CITY OF PACIFICA ADMINISTRATIVE
POLICY
No.
39 INVESTMENT POLICY
DATE ISSUED:
02/89; 11/94; 12/96; 08/17,
10/18; 06/24; 06/26
I. PURPOSE
The purpose of this Investment Policy for the City of Pacifica (the City) is to provide guidance and direction for the prudent investment of City funds and to foster the creation of a systematic and controlled investment process. The ultimate goal is to maximize the efficiency of the City’s cash management system and to enhance the economic status of the City while protecting its pooled investment cash.
II. POLICY
It is the policy of the City of Pacifica to invest public funds in a manner which will provide maximum security, meet the daily cash flow demands of the City and provide reasonable investment return while conforming to all California laws and local statutes governing the investment of public funds. It is also the policy of the City that all funds not required for immediate budgeted expenditures be invested in compliance with this Investment Policy.
III. SCOPE
This Investment Policy applies to all short-term operating funds and investment activities under the direct authority of the City. These funds are described in the most current annual financial reportAnnual Comprehensive Financial Report (ACFR) and include: General Fund, Capital Projects Fund, Special Revenue Funds, Enterprise Funds, Internal Service Funds and Fiduciary Funds, and any new fund created by the City Council unless specifically exempted. This investment policy applies to all transactions involving the financial assets and related activities of the foregoing funds.
IV. PRUDENCE
The standard of prudence to be used for managing the City’s investment program is California Government Code Section 53600.3, the prudent investor standard which
states, “When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.”
The City Manager and other individuals assigned to manage the investment portfolio, acting in accordance with written procedures and this Investment Policy 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 fashion and appropriate action is taken to control adverse developments.
V. OBJECTIVES
The City’s funds shall be invested in accordance with all applicable City policies and codes, state and local statutes and federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order:
A. Safety: Safety of principal is the foremost objective of the investment program.
Investments of the City shall be undertaken in a manner that seeks to ensure that capital losses are avoided, whether from securities default, broker-dealer default, or erosion of market value. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the City's risk preferences. The City shall seek to preserve principal by mitigating the two types of risk: credit risk and market risk. Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing in issuers that carry the direct or implied backing of the U.S. Government (including, but not limited to, the U.S. Treasury, U.S. Government Agencies, and federally insured banks). The portfolio will be diversified so that the failure of any one issuer does not unduly harm the City’s capital base and cash flow.
Market risk, (aka “interest rate risk”) defined as market value fluctuations due to overall changes in the general level of interest rates shall be mitigated by limiting the maximum maturity of any one security to five years, structuring the portfolio based on historic and current cash flow analysis eliminating the need to sell securities prior to maturity and avoiding the purchase of long-term securities for the sole purpose of short-term speculation. Moreover, it is the City’s full intent, at the time of purchase, to hold all investments until maturity to ensure the return of all invested principal dollars. Limited
exceptions will be granted for security swaps that would improve the portfolio’s yield and/or credit quality.
B. Liquidity: The City’s investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated.
C. Return on Investment: The City’s investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio.
VI. DELEGATION OF AUTHORITY
Section 53636 of the Government Code of the State of California provides that money on deposit is deemed to be in the treasury of the City. The responsibility for conducting the City's investment program resides with the City Manager or her/his designee. Daily management responsibility of the investment program may be delegated to the Finance and Administrative Services Director, who shall establish procedures for the operation consistent with this investment policy.
VII. PUBLIC TRUST
All participants in the investment process shall act reasonably as custodians of the public trust. Investment officials shall recognize that the investment portfolio is subject to public scrutiny and evaluation. The overall program shall be designed and managed with a degree of professionalism that is worthy of the public trust. Nevertheless, in a diversified portfolio, it must be recognized that occasional measured losses are inevitable, and must be considered within the context of the overall portfolio investment return, provided that adequate diversification has been implemented.
