CITY MANAGER' S REPORT ITEM 4. 5
OCTOBER 14, 2024 CITY COUNCIL REGULAR MEETING
ITEM: ANNUAL REVIEW AND ADOPTION OF THE CITY' S
INVESTMENT POLICY
RECOMMENDATION: Adopt a Resolution Approving the Annual Investment Policy for Fiscal Year 2024/5
SUMMARY:
PFM Asset Management, LLC ( PFM), the City' s investment portfolio manager, has conducted its annual review of the City' sInvestment Policy to ensure compliance with investment regulatory agencies and the California Government Code. PFM has found that the City' s Investment Policy for Fiscal Year 2024/5is comprehensive and consistent with the City' s objectives and risk tolerances and is in compliance with the California Government Code and has no recommended changes to the policy at this time. The proposed FY 2024/5 Investment Policy is attached ( Attachment B).
Staff recommends the approval of the Investment Policy as presented by PFM to be in compliance with current investment regulations adopted by the California Government Code.
BACKGROUND:
PFM manages over $ 118 billion for public entities nationwide and has a strong history of providing professionals dedicated to actively managing and supporting the administration of fixed -income operating funds, capital funds and reserves, and bond proceeds.
PFM has actively managed the City' s investment portfolio since the initial Council approved contract in 2015. PFM is nationally recognized as one of the leading investment advisory organizations, specializing in providing services to the public sector. Some of the services PFM provides are:
Review of the City' s Investment Policy
Cash flow analysis to determine current and future liquidity needs Develop and implement investment strategy
The investment policy serves as the foundation of the City' s investment goals and priorities. An annual review assures that it continues to meet the City' s goals and priorities for its portfolio. It contributes to the protection of the assets of the City.
The approved investment policy demonstrates that the City Council is fiducially responsible, thereby; promoting trust and confidence from the public that it serves.
PFM has performed its annual review of the City' s Investment Policy along with current state laws governing investment activities of local governments. PFM has found that the City' sInvestment Policy for Fiscal Year 2024/5is comprehensive, is consistent with the City' s objectives and risk tolerances, and is in compliance with CITY MANAGER' S REPORT Page 2
OCTOBER 14, 2024 CITY COUNCIL REGULAR MEETING
ANNUAL REVIEW AND ADOPTION OF THE INVESTMENT POLICY FOR FY 2024/5
the California Government Code and has no recommended changes to the policy at this time. The proposed FY 2024/5Investment Policy is attached ( Attachment B).
REASON FOR RECOMMENDATION:
The City' s investment policy provides the Finance Department with direction as to the investment objectives of the governing body ( in order of priority):
1. Safety - Preservation of the principal of invested funds
2. Liquidity - Ability to liquidate one or more of the City' s investments if unexpected expenditures arise
3. Return - Attainment of a market rate of return
It also establishes standards approved by Council; concerning the prudent care of City invested funds, the ethics of the investment officer, and internal controls/ reporting procedures.
In addition, the Government Finance Officers Association' s (GFOA) Committee on Cash Management advocates the adoption of a municipal resolution that consists of; a legal list of allowable securities, a prudent investor clause and the mandatory enactment of written investment policies. An adopted investment policy, prudently followed by the investment officer, is favorably viewed by municipal credit rating agencies. The submitted resolution meets GFOA standards.
FISCAL IMPACT:
Review of the City' sInvestment Policy is a service provided within the scope of PFM' s annual contract.
