Agenda packet — San Diego Community Power Finance and Risk Management Committee, June 20, 2024

AGENDA – FINANCE AND RISK MANAGEMENT COMMITTEE – SAN DIEGO COMMUNITY POWER 1 AGENDA
Meeting of the Finance and Risk Management Committee
San Diego Community Power (SDCP)
June 20, 2024
3:00 p.m.

City of Chula Vista
Council Chambers, 276 Fourth Avenue, Chula Vista, CA
The meeting will be held in person at the above date, time and location. Finance and Risk Management Committee (FRMC) Members and members of the public may attend in person. Under certain circumstances, FRMC Members may also attend and participate in the meeting virtually pursuant to the Brown Act (Gov. Code § 54953). As a convenience to the public, SDCP provides a call-in option and internet-based option for members of the public to virtually observe and provide public comments at its meetings. Additional details on in-person and virtual public participation are below. Please note that, in the event of a technical issue causing a disruption in the call-in option or internet-based option, the meeting will continue unless otherwise required by law, such as when an FRMC Member is attending the meeting virtually pursuant to certain provisions of the Brown Act.

Note: Any member of the public may provide comments to the Finance and Risk Management Committee on any agenda item. When providing comments to the FRMC, it is requested that you provide your name and city of residence for the record. Commenters are requested to address their comments to the FRMC as a whole through the Chair. Comments may be provided in one of the following manners:

1. Providing Oral Comments During Meeting. Anyone attending in person desiring to address the FRMC is asked to fill out a speaker’s slip and present it to the Clerk of the Board or the Secretary. To provide remote comments during the meeting, join the Zoom meeting by computer, mobile phone, or dial-in number. On Zoom video conference by computer or mobile phone, use the “Raise Hand” feature.

This will notify the moderator that you wish to speak during a specific item on the agenda or during non-agenda Public Comment. Members of the public will not be shown on video but will be able to speak when called upon. If joining the meeting using the Zoom dial-in number, you can raise your hand by pressing *9. Comments will be limited to three (3) minutes.

2. Written Comments. Written public comments must be submitted prior to the start of the meeting by using this (Web Comment Form). Please indicate a specific agenda item when submitting your comment. All written comments received prior to the meeting will be provided to the FRMC members in writing. In the discretion of the Chair, the first ten (10) submitted comments shall be stated into the record of the meeting. Comments read at the meeting will be limited to the first 400 words. Comments received after the start of the meeting will be collected, sent to the FRMC members in writing, and be part of the public record.

If you have anything that you wish to be distributed to the FRMC, please provide it via [email protected], who will distribute the information to the Members.

AGENDA – FINANCE AND RISK MANAGEMENT COMMITTEE – SAN DIEGO COMMUNITY POWER 2 The public may participate using the following remote options:

Teleconference Meeting Webinar https://zoom.us/j/93476863568 Telephone (Audio Only) (669) 900-6833 or (253) 215-8782 | Webinar ID: 934 7686 3568

WELCOME

CALL TO ORDER

ROLL CALL

PLEDGE OF ALLEGIANCE

ITEMS TO BE ADDED, WITHDRAWN, OR REORDERED ON THE AGENDA

PUBLIC COMMENTS FOR ITEMS NOT ON THE AGENDA
Opportunity for members of the public to address the Board on any items not on the agenda but within the jurisdiction of the Board. Members of the public may provide a comment in either manner described above.

CONSENT CALENDAR

1. Approve May 16, 2024, Meeting Minutes
Recommendation: Approve May 16, 2024, Meeting Minutes.

MEETING AGENDA

2. Review of Treasurer’s Report for Period Ending April 30, 2024 Recommendation: Receive and File Treasurer’s Report for Period Ending April 30, 2024.

3. Approval of Second Revision of Reserves Policy Revision Recommendation: Recommend Board Approval of Reserve Policy Revision.

4. Approval of Investment Policy Revision
Recommendation: Recommend Board Approval of Resolution No. 2024-04, adopting the first revision of the SDCP Investment Policy.

5. Approval of the FY 2024-25 Operating Budget, the FY 2024-25 Capital Budget, and the FY 2025-29 Capital Investment Plan
Recommendation: Recommend Board Approval of Resolution No. 2024-03, adopting the FY 2024-2025 Operating Budget, the FY 2024-2025 Capital Budget, and the FY 2025-2029 Capital Investment Plan.

AGENDA – FINANCE AND RISK MANAGEMENT COMMITTEE – SAN DIEGO COMMUNITY POWER 3 Committee Member Announcements
Committee Members may briefly provide information to other members and the public. There is to be no discussion or action taken on comments made by Directors unless authorized by law.

ADJOURNMENT
The Finance and Risk Management Committee will adjourn to the next regular meeting scheduled on July 18, 2024.

Compliance with the Americans with Disabilities Act
SDCP Committee meetings comply with the protections and prohibitions of the Americans with Disabilities Act. Individuals with a disability who require a modification or accommodation, including auxiliary aids or services, in order to participate in the public meeting may contact (888) 382-0169 or [email protected]. Requests for disability-related modifications or accommodations require different lead times and should be provided at least 72-hours in advance of the public meeting.

Availability of Committee Documents
Copies of the agenda and agenda packet are available at https://sdcommunitypower.org/resources/meeting-notes/. Late-arriving documents related to a Board meeting item which are distributed to a majority of the Members prior to or during the Board meeting are available for public review as required by law. Public records, including agenda-related documents, can be requested electronically at [email protected] or by mail to SDCP, PO BOX 12716, San Diego, CA 92112. The documents may also be posted at the above website. Such public records are also available for inspection, by appointment, at San Diego Community Power, 2305 Historic Decatur Road, Suite 200, San Diego, CA 92106.

Please contact [email protected] to arrange an appointment.

MEETING MINUTES – FINANCE AND RISK MANAGEMENT COMMITTEE – SAN DIEGO COMMUNITY POWER– MAY 16, 2024 1 FINANCE AND RISK MANAGEMENT COMMITTEE

SAN DIEGO COMMUNITY POWER (SDCP)
City of San Diego Metropolitan Operations Complex (MOC II) Auditorium 9192 Topaz Way, San Diego, CA 92123
Meeting Minutes
May 16, 2024
________________________________________________________________________________________ The Committee minutes are prepared and ordered to correspond to the Committee Agenda. Agenda Items can be taken out of order during the meeting.

The Agenda Items were considered in the order presented.

WELCOME

CALL TO ORDER
Chair McCann (City of Chula Vista) called the Finance and Risk Management Committee meeting to order at 3:01 p.m.

ROLL CALL
PRESENT: Chair McCann (City of Chula Vista), Director Yamane (City of National City), and Director Aguirre (City of Imperial Beach)
ABSENT: None
Also Present: Chief Financial Officer (CFO)/Treasurer Washington, General Counsel Tyagi, Assistant Clerk of the Board Vences

PLEDGE OF ALLEGIANCE
Director Aguirre led the Pledge of Allegiance.

ITEMS TO BE ADDED, WITHDRAWN, OR REORDERED ON THE AGENDA There were no items to be added, withdrawn, or reordered on the agenda.

PUBLIC COMMENTS FOR ITEMS NOT ON THE AGENDA
There were no public comments.

MEETING MINUTES – FINANCE AND RISK MANAGEMENT COMMITTEE – SAN DIEGO COMMUNITY POWER– MAY 16, 2024 2 CONSENT CALENDAR

1. Approve April 11, 2024, Meeting Minutes
Motioned by Director Aguirre (City of Imperial Beach) and seconded by Director Yamane (City of National City) to approve the minutes of the Finance and Risk Management Committee meeting held Thursday, April 11, 2024.

The motion carried unanimously by the following vote:

AYES: Chair McCann (City of Chula Vista), Director Aguirre (City of Imperial Beach), and Director Yamane (City of National City)
NOES: None
ABSTAINED: None
ABSENT: None

MEETING AGENDA

2. Review of Treasurer’s Report for Period Ending March 31, 2024 CFO/Treasurer Washington presented the Treasurer’s Report for the period ending March 31, 2024.

There were no Committee questions or comments, and no action was taken.

3. Presentation and Discussion of the FY 2024-25 Operating Budget CFO/Treasurer Washington presented the budget highlights, development, principles, draft budget summary for FY 2024-25 operating budget.

Following Committee questions and comments, no action was taken.

4. Recommend Board Approval of Power100 Green-e Certified Service Senior Director of Data Analytics and Customer Operations Lucas Utouh and Managing Director Power Services, Byron Vosburg, provided an overview of Power100 Green-e Certified Service, including PowerOn and Power100, customer feedback and needs, service offering details, and proposed Board approval of Power100 Green-e Certified Service.

Following Committee questions and comments, the following action was taken:

Motioned by Chair McCann (City of Chula Vista) and seconded by Director Aguirre (City of Imperial Beach) to recommend Board approval of Power100 Green-e Certified Service. The motion carried unanimously by the following vote:

AYES: Chair McCann (City of Chula Vista), Director Aguirre (City of Imperial Beach), and Director Yamane (City of National City)
NOES: None
ABSTAINED: None
ABSENT: None
MEETING MINUTES – FINANCE AND RISK MANAGEMENT COMMITTEE – SAN DIEGO COMMUNITY POWER– MAY 16, 2024 3 Committee Member Announcements
Director Aguirre (City of Imperial Beach) suggested exploring the possibility of moving the FRMC meetings to the South Bay.

