Item No.
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: OFFICE OF THE CITY MANAGER
BY: STEPHEN W. HANNAH, FINANCE DIRECTOR
DATE: APRIL 9, 2024
SUBJECT: FISCAL YEAR 2024-2025 INVESTMENT POLICY
EXECUTIVE SUMMARY
The City Council will consider adopting the Fiscal Year 2024-2025 Investment Policy. The adoption of the City’s Investment Policy is required by State code on an annual basis and is done to ensure the local governing body is kept apprised of both changes in State law governing municipal investments as well as the allowable types and limitations on the City Investment activities.
RECOMMENDATION
That the City Council:
Adopt the attached Investment Policy for the investment of public funds of the City of Downey and its related entities.
BACKGROUND
The City of Downey’s Investment Policy (“Policy”) establishes overall guidelines for the management and investment of the City of Downey’s public funds. To ensure compliance with Government Code Sections 53600 through 53659, the policy is reviewed, updated, and adopted by the City Council annually.
ANALYSIS
California Government Code Sections 53600 through 53659 define the types of Investments that municipal government can include in their portfolio, limit on the level of these investments, and the oversight required for the portfolio. The Investment Policy establishes strategies, practices, and procedures which are used in the administration of the City’s portfolio.
The City’s Investment Policy, as presented, complies with California Government Code requirements and has also been reviewed by the City’s investment advisor, Higgins Capital.
2024-25 INVESTMENT POLICY
APRIL 9, 2024
PAGE 2
The updated policy includes a few changes from the current policy, as highlighted below. • Adds the ability for the City to enter into investments through the purchase of:
• Registered state warrants, treasury notes or bonds of the State of California and the other 49 states,
• Bonds, notes, warrants, or other evidences of indebtedness of a local agency within California,
• The City’s own bonds issued on behalf of the City.
• Adds Municipal bonds to the City’s allowable investment types.
No further changes are proposed as part of this year’s update.
The Policy shall be adopted by the City Council on an annual basis. This policy shall be reviewed annually to ensure its consistency with respect to the overall objectives of safety, liquidity, and yield, and its relevance to current laws and financial trends.
CITY COUNCIL PRIORITIES
Fiscal Responsibility
FISCAL IMPACT
There is no financial impact.
ATTACHMENTS
Attachment A: Investment Policy
CITY OF DOWNEY
CALIFORNIA
INVESTMENT POLICY
FISCAL YEAR 2024-2025
ATTACHMENT A
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director
TABLE OF CONTENTS
Contents
TABLE OF CONTENTS ............................................................................................................. 2 POLICY ...................................................................................................................................... 3 SCOPE ...................................................................................................................................... 3 PRUDENCE ............................................................................................................................... 4 OBJECTIVE ............................................................................................................................... 5 DELEGATION OF AUTHORITY ................................................................................................ 5 ETHICS AND CONFLICTS OF INTEREST ............................................................................... 6 AUTHORIZED FINANCIAL INSTITUTIONS AND BROKER/DEALERS ................................... 6 AUTHORIZED AND SUITABLE INVESTMENTS ...................................................................... 6 MASTER REPURCHASE AGREEMENT ................................................................................ 10 REVIEW OF PORTFOLIO ......................................................................................................... 9 LEGISLATIVE CHANGES ....................................................................................................... 10 INTEREST EARNINGS ........................................................................................................... 10 INVESTMENT POOLS/MUTUAL FUNDS ............................................................................... 10 COLLATERALIZATION ........................................................................................................... 11 SAFEKEEPING AND CUSTODY OF SECURITIES ................................................................ 11 DIVERSIFICATION .................................................................................................................. 12 MAXIMUM MATURITIES ......................................................................................................... 12 INTERNAL CONTROL ............................................................................................................ 12 PERFORMANCE STANDARDS .............................................................................................. 13 REPORTING ........................................................................................................................... 13 INVESTMENT POLICY ADOPTION ........................................................................................ 13 APPENDIX A ............................................................................................................................ 14 Glossary of Terms ....................................................................................................... 14
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 3
POLICY
It is the policy of the City of Downey to invest public funds in a manner which will provide the highest investment return with the maximum security while meeting the daily cash flow demands of the City of Downey and conforming to all state and City of Downey’s laws governing the investment of public funds.
The investment of the funds of the City of Downey is directed toward the goals of safety, liquidity and yield. The State of California authority governing investments for municipal governments is set forth in the California Government Code, Sections 53600.
This policy covers the investment activities of all contingency reserves and inactive cash balances under the direct authority of the City.
