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HomeMy WebLinkAbout0252.091lIay 23. 1991 HONORABLE CITY COUNCIL city of Palo Alto / ........ BUOGET 91-92 Attention: Finance and Public Works committee Members of the council: Report iA Bri.f Tbe city council reviews the Investment Policy a~~ually as part of the budget procass. Although the section of California law that reql."'ired an investment policy was eliminated in January 1991 .. staf!' recommends the council continue to maintain a policy. Attached is a copy of the current policy with recommended changes to clarify the process for reconsidering the sanction against South Africa. In addition .. the United states Department of state has asked Palo Alto to lift sanctions against the now-independent democratic country of N4Dibia. staft supports this request. Other lrIinor chanqes are also recommended by staff. ~e. to the policy In September 1984 .. the Governor signed Assembly Bill No. 1073 which became Section 53646 of California law and required an annual statement of investment policy and a monthly report. This law was operative until January 1, 1991. Although the section of Califor­ nia law that requires an investment policy was eliminated as part of last year's state budget agreement, staff recommends the Council continue to .aintain an investment policy. The Statement of Investment policy currently contains language prohibiting investments with firms which do business with south Africa or Namibia. Namibia became independent on March 21~ 1990. 'l'he United States bas lifted sanctions, and in October 1990, Namibia opened its embassy in Washington. In early 1931, statf received letters from the O. S. Department of state requesting the CMR:2S2:91 , . • ,;---... - ~-- , \ ~"'----.---, ... -.~----.... ---"" City to lift sanctions against Namibia <see attached letter of March 4, 1991). Staff reco2menda deletinq Namibia from the paragraph on paqe 3 of the Policy. On February 1~, 1991 (CMR:148:91) staft provided an informational report which updated Council on political chsnqes in South Africa and stated that staff would return ~lth a recommendation to amend or re.ove the restrict, ions in the statement of Investment Policy, when appropriate. Statf reco .. ends addinq lanquaqe to the paragraph on South Africa in the Investment Policy which st~tes: ·staff will return with a reCOlUlendation to amend or reaove the restrictions in the statement of Investaent PolIcy if thE: President suspends or modifies the United states sanctions, and. the actions taken by the Government of SOuth Arrica are sufficient for the African Kational Congress to recommend lifting the sanctions.- Various other minor changes are reoommended~ including: a Since the city of Palo Alto nQV has an Assistant Finance Directcr, it is no longer necess&£.¥ to rely on t:he Sl~pervisor of Revenue collections to transfer funds in the absence of the Director of Finance~ Treasury Manager, and Financial Analyst. Consequently~ start recommends removing the sentence allowing the Supervisor of Revenue collections to transfer funds. o During the last year, the title of Investment Analyst has changed to Financial Analyst, so the cbange is includ&d on page 2 of the Investment Policy. o The savinqs Association Insurance Fund. (SAIF) replaced the Pederal savinqa and Loan Insurance Corporation, so that chanqe is indicated uncer Certificates of Deposits and money market accounts in Appendix A. o The Local Agency Investment Fund (LAIF) now allclis $10 million to be deposited per age.ncy, so a changa is included under LAlF in Appendix A to allow invest.ent of the amount allowed by LAIF (currently $10 million). o Now that the City is using' lDUtual funds as a holdinq account similar to LAlP, staff" recommends allowinq the Financial Allalyst to transfer funds bet'6'een the City general account and ~pproved mutual funds. This ch~nge is include~ on page 2 of the Investment Policy. JlecoMg4a.tiop. statf recommends the Council adopt the attached Investment policy as part of the budget process. CKR:252:91 2 , j Respectfully sub.itted, /~Pr7fh..f GORDON B. !'ORO Treasury Hanaqer -~ W~\R~~_~~~~~~ o rector 0 Relat~d staff Reports: CMR:148:91 Attacbaents CXR: 252: 91 J ... Dea.r )lr~ Ford: United Stat:'ber-rtment of State FcJti __ D.G. 2OS2O March ,. 