Agenda packet — Finance Committee, May 7, 2024

City Council Chambers
29844 Haun Road
Menifee, CA 92586
Lesa Sobek, District 3
Dean Deines, District 4
AGENDA
Finance Committee
Regular Meeting Agenda
Tuesday, May 7, 2024
2:00 PM Regular Meeting
Travis Hickey, Chief
Financial Officer
Edna Aguilar, Management
Analyst
REGULAR MEETING (2:00 PM)

1. CALL TO ORDER

2. ROLL CALL

3. PRESENTATIONS NONE

4. PUBLIC COMMENTS (NONAGENDA ITEMS)
This is the time for members of the public to address the Committee Members about items which are NOT listed on the agenda. The Ralph M. Brown Act limits the Committee’s ability to respon d to comments on nonagendized matters at the time such comments are made. Each speaker will be limited to three minutes on any single item.

5. APPROVAL OF MINUTES NONE

6. DISCUSSION ITEMS

6.1 Fiscal Year 2024/2025 Annual Investment Policy Review RECOMMENDED ACTION

1. Review and provide feedback on the draft Fiscal Year 2024/2025 Investment Policy and recommend it be submitted to the City Council for approval at a future City Council meeting.

6.2 Fiscal Year 2024/25 MidCycle Budget Review: Fund Balance Policy for General Fund RECOMMENDED ACTION

1. Review the existing Fund Balance Policy No. CC07 for the General Fund and provide input for policy updates as part of Fiscal year 2024/2025 MidCycle Budget Adoption.

7. STAFF COMMENTS

8. COMMITTEE MEMBER UPDATES AND COMMENTS

9. FUTURE AGENDA ITEMS
End of Fiscal Year Update Provided by Chandler Asset Management

10. ADJOURNMENT
Decorum Policy Notes
The Committee anticipates and encourages public participation at its meetings, both on agenda items and during the public comments period. Please turn your cell phones off, refrain from talking in the audience or outbursts that may be disruptive. We encourage participation and ask for a mutual respect for the proceedings.

Staff Reports
Materials related to an item on this agenda, including those submitted to the Committee after distribution of the agenda packet, are available for public inspection by contacting the City Clerk Department, at (951) 6726777, or by coming into City Hall located at 29844 Haun Road, Menifee, CA, 92586 during normal business hours.

Compliance with the Americans with Disabilities Act
If you need special assistance to participate in this meeting, you should contact the City Clerk Department at (951) 6726777, or by coming into City Hall located at 29844 Haun Road, Menifee, CA, 92586 during normal business hours. Notification 72 hours prior to the meeting will enable the City to make reasonable arrangements to assure accessibility to this meeting.

Menifee Finance Committee
May 7, 2024

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1. CALL TO ORDER

2. ROLL CALL

3. PRESENTATIONS NONE

5. APPROVAL OF MINUTES NONE

6. DISCUSSION ITEMS

6.1 Fiscal Year 2024/2025 Annual Investment Policy Review RECOMMENDED ACTION

1. Review and provide feedback on the draft Fiscal Year 2024/2025 Investment Policy and recommend it be submitted to the City Council for approval at a future City Council meeting.

6.2 Fiscal Year 2024/25 MidCycle Budget Review: Fund Balance Policy for General Fund RECOMMENDED ACTION

1. Review the existing Fund Balance Policy No. CC07 for the General Fund and provide input for policy updates as part of Fiscal year 2024/2025 MidCycle Budget Adoption.

7. STAFF COMMENTS

8. COMMITTEE MEMBER UPDATES AND COMMENTS

9. FUTURE AGENDA ITEMS
End of Fiscal Year Update Provided by Chandler Asset Management

Menifee Finance Committee
May 7, 2024

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CITY OF MENIFEE
SUBJECT: Fiscal Year 2024/2025 Annual Investment Policy Review MEETING DATE: May 7, 2024
TO: Finance Committee
PREPARED BY: Ann-Marie Etienne, Finance Manager
REVIEWED BY: Travis Hickey, Chief Financial Officer
APPROVED BY: Armando G. Villa, City Manager
-------------------------------------------------------------------------------------------------------------------------------

RECOMMENDED ACTION

1. Review and provide feedback on the draft Fiscal Year 2024/2025 Investment Policy and recommend submittal to the City Council for approval at a future City Council meeting.

DISCUSSION
In accordance with Investment Policy No. CC-11 (“Policy”), the Policy shall be reviewed and adopted at least once a year within 120 days of the end of the fiscal year, to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends.

The Policy was last endorsed and adopted by the Menifee City Council and became effective on May 5, 2021 with the most recent annual update on October 18, 2023.

The purpose of the Policy is to identify various policies and procedures that will foster a prudent and systematic investment program designed to seek the City of Menifee’s objectives of safety, liquidity and return on investment through a diversified investment portfolio. This Policy also serves to organize and formalize the City of Menifee’s investment-related activities, while complying with all applicable statutes governing the investment of public funds. This Policy is written to incorporate industry best practices and recommendations from sources such as the Government Finance Officers Association (GFOA), California Municipal Treasurers Association (CMTA), California Debt and Investment Advisory Commission (CDIAC) and the Association of Public Treasurers (APT).

On July 5, 2022, the CMTA Investment Policy Certification was granted to the City of Menifee.

This Investment Policy Certification recognizes that CMTA has validated that the City of Menifee’s Investment Policy adheres with the State of California Government Code and meets Item: 6.1
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City of Menifee Staff Report
Fiscal Year 2024/2025 Annual Investment Policy Adoption May 7, 2024

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2 1
7 4
specific requirements deemed to be best practices for municipal agency investment policies. Per CMTA recommendation, the City will seek to certify our Policy every two to three years or whenever a major update occurs.

Any recommended modifications or amendments shall be presented by staff to the governing body for their consideration and adoption. The draft Fiscal Year 2024/2025 Investment Policy revisions consist of:
•Added state-licensed broker dealers as an authorized institution. •Updated “portfolio” to “total portfolio” to reflect compliance is assessed across the entire client relationship.
•Clarified the provisions around Placement Services, including the associated glossary term based on Assembly Bill (AB) 945.
•No action necessary for Senate Bill (SB) 882 (effective 1/1/2024) related to Asset Backed Securities (ABS)/ Mortgage-Backed Securities (MBS)/ Collateralized Mortgage Obligations (CMO) as it was already stated in the policy. •Added indication that benchmarks may change based on the needs of the City. •Updated the “City of Menifee Policy Maximum” to align to the narrative in the Authorized Investments.
•Removed terms not used in the document from the glossary. •Updating the annual review of the Policy to be once a year, and no later than 120 days of the end of fiscal year. This will align the review to be able to be completed at the beginning of each fiscal year and in alignment with the annual budget process.

Although minor changes have occurred with the state government code, we are recommending that we leave the City of Menifee’s Policy maximums unchanged.

The overall goal of this Policy is to ensure that the City’s investments are managed with the degree of professionalism worthy of the public trust, with preservation and protection of the City’s assets being the guiding philosophy.

STRATEGIC PLAN OBJECTIVE
Responsive and Transparent Government

FISCAL IMPACT
There is no fiscal impact associated with the recommended action.

Item: 6.1
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City of Menifee Staff Report
Fiscal Year 2024/2025 Annual Investment Policy Adoption May 7, 2024

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ATTACHMENTS

1. Draft Revised Investment Policy FY 2024/2025
Item: 6.1
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4 7
3 8
4 CITY OF MENIFEE
Finance Policy
Policy Number: CC-11
Approving Authority:

City Council
Effective Date: 10/1/2008
Last Modified:
09/21/2022
10/18/2023
Subject
Investment Policy (FY 2023-2024)

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CITY OF MENIFEE

INVESTMENT POLICY
ADOPTED October 18, 2023

CONTENTS
INTRODUCTION................................................................................................................................................................................1 I. SCOPE...................................................................................................................................................................1 II. PRUDENCE.....................................................................................................................................................................1 III. OBJECTIVES ..................................................................................................................................................................2 IV. DELEGATION OF AUTHORITY .......................................................................................................................2 V. ETHICS AND CONFLICTS OF INTEREST.......................................................................................................3 VI. INTERNAL CONTROLS .....................................................................................................................................3 VII.AUTHORIZED FINANCIAL INSTITUTIONS, DEPOSITORIES, AND BROKER/DEALERS ..........................4 VIII. AUTHORIZED INVESTMENTS..................................................................................................................................5 IX.PROHIBITED INVESTMENT VEHICLES AND PRACTICES..........................................................9 X. INVESTMENT POOLS/MUTUAL FUNDS ...................................................................................................10 XI. COLLATERALIZATION............................................................................................................................................10 XII. DELIVERY, SAFEKEEPING AND CUSTODY..............................................................................................11 XIII. MAXIMUM MATURITY .........................................................................................................................................11 XIV.RISK MANAGEMENT AND DIVERSIFICATION......................................................................11 XV. REVIEW OF INVESTMENT PORTFOLIO .....................................................................................................13 XVI. PERFORMANCE EVALUATION ...........................................................................................................................13 XVII. REPORTING.................................................................................................................................................................13 XVIII. REVIEW OF INVESTMENT POLICY.............................................................................................................14 XIX. APPENDIX A: PERMITTED INVESTMENTS.......................................................................................................15 XX. GLOSSARY OF INVESTMENT TERMS .........................................................................................................17 Item: 6.1
Item Page Number: 4
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1 INTRODUCTION
The purpose of this investment policy is to identify various policies and procedures that will foster a prudent and systematic investment program designed to seek the City of Menifee’s objectives of safety, liquidity and return on investment through a diversified investment portfolio. This policy also serves to organize and formalize the City of Menifee’s investment-related activities, while complying with all applicable statutes governing the investment of public funds. This policy is written to incorporate industry best practices and recommendations from sources such as the Government Finance Officers Association (GFOA), California Municipal Treasurers Association (CMTA), California Debt and Investment Advisory Commission (CDIAC) and the Association of Public Treasurers (APT).