ATTACHMENTS:
A. Resolution Approving the Annual Investment Policy for Fiscal Year 2024/5 B. Investment Policy for Fiscal Year 2024/5
C. Memorandum Confirming Review of the Investment Policy from PFM Asset Management, LLC.
CITY MANAGER' SREPORT Page 3
OCTOBER 14, 2024 CITY COUNCIL REGULAR MEETING
ANNUAL REVIEW AND ADOPTION OF THE INVESTMENT POLICY FOR FY 2024/5
APPROVALS:
Cari James
Director of Fi ance
Date
9, 451, 2a- zy
9/ 2et/ Zoe 'I
Thomas Hedegard Date
Deputy City Manager
Salvador Navarrete Date
City Attorney
G, Z • Z`
Stephen J. Salvatore Date
City Manager
RESOLUTION NO. 24-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LATHROP
APPROVING THE ANNUAL INVESTMENT POLICY FOR FISCAL YEAR
2024/5
WHEREAS, Government Code § 53646( a) (1) of the State of California was amended to offer the suggestion, rather than the requirement, that local agencies file an annual investment policy; and WHEREAS, the California Debt and Investment Advisory Commission highly recommends local agencies' legislative bodies adopt an annual investment policy to increase the policy' s authority and legitimacy; and WHEREAS, Staff recommends and the City Council desires to adopt the Fiscal Year 2024/5Investment Policy; and
WHEREAS, the City' s Investment Policy provides the Finance Department with direction as to the investment objectives of the governing body ( in order of priority):
1. Safety - Preservation of the principal of invested funds
2. Liquidity - Ability to liquidate one or more of the City' s investments if unexpected expenditures arise
3. Return - Attainment of a market rate of return; and
WHEREAS, the Investment Policy for the City of Lathrop for Fiscal Year 2024/5is attached to the City Manager' s Report as " Attachment B".
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Lathrop, does hereby approve the Investment Policy for the City of Lathrop for Fiscal Year 2024/5.
Resolution No. 24- Page 1 of 2
The foregoing resolution was passed and adopted this 14th day of October, 2024, by the following vote of the City Council, to wit:
AYES:
NOES:
ABSTAIN:
ABSENT:
Sonny Dhaliwal, Mayor
ATTEST: APPROVED AS TO FORM:
Teresa Vargas, City Clerk Salvador Navarrete, City Attorney Resolution No. 24- Page 2 of 2
ATTACHMENT" "
City of Lathrop
Investment Policy
Fiscal Year 2024-5
Attachment " B"
City of Lathrop
Investment Policy
Table of Contents
1. 0 Policy 1
2. 0 Scope 1
3. 0 Prudence 1
4. 0 Objectives 2
5. 0 Delegation of Authority 2
6. 0 Ethics and Conflict of Interest 2
7. 0 Authorized Broker/ Dealers 3
8. 0 Authorized and Suitable Investments 3
9. 0 Competitive Transactions 6
10. 0 Selection of Depositories 6
11. 0 Safekeeping and Custody 7
12. 0 Diversification 7
13. 0 Maximum Maturities 7
14. 0 Performance Standards 7
15. 0 Reporting 8
16. 0 Investment Policy Adoption 8
Glossaries 9
Attachment " B"
1. 0 POLICY
The City Council of the City of Lathrop, California (the City) has adopted this Investment Policy in order to establish the investment scope, objectives, delegation of authority, standards of prudence, reporting requirements, internal controls, eligible investments and transactions, diversification requirements, risk tolerance, and safekeeping and custodial procedures for the investment of the funds of the City. All City funds will be invested in accordance with this Investment Policy and with applicable sections of the California Government Code.
This Investment Policy was endorsed and adopted by the City Council of the City of Lathrop on November 13, 2023. It replaces any previous investment policy or investment procedures of the City.
2. 0 SCOPE
This Investment Policy shall apply to all investment activities and financial assets of the City, as accounted for in the City' s Comprehensive Annual Financial Report and which include the following:
General Fund
Special Revenue Funds
Debt Service Funds
Capital Project Funds
Enterprise Funds
Trust and Agency Funds
The provisions of this Investment Policy do not apply to those cash assets governed by bond indentures, bond resolutions, employee' sretirement and deferred compensation funds, as those are administered separately.
3. 0 PRUDENCE
The standard of prudence to be used for managing the City' sinvestments shall be California Government Code Section 53600. 3, the prudent investor standard, which states that " 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' s
overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that no investment is totally without risk and that the investment activities of the City are a matter of public record.