ADJOURNMENT
Chair McCann (City Chula Vista) adjourned the meeting at 3:34 p.m. to the next Finance and Risk Management Committee meeting scheduled on Thursday, June 20, 2024. ____________________________________
Sandra Vences, Assistant Clerk of the Board

SAN DIEGO COMMUNITY POWER
Staff Report – Item 2
-------------------------------------------------------------------------------------------------------------------- To: San Diego Community Power Finance and Risk Management Committee From: Eric W. Washington, Chief Financial Officer
Via: Karin Burns, Chief Executive Officer
Subject: Review of Treasurer’s Report for Period Ending April 30, 2024 Date: June 20, 2024
--------------------------------------------------------------------------------------------------------------------

RECOMMENDATION
Receive and File Treasurer’s Report for Period Ending 4/30/24.

BACKGROUND
San Diego Community Power (SDCP) maintains its accounting records on a full accrual basis in accordance with Generally Accepted Accounting Principles (GAAP) as applicable to governmental enterprise funds.

SDCP has prepared its year-to-date financial statements for the period ended April 30, 2024, along with budgetary comparisons.

SDCP additionally reports monthly metrics during its Board meetings as part of its Update on Back-Office Operations. As part of the Treasurer’s Report, certain key metrics related to risk are to be presented during Financial and Risk Management Committee (FRMC) meetings.

On February 22, 2024, the SDCP Board of Directors (Board) approved a mid-year budget amendment for Fiscal Year 2023-24 that included net operating revenues of $1,304,274,067, total expenses of $1,071,601,284, and a resulting net position of $232,672,783. Given that the Board approval occurred on February 22, 2024, the review of the Treasurer’s Report for period ending April 30, 2024, and reports for the remaining fiscal year will include a comparison against the mid-year budget amendment adopted by the Board.

ANALYSIS AND DISCUSSION
Actual financial results for the period ended 4/30/24: $1.05 billion in net operating revenues were reported compared to $1.12 billion budgeted for the period. $881.06 million in total expenses were reported (including $859.09 million in energy costs) compared to $918.53 million budgeted for the period (including $875.91 million budgeted for energy costs). After expenses, SDCP’s change in net position of $167.16 million was reported for Fiscal Year 2023-24. The following is a summary of the actual results compared to the Fiscal Year 2023-24 Amended Budget.

Table 1: Budget Comparison Versus Actual Result
• Net operating revenues finished $71.56 million (or 6.0 percentage points) under the budget primarily due to lower-than-expected customer load demand correlated with cooler weather in the summer months of 2023.
• Operating expenses finished $37.48 million (or 4.0 percentage points) lower than what was budgeted similarly due to lower-than-expected load demand attributed to cooler weather in the summer months of 2023.

Figure 1: Proforma versus Actual Results
For the period ending 4/30/24, SDCP cumulative net position was $167,163,592 compared to the $201,249,366 reflected in the Fiscal Year 2023-24 amended budget.

Total SDCP reserves at the end of the period were $361,722,614 based on unrestricted cash and cash equivalents and total available liquidity (including lines of credit availability) was $474,222,614. SDCP has a total Fiscal Year 2023-24 year-end reserve target of $524,984,866, which is equivalent to 180-days of total operating expenses as set in SDCP’s Strategic Goals.

Figure 2: Participation Rates as of 6/1/2024
Phase 4 mass enrollment process in National City and Unincorporated County of San Diego for Non-Net Energy Metering (NEM) customers was officially completed as of May 2023. The participation rate for SDCP reflects full enrollment of current member agencies.

We are reporting on the opt outs and eligible accounts associated with the phase based on those accounts that we have noticed for enrollment on a rolling basis as of the reporting month.

Staff are also presenting the state of SDCP Arrearages related to financial risk for FRMC consideration and for regular review. Additional metrics can be added by request. The below arrearage data includes SDCP’s Receivables aged 120+ Days as of 6/1/2024.

Figure 3: State of SDCP Arrearages as of 6/01/2024
Figure 4: State of SDCP Arrearages Residential vs Commercial as of 6/01/2024

FISCAL IMPACT
N/A

ATTACHMENTS
Attachment A: 2024 Year-to-Date Period Ended April 30, 24 Financial Statements 1 ACCOUNTANTS’ COMPILATION REPORT
Management
San Diego Community Power
Management is responsible for the accompanying financial statements of San Diego Community Power (a California Joint Powers Authority) which comprise the statement of net position as of April 30, 2024, and the related statement of revenues, expenses, and changes in net position, and the statement of cash flows for the period then ended in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the accompanying statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, conclusion, nor provide any assurance on these financial statements.

Management has elected to omit substantially all of the note disclosures required by accounting principles generally accepted in the United States of America in these interim financial statements. San Diego Community Power’s annual audited financial statements include the note disclosures omitted from these interim statements. If the omitted disclosures were included in these financial statements, they might influence the user’s conclusions about the Authority’s financial position, results of operations, and cash flows. Accordingly, these financial statements are not designed for those who are not informed about such matters.

We are not independent with respect to the Authority because we performed certain accounting services that impaired our independence.

Maher Accountancy
San Rafael, CA
May 29, 2024
1101 Fifth Avenue, Suite 200 San Rafael, CA 94901 415 459 1249 mahercpa.com Current assets
Cash and cash equivalents - unrestricted 361,722,614$
Cash and cash equivalents - restricted 500,000
Accounts receivable, net of allowance 54,568,558
Accrued revenue 33,005,097
Prepaid expenses 11,808,784
Other receivables 812,500
Deposits 2,263,984
Total current assets 464,681,537
Noncurrent assets
Cash and cash equivalents - restricted 1,147,000
Lease asset, net of amortization 1,276,939
Capital assets, net of depreciation 129,667
Total noncurrent assets 2,553,606
Total assets 467,235,143
Current liabilities
Accrued cost of electricity 103,856,846
Accounts payable 569,482
Other accrued liabilities 2,510,111
State surcharges payable 181,952
Deposits - energy suppliers 4,932,500
Interest and finance costs payable 93,125
Lease liability 954,824
Total current liabilities 113,098,840
Noncurrent liabilities
Supplier security deposits 624,000
Lease liability 490,730
Total noncurrent liabilities 1,114,730
Total liabilities 114,213,570
Restricted for collateral 1,647,000
Unrestricted 351,374,573
Total net position 353,021,573$

NET POSITION

SAN DIEGO COMMUNITY POWER

STATEMENT OF NET POSITION
As of April 30, 2024
ASSETS

LIABILITIES
See accountants' compilation report. 2

OPERATING REVENUES
Electricity sales, net $ 1,046,963,238
Grant revenue 983,500
Other income 323,135
Total operating revenues 1,048,269,873

OPERATING EXPENSES
Cost of electricity 859,088,133
Contract services 15,651,235
Staff compensation 9,258,338
Other operating expenses 2,716,922
Depreciation and amortization 579,804
Total operating expenses 887,294,432
Operating income 160,975,441

NON-OPERATING REVENUES (EXPENSES)
Interest income 7,523,548
Interest and financing expense (1,489,747)
Nonoperating revenues (expenses), net 6,033,801
CHANGE IN NET POSITION 167,009,242
Net position at beginning of year 186,012,331
Net position at end of year $ 353,021,573

SAN DIEGO COMMUNITY POWER

STATEMENT OF REVENUES, EXPENSES

AND CHANGES IN NET POSITION
Ten Months Ended April 30, 2024
See accountants' compilation report. 3

CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers 1,150,698,730$
Receipts of supplier security deposits 37,126,179
Receipts from wholesale sales 17,303,232
Other operating receipts 1,306,635
Payments to suppliers for electricity (842,658,390)
Payments for goods and services (20,545,523)
Payments of staff compensation and benefits (8,899,126) Payments for deposits and collateral (5,684,693)
Payments of state surcharges (2,321,269)
Net cash provided by operating activities 326,325,775

CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES
Principal payments - bank note (35,730,000)
Interest and related expense payments (1,909,624)
Net cash provided (used) by non-capital
financing activities (37,639,624)

CASH FLOWS FROM CAPITAL AND RELATED

FINANCING ACTIVITIES
Payments of lease liability (435,086)
Payments to acquire capital assets (71,550)
Net cash (used) by capital and related financing activities (506,636)

CASH FLOWS FROM INVESTING ACTIVITIES
Interest income received 7,359,219
Net change in cash and cash equivalents 295,538,734
Cash and cash equivalents at beginning of year 67,830,880 Cash and cash equivalents at end of year 363,369,614$
Reconciliation to the Statement of Net Position
Cash and cash equivalents (unrestricted) 361,722,614$
Restricted cash - current 500,000
Restricted cash - noncurrent 1,147,000
Cash and cash equivalents 363,369,614$

SAN DIEGO COMMUNITY POWER

STATEMENT OF CASH FLOWS
Ten Months Ended April 30, 2024
See accountants' compilation report. 4
Operating income 160,975,441$
Adjustments to reconcile operating income to net
cash provided by operating activities
Depreciation and amortization expense 579,804
(Increase) decrease in:

Accounts receivable, net 55,945,173
Accrued revenue 45,787,687
Prepaid expenses 18,718,714
Other receivables (414,456)
Deposits 15,392,366
Increase (decrease) in:

Accrued cost of electricity 26,511,504
Accounts payable 130,215
Other accrued liabilities (1,284,536)
State surcharges payable (318,637)
Supplier security deposits 4,302,500
Net cash provided by operating activities 326,325,775$

SAN DIEGO COMMUNITY POWER
STATEMENT OF CASH FLOWS (continued)
Ten Months Ended April 30, 2024

RECONCILIATION OF OPERATING INCOME TO NET

CASH PROVIDED BY OPERATING ACTIVITIES
See accountants' compilation report. 5
1 ACCOUNTANTS’ COMPILATION REPORT

Board of Directors
San Diego Community Power
Management is responsible for the accompanying special purpose operating fund budgetary comparison schedule of San Diego Community Power (SDCP), a California Joint Powers Authority, for the period ended April 30, 2024, and for determining that the budgetary basis of accounting is an acceptable financial reporting framework. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the accompanying statement nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any assurance on this special purpose budgetary comparison statement.