This investment policy was endorsed and adopted by the City of Menifee’s City Council and is effective as of the 18 day of October, 2023, and replaces any previous versions.

I. SCOPE
This policy covers all funds and investment activities under the direct authority of the City of Menifee, as set forth in the State Government Code, Sections 53600 et seq., with the following exceptions:
•Proceeds of debt issuance shall be invested in accordance with the City of Menifee’s general investment philosophy as set forth in this policy; however, such proceeds are to be invested pursuant to the permitted investment provisions of their specific bond indentures.
•Any other funds specifically exempted by the City Council.

POOLING OF FUNDS
Except for cash in certain restricted and special funds, the City of Menifee 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 and in accordance with generally accepted accounting principles.

II. PRUDENCE
Pursuant to California Government Code, Section 53600.3, all persons authorized to make investment decisions on behalf of the City of Menifee are trustees and therefore fiduciaries subject to the Prudent Investor Standard:
“…all governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to this chapter are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, Item: 6.1
Item Page Number: 5
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2 or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the City of Menifee, 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 City of Menifee. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law.”
The Treasurer and other authorized persons responsible for managing City of Menifee funds acting in accordance with written procedures and this investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security’s credit risk or market price changes provided that the Treasurer or other authorized persons acted in good faith. Deviations from expectations of a security’s credit or market risk should be reported to the governing body in a timely fashion and appropriate action should be taken to control adverse developments.

III. OBJECTIVES
The City of Menifee’s overall investment program shall be designed and managed with a degree of professionalism worthy of the public trust. The overriding objectives of the program are to preserve principal, provide sufficient liquidity, and manage investment risks, while seeking a market-rate of return.
•SAFETY. Safety of principal is the foremost objective of the investment program.

Investments will be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the City of Menifee will diversify its investments by investing funds among a variety of securities with independent returns.
•LIQUIDITY. The investment portfolio will remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. •RETURN ON INVESTMENTS. The investment portfolio will be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into accountconsidering the investment risk constraints for safety and liquidity needs.

IV. DELEGATION OF AUTHORITY
Authority to manage the City of Menifee’s investment program is derived from California Government Code, Sections 41006 and 53600 et seq.

The Governing Body is responsible for the management of the City of Menifee’s funds, including the administration of this investment policy. Management responsibility for the cash management of the City of Menifee’s funds is hereby delegated to the Treasurer.

Item: 6.1
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3 The Treasurer will be responsible for all transactions undertaken and will establish a system of procedures and controls to regulate the activities of subordinate officials and employees.

Such procedures will include explicit delegation of authority to persons 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 Treasurer.

The City of Menifee may engage the services of one or more external investment advisers, who are registered under the Investment Advisers Act of 1940, to assist in the management of the City of Menifee’s investment portfolio in a manner consistent with the City of Menifee’s objectives. External investment advisers may be granted discretion to purchase and sell investment securities in accordance with this investment policy.

The City of Menifee's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City of Menifee recognizes that in a diversified portfolio, occasional measured losses may be inevitable and must be considered within the context of the overall portfolio’s return and the cash flow requirements of the City of Menifee.

V. ETHICS AND CONFLICTS OF INTEREST
All participants in the investment process shall act as custodians of the public trust.

Investment officials shall recognize that the investment portfolio is subject to public review and evaluation. ThusThus, employees and officials involved in the investment process shall refrain from personal business activity that could create a conflict of interest or the appearance of a conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions.

Employees and investment officials shall disclose to the City Manager any material interests in financial institutions with which they conduct business, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking any personal investment transactions with the same individual with whom business is conducted on behalf of the City of Menifee.

All participants in the investment process are required to comply with terms of the Political Reform Act, Fair Political Practices Commission Regulations promulgated thereunder (2 C.C.R. §§ 18110 through 18998), the City’s Conflict of Interest Policy, including, without limitation, filing of Form 700, notification and recusal obligations, and Government Code section 1090 prohibitions.C
VI. INTERNAL CONTROLS
The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management.

Item: 6.1
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4 Periodically, as deemed appropriate by the City of Menifee and/or the Governing Body, an independent analysis by an external auditor shall be conducted to review internal controls, account activity and compliance with policies and procedures.

VII. AUTHORIZED FINANCIAL INSTITUTIONS, DEPOSITORIES, AND BROKER/DEALERS To the extent practicable, the Treasurer shall endeavor to complete investment transactions using a competitive bid process whenever possible. The City of Menifee’s Treasurer will determine which financial institutions are authorized to provide investment services to the City of Menifee. It shall be the City of Menifee’s policy to purchase securities only from authorized institutions and firms.

The Treasurer shall maintain procedures for establishing a list of authorized broker/dealers and financial institutions which are approved for investment purposes that are selected through a process of due diligence as determined by the City of Menifee. Due inquiry shall determine whether such authorized broker/dealers, and the individuals covering the City of Menifee are reputable and trustworthy, knowledgeable and experienced in Public Agency investing and able to meet all ofall their financial obligations. These institutions may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15c3-1 (uniform net capital rule).

In accordance with Section 53601.5, institutions eligible to transact investment business with the City of Menifee include:
•Institutions licensed by the state and proof of FINRA certification as a broker-dealer, as defined in Section 25004 of the Corporations Code.
•Primary government dealers as designated by the Federal Reserve Bank and non- primary government dealers.
•Nationally or state-chartered banks.
•The Federal Reserve Bank.
•Direct issuers of securities eligible for purchase.

Selection of financial institutions and broker/dealers authorized to engage in transactions will be at the sole discretion of the City of Menifee, except where the City of Menifee utilizes an external investment adviser in which case the City of Menifee may rely on the adviser for selection.

All financial institutions which desire to become qualified bidders for investment transactions (and which are not dealing only with the investment adviser) must supply the Treasurer with audited financials and a statement certifying that the institution has reviewed the California Government Code, Section 53600 et seq. and the City of Menifee’s investment policy. The Treasurer will conduct an annual review of the financial condition and registrations of such qualified bidders.

Public deposits will be made only in qualified public depositories as established by State law. Deposits will be insured by the Federal Deposit Insurance Corporation, or, to the extent the amount exceeds the insured maximum, will be collateralized in accordance with State law.

SelectionThe selection of broker/dealers used by an external investment adviser retained by Item: 6.1
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5 the City of Menifee will be at the sole discretion of the adviser. Where possible, transactions with broker/dealers shall be selected on a competitive basis and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, best efforts will be made to document quotations for comparable or alternative securities. When purchasing original issue instrumentality securities, no competitive offerings will be required as all dealers in the selling group offer those securities at the same original issue price. original issue instrumentality securities, no competitive offerings will be required as all dealers in the selling group offer those securities at the same original issue price.

VIII. AUTHORIZED INVESTMENTS
The City of Menifee’s investments are governed by California Government Code, Sections 53600 et seq. Within the investments permitted by the Code, the City of Menifee seeks to further restrict eligible investments to the guidelines listed below. In the event a discrepancy is found between this policy and the Code, the more restrictive parameters will take precedence. Percentage holding limits listed in this section apply at the time the security is purchased.

Any investment currently held at the time the policy is adopted which does not meet the new policy guidelines can be held until maturity, and shall be exempt from the current policy. At the time of the investment’s maturity or liquidation, such funds shall be reinvested only as provided in the current policy.

An appropriate risk level shall be maintained by primarily purchasing securities that are of high quality, liquid, and marketable. The portfolio shall be diversified by security type and institution issuer to avoid incurring unreasonable and avoidable risks regarding specific security types or individual issuers.