Accordingly, the City recognizes that occasional measured losses may occur in a diversified portfolio and shall be considered within the context of the overall portfolio' sreturn, provided that adequate diversification has been implemented and that the sale of a security is in the best longterm interest ofthe City.
Individuals having investment responsibilities who act in accordance with written procedures and this Investment Policy and who exercise due diligence in performing their duties shall be relieved 1-
ofpersonal responsibility for an individual security' scredit risk or market price changes, provided that deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.
4. 0 OBJECTIVES
The City' sfunds shall be invested in accordance with all applicable City municipal codes and applicable resolutions, California statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order:
1. Preservation of capital and protection of investment principal.
2. Maintenance of sufficient liquidity to meet anticipated cash flows.
3. Attainment of a market value rate of return.
4. Diversification to avoid incurring unreasonable market risks.
5. 0 DELEGATION OF AUTHORITY
Authority to manage the City' s
investment program is derived from the City of Lathrop Municipal Code, Title 2, Chapter 2. 08, Section 2. 08.10. F.2. and from California Government Code Section 53607. In exercise of that authority, the City Council has delegated responsibility for the investment program to the Treasurer. The City Manager, who serves as Treasurer, shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. The City Manager may delegate investment decision making and execution authority to the City' s
Director of Finance and to other specifically authorized officers and employees. The Director of Finance shall maintain a list of persons authorized to transact securities business for the City.
No person may engage in an investment transaction except as expressly provided under the terms of this Investment Policy.
The Director of Finance shall develop written administrative procedures and internal controls, consistent with this Investment Policy, for the operation of the City' sinvestment program. Such procedures shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the City.
The Director of Finance shall establish a process for annual independent review of the City' s investment program by an external auditor. This review will provide internal control by assuring compliance with policies and procedures.
The City may engage the support services of outside investment advisors in regard to its investment program, so long as it can be clearly demonstrated that these services produce a net financial advantage or necessary financial protection ofthe City' sfinancial resources.
6. 0 ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the City' sinvestment program, or that could impair their ability to make impartial decisions. Investment officials shall disclose any material interest in financial institutions that conduct business with the City. They shall further disclose any personal financial/ investment positions that could be related to the performance of the City' s investment portfolio. Employees and officers handling investment transactions shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City.
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7. 0 AUTHORIZED BROKER/ DEALERS
The Director of Finance shall maintain a list of authorized broker/ dealers approved for investment purposes, and it shall be the policy of the City to purchase securities only from those brokers and the firms they represent. Each approved broker/ dealer must possess an authorizing certificate from the California Commissioner of Corporations as required by Section 25210 of the California Corporations Code.
The firms they represent must:
1. be recognized as a Primary Dealer by the Federal Reserve Bank ofNew York or have a primary dealer within their holding company structure, or
2. report voluntarily to the Federal Reserve Bank of New York, or
3. qualify under Securities and Exchange Commission ( SEC) Rule 15c3- (Uniform Net Capital Rule).
Broker/ dealers will be selected by the Director of Finance on the basis of their expertise in public cash management and their ability to provide services for the City' s account.
Annually, each authorized broker/ dealer shall submit a City approved Broker/ Dealer Information Request form and the firm' s most recent financial statements. The Director of Finance shall maintain a list of approved broker/ dealers, along with each firm' s most recent Broker/ Dealer Information Request form.
The City may purchase commercial paper from direct issuers even though they are not on the approved broker/ dealer list as long as they meet the criteria outlined in Item 8. 6 ofthe Authorized and Suitable Investments section of this Investment Policy.
Broker/ dealers or municipal securities dealers, that have made political contributions to any member of the City Council or to any candidate for that office, in amounts exceeding the limits set forth in Rule G- 37 of the Municipal Securities Rulemaking Board, are prohibited from serving as a City approved broker/ dealer for a period of two years following such contributions.
If the City engages the support services of an outside investment advisor, the adviser is authorized to transact with its broker/ dealer relationships on behalf of the City.
