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Home My WebLink About0276.093• I - ~",,', ~ May 6, 19S13 HONORABLE CITY COUNCIL City of Palo Alto Atte!1,tion: Finance Committee INYES'l'KENT _~_Q..t-.1J~Y rOR 1 '9 3-9 of Me~bers of the Council: BUDGET The city of Palo Alto Statement of Investment Policy states that the Council ~ill review the policy annually as part of the budget process. Staff is not recomroending any changes to the current policy for the ]993-94 Interim Budget. Respectfully submitted, /~k,. J<7v C-ORDON B. FORD . 'rreasury Manager .. ' 1\ --~,//"' /'/ (! lL--. ,,_.·).t Li_",6" \ ___ ~" EKIrY HARRrsPN Di" ctor 0, ;(~Jnance " /~ J ZL.,-»~7J ;f~~~ FLEMING (' (/'!!i ty Manager / Attachment: StatemEnt of Inv€::;.tnent Policy CMR:276:93 • n I - ".',' '. CITY OF P.~LO ALTO statement of Investment policy As a charter city, Palo Alto operates its pooled id.le cash investments under the prudent investor rule and in confor.nance ... ·ith california law. Investments are Dade vith the judgement and carel under the circumstances then preva iling, 'Which investor's with prudence, discretion~ and intelligence would make consi~ering the safety of their capital as well ~s probable income. This affords the city a broad spectrum of investment opportunities, so long as the investment is deemed prudent and is allowable under curre:r.:t legislation of th~ State of California and the charter of the City of Palo Al to ~ Palo Alto strives to maintain the level of investment of all idle funds as near 100 percent as possible, through dai.ly and projected cash flow determinations. Investments are made se that maturities match or precede cash needs of the City. PHILOSOPHY The basic· premise underlying Palo Alto~s investment philosophy is to insure that sufficient money is allJays available to l't",eet current e.xpendit·l.lres. The City is able to take advantage of the relativeiy large reserve balances maintained by its utilities, -which allolN it to take: advantage of the general te~dency of the market to provide a higher return for longer-term investments (known as liquidity prefererl.ce). Up to 20 percent of the portfolio may be in investments maturing in more than five years. consequently, in the long run, the City shoUld aver4ge a higher total return than most cities lJithout such reserves to invest. The economy, the money markets. and various financial institutions (such as the Federal Reserve System) are mor.i tored carefully to assess the probable course of interest rates. In a market ~jth increasing interest rates~ the City will tend to invest new cash in securities with relatively shorter maturities. This "Will allow the funds to be available for other investments when the interest rates are higher. 1 :-;:--""' • •• .-~-_/~~ . :, .--:~>;-~'.j,-: - (If~ ..•.. , , . ... AutHORIZED INVESTr.ENT-P~RSONNE! Id.le cash manaaement and investment transactior.s are the responsibility of the Finance Department. The Dep~rtment of Finance is under the ~ontrol of the Direc~or of Finance, 'Who is accountable to the City )ol,ana:ger ~ The de.partment is composed of the divie.ions of A<1ministration , Accounting, Treasury, Budge.t, Pur-chasing, and Real Estate, as s~t forth in sections 2.08.180 through ~.08.190 of the Palo Alto Municip~l Code. The Treasury Division is under the supervision of a Treasury Manager, who i5 accountab1e to the Director of Finance. The duties of the Treasury Manager include managing the City'· 5 portfol io of treasury investments, remaining accountable for the city/s trEasury balance) developJnq and monitorinq the City's cash flo'W model and developing long-ter--m revenue a!'!.d financing strategies and forecasts~ A Financial Analyst reports to the Treasury MaJ'l_aqer. The Financial Analyst as.sists the Treasury Manager in the purchase and sale. of securities. The Financial An!!.lyst also prepares the ll'Ionthly report, and daily records all investment transactions as to the type of investl'nent, amount, yield, and maturity~ Cash flow projections are prepared as needed. The Director of Finance or designee is authorized to make all investment transactions allo'Wed by the Statement of Investment Policy~ He or she may author-ize the Treasury Manager or Financial Ar.alyst to enter into investments ~ithin clearly specified para:mete.rs. In all circumstances approval from th!!': Director of Finance is required before selling sec~ritie5 from the City's portfolio. The Treasury Manager may also transfer no mor~ than $3 million in a day tro!!l. the City"s general account to anyone financial in5titution~ without the prior approval of the Directo~ of Finance. The Financial Analyst may transfer up to $1 m.illion bet .... een the City's general account, the Local Agency Investment Fund (LAIF) and any approved mutual fund in any day. No other person has authority to make investment transactions without the written authority of the Finance Director. 