City of Cotati – Investment Policy 1
CITY OF COTATI
INVESTMENT POLICY
(Last Revised June 27, 2017)
Table of Contents
1. Policy........................................................................................................................................................2
2. Scope ........................................................................................................................................................2
3. Prudence ..................................................................................................................................................2
4. Objectives.................................................................................................................................................3
5. Delegation of Authority ..........................................................................................................................3
6. Ethics and Conflicts of Interest..............................................................................................................3
7. Authorized Dealers and Institutions .....................................................................................................4
8. Authorized and Suitable Investments...................................................................................................4
9. Review of Investment Portfolio..............................................................................................................6
10. Investment Pools / Money Market Funds...........................................................................................7
11. Collateralization....................................................................................................................................7
12. Safekeeping and Custody .....................................................................................................................7
13. Diversification .......................................................................................................................................7
14. Maximum Maturities............................................................................................................................8
15. Internal Controls...................................................................................................................................8
16. Performance Standards........................................................................................................................8
17. Reporting ...............................................................................................................................................9
18. Investment Policy Adoption.................................................................................................................9 A. Glossary of Terms in this Policy .........................................................................................................10 B. Glossary of General Investment Terms..............................................................................................12 City of Cotati – Investment Policy 2
1. Policy
The City of Cotati shall invest public funds in such a manner as to comply with state and local laws; ensure prudent money management; provide for daily cash flow requirements; and meet the objectives of the Policy, in priority order of Safety, Liquidity and Return on investment, while considering social responsibility. In accordance with the Municipal Code of the City of Cotati and under authority granted by the City Council, the City Administrative Services Director, in coordination with the City Manager, is responsible for investing the surplus cash in the City pooled funds.
2. Scope
The investment policy applies to all investment activities and financial assets of the City of Cotati as accounted for in the Annual Comprehensive Financial Report (ACFR). This policy is applicable, but not limited to, all funds listed below:
• General Fund
• Capital Funds
• Enterprise Funds
• Other Special Revenue Funds, Debt Service Funds, Internal Service Funds • Any new fund created by the City Council unless specifically exempted.
3. Prudence
The standard of prudence to be used by the designated representative shall be the “prudent investor” standard and shall be applied in the context of managing the overall portfolio. Persons authorized to make investment decisions on behalf of local agencies investing public funds are trustees and therefore fiduciaries subject to the prudent investor standard which states, “When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, 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”.
The City Manager, Administrative Services Director, and other individuals assigned to manage the investment portfolio, acting within the intent and scope of the investment policy and other written procedures, and exercising due diligence, shall be relieved of personal responsibility and liability for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments.
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0 4. Objectives
The City’s primary investment objectives, in order of priority, shall be:
1. Safety: Safety of principal is the foremost objective of the investment program.
Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The City shall seek to preserve principal by mitigating the two types of risk: credit risk and market risk.
a. Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing in issuers that carry the direct or implied backing of the U.S. Government (including, but not limited to, the U.S. Treasury, U.S.
Government Agencies, and federally insured banks). The portfolio will be diversified so that the failure of any one issuer does not unduly harm the City’s capital base and cash flow.
b. Market risk, (aka “interest rate risk”) defined as market value fluctuations due to overall changes in the general level of interest rates shall be mitigated by limiting the maximum maturity of any one security to five years, structuring the portfolio based on historic and current cash flow analysis eliminating the need to sell securities prior to maturity and avoiding the purchase of long-term securities for the sole purpose of short-term speculation. Moreover, it is the City’s full intent, at the time of purchase, to hold all investments until maturity to ensure the return of all invested principal dollars. Limited exceptions will be granted for security swaps that would improve the portfolio’s yield and/or credit quality.
2. Liquidity: The City’s investment portfolio will remain sufficiently liquid to enable the City of Cotati to meet all operating requirements, which might be reasonably anticipated.
3. Return on Investments: The City’sinvestment portfolio shall have the objective of attaining a comparative performance measurement or an acceptable rate of return throughout budgetary and economic cycles. These measurements should be commensurate with the City’s investment risk constraints identified in this Investment Policy and the cash flow characteristics of the portfolio.
4. Social Considerations: The City will prioritize socially responsible investments that also meet the other investment objectives.
5. Delegation of Authority
The Municipal Code of the City of Cotati and the authority granted by City Council assign the responsibility of investing unexpended cash to the City Manager and Administrative Services Director. The Administrative Services Director, or their designee, shall have the daily management responsibility of the investment program and shall establish procedures for the operation consistent with this investment policy.
6. Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from personal business activity that conflicts with proper execution of the investment program or impairs their ability to City of Cotati – Investment Policy 4
make impartial investment decisions. Additionally, the Administrative Services Director and their designee are required to annually file applicable financial disclosures as required by the Fair Political Practices Commission (FPPC). Furthermore, Investment officials must refrain from undertaking personal investment transactions with the same individual(s) employed by the financial institution with whom business is conducted on behalf of the City.
7. Authorized Dealers and Institutions
The Administrative Services Director will maintain a list of approved financial institutions authorized to provide investment services to the public agency in the State of California. These may include “primary” dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3-1 (uniform net capital rule). Best practices include the following: 1) A determination that all approved broker/dealer firms, and individuals covering the public agency, are reputable and trustworthy; 2) the broker/dealer firms should have the ability to meet all their financial obligations in dealing with the Public Agency; 3) the firms, and individuals covering the agency, should be knowledgeable and experienced in Public Agency investing and the investment products involved; 4) no public deposit shall be made except in a qualified public depository as established by the established state laws; 4) all financial institutions and broker/dealers who desire to conduct investment transactions with the public agency may supply the Administrative Services Director with audited financial statements, proof of FINRA certification, trading resolution, proof of State of California registration, a completed broker/dealer questionnaire, certification of having read the Public Agency’s investment policy and depository contracts.
The Administrative Services Director may conduct an annual review of the financial condition and registrations of qualified dealers & institutions.
8. Authorized and Suitable Investments
Investment of City funds is governed by the California Government Code Sections 53600 et seq.
Within the context of the limitations, the following investments are authorized, as further limited herein:
a) United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no percentage limitation of the portfolio that can be invested in this category, although a fiveyear maturity limitation is applicable. b) Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
c) Local Agency Investment Fund (LAIF), which is a State of California managed investment pool, and Los Angeles County Investment pool, may be used up to the maximum permitted by California State Law. A review of the pool/fund is required when part of the list of City of Cotati – Investment Policy 5
authorized investments, with the knowledge that the pool/fund may include some investments allowed by statute but not explicitly identified in this investment policy.
Additionally, shares of beneficial interest issued by a joint powers authority (JPA) organized pursuant to CA Code (Section 6509.7) that invests in the securities and obligations in compliance with CA Code 53601 (subsection ‘a’ to ‘r’, inclusive) are also authorized. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
• The adviser is registered or exempt from registration with the Securities and Exchange Commission.
• The adviser has not less than five years of experience investing in the securities and obligations authorized in CA Code (subsection ‘a’ to ‘r’, inclusive). • The adviser has assets under management in excess of five hundred million dollars ($500,000,000).
d) Negotiable Certificates of Deposit issued by nationally or state-chartered banks (FDIC insured institutions) or state or federal savings institutions. Purchases of negotiable certificates of deposit may not exceed 30% of total portfolio. Principal and accrued interest on each investments must not exceed the $250,000 FDIC insurance limit. A maturity limitation of five years is applicable.
e) Time deposits or placement service deposits, non-negotiable and collateralized in accordance with the California Government Code, may be purchased through banks or savings and loan associations. Since time deposits are not liquid, no more than 50% of the investment portfolio may be invested in this investment type. A maturity limitation of five years is applicable. Effective January 1, 2020, no more than 50 percent of the agency’s money may be invested in deposits, including certificates of deposit, through a placement service as authorized under 53601.8 (excludes negotiable certificates of deposit authorized under Section 53601(i)). On January 1, 2026, the maximum percentage of the portfolio reverts back to 30 percent. Investments made pursuant to 53635.8 remain subject to a maximum of 30 percent of the portfolio.
f) Various daily money market funds administered for or by trustees, paying agents and custodian banks contracted by the City of Cotati may be purchased as allowed under the State of California Government Code. Only funds holding U.S. Treasury or Government agency obligations can be used.
