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Attachment A
PROPOSED CITY OF PALO ALTO
Investment Policy
Fiscal Year 2024-25
INTRODUCTION
The City of Palo Alto invests its pooled idle cash according to State of California law and the charter of the City of Palo Alt o. In particular, the City follows “The Prudent Investor Standard” cited in the State Government Code (Section 53600.3). Under this standard, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor st andard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managi ng public funds, a trustee shall act with care, skill, prudence, and diligence under the circumst ances 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.
INVESTMENT PHILOSOPHY
The basic principles underlying Palo Alto's investment philosophy is to ensure the safety of public funds, provide that sufficient money is always available to meet current expenditures, and achieve a reasonable rate of return on its investments.
The City's preferred and chief practice is to buy securities and to hold them to their date of maturity rather than to trade or sell securities prior to maturity. The City may, however, elect to sell a security prior to its maturity should there be a significant financial need. If securities are purchased and held to their maturity date, then any changes in the market value of those securities during their life will have no effect on their principal value. Under a buy and hold philosophy, the City is able to protect its invested principal. Th e economy, the money markets, and various financial institutions (such as the Federal Reserve Syst em) are monitored carefu lly to make prudent investments and to assess the condition of the City’s portfolio.
INVESTMENT OBJECTIVES
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
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. The objective will be to mitigate credit risk and interest
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rate risk.
a) Credit risk is the risk that an obligati on will not be paid and a loss will result.
The City will seek to minimize this risk by:
Limiting investment to the safest types of securities or minimum credit quality rating as listed in the “Authorized Investment” section Diversifying its investments among the types of securities that are authorized under this investment policy
b) Interest rate risk is the risk that changes in interest rates will adversely affect the value of an investor’s portfolio. For example, an investor with large holdings in long-term bonds has assumed significant interest rate risk because the value of the bonds will fall if interest rates rise. The City can minimize this risk by:
Buying and holding its securities until maturity
Structuring the investment portfolio so that securities mature to meet cash flow requirements
To further achieve the objective of safety, the amount that can be invested in all investment categories, excluding obligations of the U.S. Government and its agencies, is limited either as a percentage of the portfolio or by a specific dollar amount. These limits are defined under the “Authorized Investments” section.
2. Liquidity: Liquidity is the second most important objective of the investment program. The investment portf olio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by maintaining a portion of the portfolio in liq uid money market mutual funds or local government investment pools. In addition, the City will maintain one month’s net cash needs in short term and/or liquid inve stments and at least $50 million shall be maintained in securities maturing in less than two years. Although the City’s practice is to buy and hold s ecurities to maturity, since all possibl e cash demands cannot be anticipated, the portfol io will consist of securities with active secondary or resale markets should the need to sell a security prior to maturity arises.
3. Yield: Yield on the City’s portfolio is last in priority among investment objectives.
The investment portfolio sha ll be designed to obtain a mark et rate of return that reflects the authorized investments, risk co nstraints, and liquidity needs outlined in the City’s investment policy. Compared to similar sized cities, the City of Palo Alto should be able to take advant age of its relatively large reserve balances to achieve higher yields through long-term investments. In addition, the City will strive to maintain the level of investment of idle funds as close to 100 percent as possible.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) RESPONSIBILITIES
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In addition to and subordinate to the Safety, Liquidity, and Yield investment objectives, investments that support sound environmental, social and governance (ESG) objectives are also considered. While the City’s portfolio is not classified as an ESG portfolio, investments in entities that support community well-being through practices that emphasize safe and environmentally sound objectives; fair labor practices; and equality of rights regardless of sex, race, age, disability, or sexual orientation, is encouraged. Direct investments in entities that manufacture tobacco products, firearms, and engage in direct production or drilling of fossil fuels is discouraged.
This section applies to new investments (after November 5, 2018) only and does not require divestment of existing investments. Investments in Certificates of Deposit (CDs) and Negotiable Certificates of Deposit are exempt from the ESG investing objective.
