 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 for the issuer’s
debentures. Cities may not invest more than 30 percent of idle cash in commercial paper.
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 of the amount allowed by LAIF (currently
$30 million). LAIF has been particularly beneficial to those jurisdictions with small
portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield.
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 run 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, amounts are $500,000 or more, but some REPOS can be smaller.
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 comparable 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.
11
10.
Mutual Funds - Mutual funds are shares of beneficial interest issued by diversified
management companies, as defined by section 23701 M of the Revenue and Taxation Code.
To be eligible for investment, these funds must:
a)Attain the highest ranking in the highest letter and numerical rating provided by
not less than two of the three largest nationally recognized rating services; or
b)Have an investment advisor registered with the Securities and Exchange
Commission with not less than five years experience investing in the securities
and obligations, as authorized by subdivisions (a) to (n), inclusive, of Section
53601 of the California Government Code, and with assets under management
in excess of five hundred million dollars; and
c)Invest solely in those securities and obligations authorized by Sections 53601
and 53635 of the California Government Code. Where the Investment Policy of
the City of Palo Alto may be more restrictive than the State Code, the Policy
authorizes investments in mutual funds which shall have minimal investment in
securities otherwise restricted by the City’s Policy. Minimal investment is
defined as’less than 5 percent of the mutual fund portfolio; and
d)The purchase price of shares of beneficial interest purchased shall not include
any commission that these companies may charge.
e) Have a net asset value of $1.00.
Callable Securities and Multi-Step-ups: Callable securities are defined as fixed interest rate
government agency securities, that give the issuing agency the option of returning the
invested funds at a specific point in time to the purchaser. Multi-step-ups are government
agency securities in which the interest rate incroeases ("steps-up") at preset intervals, and
which also have a callable option that allows the issuing agency to return the invested funds
at a preset interval. Callable and multi-step-ups are permitted, 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.
12
11.
12.
Negotiable Certificates of Deposit (NCD). NCDs are large-dollar-amount, short-term
certificate of deposit. Such certificates are issued by large banks and bought mainly by
corporations and institutional investors. They are payable either to the bearer or to the order
of the depositor, and, being ne~."~,~iable, they enjoy an active secondary market, where they
trade in round lots of $5 millio~ :. Although they can be issued in any denomination from
$100,000 up, the typical amoun~ is $1 million. They have a minimum original maturity of
14 days; most ~rriginal maturities are under six months. Also called a Jumbo Certificate of
Deposit.
Medium-Term Corporate Notes: Notes of a maximum Of five years maturity issued by
corporations organized and operating with the United States or by depository institutions
licensed by the United States or any state and operating with the United States. According
to Califomia Code Section 53601, "Notes eligible for investment under this subdivision shall
berated in the rating category of"A" or its equivalent or better by a nationally recognized
rating service. Purchase of medium-term notes may not exceed 30 percent of the agency’s
surplus money which may be invested pursuant to this section.’"
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APPENDIX B
EXPLANATION OF PROHIBITED INVESTMENTS
°
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 0ftime, at an agreed-upon interest rate. During the period of the 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.
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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APPENDIX C
GLOSSARY OF INVESTMENT TERMS
AGENCIES: Federal agency and instrumentality securities.
ASKED: The price at which securities are offered.
BID: The price offered by a buyer of securities (when one sells securities, one asks for a bid).
See "’Offer".
BROKER: A broker brings buyers and sellers together so that he can earn a commission.
COLLATERAL: Securities, evidence of deposit, or other property, which a borrower pledges
to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of
public monies~
COMPREHENSIVE ANNUAL FINANCIAL REPORT ("CAFR"): The official annual
report for the City of Palo Alto. It includes combined financial statements for each individual
fund and account group prepared in conformity with GAAP. It also includes supporting
schedules that are necessary to demonstrate compliance with finance-related legal and
contractual provisions,~extensive introductory material, and a detailed statistical section.
COUPON: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder
’ on the bond’s face value. (b) A certificate attached to a bond evidencing interest due on a
payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and .
selling for his own account:
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: (1)
delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery of
securities with an exchange of money for the securities. DVR is delivery of securities with an
exchange of a signed receipt for the securities.
DISCOUNT: The difference between the acquisition cost of a :security and its value at maturity
when quoted at lower than face value. A security that sells below original offering price shortly after
sale, is also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued a
discount and that are redeemed at maturity for full face value (e.g., U.S. Treasury Bills).
