4 INVESTMENT PARAMETERS
1) Maximum Maturities - To the extent possible, the City shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the The City will not directly invest in securities maturing more than five (5) years from the date of trade settlement unless otherwise approved by the City Council pursuant to California Government Code Section 53601 .
Effective [XXX] and in accordance with Resolution [XXX], the City may invest in U.S. Treasury obligations, federal agency/GSE securities, and municipal debt with maturities up to five (5) years.
The intent to invest in securities beyond the five year maturity limitation shall be disclosed in writing to the City Council no less than 3 months prior to the investment. Reserve funds established by the issuance of bonds and other funds with longer-term investment horizons may be invested in securities exceeding five years if the maturity of such investments are made to coincide with the expected use of funds.
Competitive Bidding - It is the policy of the City to require that, where possible, all 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 alterna tive 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.
PERFORMANCE EVALUATION/BENCHMARK
• The investment portfolio shall be designed to attain a market-average rate of return throughout budgetary and economic cycles, taking into account the City’s risk constraints, the cash flow characteristics of the portfolio, and state and local laws, ordinances or resolutions that restrict investments with overall focus on the primary objectives of the Investment Policy which prioritize safety and liquidity over return.
• . Investment performance is continually monitored and evaluated by the City Treasurer. Investment performance statistics and activity reports are prepared on a quarterly basis for presentation to the City Manager and City Council within 45 days of the end of the quarter. • The City Treasurer shall select an appropriate, readily available index to use as a market benchmark.
The benchmark should be commensurate with the level of market risk of the portfolio, and should serve as a measure of risk, interest income, and fair value appreciation. Samples of readily available benchmarks include Intercity Exchange/Bank of America/Merrill Lynch 1-3 Year or 1-5 Year Treasury Indices.
SAFEKEEPING OF SECURITIES
• To protect against fraud or embezzlement or losses caused by collapse of an individual securities dealer, all securities owned by the City shall be held in safekeeping by a third party bank trust department, acting as agent for the City under the teams of a custody agreement or master repurchase agreement. All trades executed by a dealer will settle delivery- verseus-. payment (DVP) through the City's safekeeping agent.
• Securities held in custody for the City shall be reviewed and verified quarterly by Finance staff who has not been assigned to the investment function.
INVESTMENT GUIDELINES
5 INTERNAL CONTROL
The City Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City 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 the cost of a control should not exceed the benefits to be derived and that the valuation of costs and benefits requires estimates and judgments by management.
The internal controls shall address the following points:
• Control of collusion
• Separation of transaction authority from accounting and record keeping • Custodial safekeeping
• Avoidance of physical delivery securities
• Clear written delegation of authority to investment officials including subordinate staff members • Written confirmation of transactions for investments and wire transfers • Development of a wWire transfer agreement with the lead bank and third party custodian • Written procedures for placing investment transactions and monitoring the performance of the investment advisor(s)
REPORTING
The City Treasurer shall review and render quarterly reports to the City Manager and City Council which shall include the par and dollar amount of the investment, the classification of the investment, the percentage of the total portfolio which each type of investment represents, the name of the institution or entity, the rate of interest, the maturity date, the current market value, and the source of the market value.
• Statement that the projected cash flow is adequate to meet expected obligations over the next six months.
• A report of transactions by month.
• The weighted average maturity of the investment portfolio. • The average weighted yield to maturity of the portf olio as compared to the applicable benchmark. • Statement of compliance with the investment policy.
• The report is due within 45 days of the end of the quarter. • The City Manager may, at their his discretion, require this reporting on a monthly basis based upon market conditions.
QUALIFIED BROKER/DEALERS
• The City shall transact business with financial in stitutions and security broker/dealers after careful review of their qualifications and creditworthiness. All dealers who desire to do business with the City shall provide the necessary information (e.g. audited financial statements, proof of state registration, proof of National Association of Securities Dealers certification, etc.) from which the City can determine their creditworthiness, the existence of any pending legal action against the firm or the individual broker as well as an understanding of the security markets that they service. The City Treasurer shall annually send a copy of the current Iinvestment policyPolicy to all financial institutions and broker/dealers approved to do business with the City. Confirmation of receipt of this policyPolicy shall be considered evidence that the dealer understands the City's investment policies and intends to sell the City only appropriate investments authorized by this iInvestment policy.
6 • In accordance with California Government C ode Section 53601.5, Any investment authorized pursuant to Section 53601 or 53601.1, not purchased directly from the issuer, shall be purchased either from an institution licensed by the state as a broker-dealer, as defined in Section 25004 of the Corporations Code, or from a member of a federally regulated securities exchange, from a national or state-chartered bank, from a savings associati on or federal association (as defined by Section 5102 of the Financial Code) or from a brokerage firm designated as a primary dealer by the Federal Reserve bank.
• Selection of financial institutions and broker/dealers authorized to engage in transactions will be at the sole discretion of the City, except where the City utilizes an external investment adviser in which case the City Agency may rely on the adviser for selection.
COLLATERAL REQUIREMENTS
Collateral is required for investments in non-negotiable certificates of deposit and repurchase agreements.
In order to reduce market risk, the collateral level shall be at least 102% of market value of principal and accrued interest and marked-to-market weekly. Securities acceptable as collateral shall be the direct obligations of or are fully guaranteed as to principal and interest by the United States or any agency of the United States.
The City shall require any bank or financial institution to comply with the collateralization criteria defined in California Government Code, Section 53651.
AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code, Sections 16340, 16429.1- 16429.4, and 53600-53686. Within the context of the limitations, the following investments are authorized, as further limited herein. In the event a discrepancy is found between this Ppolicy and the Code, the more restrictive parameters will take precedence. Percentage holding limits and minimum credit quality requirements listed in this section apply at the time the security is purchased.
Any investment currently held at the time the pPolicy is adopted which does not meet the new pPolicy guidelines can be held until maturity and shall be exempt from the current pPolicy. At the time of the investment’s maturity or liquidation, such funds shall be reinvested only as provided in the current Ppolicy.
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 to avoid incurring unreasonable and avoidable risks regarding specific security types or individual issuers. • United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no percentage limitation of the portfolio which can be invested in this category, though a five-year maturity limitation is applicable.
• Federal Agency Obligations or United States Government-Sponsored Enterprise (GSE) obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or Unites States government sponsored enterprises. There is no percentage limitation of the portfolio which can be invested in this category, although a five year maturity limitation is applicable. Additionally, no more than 30% of the portfolio may be invested in any single Agency/GSE issuer, and the maximum percent of ag ency callable securities in the portfolio will be 20%.
7 • Banker’s Acceptances- Bills of exchange or time drafts drawn on and accepted by commercial banks, otherwise known as banker's acceptances. Banker’s acceptances must be issued by institutions which have short-term debt obligations rated “A-1” or its equivalent or better by at least one nationally recognized statistical rating organization (NRSRO), or long-term debt obligations which are rated in a rating category of “A” or its equivalent or bett er by at least one NRSRO. Purchase of banker's acceptances may not exceed 180 days maturity or 40% of the value of the portfolio. Furthermore, no more than 5% of the value of the portfolio may be invested in the banker's acceptances of any one commercial bank.
• Commercial Paper of the highest letter and number rating as provided by at least one NRSRO, either:
a. Issued by general corporations organized and operating within the United States, having assets in excess of $500,000,000 and having a rating in the rating category of "A" or its equivalent or better rating on debt other than commercial paper as provided by at least one NRSRO, or b. Issued by entities organized within the United States as a special purpose corporation, trust, or limited liability company. The securities must have program-wide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond. The securities must by rated “A-1” or its equivalent or better by at least one NRSRO.
Purchases of eligible commercial paper may not exceed 270 days maturity nor represent more than 10% of the outstanding paper of the issui ng corporation. Purchases of commercial paper may not exceed 25% of the value of the portfolio. No more than 5% of the portfolio may be invested in any single issuer. Under a provision sunsetting on January 1, 2026, no more than 40% of the portfolio may be invested in Commercial Paper if the City’s investment assets under management are greater than $100,000,000.
• Negotiable Certificates of Deposit issued by nationally or state chartered banks, 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. Purchases of negotiabl e certificates of deposit may not exceed 30% of the value of the portfolio. No more than 5% of the portfolio may be invested in any single issuer. A maturity limitation of five (5) years is applicable. 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.
• Repurchase Agreements - Repurchase agreements collateralized with securities authorized under in accordance with California Government Code Section 53601(j). There are no limits on the dollar amount or percentage that the City may invest. Th e maturity of the repurchase agreements shall not exceed one (1) year. The market value of the securities used as collateral for the repurchase agreements shall be monitored by the investment staff weekly and shall not be allowed to fall below 102% of the value of the repurchase agreement. A Master Repurchase agreement is required between the City and the dealer for all repurchase agreements transacted.
• Time Deposits - Time deposits, non-negotiable and collatera lized in accordance with the California Government Code, may be purchased through banks or savings and loan associations. A maturity
8 limitation of five years is applicable.
• Medium-Term Corporate Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States with a maximum maturity of five (5) years may be purchased. Securities eligible for investment shall be rated in a rating category of "A" or its equivalent better by at least one NRSRO.
Purchase of medium-term notes may not exceed 30% of the value of the portfolio and no more than 5% of the value of the portfolio may be invested in notes issued by one corporation.
• Local Agency Invest ment Fund (LAIF) - a State of California managed investment pool may be used up to the maximum permitted in accordance with California Government Code Section 16429.1.
• Money Market Funds - Money Market funds invested in U.S. Government securities are permitted under this policyPolicy and under the California Government Code Section 53601. In order to be eligible for investment under this section, an investment objective of such a fund must be the maintenance of a price per share of $1.00. Investment in such funds shall not exceed 20% of the City's total portfolio and no more than 10% of the City's total portfolio may be invested in any one money market fund. In addition, either one of the following criteria must be met:
• The fund shall have achieved a rating of "AAA" by at least two nationally recognized statistical rating organizations, or
• The fund shall have retained an advisor who is registered or exempt from registration with the Security Exchange Commission with not less than five years' experience managing money market funds with assets under management in excess of five hundred million dollars ($500,000,000).