SCOPE
A. This investment policy shall apply to all financial assets of the City of Palo Alto as accounted for in the Annual Comprehensive Financial Report (ACFR), including but not limited to the following funds:
1. General Fund
2. Special Revenue Funds
3. Debt Service Funds
4. Capital Project Fund
5. Enterprise Funds
6. Internal Service Funds
7. Trust and Agency Funds
B. The policy does not cover funds held by the California Public Employees Retirement System (CalPERS), the California Employers’ Retiree Benefit Trust (CERBT), Deferred Compensation programs (e.g. ICMA, Hartford), the Authority for California Cities Excess Liability (ACCEL), and the Public Agency Retirement Services (PARS) Section 115 Irrevocable Trust.
C. Investments of bond proceeds shall be govern ed by the provisions of the related bond indentures.
GENERAL INVESTMENT GUIDELINES
1. The maximum stated final maturity of individual securities in the portfolio should be ten years.
2. A maximum of 30 percent of the par value of the portfo lio shall be invested in securities with maturities beyond five years.
3. The City shall maintain a minimum of one month’s net cash n eeds in short term and/or liquid investments.
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4. At least $50 million shall be maintained in securities maturing in less than two (2) years.
5. Should the ratio of the market value of the portfolio to the book value of the portfolio fall below 95 percent, the Administrative Services Department will report this fact to the City Council within a reasonable time frame and evaluate whether there is any risk of holding any of the securities to maturity.
6. Commitments to purchase securities newly introduced on the market shall be made no more than three (3) working days before pricing.
7. Whenever possible, the City will obtain three or more quotations on the purchase or sale of comparable securities and take the higher yield on purchase or higher price on sale. This rule will not a pply to new issues, which are purchased at market no more than three (3) working days before pricing, as well as to LAIF, City of Palo Alto bonds, money market accounts and mutual fu nds, all of which shall be evaluated separately.
8. Where the Investment Policy specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. A later increase or decrease in a percentage resulting from a change in the portfolio’s assets or values shall not constitute a violation of that restriction. As soon as possible, percentage limitations will be restored as investments mature in each category.
AUTHORIZED INVESTMENTS
The California Government Code (Sections 53600 et seq.) governs investment of City funds. The following investments are authorized:
1. U.S. Government Securities (e.g. Treasury notes, bonds and bills ) Securities that are backed by the full faith and credit of the United States
a) There is no limit on purchase of these securities.
b) Securities will not exceed 10 years maturity.
c) All purchased securities must have an explicit or a de facto backing of the full faith and credit of the U.S. Government.
2. U.S. Government Agency Securities – Obligations issued by the Federal Government agencies (e.g. Federal National Mortgage Association, etc.).
a. There is no limit on purchase of these securities except for:
Callable and Multi-step-up securities provided that:
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- The potential call dates are known at the time of purchase - The interest rates at which they “step-up” are known at the time of purchase
- The entire face value of the security is redeemed at the call date
- No more than 25 percent of the par value of the portfolio
b. Securities will not exceed 10 years maturity.
3. California State, California Local Gov ernment Agencies, and other United States State Bonds
a) Having at time of investment a minimum Double A (AA/Aa2) rating as provided by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s).
b) May not exceed 40 percent of the par value of the portfolio.
c) Investments include:
i) Registered state warrants or treasury notes or bonds of the State of California and bonds, notes, warrant s, or other evidences of indebtedness of any local agency within California, including bonds payable solely out of the revenues from a revenue producing property owned, controlled, or operated by the state or local agency or by a department, board, agency, or authority of the state or local agency.
ii) Registered treasury notes or bond of any of the 49 United States in addition to the State of Ca lifornia, including bonds payable solely out of the revenues fro m a revenue-produc ing property owned, controlled, or operated by a state or by a department, board, agency or authority of any of the other 49 United States, in addition to the State of California.
4. Certificates of Deposit (CD) - A debt instrument issued by a bank for a specified period of time at a specified rate of interest. Purchase of CD’s are limited to:
a) May not exceed 20 percent of the par value of the portfolio.
b) No more than 10 percent of the par value of the port folio in collateralized CDs in any institution.
c) Purchase collateralized deposits only from federally insured large banks that are rated by a nationally rec ognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s).