Investments are to be made that will bear in mind the responsibility of city government to its citizens. Investments that encourage the betterment of the human condition will be sought. Alternative investments that enhance the quality of life will be given full consideration. Investments that serve to only enrich a few to the detriment of the people will be strictly avoided.
VIII. ETHICS AND CONFLICT OF INTEREST
All personnel responsible for authorizing the purchase of investments shall refrain from personal business activities that could conflict with proper execution of the investment program and/or which could impair their ability to make impartial investment decisions.
The City Manager and other key Finance personnel shall file a Statement of Economic Interests each year as required by California Government Code Section 87203 and
regulations of the Fair Political Practices Commission. Furthermore, Investment officials must refrain from undertaking personal investment transactions with the same individual(s) employed by the financial institution with whom business is conducted on behalf of the City.
[Any securities broker or dealer who has made a political contribution to any member of the City Council, or any candidate for those offices, in an amount that exceeds the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board (MSRB) within any consecutive 48-month period shall not engage in any securities transactions (purchase, sale and/or exchange) with the City.]
IX. QUALIFIED MONEY MANAGERS, FINANCIAL DEALERS AND INSTITUTIONS The City may contract with professional money managers to assist in the management of all or part of its investment portfolio in compliance with the guidelines outlined in this Investment Policy. If City staff directly invests in individual securities, then the City will maintain a list of financial institutions and primary dealers authorized to provide investment services. Professional money managers working with the City may maintain their own list. Primary dealers include those that regularly report to the Federal Reserve Bank and should qualify under Securities and Exchange Commission Rule 15c3-1 (uniform net capital rule).
All financial institutions, dealers and cash managers who desire to become qualified bidders for investment transactions must supply the City with the following: audited financial statements, proof of Financial Industry Regulatory Authority (FINRA) certification when applicable, trading resolution, proof of State of California registration when applicable, completed questionnaire and certification of having read the City of Pacifica's investment policy and depository contracts. A current audited financial statement is required to be on file for each financial institution and dealer. The City Manager may conduct an annual review of the financial condition and registrations of qualified dealers & institutions. Best practices include the following: 1) A determination that all approved broker/dealer firms, and individuals covering the public agency, are reputable and trustworthy; 2) the broker/dealer firms should have the ability to meet all their financial obligations in dealing with the Public Agency; 3) the firms, and individuals covering the agency, should be knowledgeable and experienced in Public Agency investing and the investment products involved; 4) no public deposit shall be made except in a qualified public depository as established by the established state laws.
The City shall send a copy of the current investment policy to all brokers/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 Policy and intends to sell the City only appropriate investments authorized by this Investment Policy.
X. AUTHORIZED INVESTMENTS
All investments and deposits of City funds shall be made in accordance with California Government Code Sections 16429.1, 53600-53609 and 53630-53686. Within the context of code limitations, the following investments and their respective additional limitations are authorized:
Limitations identified in the following sections shall be adhered to and the percentage limits and credit criteria shall be measured against portfolio value on the date the investment is purchased. In the event of a credit downgrade below the minimum acceptable credit rating, the City shall require investment advisors, engaged in the investing of City funds, to notify City staff of the downgrade, and provide a plan of action to address the downgrade:
A. Local Agency Obligations – 1) Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency. 2) Bonds, notes, warrants, or other evidence of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. “Local agency” means county, city, city and county, including a chartered city or county, school district, community college district, public district, county board of education, county superintendent of schools, or any public or municipal corporation.
B. United States Treasury bills, bonds and notes or those for which the full faith and credit of the United States are pledged for the payment of principal and interest. There is no limit on the percentage of U.S. Treasury obligations that may be held in the City's portfolio.
C. State Obligations – 1) Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state. 2) 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, including bonds payable solely out of the revenues from a revenueproducing 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.
D. Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments (or Agencies), including those issued by or fully
guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises with maturities not exceeding five years from the date of trade settlement.
