HomeMy WebLinkAbout04 ADOPTION OF THE 2018 INVESTMENT POLICYAgenda Item 4
• Reviewed:
AGENDA REPORT City Manager
Finance Direc1,0
r
MEETING DATE: DECEMBER 5, 2017
TO: JEFFREY C. PARKER, CITY MANAGER
FROM: JOHN A. BUCHANAN, ACTING FINANCE DIRECTOR
JENNY LEISZ, DEPUTY DIRECTOR - FINANCIAL SERVICES
SUBJECT: ADOPTION OF THE 2018 INVESTMENT POLICY
SUMMARY:
The California Government Code provides guidelines for Cities to annually adopt their
Investment Policy. The elected body and the Treasurer should review the existing
Investment Policy at least annually and confirm its content at a public meeting and
annually delegate authority to invest.
RECOMMENDATION:
Staff requests the City Council adopt the City of Tustin Investment Policy for calendar year
2018.
FISCAL IMPACT:
None.
CORRELATION TO THE STRATEGIC PLAN:
The recommendation correlates to the City's strategic plan by implementing Goal C, item
number three to develop and communicate a comprehensive set of financial policies and
their purpose to strengthen financial practices.
DISCUSSION:
The Deputy Director — Financial Services, City Manager/Acting Treasurer, and the City of
Tustin Audit Commission thoroughly reviewed the 2017 Investment Policy and the
applicable California Government Code sections referenced in the Local Agency Investment
Guidelines issued by the California Debt and Investment Advisory Commission. The only
policy change incorporated in the investment policy for 2018, is to the scope of the policy
(see page 1 of the attached Statement of Investment Policy for 2018). The scope was
modified to exclude funds invested in the PARS Pension Rate Stabilization Program
(Section 115 irrevocable trust), as these funds are subject to IRS rules and the trust
ADOPTION OF THE 2018 INVESTMENT POLICY
December 5, 2017
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agreement and investment guidelines in effect with PARS. Prior to finalizing and funding
the PARS trust for pension and other post -employment benefits (OPEB) stabilization, a
separate investment policy for the trust would be submitted to Council for approval.
Therefore, the 2018 investment policy with the change in scope explained above and other
minor changes, is submitted for adoption.
/�, John A. Buchanan
C— Acting Finance Director
J nyLz
eputy Director - Financial Services
Attachment: Statement of Investment Policy for 2018
CITY OF TUSTIN
STATEMENT OF INVESTMENT POLICY FOR 2018
I. GENERAL
PURPOSE
This statement is intended to provide guidelines for the investment of the City's temporary
idle cash, and to outline the policies for maximizing the efficiency of the City's Cash
Management System. The ultimate goal is to enhance the economic status of the City while
protecting its pooled cash. It is the intent of the City Council that all deposit and investment
activities authorized by this policy shall be at the sole discretion of the City Treasurer as to
selection and appropriateness.
SCOPE
This investment policy applies to the City of Tustin's pooled investment portfolio. This
portfolio encompasses all monies under the direct oversight of the Treasurer and includes
the General Fund, Special Revenue Funds, Capital Project Funds, Proprietary Funds,
Agency Funds, Successor Agency to the Dissolved Tustin Community Redevelopment
Agency, and any other funds that may be created. These funds are accounted for in the City
of Tustin's Comprehensive Annual Financial Report. Investment of bond proceeds will be
made in accordance with applicable bond indentures. The scope of this policy excludes funds
invested in the PARS investment trust, as these funds are subject to IRS rules and the trust
agreement and investment guidelines in effect with PARS.
OBJECTIVE
The City's Cash Management System is designed to monitor and forecast expenditures and
revenues, thus enabling the City to invest funds to the fullest extent possible. The City
investments meet the criteria established for safety and availability. The investment portfolio
will be diversified to avoid incurring unreasonable risks regarding specific security types or
individual financial institutions.