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

2. MUNICIPAL SECURITIES (REGISTERED TREASURY NOTES OR BONDS) of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, Agency, or authority of any of the other 49 states, in addition to California.
•The securities are rated in a rating category of “A” or its equivalent or better by at least one nationally recognized statistical rating organization (“NRSRO”). •No more than 5% of the total portfolio may be invested in any single issuer. •No more than 30% of the total portfolio may be in Municipal Securities.

Item: 6.1
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6 •The maximum maturity does not exceed five (5) years.

3. U.S. TREASURIES and other government obligations for which the full faith and credit of the United States are pledged for the payment of principal and interest. There are no limits on the dollar amount or percentage that the City of Menifee may invest in U.S.

Treasuries, provided that:
•The maximum maturity is five (5) years.

4. FEDERAL AGENCIES 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 are no limits on the dollar amount or percentage that the City of Menifee may invest in Federal City of Menifee or Government-Sponsored Enterprises (GSEs), provided that:
•No more than 25% of the total portfolio may be invested in any single Agency/GSE issuer.
•The maximum maturity does not exceed five (5) years.
•The maximum percent of Agency callable securities in the portfolio will be 20%.

5. BANKER’S ACCEPTANCES, provided that:
•They are issued by institutions which have short-term debt obligations rated “A-1” or its equivalent or better by at least one NRSRO; or long-term debt obligations which are rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
•No more than 40% of the total portfolio may be invested in Banker’s Acceptances. •No more than 5% of the total portfolio may be invested in any single issuer. •The maximum maturity does not exceed 180 days.

6. COMMERCIAL PAPER, provided that:
•The issuer is a corporation organized and operating in the United States with assets in excess of $500 million.
•The securities are rated “A-1” or its equivalent or better by at least one NRSRO. •They are issued by corporations which have long-term obligations rated in a rating category of “A” or its equivalent or better by at least one NRSRO. •City of Menifee may purchase no more than 10% of the outstanding commercial paper of any single issuer.
•No more than 25% of the total portfolio may be invested in Commercial Paper. Under a provision sunsetting on January 1, 2026, no more than 40% of the portfolio may be invested in Commercial Paper if the Agency’s investment assets under management are greater than $100,000,000.
•No more than 5% of the total portfolio may be invested in any single issuer. •The maximum maturity does not exceed 270 days.

Item: 6.1
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7 7. NEGOTIABLE CERTIFICATES OF DEPOSIT (NCDS), issued by a nationally or state- chartered bank, a savings association or a federal association, a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank, provided that:
•The amount of the NCD insured up to the FDIC limit does not require any credit ratings.
•Any amount above the FDIC insured limit must be issued by institutions which have short-term debt obligations rated “A-1” or its equivalent or better by at least one NRSRO; or long-term obligations rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
•No more than 30% of the total portfolio may be invested in NCDs (combined with CDARS).
•No more than 5% of the total portfolio may be invested in any single issuer. •The maximum maturity does not exceed five (5) years.

Item: 6.1
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8 one NRSRO; or long-term obligations rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
•No more than 30% of the total portfolio may be invested in NCDs (combined with CDARS).
•No more than 5% of the total portfolio may be invested in any single issuer. •The maximum maturity does not exceed five (5) years.

8. FEDERALLY INSURED TIME DEPOSITS (Non-Negotiable Certificates of Deposit) in state or federally chartered banks, savings and loans, or credit unions, provided that:
•The amount per institution is limited to the maximum covered under federal insurance.
•No more than 20% of the total portfolio will be invested in a combination of federally insured and collateralized time deposits.
•The maximum maturity does not exceed five (5) years.

9. COLLATERALIZED TIME DEPOSITS (Non-Negotiable Certificates of Deposit) in state or federally chartered banks, savings and loans, or credit unions in excess of insured amounts which are fully collateralized with securities in accordance with California law, provided that:
•No more than 20% of the total portfolio will be invested in a combination of federally insured and collateralized time deposits.
•The maximum maturity does not exceed five (5) years.

10. CERTIFICATE OF DEPOSIT PLACEMENT DEPOSIT SERVICE (CDARS), provided that:
•No more than 30% of the total portfolio may be invested in a combination of Certificates of Deposit, including CDARS.
•Under a provision sunsetting on January 1, 2026, no more than 50% of the portfolio may be invested in deposits through a placement service, including Certificates of Deposit, if the Agency is a city, district or local agency that does not pool money with other local agencies.
•The maximum maturity does not exceed five (5) years.

11. COLLATERALIZED BANK DEPOSITS. City of Menifee’s deposits with financial institutions will be collateralized with pledged securities per California Government Code, Section 53651. There are no limits on the dollar amount or percentage that the City of Menifee may invest in collateralized bank deposits.

12. REPURCHASE AGREEMENTS collateralized with securities authorized under California Government Code, maintained at a level of at least 102% of the market value of the Repurchase Agreement. There are no limits on the dollar amount or percentage that the City of Menifee may invest, provided that:
•Securities used as collateral for Repurchase Agreements will be delivered to an acceptable third party custodian.
•Repurchase Agreements are subject to a Master Repurchase Agreement between the City of Menifee and the provider of the repurchase agreement. The Master Item: 6.1
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9 Repurchase Agreement will be substantially in the form developed by the Securities Industry and Financial Markets Association (SIFMA).
•The maximum maturity does not exceed one (1) year.

13. STATE OF CALIFORNIA LOCAL AGENCY INVESTMENT FUND (LAIF), provided that:
•The City of Menifee may invest up to the maximum amount permitted by LAIF. •LAIF’s investments in instruments prohibited by or not specified in the City of Menifee’s policy do not exclude the investment in LAIF itself from the City of Menifee’s list of allowable investments, provided LAIF’s reports allow the Treasurer to adequately judge the risk inherent in LAIF’s portfolio.

14. LOCAL GOVERNMENT INVESTMENT POOLS
•Other LGIPs permitted by client.
•There is no issuer limitation for Local Government Investment Pools

15. CORPORATE MEDIUM TERM NOTES (MTNS), provided that:
•The issuer is a corporation organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States.
•The securities are rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
•No more than 30% of the total portfolio may be invested in MTNs. •No more than 5% of the total portfolio may be invested in any single issuer. •The maximum maturity does not exceed five (5) years.

16. ASSET-BACKED, MORTGAGE-BACKED, MORTGAGE PASS-THROUGH SECURITIES,

AND COLLATERALIZED MORTGAGE OBLIGATIONS FROM ISSUERS NOT DEFINED IN SECTIONS 3 AND 4 OF THE AUTHORIZED INVESTMENTS SECTION OF THIS POLICY, provided that:
•The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO.
•No more than 20% of the total portfolio may be invested in these securities. •No more than 5% of the portfolio may be invested in any single Asset-Backed or Commercial Mortgage security issuer.
•The maximum legal final maturity does not exceed five (5) years.

17. MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS that are registered with the Securities and Exchange Commission under the Investment Company Act of 1940, provided that:
a.MUTUAL FUNDS that invest in the securities and obligations as authorized under California Government Code, Section 53601 (a) to (k) and (m) to (q) inclusive and that meet either of the following criteria:

Item: 6.1
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10 (i) Attained the highest ranking or the highest letter and numerical rating provided by not less than two (2) NRSROs; or
(ii) Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations authorized by California Government Code, Section 53601 and with assets under management in excess of $500 million.
•No more than 10% of the total portfolio may be invested in shares of any one mutual fund.
b.MONEY MARKET MUTUAL FUNDS registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and issued by diversified management companies and meet either of the following criteria:
(i) Have attained the highest ranking or the highest letter and numerical rating provided by not less than two (2) NRSROs; or
(ii) Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of $500 million.
•No more than 20% of the total portfolio may be invested in the shares of any one Money Market Mutual Fund.
c. No more than 20% of the total portfolio may be invested in these securities.

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

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11 (ii) Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations authorized by California Government Code, Section 53601 and with assets under management in excess of $500 million.
•No more than 10% of the total portfolio may be invested in shares of any one mutual fund.
b.MONEY MARKET MUTUAL FUNDS registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and issued by diversified management companies and meet either of the following criteria:
(i) Have attained the highest ranking or the highest letter and numerical rating provided by not less than two (2) NRSROs; or
(ii) Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of $500 million.
•No more than 20% of the total portfolio may be invested in the shares of any one Money Market Mutual Fund.
c. No more than 20% of the total portfolio may be invested in these securities.

IX. PROHIBITED INVESTMENT VEHICLES AND PRACTICES
•State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to futures and options. •In accordance with Government Code, Section 53601.6, investment in inverse floaters, range notes, or mortgage derived interest-only strips is prohibited. •Investment in any security that could result in a zero-interest accrual if held to maturity is prohibited.
•Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited.

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12 •Purchasing or selling securities on margin is prohibited. •The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited.
•The purchase of foreign currency denominated securities is prohibited. •The purchase of a security with a forward settlement date exceeding 45 days from the time of the investment is prohibited.