• Municipal Securities (issued by State of California or Local Agency within California – including obligations of the City, the State of California, and any local agency within the State of California, and obligations of the City (provided that interest on such bonds is taxable at the Federal level, or if such interest is exempt from taxation for Fede ral income tax purposes, the purchase thereof is approved by the City TreasurerFinance Director in consultation with the City Attorney, and the purchase thereof does not cause such City obligati ons to be defeased under the indenture, trust agreement, fiscal agent agreement or similar document authorizing their issuance), provided that:
a. 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”). b. No more than 5% of the portfolio may be invested in any single issuer. c. No more than 30% of the portfolio may be in Municipal Securities. d. The maximum maturity does not exceed five (5) years.
• Municipal Securities (Issued by other 49 States) - (Registered tTreasury nNotes or bBonds) 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., provided that:
a. 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”). b. No more than 5% of the portfolio may be invested in any single issuer. c. No more than 30% of the portfolio may be in Municipal Securities. d. The maximum maturity does not exceed five (5) years.
9 • Asset-Backed, Mortgage-backed, Mortgage Passthrough Securities, and Collateralized Mortgage Obligations From Issuers Not Defined In Sections 1 And 2the first two paragraphs of of the Authorized Investments Section of this Policy (U.S. Treasury obligations and Federal Agency/GSE Debt), provided that:
a. The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO. b. No more than 20% of the total portfolio may be invested in these securities. c. No more than 5% of the portfolio may be inv ested in any single Asset-Backed or Commercial Mortgage security issuer.
d. The maximum legal final maturity does not exceed five (5) years.
• Collateralized Bank Deposits— City’s deposits with financial ins titutions 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 may invest in collateralized bank deposits.
• Supranational Securities— 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 must be 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 portfolio may be invested in any single issuer. The maximum maturity does not exceed five (5) years.
• Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 known as Local Government Investment Pools (LGIP) that invests in securities and obligations authorized in California Government Code 53601 subdivisions (a) to (r), inclusive, where each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority.
a) The joint powers authority issuing the shares must retain an investment adviser who is registered or exempt from registration with the Securities and Exchange Commission (SEC), has assets under management in excess of $500 million, and has at leas t five years of experience investing in the securities and obligations authorized by Section 53601, subdivisions (a) to (q). b) Ratings of a LGIP must be in a rating category of “AAA” or its equivalent by at least one NRSRO.
If rated by more than one organization, no rating may be lower than the category described in the preceding sentence.
c) No more than 10% of the portfolio shall be invested in any single LGIP. d) LGIP investments may not exceed 20% of the City’s portfolio in the aggregate.
INELIGIBLE INVESTMENTS AND INVESTMENT PRACTICES
Ineligible investments are those that are not described herein, including but not limited to, common stocks, reverse repurchase agreements, inverse floaters, range notes, mortgage derived interest only strips, derivatives securities, or any security that could result in zero interest accrual. Under a provision sunsetting on January 1, 2026, securities backed by the U.S. Government that could result in a zero- or negative-interest accrual if held to maturity are permitted. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. Purchasing or selling
10 securities on margin is prohibited. The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohib ited. The purchase of foreign currency denominated securities is prohibited. The purchase of securities with a forward settlement date exceeding 45 days from the time of the investment is prohibited.
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 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. • No more than 5% of the total portfolio may be deposited with or invested in aggregate of securities issued by any single issuer of the following types: Bankers Acceptances, Commercial Paper, Negotiable Certificates of Deposits, and Corporate Notes. • unless otherwise specified in this policy.
• The City 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’s risk preferences.
• If a security owned by the City is downgraded to a level below the requirements of this P policy, making the security ineligible for additional purchases, the following steps will be taken:
• Any actions taken related to the downgrade by the investment manager will be communicated to the City Treasurer in a timely manner. • If a decision is made to retain the security, the credit situation will be monitored and reported to the City Council as part of the Quarterly Investment Report.
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 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 will mitigate market risk by providing adequate liquidity for short-term cash needs, and by maki ng longer-term investments only with funds that are not needed for current cash flow purposes.
The City further recognizes that certain types of securities, including variable rate securities, securities with principal paydowns prior to matu rity, and securities with embedded options, will affect the market risk profile of the portfolio diff erently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
• The City 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 policyPolicy. • The duration of the portfolio will generally be approximately equal to the duration
11 (typically, plus or minus 20%) of a Market Benchmark as described in the Performance Evaluation/Benchmark section of this policyPolicy; an index selected by the City based on the City’s investment objectives, constraints and risk tolerances.
INVESTMENT POOLS/MUTUAL FUNDS
The City Agency shall conduct a thorough investigation of any pool or mutual fund prior to making an investment, and on a continual basis thereafter. The City Treasurer shall develop a questionnaire which will answer the following general questions:
a. A description of eligible investment securities, and a written statement of investment policy and objectives.
b. A description of interest calculations and how it is distributed, and how gains and losses are treated.
c. A description of how the securities are safegua rded (including the settlement processes), and how often the securities are priced and the program audited. d. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.
e. A schedule for receiving statements and portfolio listings. f. Are reserves, retained earnings, etc. utilized by the pool/fund? g. A fee schedule, and when and how is it assessed.
h. Is the pool/fund eligible for bond pro ceeds and/or will it accept such proceeds?
INTEREST EARNINGS
All moneys earned and collected from investments authorized in this policyPolicy shall be allocated monthly to various fund accounts based on the cash balance in each fund as a percentage of the entire pooled portfolio.
ANNUAL POLICY APPROVAL
The City's iInvestment Ppolicy shall be adopted by resolution of the City Council on an annual basis. This Iinvestment policyPolicy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends. Any amendments to the Ppolicy shall be forwarded to City Council for approval.
GLOSSARY
Definitions of investment related terms are list in the Glossary of Terms, Exhibit A
12 Accretion - Adjustment of the difference between the price of a bond bought at an original discount and the par value of the bond
Accrued Interest- Interest earned but not yet received.
Active Deposits- Funds which are immediately required for disbursement.
Agencies - Federal agency securities and/or Government-sponsored enterprises (GSEs), also known as U.S.
Government instrumentalities. Securities issued by Government National Mortgage Association (GNMA) are considered true agency securities, backed by the full faith and credit of the U.S. Government. GSEs are financial intermediaries established by the federal government to fund loans to certain groups of borrowers, for example homeowners, farmers and students and are privately owned corporations with a public purpose.
The most common GSEs are Federal Farm Credit System Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Association, and Federal National Mortgage Association.
Amortization- An accounting practice of gradually decreasing (increasing) an asset's book value by spreading its depreciation (accretion) over a period of time.
Annual Comprehensive Financial Report (ACFR): The official annual financial report for the City.
It includes combined statements and basic financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles (GAAP)
Appreciation - Increase in the value of an asset such as a stock, bond, commodity or real estate
Arbitrage- Transactions by which securities are bought and sold in different markets at the same time for the sake of the profit arising from a yield difference in the two markets.
Asked Price- The price a broker dealer offers to sell securities.
Asset-Backed - A type of security that is secured by receivables, such as credit card and auto loans. These securities typically pay principal and interest monthly.
Banker's’ Acceptance (BA) - A high quality, short term money market instrument used to finance international trade. There has never been an instance of a failure to pay a banker's acceptance in full at its maturity date.
Basis Point- One basis point is one hundredth of one percent (.01).
Benchmark - A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investment
EXHIBIT A
GLOSSARY OF TERMS
13 Bid Price- The price a broker dealer offers to purchase securities.
Bond- A financial obligation for which the issuer promises to pay the bondholder a specified stream of future cash flows, including periodic interest payments and a principal repayment.
Book 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, and includes interest earnings, and realized gains and losses on the portfolio.
Book Value- The value at which a debt security is shown on the holder's balance sheet. Book value is acquisition cost less amortization of premium or accretion of discount.
Broker- An Agent that acts as an intermediary between a Someone who brings buyers and a sellersseller for a commission, and does not trade for their own risk and account or inventory. together and is compensated for his/her service.
Callable Securities - A security that can be redeemed by the issuer before the scheduled maturity date.
Cash Flow - An analysis of all changes that affect the cash account during a specified period
Certificate of Deposit (CD) - A deposit insured up to $250,000 by the FDIC at a set rate for a specified period of time.
City Treasurer – Pursuant to section VI-1-3.04 of the Milpitas Municipal Code the City Manager is empowered to appoint the City Treasurer. The City Manager has appointed the Finance Director as the City Treasurer.
Collateral- Securities, evidence of deposit or pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposit of public moneys.
Collateralized Mortgage Obligation (CMO) - A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus.
Collateralized Securities - Debt obligations that represent claims to the cash flows from pools of loan receivables, most commonly on residential property and extending to commercial property, automobiles, student borrowings, equipment financings and more. Loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi- governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization and such issuances represent a vast portion of the bond market Commercial Mortgage-Backed Security (CMBS): A type of fixed income investment product that is backed by mortgages on commercial properties rather than residential real estate. CMBS can provide liquidity to real estate investors and commercial lenders alike. There are two types of CMBS, agency CMBS, which consist of loans pooled by governmentsponsored entities (GSEs) including Fannie Mae and Freddie Mac, and non-agency (private) CMBS, which consist of loans pooled and securitized by private lenders Commercial Paper- Short-term, negotiable unsecured promissory notes of corporations.
14 Comprehensive Annual Financial Report (CAFR)- The official annual financial report for the City, prepared in conformity with Generally Accepted Accounting Principles (GAAP).
Commercial Receivables - Business debt owed to a creditor which may be used as collateral for asset backed securities. These receivables include equipment leases, building leases, and other business loans.