SCOPE
This investment policy applies to all financial assets, investment activities and debt issues of the City of Downey, City of Downey Public Facilities Financing Corporation, City of Downey Water Facilities Corporation, Downey Housing Authority, and City of Downey acting as Successor Agency to the Redevelopment Agency and as accounted for in the Annual Comprehensive Financial Report (ACFR).
All monies entrusted to the Finance Director can be pooled in a diversified portfolio unless specifically exempted. Investments made on a pooled basis may include investments of the City of Downey and its component units and agencies.
Except for cash in restricted and special funds, the City will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation in accordance with generally accepted accounting principles.
Policy statements outlined in this document focus on the City of Downey's total investment funds portfolio, but will also apply to all other funds under the City Finance Director's span of control unless specifically exempted by resolution. This policy is applicable, but not limited to all funds listed on the next page:
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 4
General Fund
Special Revenue Funds
Debt Service Funds*
Capital Projects Funds
Enterprise Funds
Internal Services Funds
Custodial Funds
Any new fund created by the City Council unless specifically exempted *All debt issue proceeds will be invested in accordance with the associated trust indenture.
PRUDENCE
Investments shall be made with judgment and care under prevailing circumstances in which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.
The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 5
OBJECTIVE
The primary objectives, in priority order, of the City of Downey’s investment activities shall be:
Safety
Safety of principal is the foremost objective of the investment program. Investments of the City of Downey shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.
Liquidity
The City of Downey’s investment portfolio will remain sufficiently liquid to enable the City of Downey to meet all operating requirements which might be reasonably anticipated.
Yield
The City of Downey’s investment portfolio shall be designed with the objective of attaining a yield or rate of return throughout budgetary and economic cycles, commensurate with the City of Downey’s investment risk constraints and the cash flow characteristics of the portfolio.
DELEGATION OF AUTHORITY
Authority to manage the City of Downey’s investment program is granted by the City Council on an annual basis and assigns the responsibility of management for the investment program to the Finance Director who shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate investment personnel. The Finance Director may delegate daily investment activity, such as carrying out the Finance Director’s investment instructions, confirming treasury transactions and other routine activities. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 6
ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the City Manager any material financial interests in financial institutions that conduct business within their jurisdiction and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City.
AUTHORIZED FINANCIAL INSTITUTIONS AND BROKER/DEALERS
The City shall transact with primary dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (uniform net capital rule). A determination should be made to ensure that the approved broker/dealer(s) and individual(s) covering the City are reputable and trustworthy based on credibility and reliability in the local agency investment space. In addition, the broker/dealer(s) should have the ability to meet all of its financial obligations in dealing with the City of Downey.
The firm and individuals covering the City should be knowledgeable and experienced in public agency investing and the investment products involved. No public deposit shall be made except in a qualified public depository as established the state laws.
The Finance Director shall annually send a copy of the investment policy to financial institutions and broker/dealers that conduct business with the City of Downey. Receipt of this policy shall be considered confirmation that the broker/dealer understands the City of Downey’s investment policies and intends to offer the City of Downey only appropriate investments authorized by this investment policy.
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:
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 which can be invested in this category, although a five-year maturity limitation is applicable.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 7
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. There is no percentage limitation of the portfolio which can be invested in this category; a five-year maturity limitation is applicable. Bonds issued by the City, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the City or by a department, board, agency, or authority of the City.
Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.
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. Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue- producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or of the local agency.
Bankers’ acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank. Purchases of bankers’ acceptances shall not exceed 180 days’ maturity or 40 percent of the agency’s moneys that may be invested pursuant to this section. However, no more than 30 percent of the agency’s moneys may be invested in the bankers’ acceptances of any one commercial bank pursuant to this section.
Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (NRSRO), shall not exceed 270 days to maturity and shall not exceed 25% of the portfolio. No more than 5% of the total assets of the portfolio may be invested in any one issuer’s commercial paper. A local agency, other than a county or a city and a county, may invest no more than 10 percent of its total investment assets in the commercial paper and the medium-term notes of any single issuer.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 8
Time deposits, non-negotiable and collateralized in accordance with the California Government Code, may be purchased through banks or other financial institutions.
Deposits in excess of the federal deposit insurance limit are required to be collateralized as specified under Government Code Section 53630 et seq. Negotiable Certificates of deposit issued by nationally or state-chartered banks, a savings or state association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state- licensed branch of a foreign bank. Purchases of negotiable certificates of deposit may not exceed 30% of the value of the portfolio. A maturity limitation of five years is applicable.