1991 We understand that Palo Alto continues to apply economic sanctions 8qainst the newly independent Republic of Namibia. Sanctions imposed by the federal governmen~ against South Africa under the Comprehensive Anti-Apartheid Act cf 1986. as well as other provisions of law, were also applied to Namibia. which at the time was a non-self-governing territory unlawfully occupied and administered by South Africa. Many other states and localities also imposed their own sanctions against South Africa, with some extending to Namibia as well. However, Namibia attained independence from the Republic of South Africa on March 21. 1990. The United States immediately established relations with Namibia's new, democratically elected government and opened an embassy in Windhoek on the same day. !n October 1990. Namibia opeoPd its embassy in Washington. located at 1413 K Street. NW. 2i~ code 20005. Upon N~ibian independence. the Department of State and other agencies also took the steps necessary to lift the sanctions imposed 89ainst Namibia. (Sanctions resrair.. in force against Walvi5 Bay. a territorial enclave claimed by both Namibia and South Africa but administered by South Africa.) Additionally. the administration extended Most Favored Nation statuss concluded a bilateral i~vestment guarantee agreement (which permits Overseas Private Investment Corporation insurance for projects in Namibia)s granted Generalized System of Preferences benefits to imports from Namibia (i.e .• lower customs duties) and is revieving other measures to facilitate trade and investment. 'I'be Honorable Gordon Fords Treasurer. City of Palo Alto. Palo Alto. California. I ~ ~ I ., /' -2- The Government of Namibia has noted tha~ sanctions continue to be applied by some state and local authorities in the u.s. and has approached our embassy in Windhoek about this matter. The Department of State would appreciate your assistance in removing the sanctions measures Palo Alto imposed aqainst Namibia. which is now an independent and democratic country_ I would appreciate your notifying my office of any action you h~ve taken 0= plan to take in this regard. If you have ~~y questions. please feel free to contact me. or Earl Irving of the·Bureau of African A£fairs. or John Byerly or Tony Perez of the Office of the Legal Advisor. Sincerely yours. --, ~ "-rJ"::: Co lber t Coordinator of Intergovernmental Affairs Bureau of Public ALfairs -------~--------------- -0 CITY OF PALO ALTO State~ent of Investment Policy XMTROpDCTIOH As a charter city ... Palo Alto operates its pooled idle cash invest-ants under the prudent investor rule and in conformance vith California law~ Investments are made vith the judqement a~ care, under the circumstances then prevailing, which investors with prudence, discretion, and intelligence would make considerinq the safety of their capital as well as probable income. This affords the city a broa~ spectrum of investment opportunities, so long as tbe investment is deemed prudent and is allovable under current leqislation of the state of California and the charte.r of tba City of Palo Alto. Palo Alto strives to aaintain the lev~l of investment of all idle funds as near 100 percent as possible, throuqh daily and projected cash flow determination9~ Investments are sade so that maturities match or precede cash needs of the CitYa PHILOSOPHY The basic premise underlyinq Palo Alto's investment philosophy is to insure that sufficient aoney is always available to Meet current expenditures. Tbe City is able to take advantage of the relativel) larqe rese~e balances maintained by its utilities, which allow it to talte advantage of the general tendency of the .arket to provide a higher return for lonqer-term investments (known as liquidity preference) .. Dp to 20 percent of the portfolio may be in investlllents maturing in BOre than five years. consequently, in the long run, the City should average a higher total return than most cities without such reserves to invest. The eCCh~my, the money markets, and various financial institutions (such aa the Federal Reserve System) are monitored carefully to assess the probable course of interest rates~ In a aarket with increasinq interest rates, tha City will tend to invest new cash in securities with relatively shorter JDaturities. This will allow the funds to be available for other investments when the interest rates are h.iqher~ Atn'HORI ZEO INYESTXENT PERSONNEL .Idle cash management and investment trar..sactions are the responsibility of the Finance Department. 