Conduit Financing - A financing in which a governmental agency issues debt and the proceeds of the issue are loaned to a nongovernmental borrower who then applies the proceeds for a project financing or (if permitted by federal tax laws for a qualified 501(c)(3) bond) for working capital purposes.
Consumer Receivables - Consumer debt owed to a creditor which may be used as collateral for asset backed securities. These receivables include credit card, auto, and home equity loans.
Corporate Note - Debt instrument issued by a private corporation.
Coupon- The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value.
Credit Analysis - An analysis of the economic and financial conditions to determine creditworthiness or the ability to meet debt obligations.
Credit Ratings - A grade given to a debt instrument that indicates its credit quality. Private independent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations of the issuer's financial strength, or its ability to pay principal and interest in a timely fashion. Investment grade credit ratings for long-term debt are as follows:
Moody’s Standard & Poor’s Fitch
Aaa AAA AAA
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-
Credit Risk - The risk that an obligation will not be paid, and a Defined as the risk of loss will result due to a failure of the issuer of a security.
CUSIP - Stands for Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most securities, including: stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. The CUSIP system—owned by the American Bankers Association
15 and operated by Standard & Poor’s—facilitates the clearing and settlement process of securities. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security
Current Yield- The interest paid on an investment expressed as a percentage of the current price of the security.
Custodian- A bank or other financial institution that keeps custody of stock certificates and other assets.
Dealer - A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his/her own risk and account or inventory.
Debentures - A bond secured only by the general credit of the issuers.
Defeased Bond Issues- Issues that have sufficient money to retire outstanding debt when due so that the agency is released from the contracts and covenants in the bond document.
Delivery verses. Payment (DVP)- Delivery of securities with a simultaneous exchange of money for the securities.
Derivative- Securities that are based on, or derived from, some underlying asset, reference date, or index.
Direct Issuer - Issuer markets its own paper directly to the investor without use of an intermediary.
Discount- The difference between the cost of a security and its value at maturity when quoted at lower than face value.
Diversification- Dividing investment funds among a variety of securities offering independent returns and risk profiles.
Duration- A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based on three variables:
term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates.
Earned Income Yield This Period (annualized) - The Total net Earnings this period divided by Average Daily Portfolio Balance and the number of days in the period, multiplied by 365 (or 360 depending on the profile setting), and then multiplied by 100.
Face Value - The principal amount owed on a debt instrument. It is the amount on which interest is computed and represents the amount that the issuer promises to pay at maturity.
Fair Value - The amount at which a security could be exchanged between willing parties, other than in a forced or liquidation sale. If a market price is available, the fair value is equal to the market value.
Fannie Mae- Trade name for the Federal National Mortgage Association (FNMA), a U.S. sponsored corporation.
Farmer Mac - Trade name for the Federal Agricultural Mortgage Corporation, a U.S. government
16 sponsored enterprise.
Federal Agricultural Mortgage Corporation - A U.S. government sponsored enterprise that establishes a secondary market for agriculture mortgages and rural utility loans. Its securities do not carry direct U.S. government guarantees.
Federal Reserve System- The central bank of the U.S. which consists of a seven member Board of Governors, 12 regional banks and 5,700 commercial banks that are members.
Federal Deposit Insurance Corporation (FDIC) - A federal agency that provides i Insurance on bank deposits, guaranteeing deposits to a set limit per depositor, per insured bank for each account ownership category, currently provided to customers of a subscribing bank which guarantees deposits to a set limit (currently $250,000.) per account.
Federal Farm Credit Bank (FFCB) - Government-sponsored enterprise that consolidates the financing activities of the Federal Land Banks, the Federal Intermediate Credit Banks and the Banks for Cooperatives. Its securities do not carry direct U.S. government guarantees.
Federal Funds Rate - The interest rate at which depository institutions lend to one another on an overnight basis. This rate is set by the Federal Reserve through open market operations. It influences the short-term borrowing rate in the market and thus the shape of the overall yield curve and by extension, the US economy.
Federal Government Agency Securities - Federal Agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
Federal Home Loan Banks (FHLB) - Government sponsored enterprise (currently made up of 12 regional banks) that regulates, lends funds, and provides correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. Although the banks operate under federal charter with government supervision, the securities are not guaranteed by the U. S.
Government.
Federal Home Loan Mortgage Corporation (FHLMC) - Government sponsored enterprise that helps maintain the availability of mortgage credit fo r residential housing. FHLMC is a private stockholder- owned corporation. FHLMC finances these operations by marketing guaranteed mortgage certificates and mortgage participation certificates. Its discount notes and bonds do not carry direct U.S. government guarantees.
Federal National Mortgage Association (FNMA) - Government sponsored enterprise that is the largest single provider of residential mortgage funds in the United States. FNMA is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA securities do not carry direct U.S. Government guarantees.
Federal Open Market Committee (FOMC) - A committee of the Federal Reserve Board, which establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves.
17 Federal Reserve System - The central bank of the U.S. which consists of a seven member Board of Governors, the Federal Open Market Committee (FOMC), 12 regi onal banks and approximately 5,700 commercial banks that are members.
Fed Wire- A wire transmission service established by the Fe deral Reserve Bank to facilitate the transfer of funds through debits and credits of funds between participants within the Fed system.
Freddie Mac- Trade name for the Federal Home Loan Mortgage Corporation (FHLMC), a U.S. sponsored corporation.
Ginnie Mae- Trade name for the Government National Mortgage Association (GNMA), a direct obligation bearing the full faith and credit of the U.S. Government.
Government Accounting Standards Board (GASB)- A standard-setting body, associated with the Financial Accounting Foundation, which prescribes standard accounting practices for governmental units.
Government Sponsored Enterprise (GSE) – Quasi-governmental entity established to enhance the flow of credit to specific sectors of the U.S. economy. Created by acts of Congress, these agencies – although privately held – provide public financial services. Examples include Freddie Mac, Fannie Mae and Farmer Mac.
Guaranteed Investment Contracts (GICS)- An agreement acknowledging receipt of funds, for deposit, specifying terms for withdrawal, and guaranteeing a rate of interest to be paid.
Inactive Deposits- Funds not immediately needed for disbursement.
Inter-American Development Bank - Established in 1959, IADB supports Latin American and Caribbean economic development, social development, and regional integration by lending to governments and government agencies. The U.S. is a member of IADB.
Interest Rate- The annual yield earned on an investment, expressed as a percentage.
Interest Rate Risk - The risk of gain or loss in market values of securities due to changes in interest-rate levels. For example, rising interest rates will cause the market value of portfolio securities to decline.
International Bank for Reconstruction and Development (IBRD) - IBRD is one of the five member institutions within the World Bank Group. It issues World Bank bonds and provides commercial-grade or concessional financing to middle to low-income sovereign states. The U.S. is a member of IBRD.
International Finance Corporation (IFC) - IFC is a member of the World Bank Group. It is a global development institution that invests strictly in private sectors to reduce poverty and promote development in developing countries. The U.S. is a member of IFC.
Investment Agreements- An agreement with a financial institution to borrow public funds subject to certain negotiated terms and conditions concerning collateral, liquidity and interest rates.
Investment Grade (Long Term Ratings) - An evaluation from a rating agency that a specific issuer or issuance represents a low risk of default. Ratings below investment grade are considered high yield and
18 represent a high risk of non-payment. The lowest investment grade ratings are Baa3 (Moody’s), BBB- (S&P), and BBB- (Fitch).
Investment Portfolio - A collection of securities held by a bank, individual, institution or government agency for investment purposes.
Liquidity- An asset that can easily and rapidly be converted into cash without significant loss of value.
Local Agency Investment Fund (LAIF)- A pooled investment vehicle for local agencies in California sponsored by the State of California and administered by the State Treasurer. Local government units, with consent of the governing body of that agency, may voluntarily deposit surplus funds for the purpose of investment. Interest earned is distributed by the State Controller to the participating governmental agencies on a quarterly basis.
Local Government Investment Pool (LGIP)- A pooled investment vehicle sponsored by a local agency or a group of local agencies for use by other local agencies.
Mark to Market - Current value of securities at today's market price.
Market Risk- Defined as market value fluctuations due to overall changes in market conditions or interest rates. the general level of interest rates.
Market Value- The price at which a security is trading and could presumably be purchased or sold. See Fair Value
Master Repurchase Agreement - A written contract covering all future transactions between the parties to repurchase agreements and reverse repurchase agreements that establish each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.
Maturity- The date upon which the principal or stated value of an investment becomes due and payable.
Medium-Term Notes (MTNs) - Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts either on a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.
Modified Duration- A measure of exposure to market risk of a security or a portfolio. It is the percent change in the price of a security (portfolio) or a 100 basis point change in the security's (portfolio's) yield.
Money Market - The market in which short term debt instruments (Treasury Bills, Discount Notes, Commercial Paper, Banker’s Acceptances and Negotiable Certificates of Deposit) are issued and traded.
Mortgage-Backed Securities – A type of security that is secured by a mortgage or collection of mortgages.
These securities typically pay principal and interest monthly.
Municipal Securities - Debt obligations issued by states and local governments and their agencies, including cities, counties, government retirement plans, school districts, state universities, sewer districts, municipally owned utilities and authorities running bridges, airports, and other transportation facilities.
19 Mutual Funds- An investment company that pools money and can invest in a variety of securities, including fixed-income securities and money market instruments.
Nationally Recognized Statistical Rating Organization (NRSRO) - A credit rating agency that assesses the credit worthiness of an obligor as an entity or with respect to specific securities or money market instruments. US Securities and Exchange Commission establishes a registration and oversight program for NRSROs.
Negotiable Certificate of Deposit- A large denomination certificate of deposit which can be sold in the open market prior to maturity.
Net Portfolio Yield - Calculation in which the 365-day basis equals the annualized percentage of the sum of all net earnings during the period divided by the sum of all average daily portfolio Balances.
New Issue- Term used when a security is originally "brought" to market.
Note- A written promise to pay a specified amount to a certain entity on demand or on a specified date.