The special purpose statement is prepared in accordance with the budgetary basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. This report is intended for the information of the Board of Directors of SDCP.

Management has elected to omit substantially all of the note disclosures required by accounting principles generally accepted in the United States of America in these interim financial statements.

SDCP’s annual audited financial statements will include the note disclosures omitted from these interim statements. If the omitted disclosures were included in these financial statements, they might influence the user’s conclusions about the Authority’s financial position, results of operations, and cash flows.

Accordingly, these financial statements are not designed for those who are not informed about such matters.

We are not independent with respect to SDCP because we performed certain accounting services that impaired our independence.

Maher Accountancy
San Rafael, CA
May 29, 2024
1101 Fifth Avenue, Suite 200 San Rafael, CA 94901 415 459 1249 mahercpa.com 2023/24 YTD
Amended
Budget
2023/24 YTD
Actual
2023/24 YTD
Amended
Budget
Variance
(Under) Over
2023/24
YTD
Actual/
Amended
Budget %
2023/24 Annual
Amended Budget
2023/24
Amended Budget
Remaining
REVENUES AND OTHER SOURCES Gross Ratepayer Revenues 1,172,548,524 1,090,586,706$ (81,961,818) 93% 1,365,732,007$ 275,145,301$ Less: Uncollectible Customer Accounts (52,764,684) (43,623,468) 9,141,216 83% (61,457,940) (17,834,472) Grant Revenue - 983,500 983,500 - (983,500) Other Income 273,435 273,435 - (273,435) Total Revenues and Other Sources 1,119,783,840 1,048,220,173 (71,563,667) 1,304,274,067 256,053,894 OPERATING EXPENSES Cost of Energy 875,908,709 859,038,433 (16,870,276) 98% 1,020,844,552 161,806,119 Professional Services and Consultants 18,717,255 14,965,614 (3,751,641) 80% 22,250,657 7,285,043 Personnel Costs 9,740,686 9,258,338 (482,348) 95% 11,603,394 2,345,056 Marketing and Outreach 2,461,475 1,591,688 (869,787) 65% 2,925,978 1,334,290 General and Administration 5,735,316 1,982,788 (3,752,528) 35% 6,812,564 4,829,776 Programs 97,167 259,518 162,351 267% 115,500 (144,018) Total Operating Expenses 912,660,608 887,096,379 (25,564,229) 1,064,552,645 177,456,266 Operating Income (Loss) 207,123,232 161,123,794 (45,999,438) 239,721,422 78,597,628 NON-OPERATING REVENUES (EXPENSES) Investment Income - 7,523,548 7,523,548 - (7,523,548) Interest and Related Expenses (1,994,699) (1,483,750) 510,949 74% (2,393,639) (909,889) Transfer to Capital Investment Program (3,879,167) - 3,879,167 0% (4,655,000) (4,655,000) Total Non-Operating Revenues (Expenses) (5,873,866) 6,039,798 11,913,664 (7,048,639) (13,088,437) NET INCREASE (DECREASE) 201,249,366$ 167,163,592$ (34,085,774)$ 232,672,783$ 65,509,191$

SAN DIEGO COMMUNITY POWER

BUDGETARY COMPARISON SCHEDULE
Ten Months Ended April 30, 2024

OPERATING FUND
See accountants' compilation report.

SAN DIEGO COMMUNITY POWER
Staff Report – Item 3
-------------------------------------------------------------------------------------------------------------------- To: San Diego Community Power Finance and Risk Management Committee From: Eric W. Washington, Chief Financial Officer
Via: Karin Burns, Chief Executive Officer
Subject: Second Revision to Financial Reserves Policy
Date: June 20, 2024
--------------------------------------------------------------------------------------------------------------------

RECOMMENDATION
Recommend Board of Directors Approval of the Second Revision to the Financial Reserves Policy.

BACKGROUND
On October 1, 2019, the Founding Members of San Diego Community Power (SDCP) adopted the Joint Powers Agreement (JPA) which was amended and restated on December 16, 2021. Section 4.6.2 of the JPA specifies that the SDCP Board of Directors (Board) shall adopt an annual budget with a fiscal year that runs from July 1 to June 30.

Section 3.2.12 of the JPA specifies that the SDCP Board of Directors (Board) adopt rules, regulations, policies, bylaws and procedures governing the operation of SDCP.

Additionally, section 4.5.5 of the JPA states that one of the general purposes of the Board is to set policy.

Even further, section 5.10.2.c of the JPA states that the one of the primary purposes of the Finance and Risk Management Committee (FRMC) is to review and recommend to the Board financial policies and procedures to ensure equitable contributions by Parties.

On June 24, 2021, the Board originally reviewed and approved SDCP’s Financial Reserves Policy. Subsequently, on February 24, 2022, the Board Approved a revision to the Financial Reserves Policy.

The Financial Reserves Policy states that staff will complete an annual review of the Financial Reserve Policy to ensure that the policy meets the needs of the organization.

Given the growth in operating expenses and that the agency has exceeded the reserve target set in its Financial Reserves Policy, staff recommend a second revision to the Financial Reserves Policy to account for the growth in expenses.

ANALYSIS AND DISCUSSION
In FY 2022-23, when the Financial Reserve Policy was revised, SDCP had operating expenses of $329.0 million. Since then, the agency has grown substantially. In particular, in FY 2024-25, SDCP is projected to have operating expenses of $1,113.2 million as presented to the Board on May 23, 2024.

Additionally, the Financial Reserves Policy states that SDCP will allocate up to 15% of gross revenue annually toward building an Operating/Working Capital Reserve equivalent to 90-days of total operating expenses (including power supply expenses) to be held as unrestricted cash.

On September 14, 2023, staff reported to the FRMC that the agency achieved its goal of 90-days of total operating expenses to be held as unrestricted cash. More currently, on May 23, 2024, SDCP reported to the Board that the agency currently has 133-days of total cash on hand and has therefore surpassed the goal set in the Financial Reserves Policy.

However, on June 23, 2022, the Board also approved SDCP’s Mission, Vision, Core Values and Goals for 2023-2027 which included a plan to increase reserves to 90-days cash on hand by October 2023 and to 180-days cash on hand by October 2025.

Staff are therefore recommending a second revision to the Financial Reserves Policy that will update the financial reserve goal from 90-days of cash on hand to 180-days cash on hand to align with the goals set by the Board and to align with SDCP’s growth in days cash on hand.

Upon review and benchmarking of similar community choice aggregators, SDCP’s peer agencies have similar cash-on hand targets:
• Marin Clean Energy: 240 days
• Central Coast Community Energy: 180 days
• Peninsula Clean Energy: 180 days
• Clean Power Alliance: 120 days
The policy revision also includes definitions for the measurement of ‘days cash on hand’ and ‘reserves’ to provide clear, consistent, and transparent metrics for measurement. • Days cash on hand: unrestricted cash and cash equivalents x 365 / (operating expenses for the current fiscal year)
• Reserves: Net position
Finally, the policy revision includes updates for reserve distribution should the agency exceed its 180-days cash on hand target. In particular, in addition to strategic uses, staff propose adding a stabilization reserve and a programmatic reserve to the proposed reserve distribution section.

The stabilization reserve mitigates financial and cost of energy risk due cyclical cost of energy fluctuations and rate shocks and may maintain compliance with financial covenants. The purpose of this reserve would be to provide budgetary stabilization and not to serve as an alternative funding source for new programs.

The programmatic reserve could fund unforeseen and unexpected needs such as cost overruns, local leveraging or matching for external funds, or other programmatic needs as required.

FISCAL IMPACT
N/A

ATTACHMENTS
Attachment A: Draft of Second Revision to the Financial Reserves Policy Attachment B: Draft Redline Version of Second Revision to the Financial Reserves Policy
Policy Number: F21_001
Original Adoption Date: June 24, 2021
Revision Date: TBD
Subject: Financial Reserves Policy
Purpose: San Diego Community Power (SDCP) will maintain Financial Reserves (Reserves) as described in this policy to:
• Meet SDCP’s strategic objectives
• Secure, maintain, and/or improve a standalone investment grade credit rating • Secure favorable terms with vendors, including power producers • Satisfy working capital requirements
• Adhere to contractual covenants
• Provide funds to cover unanticipated expenditures
• Support rate stability
Policy Guidelines:

SDCP’s financial reserve goal is to secure 180-days of cash on hand.

The contribution to Reserves is determined through SDCP’s annual budget process as defined in the agency’s Budget Policy and/or SDCP’s rate setting process as defined in the agency’s Rate Development Policy. To the extent SDCP is ability to meet operational expenses and maintain competitive rates, SDCP will establish rates and adopt budgets with the goal of building and maintaining Reserves at or above the 180- days of cash on hand target level.