8. 0 AUTHORIZED AND SUITABLE INVESTMENTS
All investments and deposits of the City shall be made in accordance with California Government Code Sections 16429., 53600-3609 and 53630-3686, except that reserve funds from the proceeds of debt issues may be invested in permitted investments specified in the indenture of the debt issue.
For purposes of compliance with this section, an investment' sterm or remaining maturity shall be measured from the settlement date to final maturity. A security purchased in accordance with this section shall not have a forward settlement date exceeding 45 days from the time of investment.
The City has further restricted authorized investments to the following:
8. 1 Government Obligations
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As authorized in Government Code Sections 53601( a) through ( e), this category includes a wide variety of government securities. There are no portfolio limitations on the amount; however, the maturity term of these investment vehicles may not exceed five years from the date of trade settlement unless approved by the City Council. These securities include the following:
8. 1.a. United States Treasury bills, notes, bonds, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest with a final maturity not exceeding five years from the date of trade settlement.
8. 1.b. Federal Agency mortgage backed securities and debentures with a final maturity not exceeding five years from the date of trade settlement.
8. 1. c. Federal agency or United States government -sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government -sponsored enterprises with a final maturity not exceeding five years from the date oftrade settlement.
8. 2 State and Local Agency Obligations
8. 2. a. Obligations of the State ofCalifornia and any local agency within California, including bonds payable solely out of the revenues from a revenue - producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency or of the state with a final maturity not exceeding five years from the date of trade settlement, and rated in a rating
category of " A" or the equivalent or better by a Nationally Recognized Statistical Rating Organization ( NRSRO) at the time of purchase. The aggregate investment in state and local agency obligations shall not exceed 30% of the City' s
total portfolio.
8. 2. b. 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 with a final maturity not exceeding five years from the date of trade settlement, and rated in a rating category of " A" or the equivalent or better by a Nationally Recognized Statistical Rating Organization ( NRSRO) at the time of purchase. The aggregate investment in state and local agency obligations shall not exceed 30% ofthe City' stotal portfolio.
8. 3 Medium -Term Notes
Medium - Term Notes 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, with a final maturity not exceeding five years from the date of trade settlement, and rated in a rating category of "A" or the equivalent or better by a NRSRO at the time of purchase. No more than 10% of the City' stotal portfolio shall be invested in medium -term notes and the commercial paper of any one issuer, and the aggregate investment in medium -term notes shall not exceed 30% of the City' s total portfolio. In addition, AAA rated FDIC - guaranteed corporate bonds are herein authorized, within the aforementioned diversification and maturity requirements.
8. 4 Negotiable Certificates ofDeposit
Negotiable Certificates of Deposit with a maturity not exceeding five years from the date of trade settlement, issued by a nationally or state - chartered bank, a savings association or a federal association ( as defined by Section 5102 of the Financial Code), a state or federal credit union, or 4-
by a federally licensed or state -licensed branch of a
foreign bank. Certificates of Deposits may be
purchased only from financial institutions that meet the criteria set forth in the section of this Investment Policy, " Selection of Depositories." Investment in negotiable Certificates of Deposit shall not exceed 30% ofthe City' stotal portfolio.
8. 5 Non- negotiable Certificates of Deposit
Non- negotiable Certificates of Deposit with a maturity not exceeding five years from the date of trade settlement, in FDIC insured state or nationally chartered banks or savings banks, subject to the limitations of California Government Code Section 53638. Amounts in excess of FDIC insurance coverage shall be secured in accordance with California Government Code Section 53652. Certificates of Deposits may be purchased only from financial institutions that meet the criteria set forth in the section of this Investment Policy, "Selection of Depositories." Investment in non- negotiable Certificates of Deposit shall not exceed 30% of the City' stotal portfolio.
8. 6 Commercial Paper
Prime Commercial Paper with a maturity not exceeding 270 days from the date oftrade settlement with the highest ranking or of the highest letter and number rating as provided for by a NRSRO.
The entity that issues the commercial paper shall meet all of the following conditions in either subparagraph A. or sub -paragraph B. below:
A. The entity shall ( 1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500, 00,0and (3) have debt other than commercial paper, if any, that is rated in a
rating category of "A" or the
equivalent or higher by a NRSRO.