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POLICY
The City of Tustin operates its temporary pooled idle cash investments under the prudent
man rule (Civil Code Sec. 2261 et seq. and Government Code Section 53600.3). The prudent
man rule states, in essence, that "in investing.... property for the benefit of another, a trustee
shall exercise the judgment and care, under the circumstances then prevailing, which men of
prudence, discretion and intelligence exercise in the management of their own affairs...." This
affords the City a broad spectrum of investment opportunities so long as the investment is
deemed prudent and allowable under current legislation of the State of California
(Government Code Section 53600 et seq.) and the guidelines established by the following
prioritized criteria for selecting investments:
1. Safety. It is the primary duty and responsibility of the City, City Council, Finance
Director/City Treasurer (Treasurer), City Manager, and City Staff at all times to protect,
preserve and maintain intact the principal placed in trust with the City on behalf of the citizens
of the community.
2. Availability. An adequate percentage of the portfolio shall be maintained in liquid,
short-term securities which can be converted to cash as necessary to meet disbursement
requirements.
3. Yield. Yield is to be a consideration only after the basic requirements of adequate
safety and availability have been met.
Legal Investment Authority. Temporarily idle monies shall be invested in accordance with
State and local laws and regulations and this Statement of Investment Policy.
Statement of Investment Policy. Each year after review and report by the Audit
Commission, the Treasurer shall submit to the City Council a proposed Statement of
Investment Policy for Council consideration and adoption as submitted, or as revised by the
City Council
Cash Purchase Only. All securities shall be purchased on a delivery vs. payment (DVP)
basis only. Securities shall not be purchased on margin, credit or for other than full cash
payment and shall not be pledged as collateral.
Reverse Repurchase Agreements. Funds shall not be invested directly in reverse
repurchase agreements.
Selling Securities Prior to Maturity. Generally, losses will be acceptable on a sale before
maturity if the reinvested proceeds will earn income with a present value greater than the
present value of the income that would have been generated by the old investment,
considering any capital loss or foregone interest on the original investment.
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Profits from market volatility of Treasury securities are acceptable only so long as each
holding when repurchased exceeds the original purchase yield. For example, a Treasury two
year note is bought at auction at a 2.04 yield and sold five days later at 1.99. That note could
be repurchased at a minimum yield of 2.04.
Performance Standards. The investment portfolio will be designed to obtain a market -
average rate of return during budgetary and economic cycles, taking into account the City's
investment risk constraints and cash flow needs. The market -average rate of return is
defined as the U.S. Treasury security yield which most closely matches the portfolio's
weighted average maturity (WAM) as stated on the quarterly investment report, using a 12 -
month moving average.
Quarterly Reports and Role of the Audit Commission. The Treasurer shall render a
quarterly report to the City Council, City Manager, and external auditors, which states its
relationship to the Statement of Investment Policy.
Required elements of the quarterly report are as follows:
a. Type of investment
b. Institution
c. Date of maturity
d. Par value
e. Amount of deposit or cost of the security
f. Rate of interest/discount and yield
g. Statement relating the report to the Statement of Investment Policy
h. Statement that total investments with maturities of one year or less are at least
75% of the General Fund budgeted expenditures. for the current year
i. The current book value
j. The current market value
k. Average portfolio life
I. Average portfolio yield
m. Current treasury yield that most .closely matches average portfolio life
n. Ratings of all medium term notes, municipal and state securities, commercial bank
time drafts, and commercial paper to be shown
o. Summary of investments with total percentage by type of investment
p. Reflect historical rates of returns
Reports of the State Treasurer's Local Agency Investment Fund (LAIF) or other qualified
funds shall be accepted in lieu of subparagraphs a. through I. to support City deposits in the
funds.
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The two Audit Commissioners serving on the Investment Sub -Committee shall receive
monthly reports from the Treasurer to review. Any issues or concerns may be forwarded to
City Council. The Audit Commission's responsibility will be limited to the review of types and
limits of investments for compliance with the investment policy, and not for the review of
appropriateness of individual investments or rates of return. The Audit Commission Chair or
his designee and the City Treasurer shall sign the quarterly investment reports submitted to
the City Council.
II. GUIDELINES. The following directions and limitations are established hereby to direct
and control investment activities in such a manner that above -stated goals are achieved.
Delegation of Authority. California Government Code Section 53607 provides the authority
for the legislative body of the local agency to invest funds of the local agency or to delegate
that full responsibility to the Treasurer of the local agency. Under City of Tustin Ordinance
No. 832, the City Council has authorized the Treasurer to invest City funds in accordance
with California Government Code Section 53600 et seq.