The following summary of maximum percentage limits, by instrument, are established for the City’s investment portfolio:
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Authorized Investment Type Government
Code
Maximum
Maturity
Minimum
Credit
Quality
Maximum in
Portfolio
Maximum
Investment in
One Issuer
Treasury Obligations (bills,
notes, & bonds)
53601(b) 5 Years N/A 100% N/A
US Government
Agency and Federal Agency
Securities
53601(f) 5 Years N/A 100% N/A
Local Agency Investment
Fund (LAIF) 16429.1 Upon
Demand N/A
As permitted by LAIF
(currently $65
million per account)
N/A
SonomaCounty Investment Pool
(SCIP) 53684
Upon
Demand N/A
As permitted by County
Treasurer (currently no
limit)
N/A
Joint Powers Authority Pool 53601(p) N/A See § 8.3
(above) None N/A
Negotiable Certificates of Deposit 53601(i) 5 Years N/A 30% N/A Placement Service Deposits –
Deposits or
53601.8
and
53635.8
5 Years N/A 50% N/A
9. Review of Investment Portfolio
The securities held by the City of Cotati must be compliant with Section 8.0 “Authorized and Suitable Investments” at the time of purchase. The Administrative Services Director should review the portfolio of assets held in investments (at least annually) to identify non-compliant securities.
The Administrative Services Director should establish procedures to report any materially adverse impact on the performance of the portfolio to the agency.
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10. Investment Pools / Money Market Funds
A thorough investigation of the investment pool/money market fund is required prior to investing, and on a continual basis. Best efforts will be made to acquire the following information:
a) A description of eligible investment securities, and a written statement of investment policy and objectives.
b) A description of interest calculations and how it is distributed, and how gains and losses are treated.
c) A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. d) A description of who may invest in the program, how often, and what size deposit and withdrawal are allowed.
e) A schedule for receiving statements and portfolio listings. f) Are reserves, retained earnings, etc. utilized by the pool/fund? g) A fee schedule, and when and how it is assessed.
h) Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
11. Collateralization
Collateralization will be required on two types of investments: non-negotiable certificates of deposit and repurchase (and reverse repurchase) agreements. To anticipate market changes and provide a level of security for all funds, the collateralization level will be 110% of market value for non-negotiable certificate of deposit and 102% for reverse repurchase agreements of principal and accrued interest.
Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. Clearly marked evidence of ownership (safekeeping receipt) must be supplied to the entity and retained.
The City may waive the collateralization requirements for any portion of the deposit that is covered by Federal Deposit Insurance.
12. Safekeeping and Custody
All security transactions shall be conducted on a delivery-versus-payment (DVP) basis. Securities will be held by a third-party custodian designated by the Administrative Services Director and evidenced by safekeeping receipts.
13. Diversification
The City shall diversify the investments within the portfolio to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions, or maturities.
To promote diversification, no more than 5% of the portfolio may be invested in the securities of any one issuer, regardless of security type, excluding U.S. Treasuries, federal agencies, and pooled investments such as LAIF, money market funds, or local government investment pools.
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14. Maximum Maturities
To the extent possible, the City of Cotati will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than five (5) years from the date of purchase. Any investment longer than five (5) years must be done with advance permission from City Council.
15. Internal Controls
The Administrative Services Director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City of Cotati are protected from loss due to theft, fraud or misuse.
Separation of functions between the City Manager, Administrative Services Director and any designee is designed to provide an ongoing internal review to prevent the potential for converting assets or concealing transactions.
Investment decisions are made by the Administrative Services Director, executed by the Administrative Services Director or City Manager, and documented and confirmed by the designee. All wire transfers must have segregation of duties whereby approval cannot be performed by the initiator. Proper documentation obtained from confirmation and cash disbursement wire transfers is required for each investment transaction. Timely bank reconciliation is processed by an accountant or designee who is outside of the investment management delegation to ensure proper handling of all transactions.
The investment portfolio and all related transactions are reviewed and balanced to appropriate general ledger accounts monthly. An independent analysis by an external auditor shall be conducted annually to review and perform procedure testing on the City’s cash and investments that have a material impact on the financial statements. The Administrative Services Director shall review and confirm compliance with the investment process and procedures.
16. Performance Standards
The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs.
The City intends to spread its investments relatively evenly between 0 and 5 years and hold those investments to maturity, also known as laddering. The City is limiting its authorized investments to the safest end of the investment spectrum—debt issued by the U.S. Treasury, U.S. Government Agencies, and debt that is federally insured (see section 8.0 Authorized and Suitable Investments, above, for a complete list of authorized investments).
Therefore, an appropriate performance benchmark will be a Constant Treasury Maturity Rate consistent with the weighted average maturity of the portfolio. The City recognizes that benchmarks may change over time based on changes in market conditions or cash flow requirements.