X. INVESTMENT POOLS/MUTUAL FUNDS
The City of Menifee shall conduct a thorough investigation of any pool or mutual fund prior to making an investment, and on a continual basis thereafter. The Treasurer shall develop a questionnaire which will answer the following general questions:
•A description of eligible investment securities, and a written statement of investment policy and objectives.
•A description of interest calculations and how it is distributed, and how gains and losses are treated.
•A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. •A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.
•A schedule for receiving statements and portfolio listings. •Are reserves, retained earnings, etc. utilized by the pool/fund? •A fee schedule, and when and how is it assessed.
•Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? XI. COLLATERALIZATION
CERTIFICATES OF DEPOSIT (CDS). The City of Menifee shall require any commercial bank or savings and loan association to deposit eligible securities with an Agency of a depository approved by the State Banking Department to secure any uninsured portion of a Non- Negotiable Certificate of Deposit. The value of eligible securities as defined pursuant to California Government Code, Section 53651, pledged against a Certificate of Deposit shall be equal to 150% of the face value of the CD if the securities are classified as mortgages and 110% of the face value of the CD for all other classes of security.

COLLATERALIZATION OF BANK DEPOSITS. This is the process by which a bank or financial institution pledges securities, or other deposits for the purpose of securing repayment of deposited funds. The City of Menifee shall require any bank or financial institution to comply with the collateralization criteria defined in California Government Code, Section 53651.

REPURCHASE AGREEMENTS. The City of Menifee requires that Repurchase Agreements be collateralized only by securities authorized in accordance with California Government Code:
•The securities which collateralize the repurchase agreement shall be priced at Market Value, including any Accrued Interest plus a margin. The Market Value of Item: 6.1
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13 the securities that underlie a repurchase agreement shall be valued at 102% or greater of the funds borrowed against those securities. •Financial institutions shall mark the value of the collateral to market at least monthly and increase or decrease the collateral to satisfy the ratio requirement described above.
•The City of Menifee shall receive monthly statements of collateral.

XII. DELIVERY, SAFEKEEPING AND CUSTODY
DELIVERY-VERSUS-PAYMENT (DVP). All investment transactions shall be conducted on a delivery-versus-payment basis.

SAFEKEEPING AND CUSTODY. To protect against potential losses due to failure of individual securities dealers, and to enhance access to securities, interest payments and maturity proceeds, all cash and securities in the City of Menifee’s portfolio shall be held in safekeeping in the City of Menifee’s name by a third party custodian, acting as agent for the City of Menifee under the terms of a custody agreement executed by the bank and the City of Menifee. All investment transactions will require a safekeeping receipt or acknowledgment generated from the trade. A monthly report will be received by the City of Menifee from the custodian listing all securities held in safekeeping with current market data and other information.

The only exceptions to the foregoing shall be depository accounts and securities purchases made with: (i) local government investment pools; (ii) time certificates of deposit, and, (iii) money mutual funds, since the purchased securities are not deliverable.

XIII. MAXIMUM MATURITY
To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities.

The City of Menifee will not invest in securities maturing more than five (5) years from the date of trade settlement, unless the Governing Body has by resolution granted authority to make such an investment.

XIV. RISK MANAGEMENT AND DIVERSIFICATION

MITIGATING CREDIT RISK IN THE PORTFOLIO
Credit risk is the risk that a security or a portfolio will lose some or all its value due to a real or perceived change in the ability of the issuer to repay its debt. The City of Menifee will mitigate credit risk by adopting the following strategies:
•The diversification requirements included in the “Authorized Investments” section of this policy are designed to mitigate credit risk in the portfolio.

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14 •No more than 5% of the total portfolio may be deposited with or invested in securities issued by any single issuer unless otherwise specified in this policy. •The City of Menifee may elect to sell a security prior to its maturity and record a capital gain or loss in order to manage the quality, liquidity or yield of the portfolio in response to market conditions or City of Menifee’s risk preferences. •If the credit ratings of any security owned by the City of Menifee are downgraded to a level below the quality required by this investment policy, it will be the City of Menifee’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio.
•If a security is downgraded, the Treasurer will use discretion in determining whether to sell or hold the security based on its current maturity, the economic outlook for the issuer, and other relevant factors.
•If a decision is made to retain a downgraded security in the portfolio, its presence in the portfolio will be monitored and reported monthly to the Governing Body.

MITIGATING MARKET RISK IN THE PORTFOLIO
Market risk is the risk that the portfolio value will fluctuate due to changes in the general level of interest rates. The City of Menifee recognizes that, over time, longer-term portfolios have the potential to achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The City of Menifee will mitigate market risk by providing adequate liquidity for short-term cash needs, and by making longer-term investments only with funds that are not needed for current cash flow purposes.

The City of Menifee further recognizes that certain types of securities, including variable rate securities, securities with principal paydowns prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City of Menifee, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
•The City of Menifee will maintain a minimum of six months of budgeted operating expenditures in short term investments to provide sufficient liquidity for expected disbursements.
•The maximum stated final maturity of individual securities in the portfolio will be five (5) years, except as otherwise stated in this policy.
•The duration of the portfolio will generally be approximately equal to the duration (typically, plus or minus 20%) of a Market Benchmark, an index selected by the City of Menifee based on the City of Menifee’s investment objectives, constraints and risk tolerances.

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15 XV. REVIEW OF INVESTMENT PORTFOLIO
The Treasurer shall periodically, but no less than quarterly, review the portfolio to identify investments that do not comply with this investment policy and establish protocols for reporting major and critical incidences of noncompliance to the Governing Body.

XVI. PERFORMANCE EVALUATION
The investment portfolio shall be designed to attain a market-average rate of return throughout budgetary and economic cycles, taking into account the City of Menifee’s risk constraints, the cash flow characteristics of the portfolio, and state and local laws, ordinances or resolutions that restrict investments.

The Treasurer shall monitor and evaluate the portfolio’s performance relative to the chosen market benchmark(s), which will be included in the Treasurer’s quarterly report. The Treasurer shall select an appropriate, readily available index to use as a market benchmark.

Benchmarks may change over time based on changes in market conditions or cash flow requirements.

XVII. REPORTING

MONTHLY REPORTS
Monthly transaction reports will be submitted by the Treasurer to the Governing Body within 45 days of the end of the reporting period in accordance with California Government Code Section 53607.

QUARTERLY REPORTS
The Treasurer will submit a quarterly investment report to the Governing Body which provides full disclosure of the City of Menifee’s investment activities within 45 days after the end of the quarter. These reports will disclose, at a minimum, the following information about the City of Menifee’s portfolio:

1. An asset listing showing par value, cost and independent third-party fair market value of each security as of the date of the report, the source of the valuation, type of investment, issuer, maturity date and interest rate.

2. Transactions for the period.

3. A description of the funds, investments and programs (including lending programs) managed by contracted parties (i.e. LAIF; investment pools, outside money managers and securities lending agents)

4. A one-page summary report that shows:
a. Average maturity of the portfolio and modified duration of the portfolio; b. Maturity distribution of the portfolio;
c. Percentage of the portfolio represented by each investment category; d. Average portfolio credit quality; and,
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16 e. Time-weighted total rate of return for the portfolio for the prior one month, three months, twelve months and since inception compared to the City of Menifee’s market benchmark returns for the same periods;

5. A statement of compliance with investment policy, including a schedule of any transactions or holdings which do not comply with this policy or with the California Government Code, including a justification for their presence in the portfolio and a timetable for resolution.

6. A statement that the City of Menifee has adequate funds to meet its cash flow requirements for the next six months.

ANNUAL REPORTS
A comprehensive annual report will be presented to the Governing Board. This report will include comparisons of the City of Menifee’s return to the market benchmark return, suggest policies and improvements that might enhance the investment program, and will include an investment plan for the coming year.

XVIII. REVIEW OF INVESTMENT POLICY
The investment policy will be reviewed and adopted at least annually, but no later than within 120 days of the end of the fiscal year, to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends.

Any recommended modifications or amendments shall be presented by Staff to the Governing Body for their consideration and adoption.

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17 XIX. APPENDIX A PERMITTED INVESTMENTS

ALLOWABLE INVESTMENT INSTRUMENTS PER STATE GOVERNMENT CODE (AS OF JANUARY 1, 2022)A APPLICABLE TO ALL LOCAL AGENCIESB See "Table of Notes" on the next page for footnotes related to this table.