B. The entity shall ( 1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program - wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond and ( 3) have commercial paper that is rated " A- 1" or higher, or the equivalent, by a NRSRO.
No more than 10% of the City' stotal portfolio shall be invested in the commercial paper and corporate notes of any one issuer, and the aggregate investment in commercial paper shall not exceed 25% of the City' stotal portfolio.
8. 7 Banker' sAcceptances
Eligible Banker' sAcceptances with a maturity not exceeding 180 days from the date of trade settlement, drawn on or accepted by a FDIC insured commercial bank with combined capital and surplus of at least $ 250 million, whose senior long- term debt is rated in a rating category of "A" or
the equivalent or better by a NRSRO at the time of trade settlement. No more than 30% of the City' stotal portfolio shall be invested in banker' s
acceptances of any one issuer, and the aggregate
investment in banker' s
acceptances shall not exceed 40% of the City' stotal portfolio.
8. Repurchase Agreements
Repurchase Agreements with a final termination date not exceeding 30 days collateralized by U. S.
Treasury obligations, Federal Agency securities, or Federal Instrumentality securities listed in Section 8. 1 above with the maturity of the collateral not exceeding five years. For the purpose of 5-
this section, the term collateral shall mean purchased securities under the terms of the City' s approved Master Repurchase Agreement. The purchased securities shall have a minimum market value including accrued interest of 102% ofthe dollar value ofthe funds borrowed. Collateral shall be held in the City' scustodian bank, as safekeeping agent, and the market value of the collateral securities shall be marked - to -the -market daily.
Repurchase Agreements shall be entered into only with broker/ dealers who are recognized as Primary Dealers with the Federal Reserve Bank of New York, or with firms that have a Primary Dealer within their holding company structure. Primary Dealers approved as Repurchase Agreement counterparties shall have a short- tem credit rating of at least A- 1 or the equivalent and a
long- term credit rating in a
rating category of "A" or the equivalent or better. Repurchase agreement counterparties shall execute a City approved Master Repurchase Agreement with the City. The Director of Finance shall maintain a copy of the City' s approved Master Repurchase Agreement along with a list of the broker/ dealers who have executed same. There are non portfolio limits for repurchase agreements.
8. 9 Money Market Funds
Money Market Funds registered under the Investment Company Act of 1940 that ( 1) are " no- load" meaning no commission or fee shall be charged on purchases or sales of shares); (2) have a constant net asset value per share of $1. 00; (3) invest only in the securities and obligations authorized in the applicable California statutes and ( 4) have a
rating of AAAm or the equivalent by not less than two
NRSROs. The combined investment in money market funds and mutual funds shall not exceed 20% of the City' stotal portfolio.
8. 10 Mutual Funds
Mutual Funds registered under the Investment Company Act of 1940 which ( 1) are " no- load" meaning no commission or fee shall be charged on purchases or sales of shares); (2) invest in the securities and obligations authorized in the applicable California statutes and ( 3) have a rating of
AAAm or the equivalent by not less than two NRSROs. No more than 10% of the City' stotal portfolio may be invested in mutual funds of any one issuer, and the combined investment in mutual funds and money market funds shall not exceed 20% of the City' stotal portfolio.
8. 11 Local Agency Investment Fund
State of California' s Local Agency Investment Fund ( LAIF), pursuant to California Government Code Section 16429..
8. 12 Shares of beneficial interest issued by a
joint powers authority
Shares of beneficial interest issued by a
joint powers authority organized pursuant to Section 6509. 7 that invests in the securities and obligations authorized in California Government Code Section 53601 subdivisions ( a) to ( r), inclusive. 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:
1) The adviser is registered or exempt from registration with the Securities and Exchange Commission.
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2) The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions ( a) to (q), inclusive. 3) The adviser has assets under management in excess of five hundred million dollars 500, 00,00).
8. 13 Supranational Debt
United States 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, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States.