2 L ----------_ .. - +¥PES OF rIDltsTMENT Investments are limited to the fol1o~ing media: 14 securi.ties of the U .. S. Government, or its agencies 2. certificates of Deposit (or tim~ De.posits) (CD) 3. Negotiable Certifi;::ates of Deposit n~CD) 4. Banker#s Acceptance Notes (BAj 5. commercial paper 6. Locdl Agency Investment Fund (LAIF) 7. Sho~t-term Repurchase Agreements (REPO) 8. city of Palo Alto Bonds 9. Honey Market Accounts; and 10. Mutual Funds which are limited essentially to the above investments and further defined in note 9 of Appendix A .. Appendix: A provid€s a !!I.ore detailed desc'ription 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 as 'Well as interest. Most of the city's investMents will he at a fixed rate. However, so~e of the investments may be at a variable rate. The city of Palo Alto is prohibited from depositing, investing; or using city funds with banks l financial insti tu'tions, investlllJ:~nt firms, or other investment type organizations who do business ~ith either the public or private sector-of south Afrj ca so long as apartheid is the official policy of this country. staff will return with a recommendation to amend or remove the restrictions in the Statement of Investment Policy if the Presider,t suspends or modifies the United States sanctions I and the actions taken by the Government of South Africa are sufficient for the African Naticnal congress to recommend lifting the sanctions. INVESTMENT CRITERIA criteria for selecting investments are (in order of importance): .1. Safety I 2. Liquidity, ~r.d 3. 'field. The Financ~ Department maintains a list of acceptable brokers and dealers. Any broker or dealer must have at least three years experience operating with California municipalities, maintain an inventory of trading securities of at least $10 million, and be 3 - -~~-----~---------- app~oved by the Finance Director before being added to the City's list of approved brokers and dealers. A broker or dealer will be remo"ed trol!l the list should theare develop i! history of problems, {i.e., fail to deliver securities as proillised r failure to honor transactions as quoted, or failure to pro'Jide: reasGnablc information) . ~w and Reporting on Investments Monthly ~ the Finance Department will review performance in relatiorJ to the. Council-adopted policy. Monthly, the Department .rill report to the council, in a manner approve.d by the Council. its performance in relation to this policy and explain any dev-ia ..... ion from the policy and recommendations for changes, if any.. The Council ... ill review this pelicy annually as part of the Budget Process. All changes in policy must be approved by ~he Council prier to implementation. specific I~vestment strategy Depending upon the City's financial situation and conditions in the money markets, the investment strategy' \ ... i 11 change to achieve the. appropriate balance of safety, liquidity and ~,rield. Safety o No more than 10 percent of the portfolio in collatera lized CDs of any institution. -An institution must be federally insured; and -Hav'S! been in operation for at least thre€ years. with positive earnings fer at least th~ee of the past four quarters of operationj and -Report e~~ity in excess of J percent of assetsj and -Report scheduled items not in excess of 1.5 percent of assets. o No more than 30 percent of the portfolio in ne_gotiable CDs. No ~ore than $2 millio~ ~ith anyone institution. -No negotiable CDs with maturities berond 90 days. -An institution rr..ust meet the same safety tests as collateralized CDs. 4 - o 0 No more than 30\ of the portfolio i~ Banker's Accopt~nce Notes. No more than ;5 million with any one instituticn. 0 No more than 15 percent of the portfolio in COl'lllroercial paper. No !'lore than ~3 million with any one institution. o Limit investments exclusively to those stipul~ted under types of investments (specifically, there will be no investments involving Reverse Purchase Agreements) . o No new Farm Credit Securities. o No more than 2 percent of the portfolio in the Guaranteed Portion of Small Business Administration Notes. o No more than 15 percent of portfolio in ~utual Funds. o No more than 10 percent of portfolio in callable aqenc:r~ securities. Liquidity Any investment must be evaluated on its market rate and interest rate risk. If the security :must be liquidated, it may have: a small market and need to be sold at a loss, and if interest rates increase, the value of an jnvestm~nt lI'lay go down. The market rate risk is very low for U.S. agencies