Definitions
• Days cash on hand: unrestricted cash and cash equivalents x 365 / (operating expenses for the current fiscal year)
• Reserves: Net position
• Use of Reserves: A projected or estimated reduction in the amount of reserves by the end of a fiscal year below the sum of the balance of the reserves at the commencement of the fiscal year plus the projected addition to the Reserves in the budget for the current fiscal year.

Reserve Review: Reserves and annual contributions will be reviewed on an annual basis as part of SDCP’s budget process. Reserves will also be reviewed at the completion of SDCP’s annual audit to reconcile the Reserve balance.

Reserve Distribution: If reserves exceed the 180-days of cash on hand target level established in this policy, the Board may authorize reserve distributions as follows. • Strategic Uses: Use excess funds for capital projects, financing programs, paying down existing debt, rate reductions, or other strategic purposes. • Stabilization Reserve: Use excess funds to fund a Rate Stabilization Reserve.

A Stability Reserve mitigates financial and cost of energy risk due cyclical cost of energy fluctuations and rate shocks and may maintain compliance with financial covenants. The purpose of this reserve would be to provide budgetary stabilization and not to serve as an alternative funding source for new programs. • Programmatic Reserve: Use excess funds to establish a contingency for programs and projects. Specifically, this Reserve could fund unforeseen and unexpected needs such as cost overruns, local leveraging or matching for external funds, or other programmatic needs as required.

Conditions for Use of Reserves
• Temporary reductions in Reserves for cash flow purposes to even out the expected peaks or dips in revenues and expenditures are normal cyclical occurrences to be expected during the fiscal year, and do not constitute a use of reserves. Transfers to and from Reserves to account for such temporary cash flow fluctuations is within the discretion of the CFO. • The CEO will have the discretion to authorize the use of reserves during the fiscal year up to the lesser of 10% of the year’s total budgeted costs, or $100 million, for the following purposes:

1. Cover increases in power supply expenses due to spikes in costs and/or due to higher customer demand;

2. Provide necessary funds to make up for unanticipated revenue shortfalls;

3. Meet any margin or collateral posting requirements under energy supply contracts; and

4. Provide resources to meet emergency expenditures.
• Any further use of reserves as necessary or desirable, must be recommended by CEO to the Board for approval of such use.
• Any use of the reserves under the CEO’s authority shall be reported to the Board at the next regularly scheduled meeting.

Policy Review: SDCP staff will complete a periodic review of this Financial Reserve Policy to ensure that the policy meets the needs of the organization.

Policy Number: F21_001
Original Adoption Date: June 24, 2021
Revision Date: February 24, 2022XXX
Subject: Financial Reserves Policy
Purpose: San Diego Community Power (SDCP) will maintain Financial Reserves (Reserves) as described in this policy to:
• Meet SDCP’s strategic objectives
• Secure, maintain, and/or improve a standalone investment grade credit rating • Secure favorable terms with vendors, including power producers • Satisfy working capital requirements
• Adhere to contractual covenants
• Secure a standalone investment grade credit rating
• Provide funds to cover unanticipated expenditures
• Support rate stability
Policy Guidelines:

SDCP’s financial reserve goal is to secure 180-days of cash on hand.

The contribution to Reserves is determined through SDCP’s annual budget process as defined in the agency’s Budget Policy and/or SDCP’s rate setting process as defined in the agency’s Rate Development PolicySDCP will allocate up to 15% of gross revenue annually toward building an Operating/Working Capital Reserve equivalent to 90 days of total operating expenses (including power supply expenses) to be held as unrestricted cash. To the extent SDCP is ability to meet operational expenses and maintain competitive rates, Unrestricted cash is defined as total cash less restricted cash held in accounts that are restricted from use due to collateral requirements or by covenant requirements. SDCP will establish rates and adopt budgets that with the goal of building and maintaining Reserves at or above the 180-days of cash on hand target level. , subject to SDCP’s ability to meet operational expenses and maintain competitive rates.provide for a growing Operation/Working Capital Reserve that meets the above target funding levels.

Definitions
• Days cash on hand: unrestricted cash and cash equivalents x 365 / (operating expenses for the current fiscal year)
• Reserves: Net position
• Use of Reserves: For purposes of this policy, the “use of reserves” is defined as aA projected or estimated reduction in the amount of thereserves Operating/Working Capital Reserve by the end of a fiscal year below the sum of the balance of the Operating/Working Capital Reservethe reserves at the commencement of the fiscal year plus the projected addition to the Operating/Working Capital ReserveReserves in the budget for the current fiscal year.

Fund BalanceReserve Review: The fund balanceReserves and annual contributions will be reviewed on an annual basis as part of SDCP’s budget process. The fund balanceReserves will also be reviewed at the completion of SDCP’s annual audit to reconcile the fund balanceReserve balance.

Exceeding Target Fund BalanceReserve Distribution: If reserves funds exceed target the 180-days of cash on hand target level established in this policys, the Board may authorize reserve distributions as follows.
• Strategic Uses: uUse excess funds for capital projects, financing programs, paying down existing debt, rate reductions, or other strategic purposes. • Stabilization Reserve: The Board may also authorize the uUse of excess funds to fund additional Reserves such as a Rate Stabilization Reserve. A Stability Reserve mitigates financial and cost of energy risk due cyclical cost of energy fluctuations and rate shocks and may maintain compliance with financial covenants. The purpose of this reserve would be to provide budgetary stabilization and not to serve as an alternative funding source for new programs. • Programmatic Reserve: UThis Reserve would use excess funds to establish a contingency for programs and projects. Specifically, this Reserve could fund unforeseen and unexpected needs such as cost overruns, local leveraging or matching for external funds, or other programmatic needs as required.

Conditions for Use of Reserves
• For purposes of this policy, the “use of reserves” is defined as a projected or estimated reduction in the amount of the Operating/Working Capital Reserve by the end of a fiscal year below the sum of the balance of the Operating/Working Capital Reserve at the commencement of the fiscal year plus the projected addition to the Operating/Working Capital Reserve in the budget for the current fiscal year.
• Temporary reductions in the Operating/Working Capital ReserveReserves for cash flow purposes to even out the expected peaks or dips in revenues and expenditures are normal cyclical occurrences to be expected during the fiscal year, and do not constitute a use of reserves. Transfers to and from the Operating/Working Capital ReserveReserves to account for such temporary cash flow fluctuations is within the discretion of the CFO. • The CEO will have the discretion to authorize the use of reserves during the fiscal year up to the lesser of 10% of the year’s total budgeted costs, or $40 100 million, for the following purposes:

1. Cover increases in power supply expenses due to spikes in costs and/or due to higher customer demand;

2. Provide necessary funds to make up for unanticipated revenue shortfalls;

3. Meet any margin or collateral posting requirements under energy supply contracts; and

4. Provide resources to meet emergency expenditures.
• If Any further use of reserves as necessary or desirable, must be recommended by CEO to the Board for approval of are necessary or desirable to manage the operations of SDCP, the CEO must present recommendations to the Board and the Board must authorize such use.
• Any use of the reserves under the CEO’s authority shall be reported to the Board at the next regularly scheduled meeting.

Policy Review: SDCP staff will complete a periodic review of this Financial Reserve Policy annually to ensure that the policy meets the needs of the organization.

SAN DIEGO COMMUNITY POWER
Staff Report – Item 4
--------------------------------------------------------------------------------------------------------------------- To: San Diego Community Finance and Risk Management Committee From: Eric W. Washington, Chief Financial Officer
Via: Karin Burns, Chief Executive Officer
Subject: Recommend Board Approval of Resolution No. 2024-04 Adopting the First Revision to the SDCP Investment Policy
Date: June 20, 2024
---------------------------------------------------------------------------------------------------------------------

RECOMMENDATION
Recommend Board Approval of Resolution No. 2024-03 Adopting the First Revision to the SDCP Investment Policy

BACKGROUND
On October 1, 2019, the Founding Members of San Diego Community Power (SDCP) adopted the Joint Powers Agreement (JPA) which was amended and restated on December 16, 2021.

Section 3.2.12 of the JPA specifies that the SDCP Board of Directors (Board) may at its discretion adopt rules, regulations, policies, bylaws and procedures governing the operation of SDCP.

Further, Section 4.5.5 of the JPA states that one of the general purposes of the Board is to set policy.

Section 5.10.2(C) of the JPA finally states one of the primary purposes of the Financial and Risk Management Committee (FRMC) is to review and recommend to the Board financial policies and procedures to ensure equitable contributions by Parties consistent with a recommendation for Board approval of the Investment Policy herein. Further, this section states the FRMC may have such other responsibilities as may be approved by the Board, including but not limited to advising the Chief Executive Officer on fiscal and risk management policies and procedures, rules and regulations governing investment of surplus funds, audits to achieve best practices in corporate governance and selection and designation of financial institutions for deposit of SDCP funds, and credit/depository matters.

On May 25, 2023, Board Approved the SDCP Investment Policy. The policy requires an annual review. In addition, the policy allowed SDCP to engage the services from an investment adviser, who are registered under the Investment Advisers Act of 1940, to assist in the management of SDCP’s investment portfolio in a manner consistent with the SDCP’s objectives.

On February 15, 2024, the SDCP Board approved a professional services agreement with Chandler Asset Management. Subsequently, SDCP initiated a transition process that involved a review of SDCP’s Investment Policy by Chandler Asset Management, which identified possible revisions.