Investments under this subdivision shall be rated in a
rating category of "AA" or the equivalent or
better by an NRSRO and shall not exceed 30% of the City' s total portfolio.
8. 14 Allowable Investment Vehicles
It is the intent of the City that the foregoing list of authorized securities and transactions is strictly interpreted. Any deviation from this list must be approved in advance by the City Council.
The City may, from time to time issue bonds, the proceeds of which must be invested to meet specific cash flow requirements. In such circumstances the reinvestment of debt issuance or related reserve funds will be governed by the bond documents and may deviate from the provisions of this Investment Policy.
9. 0 COMPETITIVE TRANSACTIONS
Each investment transaction shall be competitively transacted with authorized broker/ dealers. At least three broker/ dealers shall be contacted for each transaction and their bid and offering prices shall be recorded.
If the City is offered a security for which there is no other readily available competitive offering, then the Director ofFinance will document quotations for comparable or alternative securities.
10. 0 SELECTION OF DEPOSITORIES
To be eligible for designation to provide depository and other banking services or for an institution' s certificates of deposit to be eligible for purchase, a bank or savings bank must be a member of the Federal Deposit Insurance Corporation and shall qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630. 7-
11. 0 SAFEKEEPING AND CUSTODY
The Director of Finance shall select one or more banks to provide third party safekeeping and custodial services for the City, in accordance with the provisions of Section 53608 of the California Government Code. A Safekeeping Agreement approved by the City shall be executed with each custodian bank prior to utilizing that bank' s safekeeping services. Custodian banks will be selected on the basis of their ability to provide services for the City' s account and the competitive pricing of their safekeeping related services.
The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. Title to all securities shall be perfected in the name of the City.
Sufficient evidence to title shall be consistent with modern investment, banking and commercial practices.
All investment securities, except Non- negotiable Certificates of Deposit, Money Market Funds, Mutual Funds, shares ofbeneficial interest issued by a
joint powers authority, and LAIF, purchased
by the City will be delivered by either book entry or physical delivery and will be held in third - party safekeeping by a City approved custodian bank, its correspondent bank or its Depository Trust Company ( DTC) participant account.
All Fed wireable book entry securities owned by the City shall be held in the Federal Reserve System in a customer account for the custodian bank which will name the City as " customer." All DTC eligible securities shall be held in the custodian bank' sDTC participant account and the custodian bank shall provide evidence that the securities are held for the City as " customer." All non -book entry ( physical delivery) securities shall be held by the custodian bank or its correspondent bank and the custodian bank shall provide evidence that the securities are held by the bank for the City as " customer."
12. 0 DIVERSIFICATION
The City will diversify its investments by security type and institution. With the exception of Government Obligations set forth in Section 8.1, Repurchase Agreements and LAIF, and notwithstanding the individual limitations set forth herein, no more than 50% of the City' s total
investment portfolio will be invested in a single security type or with a single financial institution.
13. 0 MAXIMUM MATURITIES
To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. With the exception of reserve funds, the City will not invest in securities maturing more than five years from the date of trade settlement, unless the City Council has by resolution granted authority to make such an investment at least three months prior to the date of investment.
Reserve funds may be invested in securities exceeding five years if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds. 8-
14. 0 PERFORMANCE STANDARDS
The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City' s investments shall be
compared to the average yield on the U. S. Treasury security that most closely corresponds to the portfolio' sweighted average effective maturity. When comparing the performance of the City' s portfolio, its rate of return will be computed net of all fees and expenses.
15. 0 REPORTING
The Director of Finance shall provide the City Council quarterly Investment Reports. The reports shall include the following on all invested monies:
1. Issuer name
2. Type of investment instrument
3. Purchase date
4. Maturity date
5. Weighted average maturity
6. Ending balances
7. Yield on cost
8. Weighted average yield
9. Benchmark suitable for weighted average maturity
10. Purchase Price
11. Market value
12. Percent of portfolio of each investment
13. Investments under the management of contracted parties
14. Statement of compliance with the investment policy
15. Statement of ability to meet obligations of next six months
16. 0 INVESTMENT POLICY ADOPTION
This Investment Policy shall be adopted by resolution of the City Council. The policy will be reviewed by the City Council annually, and any modifications made thereto must be approved by the City Council.