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d) For non-rated banks, deposit should be limited to amounts federally insured (FDIC). – See Appendix C
e) Rollovers are not permitted without specific instruction from authorized City staff.
5. Banker's Acceptance Notes (BA) – Bills of exchange or time drafts drawn on and accepted by commercial banks. Purchase of banker’s acceptances are limited to:
a) No more than 30 percent of the par value of the portfolio.
b) Not to exceed 180 days maturity.
c) No more than $5 million with any one institution.
6. Commercial Paper - Short-term unsecured ob ligations issued by banks, corporations, and other borrowers. Purchases of commercial paper are limited to:
a) Having highest letter or numerical rating as provided for by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s).
b) No more than 15 percent of the par value of the portfolio.
c) Not to exceed 270 days maturity.
d) No more than $3 million or 10 percent of the outstanding commercial paper of any one institution, whichever is lesser.
7. Local Agency Investment Fund (LAIF) – A State of California managed investment pool may be used up to the maximum permitted by California State Law.
8. Short-Term Repurchase Agreements (REPO) – A contractual agreement between a seller and a buyer, usually of U. S. government securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated time. Purchases of REPO’s must:
a) Not to exceed 1 year.
b) Market value of securities that underlay a repurchas e agreement shall be valued at 102 percent or greater of the funds borrowed against those securities.
c) A Master Repurchase agreement must be signed with the bank or dealer.
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9. Money Market Deposit Accounts – Liquid bank accounts which seek to maintain a net asset value of $1.00.
10. Mutual Funds which seek to maintain a net asset value of $1.00 and which are limited essentially to the above investments and further defined in note 9 of Appendix A
a) No more than 20 percent of the par value of the portfolio.
b) No more than 10 percent of the par value with any one institution.
11. Negotiable Certificates of Deposit (NCD) issued by nationally or state-chartered banks and state or federal savings institutions and fu rther defined in note 11 of Appendix A. Purchases of negotiable certificates of deposit:
a) May not exceed 20 percent of the par value of the portfolio.
b) No more than $5 million in any one institution.
12. Medium-Term Corporate Notes – Issued by corporation organized and operating within the United States or by depository institutions licensed by the United States or any state and operating with the United States.
a) Not to exceed 5 years maturity.
b) Securities eligible for investment shall have a minimum rating of AA or Aa2 from a nationally re cognized rating service (e.g. Moody’s, Fitch, and/or Standard & Poor’s).
c) No more than 10 percent of the par value of the portfolio.
d) No more than $5 million of the par value may be invested in securities of any single issuer, other than the U.S. Government, its agencies and instrumentality.
e) If securities owned by th e City are downgraded by Moody’s, Fitch, or Standard & Poors to a level below AA or Aa2, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio.
13. Supranational Organizations Securities – Supranational organizations refer to International Bank for Reconstruction a nd Development (IBRD), International Finance Corporation (IFC) and Inter-American Development Bank (IADB).
a. Securities will not exceed 5 years maturity.
b. No more than 20 percent of the par value of the portfolio.
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c. No more than 10 percent of the par value with any one institution. d. Securities eligible for investment shall have a minimum rating of AA or Aa2 from a nationally re cognized rating service (e.g. Moody’s, Fitch, and/or Standard & Poor’s).
e. Limited to United States dolla r denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by IBRD, IFC, and IADB.
Appendix A provides a more detailed description of each investment vehicle and its security and liquidity features. Most of the City's short-te rm investments will be in securities which pay principal upon maturity, while long-term investments may be in securities that periodically repay principal, as well as interest. Most of the City's investments will be at a fixed rate. However, some of the investments may be at a variable rate, so long as that rate changes on specified dates in pre- determined increments.
PROHIBITED INVESTMENTS:
Includes all investments not specified above, and in particular:
1. Reverse repurchase agreements
2. Derivatives, as defined in Appendix B
Appendix B provides a more detailed description of each investment, which is prohibited, for City investment.