E. Banker’s Acceptances with a maturity not exceeding 180 days from the date of trade settlement, drawn on or accepted by a FDIC insured commercial bank with combined capital and surplus of at least $250 million, rated at least A-1 or the equivalent by a nationally recognized statistical rating organization (NRSRO) at the time of purchase and whose senior long-term debt is rated at least A or the equivalent by a NRSRO at the time of purchase. No more than 5% of the City’s total portfolio shall be invested in banker’s acceptances of any one issuer, and the aggregate investment in banker’s acceptances shall not exceed 25% of the City’s total portfolio.
F. Commercial Paper of “prime” quality of the highest ranking or the highest letter and numerical rating as provided for by a nationally recognized statistical rating organization. Purchases must be limited to corporations organized and operating within the United States, having assets in excess of $500 million and having an “A” or higher rating for the issuer’s debentures, other commercial paper (as provided by Moody’s or Standard and Poor’s rating services). No more than 5% of the City’s total portfolio may be invested in the commercial paper of any one issuerNo more than 10% of the City’s total investment assets may be invested in the commercial paper and medium-term notes of any one issuer, and the aggregate investment in commercial paper shall not exceed 25% of the City’s total portfolio. The maximum maturity of commercial paper cannot exceed 270397 days from the date of trade settlement.
G. Shares of beneficial interest issued by diversified management companies, that are money market funds or money market mutual funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, et seq.). To be eligible for investment pursuant to this subdivision these companies shall either: (1) attain the highest ranking or the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services or (2) retain an investment advisor registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of $500 million. No more than 20% of the City’s portfolio shall be invested in money market funds, and no more than 10% of the City’s funds may be invested in shares of any one mutual fund (this 10% limitation does not apply to money market mutual funds), consistent with California Government Code Section 53601(l). Only funds holding U.S. Treasury or Government agency obligations can be used.
H. State of California Local Agency Investment Fund. State of California’s Local Agency Investment Fund (LAIF), pursuant to California Government Code Section 16429.1.
There is no limit on the percentage of LAIF that may be held in the City's portfolio.
LAIF investments are subject to statutory limits. The LAIF portfolio should be reviewed periodically.
I. San Mateo County Investment Pool The San Mateo County Investment Pool may be used up to the maximum permitted by California State Law. A review of the pool/fund is required when part of the list of authorized investments, with the knowledge that the pool/fund may include some investments allowed by statute but not explicitly identified in this investment policy.
I.J. Shares of Beneficial Interest issued by a Joint Powers Authority, including the California Asset Management Program (CAMP) and CalTrust. The City can invest in this category, provided the City is a member of the Joint Powers Authority and therefore a voting member. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria: The adviser is registered or exempt from registration with the Securities and Exchange Commission. The adviser has not less than five years of experience investing in the securities and obligations authorized in CA Code (subsection ‘a’ to ‘r’, inclusive). The adviser has assets under management in excess of five hundred million dollars ($500,000,000).
J.K. Medium Term Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States with a final maturity not exceeding five years from the date of trade settlement. These notes must have a rating of at least “A” or the equivalent by a NRSRO. No more than 5% of the City’s total portfolio shall be invested in medium term notes of any one issuerNo more than 10% of the City’s total investment assets may be invested in the commercial paper and medium-term notes of any one issuer, and the aggregate investment in medium term notes shall not exceed 25%30% of the City’s total portfolio.
K.L. Non-Negotiable Certificates of DepositTime Deposits or Placement Service Deposits (Gov. Code §53601.8) - The City may invest a portion of its surplus funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of deposits, in accordance with Government Code 53601.8. Deposits placed through a privatesector placement service shall not exceed fifty percent (50%) of the agency’s total investment portfolio at the time of purchase, as permitted under Government Code § 53601.8. Principal and accrued interest shall be fully insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), or collateralized in accordance with state law. Negotiable certificates of deposit
authorized under Government Code § 53601(i) are excluded from this limitation. This authority remains in effect through January 1, 2031, unless extended by further legislative action.