ANALYSIS AND DISCUSSION
Chandler Asset Management made recommendations for the following revisions to the SDCP Investment Policy to update language to better serve SDCP’s investment objectives.

Changes to Acceptable Investment Types has been expanded to include , Medium Term Notes, Pass-Thru Securities, Municipal Securities, and Supranationals. Additionally, the policy includes updated issuer limitations for existing options like Agency securities, Negotiable CDs, Money Market Funds, and Commercial Paper. To manage exposure to callable bonds, has been reduced to not exceed 20% of the total portfolio.

In accordance with the recent passing of SB 1489, the policy now prohibits purchasing securities with a settlement date exceeding 45 days. The report section has been updated to include language on selecting a market benchmark for performance evaluation.

SDCP would rename the relevant section to "Risk Management and Diversification" to better reflect its content. This section now includes Supranationals on the list of securities exempt from the 5% issuer limitation. Additionally, language has been added regarding managing the portfolio's duration within a 20% band of the chosen market benchmark to mitigate portfolio interest rate risk.

The glossary has been updated to ensure all terms are clearly defined. We encourage you to reach out with any questions or if you’d like to discuss these changes further. We’re happy to provide additional information or clarification on any aspect of the revised Investment Policy.

All changes or updates to the SDCP Investment Policy will require Board approval.

FISCAL IMPACT
There are no fiscal impacts to recommend Board approval of the Investment Policy Revision.

ATTACHMENTS
Resolution No. 2024-04 Adopting the First Revision to the SDCP Investment Policy Attachment A: SDCP Investment Policy First Revision
Attachment B: Redline Version of SDCP Investment Policy First Revision RESOLUTION NO. 2024-04

A RESOLUTION OF THE BOARD OF DIRECTORS OF

SAN DIEGO COMMUNITY POWER ADOPTING THE FIRST REVISION TO THE

SDCP INVESTMENT POLICY
A. San Diego Community Power (“SDCP”) is a joint powers authority formed pursuant to the Joint Exercise of Powers Act, Cal. Gov. Code § 6500 et seq., California Public Utilities Code § 366.2, and a Joint Powers Agreement effective on October 1, 2019, and amended on December 16, 2021, (“JPA Agreement”).

B. The JPA Agreement provides that the SDCP Board of Directors (“Board”) may at its discretion adopt rules, regulations, policies, bylaws, and procedures governing the operation of SDCP.

C. The Board has determined that an Investment Policy that comports with the requirements of California Government Code Sections 53600-53608 is in the best interests of SDCP to ensure assets are protected.

D. The purpose of the Investment Policy is to identify (1) the objectives and priorities for SDCP investments; (2) the types of investments that are permitted and prohibited; and (3) the controls SDCP will implement to ensure assets are protected.

E. The SDCP Board proposes to adopt the First Revision to the SDCP Investment Policy, attached hereto as Attachment A.

NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of San Diego Community Power as follows:

Section 1. The Board of Directors hereby adopts the First Revision to the SDCP Investment Policy.

Section 2. This resolution shall take effect immediately upon its adoption.

PASSED AND ADOPTED at a meeting of the Board of Directors of San Diego Community Power held on ___________________.
__________________________________________
Joe LaCava Chair
Board of Directors
San Diego Community Power
ATTEST: APPROVED AS TO FORM:
__________________________________ _______________________________ Maricela Hernandez, MMC, CPMC Veera Tyagi, General Counsel Secretary, Board of Directors San Diego Community Power San Diego Community Power
SDCP Investment Policy | 1
Subject: Investment Policy
Purpose: The San Diego Community Power (“SDCP”) Investment Policy (“Policy”) establishes investment guidelines for protecting SDCP’s cash reserves, deposits, and investments (“Funds”) while producing a reasonable rate of return on investments.

The Policy articulates: (1) the objectives and priorities for SDCP investments; (2) the types of investments that are permitted and prohibited; and (3) the controls SDCP will implement to ensure assets are protected.

This Policy is adopted pursuant to California Government Code Section (“Section”) 53600-53608 and must be adopted or amended by resolution. The SDCP Board of Directors (“Board”) is not required to adopt a formal Investment Policy by statute, however, it is in the best practice to ensure agency assets are protected.

Background
On October 1, 2019, the Founding Members of San Diego Community Power (SDCP) adopted the Joint Powers Agreement (JPA) which was amended and restated on December 16, 2021.

Section 3.2.12 of the JPA specifies that the SDCP Board of Directors (Board) may at its discretion adopt rules, regulations, policies, bylaws and procedures governing the operation of SDCP.

Further, Section 4.5.5 of the JPA states that one of the general purposes of the Board is to set policy.

Policy Number: 2023-07
Original Adoption Date: May 25, 2023
Revision Date: TBD
SDCP Investment Policy | 2
Investment Objectives
To the extent possible, investments will align with SDCP’s mission, vision, value, and goals.

When managing Funds, SDCP’s primary objectives shall be to (1) safeguard the principal of the Funds, (2) meet the liquidity needs of SDCP, (3) achieve a return on funds invested, and (4) exercise a high standard of care on Funds within SDCP’s control. 1) Safety: Safety of principal is the foremost objective of cash and investment management activities. The investment of Funds shall be undertaken in a manner that seeks to ensure the preservation of principal.
2) Liquidity: The Funds of SDCP shall remain sufficiently liquid to meet all operating needs that may be reasonably anticipated. Since all possible cash demands cannot be anticipated, the investment of Funds in deposits or instruments that are available on demand is recommended.
3) Return on Investments: SDCP’s deposit and investment portfolio shall be designed with the objective of attaining a market rate of return throughout the economic cycle while considering investment risk and liquidity constraints. The return on deposits and investments is of secondary importance compared to the safety and liquidity objectives described in Investment Objectives, Section A and Investment Objectives, Section B, above.
4) Standard of Care: SDCP will manage Funds in accordance with the “Prudent Investor Standard” pursuant to California Government Code Section 53600.31 as follows:
“All governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling or managing public funds, a trustee shall act with care, skill, prudence and diligence under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law.”
1 All further statutory references are to the California Government Code unless otherwise stated.

SDCP Investment Policy | 3
Delegation of Authority
Pursuant to Section 53607, the Board has the authority to delegate the responsibility to manage SDCP’s funds to the Treasurer. The Treasurer has authority to appoint Deputy Treasurer(s) as the Treasurer deems necessary to carry the duties in accordance with the Investment Policy.

SDCP may engage the services from one or more external investment advisers, who are registered under the Investment Advisers Act of 1940, to assist in the management of SDCP’s investment portfolio in a manner consistent with the SDCP’s Policy. External investment advisers may be granted discretion to purchase and sell investment securities in accordance investment objective set forth in this Policy.

Scope
This Investment Policy applies to all funds and investment under the direct authority of SDCP.

This Policy does not apply to the investment of bond proceeds, which would be governed by any applicable bond documents and any other funds specifically exempted by SDCP’s Board of Directors.

Acceptable Investment Types: To the extent possible, investments will align with SDCP’s mission, vision, value, and goals.

1. Deposits at Bank(s): Funds may be invested in non-interest-bearing depository accounts to meet SDCP’s operating and collateral needs and grant requirements. Funds not needed for these purposes may be invested in interest-bearing depository accounts or Federal Deposit Insurance Corporation (FDIC) insured certificates of deposit with maturities not to exceed five (5) years. Banks eligible to receive deposits will be federally or state chartered and will conform to Section 53635.2 which requires that banks “have received an overall rating of not less than ‘satisfactory’ in its most recent evaluation by the appropriate federal financial supervisory agency of its record of meeting the credit needs of California's communities, including low- and moderate-income neighborhoods, pursuant to Section 2906 of Title 12 of the United States Code.” As per Section 53652, banks must collateralize the deposits of public agencies in an amount equal to no less than 110% of as currently stated in the value of the deposits. The Treasurer will monitor the credit quality of eligible banks holding SDCP deposits that exceed FDIC insurance limits to ensure the safety of SDCP deposits.

2. Local Agency Investment Fund (LAIF): Funds may be invested in the Local Agency Investment Fund established by the California State Treasurer for the benefit of local agencies. LAIF’s investments in instruments prohibited by or not specified in SDCP’s policy do not exclude the investment in LAIF itself from SDCP list of allowable investments, provided LAIF’s reports allow the Treasurer to adequately judge the risk inherent in LAIF’s portfolio.

SDCP Investment Policy | 4

3. US Treasury Obligations: Funds may be invested in United States Treasury obligations with a term to maturity not exceeding five (5) years and subject to the limitations set forth in Sections 53601 et seq. and 53635 et seq.

4. Federal Agency Securities: Funds may be invested in Federal Agency Securities or Government-Sponsored Enterprise (GSE) obligations with a term to maturity not exceeding five (5) years and subject to the limitations set forth in Sections 53601 et seq. and 53635 et seq. No more than 20% of the total portfolio may be invested in callable agency securities and no more than 30% of the total portfolio may be invested in any single Agency/ GSE issuer.

5. Bankers’ Acceptances: Funds may be invested in Banker’s Acceptances provided that they are issued by institutions which have short-term debt obligations rated “A-1” or its equivalent of better by at least one NRSRO (Nationally Recognized Statistical Rating Organization). Not more than 40% of the portfolio may be invested in Bankers’ Acceptances, and no more than 5% of the portfolio may be invested in any single issuer.

The maximum maturity shall not exceed 180 days.