INVESTMENT TYPE

MAXIMUM

REMAINING

MATURITY

MAXIMUM SPECIFIED
% OF PORTFOLIO
City of Menifee Policy
Maximums

MINIMUM QUALITY

REQUIREMENTS

GOVERNMENT

CODE SECTIONS
Local Agency Bonds 5 years None None
30%
None 53601(a)
U.S. Treasury Obligations 5 years None None None 53601(b) State Obligations: CA and Others 5 years None None
30%
None 53601(c)
53601(d)
CA Local Agency Obligations 5 years None None
30%
None 53601(e)
U.S. Agency Obligations 5 years None None
25%
None 53601(f)
Bankers' Acceptance 180 days 40% E 40% E None 53601(g)
Commercial Paper: Non-pooled FundsF
(under $100,000,000 of investments)
270 days or less 25% of the agency's
moneyG
25% of the agency's
moneyG
Highest letter and number
rating by an NRSROH 53601(h)(2)(c)
Commercial Paper: Non-pooled FundsF
(min. $100,000,000 of investments)
270 days or less 40% of the agency's
moneyG
25% of the agency's
moneyG
Highest letter and number
rating by an NRSROH 53601(h)(2)(c)
Commercial Paper: Pooled FundsI 270 days or less 40% of the agency's moneyG
25% of the agency's
moneyG
Highest letter and number
rating by an NRSROH 53635(a)(1)
Negotiable Certificates of Deposit 5 years 30% J 2030
%J
None 53601(i)
Non-negotiable Certificates of Deposit 5 years None None 20%
None 53630 et seq.

Placement Service Deposits 5 years 50% K 30% K None 53601.8 and 53635.8
Placement Service Certificates of Deposit 5 years 50% K 30% K None 53601.8 and 53635.8
Repurchase Agreements 1 year None None None 53601(j)
Reverse Repurchase Agreements and
Securities Lending Agreements 92 daysL 20% of the base value of the portfolio
20% of the base value
of the portfolio None M 53601(j)
Medium Term NotesN 5 years or less 30% 30% "A" rating category or its equivalent or better 53601(k)
Mutual Funds and Money Market Mutual
Funds N/A 20% O 20% O Multiple P,Q 53601(l) and
53601.6(b)
Collateralized Bank DepositsR 5 years None 20% None 53630 et seq. and 53601(n)
Mortgage Pass-through and Asset-Backed
Securities 5 years or less 20% 20% "AA" rating category or its equivalent or better 53601(o)
County Pooled Investment Funds N/A None None None 27133 Joint Powers Authority Pool N/A None None MultipleS 53601(p) Local Agency Investment Fund (LAIF) N/A None None None 16429.1 Voluntary Investment Program FundT N/A None None None 16340 Supranational ObligationsU 5 years or less 30% 30% "AA" rating category or its equivalent or better 53601(q)
Public Bank Obligations 5 years None None None 53601(r), 53635(c), and 57603
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18 TABLE OF NOTES FOR APPENDIX A
A Sources: Sections 16340, 16429.1, 27133, 53601, 53601.6, 53601.8, 53630 et L Reverse repurchase agreements or securities lending agreements may exceed the seq., 53635, 53635.8, and 57603. 92-day term if the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse B Municipal Utilities Districts have the authority under the Public Utilities Code repurchase agreement or securities lending agreement and the final maturity dates Section 12871 to invest in certain securities not addressed here. of the same security.

C Section 53601 provides that the maximum term of any investment authorized M Reverse repurchase agreements must be made with primary dealers of the Federal under this section, unless otherwise stated, is five years. However, the legislative Reserve Bank of New York or with a nationally or state-chartered bank that has a body may grant express authority to make investments either specifically or as a significant relationship with the local agency. The local agency must have held the part of an investment program approved by the legislative body that exceeds this securities used for the agreements for at least 30 days. five-year remaining maturity limit. Such approval must be issued no less than three months prior to the purchase of any security exceeding the five-year maturity limit. N “Medium-term notes” are defined in Section 53601as “all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, D Percentages apply to all portfolio investments regardless of source of funds. For issued by corporations organized and operating within the United States or by instance, cash from a reverse repur-chase agreement would be subject to the depository institutions licensed by the United States or any state and operating restrictions. within the United States.”
E No more than 30 percent of the agency’s money may be in bankers’ acceptances of O No more than 10 percent invested in any one mutual fund. This limitation does not any one commercial bank. apply to money market mutual funds.

F Includes agencies defined as a city, a district, or other local agency that do not pool P A mutual fund must receive the highest ranking by not less than two nationally money in deposits or investment with other local agencies, other than local recognized rating agencies, or the fund must retain an investment advisor who is agencies that have the same governing body. registered with the SEC (or exempt from registration), has assets under management in excess of $500 million, and has at least
five years' experience investing in instruments authorized by Sections 53601 and 53635.

G Local agencies, other than counties or a city and county, may purchase no more Q A money market mutual fund must receive the highest ranking by not less than two than 10 percent of the outstanding commercial paper and medium-term notes of nationally recognized statistical rating organizations or retain an investment advisor any single issuer. registered with the SEC or exempt from registration and who has not less than five years' experience investing in money market instruments with assets under H Issuing corporation must be organized and operating within the U.S., have assets in management in excess of $500 million. excess of $500million, and debt other than commercial paper must be in a rating category of "A" or its equivalent or higher by a nationally recognized statistical R Investments in notes, bonds, or other obligations under Section 53601(n) require rating organization, or the issuing corporation must be organized within the U.S. as that collateral be placed into the custody of a trust company or the trust department a special purpose corporation, trust, or LLC, have program wide credit of a bank that is not affiliated with the issuer of the secured obligation, among other enhancements, and have commercial paper that is rated “A-1” or higher, or the specific collateral requirements. equivalent, by a nationally recognized statistical rating agency.

S A joint powers authority pool must retain an investment advisor who is registered I Includes agencies defined as a county, a city and county, or other local agency that with the SEC (or exempt from registration), has assets under management in excess pools money in deposits or investments with other local agencies, including local of $500 million, and has at least five years' experience investing in instruments agencies that have the same governing body. Local agencies that pool exclusively authorized by Section 53601, subdivisions (a) to (o). with other local agencies that have the same governing body must adhere to the limits set forth in Section 53601(h)(2)(C). T Local entities can deposit between $200 million and $10 billion into the Voluntary Investment Program Fund, upon approval by their governing bodies. Deposits in J No more than 30 percent of the agency’s money may be in negotiable certificates the fund will be invested in the Pooled Money Investment Account. of deposit that are authorized under Section 53601(i).

U Only those obligations issued or unconditionally guaranteed by the International K Effective January 1, 2020, no more than 50 percent of the agency’s money may be Bank for Reconstruction and Development (IBRD), International Finance invested in deposits, including certificates of deposit, through a placement service Corporation (IFC), and Inter- as authorized under 53601.8 (excludes negotiable certificates of deposit authorized American Development Bank (IADB), with a maximum remaining maturity of five under Section 53601(i)). On January 1, 2026, the maximum percentage of the years or less. portfolio reverts back to 30 percent. Investments made pursuant to 53635.8 remain subject to a maximum of 30 percent of the portfolio.

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19 XX. GLOSSARY OF INVESTMENT TERMS
AGENCIES. Shorthand market terminology for any obligation issued by a government-sponsored entity (GSE), or a federally related institution. Most obligations of GSEs are not guaranteed by the full faith and credit of the US government. Examples are:

FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry. FFCB issues discount notes and bonds.

FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market.

FHLB issues discount notes and bonds.

FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in the housing market. FHLMC, also called “FreddieMac” issues discount notes, bonds and mortgage pass-through securities.

FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established to provide credit and liquidity in the housing market. FNMA, also known as “FannieMae,” issues discount notes, bonds and mortgage pass-through securities.

GNMA. The Government National Mortgage Association, known as “GinnieMae,” issues mortgage pass-through securities, which are guaranteed by the full faith and credit of the US Government.

PEFCO. The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not guaranteed by the full faith and credit of the US government.

TVA. The Tennessee Valley Authority provides flood control and power and promotes development in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA currently issues discount notes and bonds.

ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of revolving lines of credit.

AVERAGE LIFE. In mortgage-related investments, including CMOs, the average time to expected receipt of principal payments, weighted by the amount of principal expected.

BANKER’S ACCEPTANCE. A money market instrument created to facilitate international trade transactions. It is highly liquid and safe because the risk of the trade transaction is transferred to the bank which “accepts” the obligation to pay the investor.

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

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

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

CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate.

CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement service that allows local agencies to purchase more than $250,000 in CDs from a Item: 6.1
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20 single financial institution (must be a participating institution of CDARS) while still maintaining FDIC insurance coverage. CDARS Intrafi is currently the onlyan entity providing this service. CDARS facilitates the trading of deposits between the California institution and other participating institutions in amounts that are less than $250,000 each, so that FDIC coverage is maintained.
maintained.

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

COLLATERALIZED BANK DEPOSIT. A bank deposit that is collateralized at least 100% (principal plus interest to maturity). The deposit is collateralized using assets set aside by the issuer such as Treasury securities or other qualified collateral to secure the deposit in excess of the limit covered by the Federal Deposit Insurance Corporation.

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

COLLATERALIZED TIME DEPOSIT. Time deposits that are collateralized at least 100% (principal plus interest to maturity). These instruments are collateralized using assets set aside by the issuer such as Treasury securities or other qualified collateral to secure the deposit in excess of the limit covered by the Federal Deposit Insurance Corporation.