M. Negotiable Certificates of Deposit issued by nationally or state-chartered banks (FDIC insured institutions) or state or federal savings institutions. Purchases of negotiable certificates of deposit may not exceed 30% of total portfolio. Principal and accrued interest on these investments must not exceed the $250,000 FDIC insurance limit. A maturity limitation of five years is applicable.
L.N. Repurchase Agreements - “Repurchase agreement” means a purchase of securities by the local agency pursuant to an agreement by which the counterparty seller will repurchase the securities on or before a specified date and for a specified amount and the counterparty will deliver the underlying securities to the local agency by book entry, physical delivery, or by third-party custodial agreement. The transfer of underlying securities to the counterparty bank’s customer book-entry account may be used for book-entry delivery. Investments in repurchase agreements may be made, on authorized investments, when the term of the agreement does not exceed 180 days.
XI. REVIEW OF INVESTMENT PORTFOLIO
The securities held by the City of Pacifica must be in compliance with the Authorized Investments section of this Investment Policy at the time of purchase. The City Manager should review the portfolio (at least annually) to identify those securities that do not comply.
The City Manager should establish procedures to report any major and critical incidences of noncompliance identified through the review of the portfolio.
XII. INVESTMENT POOLS / MONEY MARKET FUNDS
A thorough investigation of the investment pool/money market fund is required prior to investing, and on a continual basis. Best efforts will be made to acquire the following information:
• A description of eligible investment securities, and a written statement of investment policy and objectives.
• A description of interest calculations and how it is distributed, and how gains and losses are treated.
• A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited.
• A description of who may invest in the program, how often, and what size deposit and withdrawal are allowed.
• A schedule for receiving statements and portfolio listings. • Are reserves, retained earnings, etc. utilized by the pool/fund? • A fee schedule, and when and how is it assessed.
• Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
XI.XIII. PROHIBITED INVESTMENTS
At the time of purchase, all permitted investments shall conform in all respects with this Investment Policy and with California Government Code Sections 53601, 53601.1, 53601.2, 53601.6, and 53635, as may be amended from time to time. No investment prohibited by California Government Code shall be permitted herein.
Ineligible investments, those that are not described herein, including but not limited to, common stocks or long term (over five years in maturity) notes and bonds, are prohibited from use in this portfolio.
Types of securities or transactions not permitted include:
A. Borrowing for investment purposes (leverage)
B. Inverse floaters, leveraged floaters, equity-linked securities, event-linked securities, structured investment vehicles (SIV)
Exempt from this definition are simple FRNs whose periodic coupon adjustment is based on a short-term (one-year or less) rate index (such as Treasury bills, federal funds, prime rate or LIBOR) and which have a reasonable expectation of maintaining a value at par at each interest rate adjustment through final maturity.
The following securities are also exempt from this definition: U.S. Treasury and Agency zero coupon bonds, U.S. Treasury and Agency strips, Resolution Funding Corporation (REFCORP) strips or other callable securities which otherwise meet quality, maturity and percent limitations assigned to their respective security category.
C. Derivatives (e.g., swaptions, spreads, straddles, caps, floors, collars, etc.) shall be prohibited.)
D. Trading of options and futures are prohibited.
The City discourages investments in tobacco, fossil fuel, or weapons manufacturing companies, consistent with the policies/practices of the State Treasurer’s Local Agency Investment Account/Pool Money Investment Account (LAIF/PMIA).
XIV. COLLATERALIZATION
Collateralization will be required on two types of investments: non-negotiable certificates of deposit and repurchase agreements. To anticipate market changes and provide a level of security for all funds, the collateralization level will be 110% of market value for nonnegotiable certificate of deposit and 102% for repurchase agreements of principal and accrued interest.
Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the entity and retained.
The City may waive the collateralization requirements for any portion of the deposit that is covered by Federal Deposit Insurance.