and BAs since there is an active market in these securities. It is more di~ficult to find a purchaser of HeDs or commercial paper, and most CDs cannot be liquiciated without a sUbstantial loss of interest. Usually, the longer term the investment the larger degree of interest rate riSk. If jnterest rates increase, it is likely that the long-term investments would decrease in value. This is primarily a factor for secu~itje5 which have maturitles in excess of two years. Since almost all of the LWestments held by the City of Palo Alto with maturit~es in excess of two years are U.S. government securities, it is possible to maintain fa~rly accurate records on the market value of these securities and show the market value and potential loss to interest rate risk. This risk is a part of all long-term investment portfolios and does not become an important factor unless there is a need for the cash, and the loss (if any) must be realized. The following are liquidity constraints: o Liquidity enough to meet one mo~th's cash needs. o At least $50 million maturing in less than 2 years. 5 L f i .. - " No more than 20 percent of the portfol io shall be j n investments maturing in more than five years. o Any security purchased ..... ith a m.aturity greater than 10 years ma}'" pa~r pr ir.cipal as well as interest on a periodic basis. o Market value of the portfolio ~ill exceed 95 percent of the cost basis of the portfolio. Should the rat.io fall below 95 percent the Finance Department ~ill restrict future investments to those maturing in cne year or less and/or liquidate securities as deemed financially prudent untll the ratio is aChieved. o commitmer.ts to purchase neo", securities shall be made no more than three (3) working days before pricing. Yield l 'iolhich is defined as the return on an investment, ..... i11 be the third criteria for investments, after safety and liquidity, Whenever possible, the City will obtain three or mere bids on the purchase or sale of securities and take the higher yield on purchase or higher price en sale~ This rule ~ill not apply to new issues whiCh are purchased at market no mere than three (3) working days before pricing, LAIF, city of Palo Alto bondS, money market accounts or mutual funds, ~hlch shall be eValuated separately. ~.dopted by City Council October 221 1984. Monthly reporting effective January 1985. Amended and Adopted by city council J~ne 24, 1985. Amended by City Council December 2, 19B5~ Amended by City council June 23, 19B6~ Amended by City Council June 22, 19B7~ Amended by City council August 8 , 19Sa Amended by City Council November 28. 1988. Amended by City council June 26, 1989. Amended by City council Hay 14, 1990. Amended by City Council June 24, 1991. Amended by City Council June 22, 1992~ 6 f' :"i , , I I - 2. 3. 4. .1 APPENDIX A EXPLA..~ATION OF ALLOWABLE INVESTMENTS U. S. Government Agency Securities.. V. S. Government Agency Obligations include the securities of the Federal National Mortgage Association (FNMA) , Federi!l Land Banks (FLB;. Federal Intermediate Credit Banks (FICB). Banks for cooperatives, Fed-eral Home Loan Banks (FHLBi, Government National Mortgage Association (GN!'_l.J. Federal Home Loan Mortgage Corporation (FHLHC), stu~ent Loan Harketing Association (SLMA), Small Business Administration {SBA) and Tennessee ValIer Authority (TVA). Federal Agency securities C!ll"'e debt obligations that eSaentially result from l~nding programs of the Government. Federal agency sec~rities differ from other types of securities as ....... e11 as among themselves. Their characteristics d.epend on the issuing agency ~ It is possible to distinguish three types of issues: {A) participation certificates (pooled securities), CB) Certificate of Interest (pooled loans), (C) notes, bonds, and debentures. The securities of a few ~gencies are explicitly backed by the full feith and credit of the U.S~ GovE!rnment. All issues, however, have defacto backiMq from the federal government, and it is highly unlikely that the gover!1l!!ent ,..culd let any agency default on its obligations. certificates of Deposit~ A Certificate of Deposit (CD) 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 certifi;:;ate of Deposit is guaranteed by the Federal Deposit Insurance corporation (FDIC) if the Qeposit is with a bank or savings bank, or the Savings Association Insurance Fund (SAIF) if the deposit is ",-ith a savings and loan .. CDs vith a face value in excess of $100,000 can be collateralized by U.S. Gover1U:!ent Agency and Treas'..lry Department securities or first mortgage loans~ Government securities onust be at least 110 percent of the face ~~'al ue of the cn collateralized in excess of the first $100,OOO~ 