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

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

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

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

DEBENTURE. A bond secured only by the general credit of the issuer.

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

DERIVATIVE. Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, or any security which represents a component of another security which has been separated from other components (“Stripped” coupons and principal). A derivative is also defined as a financial instrument the value of which is totally or partially derived from the value of another instrument, interest rate, or index.

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

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

DURATION. The weighted average time to maturity of a bond where the weights are the present values of the future cash flows. Duration measures the price sensitivity of a security to changes interest rates.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC). The Federal Deposit Insurance Corporation (FDIC) is an independent federal Agency insuring deposits in U.S. banks and thrifts in the event of bank failures. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices.

FEDERALLY INSURED TIME DEPOSIT. A time deposit is an interest-bearing bank deposit account that has a specified date of maturity, such as a certificate of deposit (CD). These deposits are limited to funds insured in accordance with FDIC insurance deposit limits.

FIDUCIARY. A person or organization that acts on behalf of another person(s) or organization that puts their clients’ interest ahead of their own as they are bound both legally and ethically to act in the other’s best interests.

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

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

LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to government entities and certain non-profit organizations in California that is managed by the State Treasurer’s Office.

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

MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the remaining debt early. Unlike a call option, with a make whole call provision, the issuer makes a lump sum payment that equals the net present value (NPV) of future coupon payments that will not be paid because of the call. With this type of call, an investor is compensated, or "made whole."
MARGIN. The difference between the market value of a security and the loan a broker makes using that security as collateral.

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

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

MATURITY. The final date upon which the principal of a security becomes due and payable. The investment’s term or remaining maturity is measured from the settlement date to final maturity.

MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts on either a continuous or an intermittent basis.

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22 MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.

MODIFIED DURATION. The percent change in price for a 100-basis point change in yields. Modified duration is the best single measure of a portfolio’s or security’s exposure to market risk.

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

MONEY MARKET MUTUAL FUND. A mutual fund that invests exclusively in short-term securities.

Examples of investments in money market funds are certificates of deposit and U.S.

Treasury securities. Money market funds attempt to keep their net asset values at $1 per share.

MORTGAGE PASS-THROUGH SECURITIES. A securitized participation in the interest and principal cash flows from a specified pool of mortgages. Principal and interest payments made on the mortgages are passed through to the holder of the security.

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

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

NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO).

A credit rating Agency that the Securities and Exchange Commission in the United States uses for regulatory purposes. Credit rating agencies provide assessments of an investment's risk. The issuers of investments, especially debt securities, pay credit rating agencies to provide them with ratings. The three most prominent NRSROs are Fitch, S&P, and Moody's.

NEGOTIABLE CERTIFICATE OF DEPOSIT (CD). A short-term debt instrument that pays interest and is issued by a bank, savings or federal association, state or federal credit union, or state- licensed branch of a foreign bank. Negotiable CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor (investor).

PAYDOWN. A reduction in the principal amount owed on a bond, loan, or other debt.

PRIMARY DEALER. A financial institution (1) that is a trading counterparty with the Federal Reserve in its execution of market operations to carry out U.S. monetary policy, and (2) that participates for statistical reporting purposes in compiling data on activity in the U.S.

Government securities market.

PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies to fiduciaries. In California, the rule is stated as “Investments shall be managed with the care, skill, prudence and diligence, under the circumstances then prevailing, that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of like character and with like aims to accomplish similar purposes.” REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller’s point of view, the same Item: 6.1
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23 transaction is a reverse repurchase agreement.

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

SECURITIES AND EXCHANGE COMMISSION (SEC). The U.S. Securities and Exchange Commission (SEC) is an independent federal government Agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States.

SECURITIES AND EXCHANGE COMMISSION SEC) RULE 15C3-1.An SEC rule setting capital requirements for brokers and dealers. Under Rule 15c3-1, a broker or dealer must have sufficient liquidity in order to cover the most pressing obligations. This is defined as having a certain amount of liquidity as a percentage of the broker/dealer's total obligations. If the percentage falls below a certain point, the broker or dealer may not be allowed to take on new clients and may have restrictions placed on dealings with current client.

STRUCTURED NOTE. A complex, fixed income instrument, which pays interest, based on a formula tied to other interest rates, commodities or indices. Examples include inverse floating rate notes which have coupons that increase when other interest rates are falling, and which fall when other interest rates are rising, and "dual index floaters," which pay interest based on the relationship between two other interest rates - for example, the yield on the ten- year Treasury note minus the Libor rate. Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements.

SUPRANATIONAL. A Supranational is a multi-national organization whereby member states transcend national boundaries or interests to share in the decision making to promote economic development in the member countries.

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

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

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

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

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

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

Item: 6.1
Item Page Number: 27
Menifee Finance Committee May 7, 2024 Page 29 of 41

Revision History
Revision No. Date Approved Approved By: Comments
0 10/01/2008 City Council 2008-2009 Investment Policy; Resolution No. 08-18 1 08/04/2009 City Council 2009-2010 Investment Policy; Resolution No. 09-110 2 11/15/2011 City Council 2011-2012 Investment Policy; Resolution No. 11-240 3 12/04/2012 City Council 2012-2013 Investment Policy; Resolution No. 12-299 4 11/06/2013 City Council 2013-2014 Investment Policy; Resolution No. 13-345 5 03/06/2019 City Council 2018-2019 Investment Policy; Resolution No. 19-775 6 05/05/2021 City Council 2020-2021 Investment Policy; Resolution No. 21-1018 7 09/21/2022 City Council 2022-2023 Investment Policy; Resolution No. 22-1201 8 10/18/2023 City Council 2023-2024 Investment Policy; Resolution No. 23-1362 Item: 6.1
Item Page Number: 28
Menifee Finance Committee May 7, 2024 Page 30 of 41

CITY OF MENIFEE
SUBJECT: Fiscal Year 2024/25 Mid-Cycle Budget Review: Fund Balance Policy for General Fund
MEETING DATE: May 7, 2024
TO: Finance Committee
PREPARED BY: Margarita Cornejo, Deputy Finance Director REVIEWED BY: Travis Hickey, Chief Financial Officer
APPROVED BY: Armando G. Villa, City Manager
-------------------------------------------------------------------------------------------------------------------------------

RECOMMENDED ACTION

1. Review the existing Fund Balance Policy No. CC-07 for the General Fund and provide input for policy updates as part of Fiscal year 2024/2025 Mid-Cycle Budget Adoption.

DISCUSSION
Policy No. CC-07, Fund Balance Policy for the General Fund (“Policy”), initially adopted June 21, 2011, and most recently updated in September 2021, provides a formal policy outlining the City’s minimum levels of unrestricted fund balance to address protection from any unexpected situations that require financial resources. As part of the City’s overall financial management and long-term planning efforts, reviewing the existing Policy periodically provides an opportunity to assess if the existing structure and thresholds provides the agency with adequate reserves to support municipal operations.

Maintaining adequate reserves benefits the City in several ways, including, but not limited to:
increased credit quality, provides the City with a stronger long-term financial health to address downturns in the economy and impacts of negative events, as well as support needed funding for continued maintenance of property, replenishment of vehicles and equipment, and larger and more volatile on-going expenses, such insurance premiums/claims, and pension liability related costs. At the same time, the City must balance retaining adequate reserves with funding services and current expenditures. With increasing costs often outpacing the growth of revenues, the City must weigh the opportunity cost of directing resources towards building reserves versus funding other items.

During the 2021 review update of the reserve policy, the City identified the intent to review the policy every three years and assess the need and ability to increase the reserve. Based on the current adopted policy, the City presently has a total reserve requirement in the General Fund of Item: 6.2
Item Page Number: 1
Menifee Finance Committee May 7, 2024 Page 31 of 41

City of Menifee Staff Report
FY2024/25 Mid-Cycle Budget Review: Fund Balance Policy for General Fund May 7, 2024

Page 2 of 3 ends

2 1
9 3
35% of operating expenditures. In the calculation of the reserve requirement, both Fund 100 (General Fund) and Fund 105 (Quality of Life) are included. The three components of the existing Fund Balance Reserves, based on the FY2023/24 Adopted Budget, are:

Reserve Fund Requirement for FY2023/24
Operating Stabilization Reserve (12.5%) =
$11,257,355 (Committed)
Economic Uncertainty Reserve (12.5%) =
$11,257,355 (Assigned)
Unassigned Fund Balance (10%) =
$9,005,884 (Unassigned)
Total: $31,520,594
For general reference surrounding agencies have reserve requirements ranging from 17.5% to 35% of annual budgeted expenditures. However, each city has unique revenue and expenditure composition, with the corresponding fund balance reserve policy developed upon such structure.

In its review of the FY2024/25 Mid-Cycle Budget review process, staff has preliminarily reviewed the existing Policy and the projected fund balance in excess of the established required 35% threshold to determine the financial feasibility to consider increasing the reserve requirement beginning FY2024/25.