Ethics and Conflicts of Interest. The Treasurer shall refrain from personal business activity
that could conflict with proper execution of the investment program or which could impair the
ability to make impartial investment decisions. The Treasurer is governed by Government
Code Section 1090 et seq.; the Political Reform Act of 1974 regarding disclosure of material
financial interests; disqualification requirements and the City's gift regulation.
Investment Transactions. Every investment transaction shall be reviewed, authorized and
documented by the Treasurer.
Pooled Cash. Wherever practical, the City's cash shall be consolidated into one bank
account and invested on a pooled basis. Interest earnings shall be allocated according to
each fund's cash balance as required.
Competitive Bids and Offers. Purchase and sale of securities shall be made on the basis
of documented competitive offers and bids whenever practical. Documented opinions of
reasonableness are acceptable substitutes if necessary.
Cash Forecast. The cash flow for the City shall be analyzed with the receipt of revenues
and maturity of investments scheduled so that adequate cash will be available to meet
disbursement requirements.
Investment Limitations. Security purchases, deposits and holdings shall be maintained
within statutory limits imposed by the California Government Code 53601 et-seq. and shall
include only the following:
a. Negotiable certificates of deposit (NCDs) issued by a nationally or state chartered
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bank, a state or federal credit union, or a federal licensed or state licensed branch of
a foreign bank. NCDs shall not exceed thirty percent (30%) of total portfolio assets.
b. Prime quality Commercial Paper, highest letter and numerical short term debt ratings
by a Nationally Recognized Standard Rating Organization (NRSRO) and Al or P1 or
equivalent rating, if any, of other debt; but not to exceed fifteen (15) percent of
invested funds at the time of purchase and limited to a maximum maturity of two
hundred seventy (270) days. Average weighted maturity shall not exceed ninety (90)
days if Commercial Paper exceeds ten (10) percent of total portfolio assets.
C. Government-sponsored pools, such as California State Treasurer's Local Agency
Investment Fund (LAIF), California Asset Management Program (CAMP), and Mutual
Funds if, in the judgment of the Treasurer, they meet MTA of US&C suggested due
diligence standards, or are rated in the highest category by a nationally recognized
rating service.
d. Commercial Bank Time Drafts (Bankers Acceptances), highest letter and numerical
short term debt ratings by a NRSRO and Al or P1 or equivalent rating, if any, of other
debt; shall have a maximum maturity of one hundred eighty (180) days and shall not
be in excess of twenty-five percent (25%) of invested funds at the time of purchase
and no more than thirty percent (30%) of the total portfolio may be invested in the
bankers' acceptances of any one commercial bank.
e. Medium-term notes, defined as all corporate and depository institution debt securities
with a maximum remaining maturity of five (5) years or less, issued by corporations
organized and operating within the United States or by depository institutions licensed
by the United States or any state and operating within the United States. Notes eligible
for investment under this subdivision shall be rated A or better by a. NRSRO.
Purchases may not exceed fifteen percent (15%) of invested funds at the time of
purchase, and five percent (5%) of the total portfolio of any one issuer's securities.
f. Municipal and State Securities. Bonds, notes, warrants, or other evidences of
indebtedness of any local or state agency within the 50 United States including bonds
payable solely out of the revenues from a revenue-producing property owned,
controlled, or operated by the local agency or state, or by a department, board,
agency, or authority of the local agency or state and shall not exceed fifteen percent
(15%) of total portfolio and five percent (5%) of the total portfolio of any one issuer's
securities.
g. Federal Agency bonds or notes, but not in excess of seventy-five percent (75%) of
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invested funds at time of purchase with a maximum maturity of five (5) years
remaining to stated final maturity.
h. U.S. Treasury securities not exceeding five (5) years to final maturity
Investment Contracts. Bond proceeds may be placed in investment contracts if
authorized by borrowing documents. Guarantors of such contracts shall have at least
an AA rating by two major investment services. Contracts shall contain market value
protection in case of downgrading by including delivery of cash or Treasury securities,
at the election of the City.