Repurchase agreements with specific terms and conditions may be transacted with banks and broker/dealers. The maturity of the repurchase agreements shall not exceed 90 days. The market value of Treasury securities used as collateral for the repurchase agreements shall be monitored by staff and shall not be allowed to fall below 110% of the value of the repurchase agreement. A PSA Master Repurchase Agreement is required between the City of Downey and the broker/dealer or financial institution for all repurchase agreements transacted.
Reverse repurchase agreements with specifies terms and conditions may be transacted with broker/dealers and financial institutions but cannot exceed 20% of the portfolio value the date entered into. The City may enter into reverse repurchase agreements only to fund short-term liquidity needs. The term of reverse repurchase agreements may not exceed 90 days.
Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Notes eligible for investment under this subdivision shall be rated in a rating category of “A” or its equivalent or better by an NRSRO. Purchases of medium-term notes shall not include other instruments authorized by this section and may not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section. A maturity limitation of five years is applicable.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 9
Ineligible investments are those that are not described herein, including but not limited to Common stocks and long term (over five years in maturity) notes and bonds are generally prohibited from use in this portfolio. On occasion, special circumstances arise that necessitate the purchase of securities beyond the five-year limitation, which require City Council prior to purchase. Such approval must be issued no less than three months prior to the purchase of any security exceeding the five-year maturity limit. See below authorization for the City of Downey. Special circumstances arise that necessitates the purchase of securities beyond the five (5) year limitation by three (3) to six (6) months to maximize return on investment. On occasion, time is of the essence due to market deadlines for making such investment purchases, making obtaining prior approval from City Council unpractical and resulting in the loss of an investment opportunity.
Therefore, the Finance Director is authorized to make Suitable Investments as described in this Investment Policy, not to exceed six (6) months beyond the five (5) year limitation, provided such investment is also authorized under State law, with the prior notification to and acknowledgement of the City Manager, and in his absence, the City Treasurer. Further notification will be given in the form of a report to the City Council at the next regularly scheduled City Council Meeting following the purchase of any securities beyond the five (5) year limitation, for City Council acknowledgement and acceptance.
Various daily cash funds administered for or by trustees, paying agents and custodian banks contracted by the City of Downey may be purchased as allowed under State of California Government Code. Only funds holding U.S. Treasury or Government agency obligations can be utilized.
The following summary of maximum percentage limits, by instrument, is established for the City of Downey’s total investment funds portfolio and all exceptions to the Investment Type Percentage, to the extent permitted by law, must be approved by the Finance Director in written form and included in monthly reporting to City Council:
Investment Type Percentage
US Treasury Bonds/Notes/Bills 0 to 100%
US Government Agency Obligations 0 to 100%
Repurchase Agreements 0 to 50%
Bankers' Acceptances 0 to 40%
Municipals 0 to 30%
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 10
Negotiable Certificates of Deposit 0 to 30% Time Deposits 0 to 100%
Reverse Repurchase Agreements 0 to 20%
Commercial Paper 0 to 25%
Local Agency Investment Fund $75,000,000 limit per acct Other Pools & Money Market 0 to 20%
Mutual funds
MASTER REPURCHASE AGREEMENT
If repurchase agreements are legal or authorized, a Master Repurchase Agreement must be signed with the bank or dealer.
REVIEW OF INVESTMENT PORTFOLIO
The securities held by the City must be in compliance with Section 6, Authorized and Suitable Investments subsequent to the date of purchase. The Finance Director shall at least quarterly review the portfolio and identify those securities that do not comply. The Finance Director shall establish procedures to report to council major and critical incidences of noncompliance identified through the review of the portfolio.
LEGISLATIVE CHANGES
Any State of California legislative action, that further restricts allowable maturities, investment type or percentage allocations, will be incorporated into the City of Downey's Investment Policy and supersede any and all previous applicable language.
INTEREST EARNINGS
All monies earned and collected from investments authorized in this policy shall be allocated monthly based on the cash balance in each fund as a percentage of the entire investment funds portfolio.
INVESTMENT POOLS/MUTUAL FUNDS
LAIF
Local Agency Investment Fund (LAIF), which is a State of California managed investment pool, may be used up to the maximum permitted by California State Law.
Other Pools and Money Market Funds
Medium Term Corporate Notes 0 to 30%
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 11
A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. Best efforts will be made to acquire the following information:
1. A description of eligible investment securities, and a written statement of investment policy and objectives.
2. A description of interest calculations and how it is distributed, and how gains and losses are treated.
3. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced, and the program audited.
4. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.