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GLOSSARY OF SELECTED TERMS
Benchmark
A passive index used to compare the performance, relative to risk and return, of an investor' s portfolio.
Cash Flow
A comparison of cash receipts ( revenues) to required payments ( debt service, operating expenses, etc.).
Credit Risk
The chance that an issuer will be unable to make scheduled payments of interest and principal on an outstanding obligation. Another concern for investors is that the market' sperception of a corporation' scredit will cause the market value of a security to fall, even if default is not expected.
Credit Rating
Various alphabetical and numerical designations used by institutional investors, Wall Street underwriters, and commercial rating companies to give relative indications of bond and note creditworthiness. Standard & Poor' s and Fitch Ratings use the same system, starting with their highest rating, of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D for default. Moody' sInvestors Service uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D. Each ofthe services use pluses (+), minuses or numerical modifiers to indicate steps within each category. The top four letter categories are considered investment grade ratings.
Duration
A measure of the timing of cash flows to be received from a security that provides the foundation for a measure of the interest rate sensitivity of a bond. Duration is an elasticity measure and represents the percentage change in price divided by the percentage change in interest rates. A high duration measure indicates that for a given level of movement in interest rates, prices of securities will vary considerably.
Fiduciary
An individual who holds something in trust for another and bears liability for its safekeeping.
Investment Oversight Committee
A committee of three to eleven members formed under Government Code Section 27131 to monitor and review a county' s
investment policy by causing an annual audit and discussing its finding at an open meeting. Although cities and other local agencies are not required to compose an investment oversight committee, the State Legislature has declared that all local agencies " should participate in reviewing the policies that guide the investment of those funds." Liquidity
The ease with which an investment may be converted to cash, either by selling it in the secondary market or by demanding its repurchase pursuant to a put or other prearranged agreement with the issuer or another party.
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Liquidity Risk
The chance that a security, sold prior to maturity, will be sold at a loss of value. For a local agency, the liquidity risk of an individual investment may not be as critical as how the overall liquidity of the portfolio allows the agency to meet its cash needs.
Market Risk
The chance that the value of a security will decline as interest rates rise. In general, as interest rates fall, prices of fixed income securities rise. Similarly, as interest rates rise, prices fall. Market risk also is referred to as systematic risk or risk that affects all securities within an asset class similarly.
Maturity
The stated date on which all or a stated portion of the principal amount of a security becomes due and payable.
Net Present Value
An amount that equates future cash flows with their value in present terms.
Par Amount or Par Value
The principal amount of a note or bond which must be paid at maturity. Par, also referred to as the face amount" of a security, is the principal value stated on the face of the security. A par bond is one sold at a price of 100 percent of its principal amount.
Pooled Investment
A market institution authorized under various sections of state law that represents the combined deposits of more than one local agency and pays returns based upon each local agency' sshare of investment in the pool.
Portfolio
The combined holdings of all investment assets held by an investor.
Principal Amount
The face amount or par amount of a bond or issue of bonds payable on stated dates of maturity.
Put
The ability of a holder of an investment security to sell at a specified time and for a specified price the security back to the issuer or prior holder.
Return
The principal plus interest on an investment or portfolio of investments. In certain unfavorable market environments or due to risk factors, income derived from principal and interest may be less than the original amount invested.
Risk
The uncertainty of maintaining the principal or interest associated with an investment due to a variety of factors.
Yield
For the purposes of this publication, return and yield are synonymous. 11 -
GLOSSARY OF INVESTMENT INSTRUMENTS
Asset -Backed Securities
Securities that are supported by pools of assets, such as installment loans or leases, or by pools of revolving lines of credits. Asset -backed securities are structured as trusts in order to perfect a security interest in the underlying assets.
Bank Note
A senior, unsecured, direct obligation of a bank or U. S. branch of aforeign bank.
