HomeMy WebLinkAbout06 ADOPTION OF THE 2023 INVESTMENT POLICYAGENDA REPORT
Agenda Item
Reviewed:
City Manager
Finance Director @
MEETING DATE:
TO:
FROM:
SUBJECT:
FEBRUARY 7, 2023
MATTHEW S. WEST, CITY MANAGER
JENNIFER KING, FINANCE DIRECTOR
ADOPTION OF THE 2023 INVESTMENT POLICY
SUMMARY:
The City's Investment Policy is reviewed on an annual basis for submission and approval by the
City Council. The Audit Commission reviewed the proposed changes to the Investment Policy at
the December 15, 2022 and January 12, 2023 meetings and recommends that the City Council
adopt the Investment Policy for Calendar Year 2023.
RECOMMENDATION:
It is recommended that the City Council adopt the City's Investment Policy for Calendar Year 2023,
which includes proposed changes to the Investment Policy that continues to provide for safety and
liquidity while achieving a reasonable rate of return.
FISCAL IMPACT:
Consistent with State Law, the City's primary objective is to invest in a manner aimed to safeguard
principal and maintain liquidity where the secondary objective is to achieve a market rate of return.
The proposed changes to the Investment Policy for Calendar Year 2023 continue to provide for
safety and liquidity while achieving a reasonable rate of return.
CORRELATION TO THE STRATEGIC PLAN:
The recommendation correlates to the strategic plan by implementing Goal C, sustain long-term
financial strength with adequate reserves and enhanced capacity to provide a sustainable level of
City services.
DISCUSSION:
The California Government Code sets specific rules for how public agencies can invest their idle
cash and limits the types of investment vehicles public agencies can utilize. The City's Investment
Policy further limits investment choices to a smaller subset of what is allowed by the Government
Code. The City's primary investment objective is to achieve a reasonable rate of return on public
funds while minimizing the potential for capital losses arising from market changes or issuer default.
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2023 Investment Policy Page 2 of 3
Although the generation of revenues through interest earnings on investments is an appropriate City
goal, the primary consideration in the investment of City funds is capital preservation in the overall
portfolio. As such, the City's yield objective is to achieve a reasonable rate of return on City
investments rather than the maximum generation of income, which could expose the City to
unacceptable levels of risk.
Consistent with best practice, the Investment Policy is reviewed by staff and the Audit Commission
each year and is presented to the City Council for consideration and final approval. The
recommended changes to the City's Investment Policy are summarized below and are reflected in
the attached Proposed 2023 Statement of Investment Policy, which includes red-lined changes:
Delegation of Authority -clarifying that adoption of the annual investment policy also
delegates to the City Treasurer the authority to invest City funds for a one-year period (page
4 ). The City Manager serves as the City Treasurer when the Finance Director position is
vacant.
Authorized Investments
•Recommend adding restrictions to commercial paper security issuers as well as
investment advisors that manage money market mutual funds and JPA investment
pools. (Pages 7 and 8)
•Recommend the removal of investing bond proceeds in investment contracts as
investment of bond proceeds is not covered under the City's Investment Policy.
Investment of bond proceeds is covered by bond documents. (Page 9)
•Recommend restricting investment of mortgage pass-through securities to those
guaranteed by the U.S government or a government-sponsored enterprise. (page 9)
Prohibited Investments -adding language to prohibit security purchases with a forward
settlement date more than 45 days from the time of investment. (Page 10)
Maximum Maturities -clarifying the maximum investment maturity limit of five-year is from
the date of settlement. (Page 12)
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Finance Director
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City of Tustin
Statement of Investment Policy for 2023
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TABLE OF CONTENTS
I. PURPOSE 3
II. SCOPE 3
III. PRUDENCE 3
IV. OBJECTIVES 3
V. DELEGATION OF AUTHORITY 4
VI. ETHICS AND CONFLICTS OF INTEREST 4
VII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS 4
VIII. AUTHORIZED INVESTMENTS 6
IX. PROHIBITED INVESTMENTS 9
X. REVIEW OF INVESTMENT PORTFOLIO 10
XI. INVESTMENT POOLS/MUTUAL FUNDS 10
XII. COLLATERALIZATION 11
XIII. SAFEKEEPING AND CUSTODY 11
XIV. DIVERSIFICATION 12
XV. MAXIMUM MATURITIES 12
XVI. INTERNAL CONTROLS 12
XVII. PERFORMANCE STANDARDS 12
XVIII. REPORTING 13
XIX. INVESTMENT POLICY ADOPTION 13
XX. CONTINUING EDUCATION AND TRAINING 14
GLOSSARY 15
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I. 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 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 executed at the direction of the City Treasurer
as to selection and appropriateness.
II. SCOPE
This investment policy applies to the City of Tustin’s pooled investment portfolio, which
encompasses all monies under the direct oversight of the Treasurer. The funds covered
by this policy are accounted for and incorporated in the City of Tustin’s Annual
Comprehensive Financial Report (ACFR) and include:
– General Fund
– Special Revenue Funds
– Capital Project Funds
– Proprietary Funds
– Successor Agency to the Dissolved Tustin Community Redevelopment
Agency
– Other funds that may be created
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 the IRS rules, the trust agreement, and PARS investment guidelines.
III. PRUDENCE
The standard of prudence, according to California Code section 53600.3, to be used by
the Treasurer and designated representative(s), shall be the “prudent investor” standard
and shall be applied in the context of managing the overall portfolio. Persons authorized
to make investment decisions on behalf of the City are trustees and therefore fiduciaries
subject to the prudent investor standard which states, “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 City, that a prudent person acting in the 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 City”. Within the limitations of this section
and considering individual investments as part of an overall strategy, investments may be
acquired as authorized by law.
IV. OBJECTIVES
The primary objectives of the City of Tustin’s cash management and investment program,
in priority order, shall be:
Safety: It is the primary duty and responsibility of the City, City Council, City
Treasurer (Treasurer), City Manager, and City Staff to diligently protect, preserve,
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and maintain intact the principal placed in trust with the City on behalf of the
citizens of the community. Investments by the City Treasurer and/or designated
representative(s) shall be undertaken in a manner that seeks to ensure the
preservation of principal in the overall portfolio. To attain this objective, the City
Treasurer will diversify investments by investing funds among a variety of security
types, credit counterparties, and individual financial institutions. This will be done
while continually assessing risks inherent in fixed income investing, including but
not limited to: interest rate risk, default risk, reinvestment risk and inflation risk.
Liquidity: The City's investment portfolio will remain sufficiently liquid to enable
the City to meet all operating requirements which might be reasonably anticipated.
The City will keep enough cash and cash equivalents on hand to ensure a
minimum of six months of expenditures can be met.
Return on Investments: The City's investment portfolio shall have the objective
of attaining a market rate of return throughout budgetary and economic cycles.
Comparative performance measurements will be commensurate with the City's
investment risk constraints as outlined in this investment policy and the City’s cash
flow requirements.
V. DELEGATION OF AUTHORITY
California Government Code Section 53607 provides the authority for the legislative body
of the City to invest funds of the City or to delegate that full responsibility to the Treasurer
of the City for a one-year period. Under City of Tustin Municipal Code Section 1612, the
City Council has authorized the Treasurer to invest City funds in accordance with
California Government Code. Adoption of the annual investment policy delegates to the
City Treasurer for a period of one-year the authority to invest funds of the City in
accordance with the Investment Policy.
The City of Tustin shall invest public funds in such a manner as to comply with state and
local laws; ensure prudent money management; provide for daily cash flow
requirements; and meet the objectives of the policy, in priority of Safety, Liquidity, and
Return on Investment. Annually, City Treasurer shall review the policy with the Audit
Commission and the Investment Sub-Committee and submit the policy to City Council
for adoption.
VI. 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 and the City's gift regulation.
VII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Treasurer shall maintain a list of approved financial institutions authorized to provide
investment related services to the City. The types of institutions include custodian banks,
financial depositories, broker/dealers, and investment advisors. For authorized financial
institutions providing depository and/or investment services to the City, the Treasurer or
designated representative(s) shall perform an annual review of the financial condition and
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registrations of the authorized institutions, including their annual audited financial
statements. A current audited financial statement is required to be on file for each financial
institution and broker/dealer through which the City invests its funds.