Open Market Operations - Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit: Sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool.
Par Value- The amount of principal which must be paid at maturity. Also referred to as the face amount of a bond, normally quoted in S1,000 increments per bond.
Perfected Delivery- Refers to an investment where the actual security or collateral is held by an independent third party representing the purchasing entity.
Portfolio- Combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset. The purpose of a portfolio is to reduce risk by diversification.
Premium - The difference between the par value of a bond and the cost of the bond, when the cost is above par.
Primary Dealer- A group of government securities dealers th at submit daily reports of market activity , and security positions and monthly financial statements to the held to the Federal Reserve Bank of New York and are subject to its informal oversight. These dealers are authorized to buy and sell government securities in direct dealing with the Federal Reserve Bank of New York in its execution of market operations to carry out U.S. monetary policy. Such dealers must be qualified in terms of reputation, capacity, and adequacy of staff and facilities.
Prime (Short Term Rating) - High quality ratings for short term debt such as commercial paper. Prime ratings are as follows: P1 (Moody’s), A1 (S&P), and F1 (Fitch).
Principal- The face value or par value of a debt instrument, or the amount of capital invested in a given security.
20 Prospectus- A legal document that must be provided to any prospective purchaser of a new securities offering registered with the Securities and Exchange Commission ( SEC) that typically includes information on the issuer, the issuer's business, the proposed use of proceeds, the experience of the issuer's management, and certain certified financial statements ( also known as an "official statement")
Prudent Investor Standard- A standard of conduct where a person acts with care, skill, prudence, and diligence when investing, reinvesting, purchasing, acquiring, exchanging, selling and managing funds.
The test of whether the standard is being met is if a prudent person acting in a similar situation would engage in similar conduct to ensure that investments safeguard principal and maintain liquidity.
Public Deposits - A bank that is qualified under California law to accept a deposit of public funds.
Purchase Date- The date in which a security is purchased for settlement on that or a later date. Also known as the “trade date”.
Rate of Return- (1) The yield obtainable on a security based on its purchase price or its current market price. (2) Income earned on an investment, expressed as a percentage of the cost of the investment . ( This may be the amortized yield to maturity on a bond or the current income return.
Realized Gain (or Loss) - Gain or loss resulting from the sale or disposal of a security.
Regional Dealer - A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities and that is not a primary dealer
Repurchase Agreement (RP or REPO) - A transaction in which a counterparty or the holder of securities (e.g. investment dealer) sells these securities to an investor (e.g. the City) with a simultaneous agreement to repurchase them at a fixed date. The security "buyer" (e.g. the City) in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate the “buyer” for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves. A transaction where the seller agrees to buy back from the buyer (City) the securities at an agreed upon price on demand or at a specified date.
Reverse Repurchase Agreement (REVERSE REPO) - The opposite of a repurchase agreement. A reverse Repo is a transaction in which the City sells securities to a counterparty (e.g. investment dealer) and agrees to repurchase the securities from the counterparty at a fixed date. The counterparty in effect lends the seller (e.g. the City) money for the period of the agreement with terms of the agreement stru ctured to compensate the buyer.A transaction where the seller (City) agrees to buy b ack from the buyer the securities at an agreed upon price on demand or at a specified date.
Risk- Degree of uncertainty of return on an asset.
Rule G-37 of the Municipal Securities Rulemaking Board- Federal regulations to sever any connection between the making of political contributions and the awarding of municipal securities business.
Safekeeping Service - A service which banks offer to clients for a fee, where physical securities are held in the bank’s vault for protection and book-entry securities are on record with the Federal Reserve Bank or Depository Trust Company in the bank’s name for the benefit of the client. As agent for the client, the
21 safekeeping bank settles securities transactions, collects coupon payments, and redeems securities at maturity or on call date, if called. An arrangement under which a third party institution holds securities or valuables under safe, controlled conditions. A safekeeping arrangement is evidenced by a safekeeping receipt.
Sallie Mae - Trade name for the Student Loan Marketing Association (SLMA), a U.S. sponsored corporation.
Secondary Market- A market made for the purchase and sale of outstanding issues following the initial distribution.
Securities - Investment instruments such as notes, bonds, stocks, money market instruments and other instruments of indebtedness or equity.
Securities and Exchange Commission (SEC)- The federal agency responsible for supervising and regulating the securities industry.
Settlement Date- The date on which a trade is cleared by delivery of securities against funds.
Spread - The difference between two figures or percentages. It may be the difference between the bid (price at which a prospective buyer offers to pay) and asked (price at which an owner offers to sell) prices of a quote, or between the amount paid when bought and the amount received when sold.
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. Issuer s of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements.
Student Loan Market Association (SLMA) - Government-sponsored enterprise that purchases student loans from originating financial institutions and provides fina ncing to state student loan agencies. It provides a national secondary market for federally sponsored student loans and credit to participants in the post-secondary education lending sector.
Subordinated Debt - Debt over which senior debt has priority. In the event of a bankruptcy, subordinated debt holders receive payment only after senior debt holders are paid in full.
Supranationals - International development ins titutions that provide develo pment financing, advisory services, and other financial services to member count ries to promote improved living standards through sustainable local economic growth.
Tax and Revenue Anticipation Notes (TRANS)- Notes issued in anticipation of receiving tax proceeds or other revenues at a future date.
Time Certificate of Deposit- A non-negotiable certificate of deposit which cannot be sold prior to maturity.
Time Deposit - A deposit with a California bank or savings and loan association for a specific amount and
22 with a specific maturity date and interest rate. Deposits of up to $250,000 are insured by FDIC. Deposits over $100,000 are collateralized above the insurance with either government securities (at 110% of par value), first trust deeds (at 150% of par value), or letters of credit (at 105% of par value).
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
Treasury Bills- U.S. Treasury Bills which are short-term, di rect obligations of the U.S. Government issued with original maturities of 13 weeks, 26 weeks and 52 weeks; sold in minimum amounts of $10,000 in multiples of $5,000 above the minimum. Issued in book entry form only. T-bills are sold on a discount basis.
Trustee or trust company or trust department of a bank- A financial institution with trust powers which acts in a fiduciary capacity for the benefit of the bondholders in enforcing the terms of the bond contract.
Underwriter- A dealer which purchases a new issue of municipal securities for resale.
Uniform Net Capital Rule - Securities and Exchange Commission re quirement that member firms as well as nonmember broker/dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.
U.S. Government Agencies- Instruments issued by various US Government Agencies most of which are secured only by the credit worthiness of the particular agency. See Agencies
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 the benchmark for interest rates on all other securities in the U.S. The Treasury issues both discounted securities and fixed coupon notes and bonds. The income from Treasury securities is exempt from state and local, but not federal, taxes.
Treasury Bills - Securities issued at a discount with initial maturities of one year or less. The Treasury currently issues three-month and six-mont h Treasury bills at regular weekly auctions. It also issues very short-term “cash management” bills as needed to smooth out cash flows.
Treasury Notes - Intermediate-term coupon-bearing securities with initial maturities of one year to ten years.
Treasury Bond - Long-term coupon-bearing securities with initial maturities of ten years or longerDebt obligations of the United States Government sold by the Treasury Department in the forms of Bills, Notes, and Bonds. Bills are short-term obligations that mature in 1 year or less and are sold on the basis of a rate of discount. Notes are obligations which mature between 1 year and 10 years. Bonds are long-term obligations which generally mature in 10 years or more.
Unrealized Gain (or Loss) - Gain or loss that has not become actual. It becomes a realized gain (or loss) when the security in which there is a gain or loss is actually sold. See REALIZED GAIN (OR LOSS).
23 Volatility - Characteristic of a security, commodity or market to rise or fall sharply in price within a short-term period.
World Bank Group - The World Bank Group is an international anti-poverty institution offering loans, advice and customer resources to more than 100 developing countries. It was established in 1944. The U.S. is a member of the World Bank
Weighted Average Maturity (WAM)- The average maturity of all the securities that comprise a portfolio that is typically expressed in days or years.
Weighted Average Yield at the End of Period - The summation of each investment’s period-end scheduled book value multiplied by its ending sub-period yield and divided by the total scheduled book value. Investments maturing on or before the end date of the report period will not affect the weighted average yield.
When Issued (WI) - Short form of “when, as, and if issued.” WI refers to a transaction made conditionally because a security, although authorized, has not yet been issued with the exception of new Treasury, Agency, and Corporate issuances to settle within 21 days.
Yield- The rate of annual income return on an investment, expressed as a percentage. It is obtained by dividing the current dollar income by the current market price of the security.
Yield Curve- A graphic representation that shows the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity.
Yield to Maturity- The rate of income return on an investment, minus any premium or plus any discount, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond, expressed as a percentage.
Yield Curve- A graphic representation that shows the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity.
1 CITY OF MILPITAS
INVESTMENT POLICY-Fiscal Year 2025-26
PURPOSE
The purpose of this Policy is to establish overall guidelines for the management and investment of the City of Milpitas (the City) unexpended funds under authority granted by the City Council. This Policy is in compliance with the provisions of the California Government Code, Sections 16340, 16429.1- 16429.4, and 53600-53686, the authority governing investments for municipal governments.
INVESTMENT OBJECTIVES
The primary objectives of this Investment Policy, in order of priority, are safety, liquidity, and return:
1) Safety - Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. This objective shall be accomplished by mitigating credit risk and market risk. 2) Liquidity - The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This objective shall be accomplished by structuring the portfolio so that securities mature concurrently with anticipated needs. The portfolio shall consist largely of securities with active secondary or resale market. Furthermore, a portion of the portfolio may be placed in money market funds or Local Agency Investment Fund (LAIF) which offer same day liquidity for short term investment.
3) Return - The investment portfolio is designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into consideration the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Nevertheless, investment performance shall be monitored and evaluated by the City Treasurer 1 by comparison with other investment portfolio benchmarks.