XII.XV. SAFEKEEPING AND CUSTODY
All security transactions entered into by the City shall be conducted on a delivery versus payment (DVP) basis as evidenced by safekeeping receipts in the City’s name and shall be delivered to the City or the City’s designated custodian upon receipt of payment by the City.
XIII.XVI. DIVERSIFICATION
The City’s investment portfolio shall be diversified to avoid incurring unreasonable risks inherent in over investing in specific instruments, individual financial institutions or maturities. See Attachment A for portfolio investment parameters. To promote diversification, the City will typically not invest more than 5% of the portfolio in the securities of any one issuer, regardless of security type, excluding U.S. Treasuries, federal agencies, and pooled investments such as LAIF, money market funds, or local government investment pools.
XVII. MAXIMUM MATURITIES
To the extent possible, the City of Pacifica will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than 5 years from the date of purchase.
Any investment longer than 5 years must be done with advance permission from City Council.
XIV.XVIII. INTERNAL CONTROLS
The Finance Department will establish a system of internal controls, which shall be documented in writing. The controls shall be designed to prevent loss of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets or imprudent actions by employees and officers of the City.
Controls deemed most important include: control of collusion, segregation of duties, separating transaction authority from accounting and record keeping, custodial safekeeping, clear delegation of authority, written confirmation of telephone transactions, documentation of transactions and strategies and code of ethical standards.
Separation of functions between the City Manager and Finance and Administrative Services Director is designed to provide an ongoing internal review to prevent the potential for converting assets or concealing transactions.
Investment decisions are made by the Finance and Administrative Services Director, executed by the Deputy Finance Director/Senior Accountant/Accountant and confirmed by the City Manager. All wire transfers initiated by the Finance and Administrative Services Director must be reconfirmed by the appropriate financial institution to the Deputy Finance Director/Senior Accountant/Accountant. Proper documentation obtained from confirmation and cash disbursement wire transfers is required for each investment transaction. Timely bank reconciliation is conducted to ensure proper handling of all transactions.
The investment portfolio and all related transactions are reviewed and balanced to appropriate general ledger accounts by the Finance and Administrative Services Director or designee on a monthly basis. An independent analysis by an external auditor shall be conducted annually to review and perform procedure testing on the City’s cash and investments that have a material impact on the financial statements. The City Manager shall review and assure compliance with investment process and procedures.
XV.XIX. PERFORMANCE STANDARDS
The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City’s investments shall be compared to the average yield on the U.S. Treasury security that most closely corresponds to the portfolio’s weighted average effective maturity.
When comparing the performance of the City’s portfolio, its rate of return will be computed net of all fees and expenses. The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The City intends to spread its investments relatively evenly between 0 and 5 years and hold those investments to
maturity. Therefore, an appropriate performance benchmark will be a market-based index or blended benchmark that reflects the portfolio’s actual composition and weighted average maturity. This may include Treasury indices, government/credit indices, or other publicly available benchmarks consistent with the investment types authorized in the City’s policy. The selected benchmark shall be reviewed periodically and adjusted as needed to remain aligned with the City’s investment objectives and evolving portfolio structure.
XVI.XX. QUARTERLY REPORTING
The City Manager or designee shall present a quarterly report to the City Council no later than 3045 days after the receipt of the last bank statement for the quarterly periodthe end of the quarter. If there are no Council meetings within the 45-day period, the quarterly report shall be presented to the Council at the soonest possible meeting thereafter.
The report will provide a clear picture of the status of the current investment portfolio. The report shall include the following information on investments:
• Type of investment (e. g. U.S. Treasury security, commercial paper); • Issuer name;
• Date of maturity;
• Yield to maturity;
• Weighted Average Maturity (WAM) of the portfolio;
• Par and dollar amount invested in all securities, and investments and monies;
• A description of the funds, investments, and programs (including lending programs) managed by contracted parties (i.e. LAIF, investment pools, outside money managers, and securities lending agents); • Current market value as of the date of the report of all funds held by the local agency and under the management of any outside party that is not also a local agency or LAIF and the source of the valuation; • A statement of compliance with the investment policy or an explanation • for non-compliance; and
• A statement of the local agency’s ability to meet its pool’s expenditure requirements for the next six months, as well as an explanation of why sufficient money will not be available if that is the case.