A. Financial Institutions
In selecting financial institutions (custodian banks or depositories), the Treasurer shall
conduct a comprehensive review of prospective depositories’ credit characteristics and
financial history. Funds greater than the FDIC insured amount shall be invested (deposits
and/or certificates of deposit) only in commercial banks and savings & loans with a bank
financial strength rating of “A” by Moody’s Investor Service or equivalent rating by another
Nationally Recognized Statistical Rating Organization (NRSRO). Qualifications and
minimum requirements for depositories that may be eligible for funds greater than the
FDIC insured amount shall be established by the Treasurer and will be provided to any
institution seeking to conduct business with the City. Banks and Savings & Loan
Associations seeking to establish eligibility as a depository for the City’s deposits shall
make available annual audited financial statements, either via the Internet or upon request
for review by the Treasurer. Any institution meeting the City’s required criteria, including
meeting the collateral requirements as stated in California Government Code Section
53652 and outlined in Section XII of this policy, will be eligible for placement of public
deposits by the City, subject to approval by the Treasurer. As deemed necessary by the
Treasurer, reviews of unaudited quarterly financial data may be conducted for institutions
on the City’s approved list. Any institution falling below the City’s established minimum
criteria shall be removed from the approved list, no new deposits may be placed with that
institution, and all funds remaining shall be withdrawn as the deposits mature. The City
Treasurer shall notify parties as part of the quarterly reporting process outlined in Section
X. of this policy.
The financial institution providing the City with its primary banking and custodian services
may have additional qualifications and minimum requirements based on the City’s banking
needs.
The City of Tustin has established the following minimum qualifications for a financial
institution providing banking services, upon which additional qualifications may be
required:
• Federal or State of California charter financial institution that is a member of
the Federal Reserve;
• Qualified depository of public funds to ensure the collateralization requirements
for governmental entities are met;
• Experience with providing banking services to similar sized and type
governmental agencies to ensure the City’s banking needs will be met, and
must possess familiarity with reporting and other banking requirements for
governmental agencies;
• Electronic capabilities to meet the City’s current banking needs, which saves
staff time. Currently, these include safekeeping, positive pay, payroll direct
deposit, lock box service, bill concentration, electronic fund transfers,
electronic blocks and filters, electronic receivables, credit card processing, and
remote deposit;
• Access to all Federal Reserve Bank services including direct clearing with the
Federal Reserve Bank.
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B. Broker/Dealers
All brokers and dealers that desire to become authorized to do business with the City as
qualified bidders for investment transactions must complete and sign a “Broker/Dealer
Questionnaire” and submit related documents relative to eligibility. This includes current
audited financial statements, proof of State of California registration, proof of FINRA
(Financial Industry Regulatory Authority) registration, and written acknowledgement that
they have received and read the City’s investment policy. Eligible firms may include
primary dealers or regional dealers that qualify under the Securities & Exchange
Commission Rule 15c3-1 (uniform net capital rule). The firm, and individuals covering the
City’s account must be knowledgeable and experienced in public agency investing,
familiar with California Government Code as it relates to investments, and capable of
executing transactions according to institutional trading practices. Investments shall be
transacted only with authorized broker/dealers which have been reviewed and approved
by the Treasurer for reliability, credit worthiness, and trustworthiness.
C. Investment Advisors
The Treasurer may engage the services of outside professionals for evaluation and advice
regarding the City’s investment program. An authorized investment advisor may provide
investment management services, which may also include facilitating trade executions
under the direction of the Treasurer or designated representative(s). Advisors shall be
registered by the Securities & Exchange Commission and licensed to do business in the
State of California. Authorized advisors are subject to the provisions of this investment
policy and must act in the best interest of the City in the capacity of a fiduciary.
VIII. AUTHORIZED INVESTMENTS
The City of Tustin is provided a broad spectrum of eligible investments under California
Government Code Sections 53600 – 53609 (authorized investments), 53630 – 53686
(deposits and collateral), and 16429.1 (Local Agency Investment Fund). If a type of
investment is added to the California Government Code, it can only be added to the City’s
Authorized and Permitted Investment List with an amendment to this investment policy
and approval by the City Council. If a type of investment permitted by the City should be
removed from the California Government Code, it shall be deemed concurrently removed
from the City’s Authorized and Permitted Investment List, except for existing holdings
which may be held until they mature.
Security purchases, deposits, and holdings shall be maintained within statutory limits
imposed by California Government Code and shall include only the following. Percentage
holding limitations and credit quality minimums apply at the time the security is purchased.
Please refer to the table on page 11 for holding limitations by security class, type, and
issuer.
A. Municipal Bonds including:
a. Bonds issued by the local agency (City of Tustin bonds), including bonds
payable solely out of the revenues from a revenue-producing property owned,
controlled, or operated by the local agency or by a department, board, agency,
or authority of the local agency. (Legal Authority – Government Code Section
53601(a)).
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b. Registered state warrants (State of California) of treasury notes or bonds of
this state, including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by the state or by a
department, board, agency, or authority of the state. (Legal Authority –
Government Code Section 53601(c)).
c. Registered treasury notes or bonds of any of the other 49 states in addition to
California, including bonds payable solely out of the revenue from a revenue-
producing property owned, controlled, or operated by a state or by a
department, board, agency, or authority of any of the other 49 states, in
addition to California. (Legal Authority – Government Code Section 53601(d)).
d. Bonds, notes, warrants, or other evidences of indebtedness of any local
agency within the State of California, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or operated
by a local agency, or by a department, board, agency, or authority of the local
agency. (Legal Authority – Government Code Section 53601(e)).
B. Securities of the U.S. Government Obligations issued by the United States Treasury
and backed by the “full faith and credit” of the Federal government. These securities
are in the form of U.S. Treasury notes, bills, certificates of indebtedness, and bonds.
(Legal Authority – Government Code Section 53601(b)).
C. Federal agency or United States government-sponsored enterprise obligations,
participations, or other instruments, including those issued by or fully guaranteed as
to principal and interest by federal agencies or United States government-
sponsored enterprises. (Legal Authority – Government Code Section 53601(f)).
D. Bankers’ Acceptances – Bankers’ acceptances are short-term debt instruments
issued by a company that is guaranteed by a commercial bank. Bankers
Acceptances limited to banks with a bank financial strength rating of “A” by Moody’s
Investor Service or equivalent rating by another Nationally Recognized Statistical
Rating Organization. (Legal Authority – Government Code Section 53601(g)).
E. Commercial Paper – Commercial paper is issued by corporations to meet short term
funding needs with a maturity date of less than 270 days from the issue date.
Investments are restricted to only “prime” quality commercial paper with the highest
ranking or of the highest letter and numerical rating as provided for by a NRSRO.
(Legal Authority – Government Code Section 53601(h)).
a. Per California Government Code Section 53601(h), the entity that issues the
commercial paper shall meet all the following conditions in either A or B below:
A. The entity shall (1) be organized and operating in the United States as a
general corporation, (2) have total net assets in excess of five hundred million
dollars ($500,000,000), and (3) have debt other than commercial paper, if any,
that is rated “A” or higher by a NRSRO. B. The entity shall (1) be organized
within the United States as a special purpose corporation, trust, or limited
liability company, (2) have program wide credit enhancements, including, but
not limited to, over collateralization, letter of credit, or surety bonds, and (3)
have commercial paper that is rated “A-1” or higher, or the equivalent, by a
NRSRO.
F. Negotiable Certificates of Deposit – Certificates of deposit issued by a nationally or
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state-chartered bank or a federal association, a state or Federal credit union, or by
a federally licensed or state licensed branch of a foreign bank. The term of
negotiable certificates of deposit is restricted to a maximum of five years. (Legal
Authority – Government Code Section 53601(i)). Any amount above the FDIC
insured limit must be issued by institutions which have short-term ratings of “A-1” or
its equivalent or higher by a NRSRO; or long-term debt obligations rated in the “A”
category or its equivalent or higher by a NRSRO.
G. 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. 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. The purchase of a security pursuant to an repurchase
agreement requires the counter party to deliver the underlying security by book entry
or by a third-party custodial agreement. Repurchase Agreements may only be made
with banks and primary dealers with which the City has entered into a Master
Repurchase Agreement modeled after the Public Securities Associations’ Master
Repurchase Agreement. (Legal Authority – Government Code Section 53601(j)).
H. Corporate or Medium-Term Notes – Corporate or medium-term notes are
obligations of a domestic corporation or depository institution with a minimum credit
rating of “A” or better by a NRSRO at the time of purchase. If the credit rating of a
security is subsequently downgraded below the minimum rating level for a new
investment of that security, the Treasurer shall evaluate the downgrade on a case-
by-case basis to determine if the security should be held or sold. The Treasurer will
apply legal constraints and the general objectives of safety, liquidity, and return
when making the decision. (Legal Authority – Government Code Section 53601(k)).
I. Money Market Mutual Funds – Money market mutual funds qualifying for City
investment must restrict their portfolios to issues approved by the same state
investment statute that defines investment alternatives. In addition, these money
market mutual funds must adhere to Federal statutes regarding the size of the
money market mutual fund and its safety, must attain the highest ranking of two of
the three highest ranking NRSRO, and must retain an investment advisor registered
with the Securities and Exchange Commission with not less than five years of
experience investing in money market instruments and assets under management
of at least five hundred million dollars. The money market mutual funds must invest
solely in investments, which the City itself could legally purchase. (Legal Authority
– Government Code Section 53601(l)).