Additionally, investments are to be made that will bear in mind the responsibility of City government to its residents. The following investment considerations, which enhance the quality of life, will be adhered to:
• Divestment From Publicly-Traded Fossil Fuel Companies - The City of Milpitas has a responsibility to protect the lives and livelihoods of its inhabitants from the threat of climate change. The City believes that its investments should support a future where all residents can live healthy lives without the negative impacts of a warming environment. For the purposes of
1 City Treasurer – Pursuant to section VI-1-3.04 of the Milpitas Municipal Code the City Manager is empowered to appoint the City Treasurer. The City Manager has appointed the Finance Director as the City Treasurer.
POLICY OVERVIEW
2 the Investment Policy, a "fossil fuel company" shall be defined as any of the two hundred publicly-traded companies with the largest coal, oil and gas reserves as measured by the gigatons of carbon dioxide that would be emitted if those reserves were extracted and burned, as listed in the Carbon Tracker Initiative's "Unburnable Carbon" report. Staff responsible for managing the City's investment portfolio are directed to divest all City investment funds held in fossil fuel companies once they reach their maturities and are prohibited from making any new investments in such companies.
SCOPE
The Investment Policy applies to all financial assets of the City of Milpitas as accounted for in the Annual Comprehensive Financial Report (ACFR), including but not limited to the funds listed below:
• General Fund
• Special Revenue Funds
• Capital Projects Funds
• Debt Service Fund
• Enterprise Funds
• Internal Service Fund
• Trust and Agency Funds
• Any new fund created by the City Council unless specifically exempted with the exception of the following:
1) The City's Deferred Compensation Plan is excluded because it is managed by a third- party administrator and invested by individual plan participants. 2) Proceeds of debt issuance shall be invested in accordance with the investment objectives of this Policy. However, such proceeds are generally invested in accordance with permitted investment provisions of their specific bond indentures. If the City Treasurer determines that the matching of bond reserve fund with the maturity schedule of an individual bond issue is prudent, the Investment Policy authorizes extending beyond the five-year maturity limitation as outlined in this document. 3) City of Milpitas Section 115 Pension Trust was created and authorized by the City Council on May 18, 2021 (Resolution No. 9071) with investments managed by an Investment Advisor under the delegated authority from and direction provided by the City of Milpitas Section 115 Pension Trust Committee pursuant to an investment policy and guidelines developed by the Committee.
STANDARDS OF CARE
1) Prudence - Pursuant to California Government Code, Section 53600.3, all persons authorized to make investment decisions on behalf of the City 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, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the Agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and
3 with like aims, to safeguard the principal and maintain the liquidity needs of the Agency.
Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law.” The City Treasurer and other individuals assigned to manage the investment portfolio, acting within the intent and scope of the investment policy and other written procedures and exercising due diligence, shall be relieved of personal responsibility and liability for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments. 2) Ethics and Conflict of Interest - Officers and employees (City Investment Officials) involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program or could impair their ability to make impartial investment decisions. City Investment Officials shall avoid all conflicts of interest or appearance of conflicts of interest when performing duties in furtherance of this investment program. The Director of Finance, acting as the City Treasurer shall immediately disclose any financial interest which is subject to disclosure under the California Political Reform Act or would constitute a conflict of interest under Government Code Section 1090 to the City Manager and the City Attorney. All other City Investment Officials shall immediately disclose any financial interest which is subject to disclosure under the California Political Reform Act or would constitute a conflict of interest under Government Code Section 1090 to the Director of Finance/City Treasurer who will in turn immediately notify the City Manager and City Attorney. Additionally, City Investment Officials shall comply with the City Code of Ethics, conflict of interest requirements under state law and the disclosure requirements of the Political Reform Act. .
3) Delegation of Authority - Authority to manage the investment program is derived from California Government Code, Sections 41006 and 53600 et seq and granted to the City Treasurer by Section VI- 1-3.04 of the City of Milpitas Municipal Code. Under the oversight of the City Treasurer, responsibility for the operation of the investment program may be delegated to the Finance Administration staff, who shall act in accordance with established written procedures and internal controls consistent with the Investment Policy. The City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of the subordinate staff members. The system of internal controls includes separation of duties, custodial safekeeping, avoidance of physical delivery securities, development of wire transfer agreement, and clear delegation of authority to subordinate staff members. The City 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’s investment portfolio in a manner consistent with the City’s objectives. External investment advisers may be granted discretion to purchase and sell investment securities in accordance with this Investment Policy. The City’s overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that 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.
INVESTMENT PARAMETERS
INVESTMENT GUIDELINES
4 1) Maximum Maturities - To the extent possible, the City shall attempt to match its investments with anticipated cash flow requirements. The City will not directly invest in securities maturing more than five (5) years from the date of trade settlement unless otherwise approved by the City Council pursuant to California Government Code Section 53601. Effective [XXX] and in accordance with Resolution [XXX], the City may invest in U.S. Treasury obligations, federal agency/GSE securities, and municipal debt with maturities up to five (5) years. Reserve funds established by the issuance of bonds and other funds with longer-term investment horizons may be invested in securities exceeding five years if the maturity of such investments are made to coincide with the expected use of funds.
Competitive Bidding - It is the policy of the City to require that, where possible, all 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.
PERFORMANCE EVALUATION/BENCHMARK
• The investment portfolio shall be designed to attain a market-average rate of return throughout budgetary and economic cycles, taking into account the City’s risk constraints, the cash flow characteristics of the portfolio, and state and local laws, ordinances or resolutions that restrict investments with overall focus on the primary objectives of the Investment Policy which prioritize safety and liquidity over return.
• . Investment performance is monitored and evaluated by the City Treasurer. Investment performance statistics and activity reports are prepared on a quarterly basis for presentation to the City Manager and City Council within 45 days of the end of the quarter. • The City Treasurer shall select an appropriate, readily available index to use as a market benchmark.
The benchmark should be commensurate with the level of market risk of the portfolio, and should serve as a measure of risk, interest income, and fair value appreciation.
SAFEKEEPING OF SECURITIES
• To protect against fraud or embezzlement or losses caused by collapse of an individual securities dealer, all securities owned by the City shall be held in safekeeping by a third party bank trust department, acting as agent for the City under the teams of a custody agreement or master repurchase agreement. All trades executed by a dealer will settle delivery-versus- payment (DVP) through the City's safekeeping agent.
• Securities held in custody for the City shall be reviewed and verified quarterly by Finance staff who has not been assigned to the investment function.
INTERNAL CONTROL
The City Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City 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 the cost of a control should not exceed the benefits to be derived and that the valuation of costs and benefits requires estimates and judgments by management.
The internal controls shall address the following points:
• Control of collusion
5 • Separation of transaction authority from accounting and record keeping • Custodial safekeeping
• Avoidance of physical delivery securities
• Clear written delegation of authority to investment officials including subordinate staff members • Written confirmation of transactions for investments and wire transfers • Wire transfer agreement with the lead bank and third party custodian • Written procedures for placing investment transactions and monitoring the performance of the investment advisor(s)
REPORTING
The City Treasurer shall review and render quarterly reports to the City Manager and City Council which shall include the par and dollar amount of the investment, the classification of the investment, the percentage of the total portfolio which each type of investment represents, the name of the institution or entity, the rate of interest, the maturity date, the current market value, and the source of the market value.
• Statement that the projected cash flow is adequate to meet expected obligations over the next six months.
• A report of transactions by month.
• The weighted average maturity of the investment portfolio. • The average weighted yield to maturity of the portfolio as compared to the applicable benchmark. • Statement of compliance with the investment policy.
• The report is due within 45 days of the end of the quarter. • The City Manager may, at their discretion, require this reporting on a monthly basis based upon market conditions.
QUALIFIED BROKER/DEALERS
• The City shall transact business with financial institutions and security broker/dealers after careful review of their qualifications and creditworthiness. All dealers who desire to do business with the City shall provide the necessary information (e.g. audited financial statements, proof of state registration, proof of National Association of Securities Dealers certification, etc.) from which the City can determine their creditworthiness, the existence of any pending legal action against the firm or the individual broker as well as an understanding of the security markets that they service. The City Treasurer shall annually send a copy of the current Investment Policy to all financial institutions and broker/dealers approved to do business with the City. Confirmation of receipt of this Policy shall be considered evidence that the dealer understands the City's investment policies and intends to sell the City only appropriate investments authorized by this Investment policy. • In accordance with California Government Code Section 53601.5, Any investment authorized pursuant to Section 53601 or 53601.1, not purchased directly from the issuer, shall be purchased either from an institution licensed by the state as a broker-dealer, as defined in Section 25004 of the Corporations Code, or from a member of a federally regulated securities exchange, from a national or state-chartered bank, from a savings association or federal association (as defined by Section 5102 of the Financial Code) or from a brokerage firm designated as a primary dealer by the Federal Reserve bank.
• Selection of financial institutions and broker/dealers authorized to engage in transactions will be at the sole discretion of the City, except where the City utilizes an external investment adviser in which case the City may rely on the adviser for selection.
6 COLLATERAL REQUIREMENTS
Collateral is required for investments in non-negotiable certificates of deposit and repurchase agreements.
In order to reduce market risk, the collateral level shall be at least 102% of market value of principal and accrued interest and marked-to-market weekly. Securities acceptable as collateral shall be the direct obligations of or are fully guaranteed as to principal and interest by the United States or any agency of the United States.
The City shall require any bank or financial institution to comply with the collateralization criteria defined in California Government Code, Section 53651.
AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code, Sections 16340, 16429.1- 16429.4, and 53600-53686. Within the context of the limitations, the following investments are authorized, as further limited herein. In the event a discrepancy is found between this Policy and the Code, the more restrictive parameters will take precedence. Percentage holding limits and minimum credit quality requirements 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 to avoid incurring unreasonable and avoidable risks regarding specific security types or individual issuers. • United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no percentage limitation of the portfolio which can be invested in this category, though a five-year maturity limitation is applicable.