XVII.XXI. REVIEW, ADOPTION & AMENDMENTS
The City’s Investment Policy shall be adopted by resolution of the City Council. 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 compliance with current law. Any amendments to the Investment Policy must be approved by the City Council.
The Finance and Administrative Services Director shall establish written investment policy procedures for the operation of the investment program consistent with this policy. The procedures should include reference to: safekeeping, master repurchase agreements, wire transfer agreements, banking service contracts and collateral/depository agreements. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the City of Pacifica.
INVESTMENT POLICY GLOSSARY
Accrued Interest: Interest earned but not yet received.
Active Deposits: Funds that are immediately required for disbursement.
Amortization: An accounting practice of gradually decreasing (increasing) an asset's book value by spreading its depreciation (accretion) over a period of time.
Annual Comprehensive Financial Report (ACFR): The official annual financial report for the City. It includes five combined statements and basic financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles (GAAP).
Asked Price: The price a broker dealer offers to sell securities. Basis Point: One basis point is one hundredth of one percent (.01). Bid Price: The price a broker / dealer offers to purchase securities.
Bankers Acceptances (BAs) – Bankers’ acceptances (BAs) are money market instruments that are created in the course of bank financing transactions, particularly international trade financings. In creating a BA, a bank accepts responsibility for future payment of a draft or letter of credit issued in the course of a financing transaction, and then sells this obligation at a discount in the money market to an investor. The investor is shielded from the possibility of default on the part of the ultimate borrower because of the bank’s acceptance or guarantee of the BA at maturity.
Bond: A financial obligation for which the issuer promises to pay the bondholder a specified stream of future cash flows, including periodic interest payments and a principal repayment.
Bond Swap: Selling one bond issue and buying another at the same time in order to create an advantage for the investor. Some benefits of swapping may include taxdeductible losses, increased yields, and an improved quality portfolio.
Book Entry Securities: Securities, such stocks held in “street name,” that are recorded in a customer’s account, but are not accompanied by a certificate. The trend is toward a certificate-free society to cut down on paperwork and to diminish investors’ concerns about the certificates themselves. All the large New York City banks, including those that handle the bulk of the transactions of the major government securities dealers, now clear most of their transactions with each other and with the Federal Reserve through the use of automated telecommunications and the “book-entry” custody system maintained by the Federal Reserve Bank of New York. These banks have deposited with the Federal Reserve Bank a major portion of their government and agency securities holdings, including securities held for the accounts of their customers or in a fiduciary capacity for the City. Virtually all transfers for the account of the banks, as well as for the government securities dealers who are their clients, are now effected solely by bookkeeping entries.
The system reduces the costs and risks of physical handling and speeds the completion of transactions.
Book Value: The value at which a debt security is shown on the holder's balance sheet.
Book value is acquisition cost less amortization of premium or accretion of discount.
Broker: In securities, the intermediary between a buyer and a seller of securities. The broker, who usually charges a commission, must be registered with the exchange in which he or she is trading, accounting for the name registered representative.
Bullet Bond: See “Non-callable Bond.”
Callable Bond: A debit obligation where the bond issuer (i.e. borrower) has the option to call the bond or pay it off early (before the scheduled maturity date). For instance, a 5- year bond might be “callable quarterly”—meaning that, although the bond has a scheduled end date 5 years from now, it could end in 3 months (and every 3 months after that, until the scheduled maturity date).
Certificate of Deposit: A deposit insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) at a set rate for a specified period of time.
Collateral: Securities, evidence of deposit or pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposit of public moneys.