J. JPA Investment Pools – Shares of beneficial interest issued by a joint powers’
authority organized pursuant to Section 6509.7 that invests in the securities and
obligations authorized in subdivisions (a) to (q), inclusive. The JPA must retain an
investment advisor that is registered with the SEC (or exempt from registration), has
assets under management in excess of $500 million, and has at least five years’
experience investing in instruments authorized by Section 53601, subdivisions (a)
to (q). Each share shall represent an equal proportional interest in the underlying
pool of securities owned by the joint powers’ authority. (Legal Authority –
Government Code Section 53601(p)).
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K. Bonds of Supranationals – U.S. dollar denominated senior unsecured
unsubordinated obligations issued by or unconditionally guaranteed by one of the
three supranational banking groups: International Bank for Reconstruction and
Development (World Bank or IBRD), International Finance Corporation (IFC), and
Inter-American Development Bank (IADB). Supranational banks are formed by a
group of countries through an international treaty with specific objectives such as
fighting poverty or promoting economic development and have been incorporated
into U.S. Federal Law by Congressional Acts. Investments shall be rated “AA” or
better by an NRSRO and have a remaining maturity of five years or less. (Legal
Authority – Government Code Section 53601(q)).
L. Collateralized Bank Deposits – All active (checking and savings accounts) and
inactive (time or certificate of deposits) above FDIC insured limits must be
collateralized pursuant to Government Code. (Legal Authority – California
Government Code Section 53652; 53653; 53635.2).
California Code also allows for the use of placement services to purchase FDIC
insured CD’s, not to exceed 30% of total holdings. The City may utilize these
services at the discretion of the Treasurer. (Legal Authority – California Government
Code Sections 53601.8 and 53635.8).
M. Orange County Investment Pool (OCIP) – Investment in OCIP is allowable
according to the guidelines in Government Code. (Legal Authority – Government
Code Section 53684).
N. Local Agency Investment Fund (LAIF) – The Local Agency Investment Fund (LAIF)
is a special fund in the California State Treasury created and governed pursuant to
Government Code Sections 16429.1 et seq. Investments in LAIF are limited to the
maximum amount as specified by LAIF. Principal amount withdrawal of $10 million
or greater needs 24-hour notice, and less than $10 million may be withdrawn the
same day. The fees charged by LAIF are limited by statute. (Legal Authority –
Government Code Section 16429.1).
O. Agency Mortgage Pass-Through Securities are created when mortgages are
pooled together and undivided interests or participations in the stream of revenues
associated with the mortgages are sold. The City shall only invest in mortgage
pass-through securities that are guaranteed by the U.S. government or a
government-sponsored enterprise. The securities shall be rated at least “AA” or its
equivalent by a NRSRO. The maximum legal final maturity may not exceed five (5)
years. (Legal Authority – Government Code Section 53601(o)).
IX. PROHIBITED INVESTMENTS
In accordance with California Code Section 53601.6, the City shall not invest in inverse
floaters, range notes, or mortgage-derived, interest-only strips, or in any security that could
result in zero interest accrual if held to maturity. This limitation shall not apply to local
agency investments in shares of beneficial interest issued by diversified management
companies registered under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1
et seq.) that are authorized for investment pursuant to subdivision (l) of Section 53601.
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Additionally, the City shall not invest funds directly in reverse repurchase agreements.
Securities shall not be purchased on margin, credit, or for other than full cash payment,
and shall not be pledged as collateral. All securities shall be purchased on a delivery
versus payment (DVP) basis.
The purchase of a security with a forward settlement date exceeding 45 days from the
time of investment is prohibited.
X. REVIEW OF INVESTMENT PORTFOLIO
The Treasurer shall render a quarterly report to the City Council, City Manager, Audit
Commission and external auditors, which states its relationship to the current Investment
Policy. The report shall include, at the minimum, required elements as detailed in Section
XVIII of this policy.
The two Audit Commissioners serving on the Investment Sub-Committee shall receive
monthly reports for the first two months of each quarter from the Treasurer for 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.
XI. INVESTMENT POOLS/MUTUAL FUNDS
An investigation of any investment pool or money market mutual fund is required prior to
investing and on an annual basis. The investigation shall, at a minimum, obtain the
following information:
• A description of eligible investment securities, and a written statement of
investment policy and objectives;
• A description of interest calculations and how it is distributed, and how gains
and losses are distributed;
• A description of how securities are safeguarded (including the settlement
process) and how often the securities are marked to market and how often an
audit is conducted;
• A description of who may invest in the program, how often, what size deposits
and withdrawals are permitted;
• A schedule for receiving statements and portfolio listings;
• A description of the process for maintaining a reserve or retaining earnings, if
applicable. Or understanding if all income, after expenses, is distributed to
participants;
• A fee schedule describing when and how fees are assessed;
• A description of eligibility for bond proceeds.
For money market mutual funds, the prospectus and statement of information is acceptable and
may be obtained electronically.
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XII. COLLATERALIZATION
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 more than the total amount of all deposits of a
depository as follows:
– Government securities at least 110 percent.
– Mortgage backed securities at least 150 percent.
XIII. SAFEKEEPING AND CUSTODY
All security transactions, including collateral for repurchase agreements, shall be
conducted on a delivery versus payment (DVP) basis. Securities will be held by a third-
party custodial bank designated by the Treasurer. Securities shall be held in the name of
the City and the City shall receive confirmations as evidenced by safekeeping receipts.
Maximum
Maturity
Municipal Bonds 5 years 30%5%N/A
U.S. Treasuries and General Obligations 5 years 100%100%N/A
Federal Agency or US Government Sponsored
Enterprise 5 years 100%50%N/A
Bankers' Acceptance 180 days 30%5% A or Equivalent by
an NRSRO
Commercial Paper (c) (d)270 days 30%5% A-1/P-1 plus A
long term
Negotiable Certificates of Deposit (e)5 years 30%5%N/A
Repurchase Agreements (102% Collateralized)1 year 30%5%N/A
Medium-Term (Corporate) Notes (d)5 years 30% 5%A
Money Market Mutual Funds N/A 20%10%AAA/AAA
Agency Mortgage Pass-Through Securities 5 years 20% 10%AA
Shares of Beneficial Interest by a JPA 5 years 100%50%N/A
Supranational (IBRD, IFD, and IADB)5 years 5%5%AA
Collateralized Bank Deposits 5 years 100%30%N/A
Orange County Investment Pool N/A Max permitted by
County Treasurer
Max permitted by
County Treasurer N/A
Local Agency Investment Fund N/A Max permitted by
State Treasurer
Max permitted by
State Treasurer N/A
(a) In compliance if within limits at time of purchase; Combine issuer types to determine maximum counterparty risk.
(b) Rating categories are inclusive of rating modifiers such as "+/-" or numbers from one NRSRO unless two ratings are required.
(c ) A-1 or equivalent plus A long term; total assets in excess of $500MM; no more than 10% outstanding from a single issuer.
(d) SB 998 also combines the issuer limitation of a local agency's investments in commercial paper and medium-term notes to 10% of any single issuer.
(e ) Any amount above the FDIC insured limit must be issued by institutions which have short-term ratings of "A-1" or its equivalent or higher by a
NRSRO; or long-term debt obligations rated in the "A" category or its equivalent or higher by a NRSRO.
City of Tustin Allowable Investments
Investment Type Maximum %
Holdings
Maximum % per
Issuer (a)
Minimum Rating
(b)
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The only exception to the foregoing shall be depository accounts and securities purchases
made with: (i) local government investment pools; (ii) time certificates of deposit, and, (iii)
mutual funds and money market mutual funds, since these securities are not deliverable.
XIV. DIVERSIFICATION
Assets held in the investment portfolio shall be diversified to eliminate the risk of loss
resulting from over-concentration of assets in a specific class of securities.
Refer to the table on page 11 for diversification limits
XV. MAXIMUM MATURITIES
Unless previously authorized by City Council, no investment may have a term final stated
maturity longer than five (5) years from the date of settlement. Such approval must be
issued no less than three months prior to the purchase of any security exceeding the five-
year maturity limit.
Please refer to the table on page 11 for maturity limits. In addition to the maximum maturity
limits, the weighted average maturity of the portfolio shall not exceed 36 months. At the
time of purchase, the short-term portion of the total investment portfolio shall have
sufficient cash and maturities to cover the next six months of anticipated use of funds.
XVI. 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).
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 ensure that money is 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.
XVII. PERFORMANCE STANDARDS
The investment portfolio will be designed to obtain a market-average rate of return during
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budgetary and economic cycles, considering the City’s investment risk constraints and cash flow
needs. The City Treasurer shall monitor and evaluate the portfolio’s performance relative to the
chosen market benchmark(s), which will be included in the City Treasurer’s quarterly report. The
City Treasurer shall select an appropriate, readily available index to use as a market
benchmark. The market benchmark for 2021 will be the Intercontinental Exchange (ICE) Bank
of America Merrill Lynch (BAML) 1-5 Year U.S. Treasury/Agency Index.