6. Negotiable Certificates of Deposit: Funds may be invested in negotiable certificates of deposit in accordance with the requirements of Section 53601 and 53601.8, and subject to the following limitations:

A. Issued by an entity as defined in Section 53601(i); and B. No more than 30% of the total portfolio shall be invested in certificates of deposit, no more than 5% of the total portfolio may be invested in any single issuer, and the maximum maturity does not exceed 5 years.

7. Placement Service Deposits: Funds may be invested in deposits placed with a private sector entity that assists in the placement of deposits with eligible financial institutions located in the United States (Section 53601.8). The full amount of principal and the interest that may be accrued during the maximum term of each deposit shall at all times be insured by federal deposit insurance. The maximum portfolio exposure to the deposits placed pursuant to this section shall be limited by Section 53601.8.

8. Money Market Funds: Funds may be invested in money market funds pursuant to Section 53601(l)(2) and subject to Section 53601(l)(4). No more than 20% of the portfolio may be invested in the shares of any one Money Market Fund. No more than 20% of the total portfolio may be invested in these securities.

9. Commercial Paper: of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a NRSRO. The entity that issues the commercial paper must meet all of the following conditions in either paragraph A or paragraph B:

SDCP Investment Policy | 5
A. The entity meets the following criteria: (i) is organized and operating in the United States as a general corporation, (ii) has total assets in excess of five hundred million dollars ($500,000,000), and (iii) has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or higher by an NRSRO.

B. The entity meets the following criteria: (i) is organized within the United States as a special purpose corporation, trust, or limited liability company, (ii) has program-wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond, and (iii) has commercial paper that is rated “A-1” or higher, or the equivalent, by an NRSRO.
• No more than 10% of the outstanding commercial paper of any single issuer. • No more than 25% of SDCP’s investment assets under management may be invested in Commercial Paper. Under a provision sunsetting on January 1, 2026, no more than 40% of the total portfolio may be invested in Commercial Paper if SDCP’s investment assets under management are greater than $100,000,000. • No more than 5% of the total portfolio may be invested in any single issuer. The maximum maturity does not exceed 270 days.

10. Medium Term Notes (MTN): The issuer is a corporation organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. (Section 53601 et seq). The securities are rated in a rating category of “A” or its equivalent or better by at least one NRSRO. No more than 30% of the total portfolio may be invested in MTNs, no more than 5% of the total portfolio may be invested in any single issuer and the maximum maturity does not exceed five (5) years.

11.Pass Thru Securities: Asset-Backed, Mortgage-Backed, Mortgage Pass-Through Securities, and Collateralized Mortgage Obligations (Section 53601 et seq) from issuers not defined in sections 3 and 4 of the Acceptable Investment Types section of this policy, provided that: The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO, no more than 20% of the total portfolio may be invested in these securities, no more than 5% of the total portfolio may be invested in any single Asset-Backed or Commercial Mortgage security issuer and the maximum maturity does not exceed five (5) years.

12. Municipal Securities: include obligations of SDCP, the State of California and any local agency within the State of California,(Section 53601) provided that: The securities are rated in a rating category of “A” or its equivalent or better by at least one nationally recognized statistical rating organization (“NRSRO”)., no more than 5% of the total portfolio may be invested in any single issuer, no more than 30% of the total portfolio may be in Municipal Securities and the maximum maturity does not exceed five (5) years.

SDCP Investment Policy | 6

13. Municipal Securities; (Registered treasury notes or bonds) of any of the other 49 states in addition to California, including bonds payable solely out of the revenues 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 (Section 53601). The securities are rated in a rating category of “A” or its equivalent or better by at least one NRSRO, no more than 5% of the total portfolio may be invested in any single issuer, no more than 30% of the total portfolio may be in Municipal Securities and the maximum maturity does not exceed five (5) years.

14.Supranationals: Issues are US dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank. (Section 53601).The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO, no more than 30% of the total portfolio may be invested in these securities, no more than 10% of the total portfolio may be invested in any single issue and the maximum maturity does not exceed five (5) years.

Prohibited Investment Types
Pursuant to Section 53601.6, SDCP shall not invest Funds in any security that could result in a zero-interest accrual, or less, if held to maturity. These prohibited investments include, but are not limited to, inverse floaters, range notes, or mortgage-derived interest-only strips. The purchase of foreign currency denominated securities is prohibited. The purchase of Crypto Asset Securities is prohibited. The purchase of a security with a forward settlement date exceeding 45 days from the time of the investment is prohibited. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. Purchasing or selling securities on margin is prohibited. The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited. SDCP is prohibited from investing in any company or organization whose business do not align with SDCP’s mission, vision, value, and goals.

Investment Portfolio Management
The term to maturity of any Funds invested shall not exceed five (5) years pursuant to Section 53601. The Treasurer will allocate Funds among authorized investments consistent with the objectives and standards of care outlined in this Policy.

Collateralization
Certificates of Deposit (CDs). SDCP shall require any commercial bank or savings and loan association to deposit eligible securities with an agency of a depository approved by the State Banking Department to secure any uninsured portion of a Non-Negotiable Certificate of Deposit.

The value of eligible securities as defined pursuant to California Government Code, Section 53651, pledged against a Certificate of Deposit shall be equal to 150% of the face value of the SDCP Investment Policy | 7
CD if the securities are classified as mortgages and 110% of the face value of the CD for all other classes of security.

Bank Deposits. This is the process by which a bank or financial institution pledges securities, or other deposits for the purpose of securing repayment of deposited funds. SDCP shall require any bank or financial institution to comply with the collateralization criteria defined in California Government Code, Section 53651.

Risk Management and Diversification
SDCP’s investment portfolio will be diversified to avoid incurring unreasonable and avoidable risks associated with concentrating investments in specific security types, maturity segment, or in individual financial institutions. No more than 5% of the investment portfolio shall be in securities of any one issuer except for U.S. Treasuries, U.S. Government Agency issues, Supranationals and investment pools such as LAIF, and money market funds.

A. Credit Risk: Credit risk, defined as the risk of loss due to failure of the insurer of a security, shall be mitigated by investing in those securities with an “A” or above rating and approved in the Investment Policy and by diversifying the investment portfolio so that the failure of any one issuer would not unduly harm SDCP’s cash flow.

B. Market Risk: Market risk or interest rate risk, defined as the risk of market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by implementing a short term and long-term investment strategies. It is explicitly recognized herein, however, that in a diversified portfolio, occasional measured losses are inevitable and must be considered within the context of overall investment return.

The duration of the portfolio will generally be approximately equal to the duration (typically, plus or minus 20%) of a Market Benchmark, an index selected by SDCP based on SDCP’s investment objectives, constraints and risk tolerances. Credit Rating This Investment Policy sets forth minimum credit ratings for each type of security. These credit ratings apply to the initial purchase of a security and do not automatically force the sale of a security if the credit ratings of the security fall below the policy limits.

Minimum credit ratings:

A. For securities with maturities of 13 months or less, the rating must be in the highest short-term rating category (without regard to qualification of such rating symbol such as “+” or “- “) by at least one nationally recognized statistical rating organization (the “NRSRO”).

B. For securities with maturities greater than 13 months, the rating must be “A” or higher by at least one NRSRO.

SDCP Investment Policy | 8
The monitoring of credit ratings consists of the following procedures:

1. When a credit rating downgrade occurs which results in a rating below the minimum credit requirement, SDCP’s Finance Department or external investment adviser will analyze and evaluate the credit rating to determine whether to hold or sell the investment.

2. In the event a security in the Fund receives a credit rating downgrade which results in a rating below the minimum credit rating requirement, SDCP’s Treasurer will report the rating change to the Finance and Risk Management Committee in the monthly public report. In the same manner, the Finance and Risk Management Committee will be informed on the decision to hold or sell a downgraded security.

3. The Investment Officials or authorized employees involved in the investment process and external investment advisers shall meet at least quarterly to review and update the approved list of securities and establish credit criteria for each category of security.

To ensure that the Fund maintains the highest overall credit rating with the contracted NRSRO, the asset allocation and portfolio holdings will be provided to the contracted NRSRO on a monthly basis.

Brokers
The Treasurer shall endeavor to complete investment transactions in accordance with Section 53601.5, institutions eligible to transact investment business with SDCP include:

A. Institutions licensed by the state as a broker-dealer.

B. Institutions that are members of a federally regulated securities exchange.

C. Primary government dealers as designated by the Federal Reserve Bank and non-primary government dealers.

D. Nationally or state-chartered banks.

E. The Federal Reserve Bank.

F. Direct issuers of securities eligible for purchase.

Broker/dealers shall be approved by the Chief Executive Officer upon recommendation by the Treasurer. Selection of broker/dealers shall be based upon the following criteria: the reputation and financial strength of the company or financial institution, the reputation and expertise of the individuals employed, and pursuant to the requirements of Section 53601.5. The Treasurer shall require any selected broker, brokerage firm, dealer, or securities firm to affirm that it has not, within any 48-consecutive month period, made a political contribution to any member of the SDCP Board, or any candidate who may join the SDCP Board in an amount exceeding the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board, the Political Reform Act, including section 84308, or any applicable SDCP Policy, as amended from time to time. The selected broker or dealers shall be provided with and acknowledge receipt of this Policy.

SDCP Investment Policy | 9
Losses
Losses are acceptable on a sale before maturity and may be taken if required to meet the liquidity needs of SDCP or if the reinvestment proceeds will earn an income flow with a present value higher than the present value of the income flow that would have been generated by the original investment, considering any investment loss or foregoing interest on the original investment.