15
DIVERSIFICATION: Dividing investment funds among a variety of securities that offer
independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal Government that were established to
supply credit to various classes of institutions andJindividuals (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
(HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie
Mac, 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 ofseven
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 banl~ 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 Wash!ngton, 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
security holder is protected by the full faith and credit of the U.S. Government. Ginnie Mac
securities are backed by the FHA, VA, or FMHM mortgages. The term "pass-throughs" is often
used to describe Ginnie Maes.
16
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. In the money market, a security is said to be liquid if the spread between
bid and asked prices is narrow, and reasonable amount can be done at those quotes.
LOCAL GOVERNMENT INVESTMENT FUND ("LAIF"): Monies from local governmental
units may be remitted to the California State Treasurer for deposit in this special fund for the purpose
of investment.
MARKET VALUE: The price at which a security is trading and could presumably be purchased
or sold. ~
MASTER REPURCHASE AGREEMENT: A written contract coveting all future transactions
between the parties to repurchase-reverse repurchase agreements, that establishes each party’s fights
in the transactions. A master agreement will often specify, among other things, the right of the buyer
(lender) to liquidate the underlying securities in the event of default by the seller (borrower).
MATURITY: The date upon which the principal0r stated value of an investment becomes due and
payable.
MONEY MARKET: The market in which short-term debt instruments (e.g., bills, commercial
paper, and bankers’ acceptances) are issued and traded.
OFFER: The price asked by a seller of securities (when one buys securities, one asks for an offer).
See "’Asked" and "Bid".
OPEN MARKET OPERATIONS: Purchases and sales.of government and certain other securities
in the open market by the New York Federal Reserve Bank, as directed by the FOMC in order to
influence the volume o.fmoney and credit in the economy. Purchases inject reserves into the bank
system and stimulate growth of money and credit; sales have the opposite effect. Open market
operations are the Federal Reserve’s mostimportant and most flexible monetary policy tool.
PORTFOLIO: A collection of securities that an investor holds.
PRIMARY DEALER: A group of government securities dealers that submit daily reports of
market activity and positions, and monthly financial statements to the Federal P.eserve Bank of New
York, and are subject to its informal oversight. Primary dealers include Securities and Exchange
Commission (SEC) -- registered securities broker-dealers, banks, and a few unregulated firms.
PRUDENT INVESTOR RULE: An investment standard cited in the California Government Code
(CGC) Section 53600 et seq. Under this standard, all governing bodies of local agencies or persons
authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries
subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring,
exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and
diligence under the circumstances then prevailing, including, but not limited to the general economic
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conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and
familiarity with those matters would use in the conduct of funds of a like character and with like
aims, to safeguard the principal and maintain the liquidity needs of.the agency.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution that: (1) does not claim
exemption°from the payment of any sales, compensating use, or ad valorem taxes under the laws .of
this state; (2) has segregated forthe benefit of the commission eligible collateral having a value of
not less than its maximum liability; and (3) has been approved by the Public Deposit Protection
Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its.purchase,.pfiz~_or its current
market price.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank’s vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SECURITIES AND EXCHANGE COMMISSION: An agency created by Congress to administer
securities legislation for the purpose of protecting investors in securities transactions.
STRUCTURED NOTES: Notes issued by instrumentalities (e.g., FHLB, FNMA, SLMA) and by
corporations, that have imbedded options (e.g., call features, step-up coupons, floating rate coupons,
derivative-based returns) in their debt structure. The market performance of structured notes is
affected by fluctuating interest rates; the volatility of imbedded options; and shifts in the yield curve.
TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate 0fdeposit, which cannot be
sold prior to maturity.
TREASURY BILLS: A non-interest bearing discount security that is issued by the U.S. Treasury
to finance the national debt. Most T-bills are issued to mature in three months, six months, or one
year.
TREASURY BONDS: Long-term, coupon-beating U.S. Treasury securities that are issued as direct
obligations of the U.S. Government, and having initial maturities of 0more than 10 years.
TREASURY NOTES: Medium-term, coupon-bearing U.S. Treasury securities that are issued as
direct obligations of the U.S. Government, and having initial maturities of two to 10 years.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
YIELD-TO-CALL (YTC): The rate of return an investor earns from a bond assuming the bond
is redeemed (called) prior to its nominal maturity date.
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YIELD-TO-MATURITY: The current income yield minus any premium above par or plus any
discount from par in purchase price, with the adjustment spread over the period from the date of
purchase to the date of maturity of the
ZERO-COUPON SECURITIES: Security that is issued at a discount and makes no periodic
interest payments. The rate of return consists of a gradual accretion of the principal of the security
and is payable at par upon maturity.
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