XVIII. REPORTING
Reports shall be produced according to standards outlined in California Code section
53646. The purpose for these reports will be to formulate suggestions for improved future
performance, and to verify that authorized treasury personnel have acted in accordance
with the investment policy and written investment procedures.
In addition, the City Treasurer shall produce monthly transaction and quarterly investment
reports. The required elements of the quarterly report are as follows:
a. Type of investment
b. Issuer
c. Date of maturity
d. Par value and dollar amount invested
e. Listing of all investments and monies held by the City
f. Amount of deposit or cost of the security
g. Description of all funds that are under contract with other parties
h. Rate of interest/discount and yield
i. Statement relating the report to the Statement of Investment Policy
j. Statement that there are enough funds to meet the City’s anticipated cash flow
needs for at least the next six months
k. The current book value
l. The current market value
m. Average portfolio life
n. Average portfolio yield
o. Current treasury yield that most closely matches average portfolio life
p. Ratings of all corporate bonds, medium-term notes, municipal and state
securities, commercial bank time drafts, and commercial paper to be shown
q. Summary of investments with total percentage by type of investment
r. 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 l. to support City deposits in
the funds. Quarterly reports shall state portfolio compliance to the statement of investment
policy, or the way the portfolio is not in compliance.
XIX. INVESTMENT POLICY ADOPTION
The Treasurer shall annually review the City’s Investment Policy with the City of Tustin
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Audit Commission. Proposed amendments will be brought to the City Council for final
action upon the recommendation of the Treasurer.
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.
XX. CONTINUING EDUCATION AND TRAINING
The City of Tustin and the Treasurer’s office value professionalism and accountability in
the execution of the investment program. To ensure the highest level of professional
standards, investment staff responsible for the day-to-day management of the portfolio
are encouraged to complete at least 12 hours per year of continuing education in the
areas of cash and investment management.
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GLOSSARY
AGENCIES: Federal agency securities and/or Government-sponsored enterprises.
BANKERS’ ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
BENCHMARK: A comparative base for measuring the performance or risk tolerance of the
investment portfolio. A benchmark should represent a close correlation to the level of risk and the
average duration of the portfolio’s investments.
BOOK RETURN: Book return is calculated by summing interest received, accrued interest
earned, amortization of premiums and discounts, and realized gains and losses; then dividing
the sum by the average balance of the portfolio.
BOOK VALUE MEASUREMENT (also see BOOK RETURN): The incorporation of book value
measurement allows us to estimate the expected earnings on the portfolio when securities are
held to maturity. Because the calculation does not incorporate unrealized gains or losses,
measuring book value alone does not give a complete picture of the portfolio’s assumed risk.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a
Certificate. Large denomination (over $250,000) CDs are typically negotiable.
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.
COLLATERALIZED BANK DEPOSIT: A bank deposit that is collateralized at least 100%
(principal plus interest to maturity). The deposit is collateralized using assets set aside by the
issuer such as Treasury securities or other qualified collateral to secure the deposit in excess of
the limit covered by the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER: The short-term unsecured debt of corporations.
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: delivery versus
payment and delivery versus receipt. Delivery versus payment is delivery of securities with an
exchange of money for the securities. Delivery versus receipt is delivery of securities with an
exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the
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movement of one or more underlying index or security, and may include a leveraging factor, or
(2) financial contracts based upon notional amounts whose value is derived from an underlying
index or security (interest rates, foreign exchange rates, equities or commodities).
DISCOUNT: The difference between the cost price of a security and its maturity when quoted at
lower than face value. A security selling below original offering price shortly after the initial sale is
also referred to as trading at a discount.
DISCOUNT SECURITIES: Non-interest-bearing money market instruments that are issued a
discount and redeemed at maturity for full face value (e.g. U.S. Treasury Bills.)
DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent
returns.
DURATION: A measure of the sensitivity of the price (the value of principal) of a fixed-income
investment to a change in interest rates. Duration is expressed as a number of years. Rising
interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
FAIR MARKET VALUE MEASUREMENT (also see TOTAL RETURN): The incorporation of fair
market value reporting tells us that portfolios are performing in a manner that is consistent with
interest rate changes. Fair Market Value reporting is particularly important in rising rate interest
rate environments as it provides the ability to explain to stakeholders why there are unrealized
losses in the portfolio.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to
various classes of institutions and individuals (e.g. S&L’s, small business firms, students, farmers,
farm cooperatives, and exporters.)
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank
deposits, currently up to $250,000 per entity.
FEDERAL FARM CREDIT BANK (FFCB): The Federal Farm Credit Bank System provides credit
and liquidity in the agricultural industry. FFCB issues discount notes and bonds.
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 Mae, as the
corporation is called, is a private stockholder-owned corporation. The corporation’s purchases
include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages.
FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees
that all security holders will receive timely payment of principal and interest.
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FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal
Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a
rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding
purchases and sales of Government Securities in the open market as a means of influencing the
volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and
consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks and
about 5,700 commercial banks that are members of the system.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Freddie Mac is a stockholder-
owned, government sponsored enterprise (GSE) or agency that was chartered by Congress in
1970 to support the mortgage market by purchasing mortgages from lenders and either holding
them or packaging them into mortgage-backed securities (MBS). Freddie Mac guarantees the
timely payment of principal and interest on the underlying mortgages.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities
influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers,
commercial banks, savings and loan associations, and other institutions. Security holder is
protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the
FHA, VA or FHA mortgages. The term “pass-throughs” is often used to describe Ginnie Maes.
JOINT POWERS AUTHORITY (JPA): A separate legal entity formed by two or more local
agencies to jointly exercise common powers.
LOCAL AGENCY INVESTMENT FUND (LAIF): A voluntary investment fund open to government
entities and certain non-profit organizations in California that is managed by the State Treasurer’s
Office.
LIQUIDITY: The term liquidity is used when referring to how easily an investment can be
converted into cash. It is also used when describing the pool of money an agency keeps in
overnight or short-term investments to meet immediate cash needs. A liquid asset is one that can
be converted easily and rapidly into cash without a substantial loss of value. In the money
markets, a security is said to be liquid if the spread between bid and asked prices is narrow and
reasonable size can be done at those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political
subdivisions that are placed in the custody of a State or County Treasurer for investment and
reinvestment.
MARKET VALUE: The price at which a security is quoted and could presumably be purchased
or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions
between the parties to repurchase—reverse repurchase agreements that establishes each party’s
rights 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 principal or stated value of an investment becomes due
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and payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper,
bankers’ acceptances, etc.) are issued and traded.
MONEY MARKET MUTUAL FUND: A mutual fund that invests exclusively in short-term
securities. Money market funds attempt to keep their net asset value at $1.00 per share.
MORTGAGE PASS-THROUGH SECURITIES: A securitized participation in the interest and
principal cash flows from a specified pool of mortgages. Principal and interest payments made on
the mortgages are passed through to the holder of the security.
MUNICIPAL BONDS: Securities issued by state and local agencies to finance capital and
operating expenses.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO): A credit
rating agency that the Securities and Exchange Commission in the United States uses for
regulatory purposes. Credit rating agencies provide assessments of an investment’s risk. The
issuers of investments, especially debt securities, pay credit rating agencies to provide them with
ratings. The three most prominent NRSROs are Moody’s, S&P, and Fitch.
NEGOTIABLE CERTIFICATE OF DEPOSIT: A short-term debt instrument that pays interest and
is issued by a bank, savings or federal association, state or federal credit union, or state-licensed
branch of a foreign bank. Negotiable CDs are traded on a secondary market.
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 of money 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 most important and most flexible monetary policy tool.
ORANGE COUNTY INVESTMENT POOL (OCIP): A voluntary County investment pool open to
local government agencies in Orange County and managed by the Orange County Treasurer.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily reports of market
activity and positions and monthly financial statements to the Federal Reserve 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 PERSON RULE: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody
state—the so-called legal list. In other states the trustee may invest in a security if it is one which
would be bought by a prudent person of discretion and intelligence who is seeking a reasonable
income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption
from the payment of any sales or compensating use or ad valorem taxes under the laws of this
state, which has segregated for the benefit of the commission eligible collateral having a value of
not less than its maximum liability and which has been approved by the Public Deposit Protection
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Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current
market price. This may be the amortized yield to maturity on a bond the current income return.
REPURCHASE AGREEMENT (REPO): A holder of securities sells these securities to an investor
with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in
effect lends the “seller” money for the period of the agreement, and the terms of the agreement
are structured to compensate him for this.
REVERSE REPURCHASE AGREEMENT (REVERSE REPO): A reverse-repurchase agreement
(reverse repo) involves an investor borrowing cash from a financial institution in exchange f or
securities. The investor agrees to repurchase the securities at a specified date for the same cash
value plus an agreed upon interest rate. Although the transaction is similar to a repo, the purpose
of entering into a reverse repo is quite different. While a repo is a straightforward investment of
public funds, the reverse repo is a borrowing.