From an overall perspective, the City’s recommended approach would be to focus on reserves as financial strategy to serve two main purposes:

1.Reserves as Insurance: Dedicated reserves intended to guard the City against risks such as revenue instability, catastrophic events, and cashflow instability. Collectively, this represents the City’s current 35% reserve requirement. In the 2024 update, an option would be to increase from 35% to 40%.

2.Reserves as Savings: Dedicated accounts (Restricted, Committed, Assigned) deliberately accumulated to pay for future costs or cost increases that would not be affordable within a single year’s revenue. For example, in the FY2023/24 and FY2024/25 budget adoption in June 2023, the City Council approved establishing Assigned Fund balances for insurance/self-insured retention (SIR) costs, and Fleet Replacements, where surplus funds beyond the reserve requirement were identified. In the 2024 update, options would include: reviewing/establishing the adequate amounts to dedicate to such accounts, as well as consider establishing accounts towards pension liability and public facility costs.

As a relatively newer City, Menifee has been able to pay off its unfunded pension liability annually. However, as the City ages, pension liability grows, more of the workforce becomes retirees, and CalPERS investment performance fluctuates year over year, it will be increasingly difficult to absorb an outstanding unfunded liability within a single year’s budget. Additionally, the City Council may wish to consider a more robust and deliberate accumulation of funding set aside for future public facilities.

Staff will present a proposed revised Policy with final recommendation as part of the June 5, 2024, City Council meeting as part of the mid-cycle budget adoption process. In preparation for this, Item: 6.2
Item Page Number: 2
Menifee Finance Committee May 7, 2024 Page 32 of 41

City of Menifee Staff Report
FY2024/25 Mid-Cycle Budget Review: Fund Balance Policy for General Fund May 7, 2024

Page 3 of 3 ends

2 1
9 3
staff would like to collect input from the Finance Committee on some of the options to consider in the 2024 update.

FISCAL IMPACT
There is no fiscal impact associated with the recommended action. The proposed Policy will be presented for City Council consideration at the June 5, 2024 meeting. Modifications of the Policy such as increasing the reserve requirement threshold (i.e. increasing from 35% to 40%), or incorporating new restricted, committed, or assigned fund balances would result in a fiscal impact of available unassigned fund balance. The final fiscal impact of such modification will be addressed in the Ppolicy update staff report.

ATTACHMENTS

1. Policy No. CC-07: Fund Balance Policy for the General Fund (as of September 2021) Item: 6.2
Item Page Number: 3
Menifee Finance Committee May 7, 2024 Page 33 of 41

CITY OF MENIFEE
City Council Policy
Policy Number: CG-07
Approving Authority:

City Council
Subject
Fund Balance Policy for the General Fund
Page l of8
These policies/procedures apply to the General Fund of the City of Menifee as described below. The City of Menifee's primary financial objective is to maintain the fiscal stability of the organization. Fund balance is the difference between the assets and liabilities reported in a governmental fund. Unrestricted fund balance is an important measure of economic stability. lt is essential that the City maintain adequate levels of unrestricted fund balance to mitigate financial risk that can occur from unforeseen revenue fluctuations, unanticipated expenditures, and similar circumstances. Having adequate financial resources will enable the City to achieve this objective and its mission of serving the citizens of Menifee.

3. POLTCY
A. Governmental Fund Reserves (Fund Balance)
For Governmental Funds, the Governmental Accounting Standards Board ('GASB") Statement No. 54 defines five specific classifications of fund balance.

The five classifications are intended to identify whether the specific components of fund balance are available for appropriation and are therefore "Spendable." The classifications also are intended to identify the extent to whlch fund balance is constrained by special restrictions, if any. Applicable only to governmental funds, the five classifications of fund balance are as follows:

CLASSIFICATION NATURE OF RESTRICTION
Non-spendable
Restricted
Cannot be readily converted to cash
Externally imposed restrictions
Policy CC-07, Page 1 of 8
Effective Date: 6121 12O11
Last Modified: 911512021

1. PURPOSE
The purpose of this Policy is to establish the City's minimum levels of unrestricted fund balance to address protection from risk and unexpected situations that require financial resources. The identified fund balance levels will be maintained in various accounts to identify certain requirements for classifying fund balance in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Repofting and Governmental Fund Definitions.

2. SCOPE / BACKGROUND
Item: 6.2
Item Page Number: 4
Menifee Finance Committee May 7, 2024 Page 34 of 41

Committed
Assigned
Unassigned
City Council imposed commitment
City Manager assigned purpose/intent
Residual balance not otherwise restricted
The following components are defined by GASB statement 54 and shall be reflected in the City's Fund Balance designations:

Non-Spendable Fund Balance
That portion of fund balance that includes amounts that are either (a) not in a spendable form, or (b) legally or contractually required to be maintained intact. ii. Restricted Fund Balance
The portion of fund balance that reflects constraints placed on the use of resources (other than non-spendable items) that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation.
iii. Committed Fund Balance
Limitations imposed at the highest level of decision making that requires formal action at the same level to remove (City Council).

The City Council, as the City's highest level of decision-making authority, may commit fund balance for spegfic purposes pursuant to constraints imposed by formal actions taken, such as an ordinance or resolutron. These committed amounts cannot be used for any other purpose unless the City Council removes or changes the specified use through the same type of formal action taken to establish the commitment. City Council action to commit fund balance needs to occur within the flscal reporting period; however, the amounl can be determined subsequently.
tv Assigned Fund Balance
Assigned fund balance comprises amounts intended to be used by the government for specific purposes.

The City Council has authorized the City Manager or designee as the official authorized to assign fund balance to a specific purpose as approved by the fund balance policy. Such assignments cannot exceed the available (spendable, unrestricted, uncommitted) fund balance in any particular fund.

Unassigned Fund Balance
That portion of a fund balance that includes amounts that do not fall into one of the above four categories. The General Fund is the only fund that will report this category of fund balance.

Policy CC-07, Page 2 of 8
Item: 6.2
Item Page Number: 5
Menifee Finance Committee May 7, 2024 Page 35 of 41

vt. Reporting Encumbrances
Encumbering amounts in governmental funds for specific purposes for which resources have already been restricted, committed, or assigned should not result in a separate display of encumbered amounts. Encumbered amounts for specific purposes for which amounts have not been previously restricted, committed or assigned, will be classified as committed or assigned, as appropriate, based on the definitions and criteria set forth in GASB Statement No. 54.
vll, Hierarchy of Fund Balance Use
When multiple categories of fund balance are available for expenditure, the City will spend the most restricted funds first before moving down to the next category with available funds in the following order:
a. Restricted
b. Committed
c. Assigned
d. Unassigned
viii. Establishing An Operating Reserve Stabilization Fund Balance (Committed) Maintaining an Operating Reserve Stabilization Fund Balance is a necessity for sound financial management and fiscal accountability. The City Council has the authority to establish an Operating Reserve Stabilization Fund Balance that will be a Committed Fund Balance.

Catastrophic Events and Major Drsasters-The Financial Stabilization fund balance is to fund the extraordinary operating costs, legal costs and cash flow problems associated with delays in State and Federal reimbursements for any catastrophic event and major disaster (natural or man-made) declared by the City Council of their designee, or by the State of California, or by the federal government that are nonrecurring expenditures.

A budget revision must be approved by the City Council. A maximum of fifty percent of the prior year ending balance in the Operating Reserve Stabilization Fund may be used. At no time may the balance be less than 5 percent of the Policy CC-07, Page 3 of 8
An Operating Reserve Stabilization Fund Balance in the General Fund is established for the purpose of providing funds for an urgent effect that affects the safety of residents, employees, or property (e.9., earthquake, wildfires, terrorist attack etc.). The minimum level for the Financial Stabilization Account is 12.5o/o of General Fund operating expenditures. The recognition of an urgent event must be established by the City Council by adoption of a resolution explaining the nature of the fiscal crisis and requires approval by a majority vote of the City Council in order for staff to utilize the funds set aside in the Operating Reserve Stabilization Fund Balance.
ix. Use of Operating Reserve Stabilization Fund Balance General Fund Operating Reserve Stabilization Fund Balance shall be used only to fund unanticipated needs and/or emergencies as described below:

Item: 6.2
Item Page Number: 6
Menifee Finance Committee May 7, 2024 Page 36 of 41

adopted annual appropriations, or half of the prior year ending balance, whichever is greater.

Changes and Replenishment of Operating Reserve Stabilization Fund Balance
The City Council may, by a majority vote of its members, change the amount of this commitment and/or the speciflc uses of these monies. ln the event that the balance drops below the established minimum level, the City Council will develop a plan to replenish the Operating Reserve Stabilization Fund Balance to the established minimum level within three years. The progress of replenishment should be reported in the annual budget. The City will use non-recurring revenues, budget surplus, proceeds from the sale of City- owned surplus property, and any other funds identified in the budget to increase the Operating Reserve Stabilization Fund Balance.