AUTHORIZED INVESTMENT PERSONNEL
Idle cash management and invest ment transactions are the res ponsibility of th e Administrative Services Department. The Administrative Services Department is under the control of the Director of Administrative Services (Director), as treasurer, who is subject to the direction and supervision of the City Manager.
The Assistant Directors of Administrative Servi ces (Assistant Director), who reports to the Director, are authorized to make all investme nt transactions allowed by the Statement of Investment Policy. The Assistant Director ma y authorize the Manager of Treasury, Debt & Investments and/or Senior Mana gement Analyst (Manager and/or Analyst) to enter into investments within clearly specified parameters.
The Investment function is under the supervision of the Assistant Director. The Assistant Director is charged with the responsibility to manage the investment progr am (portfolio), which includes developing and monitoring the C ity's cash flow model and deve loping long-term revenue and financing strategies and forecasts.
The Manager and/or Analyst are subject to the direction and supervision of the Assistant Director.
The Manager and/or Analyst assist the Assistant Dire ctor, in the purchase a nd sale of securities.
The Manager and/or Analyst also prepare the quart erly report, and record daily all investment
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transactions as to the type of investment, amou nt, yield, and maturity. Ca sh flow projections are prepared as needed.
In all circumstances, appr oval from the Director of Administrative Services is required before selling securities from the City's portfolio. The Manager and/or Analyst may also transfer no more than a total of $10 million a day from the City's general account to any one financial institution, without the prior approval of the Assistant Director.
No other person has authority to make investment transactions without the written authority of the Director or Assistant Director of Administrative Services.
USE OF BROKERS AND DEALERS
The Administrative Services Department maintains a list of acceptable dealers. A dealer acts as a principal in security transact ions, selling securities from a nd buying securities for their own position. A dealer must have:
a) At least three years experience operating with California municipalities;
b) Maintain an inventory of trading securities of at least $10 million; and
c) Annually provide documentation showing th eir financial condition and relevant registration;
b)d) Annually certify in writing that they ha ve reviewed the app licable California Government Code sections and the City’s Investment Policy; and
c)e) Be approved by the Assistant Director befo re being added to the City's list of approved dealers; including individual traders or agents representing a dealer:
A dealer will be removed from the list should ther e develop a history of problems to include:
failure to deliver securities as promised, failure to honor transactions as quoted, or failure to provide accurate information.
SAFEKEEPING AND CUSTODY
All securities shall be delivered to the City's safekeeping custodian and held in the name of the City of Palo Alto, with the exception of the following investments:
a) Certificates of deposit, which may be held by the City itself.
b) City shares in pooled investment funds, under contract.
c) Mutual funds
d) Local Agency Investment Fund (LAIF)
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POLICY REVIEW AND REPORTING ON INVESTMENTS
Monthly, the Administrative Services Department will review performance in relation to Council adopted Policy. Per California Government Code Section 53646, Qquarterly, the Department will report to Council investment activ ity, including: the portfolio’s performance in comparison to policy, explain any variances from policy, provide any recommendations for policy changes, and discuss overall compliance with the City’s Investment Policy. In addition, the Department will provide Council with:
a) A detailed list of all securities, investments and monies held by the City, and b) Report on the City’s ability to meet expenditure requirements over the next six months.
Per California Government Code Section 53607, the Department shall provide a monthly report of transactions (investments, rei nvestment, sold, and exchanged s ecurities) made during the month to the Council. This reporting requirement is separate and distinct from the quarterly investment report submitted under Code Section 53646.
Annually, the Administrative Serv ices Department will pres ent a Proposed Statement of Investment Policy, to include the delegation of investment authority, to the City Council for review during the annual budget process. All proposed changes in policy must be approved by the Council prior to implementation.