j. Money Market Funds. Shares of beneficial interest issued by diversified management
companies that are money market funds registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, et
seq.). Fund rating must be rated at the second highest rating category from two
NRSROs.
k. Repurchase Agreements. Investment in repurchase agreements may be made when
the term of the agreement does not exceed one year. The market value of securities
that underlie a repurchase agreement shall be valued at 102 percent or greater of
funds borrowed against those securities and the value shall be adjusted no less than
quarterly. Since the market value of the underlying securities is subject to daily
market fluctuations, the investments in repurchase agreements shall be in compliance
if the value of the underlying securities is brought back up to 102 percent no later than
the next business day.
Liquidity. The marketability (salability) of a security shall be considered at the time of
purchase since the security may have to be sold at a later date to meet an unanticipated cash
demand.
Maturity Limitations. As a general rule, intermediate-term maturities shall not represent a
significant percentage of the total portfolio. Unless previously authorized by City Council, no
investment may have a term final stated maturity longer than five (5) years. Such approval
must be issued no less than three months prior to the purchase of any security exceeding
the five-year maturity limit. At the time of purchase, the short term portion of the total
investment portfolio shall have maturities of one year or less totaling at least 75% of the
General Fund budgeted expenditures for the current fiscal year.
Collateral. Collateral requirements are addressed in California Government Code Section
53652. All active and inactive deposits must be secured at all times with eligible securities
in securities pools pursuant to Sections 53656 and 53657. Eligible securities held as
collateral shall have a market value in excess of the total amount of all deposits of a
depository as follows:
--government securities at least 110 percent.
--mortgage backed securities at least 150 percent.
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Authorized Broker/Dealers. Investments shall be transacted only through Authorized
Broker/Dealers which have been reviewed and approved by the Treasurer for reliability, credit
worthiness and trustworthiness.
Diversification. The portfolio shall consist of various types of securities approved by statute
and this Statement of Investment Policy, as well as varied issuers and maturities. In regards
to commercial paper and medium-term notes, no more than 5% of the total two combined
shall be with the same issuing company.
Safekeeping. Securities purchased from broker/dealers shall be held in third party
safekeeping by the trust department of the local agency's bank, or by other third party trustees
designated by the Treasurer. Said securities shall be held in the name of the City with the
trustee executing agreements and confirmations of investment transactions as directed by
the City Treasurer.
III. STRATEGY. Strategy refers to the plan to manage financial resources in the most
advantageous manner.
Economic Forecasts. The Treasurer periodically may obtain economic forecasts from
economists and financial experts through bankers and broker/dealers in order to assist in the
formulation of investment plans.
Implementing Investment Strategy. The Treasurer shall execute investment transactions
which conform to current and anticipated cash requirements, interest rate trends, and stated
investment strategy.
Relationships. The Treasurer shall maintain a close working relationship with the
departments of the City to anticipate and accommodate disbursements of City funds. For
liquidity planning purposes, Department Heads shall apprise the Treasurer when large
expenditures (over $500,000) are anticipated.
Preserve Portfolio Value. The Treasurer shall develop an investment strategy that
maintains earnings consistent with defined "Performance Standards" (page 3) and preserves
the value of the City's portfolio.
Internal Controls. The Finance Department shall establish a system of internal controls
which shall be reviewed annually, with the independent Auditor. The controls shall be
designed to prevent losses of public funds arising from fraud, employee error,
misrepresentation by third parties, unanticipated changes in financial markets, or imprudent
action by employees or officers of the City of Tustin. The Finance Department will maintain
the City's Investment Records in compliance with Government Accounting Standards Board
Rule 31 (GASB 31).
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The City attempts to invest 100% of all available funds through daily and projected cash flow
determinations and after consideration of bank requirements for clearings and services.
Management of idle cash and investment transactions is the responsibility of the Treasurer.
The City's investment philosophy is to insure that money is always safe and available when
needed.
The Treasurer shall annually review the City's Investment Policy with the City of Tustin Audit
Commission. Proposed amendments will be brought to the City Council for final action upon
the recommendation of the Treasurer.
SALinda\Audit Commission\Investment Policy 2018.- FINAL.docx
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