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 & EXCHANGE COMMISSION: Agency created by Congress to protect investors
in securities transactions by administering securities legislation.
SEC RULE 15(C)3-1: See Uniform Net Capital Rule.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA,
FFCB, etc.) and Corporations, which have imbedded options (e.g., call features, step-up coupons,
floating rate coupons, derivative-based returns) into their debt structure. Their market
performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options
and shifts in the shape of the yield curve.
SUPRANATIONAL: A supranational is a multi-national organization whereby member states
transcend national boundaries or interests to share in the decision making to promote economic
development in the member countries.
TOTAL RETURN: Total return is calculated by summing up interest received, accrued interest
earned, realized gains and losses and unrealized gains and losses. By incorporating unrealized
gains and losses, total return identifies the marked-to-market risks of a portfolio.
TREASURY BILLS: A discount security issued by the U.S. Treasury to finance the national debt.
Most bills are issued to mature in three months, six months, or one year.
TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities issued as direct
obligations of the U.S. Government and having initial maturities of more than 10 years.
TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities issued as direct
obligations of the U.S. Government and having initial maturities from 2 to 10 years.
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UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans and commitments to
purchase securities, one reason new public issues are spread among members of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
YIELD: The rate of annual income on an investment, expressed as a percentage. (a) INCOME
YIELD is obtained by dividing the current dollar income by the current market price for the security.
(b) NET YIELD or YIELD TO MATURITY is 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 bond.
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City of Tustin
Statement of Investment Policy for 20232
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TABLE OF CONTENTS
I. PURPOSE 3
II. SCOPE 3
III. PRUDENCE 3
IV. OBJECTIVES 3
V. DELEGATION OF AUTHORITY 4
VI. ETHICS AND CONFLICTS OF INTEREST 4
VII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS 4
VIII. AUTHORIZED INVESTMENTS 6
IX. PROHIBITED INVESTMENTS 9
X. REVIEW OF INVESTMENT PORTFOLIO 10
XI. INVESTMENT POOLS/MUTUAL FUNDS 10
XII. COLLATERALIZATION 11
XIII. SAFEKEEPING AND CUSTODY 11
XIV. DIVERSIFICATION 12
XV. MAXIMUM MATURITIES 12
XVI. INTERNAL CONTROLS 12
XVII. PERFORMANCE STANDARDS 12
XVIII. REPORTING 13
XIX. INVESTMENT POLICY ADOPTION 13
XX. CONTINUING EDUCATION AND TRAINING 14
GLOSSARY 15
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I. 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 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 executed at the direction of the City Treasurer
as to selection and appropriateness.
II. SCOPE
This investment policy applies to the City of Tustin’s pooled investment portfolio, which
encompasses all monies under the direct oversight of the Treasurer. The funds covered
by this policy are accounted for and incorporated in the City of Tustin’s Annual
Comprehensive Annual Financial Report (ACAFR) and include:
– General Fund
– Special Revenue Funds
– Capital Project Funds
– Proprietary Funds
– Successor Agency to the Dissolved Tustin Community Redevelopment
Agency
– Other funds that may be created
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 the IRS rules, the trust agreement, and PARS investment guidelines.
III. PRUDENCE
The standard of prudence, according to California Code section 53600.3, to be used by
the Treasurer and designated representative(s), shall be the “prudent investor” standard
and shall be applied in the context of managing the overall portfolio. Persons authorized
to make investment decisions on behalf of the City are trustees and therefore fiduciaries
subject to the prudent investor standard which states, “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 City, that a prudent person acting in the 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 City”. Within the limitations of this section
and considering individual investments as part of an overall strategy, investments may be
acquired as authorized by law.
IV. OBJECTIVES
The primary objectives of the City of Tustin’s cash management and investment program,
in priority order, shall be:
Safety: It is the primary duty and responsibility of the City, City Council, City
Treasurer (Treasurer), City Manager, and City Staff to diligently protect, preserve,
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and maintain intact the principal placed in trust with the City on behalf of the
citizens of the community. Investments by the City Treasurer and/or designated
representative(s) shall be undertaken in a manner that seeks to ensure the
preservation of principal in the overall portfolio. To attain this objective, the City
Treasurer will diversify investments by investing funds among a variety of security
types, credit counterparties, and individual financial institutions. This will be done
while continually assessing risks inherent in fixed income investing, including but
not limited to: interest rate risk, default risk, reinvestment risk and inflation risk.
Liquidity: The City's investment portfolio will remain sufficiently liquid to enable
the City to meet all operating requirements which might be reasonably anticipated.
The City will keep enough cash and cash equivalents on hand to ensure a
minimum of six months of expenditures can be met.
Return on Investments: The City's investment portfolio shall have the objective
of attaining a market rate of return throughout budgetary and economic cycles.
Comparative performance measurements will be commensurate with the City's
investment risk constraints as outlined in this investment policy and the City’s cash
flow requirements.
V. DELEGATION OF AUTHORITY
California Government Code Section 53607 provides the authority for the legislative body
of the City to invest funds of the City or to delegate that full responsibility to the Treasurer
of the City for a one-year period. Under City of Tustin Municipal Code SectionOrdinance
No. 1612, the City Council has authorized the Treasurer to invest City funds in accordance
with California Government Code. Adoption of the annual investment policy delegates to
the City Treasurer for a period of one-year the authority to invest funds of the City in
accordance with the Investment Policy.
The City of Tustin shall invest public funds in such a manner as to comply with state and
local laws; ensure prudent money management; provide for daily cash flow
requirements; and meet the objectives of the policy, in priority of Safety, Liquidity, and
Return on Investment. Annually, City Treasurer shall review the policy with the Audit
Commission and the Investment Sub-Committee and submit the policy to City Council
for adoption.
VI. 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 and the City's gift regulation.
VII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Treasurer shall maintain a list of approved financial institutions authorized to provide
investment related services to the City. The types of institutions include custodian banks,
financial depositories, broker/dealers, and investment advisors. For authorized financial
institutions providing depository and/or investment services to the City, the Treasurer or
designated representative(s) shall perform an annual review of the financial condition and
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registrations of the authorized institutions, including their annual audited financial
statements. A current audited financial statement is required to be on file for each financial
institution and broker/dealer through which the City invests its funds.
A. Financial Institutions
In selecting financial institutions (custodian banks or depositories), the Treasurer shall
conduct a comprehensive review of prospective depositories’ credit characteristics and
financial history. Funds greater than the FDIC insured amount shall be invested (deposits
and/or certificates of deposit) only in commercial banks and savings & loans with a bank
financial strength rating of “A” by Moody’s Investor Service or equivalent rating by another
Nationally Recognized Statistical Rating Organization (NRSRO). Qualifications and
minimum requirements for depositories that may be eligible for funds greater than the
FDIC insured amount shall be established by the Treasurer and will be provided to any
institution seeking to conduct business with the City. Banks and Savings & Loan
Associations seeking to establish eligibility as a depository for the City’s deposits shall
make available annual audited financial statements, either via the Internet or upon request
for review by the Treasurer. Any institution meeting the City’s required criteria, including
meeting the collateral requirements as stated in California Government Code Section
53652 and outlined in Section XII of this policy, will be eligible for placement of public
deposits by the City, subject to approval by the Treasurer. As deemed necessary by the
Treasurer, reviews of unaudited quarterly financial data may be conducted for institutions
on the City’s approved list. Any institution falling below the City’s established minimum
criteria shall be removed from the approved list, no new deposits may be placed with that
institution, and all funds remaining shall be withdrawn as the deposits mature. The City
Treasurer shall notify parties as part of the quarterly reporting process outlined in Section
X. of this policy.
The financial institution providing the City with its primary banking and custodian services
may have additional qualifications and minimum requirements based on the City’s banking
needs.
The City of Tustin has established the following minimum qualifications for a financial
institution providing banking services, upon which additional qualifications may be
required:
Federal or State of California charter financial institution that is a member of
the Federal Reserve;
Qualified depository of public funds to ensure the collateralization requirements
for governmental entities are met;
Experience with providing banking services to similar sized and type
governmental agencies to ensure the City’s banking needs will be met, and
must possess familiarity with reporting and other banking requirements for
governmental agencies;
Electronic capabilities to meet the City’s current banking needs, which saves
staff time. Currently, these include safekeeping, positive pay, payroll direct
deposit, lock box service, bill concentration, electronic fund transfers,
electronic blocks and filters, electronic receivables, credit card processing, and
remote deposit;
Access to all Federal Reserve Bank services including direct clearing with the
Federal Reserve Bank.