Adopted by City Council October 22, 1984 Amended by City Council June 17, 2002 Monthly reporting effective January 1985 Amended by City Council June 17, 2003 Amended and Adopted by City Council June 24, 1985 Amended by City Council June 28, 2004 Amended by City Council December 2, 1985 Amended by City Council June 20, 2005 Amended by City Council June 23, 1986 Amended by City Council June 12, 2006 Amended by City Council June 22, 1987 Amended by City Council June 11, 2007 Amended by City Council August 8, 1988 Amended by City Council June 09, 2008 Amended by City Council November 28, 1988 Amended by City Council June 15, 2009 Amended by City Council June 26, 1989 Amended by City Council June 28, 2010 Amended by City Council May 14, 1990 Am ended by City Council June 20, 2011 Amended by City Council June 24, 1991 Amended by City Council June 18, 2012 Amended by City Council June 22, 1992 Amended by City Council June 03, 2013 Amended by City Council June 23, 1993 Amended by City Council June 16, 2014 Amended by City Council June 20, 1994 Amended by City Council June 15, 2015 Amended by City Council June 19, 1995 Amended by City Council June 13, 2016 Amended by City Council June 24, 1996 Amended by City Council June 27, 2017 Amended by City Council June 23, 1997 Am ended by City Council November 5, 2018 Amended by City Council January 26, 1998 Amended by City Council June 24, 2019 Amended by City Council June 22, 1998 Adopted by City Council June 22, 2020 Amended by City Council June 28, 1999 Amended by City Council June 21, 2021 Amended by City Council June 19, 2000 Adopted by City Council June 20, 2022 Amended by City Council June 11, 2001 Adopted by City Council June 19, 2023
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APPENDIX A
EXPLANATION OF PERMITTED INVESTMENTS
1. U.S. Government Securities: United States Treasury notes, bonds, bills, or certificates of indebtedness or those for which the faith and credit of the Un ited States are pledged for the payment of principal and interest.
2. U.S. Government Agency Securities: U.S. Government Agency Obligations include the securities of the Federal National Mortga ge Association (FNMA), Federal Land Banks (FLB), Federal Intermediate Credit Banks (FICB), banks for cooperatives, Federal Home Loan Banks (FHLB), Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Stude nt Loan Marketing Association (SLMA), Small Business Administration (SBA), Federal Farm Credit (FFC), and Federal Agricultural Mortgage Corporation (FAMC or FMAC). Federal Agency secu rities are debt obligations that essentially result from lending programs of the Government. Federal agency securities differ from other types of secu rities, as well as among themse lves. Their ch aracteristics depend on the issuing agency. It is possible to distinguish three types of issues: (A) participation certificates (pooled securities), (B) Certificates of interest (pooled loans), (C) notes, bonds, and debentures. The securities of a few agencies are explicitly backed by the full faith and credit of the U.S. Government. All other issues purchased by the City have the de facto backing from the federal government, and it is highly unlikely that the government would let any agency default on its obligations.
3. Certificates of Deposit: A certificate of deposit (CDs) is a receipt for funds deposited in a bank, savings bank, or savings and loan associ ation for a specified period of time at a specified rate of interest. Denominati ons are $250,000 and up. The first $250,000 of a certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC), if the deposit is with a bank or savings bank, or the Savings Association Insurance Fund (SAIF), if the deposit is with a savings and loan. CDs with a face value in excess of $250,000 can be collateralized by U.S. Government Agen cy and Treasury Department securities or first mortgage loans. Government securities must be at least 110 percent of the face value of the CD collateralized in excess of the first $250,000. The va lue of first mortgages must be at least 150 percent of the face value of th e CD balance insured in excess of the first $250,000. Generally, CDs are issued for more than 30 days and the maturity can be selected by the purchaser.
4. Bankers' Acceptance: A Banker's Acceptance (BA) is a ne gotiable time draft or bill of exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually created to finance the import and export of goo ds, the shipment of goods within the United States and storage of readily marketable stap le commodities. In ove r 70 years of usage in the United States, there has been no known instance of principal loss to any investor in BAs.
In addition to the guarantee by the accepting bank, the transaction is identified with a specific commodity. Warehouse receipts verify th at the pledged commodities exist, and, by
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definition, these commodities ar e readily marketable. The sale of the underlying goods generates the necessary funds to liquidate the indebtedness.