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 $100,000. Generally, CDs are issued for more than 30 days and the maturity can be selected by the purchaser. Negotiable Cert,i,_Jicate of Deposit. Negotiable Certificates of Deposit (NCDs) are usually supported only by the strength of the issuing institution, but can be sold at any time and thus provide liquidity . .e.,ankers' Acceptnanc_",,---=-A Banker's Acceptance is a negotiable time draft or bill of eXChange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably obligates the bank to pay the bearer the face amount of the draft at maturity~ BAs are usua.lly created to fina.nce the :- - ---------------~---~---- ""-"l iillport and eXpol:'t 0 f goods I the United States and 6to~age of commodities. shipment of goods .... ithin. the readilJr marketable staple In. over 70 years of usage in the united States .. t:here has been no known instance of principal loss to any investor in BAs. In addition to the guarantee by the accepting bank I the transaction is identified 'With a E:>pecific comrnoditY4 Warehouse receipts verify that the pledged commodities exist, and, by definitioT" these cOlrunodities are readily marketable. The sale of the underlying goods generates the nece$.sary funds to liquidate tl"-,e 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 ill'ith BA dealers. BAs are sold at a discount from par. An acceptance is tied to a specific loan transaction; therefore, the amount and maturity of the acceptance is fixed. 5. ~ol'!U!?ercial paper. CO!!'.mercial 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 farm 'With maturities from one to 270 days selected by the purchaser, and denominations generally start at $100,000. There is a small secondary market for cOm1!l.ercial 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 i~revocable letters Cif cred it ,frrl!:1. major' banks. State laW' limits a City to investments ~n United states corporations having assets i~ excess of five hundred million dollars ~ith an ·A~ or higher rating ~or the iss~er's debent~res. Cities may not invest more than 30 percent of idle cash in camm€rcial paper. 6. Local Agency Investment Fund Demar:'l£lm_1J.m?9sit. Tht:: Local AgeT)cy 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 $15 n".illion). LAIF has been particularly beneficial to those jurisdictions with small portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield. 7. ~chA§e Agreg~ents. A Repurchase Agreement (REPOS} is not a security. but a contractual arrangement bet~een a financial 2 - 8. 9. o institution or dealer ar,d a~ investor. The ~gr~e:ment nor:nally can run for one or more days. The in\restor puts up funds tor a certain number cf days at a stated yield. In return the Investor takes title to a given block of securities as collateral. At maturity the .sec1..'.rities are repurchased and the funds repaid plus interest. Usually. a:nounts are $500,000 or more, hut some rep;'lrchase agreemer::ts can be 3maller. ~_ Market Accounts. Money M:!rket Deposit Accounts are market-sensitive bank accounts, which are available to depesitors at any time .ithout penalty. The interest rate ie generally comparable to rates on money market ~utual funds, though any individual bank's rate may be higher or lower. These accounts are insured by the Federal Deposit Insurance corporation or-t:he Savings Asso,c:iation Insurance Fund. Mutual FUnds. Mutual Funds are shar~s of be~eficial interest issued by diversified management companies, as defined by section 23701 M of the Revenue and ':'axation Code. To be eligible. for inye5tment~ these funds must: a~ Attain the highest ranking in the highest letter and numerical rating provided by not less than tlu'O of the three largest nationally recognized rating services; or b. Have. an investnent advisor registered 'With the Securities and ExcJ"!_ange Commission with not less than five years experience investing in the securities and obligations as authorized by subdivisions (al to (m), inclusive, -of section 53601 of the California Government Code, and with assets under management in excess of five hundred million dollars; and c. Invest solely in those securities and obligations authorized by Sections 53601 and 53635 of the California Government Code. w-"here the Investment Policy of the t.:i ty of Palo Alto may be more restrictive than the State Code, the Policy authoriz.es investments in mutual funds which shall have minimal investment in securities ctherwise re&tricted by the city's policy. Minimal investment is defined as less than 5 perc~nt of the mutual fund portfolio; and d. The purchase price of shares of beneficial interest p'l.i.rchased shall not include any commission that these companies ~ay charge. trea$ilnl'utRle~t ir'!IIPQl92 7-28--S2 l