• Federal Agency Obligations or United States Government-Sponsored Enterprise (GSE) obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or Unites States government sponsored enterprises. There is no percentage limitation of the portfolio which can be invested in this category, although a five year maturity limitation is applicable. Additionally, no more than 30% of the portfolio may be invested in any single Agency/GSE issuer, and the maximum percent of agency callable securities in the portfolio will be 20%.
• Banker’s Acceptances- Bills of exchange or time drafts drawn on and accepted by commercial banks, otherwise known as banker's acceptances. Banker’s acceptances must be issued by institutions which have short-term debt obligations rated “A-1” or its equivalent or better by at least one nationally recognized statistical rating organization (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. Purchase of banker's acceptances may not exceed 180 days maturity or 40% of the value of the portfolio. Furthermore, no more than 5% of the value of the portfolio may be invested in the banker's acceptances of any one commercial bank.
7 • Commercial Paper of the highest letter and number rating as provided by at least one NRSRO, either:
a. Issued by general corporations organized and operating within the United States, having assets in excess of $500,000,000 and having a rating in the rating category of "A" or its equivalent or better rating on debt other than commercial paper as provided by at least one NRSRO, or b. Issued by entities organized within the United States as a special purpose corporation, trust, or limited liability company. The securities must have program-wide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond. The securities must by rated “A-1” or its equivalent or better by at least one NRSRO.
Purchases of eligible commercial paper may not exceed 270 days maturity nor represent more than 10% of the outstanding paper of the issuing corporation. Purchases of commercial paper may not exceed 25% of the value of the portfolio. No more than 5% of the portfolio may be invested in any single issuer.
• Negotiable Certificates of Deposit issued by nationally or state chartered banks, 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. Purchases of negotiable certificates of deposit may not exceed 30% of the value of the portfolio. No more than 5% of the portfolio may be invested in any single issuer. A maturity limitation of five (5) years is applicable. 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.
• Repurchase Agreements - Repurchase agreements collateralized with securities authorized under in accordance with California Government Code Section 53601(j). There are no limits on the dollar amount or percentage that the City may invest. The maturity of the repurchase agreements shall not exceed one (1) year. The market value of the securities used as collateral for the repurchase agreements shall be monitored by the investment staff weekly and shall not be allowed to fall below 102% of the value of the repurchase agreement. A Master Repurchase agreement is required between the City and the dealer for all repurchase agreements transacted.
• Time Deposits - Time deposits, non-negotiable and collateralized in accordance with the California Government Code, may be purchased through banks or savings and loan associations. A maturity limitation of five years is applicable.
• Medium-Term Corporate Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States with a maximum maturity of five (5) years may be purchased. Securities eligible for investment shall be rated in a rating category of "A" or its equivalent better by at least one NRSRO.
Purchase of medium-term notes may not exceed 30% of the value of the portfolio and no more than 5% of the value of the portfolio may be invested in notes issued by one corporation.
• Local Agency Investment Fund (LAIF) - a State of California managed investment pool may be used up to the maximum permitted in accordance with California Government Code Section 16429.1.
8 • Money Market Funds - Money Market funds invested in U.S. Government securities are permitted under this Policy and under the California Government Code Section 53601. In order to be eligible for investment under this section, an investment objective of such a fund must be the maintenance of a price per share of $1.00. Investment in such funds shall not exceed 20% of the City's total portfolio and no more than 10% of the City's total portfolio may be invested in any one money market fund. In addition, either one of the following criteria must be met:
• The fund shall have achieved a rating of "AAA" by at least two nationally recognized statistical rating organizations, or
• The fund shall have retained an advisor who is registered or exempt from registration with the Security Exchange Commission with not less than five years' experience managing money market funds with assets under management in excess of five hundred million dollars ($500,000,000).
• Municipal Securities (issued by State of California or Local Agency within California – including the State of California, any local agency within the State of California, and obligations of the City (provided that interest on such bonds is taxable at the Federal level, or if such interest is exempt from taxation for Federal income tax purposes, the purchase thereof is approved by the City Treasurer in consultation with the City Attorney, and the purchase thereof does not cause such City obligations to be defeased under the indenture, trust agreement, fiscal agent agreement or similar document authorizing their issuance), provided that:
a. 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”). b. No more than 5% of the portfolio may be invested in any single issuer. c. No more than 30% of the portfolio may be in Municipal Securities. d. The maximum maturity does not exceed five (5) years.
• Municipal Securities (Issued by other 49 States) - 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., provided that:
a. 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”). b. No more than 5% of the portfolio may be invested in any single issuer. c. No more than 30% of the portfolio may be in Municipal Securities. d. The maximum maturity does not exceed five (5) years.
• Asset-Backed, Mortgage-backed, Mortgage Passthrough Securities, and Collateralized Mortgage Obligations From Issuers Not Defined In the first two paragraphs of of the Authorized Investments Section of this Policy (U.S. Treasury obligations and Federal Agency/GSE Debt), provided that:
a. The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO. b. No more than 20% of the total portfolio may be invested in these securities. c. No more than 5% of the portfolio may be invested in any single Asset-Backed or Commercial Mortgage security issuer.
d. The maximum legal final maturity does not exceed five (5) years.
• Collateralized Bank Deposits—City’s deposits with financial institutions will be collateralized with pledged securities per California Government Code, Section 53651. There are no limits on the dollar
9 amount or percentage that the City may invest in collateralized bank deposits.
• Supranational Securities—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 must be 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 portfolio may be invested in any single issuer. The maximum maturity does not exceed five (5) years.
• Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 known as Local Government Investment Pools (LGIP) that invests in securities and obligations authorized in California Government Code 53601 subdivisions (a) to (r), inclusive, where each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority.
a) The joint powers authority issuing the shares must retain an investment adviser who is registered or exempt from registration with the Securities and Exchange Commission (SEC), has assets under management in excess of $500 million, and has at least five years of experience investing in the securities and obligations authorized by Section 53601, subdivisions (a) to (q). b) Ratings of a LGIP must be in a rating category of “AAA” or its equivalent by at least one NRSRO.
If rated by more than one organization, no rating may be lower than the category described in the preceding sentence.
c) No more than 10% of the portfolio shall be invested in any single LGIP. d) LGIP investments may not exceed 20% of the City’s portfolio in the aggregate.
INELIGIBLE INVESTMENTS AND INVESTMENT PRACTICES
Ineligible investments are those that are not described herein, including but not limited to, common stocks, reverse repurchase agreements, inverse floaters, range notes, mortgage derived interest only strips, derivatives securities, or any security that could result in zero interest accrual. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited.
Purchasing or selling securities on margin is prohibited. The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited. The purchase of foreign currency denominated securities is prohibited. The purchase of securities with a forward settlement date exceeding 45 days from the time of the investment is prohibited.
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 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. • No more than 5% of the total portfolio may be deposited with or invested in aggregate of any single issuer of the following types: Bankers Acceptances, Commercial Paper, Negotiable
10 Certificates of Deposits, and Corporate Notes.
•
• The City 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’s risk preferences.
• If a security owned by the City is downgraded to a level below the requirements of this Policy, making the security ineligible for additional purchases, the following steps will be taken:
• Any actions taken related to the downgrade by the investment manager will be communicated to the City Treasurer in a timely manner. • If a decision is made to retain the security, the credit situation will be monitored and reported to the City Council as part of the Quarterly Investment Report.
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 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 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 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, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
• The City 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 as described in the Performance Evaluation/Benchmark section of this Policy; an index selected by the City based on the City’s investment objectives, constraints and risk tolerances.
INVESTMENT POOLS/MUTUAL FUNDS
The City shall conduct a thorough investigation of any pool or mutual fund prior to making an investment, and on a continual basis thereafter. The City Treasurer shall develop a questionnaire which will answer the following general questions:
a. A description of eligible investment securities, and a written statement of investment policy and objectives.
b. A description of interest calculations and how it is distributed, and how gains and losses are treated.
c. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited.
11 d. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.
e. A schedule for receiving statements and portfolio listings. f. Are reserves, retained earnings, etc. utilized by the pool/fund? g. A fee schedule, and when and how is it assessed.
h. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
INTEREST EARNINGS
All moneys earned and collected from investments authorized in this Policy shall be allocated monthly to various fund accounts based on the cash balance in each fund as a percentage of the entire pooled portfolio.
ANNUAL POLICY APPROVAL
The City's Investment Policy shall be adopted by resolution of the City Council on an annual basis. This Investment Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends. Any amendments to the Policy shall be forwarded to City Council for approval.
GLOSSARY
Definitions of investment related terms are list in the Glossary of Terms, Exhibit A
12 Accretion - Adjustment of the difference between the price of a bond bought at an original discount and the par value of the bond
Accrued Interest- Interest earned but not yet received.
Active Deposits- Funds which are immediately required for disbursement.
Agencies - Federal agency securities and/or Government-sponsored enterprises (GSEs), also known as U.S.
Government instrumentalities. Securities issued by Government National Mortgage Association (GNMA) are considered true agency securities, backed by the full faith and credit of the U.S. Government. GSEs are financial intermediaries established by the federal government to fund loans to certain groups of borrowers, for example homeowners, farmers and students and are privately owned corporations with a public purpose.
The most common GSEs are Federal Farm Credit System Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Association, and Federal National Mortgage Association.
Amortization- An accounting practice of gradually decreasing (increasing) an asset's book value by spreading its depreciation (accretion) over a period of time.
Annual Comprehensive Financial Report (ACFR): The official annual financial report for the City.
It includes combined statements and basic financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles (GAAP)
Appreciation - Increase in the value of an asset such as a stock, bond, commodity or real estate
Arbitrage- Transactions by which securities are bought and sold in different markets at the same time for the sake of the profit arising from a yield difference in the two markets.
Asked Price- The price a broker dealer offers to sell securities.
Asset-Backed - A type of security that is secured by receivables, such as credit card and auto loans. These securities typically pay principal and interest monthly.
Bankers’ Acceptance (BA) - A high quality, short term money market instrument used to finance international trade. There has never been an instance of a failure to pay a banker's acceptance in full at its maturity date.