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B. Broker/Dealers
All brokers and dealers that desire to become authorized to do business with the City as
qualified bidders for investment transactions must complete and sign a “Broker/Dealer
Questionnaire” and submit related documents relative to eligibility. This includes current
audited financial statements, proof of State of California registration, proof of FINRA
(Financial Industry Regulatory Authority) registration, and written acknowledgement that
they have received and read the City’s investment policy. Eligible firms may include
primary dealers or regional dealers that qualify under the Securities & Exchange
Commission Rule 15c3-1 (uniform net capital rule). The firm, and individuals covering the
City’s account must be knowledgeable and experienced in public agency investing,
familiar with California Government Code as it relates to investments, and capable of
executing transactions according to institutional trading practices. Investments shall be
transacted only with authorized broker/dealers which have been reviewed and approved
by the Treasurer for reliability, credit worthiness, and trustworthiness.
C. Investment Advisors
The Treasurer may engage the services of outside professionals for evaluation and advice
regarding the City’s investment program. An authorized investment advisor may provide
investment management services, which may also include facilitating trade executions
under the direction of the Treasurer or designated representative(s). Advisors shall be
registered by the Securities & Exchange Commission and licensed to do business in the
State of California. Authorized advisors are subject to the provisions of this investment
policy and must act in the best interest of the City in the capacity of a fiduciary.
VIII. AUTHORIZED INVESTMENTS
The City of Tustin is provided a broad spectrum of eligible investments under California
Government Code Sections 53600 – 53609 (authorized investments), 53630 – 53686
(deposits and collateral), and 16429.1 (Local Agency Investment Fund). If a type of
investment is added to the California Government Code, it can only be added to the City’s
Authorized and Permitted Investment List with an amendment to this investment policy
and approval by the City Council. If a type of investment permitted by the City should be
removed from the California Government Code, it shall be deemed concurrently removed
from the City’s Authorized and Permitted Investment List, except for existing holdings
which may be held until they mature.
Security purchases, deposits, and holdings shall be maintained within statutory limits
imposed by California Government Code and shall include only the following. Percentage
holding limitations and credit quality minimums apply at the time the security is purchased.
Please refer to the table on page 11 for holding limitations by security class, type, and
issuer.
A. Municipal Bonds including:
a. Bonds issued by the local agency (City of Tustin bonds), including bonds
payable solely out of the revenues from a revenue-producing property owned,
controlled, or operated by the local agency or by a department, board, agency,
or authority of the local agency. (Legal Authority – Government Code Section
53601(a)).
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b. Registered state warrants (State of California) of treasury notes or bonds of
this state, including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by the state or by a
department, board, agency, or authority of the state. (Legal Authority –
Government Code Section 53601(c)).
c. Registered treasury notes or bonds of any of the other 49 states in addition to
California, including bonds payable solely out of the revenue from a revenue-
producing property owned, controlled, or operated by a state or by a
department, board, agency, or authority of any of the other 49 states, in
addition to California. (Legal Authority – Government Code Section 53601(d)).
d. Bonds, notes, warrants, or other evidences of indebtedness of any local
agency within the State of California, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or operated
by a local agency, or by a department, board, agency, or authority of the local
agency. (Legal Authority – Government Code Section 53601(e)).
B. Securities of the U.S. Government Obligations issued by the United States Treasury
and backed by the “full faith and credit” of the Federal government. These securities
are in the form of U.S. Treasury notes, bills, certificates of indebtedness, and bonds.
(Legal Authority – Government Code Section 53601(b)).
C. Federal agency or United States government-sponsored enterprise obligations,
participations, or other instruments, including those issued by or fully guaranteed as
to principal and interest by federal agencies or United States government-
sponsored enterprises. (Legal Authority – Government Code Section 53601(f)).
D. Bankers’ Acceptances – Bankers’ acceptances are short-term debt instruments
issued by a company that is guaranteed by a commercial bank. Bankers
Acceptances limited to banks with a bank financial strength rating of “A” by Moody’s
Investor Service or equivalent rating by another Nationally Recognized Statistical
Rating Organization. (Legal Authority – Government Code Section 53601(g)).
E. Commercial Paper – Commercial paper is issued by corporations to meet short term
funding needs with a maturity date of less than 270 days from the issue date.
Investments are restricted to only “prime” quality commercial paper with the highest
ranking or of the highest letter and numerical rating as provided for by a NRSRO.
(Legal Authority – Government Code Section 53601(h)).
a. Per California Government Code Section 53601(h), the entity that issues the
commercial paper shall meet all the following conditions in either A or B below:
A. The entity shall (1) be organized and operating in the United States as a
general corporation, (2) have total net assets in excess of five hundred million
dollars ($500,000,000), and (3) have debt other than commercial paper, if any,
that is rated “A” or higher by a NRSRO. B. The entity shall (1) be organized
within the United States as a special purpose corporation, trust, or limited
liability company, (2) have program wide credit enhancements, including, but
not limited to, over collateralization, letter of credit, or surety bonds, and (3)
have commercial paper that is rated “A-1” or higher, or the equivalent, by a
NRSRO.
F. Negotiable Certificates of Deposit – Certificates of deposit issued by a nationally or
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state-chartered bank or a federal association, a state or Federal credit union, or by
a federally licensed or state licensed branch of a foreign bank. The term of
negotiable certificates of deposit is restricted to a maximum of five years. (Legal
Authority – Government Code Section 53601(i)). Any amount above the FDIC
insured limit must be issued by institutions which have short-term ratings of “A-1” or
its equivalent or higher by a NRSRO; or long-term debt obligations rated in the “A”
category or its equivalent or higher by a NRSRO.
G. 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. 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. The purchase of a security pursuant to an repurchase
agreement requires the counter party to deliver the underlying security by book entry
or by a third-party custodial agreement. Repurchase Agreements may only be made
with banks and primary dealers with which the City has entered into a Master
Repurchase Agreement modeled after the Public Securities Associations’ Master
Repurchase Agreement. (Legal Authority – Government Code Section 53601(j)).
H. Corporate or Medium-Term Notes – Corporate or medium-term notes are
obligations of a domestic corporation or depository institution with a minimum credit
rating of “A” or better by a NRSRO at the time of purchase. If the credit rating of a
security is subsequently downgraded below the minimum rating level for a new
investment of that security, the Treasurer shall evaluate the downgrade on a case-
by-case basis to determine if the security should be held or sold. The Treasurer will
apply legal constraints and the general objectives of safety, liquidity, and return
when making the decision. (Legal Authority – Government Code Section 53601(k)).
I. Money Market Mutual Funds – Money market mutual funds qualifying for City
investment must restrict their portfolios to issues approved by the same state
investment statute that defines investment alternatives. In addition, these money
market mutual funds must adhere to Federal statutes regarding the size of the
money market mutual fund and its safety, must attain the highest ranking of two of
the three highest ranking NRSRO, and must retain an investment advisor registered
with the Securities and Exchange Commission with not less than five years of
experience investing in money market instruments and assets under management
of at least five hundred million dollars. The money market mutual funds must invest
solely in investments, which the City itself could legally purchase. (Legal Authority
– Government Code Section 53601(l)).
J. JPA Investment Pools – Shares of beneficial interest issued by a joint powers’
authority organized pursuant to Section 6509.7 that invests in the securities and
obligations authorized in subdivisions (a) to (q), inclusive. The JPA must retain an
investment advisor that is registered with the SEC (or exempt from registration), has
assets under management in excess of $500 million, and has at least five years’
experience investing in instruments authorized by Section 53601, subdivisions (a)
to (q). Each share shall represent an equal proportional interest in the underlying
pool of securities owned by the joint powers’ authority. (Legal Authority –
Government Code Section 53601(p)).
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K. Bonds of Supranationals – U.S. dollar denominated senior unsecured
unsubordinated obligations issued by or unconditionally guaranteed by one of the
three supranational banking groups: International Bank for Reconstruction and
Development (World Bank or IBRD), International Finance Corporation (IFC), and
Inter-American Development Bank (IADB). Supranational banks are formed by a
group of countries through an international treaty with specific objectives such as
fighting poverty or promoting economic development and have been incorporated
into U.S. Federal Law by Congressional Acts. Investments shall be rated “AA” or
better by an NRSRO and have a remaining maturity of five years or less. (Legal
Authority – Government Code Section 53601(q)).
L. Collateralized Bank Deposits – All active (checking and savings accounts) and
inactive (time or certificate of deposits) above FDIC insured limits must be
collateralized pursuant to Government Code. (Legal Authority – California
Government Code Section 53652; 53653; 53635.2).
California Code also allows for the use of placement services to purchase FDIC
insured CD’s, not to exceed 30% of total holdings. The City may utilize these
services at the discretion of the Treasurer. (Legal Authority – California Government
Code Sections 53601.8 and 53635.8).
M. Orange County Investment Pool (OCIP) – Investment in OCIP is allowable
according to the guidelines in Government Code. (Legal Authority – Government
Code Section 53684).
N. Local Agency Investment Fund (LAIF) – The Local Agency Investment Fund (LAIF)
is a special fund in the California State Treasury created and governed pursuant to
Government Code Sections 16429.1 et seq. Investments in LAIF are limited to the
maximum amount as specified by LAIF. Principal amount withdrawal of $10 million
or greater needs 24-hour notice, and less than $10 million may be withdrawn the
same day. The fees charged by LAIF are limited by statute. (Legal Authority –
Government Code Section 16429.1).