1 • The Department of Finance is under the control of the Director of Finance .. who ia accountable to the City Manaqer. Tb.e department is composed of the divisions ot Administration, Accountinq, Treasury, Budqet, Purchasing, and Real Esta.te., as set forth in sections 2.08.160 through 2.08.190 of the Palo Alto Municipal Code. The Treasury Division is under the supervision of a Treasury Manage~ .. who Is accountable to the Dire.ctor of Finance ~ Thll! duties of the Treasury Manaqer include menaqinq the City's portfolio of treasury investJIents, remaining accountable for the City's treasury balance, developinq and monitoring the City's cash flow .o4el and developing lonq-terw; revenue and financinq strateqies and tore'Casts. A l'ilI.aDcial A.""1 Iw. est.efl4s Analyst reports to the Treasury Manager. The l'iaaDcial Ift.est.eRt Analyst assists the Treasury Manager in the purchase and sale of securities~ The Financial II'l(eSgeAt Analyst also prepares the monthly report, and daily records all invesaent transactions as to the type of investment, amount, yield, and. maturity. Cash floW' projections are prepa%'ed as needed. The Director of Finance or desiqnee is authorized to make all investment transactions alloyed by the Statemant of Investment Policy. He or she may authorize the Treasury Manaqer or Pinaneial I .. yes~.e81a Analyst to enter into investments within cle?..rly specified parameters. In all circumstances approval from the Director of Finance is required before selling securities from the City's portfolio~ Tbe Treasury Manager .ay also transfer no more than $3 million in a 4ay from the City's general account to anyone financial institution, without the prior approval of the Director of Finance. Tbe FiD&llcial l:w.'e8wan' Analyst may transfer up to $1 JIIillion between the City's general account, aM the Local Agency Investment FUnd (LAIF) &Dd. &Ill' &FprOV6d .utual fund in al1Y day. 11'1 E:he a);S8ftse at the ai!'ee~a. af Fil'l8:l'lee, the 'Pl-easl:I:p) MaPtalJep, af\d t.fte !ft\es*-ent. Aftaly.~, the St:lpep"riser 81 Re.sPttle Sellee"tisftB sa". );eo "i.eti ..,.i1::*.1'1 .lIiths.i~y tei:raRsfa'! 'ld;p t.a $1: .i11ie", ~e1::"eel'l "Ute ei~~'s gefteE'al aeeeutit: and ~Re Laea:l J.ljeftey InJee~.8Pl-' :f'ttfld: (Li'tIF) i No other person has authority to :iIlake investment transactions without the written authority of the Finance Director. 2 -----~--,------~ \ , o nPES OF INYESTHENT Investments are limited to the rollowinq media: 1. ~. J. c. 5. 6. 7. 8. 9. 10. securities of the u.s. Governaent~ or its aqencies certificates of Deposit (or time Deposits) (CD) Negotiable Certificates of Deposit (NCO) Banker's Acceptance Notes (SA) commercial Paper Local Aqency Investment Fund (LAIF) Short-tar. Repurchase Agreements (REPO) city of Palo Alto Bonds Money Market Accounts; and MUtual Funds ~hich are limited ess~ntially to the above inve8tm~ .. lts and further defined in T.Qte 9 of Appendix A. Appendix A provides a more detailed description of each investment veblc.le and ita security and liquidity features. Most of the City'. short-term investments will be in securities Yhich pay principal upon aaturity, while long-term investments may be in securities which peliodically repay principal as well as interest. Host of the City's i~vestments viII be at a fixed rate. Howeve~, some of the investments may be at a variable rate. Tbe City of Palo Alto is prohibited (rom depositing, investing, or usinq City funds with banks, financial institutions, investment firms, or other investment type organizations who do business with either the public or private secto~ of south Africa er Ha.isia so lonq as apartheid is the official policy of ~ thi. countr4eey. Butt _111 retura .. it'll • rec~aD4at1o.D to .. anll or r_ove the r .. tricUou ill til. 8tat __ t o~ Xav •• bent policy U th. Pr .. l4ellt auapeD4G or aodifie. tbe Uaited state •• &Actions, and tbe action. takeD. :by tbe Governaent or-south Afrioa are .ur-t'icieDt for the ArriC&D xational CODqre •• to reoo.aend lif~inq the sanction •• INYEST"E'T CRITERIA Criteria for selecting investments are (in order of i.port~nce): 1.. Safety, 2. Liquidi ty, and 3. Yield .. Vp; of Broker, And pealers The Finance Department maintains a list of acceptable brokers and d"'!la.lers.. Any broker or dealer must have at least three years experience operating with California muniCipalities, maintain an inventory of tradinq securities of at least $10 million, and be approved by the Finance Director before being added to the City's J . , llst of approved brokers and dealers. A broker or dealer will be removed from the list should there develop a history ot problems, (i.e., fail to deliver securities as promised, failure to honor transactions as quoted, or failure to provide reasonable information) . Reyiew and Reporting s~InHstm,!ntA Monthly, t.'tote Finance De~'l.B.rtJlent will revie .... perfonlance in relation to tbe Council-adopted i'Olicy. Monthly, the Oepart.ent will report to the Council, 1n a manner approved by the Council, its performance in relat,ion to this policy and explain any deviation from the policy and recommendations for changes, if any. The council will review this policy annually as part of the Budqet Process. All changes in policy must be a~proved by the Council prior to i.plementation4 Specific Inyestment strategy Dependinq upon the City'S financial situation and conditions in the .oney markets, the invest~ent strateqy will change to achieve the appropriate balance of saEety, liquidity and yield. Safety o No more than 10 percent of the portfolio in collatera­ lized CDs of any institution. -An ir~titution .ust be federally insured; and -Rave been in operation for at least three years, with positive earnings for at least three of the past four qu4rters of operation; and -Report equity in excess of 3 percent of assets; and -Raport scheduled items not in excess of 1.5 percent of assets. o No aore than 30 percent of the portfolio in neqotiable COB. -No acre than $2 million with anyone institution. -No negotiable CDs vith maturities beyond ~3 ~~ys. -An institution must meet the same safety tests '8 collateralized CDs. 4 , , r· ... -..... --------------------~-------: , . o o o No more than 30\ of the portfolio in Banker's Acceptance Notes. No more than $5 .lIlion with anyone institution . . 0 No .ore than 15 percent ot the portfolio in Commercial Paper .. No more than $1 Dillion with anyone institution a o LiRit inv8staents exclusively tn those stipulated under types ot inve8t.~nt. {specifically, there will be no investments involving Reverse Purchase Aqreements)a o No new Fara Credit securities. o No more than 2 percent of the portfolio in the Guara....,teed Portion of Small Business Administration Notes. o No more than 15 percent of portfolio in MUtual Funds. Liquidity Any investment must be evaluated on its ~arket rate and interest rate riSk. If the security Dust be liquidated, it Day have a small Il8rket and need to be sold at a loss., and if interest rates increase, the value of an investment may go down. The market rate risk is very low for u.s. aqencies and BAs since there is an active llarket in these securities. It is more difficult to find a purchaser of NCDs or commercial paper, and most CDs cannot be liquidated without a substantial loss of interest. Usually, the longer term the investment the larqer degree of interest rate risk. If interest rates increase~ it is likely tbat the lonq-tera investments would decrease in value. This is primarily a factor fer securities which have maturities in excesS of t~o years. Since almost all of the investments held by th~ city of Palo Alto 'With maturities in ex:cess of two yearF> are U~S. aqencies, it is possible to maintain fairly accurate records on the Ilarxet value of these securities and show the lIIarket value and potential 108s to interest rate risk. This risk is a part of all long-term inveatment portfolios and does not beco.e an important factor unless there is a need for the cash, and the loss (if any) must be realized. Tbe ~ollowinq are liquidity constraints: o Liquidity enough to meet one month's cash needs. o At least $35 million maturing in less tban 2 years. o No more than 20 percent of the portfolio shall be in investments maturinq in more than five years. 5 ----..