Basis Point- One basis point is one hundredth of one percent (.01).
Benchmark - A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investment
Bid Price- The price a broker dealer offers to purchase securities.
EXHIBIT A
GLOSSARY OF TERMS
13 Bond- A financial obligation for which the issuer promises to pay the bondholder a specified stream of future cash flows, including periodic interest payments and a principal repayment.
Book 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, and includes interest earnings, and realized gains and losses on the portfolio.
Book Value- The value at which a debt security is shown on the holder's balance sheet. Book value is acquisition cost less amortization of premium or accretion of discount.
Broker- An Agent that acts as an intermediary between a buyer and a seller for a commission, and does not trade for their own risk and account or inventory.
Callable Securities - A security that can be redeemed by the issuer before the scheduled maturity date.
Cash Flow - An analysis of all changes that affect the cash account during a specified period
Certificate of Deposit (CD) - A deposit insured up to $250,000 by the FDIC at a set rate for a specified period of time.
City Treasurer – Pursuant to section VI-1-3.04 of the Milpitas Municipal Code the City Manager is empowered to appoint the City Treasurer. The City Manager has appointed the Finance Director as the City Treasurer.
Collateral- Securities, evidence of deposit or pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposit of public moneys.
Collateralized Mortgage Obligation (CMO) - A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus.
Collateralized Securities - Debt obligations that represent claims to the cash flows from pools of loan receivables, most commonly on residential property and extending to commercial property, automobiles, student borrowings, equipment financings and more. Loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi- governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization and such issuances represent a vast portion of the bond market Commercial Mortgage-Backed Security (CMBS): A type of fixed income investment product that is backed by mortgages on commercial properties rather than residential real estate. CMBS can provide liquidity to real estate investors and commercial lenders alike. There are two types of CMBS, agency CMBS, which consist of loans pooled by governmentsponsored entities (GSEs) including Fannie Mae and Freddie Mac, and non-agency (private) CMBS, which consist of loans pooled and securitized by private lenders Commercial Paper- Short-term, negotiable unsecured promissory notes of corporations.
Commercial Receivables - Business debt owed to a creditor which may be used as collateral for asset
14 backed securities. These receivables include equipment leases, building leases, and other business loans.
Conduit Financing - A financing in which a governmental agency issues debt and the proceeds of the issue are loaned to a nongovernmental borrower who then applies the proceeds for a project financing or (if permitted by federal tax laws for a qualified 501(c)(3) bond) for working capital purposes.
Consumer Receivables - Consumer debt owed to a creditor which may be used as collateral for asset backed securities. These receivables include credit card, auto, and home equity loans.
Corporate Note - Debt instrument issued by a private corporation.
Coupon- The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value.
Credit Analysis - An analysis of the economic and financial conditions to determine creditworthiness or the ability to meet debt obligations.
Credit Ratings - A grade given to a debt instrument that indicates its credit quality. Private independent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations of the issuer's financial strength, or its ability to pay principal and interest in a timely fashion. Investment grade credit ratings for long-term debt are as follows:
Moody’s Standard & Poor’s Fitch
Aaa AAA AAA
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-
Credit Risk The risk that an obligation will not be paid, and a loss will result due to a failure of the issuer of a security.
CUSIP - Stands for Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most securities, including: stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. The CUSIP system—owned by the American Bankers Association and operated by Standard & Poor’s—facilitates the clearing and settlement process of securities. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security
Current Yield- The interest paid on an investment expressed as a percentage of the current price of the
15 security.
Custodian- A bank or other financial institution that keeps custody of stock certificates and other assets.
Dealer - A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his/her own risk and account or inventory.
Debentures - A bond secured only by the general credit of the issuers.
Defeased Bond Issues- Issues that have sufficient money to retire outstanding debt when due so that the agency is released from the contracts and covenants in the bond document.
Delivery verses Payment (DVP)- Delivery of securities with a simultaneous exchange of money for the securities.
Derivative- Securities that are based on, or derived from, some underlying asset, reference date, or index.
Direct Issuer - Issuer markets its own paper directly to the investor without use of an intermediary.
Discount- The difference between the cost of a security and its value at maturity when quoted at lower than face value.
Diversification- Dividing investment funds among a variety of securities offering independent returns and risk profiles.
Duration- A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based on three variables:
term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates.
Earned Income Yield This Period (annualized) - The Total net Earnings this period divided by Average Daily Portfolio Balance and the number of days in the period, multiplied by 365 (or 360 depending on the profile setting), and then multiplied by 100.
Face Value - The principal amount owed on a debt instrument. It is the amount on which interest is computed and represents the amount that the issuer promises to pay at maturity.
Fair Value - The amount at which a security could be exchanged between willing parties, other than in a forced or liquidation sale. If a market price is available, the fair value is equal to the market value.
Fannie Mae- Trade name for the Federal National Mortgage Association (FNMA), a U.S. sponsored corporation.
Farmer Mac - Trade name for the Federal Agricultural Mortgage Corporation, a U.S. government sponsored enterprise.
Federal Agricultural Mortgage Corporation - A U.S. government sponsored enterprise that establishes a secondary market for agriculture mortgages and rural utility loans. Its securities do not carry direct U.S. government guarantees.
16 Federal Deposit Insurance Corporation (FDIC) A federal agency that provides insurance on bank deposits, guaranteeing deposits to a set limit per depositor, per insured bank for each account ownership category, currently $250,000..
Federal Farm Credit Bank (FFCB) - Government-sponsored enterprise that consolidates the financing activities of the Federal Land Banks, the Federal Intermediate Credit Banks and the Banks for Cooperatives. Its securities do not carry direct U.S. government guarantees.
Federal Funds Rate - The interest rate at which depository institutions lend to one another on an overnight basis. This rate is set by the Federal Reserve through open market operations. It influences the short-term borrowing rate in the market and thus the shape of the overall yield curve and by extension, the US economy.
Federal Government Agency Securities - Federal Agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
Federal Home Loan Banks (FHLB) - Government sponsored enterprise (currently made up of 12 regional banks) that regulates, lends funds, and provides correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. Although the banks operate under federal charter with government supervision, the securities are not guaranteed by the U. S.
Government.
Federal Home Loan Mortgage Corporation (FHLMC) - Government sponsored enterprise that helps maintain the availability of mortgage credit for residential housing. FHLMC is a private stockholder- owned corporation. FHLMC finances these operations by marketing guaranteed mortgage certificates and mortgage participation certificates. Its discount notes and bonds do not carry direct U.S. government guarantees.
Federal National Mortgage Association (FNMA) - Government sponsored enterprise that is the largest single provider of residential mortgage funds in the United States. FNMA is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA securities do not carry direct U.S. Government guarantees.
Federal Open Market Committee (FOMC) - A committee of the Federal Reserve Board, which establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves.
Federal Reserve System - The central bank of the U.S. which consists of a seven member Board of Governors, the Federal Open Market Committee (FOMC), 12 regional banks and approximately 5,700 commercial banks that are members.
Fed Wire- A wire transmission service established by the Federal Reserve Bank to facilitate the transfer of funds through debits and credits of funds between participants within the Fed system.
Freddie Mac- Trade name for the Federal Home Loan Mortgage Corporation (FHLMC), a U.S. sponsored
17 corporation.
Ginnie Mae- Trade name for the Government National Mortgage Association (GNMA), a direct obligation bearing the full faith and credit of the U.S. Government.
Government Accounting Standards Board (GASB)- A standard-setting body, associated with the Financial Accounting Foundation, which prescribes standard accounting practices for governmental units.
Government Sponsored Enterprise (GSE) – Quasi-governmental entity established to enhance the flow of credit to specific sectors of the U.S. economy. Created by acts of Congress, these agencies – although privately held – provide public financial services. Examples include Freddie Mac, Fannie Mae and Farmer Mac.
Guaranteed Investment Contracts (GICS)- An agreement acknowledging receipt of funds, for deposit, specifying terms for withdrawal, and guaranteeing a rate of interest to be paid.
Inactive Deposits- Funds not immediately needed for disbursement.
Inter-American Development Bank - Established in 1959, IADB supports Latin American and Caribbean economic development, social development, and regional integration by lending to governments and government agencies. The U.S. is a member of IADB.
Interest Rate- The annual yield earned on an investment, expressed as a percentage.
Interest Rate Risk - The risk of gain or loss in market values of securities due to changes in interest-rate levels. For example, rising interest rates will cause the market value of portfolio securities to decline.
International Bank for Reconstruction and Development (IBRD) - IBRD is one of the five member institutions within the World Bank Group. It issues World Bank bonds and provides commercial-grade or concessional financing to middle to low-income sovereign states. The U.S. is a member of IBRD.
International Finance Corporation (IFC) - IFC is a member of the World Bank Group. It is a global development institution that invests strictly in private sectors to reduce poverty and promote development in developing countries. The U.S. is a member of IFC.
Investment Agreements- An agreement with a financial institution to borrow public funds subject to certain negotiated terms and conditions concerning collateral, liquidity and interest rates.
Investment Grade (Long Term Ratings) - An evaluation from a rating agency that a specific issuer or issuance represents a low risk of default. Ratings below investment grade are considered high yield and represent a high risk of non-payment. The lowest investment grade ratings are Baa3 (Moody’s), BBB- (S&P), and BBB- (Fitch).
Investment Portfolio - A collection of securities held by a bank, individual, institution or government agency for investment purposes.
Liquidity- An asset that can easily and rapidly be converted into cash without significant loss of value.
Local Agency Investment Fund (LAIF)- A pooled investment vehicle for local agencies in California
18 sponsored by the State of California and administered by the State Treasurer. Local government units, with consent of the governing body of that agency, may voluntarily deposit surplus funds for the purpose of investment. Interest earned is distributed by the State Controller to the participating governmental agencies on a quarterly basis.
Local Government Investment Pool (LGIP)- A pooled investment vehicle sponsored by a local agency or a group of local agencies for use by other local agencies.