O. Investment Contracts – In addition to investments as outlined in the table on page
11, bond proceeds may be placed in investment contracts if authorized by borrowing
documents. Guarantors of such contracts shall have at least two “AA” ratings by two
NRSROs. Contracts shall contain market value protection in case of downgrade by
including delivery of cash or Treasury securities at the election of the City.
P.O. Agency Mortgage Pass-Through Securities are created when mortgages are
pooled together and undivided interests or participations in the stream of revenues
associated with the mortgages are sold. The City shall only invest in mortgage
pass-through securities that are guaranteed by the U.S. government or a
government-sponsored enterprise. The securities shall be rated at least “AA” or its
equivalent by a NRSRO. The maximum legal final maturity may not exceed five (5)
years. (Legal Authority – Government Code Section 53601(o)).
IX. PROHIBITED INVESTMENTS
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In accordance with California Code Section 53601.6, the City shall not invest in inverse
floaters, range notes, or mortgage-derived, interest-only strips, or in any security that could
result in zero interest accrual if held to maturity. This limitation shall not apply to local
agency investments in shares of beneficial interest issued by diversified management
companies registered under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1
et seq.) that are authorized for investment pursuant to subdivision (l) of Section 53601.
Additionally, the City shall not invest funds directly in reverse repurchase agreements.
Securities shall not be purchased on margin, credit, or for other than full cash payment,
and shall not be pledged as collateral. All securities shall be purchased on a delivery
versus payment (DVP) basis.
The purchase of a security with a forward settlement date exceeding 45 days from the
time of investment is prohibited.
X. REVIEW OF INVESTMENT PORTFOLIO
The Treasurer shall render a quarterly report to the City Council, City Manager, Audit
Commission and external auditors, which states its relationship to the current Investment
Policy. The report shall include, at the minimum, required elements as detailed in Section
XVIII of this policy.
The two Audit Commissioners serving on the Investment Sub-Committee shall receive
monthly reports for the first two months of each quarter from the Treasurer for 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.
XI. INVESTMENT POOLS/MUTUAL FUNDS
An investigation of any investment pool or money market mutual fund is required prior to
investing and on an annual basis. The investigation shall, at a minimum, obtain the
following information:
A description of eligible investment securities, and a written statement of
investment policy and objectives;
A description of interest calculations and how it is distributed, and how gains
and losses are distributed;
A description of how securities are safeguarded (including the settlement
process) and how often the securities are marked to market and how often an
audit is conducted;
A description of who may invest in the program, how often, what size deposits
and withdrawals are permitted;
A schedule for receiving statements and portfolio listings;
A description of the process for maintaining a reserve or retaining earnings, if
applicable. Or understanding if all income, after expenses, is distributed to
participants;
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A fee schedule describing when and how fees are assessed;
A description of eligibility for bond proceeds.
For money market mutual funds, the prospectus and statement of information is acceptable and
may be obtained electronically.
XII. COLLATERALIZATION
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 more than the total amount of all deposits of a
depository as follows:
– Government securities at least 110 percent.
– Mortgage backed securities at least 150 percent.
Maximum
Maturity
Municipal Bonds 5 years 30% 5% N/A
U.S. Treasuries and General Obligations 5 years 100% 100% N/A
Federal Agency or US Government Sponsored
Enterprise 5 years 100% 50% N/A
Bankers' Acceptance 180 days 30% 5%
N/A A or Equivalent
by an NRSRO
Commercial Paper (c) (d)270 days 30% 5%
A-1/P-1 plus A long
term
Negotiable Certificates of Deposit (e)5 years 30% 5% N/A
Repurchase Agreements (102% Collateralized)1 year 30% 5% N/A
Medium-Term (Corporate) Notes (d)5 years 30% 5% A
Money Market Mutual Funds N/A 20% 10% AAA/AAA
Agency Mortgage Pass-Through Securities 5 years 20% 10% AA
Shares of Beneficial Interest by a JPA 5 years 100% 50% N/A
Supranational (IBRD, IFD, and IADB)5 years 5% 5% AA
Collateralized Bank Deposits 5 years 100% 30% N/A
Orange County Investment Pool N/A Max permitted by
County Treasurer
Max permitted by
County Treasurer N/A
Local Agency Investment Fund N/A Max permitted by
State Treasurer
Max permitted by
State Treasurer N/A
(a) In compliance if within limits at time of purchase; Combine issuer types to determine maximum counterparty risk.
(b) Rating categories are inclusive of rating modifiers such as "+/-" or numbers from one NRSRO unless two ratings are required.
(c ) A-1 or equivalent plus A long term; total assets in excess of $500MM; no more than 10% outstanding from a single issuer.
(d) SB 998 also combines the issuer limitation of a local agency's investments in commercial paper and medium-term notes to 10% of any single issuer.
City of Tustin Allowable Investments
Investment Type Maximum %
Holdings
Maximum % per
Issuer (a)
Minimum Rating
(b)
(e ) Any amount above the FDIC insured limit must be issued by institutions which have short-term ratings of "A-1" or its equivalent or higher by a NRSRO; or long-
term debt obligations rated in the "A" category or its equivalent or higher by a NRSRO.
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XIII. SAFEKEEPING AND CUSTODY
All security transactions, including collateral for repurchase agreements, shall be
conducted on a delivery versus payment (DVP) basis. Securities will be held by a third-
party custodial bank designated by the Treasurer. Securities shall be held in the name of
the City and the City shall receive confirmations as evidenced by safekeeping receipts.
The only exception to the foregoing shall be depository accounts and securities purchases
made with: (i) local government investment pools; (ii) time certificates of deposit, and, (iii)
mutual funds and money market mutual funds, since these securities are not deliverable.
XIV. DIVERSIFICATION
Assets held in the investment portfolio shall be diversified to eliminate the risk of loss
resulting from over-concentration of assets in a specific class of securities.
Refer to the table on page 11 for diversification limits
XV. MAXIMUM MATURITIES
Unless previously authorized by City Council, no investment may have a term final stated
maturity longer than five (5) years from the date of settlement. Such approval must be
issued no less than three months prior to the purchase of any security exceeding the five-
year maturity limit.
Please refer to the table on page 11 for maturity limits. In addition to the maximum maturity
limits, the weighted average maturity of the portfolio shall not exceed 36 months. At the
time of purchase, the short-term portion of the total investment portfolio shall have
sufficient cash and maturities to cover the next six months of anticipated use of funds.
XVI. 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).
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 ensure that money is 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.
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XVII. PERFORMANCE STANDARDS
The investment portfolio will be designed to obtain a market-average rate of return during
budgetary and economic cycles, considering the City’s investment risk constraints and cash flow
needs. The City Treasurer shall monitor and evaluate the portfolio’s performance relative to the
chosen market benchmark(s), which will be included in the City Treasurer’s quarterly report. The
City Treasurer shall select an appropriate, readily available index to use as a market
benchmark. The market benchmark for 2021 will be the Intercontinental Exchange (ICE) Bank
of America Merrill Lynch (BAML) 1-5 Year U.S. Treasury/Agency Index.
XVIII. REPORTING
Reports shall be produced according to standards outlined in California Code section
53646. The purpose for these reports will be to formulate suggestions for improved future
performance, and to verify that authorized treasury personnel have acted in accordance
with the investment policy and written investment procedures.
In addition, the City Treasurer shall produce monthly transaction and quarterly investment
reports. The required elements of the quarterly report are as follows:
a. Type of investment
b. Issuer
c. Date of maturity
d. Par value and dollar amount invested
e. Listing of all investments and monies held by the City
f. Amount of deposit or cost of the security
g. Description of all funds that are under contract with other parties
h. Rate of interest/discount and yield
i. Statement relating the report to the Statement of Investment Policy
j. Statement that there are enough funds to meet the City’s anticipated cash flow
needs for at least the next six months
k. The current book value
l. The current market value
m. Average portfolio life
n. Average portfolio yield
o. Current treasury yield that most closely matches average portfolio life
p. Ratings of all corporate bonds, medium-term notes, municipal and state
securities, commercial bank time drafts, and commercial paper to be shown
q. Summary of investments with total percentage by type of investment
r. 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 l. to support City deposits in
the funds. Quarterly reports shall state portfolio compliance to the statement of investment
policy, or the way the portfolio is not in compliance.
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XIX. INVESTMENT POLICY ADOPTION
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.
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.
XX. CONTINUING EDUCATION AND TRAINING
The City of Tustin and the Treasurer’s office value professionalism and accountability in
the execution of the investment program. To ensure the highest level of professional
standards, investment staff responsible for the day-to-day management of the portfolio
are encouraged to complete at least 12 hours per year of continuing education in the
areas of cash and investment management.
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GLOSSARY
AGENCIES: Federal agency securities and/or Government-sponsored enterprises.