BAs enjoy marketability since the Federal Reserve Bank is authorized to buy and sell prime BAs with maturities of up to nine months. The Federal Reserve Bank enters into repurchase agreements in the normal course of open market operations with BA dealers.
As are sold at a discount from par. An accepta nce is tied to a specific loan transaction; therefore, the amount and maturity of the acceptance is fixed.
5. Commercial Paper: Commercial paper notes are unsecured promissory notes of industrial corporations, utilities, and ba nk holding companies. Interest is discounted from par and calculated using actual number of days on a 360-day year. The notes are in bearer form, with maturities up to 270 days selected by the pur chaser, and denominations generally start at $100,000. There is a small secondar y market for commercial pa per notes and an investor may sell a note prior to maturity.
Commercial paper notes are ba cked by unused lines of cred it from major banks. Some issuer's notes are insured, while some are backed by irrevocable letters of credit from major banks. State law limits a City to investments in United States corporations having assets in excess of five hundred million dollars with an "A" or higher rating by a nationally recognized rating service for the issuer's debentures. Cities may not invest more than 25 percent of idle cash in commercial paper.
6. Local Agency Investment Fund Demand Deposit: The Local Agency Investment Fund LAIF) was established by the State to enable treasurers to place funds in a pool for investments. The City is limited to an investment of the amount allowed by LAIF (currently $75 million). LAIF has been particularly bene ficial to those jurisdictions with small portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield.
7. Repurchase Agreements: A Repurchase Agreement (REPOS ) is not a security, but a contractual arrangement between a financial in stitution or dealer and an investor. The agreement normally can run for one or more da ys. The investor puts up funds for a certain number of days at a stated yiel d. In return, the investor ta kes title to a given block of securities as collateral. At maturity, the securities are repurchased and the funds repaid, plus interest. Usually, amounts are $500,000 or more, but some REPOS can be smaller.
8. Money Market Deposit Accounts: Money Market Deposit Accounts are market-sensitive bank accounts, which are available to depositors at any time, w ithout penalty. The interest rate is generally comparable to rates on money market mutual funds, though any individual bank's rate may be higher or lower. Thes e accounts are insured by the Federal Deposit Insurance Corporation or the Savings Association Insurance Fund.
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9. Mutual Funds: Mutual funds are shares of benefi cial interest issu ed by diversified management companies, as defined by Section 23701 M of the Revenue and Taxation Code.
To be eligible for investment, these funds must:
a) Attain the highest ranking in the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services; or
b) Have an investment advi sor registered with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations, as authorized by subdivisi ons (a) to (n), inclusive, of Section 53601 of the California Government Code, and with assets under management in excess of five hundred million dollars; and
c) Invest solely in those securities and obligations authorized by Sections 53601 and 53635 of the California Government Code. Where the Investment Policy of the City of Palo Alto may be more restrictive than the State Code, the Policy authorizes investments in mutual funds that shall have minimal investment in securities otherwise restri cted by the City's Policy. Minimal investment is defined as less than 5 percent of the mutual fund portfolio; and
d) The purchase price of shares of benefici al interest purchased shall not include any commission that these companies may charge.
e) Have a net asset value of $1.00.
10. Callable Securities and Multi-Step-ups: Callable securities are de fined as fixed interest rate government agency securiti es that give the i ssuing agency the opti on of returning the invested funds at a specific point in time to the purchaser. Multi-step-ups are government agency securities in which the interest rate increases ("steps-up") at preset intervals, and which also have a callable option that allows the issuing agency to return the invested funds at a preset interval. Callable and multi-step-ups are permitted, provided that:
the potential call dates are known at the time of purchase;
the interest rates at which they “step-up” are known at the time of purchase; and
the entire face value of the security is redeemed at the call date.
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11. Negotiable Certificates of Deposit (NCD): NCDs are large-dolla r-amount, short-term certificate of deposit. Such certificates ar e issued by large banks and bought mainly by corporations and institutional investors. They are payable either to the bearer or to the order of the depositor, and, being nego tiable, they enjoy an active secondary market, where they trade in round lots of $5 million. Although they can be is sued in any denomination from $100,000 up, the typical amount is $1 million also called a Jumbo Certificate of Deposit.