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17. Reporting
The City Administrative Services Director may review and render quarterly reports to the City Council that include the following information:
• Investment type (e.g. U.S. Treasury Note, U.S. Government Agency Bond) • Name of the issuer (e.g. Federal Farm Credit Bank, Federal Home Loan Bank) • Maturity date
• Yield to maturity
• Current market value and source of market value
• Par and dollar amount for each security the City has invested in • Par and dollar amount on any money held by the City (e.g. LAIF balance, Cash Balance). • Description of any of the City’s funds, investments, or programs that are under the management of contracted parties, including lending programs. • Statement of compliance or non-compliance of the portfolio to the investment policy A statement denoting the ability or inability of the City to meet its expenditure requirements for the next six months.
When provided, quarterly reports shall be placed on the City Council meeting agenda for its review and approval no later than 30 days after the quarter ends. If there are no Council meetings within the 30-day period, the quarterly report shall be presented to the Council at the soonest possible meeting thereafter.
18. Investment Policy Adoption
The City of Cotati investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed annually by the City Council and any modifications made thereto must be approved by the City Council.
The Administrative Services Director shall establish written investment policy procedures for the operation of the investment program consistent with this policy. The procedures should include reference to: safekeeping, master repurchase agreements, wire transfer agreements, banking service contracts and collateral/depository agreements. Such procedures shall include explicit delegation of authority to the people responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the City of Cotati.
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A. Glossary of Terms in this Policy
Accrued Interest: Interest earned but not yet received.
Annual Comprehensive Financial Report (ACFR): The official annual financial report for the City. It includes five combined statements and basic financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles (GAAP).
Bond: A financial obligation for which the issuer promises to pay the bondholder a specified stream of future cash flows, including periodic interest payments and a principal repayment.
Bond Swap: Selling one bond issue and buying another at the same time to create an advantage for the investor. Some benefits of swapping may include tax-deductible losses, increased yields, and an improved quality portfolio.
Broker: In securities, the intermediary between a buyer and a seller of securities. The broker, who usually charges a commission, must be registered with the exchange in which he or she is trading, accounting for the name registered representative.
Certificate of Deposit: A deposit insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) at a set rate for a specified period of time.
Collateral: Securities, evidence of deposit or pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposit of public moneys.
Constant Maturity Treasury (CMT): An average yield of a specific Treasury maturity sector for a specific time frame. This is a market index for reference of past direction of interest rates for the given Treasury maturity range.
Custody: A banking service that provides safekeeping for the individual securities in a customer's investment portfolio under a written agreement that also calls for the bank to collect and pay out income, to buy, sell, receive, and deliver securities when ordered to do so by the principal.
Delivery vs. Payment (DVP): Delivery of securities with a simultaneous exchange of money for the securities.
Diversification: Dividing investment funds among a variety of securities offering independent returns and risk profiles.
Federal Deposit Insurance Corporation (FDIC): Insurance provided to customers of a subscribing bank that guarantees deposits to a set limit (currently $250,000) per account.
Interest Rate: The annual yield earned on an investment, expressed as a percentage.
Liquidity: Refers to the ability to rapidly convert an investment into cash.
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Market Value: The price at which a security is trading and could presumably be purchased or sold.
Maturity: The date upon which the principal or stated value of an investment becomes due and payable.
Portfolio: Collection of securities held by an investor.
Primary Dealer: A group of government securities dealers that submit daily reports of market activity and security positions held to the Federal Reserve Bank of New York and are subject to its informal oversight.
Purchase Date: The date in which a security is purchased for settlement on that or a later date.
Rate of Return: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return.
Risk: Degree of uncertainty of return on an asset. Safekeeping: See Custody.
Settlement Date: The date on which a trade is cleared by delivery of securities against funds.
Time Deposit: A deposit in an interest-paying account that requires the money to remain on account for a specific length of time. While withdrawals can generally be made from a passbook account at any time, other time deposits, such as certificates of deposit, are penalized for early withdrawal.
Treasury Obligations: Debt obligations of the U.S. Government that are sold by the Treasury Department in the forms of bills, notes, and bonds. Bills are short-term obligations that mature in one year or less. Notes are obligations that mature between one year and ten years. Bonds are longterm obligations that generally mature in ten years or more.
U.S. Government Agencies: Instruments issued by various US Government Agencies most of which are secured only by the credit worthiness of the agency.
Yield: The rate of annual income returns on an investment, expressed as a percentage. It is obtained by dividing the current dollar income by the current market price of the security.