BANKERS’ ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
BENCHMARK: A comparative base for measuring the performance or risk tolerance of the
investment portfolio. A benchmark should represent a close correlation to the level of risk and the
average duration of the portfolio’s investments.
BOOK RETURN: Book return is calculated by summing interest received, accrued interest
earned, amortization of premiums and discounts, and realized gains and losses; then dividing
the sum by the average balance of the portfolio.
BOOK VALUE MEASUREMENT (also see BOOK RETURN): The incorporation of book value
measurement allows us to estimate the expected earnings on the portfolio when securities are
held to maturity. Because the calculation does not incorporate unrealized gains or losses,
measuring book value alone does not give a complete picture of the portfolio’s assumed risk.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a
Certificate. Large denomination (over $250,000) CDs are typically negotiable.
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.
COLLATERALIZED BANK DEPOSIT: A bank deposit that is collateralized at least 100%
(principal plus interest to maturity). The deposit is collateralized using assets set aside by the
issuer such as Treasury securities or other qualified collateral to secure the deposit in excess of
the limit covered by the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER: The short-term unsecured debt of corporations.
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: delivery versus
payment and delivery versus receipt. Delivery versus payment is delivery of securities with an
exchange of money for the securities. Delivery versus receipt is delivery of securities with an
exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the
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movement of one or more underlying index or security, and may include a leveraging factor, or
(2) financial contracts based upon notional amounts whose value is derived from an underlying
index or security (interest rates, foreign exchange rates, equities or commodities).
DISCOUNT: The difference between the cost price of a security and its maturity when quoted at
lower than face value. A security selling below original offering price shortly after the initial sale is
also referred to as trading at a discount.
DISCOUNT SECURITIES: Non-interest-bearing money market instruments that are issued a
discount and redeemed at maturity for full face value (e.g. U.S. Treasury Bills.)
DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent
returns.
DURATION: A measure of the sensitivity of the price (the value of principal) of a fixed-income
investment to a change in interest rates. Duration is expressed as a number of years. Rising
interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
FAIR MARKET VALUE MEASUREMENT (also see TOTAL RETURN): The incorporation of fair
market value reporting tells us that portfolios are performing in a manner that is consistent with
interest rate changes. Fair Market Value reporting is particularly important in rising rate interest
rate environments as it provides the ability to explain to stakeholders why there are unrealized
losses in the portfolio.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to
various classes of institutions and individuals (e.g. S&L’s, small business firms, students, farmers,
farm cooperatives, and exporters.)
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank
deposits, currently up to $250,000 per entity.
FEDERAL FARM CREDIT BANK (FFCB): The Federal Farm Credit Bank System provides credit
and liquidity in the agricultural industry. FFCB issues discount notes and bonds.
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 Mae, as the
corporation is called, is a private stockholder-owned corporation. The corporation’s purchases
include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages.
FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees
that all security holders will receive timely payment of principal and interest.
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FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal
Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a
rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding
purchases and sales of Government Securities in the open market as a means of influencing the
volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and
consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks and
about 5,700 commercial banks that are members of the system.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Freddie Mac is a stockholder-
owned, government sponsored enterprise (GSE) or agency that was chartered by Congress in
1970 to support the mortgage market by purchasing mortgages from lenders and either holding
them or packaging them into mortgage-backed securities (MBS). Freddie Mac guarantees the
timely payment of principal and interest on the underlying mortgages.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities
influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers,
commercial banks, savings and loan associations, and other institutions. Security holder is
protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the
FHA, VA or FHA mortgages. The term “pass-throughs” is often used to describe Ginnie Maes.
JOINT POWERS AUTHORITY (JPA): A separate legal entity formed by two or more local
agencies to jointly exercise common powers.
LOCAL AGENCY INVESTMENT FUND (LAIF): A voluntary investment fund open to government
entities and certain non-profit organizations in California that is managed by the State Treasurer’s
Office.
LIQUIDITY: The term liquidity is used when referring to how easily an investment can be
converted into cash. It is also used when describing the pool of money an agency keeps in
overnight or short-term investments to meet immediate cash needs. A liquid asset is one that can
be converted easily and rapidly into cash without a substantial loss of value. In the money
markets, a security is said to be liquid if the spread between bid and asked prices is narrow and
reasonable size can be done at those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political
subdivisions that are placed in the custody of a State or County Treasurer for investment and
reinvestment.
MARKET VALUE: The price at which a security is quoted and could presumably be purchased
or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions
between the parties to repurchase—reverse repurchase agreements that establishes each party’s
rights 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 principal or stated value of an investment becomes due
DocuSign Envelope ID: 1A2EB726-B254-4B6D-B0CA-5BB398CA5305
Page 18 of 20
and payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper,
bankers’ acceptances, etc.) are issued and traded.
MONEY MARKET MUTUAL FUND: A mutual fund that invests exclusively in short-term
securities. Money market funds attempt to keep their net asset value at $1.00 per share.
MORTGAGE PASS-THROUGH SECURITIES: A securitized participation in the interest and
principal cash flows from a specified pool of mortgages. Principal and interest payments made on
the mortgages are passed through to the holder of the security.
MUNICIPAL BONDS: Securities issued by state and local agencies to finance capital and
operating expenses.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO): A credit
rating agency that the Securities and Exchange Commission in the United States uses for
regulatory purposes. Credit rating agencies provide assessments of an investment’s risk. The
issuers of investments, especially debt securities, pay credit rating agencies to provide them with
ratings. The three most prominent NRSROs are Moody’s, S&P, and Fitch.
NEGOTIABLE CERTIFICATE OF DEPOSIT: A short-term debt instrument that pays interest and
is issued by a bank, savings or federal association, state or federal credit union, or state-licensed
branch of a foreign bank. Negotiable CDs are traded on a secondary market.
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 of money 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 most important and most flexible monetary policy tool.
ORANGE COUNTY INVESTMENT POOL (OCIP): A voluntary County investment pool open to
local government agencies in Orange County and managed by the Orange County Treasurer.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily reports of market
activity and positions and monthly financial statements to the Federal Reserve 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 PERSON RULE: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody
state—the so-called legal list. In other states the trustee may invest in a security if it is one which
would be bought by a prudent person of discretion and intelligence who is seeking a reasonable
income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption
from the payment of any sales or compensating use or ad valorem taxes under the laws of this
state, which has segregated for the benefit of the commission eligible collateral having a value of
not less than its maximum liability and which has been approved by the Public Deposit Protection
DocuSign Envelope ID: 1A2EB726-B254-4B6D-B0CA-5BB398CA5305
Page 19 of 20
Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current
market price. This may be the amortized yield to maturity on a bond the current income return.
REPURCHASE AGREEMENT (REPO): A holder of securities sells these securities to an investor
with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in
effect lends the “seller” money for the period of the agreement, and the terms of the agreement
are structured to compensate him for this.
REVERSE REPURCHASE AGREEMENT (REVERSE REPO): A reverse-repurchase agreement
(reverse repo) involves an investor borrowing cash from a financial institution in exchange for
securities. The investor agrees to repurchase the securities at a specified date for the same cash
value plus an agreed upon interest rate. Although the transaction is similar to a repo, the purpose
of entering into a reverse repo is quite different. While a repo is a straightforward investment of
public funds, the reverse repo is a borrowing.
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 & EXCHANGE COMMISSION: Agency created by Congress to protect investors
in securities transactions by administering securities legislation.
SEC RULE 15(C)3-1: See Uniform Net Capital Rule.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA,
FFCB, etc.) and Corporations, which have imbedded options (e.g., call features, step-up coupons,
floating rate coupons, derivative-based returns) into their debt structure. Their market
performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options
and shifts in the shape of the yield curve.
SUPRANATIONAL: A supranational is a multi-national organization whereby member states
transcend national boundaries or interests to share in the decision making to promote economic
development in the member countries.
TOTAL RETURN: Total return is calculated by summing up interest received, accrued interest
earned, realized gains and losses and unrealized gains and losses. By incorporating unrealized
gains and losses, total return identifies the marked-to-market risks of a portfolio.
TREASURY BILLS: A discount security issued by the U.S. Treasury to finance the national debt.
Most bills are issued to mature in three months, six months, or one year.
TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities issued as direct
obligations of the U.S. Government and having initial maturities of more than 10 years.
TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities issued as direct
obligations of the U.S. Government and having initial maturities from 2 to 10 years.
DocuSign Envelope ID: 1A2EB726-B254-4B6D-B0CA-5BB398CA5305
Page 20 of 20
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans and commitments to
purchase securities, one reason new public issues are spread among members of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
YIELD: The rate of annual income on an investment, expressed as a percentage. (a) INCOME
YIELD is obtained by dividing the current dollar income by the current market price for the security.
(b) NET YIELD or YIELD TO MATURITY is 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 bond.
DocuSign Envelope ID: 1A2EB726-B254-4B6D-B0CA-5BB398CA5305
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