Commercial Paper – Commercial paper (CP) is an unsecured, short-term (under 270 daysup to 397 days) promise to repay a fixed amount on a certain future date.
Corporations, banks and other borrowers issue CP as a less expensive alternative to short-term loans.
Constant Maturity Treasury (CMT): An average yield of a specific Treasury maturity sector for a specific time frame. This is a market index for reference of past direction of interest rates for the given Treasury maturity range.
Coupon: The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value.
Credit Analysis: A critical review and appraisal of the economic and financial conditions or of the ability to meet debt obligations.
Current Yield: The interest paid on an investment expressed as a percentage of the current price of the security.
Custody: A banking service that provides safekeeping for the individual securities in a customer's investment portfolio under a written agreement that also calls for the bank to collect and pay out income, to buy, sell, receive and deliver securities when ordered to do so by the principal.
Delivery vs. Payment (DVP): Delivery of securities with a simultaneous exchange of money for the securities.
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: The weighted average maturity of a bond's cash flow stream, where the present value of the cash flows serve as the weights; the future point in time at which on average, an investor has received exactly half of the original investment, in present value terms; a bond's zero-coupon equivalent; the fulcrum of a bond's present value cash flow time line.
Fannie Mae: Trade name for the Federal National Mortgage Association (FNMA), a U.S. sponsored corporation.
Federal Deposit Insurance Corporation (FDIC): Insurance provided to customers of a subscribing bank that guarantees deposits to a set limit (currently $250,000) per account.
Federal Reserve System: The central bank of the U.S. that consists of a seven member Board of Governors, 12 regional banks and approximately 8,000 commercial banks that are members.
Fed Wire: A wire transmission service established by the Federal Reserve Bank to facilitate the transfer of funds through debits and credits of funds between participants within the Fed system.
Freddie Mac: Trade name for the Federal Home Loan Mortgage Corporation (FHLMC), a U.S. sponsored corporation.
Interest Rate: The annual yield earned on an investment, expressed as a percentage.
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.
Liquidity: Refers to the ability to rapidly convert an investment into cash.
Local Agency Debt (Municipal and State Obligations) – Municipal notes, bonds, and other obligations are securities issued by state and local government agencies to finance capital and operating expenses.
Local Agency Investment Fund (LAIF) – LAIF was created in the California State Treasury by Gov. Code §16429. LAIF holds local government funds in trust in a state investment pool in order to provide safety, liquidity and the benefits of the investment pool yield for local government entities invested in LAIF. LAIF may hold a broader range of securities that would not be eligible under the City investment criteria. Since LAIF is subject to different statutory investment provisions, any such variances in the LAIF pool holdings are appropriate exceptions for City purposes.
Market Value: The price at which a security is trading and could presumably be purchased or sold.
Maturity: The date upon which the principal or stated value of an investment becomes due and payable.
Medium-term notes (MTNs) – Medium-term notes are debt obligations that are continuously offered in a range of maturities. Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. The California Government Code restricts local agencies to the purchase of medium-term notes that meet, among other things, certain term and quality standards.
Money Market Mutual Funds – Money market mutual funds (MMMFs), called shares of beneficial interest issued by diversified management companies, are mutual funds that invest exclusively in short-term money market instruments. MMMFs seek the preservation of capital as a primary goal while maintaining a high degree of liquidity and providing current income representative of the market for short-term investments. Industry officials may refer to their funds as "money market funds".
Nationally Recognized Statistical Rating Organizations (NRSRO): A U.S. Securities & Exchange Commission registered agency that assesses the creditworthiness of an entity or specific security. NRSRO typically refers to Standard and Poor’s Ratings Services, Fitch Ratings, Inc. or Moody’s Investors Services.
New Issue: Term used when a security is originally "brought" to market.
Non-callable Bond: Also known as, “Bullet Bond.” A non-callable bond is a debt obligation where the bond issuer does not have the option to “call the bond” i.e.-end the bond before the scheduled maturity date.