Delivery and Safekeeping
The delivery and safekeeping of all securities shall be made through a third-party custodian when practical and cost effective as determined by the Treasurer, or a duly appointed Deputy Treasurer, and in accordance with Section 53608.

The Treasurer shall review all transaction confirmations for conformity with the original transaction and monitor for excessive trading.

Ethics and Conflict of Interest
The Investment Officials or authorized employees involved in the investment process, shall act as custodians of the public trust and will refrain from personal business activities that could conflict with proper execution of the investment program, or which could impair their ability to make impartial decisions. Investment Officials and any external investment advisers acknowledge that all direct SDCP investments are subject to public review and evaluation.

SDCP Investment Officials involved in the investment process shall refrain from personal business activity that could create a conflict of interest or the appearance of a conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions.

SDCP Investment Officials shall disclose to General Counsel or designee i) any material interests in financial institutions with which they conduct business, and ii) disclose any personal investments with a direct, indirect or beneficial interest totaling $2,000 or more. Investment Officials shall refrain from undertaking any personal investment transactions with the same individual from the external investment adviser with whom business is conducted on behalf of SDCP.

Investment Officials, pursuant with all applicable laws, shall not accept honoraria, gifts, and gratuities from advisers, brokers, dealers, bankers, or other entity with whom SDCP conducts business.

Any external investment adviser contracted by SDCP will comply with Municipal Securities Rulemaking Board Rule G-37 and shall follow the Investment Adviser Fiduciary Standard established by the U.S. Securities and Exchange Commission.

SDCP Investment Policy | 10
Internal Controls
The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met.

Accordingly, the Treasurer shall establish and maintain internal controls that shall address the following points:

A. Control of Collusion: Collusion is a situation where two or more employees are working in conjunction to defraud their employer. To achieve a segregation of duties, individuals who authorize investment transactions shall not also record or reconcile said transactions.

B. Clear Delegation of Authority to Subordinate Staff Members: Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities.

C. Delivery-Versus-Payment (DVP): All investment transactions shall be conducted on a delivery-versus-payment basis.

To protect against potential losses due to failure of individual securities dealers, and to enhance access to securities, interest payments and maturity proceeds, all cash and securities in SDCP’s portfolio shall be held in safekeeping in SDCP’s name by a third-party custodian, acting as agent for SDCP under the terms of a custody agreement executed by the bank and SDCP. All investment transactions will require a safekeeping receipt or acknowledgment generated from the trade. A monthly report will be received by SDCP from the custodian listing all securities held in safekeeping with current market data and other information. The only exceptions to the foregoing shall be depository accounts and securities purchases made with: (1) local government investment pools; (2) time certificates of deposit, (3) Local Agency Investment Fund, and (4) mutual funds and money market mutual funds, since these securities are not deliverable.

E. Avoidance of Physical Delivered Bearer Securities: Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place.

Bearer securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with such securities.

SDCP Investment Policy | 11
F. Written Confirmation of Telephone Wire Transfers: Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written or electronic communications and approved by the appropriate person. Development of a Wire Transfer Agreement with the Lead Bank or Third-Party.

G. Audits: SDCP’s Funds shall be subject to a process of independent review by its external auditors. SDCP’s external auditors shall review the investment portfolio in connection with SDCP’s annual audit for compliance with the Policy pursuant to Section 27134. The results of the audit shall be reported to the Treasurer.

Reports
A. Monthly: The Treasurer will perform a monthly review of the investment function.

Following the commencement of investment transactions, the Treasurer shall submit a monthly report of all investment transactions to the Finance and Risk Management Committee. Investment transactions are defined as the purchase, sale or exchange of securities.

B. Annually: The Treasurer will submit an annual report to the Finance and Risk Management Committee within 60 days of the end of a fiscal year providing the following:
• A list of individual securities by investment type, issuer, credit risk rating, CUSIP number, settlement date of purchase, date of maturity, par value and dollar amount invested on all securities, the market value and source of the market value information; • A statement that the portfolio is in compliance with this Policy and in accordance with Section 53646 or the manner in which the portfolio is not in compliance; and • A statement of SDCP’s ability to meet anticipated cash requirements for the upcoming 12 months.
• The Treasurer shall monitor and evaluate the portfolio’s performance relative to the chosen market benchmark(s), which will be included in the Treasurer’s annual report.

The Treasurer shall select an appropriate, readily available index to use as a market benchmark. Benchmarks may change over time based on changes in market conditions or cash flow requirements.

C. Annual Review: This Policy will be reviewed annually by the Treasurer. The Board is authorized to approve changes to this Policy following the review of proposed changes by the Finance Risk Management Committee.

SDCP Investment Policy | 12
Glossary of Investment Terms
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of revolving lines of credit.

BANKERS’ ACCEPTANCES. A short-term, negotiable, unconditional, and time draft drawn on and accepted by a bank. It is typically used in trade to finance the purchase and sale of goods.

BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial market index, which reflects the mix of securities allowed under a specific investment policy.

BROKER. A broker brings buyers and sellers together for a transaction for which the broker receives a commission. A broker does not sell securities from his own position.

CALLABLE. A callable security gives the issuer the option to call it from the investor prior to its maturity. The main cause of a call is a decline in interest rates. If interest rates decline, the issuer will likely call its current securities and reissue them at a lower rate of interest.

CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate. Large denomination CDs may be marketable.

CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement service that allows local agencies to purchase more than $250,000 in CDs from a single financial institution (must be a participating institution of CDARS) while still maintaining FDIC insurance coverage. CDARS is currently the only entity providing this service. CDARS facilitates the trading of deposits between the California institution and other participating institutions in amounts that are less than $250,000 each, so that FDIC coverage is maintained.

COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase agreement. Also, securities pledged by a financial institution to secure deposits of public monies.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the cash flows of mortgage securities (and whole loans) to create securities that have different levels of prepayment risk, as compared to the underlying mortgage securities.

COMMERCIAL PAPER. The short-term unsecured debt of corporations.

COUPON. The rate of return at which interest is paid on a bond.

CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer.

SDCP Investment Policy | 13
CRYPTO ASSET. Digital assets that use public ledgers over the internet to prove ownership.

They use cryptography, peer-to-peer networks and a distributed ledger technology (DLT) – such as blockchain – to create, verify and secure transactions.

CUSIP. Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most financial instruments, including: stocks of all registered U.S. and Canadian companies, commercial paper, and U.S. government and municipal bonds.

DEALER. A dealer acts as a principal in security transactions, selling securities from and buying securities for his own position.

DELIVERY vs PAYMENT (DVP). A securities industry procedure whereby payment for a security must be made at the time the security is delivered to the purchaser’s agent.

DISCOUNT. The difference between the par value of a bond and the cost of the bond, when the cost is below par. Some short-term securities, such as T-bills and banker’s acceptances, are known as discount securities. They sell at a discount from par, and return the par value to the investor at maturity without additional interest. Other securities, which have fixed coupons, trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality.

DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid excessive exposure to any one source of risk.

DURATION. The weighted average time to maturity of a bond where the weights are the present values of the future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. (See modified duration).

FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other banks. The Federal Reserve Bank through open-market operations establishes it.

ISSUER. The entity identified as the counterparty or obligator related to a security trade.

INVERSE FLOATER. A bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate.

INVESTMENT OFFICIALS. This includes any applicable SDCP staff participating in the investment process; SDCP Treasurer; SDCP Deputy Treasurer(s); and SDCP Board of Directors.

LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate higher than the cost of borrowing.

LIQUID. Term for securities that can be converted to cash quickly.

LIQUIDITY. The speed and ease with which an asset can be converted to cash.

SDCP Investment Policy | 14
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.

LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State Treasurer’s Office Local Agency Investment Fund (LAIF) to county pools, to Joint Powers Authorities (JPAs). These funds are not subject to the same SEC rules applicable to money market mutual funds.

MARGIN. The difference between the market value of a security and the loan a broker makes using that security as collateral.

MARKET RISK. The risk that the value of securities will fluctuate with changes in overall market conditions or interest rates.

MARKET VALUE. The price at which a security can be traded.

MATURITY. The final date upon which the principal of a security becomes due and payable.

MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts on either a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.

MODIFIED DURATION. The percent change in price for a 100 basis point change in yields.

Modified duration is the best single measure of a portfolio’s or security’s exposure to market risk.

MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes, commercial paper, and banker’s acceptances) are issued and traded.

MORTGAGE BACK SECURITY. Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.

MORTGAGE-DERIVED INTEREST-ONLY STRIPS. A financial product created by separating the interest and principal payments of a mortgage-backed security.

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 SECURITIES. Securities issued by state and local agencies to finance capital and operating expenses.

MUTUAL FUND. An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund’s prospectus. Mutual funds can be invested in various types of domestic and/or international stocks, bonds, and money market SDCP Investment Policy | 15
instruments, as set forth in the individual fund’s prospectus. For most large, institutional investors, the costs associated with investing in mutual funds are higher than the investor can obtain through an individually managed portfolio.

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 Fitch, S&P, and Moody's.

NEGOTIABLE CD. 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 in a secondary market and are payable upon order to the bearer or initial depositor (investor).

PREMIUM. The difference between the par value of a bond and the cost of the bond, when the cost is above par.