-~---' -' • \ o o .,--- Any security purchased Yith a maturity qreater than 10 years may pay principal as well as interest on a periodic basis. Market value of the portfolio viII exceed 95 percent of the cost basis of the portfolio. Should the ratio fall below 95 percent the Finance Department will restrict future investments to those maturing in one year or less and/or liquidate securities as deellled financially prudent until the ratio is achieved. o oommitments to purchase new securities shall be made no aore than 36 hours before pricing. Yield, which is derined as the return on an investment, will be the third criteria for investments$ after safety and liquidity~ Whenever possible~ the city will obtain three or more bids on the F..trc.hase or sale of 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 36 hours before pricing, LAXF, City of Palo Alto bonds, money market accounts or .utual funds, which shall be evaluated separately. Adopted by City Council October 22, 1984. Monthly reporting effective January 1985. Amended and Adopted by city Council June 2., 1985. Amended by City Council December 2, 1985. Aaended by City Council June 23, 1986. Amended by City Council June 22, 1987. Amended by City Council Auqust 8, 1988 ~ended by City Council November 28, 1988. Amended by City Council June 26, 1989. Amended by City Council May 14, 1990. 6 " 'i n ,- ! \ .1 -----.---~.~--~----.----~ ...... ---- o APPENIlIX A EXPLANATION OF ALLOWABLE INVESTKENTS 1. V,S. Gayernll@Dt Agency securities. U.S. Government Agency Obllqation. include the securities of the Federal National Kortqaqe Association £FNMAJ, Federal Land Banlte (FLBJ, Federal Interaediate credit Banks (FICS), Sanlts for cooperatives .. Federal Bome Loan Bank& (FHLB), Government National Mortqaqe Association (GKMA), Federal Home Loan Mottgage Corpor~tion (FHLMC) , Student Loan Marketinq Association (SLMA), small BusineBs A~inistrat1on (SSAJ and Tennessee Valley Authority {TVA). Federal Agency securities are debt Obliqations that essentially result from lendinq programs of the Government. Federal aqency securities differ from other types of securities as well as among themselves. Their characteristics depend on the issuing agency. It is possible to distinguish t~ree types of issues: CAl p~rticipation certificates (pooled securities), (B) Certificate of Interest (pooled loans), (e) notes, bond.s~ and debentures. The securities of a few agencies are explicitly backed by the full faith and credit of the U ~ S a Government a All issues, however, have de facto backing from the federal qovernment, and it is highly unlikely that the goverl1llent 'Would let any agency default on its obliqations. 2. certifiAAtes Of peposit. A Certificate of Deposit (CD) is a receipt for funds deposited in a bank, savinqs bank, or savings and loan association for a specified period of time at a specified rate of interest a Denominations are $100,000 del lars and up.. The first $100,000 of a Certificate of Deposit is guaranteed by the Feoera! Deposit Insurance Corporation (FDIC) if the deposit is with a bank or savings ban..1c:., or the Savinq_ As8ociatioll Xns'Ur&llce PUD4 (SAI:r) Federal S6uift •• aftd LeaR IAB~eftee eerpera~i6ft (FSLISJ if the deposit is with a savings and loan. COs with a face value in excess of $100,000 can be collateralized by O.S. Govern.ent Agency and Treasury Department securities or first .ortqaqe loans~ Government securities aust be at lea!ot 110 percent of the face value of the CD collateralized in excess of the first $100,000. The value of first mortgaqes must be at least 150 percent of the face value of the CO balance insure~ in excess of the first $100,OOOa Generally, COs are issued for lIIore than 30 days and the maturity can be selected by the purchaser. 3. Hegqtiablp. Certificate Cf Deposita Negotiable certificates of Deposit (~CCs) are usually supported only by the strength of the iSBuing institution, but can be sold at any time and thus provide liquidity. I ~ 4. ---....... _--,--- Bank~rs' Aceeptange. A Banker's Acceptance is a negoti8ble ti .. draft or bill ot exchange dri!',wn on and accepted by a commercial bank~ Acceptance o£ the draft irrevocably obliqatea the bank to pay the bearer the face &mount ot the dra.ft at .aturity.. BAs are usually created to finance the import and export of qoods" the shipment of qoods vi thin the United states and storage of r~adily marketable staple commodities. In over 70 years ot usaqe in tt.e United states, there has been no known instance of principal loss to