Yield to Maturity: The rate of income returns on an investment, minus any premium or plus any discount, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond, expressed as a percentage.
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B. Glossary of General Investment Terms
Active Deposits: Funds that are immediately required for disbursement.
Amortization: An accounting practice of gradually decreasing (increasing) an asset's book value by spreading its depreciation (accretion) over a period of time.
Asked Price: The price a broker dealer offers to sell securities. Basis Point: One basis point is one hundredth of one percent (.01). Bid Price: The price a broker / dealer offers to purchase securities.
Book Entry Securities: Securities, such stocks held in “street name,” that are recorded in a customer’s account, but are not accompanied by a certificate. The trend is toward a certificate-free society to cut down on paperwork and to diminish investors’ concerns about the certificates themselves. All the large New York City banks, including those that handle the bulk of the transactions of the major government securities dealers, now clear most of their transactions with each other and with the Federal Reserve using automated telecommunications and the “bookentry” custody system maintained by the Federal Reserve Bank of New York. These banks have deposited with the Federal Reserve Bank a major portion of their government and agency securities holdings, including securities held for the accounts of their customers or in a fiduciary capacity for the City. Virtually all transfers for the accounts of the banks, as well as for the government securities dealers who are their clients, are now affected solely by bookkeeping entries. The system reduces the costs and risks of physical handling and speeds up the completion of transactions.
Book Value: The value at which a debt security is shown on the holder's balance sheet. Book value is acquisition cost less amortization of premium or accretion of discount.
Bullet Bond: See “Non-callable Bond.”
Callable Bond: A debit obligation where the bond issuer (i.e. borrower) has the option to call the bond or pay it off early (before the scheduled maturity date). For instance, a 5-year bond might be “callable quarterly”—meaning that, although the bond has a scheduled end date 5 years from now, it could end in 3 months (and every 3 months after that, until the scheduled maturity date).
Coupon: The annual rate of interest that a bond issuer promises to pay the bondholder on the bond's face value.
Credit Analysis: A critical review and appraisal of the economic and financial conditions or of the ability to meet debt obligations.
Current Yield: The interest paid on an investment expressed as a percentage of the current price of the security.
Discount: The difference between the cost of a security and its value at maturity when quoted at lower than face value.
Duration: The weighted average maturity of a bond's cash flow stream, where the present value of the cash flows serve as the weights; the future point in time at which on average, an investor has received exactly half of the original investment, in present value terms; a bond's zero-coupon equivalent; the fulcrum of a bond's present value cash flow time line.
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Fannie Mae: Trade name for the Federal National Mortgage Association (FNMA), a U.S. sponsored corporation.
Federal Reserve System: The central bank of the U.S. that consists of a seven-member Board of Governors, 12 regional banks and approximately 8,000 commercial banks that are members.
Fed Wire: A wire transmission service established by the Federal Reserve Bank to facilitate the transfer of funds through debits and credits of funds between participants within the Fed system.
Freddie Mac: Trade name for the Federal Home Loan Mortgage Corporation (FHLMC), a U.S. sponsored corporation.
Investment Agreements: An agreement with a financial institution to borrow public funds subject to certain negotiated terms and conditions concerning collateral, liquidity, and interest rates.
Nationally Recognized Statistical Rating Organizations (NRSRO): A U.S. Securities & Exchange Commission registered agency that assesses the creditworthiness of an entity or specific security. NRSRO typically refers to Standard and Poor’s Ratings Services, Fitch Ratings, Inc., or Moody’s Investors Services.
New Issue: Term used when a security is originally "brought" to market.
Non-callable Bond: Also known as, “Bullet Bond.” A non-callable bond is a debt obligation where the bond issuer does not have the option to “call the bond” i.e.-end the bond before the scheduled maturity date.
Perfected Delivery: Refers to an investment where the actual security or collateral is held by an independent third party representing the purchasing entity.
Repurchase Agreement (REPO): A transaction where the seller (bank) agrees to buy back from the buyer (City) the securities at an agreed upon price after a stated period of time.
Reverse Repurchase Agreement (REVERSE REPO): A transaction where the seller (City) agrees to buy back from the buyer (bank) the securities at an agreed upon price after a stated period of time.
Secondary Market: A market made for the purchase and sale of outstanding issues following the initial distribution.
Yield Curve: The yield on bonds, notes or bills of the same type and credit risk at a specific date for maturities up to thirty years.