B. MINIMUM LEVEL OF FUND BALANCE
Committed Fund Balance for Operating Reserve Stabilization Fund The City's General fund balance committed for Operating Reserve Stabilization is established at a minimum of twelve and a half percent (12.5o/ol of the General Fund's current operating expenditures, to be used in a catastrophic event or major emergency. ii. Assigned Fund Balance for Economic Uncertainty Reserve Fund The City's Assigned for Economic Uncertainty Reserve Fund Balance is established at a minimumof@oftheGeneralFund,scurrentoperating
expenditures, to be used during times of severe economic distress such as protracted recessionary periods, State raids on local resources, or other impactful unforeseen events which greatly diminish the financial ability of the City to deliver core services. The Assigned for Economic Uncertainty Reserve Fund Balance will be used during periods of economic distress as measured by one of the following triggers:
. Consumer Price lndex exceeds the index for the previous year by more than five percent for two consecutive years.
. Local unemployment rate exceeds ten percent for three consecutive quarters. . The rate of inflation exceeds the growth in property tax revenue by five percent for two consecutive fiscal years.

I GFOA Bcst Practice: Appropriatc Lcvel ol Unrestricted Fund Balancc in thc Cencral Fund (2002 and 2009) x
Policy CC-07, Page 4 of 8
It is the goal of the City to achieve and maintain a minimum unrestricted (committed, assigned and unassigned) fund balance in its General Fund equal to 35% of the current vear's budqeted ooeratinq expenditure. This percentage represents a balance roughly equal to four (4) months of operating expenditures. The Government Finance Officers Association (GFOA) recommends that "general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months (roughly 16.7%) of regular general fund operating revenues or regular general fund operating expenditures."l The City considers a balance of less than 20% to be a cause for concern, barring unusual or deliberate circumstances.

Item: 6.2
Item Page Number: 7
Menifee Finance Committee May 7, 2024 Page 37 of 41

Significant State take-away of revenue totaling more than five percent of total revenue in a given fiscal year.

Sales Tax revenue falls by ten percent of the previous quarter for at least lhree consecutive quarters.

Revenue forecasts for the next fiscal year estimates revenue loss of more than seven percent.
iii. Unassigned Fund Balance
The City will achieve and maintain a minimum Unassigned Fund Balance in its General Fund of !g!_p@!l!.&) of the current year's operating expenditures.

This minimum fund balance is to protect against cash flow shortfalls related to timing of pro.lected revenue receipts and to maintain budgeted levels of service. iv. Replenishing Minimum Fund Balance Deficiencies
When minimum fund balance falls below the required threshold, the City Council must approve and adopt a plan to restore this balance to the target level within three years using the budget strategies described below:
. The City will use budget surplus
. The City will reduce recurring expenditures to eliminate any structural deficit or,
. The City will increase revenues or pursue other funding sources, or . A combination of the three options above
The progress of replenishment shall be reported in the annual budget. lf the fund balance is not positive at any year-end, the City shall develop a funding plan and a timeframe to bring it into a positive state.

The unassigned fund balance deficit in General Fund shall be restored through the following mechanisms, in order of priority:
. Reduction of (1) assigned fund balance levels, (2) committed fund balance levels;
. Transfer of unassigned fund balances from other related funds, if allowed. vt. Surplus Fund Balance
Unrestricted fund balance in the General Fund will be considered a surplus il over 4Oo/o of the budgeted operating expenditures. lf unrestricted fund balance of the General Fund exceeds 40%, the City may consider such fund balance surpluses to be used for (a)capital projects and equipment (b) pay down long{erm obligations, and/or (c) one{ime expenditures that are non-recurring in nature, and which do not require additional future operating expenditure outlay for maintenance, additional stafflng or other recurring expenditure. Appropriation from the General Fund's unrestricted fund balance shall require the approval of the City Council.

Policy CC-07, Page 5 of 8
v. Deficit Fund Balance
Item: 6.2
Item Page Number: 8
Menifee Finance Committee May 7, 2024 Page 38 of 41

vii. Surplus Fund Balance-City Hall Commitment
ln any year where total revenues exceed total expenditures (including capital expenditures), and the unrestricted fund balance of the General Fund exceeds 40%, the surplus may be transferred by direction of the City Council to the Committed Fund account set aside for construction of the future City Hall.

A. lmplementation and Review
Upon adoption of this policy the City Council authorizes the Finance Department to establish standards and procedures which may be necessary for its implementation. The City Council shall review and approve this policy via resolution at a minimum of every three (3) years to ensure it continues to meet the needs of the City given the economic factors and the current financial status at that time interval.

5. RESPONSIBILITIES
A. City Council
Adopt fund balance policy
B. City Manager
Determine appropriate levels of fund balance in accordance with adopted policy.

C. City of Menifee, Finance
L
ii.
iii.

Finance Director to assign specific amounts for financial reporting purposes.

Responsible for recording amounts according to adopted policy.

Responsible for ensuring that fund balance is properly reported in the City's Comprehensive Annual Financial Report (CAFR).

Governmental Funds:

The following definitions will be used in reporting activity in governmental funds across the City. The City may or may not report all funds types in any given reporting period, based on actual circumstances and activity.

The qeneral fund is used to account for all financial resources not accounted for and reported in another fund.

Soecial revenue funds are used to account and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specific purposes other than debt services or capital projects.

Debt service funds are used to account for all financial resource restricted committed or assigned to expenditure for principal and interest.

Policy CC-07, Page 6 of 8

4. PROCEDURES

6. DEFINITIONS
Item: 6.2
Item Page Number: 9
Menifee Finance Committee May 7, 2024 Page 39 of 41

Caoital oroiect funds are used to account for all financial resources restricted, committed, or assigned to expenditures for the acquisition or construction of capital assets.

Permanent funds are used to account for resources restricted to the extent that only earnings, and not principal, may be used for purposes that support the City's purposes.

Fund balance classification in oovernmental funds:

Fund balance is defined as the excess of tolal assets as compared to total liabilities in a governmental fund. GASB Statement No. 54 outlines the requirement to report the fund balance for governmental funds in specific classifications which create a hierarchy primarily based on the extent to which the City is bound lo the constraints on the specific purposes for which funds can be spent. The Fund Balance consists of the following categories:

Stabilization Arranqement:

Per GASB Statement No. 54, governments have the option to formally set aside unrestricted fund balance amounts to use for budget or revenue stabilization, working capital needs, and contingencies or emergencies. The authority to set aside such amounts can be established by statute, ordinance, resolution, or charter. These amounts are subject to controls that dictate the circumstances under which they can be spent. The formal action that imposes the parameters for spending should identify and describe the specific circumstances under which a need for stabilization arises. These circumstances should be such that they would not be expected to occur routinely. Stabilization amounls should be reported jn the general fund as restricted or committed if they meet the criteria of restricted or Policy CC-07, Page 7 of 8
. Non-spendable Fund Balance: That portion of a fund balance that includes amounts that cannot be spent because they are either (a) not in a spendable form, such as prepaid items, inventories of supplies, or loans receivable; or (b) legally or contractually required to be maintained intact, such as the principal portion of an endowment.
o Restricted Fund Balance: That portion of a fund balance that reflects constraints placed on the use of resources (other than non-spendable items) that are either (a) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation.
. Committed Fund Balance: That portron of a fund balance that includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government's highest level of decision- making authority and remain binding unless removed in the same manner. . Assiqned Fund Balance: That portion of a fund balance that includes amounts that are constrained by the government's intent to be used for specific purposes, but that are neither restricted nor committed. Such intent needs to be established at either the highest level of decision-making, or by an official designated for that purpose.
. Unassioned Fund Balance: That portion of a fund balance that includes amounts that do not fall into one of the above four categories. The General Fund is the only fund that will report this category of fund balance.

Item: 6.2
Item Page Number: 10
Menifee Finance Committee May 7, 2024 Page 40 of 41

committed fund balance. A stabilization agreement would satisfy the criteria to be reported as a separate special revenue fund only if the resources are derived from a specific restricted or committed revenue source. The notes to the annual financial reporl disclose the authority for establishing the arrangement, the requirement for additions to the amount, the conditions under which amounts may be spent, and the balance.

Revision History
Revision No. Date
Approved Approved By: Comments
0 6t21t11 City Council Orioinal Policy
1 6t19t12 City Council Revision # 1
2 8t21t13 City Council FN01-2
3 9t15t2021 City Council Revision 3/CC-07
-t/;fi
Bill zimfo9tfuln, Mayor
Policy CC-07, Page 8 of 8
Item: 6.2
Item Page Number: 11
Menifee Finance Committee May 7, 2024 Page 41 of 41

Finance CommitteeMay 7, 2024

Finance Committee
May 7, 2024