5. A schedule for receiving statements and portfolio listings.
6. Are reserves, retained earnings, etc. utilized by the pool/fund?
7. A fee schedule, and when and how is it assessed.
8. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
COLLATERALIZATION
Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse repurchase) agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110% of market value of principal and accrued interest. The City chooses to limit collateral to US Treasury securities. Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the City and retained. The right of collateral substitution is granted.
SAFEKEEPING AND CUSTODY OF SECURITIES
To protect against fraud or embezzlement, or losses caused by collapse of an individual securities dealer, all securities owned by the City of Downey shall be held in safekeeping by a third party. All investment securities may be maintained by a banking institution or a broker/dealer firm for safekeeping as long as the securities are held in the City’s name.
Third-party safekeeping arrangements will be approved by the Finance Director and will be corroborated by a written custodial agreement. All securities held by the safekeeping custodian on behalf of the City shall have the City of Downey as the registered owner, and all interest and principal payments and withdrawals shall indicate the City of Downey as the payee.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 12
All bank deposits will be FDIC insured or deposited with institutions that comply with the State collateral requirements for public funds.
Securities held in custody for the City of Downey shall be independently audited on an annual basis to verify investment holdings.
All exceptions to this safekeeping policy must be approved by the Finance Director in written form and included in monthly reporting to City Council.
DIVERSIFICATION
The City of Downey will diversify its investments by security type and institution. With the exception of U.S. Treasury securities and authorized pools, no more than 5% of the City of Downey’s total investment funds portfolio will be invested in a single security type or with a single financial institution.
MAXIMUM MATURITIES
To the extent possible, the City of Downey will attempt to match its investments with anticipated cash flow requirements. The City of Downey may collateralize its repurchase agreements using longer-dated investments not to exceed five (5) years to maturity.
Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than 5 years from the settlement date. However, the City may collateralize its repurchase agreements using longer-dated Treasury securities not to exceed five (5) years to maturity. Reserve funds may be invested in securities exceeding five (5) years if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds, is based on the bond legal document, and is approved by the City Council.
INTERNAL CONTROL
Internal policies and procedures have been developed and documented to assure that appropriate controls are in place to document and confirm all transactions.
An independent annual review by the City of Downey’s external auditor shall be conducted in conjunction with the City of Downey’s annual audit. This review will assure compliance with policies and procedures.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director 13
PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economy cycles, commensurate with the investment risk constraints and cash flow needs. The City’s investment strategy is passive (buy and hold); however, the City will take advantage of market conditions when reviewing maturity ladders and cash flow needs. Given this strategy, the basis used by the Finance Director is a reasonable market yield based on the weighted average maturity of the portfolio and the comparable US Treasury.
REPORTING
The Finance Director shall provide the City Council monthly investment reports, which provide a clear picture of the status of the current investment portfolio. The management report may include comments on the fixed income markets and economic conditions, discussions regarding restrictions on percentage of investment by categories, possible changes in the portfolio structure going forward and thoughts on investment strategies.
Schedules in the quarterly report (submitted within 45 days following quarter end) should include the following:
A listing of individual securities held at the end of the reporting period by authorized investment category.
Acquisition date and final maturity of all investments listed. Coupon, discount or earnings rate.
Par value, Book Value and Market Value.
Percentage of the Portfolio represented by each investment category Statement on availability of funds to meet its obligations within the next six months.
INVESTMENT POLICY ADOPTION
The City of Downey’s investment policy shall be adopted by resolution of the City of Downey’s City Council. The policy shall be reviewed annually by the City Council and any modifications made thereto must be approved by the City of Downey’s City Council.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director
14 APPENDIX A
Glossary of Terms
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.
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.
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.
Coupon - The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value.
Custody - A banking service that provides safekeeping for the individual securities in a customer's investment portfolio under a written agreement which 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.
Discount - The difference between the cost of a security and its value at maturity when quoted at lower than face value.
Diversification - Dividing investment funds among a variety of securities offering independent returns and risk profiles.
Liquidity - Refers to the ability to rapidly convert an investment into cash.
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.
City of Downey Investment Policy
Prepared by: Stephen W. Hannah, Finance Director
15 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.
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.
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.
Risk - Degree of uncertainty of return on an asset.
Safekeeping - see custody.
Treasury Bills - U.S. Treasury Bills which are short-term, direct obligations of the U.S. Government issued with original maturities of 13 weeks, 26 weeks and 52 weeks; sold in minimum amounts of $10,000 in multiples of $5,000 above the minimum. Issued in book entry form only. T-bills are sold on a discount basis.