Banker' sAcceptance
Normally, a short- tem bill of exchange that is accepted as payment by banks engaged in financing trade of physical assets or merchandise.
Bond
A debt obligation of a firm or public entity. A bond represents the agreement to repay the debt in principal and, typically, in interest on the principal.
Callable Security
An investment security that contains an option allowing the issuer to retire the security prior to its final maturity date.
Certificate of Deposit
A short- tem, secured deposit in a financial institution that usually returns principal and interest to the lender at the end of the loan period. Certificates of Deposit ( CDs) differ in terms of collateralization and marketability. Those appropriate to public agency investing include:
Negotiable Certificates of Deposit — Generally, short term debt instruments that usually pay interest and are issued by a bank, savings or federal association, state or federal credit union, or state - licensed branch of a foreign bank. The majority of negotiable CDs mature within six months while the average maturity is two weeks. Negotiable CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor ( investor).
Non -Negotiable Certificates of Deposit — CDs that carry a penalty if redeemed prior to maturity. A secondary market does exist for these non- negotiable CDs, but include a transaction cost that reduces returns to the investor. Non- negotiable CDs issued by banks and savings and loans are insured by the Federal Deposit Insurance Corporation up to the amount of $250, 00, including principal and interest. Amounts deposited above this amount may be secured with other forms of collateral through an agreement between the investor and the issuer. Collateral may include other securities including Treasuries or agency securities such as those issued by the Federal National Mortgage Association.
Commercial Paper
A short- tem, unsecured promissory note issued by a
large corporation.
Corporate Notes and Bonds
Debt instruments, typically unsecured, issued by corporations, with original maturities in most cases greater than one year and less than ten years.
Federal Agency and Instrumentality Obligations
12 -
Obligations issued by a government -sponsored entity or a federally regulated institution.
Mortgage Pass -Through Obligations
Securities that are created when residential mortgages ( or other mortgages) are pooled together and undivided interests or participations in the stream of revenues associated with the mortgages are sold.
Municipal Notes, Bonds, and Other Obligations
Obligations issued by state and local governments to finance capital and operating expenses.
Notes
Debt obligations of a firm or public entity, usually maturing in less than ten years.
Repurchase Agreements
From the perspective of a local agency, the short term, often overnight, purchase of securities with an agreement to resell the securities at an agreed upon price.
Reverse Repurchase Agreements
Differs from a
repurchase agreement in the sense that a reverse repurchase agreement is an agreement to sell securities in return for cash with an agreement to repurchase the securities at an agreed upon price.
State and Local Investment Pools
The combined deposits of state and local agencies organized and operated by a state treasurer or a local official. These pools operate much like a mutual fund, with local agencies investing money together in order to increase efficiency and reduce costs.
State Noted, Bonds, and Warrants
Obligations ofthe State of California or another state government with different maturity lengths.
Zero -Interest Bond
A bond on which interest is not payable until maturity ( or earlier redemption), but compounds periodically to accumulate to a stated maturity amount. Zero -interest bonds are typically issued at a discount and repaid at par upon maturity.
Excerptedfrom Understanding Public Investment Reporting - A Handbook For Local Elected Officials, California Debt and Investment Advisory Commission, 2003. 13 -
ATTACHMENT" L, "
October 2, 2024
pfml asset
management
Memorandum
To: Cari James, Finance Director
Thomas Hedegard, Deputy City Manager
City of Lathrop
From: Monique Spyke, Managing Director
Allison Kaune, Senior Analyst
PFM Asset Management LLC
Re: 2024 Investment Policy Review
We have completed our review of the City of Lathrop' s (the "City") Investment Policy (the "Policy").
This year we are recommending no changes to the Policy. The City' s Policy is well written and in compliance with applicable sections of California Government Code ( the " Code"). Furthermore, we are not aware of any upcoming changes to the Code that would impact the Investment Policy.
Please let us know if you have any questions. Thank you.
A division of U. S. Bancorp Asset Management, Inc.
NOT FDIC INSURED : NO BANK GUARANTEE : MAY LOSE VALUE
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