Mark to Market - Current value of securities at today's market price.
Market Risk- Defined as market value fluctuations due to overall changes in market conditions or interest rates.
Market Value- The price at which a security is trading and could presumably be purchased or sold. See Fair Value
Master Repurchase Agreement - A written contract covering all future transactions between the parties to repurchase agreements and reverse repurchase agreements that establish each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.
Maturity- The date upon which the principal or stated value of an investment becomes due and payable.
Medium-Term Notes (MTNs) - Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts either on a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.
Modified Duration- A measure of exposure to market risk of a security or a portfolio. It is the percent change in the price of a security (portfolio) or a 100 basis point change in the security's (portfolio's) yield.
Money Market - The market in which short term debt instruments (Treasury Bills, Discount Notes, Commercial Paper, Banker’s Acceptances and Negotiable Certificates of Deposit) are issued and traded.
Mortgage-Backed Securities – A type of security that is secured by a mortgage or collection of mortgages.
These securities typically pay principal and interest monthly.
Municipal Securities - Debt obligations issued by states and local governments and their agencies, including cities, counties, government retirement plans, school districts, state universities, sewer districts, municipally owned utilities and authorities running bridges, airports, and other transportation facilities.
Mutual Funds- An investment company that pools money and can invest in a variety of securities, including fixed-income securities and money market instruments.
Nationally Recognized Statistical Rating Organization (NRSRO) - A credit rating agency that assesses the credit worthiness of an obligor as an entity or with respect to specific securities or money market instruments. US Securities and Exchange Commission establishes a registration and oversight program for NRSROs.
Negotiable Certificate of Deposit- A large denomination certificate of deposit which can be sold in the open market prior to maturity.
19 Net Portfolio Yield - Calculation in which the 365-day basis equals the annualized percentage of the sum of all net earnings during the period divided by the sum of all average daily portfolio Balances.
New Issue- Term used when a security is originally "brought" to market.
Note- A written promise to pay a specified amount to a certain entity on demand or on a specified date.
Open Market Operations - Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit: Sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool.
Par Value- The amount of principal which must be paid at maturity. Also referred to as the face amount of a bond, normally quoted in S1,000 increments per bond.Perfected Delivery- Refers to an investment where the actual security or collateral is held by an independent third party representing the purchasing entity.
Portfolio- Combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset. The purpose of a portfolio is to reduce risk by diversification.
Premium - The difference between the par value of a bond and the cost of the bond, when the cost is above par.
Primary Dealer- A group of government securities dealers that submit daily reports of market activity, positions and monthly financial statements to the the Federal Reserve Bank of New York and are subject to its informal oversight. These dealers are authorized to buy and sell government securities in direct dealing with the Federal Reserve Bank of New York in its execution of market operations to carry out U.S. monetary policy. Such dealers must be qualified in terms of reputation, capacity, and adequacy of staff and facilities.
Prime (Short Term Rating) - High quality ratings for short term debt such as commercial paper. Prime ratings are as follows: P1 (Moody’s), A1 (S&P), and F1 (Fitch).
Principal- The face value or par value of a debt instrument, or the amount of capital invested in a given security.
Prospectus- A legal document that must be provided to any prospective purchaser of a new securities offering registered with the Securities and Exchange Commission (SEC) that typically includes information on the issuer, the issuer's business, the proposed use of proceeds, the experience of the issuer's management, and certain certified financial statements (also known as an "official statement")
Prudent Investor Standard- A standard of conduct where a person acts with care, skill, prudence, and diligence when investing, reinvesting, purchasing, acquiring, exchanging, selling and managing funds.
The test of whether the standard is being met is if a prudent person acting in a similar situation would engage in similar conduct to ensure that investments safeguard principal and maintain liquidity.
Public Deposits - A bank that is qualified under California law to accept a deposit of public funds.
20 Purchase Date- The date in which a security is purchased for settlement on that or a later date. Also known as the “trade date”.
Rate of Return- (1) The yield obtainable on a security based on its purchase price or its current market price. (2) Income earned on an investment, expressed as a percentage of the cost of the investment. ( This may be the amortized yield to maturity on a bond or the current income return.
Realized Gain (or Loss) - Gain or loss resulting from the sale or disposal of a security.
Regional Dealer - A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities and that is not a primary dealer
Repurchase Agreement (RP or REPO) - A transaction in which a counterparty or the holder of securities (e.g. investment dealer) sells these securities to an investor (e.g. the City) with a simultaneous agreement to repurchase them at a fixed date. The security "buyer" (e.g. the City) in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate the “buyer” for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves.
Reverse Repurchase Agreement (REVERSE REPO) - The opposite of a repurchase agreement. A reverse Repo is a transaction in which the City sells securities to a counterparty (e.g. investment dealer) and agrees to repurchase the securities from the counterparty at a fixed date. The counterparty in effect lends the seller (e.g. the City) money for the period of the agreement with terms of the agreement structured to compensate the buyer.
Risk- Degree of uncertainty of return on an asset.
Rule G-37 of the Municipal Securities Rulemaking Board- Federal regulations to sever any connection between the making of political contributions and the awarding of municipal securities business.
Safekeeping Service - A service which banks offer to clients for a fee, where physical securities are held in the bank’s vault for protection and book-entry securities are on record with the Federal Reserve Bank or Depository Trust Company in the bank’s name for the benefit of the client. As agent for the client, the safekeeping bank settles securities transactions, collects coupon payments, and redeems securities at maturity or on call date, if called.
Sallie Mae- Trade name for the Student Loan Marketing Association (SLMA), a U.S. sponsored corporation.
Secondary Market- A market made for the purchase and sale of outstanding issues following the initial distribution.
Securities - Investment instruments such as notes, bonds, stocks, money market instruments and other instruments of indebtedness or equity.
Securities and Exchange Commission (SEC)- The federal agency responsible for supervising and regulating the securities industry.
Settlement Date- The date on which a trade is cleared by delivery of securities against funds.
21 Spread - The difference between two figures or percentages. It may be the difference between the bid (price at which a prospective buyer offers to pay) and asked (price at which an owner offers to sell) prices of a quote, or between the amount paid when bought and the amount received when sold.
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.
Student Loan Market Association (SLMA) - Government-sponsored enterprise that purchases student loans from originating financial institutions and provides financing to state student loan agencies. It provides a national secondary market for federally sponsored student loans and credit to participants in the post-secondary education lending sector.
Subordinated Debt - Debt over which senior debt has priority. In the event of a bankruptcy, subordinated debt holders receive payment only after senior debt holders are paid in full.
Supranationals - International development institutions that provide development financing, advisory services, and other financial services to member countries to promote improved living standards through sustainable local economic growth.
Tax and Revenue Anticipation Notes (TRANS)- Notes issued in anticipation of receiving tax proceeds or other revenues at a future date.
Time Certificate of Deposit- A non-negotiable certificate of deposit which cannot be sold prior to maturity.
Time Deposit - A deposit with a California bank or savings and loan association for a specific amount and with a specific maturity date and interest rate. Deposits of up to $250,000 are insured by FDIC. Deposits over $100,000 are collateralized above the insurance with either government securities (at 110% of par value), first trust deeds (at 150% of par value), or letters of credit (at 105% of par value).
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
Treasury Bills- U.S. Treasury Bills which are short-term, direct obligations of the U.S. Government issued with original maturities of 13 weeks, 26 weeks and 52 weeks; sold in minimum amounts of $10,000 in multiples of $5,000 above the minimum. Issued in book entry form only. T-bills are sold on a discount basis.
Trustee or trust company or trust department of a bank- A financial institution with trust powers which acts in a fiduciary capacity for the benefit of the bondholders in enforcing the terms of the bond contract.
Underwriter- A dealer which purchases a new issue of municipal securities for resale.
22 Uniform Net Capital Rule - Securities and Exchange Commission requirement that member firms as well as nonmember broker/dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.
U.S. Government Agencies- Instruments issued by various US Government Agencies most of which are secured only by the credit worthiness of the particular agency. See Agencies
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 the benchmark for interest rates on all other securities in the U.S. The Treasury issues both discounted securities and fixed coupon notes and bonds. The income from Treasury securities is exempt from state and local, but not federal, taxes.
Treasury Bills - Securities issued at a discount with initial maturities of one year or less. The Treasury currently issues three-month and six-month Treasury bills at regular weekly auctions. It also issues very short-term “cash management” bills as needed to smooth out cash flows.
Treasury Notes - Intermediate-term coupon-bearing securities with initial maturities of one year to ten years.
Treasury Bond - Long-term coupon-bearing securities with initial maturities of ten years or longer Unrealized Gain (or Loss) - Gain or loss that has not become actual. It becomes a realized gain (or loss) when the security in which there is a gain or loss is actually sold. See REALIZED GAIN (OR LOSS).
Volatility - Characteristic of a security, commodity or market to rise or fall sharply in price within a short-term period.
World Bank Group - The World Bank Group is an international anti-poverty institution offering loans, advice and customer resources to more than 100 developing countries. It was established in 1944. The U.S. is a member of the World Bank
Weighted Average Maturity (WAM)- The average maturity of all the securities that comprise a portfolio that is typically expressed in days or years.
Weighted Average Yield at the End of Period - The summation of each investment’s period-end scheduled book value multiplied by its ending sub-period yield and divided by the total scheduled book value. Investments maturing on or before the end date of the report period will not affect the weighted average yield.
When Issued (WI) - Short form of “when, as, and if issued.” WI refers to a transaction made conditionally because a security, although authorized, has not yet been issued with the exception of new Treasury, Agency, and Corporate issuances to settle within 21 days.
Yield- The rate of annual income return on an investment, expressed as a percentage. It is obtained by
23 dividing the current dollar income by the current market price of the security.
Yield Curve- A graphic representation that shows the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity.
Yield to Maturity- The rate of income return on an investment, minus any premium or plus any discount, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond, expressed as a percentage.