any investor in BAs .. In addition to the quarantee by the accepti1l9 bank, the transaction is identified with a specific commodity. Warehouse receipts verify that the pledged commodities exist, and l by definition, these coamodities are readily marketable. The sale ot the underlyinq goods generates the necessary tunds to liquidate the indehtedness. BAs enjoy marketability since the Federal Reserve Bank is authorized to buy and sell prime BAs with maturities ot up to nine JaOnths. The Federal Reserve Bank enters into repurchase aqreements in the normal course of open market operations with SA dealers. BAs are sold at a discount trOD par. An acceptance is tied to a specific loan transaction; therefore, the amount and maturity of the acceptance is fixed. 5. cogercial Paper, Commercial paper notes are unsecured pro.issory notes of industrial corporations, utilities, l'.nd 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 from one to 270 days selected by the purchaser, and denominations generally start at $1.00 ,000... There is a s1IIall secondary :market for commercial paper notes and an invastor may sell a note prior to maturity. commercial p~per notes ere backed by unused lines of credit from major banks* Some issuer's notes ar~ insured while soae are backed by irrevocable letters of credit from ~ajor banks. state law Ii.its a city to investments in united States corporations having assets in excess of five hundred aillion dollars with an MA· or higher rating for the issuer's debentures. cities say not invest more than 30 percent of idle cash in commercial paper. 6* Ipcal Agency Investment Fund Demand peposit* The Local Aqency Investment Fund (LAIF) was established by the state to enable 2 -,.--.. ., ...... _------ '.,,,-." ~};. '-;- ,~fi~s- :~~~ -, -' t.reasurer .. to place funds in a pool tor investments. The city is lblited to an investJtent of the .. ount al10.e4 tty LAlI' (<n>rr."Uy fLO a1111o,,) U .HUe,,_ LAU has been particularly beneficial to those jurisdictions -with small port~olios. Palo Alto uses ~~is fund for short-te~ invest.ent r liquidity, ~nd yield. 7 • Bepu!"ghD Be Agreement'. A Repurcha S6 Agreement (REPeS j is not a 8ecurity~ but a contractual arranqe.ent between a financial ir.&titution or dealer and lin investor. The aqreement normally can run for one or more days. The investor puts up ft!e funds for a certain number of days at a stated yield. In return he • -, IDv •• ~or takes ti~l. to a given block of securities ~s.p366X~ collateral. At maturity the securities ere repurchased and the funds repaid plua interes.t. Osually, amo\lnts are $500,000 or more, but some repurchase aqreesenta can be smaller. S. Money Mar1srt Accounts. Money Market Deposit Accounts are .arket-senaitiva 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. Tbese accounts are insured by the Federal Deposit Insurance Corporation or the SaviD;. a.aociatioD InauraDoe JUDd Pe4e~al 6a>'1iftIJ8 ana Leetn Ift6IW&Plee esypera .. :iel't .. 9. Mutual Funds. Mutual Funds are shares of beneficial interest iSSUed by diversified aana,gement compa.nies, as defined. by section 23701 X of the Revenue and Taxation Code. To be eliqible for investment, theBe funds must: a. Attain the highest ranking-in the big-hest letter and numerical ratinq provided by not less than two of the tnree largest natio~ally recognized ratinq services; or b. Bave an investment advisor reqi&tered tiith the Securities and Excbange COlUlission with not less than five years experience investing in the securities and obliqations as authorized by subdivisions taj to Cm), inClusive, of Section 53601. of the California Government Code, and with assets under management in excess of five bundred .. Ii l1.ion dollars; and c. Invest solely in those securities and obligations authorized by Sections 53601 and 53635 of the Cslifornia Government Code. Where the Invl!-stJQent 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 Ilinilloal invest1llent in securities otherwise 3 " " .' , ~ .' .- ~ "-I<, ;, __ r .' restrJcted by the city's policy. Mini.al invest.ent 1. defined as less than 5 percent ot the .utual fund. portfolio; and cS~ The purchase price of shares ot beneficial interea.t purchased ahAll not include &.n.y co_ie.ion that these coapan1ea may charqe. trus/lr'1vet11m1nt: hvpOl-C, 1 $-1I-91 7----~ .. "------·----.