Non-Negotiable Certificates of Deposit (NCDs) – A short-term, secured deposit in a financial institution that usually returns principal and interest to the lender at the end of the loan period. These CDs generally carry a penalty if redeemed prior to maturity.
Perfected Delivery: Refers to an investment where the actual security or collateral is held by an independent third party representing the purchasing entity.
Portfolio: Collection of securities held by an investor.
Primary Dealer: A group of government securities dealers that submit daily reports of market activity and security positions held to the Federal Reserve Bank of New York and are subject to its informal oversight.
Purchase Date: The date in which a security is purchased for settlement on that or a later date.
Rate of Return: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return.
Repurchase Agreements – A repurchase agreement (repo) is a short-term purchase of securities with a simultaneous agreement to sell the securities back on a specified date at an agreed upon price.
Reverse Repurchase Agreement (REVERSE REPO): A transaction where the seller (City) agrees to buy back from the buyer (bank) the securities at an agreed upon price after a stated period of time.
Risk: Degree of uncertainty of return on an asset. Safekeeping: See Custody.
Secondary Market: A market made for the purchase and sale of outstanding issues following the initial distribution.
Settlement Date: The date on which a trade is cleared by delivery of securities against funds.
Shares of Beneficial Interest issued by a Joint Powers Authority – shares of beneficial interest are issued by the joint powers authority, with each share representing an equal proportional interest in the underlying pool of securities owned by the joint powers authority.
Time Deposit: A deposit in an interest-paying account that requires the money to remain on account for a specific length of time. While withdrawals can generally be made from a passbook account at any time, other time deposits, such as certificates of deposit, are penalized for early withdrawal.
U.S. Government Sponsored Enterprise Debt (GSEs) (known as Agencies) – Federal agency and instrumentality obligations are marketable debt instruments issued by a government-sponsored enterprises (GSE), or a federally related institution, commonly known as federal or U.S. “agencies.” Such agencies include, Federal Farm Credit Bank System (FFCB), Federal Home Loan Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Resolution Funding Corporation (REFCORP).
U. S. Government Treasuries – United States Treasury Bills, Notes, and Bonds backed by the full faith and credit of the United States Government and considered to be the most secure securities.
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: The yield on bonds, notes or bills of the same type and credit risk at a specific date for maturities up to thirty years.
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.
ATTACHMENT A
SUMMARY OF PERMITTED INVESTMENTS
AUTHORIZED
INVESTMENTS
MAXIMUM %
HOLDINGS
PURCHASE
RESTRICTIONS
MAXIMUM
MATURITY
MINIMUM
CREDIT
RATINGS *
U.S. Treasury 100% n/a 5 years n/a
U.S. Agencies 100% n/a 5 years Aa / AA n/a
Commercial Papers 25% n/a 270 days
397 days
P-1 / A-1+
Negotiable CD’s
25% 30% n/a 1 year 5
years
P-2 / A-1 n/a
Placement Service Deposits
(Gov. Code 53601.8)
50% Private-sector
placement
service
5 years FDIC / NCUA
Banker’s Acceptances
25% Domestic banks
only
180 days A / A
Fully Collateralized Time
Deposits (FDIC insured)
100% n/a 5 years n/a
Fully Collateralized Money
Market Bank Account
100% n/a daily liquidity n/a
Money Market Funds 100% 20% NAV = $1.00 daily liquidity n/a Medium Term Notes 25% 30% n/a 5 years
A for 3 years or
less A / A
AA for over 3
years
Repurchase Agreements 25%
102% collateral;
daily marktomarket
180 days n/a
Local Agency Investment
Fund
100% n/a daily liquidity n/a
San Mateo County
Investment Pool
100% n/a daily liquidity n/a
California Asset
Management Program
(CAMP)
25% 100% n/a
daily liquidity
(CAMP) AAAm
CA Municipal Obligations 25%
Not issued by
City or related
City agency
2 years Aa / AA