RANGE NOTES. A structured investment where the coupon is linked to the performance of a reference index
REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller’s point of view, the same transaction is a reverse repurchase agreement.

SAFEKEEPING. A service to bank customers whereby securities are held by the bank in the customer’s name.

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 RATE OF RETURN. A measure of a portfolio’s performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains, and losses in the portfolio.

U.S. TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk, and are the benchmark for interest rates on all other securities in the US and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds.

TREASURY BILLS. All securities issued with initial maturities of one year or less are issued as discounted instruments, and are called Treasury bills. The Treasury currently issues three- and six-month T-bills at regular weekly auctions. It also issues “cash management” bills as needed to smooth out cash flows.

SDCP Investment Policy | 16
TREASURY NOTES. All securities issued with initial maturities of two to ten years are called Treasury notes, and pay interest semi-annually.

TREASURY BONDS. All securities issued with initial maturities greater than ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually.

VOLATILITY. The rate at which security prices change with changes in general economic conditions or the general level of interest rates.

YIELD TO MATURITY. The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost.

SDCP Investment Policy | 1
Subject: Investment Policy
Purpose: The San Diego Community Power (“SDCP”) Investment Policy (“Policy”) establishes investment guidelines for protecting SDCP’s cash reserves, deposits, and investments (“Funds”) while producing a reasonable rate of return on investments.

Background
On October 1, 2019, the Founding Members of San Diego Community Power (SDCP) adopted the Joint Powers Agreement (JPA) which was amended and restated on December 16, 2021.

Section 3.2.12 of the JPA specifies that the SDCP Board of Directors (Board) may at its discretion adopt rules, regulations, policies, bylaws and procedures governing the operation of SDCP.

Further, Section 4.5.5 of the JPA states that one of the general purposes of the Board is to set policy.

Policy Number: 2023-07
Original Adoption Date: May 25, 2023
SDCP Investment Policy | 2
Investment Objectives
To the extent possible, investments will align with SDCP’s mission, vision, value, and goals.

Scope
This Investment Policy applies to all funds and investment under the direct authority of SDCP.

This Policy does not apply to the investment of bond proceeds, which would be governed by any applicable bond documents and any other funds specifically exempted by SDCP’s Board of Directors.

Acceptable Investment Types: To the extent possible, investments will align with SDCP’s mission, vision, value, and goals.

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Commented [CM1]: CAM recommends adding risk
management language permitting investing in LAIF if there is a discrepancy between SDCP policy and LAIF investments Commented [CD2R1]: This will allow investments in LAIF
even if they hold SDCP prohibited items. Protection from indirectly investing in prohibited items. This should be fine since we won't be able to control the LAIF holdings.

SDCP Investment Policy | 4

5. Bankers’ Acceptances: Funds may be invested in Banker’s Acceptances provided that they are issued by institutions which have short-term debt obligations rated “A-1” or its equivalent of better by at least one NRSRO (Nationally Recognized Statistical Rating Organization). Not more thant 40% of the portfolio may be invested in Bankers’ Acceptances, and no more than 5% of the portfolio may be invested in any single issuer.

The maximum maturity shall not exceed 180 days.

Commented [CM3]: CAM recommends adding a 20%
limitation to callables and 30% max total portfolio
Commented [CD4R3]: Setting percentage limitations
seems fine and reasonable. @Eric Washington
Commented [CM5]: CAM recommends adding risk
management language to NCDs
Commented [CD6R5]: @Eric Washington Do we want
the limit of 5% of total investments in a single issuer of a CD?
Commented [CM7]: Not sure what to adjust here
Commented [DD8R7]: 20% limit per fund and overall
Commented [CD9R7]: @Eric Washington Do we want
the limit of 20% of total investments in a single money market fund? This is risk management strategy by forcing diversification.

The maximum maturity does not exceed 270 days.

11. Pass Thru Securities: Asset-Backed, Mortgage-Backed, Mortgage Pass-Through Securities, and Collateralized Mortgage Obligations (Section 53601 et seq) from issuers not defined in sections 3 and 4 of the Acceptable Investment Types section of this policy, provided that: The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO, no more than 20% of the total portfolio may be invested in these securities, no more than 5% of the total portfolio may be invested in any single Asset-Backed or Commercial Mortgage security issuer and the maximum maturity does not exceed five (5) years.

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Commented [CM10]: CAM recommends adding MTN to
permitted investments
Commented [CD11R10]: @Eric Washington Using MTN
with good ratings as defined by our policy should provide us with safe investments.

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Commented [CM12]: CAM recommends adding Pass
Thru securities to Acceptable Investment Types
Commented [CD13R12]: @Eric Washington This could
lead to higher yield compared to traditional fixed-income investments due to prepayment risks from borrowers
paying their loan off early.

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SDCP Investment Policy | 6

The securities are rated in a rating category of “A” or its equivalent or better by at least one NRSRO, no more than 5% of the total portfolio may be invested in any single issuer, no more than 30% of the total portfolio may be in Municipal Securities and the maximum maturity does not exceed five (5) years.

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Commented [CM15]: CAM recommends adding Supra’s
Commented [CD16R15]: @Eric Washington We have to
decide if we're okay with our funds being used in another country. I notice that MCE approves the use of Supra's in their Investment policy.

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Commented [CM17]: Cam recommends adding language
from SB 1489 limiting the purchase of a security with a settlement date greater than 45
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SDCP Investment Policy | 7
The value of eligible securities as defined pursuant to California Government Code, Section 53651, pledged against a Certificate of Deposit shall be equal to 150% of the face value of the CD if the securities are classified as mortgages and 110% of the face value of the CD for all other classes of security.

Commented [CM18]: CAM recommends adding
Collateralization language to policy
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Commented [CM19]: CAM recommends adding Supra’s
to the list of securities permitted with more than 5% issuer limitation
SDCP Investment Policy | 8
Credit Rating
This Investment Policy sets forth minimum credit ratings for each type of security. These credit ratings apply to the initial purchase of a security and do not automatically force the sale of a security if the credit ratings of the security fall below the policy limits.

Minimum credit ratings:

B. For securities with maturities greater than 13 months, the rating must be “A” or higher by at least one NRSRO.

The monitoring of credit ratings consists of the following procedures:

To ensure that the Fund maintains the highest overall credit rating with the contracted NRSRO, the asset allocation and portfolio holdings will be provided to the contracted NRSRO on a monthly basis.

SDCP Investment Policy | 9
Brokers
The Treasurer shall endeavor to complete investment transactions in accordance with Section 53601.5, institutions eligible to transact investment business with SDCP include:

A. Institutions licensed by the state as a broker-dealer.

B. Institutions that are members of a federally regulated securities exchange.

C. Primary government dealers as designated by the Federal Reserve Bank and non-primary government dealers.

D. Nationally or state-chartered banks.

E. The Federal Reserve Bank.

F. Direct issuers of securities eligible for purchase.

Losses
Losses are acceptable on a sale before maturity and may be taken if required to meet the liquidity needs of SDCP or if the reinvestment proceeds will earn an income flow with a present value higher than the present value of the income flow that would have been generated by the original investment, considering any investment loss or foregoing interest on the original investment.

The Treasurer shall review all transaction confirmations for conformity with the original transaction and monitor for excessive trading.

SDCP Investment Policy | 10
Ethics and Conflict of Interest
The Investment Officials or authorized employees involved in the investment process, shall act as custodians of the public trust and will refrain from personal business activities that could conflict with proper execution of the investment program, or which could impair their ability to make impartial decisions. Investment Officials and any external investment advisers acknowledge that all direct SDCP investments are subject to public review and evaluation.

Investment Officials, pursuant with all applicable laws, shall not accept honoraria, gifts, and gratuities from advisers, brokers, dealers, bankers, or other entity with whom SDCP conducts business.

Internal Controls
The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met.

Accordingly, the Treasurer shall establish and maintain internal controls that shall address the following points:

B. Clear Delegation of Authority to Subordinate Staff Members: Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid SDCP Investment Policy | 11
improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities.

C. Delivery-Versus-Payment (DVP): All investment transactions shall be conducted on a delivery-versus-payment basis.

E. Avoidance of Physical Delivered Bearer Securities: Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place.

Bearer securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with such securities.

F. Written Confirmation of Telephone Wire Transfers: Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written or electronic communications and approved by the appropriate person. Development of a Wire Transfer Agreement with the Lead Bank or Third-Party.

Reports
A. Monthly: The Treasurer will perform a monthly review of the investment function.

SDCP Investment Policy | 12
B. Annually: The Treasurer will submit an annual report to the Finance and Risk Management Committee within 60 days of the end of a fiscal year providing the following:
• A list of individual securities by investment type, issuer, credit risk rating, CUSIP number, settlement date of purchase, date of maturity, par value and dollar amount invested on all securities, the market value and source of the market value information; • A statement that the portfolio is in compliance with this Policy and in accordance with Section 53646 or the manner in which the portfolio is not in compliance; and • A statement of SDCP’s ability to meet anticipated cash requirements for the upcoming 12 months.
• The Treasurer shall monitor and evaluate the portfolio’s performance relative to the chosen market benchmark(s), which will be included in the Treasurer’s annual report.

The Treasurer shall select an appropriate, readily available index to use as a market benchmark. Benchmarks may change over time based on changes in market conditions or cash flow requirements.

Commented [CM20]: CAM recommends adding a market
benchmark for performance evaluation
SDCP Investment Policy | 13
Glossary of Investment Terms
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of revolving lines of credit.