State law prohibits the investment of local agency funds in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or any person with investment deci sion making authority in the administrative, manager’s, budget, auditor-controller’s, or treasurer’s offices of the local agency also serves on the board of directors, other credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificate of deposit.
12. Medium-Term Corporate Notes: 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 th e United States. According to California Government Code Section 53601, “Notes eligible for investment under this subdivision shall be rated in a rating cat egory of “A” or its equivalent or better by a nationa lly recognized rating service. Purchase of medium-term notes shall include other instruments authorized by this section and shall not exce ed 30 percent of the agency’s moneys that may be invested pursuant to this section.”
13. Supranational Securities: California Government Code Section53601 defines allowable supranational securities as United Stat es dollar denominated senior unsecured unsubordinated obligations issued or unconditi onally guaranteed by th e International Bank for Reconstruction and Development, the In ternational Finance Corporation, and Inter- American Development Bank. Supranationals ar e well capitalized and in most cases have strong credit support from cont ingent capital calls from their member countries. Section 53601 was amended effective January 1, 2015 to allow local agencies to invest in the senior debt obligations of these three supranational issuers which are eligible for purchase and resale within the United States. These entities were established with the purpose of ending poverty and raising the standard of living around the world through sustainable economic growth.
a) The supranationals are international organization owned by member countries.
These are:
International Bank for Reconstruction and Development (IBRD or World Bank), a member of the World Bank Group, provides direct loans and guarantees to sovereigns and government-backed projects International Finance Corporation (IFC), a member of the World Bank Group, supports the creation and growth of private companies through direct lending and equity investment , attracting third party capital, and providing advisory services
Inter-American Development Bank (IADB), a member of the Inter -
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American Development Bank Group, provides loans, grants, and guarantees to sovereigns in Latin America and the Caribbean
b) Additional characteristics shared by the IBRD, IFC, and IADB include:
Headquartered in Washington, D.C. with the United States as the largest shareholder of each organization
Rated AAA/Aaa by S&P and Moody’s
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APPENDIX B
EXPLANATION OF PROHIBITED INVESTMENTS
1. Reverse Repurchase Agreements: A Reverse Repurchase Agreement (Reverse REPO) is a contractual agreement by the investor (e.g. lo cal agency) to post a security it owns as collateral, and a bank or dealer temporarily exchanges cash for this collateral, for a specific period of time, at an agreed-upon interest rate. During the period of the agreement, the local agency may use this cash for any purpose. At maturity, the securities are repurchased from the bank or dealer, plus interest.
California law contains a number of restric tions on the use of Reverse REPOS by local agencies.
2. Derivatives: A derivative is a financial instrument created from, or whose value depends on (is derived from), the value of one or more underlying asse ts or indices. The term "derivative" refers to instruments or features , such as collateralized mortgage obligations, forwards, futures, currency and interest rate swaps, options, caps and floors. Except for those callable and multi-step-up securi ties as described under Permit ted Investments, derivatives are prohibited.
Certain derivative products have characterist ics which could include high price volatility, liquid markets, products that are not market-tested, products that are highly leveraged, products requiring a high degree of sophistication to manage, and products that are difficult to value.
According to California law, a local agency sh all not invest any funds in inverse floaters, range notes, or interest-only strips that are derived from a pool of mortgages.
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APPENDIX C
GLOSSARY OF INVESTMENT TERMS
AGENCIES: Federal agency and instrumentality securities.
ASKED: The price at which securities are offered.
BID: The price offered by a buyer of securities (when one sells securities, one asks for a bid).
See “Offer”.
BROKER: A person or institution that conducts investment transactions on behalf of the buyer and seller of the investment and earns a commission on the transaction.
COLLATERAL: Securities, evidence of deposit, or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.
ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official annual report for the City of Palo Alto. It includes combined financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles and pronouncements set forth by the Governmental Accounting Standards Board (GASB). The ACFR also includes supporting schedules that are necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed statistical section.
COUPON: The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value or the certificate attached to a bond evidencing interest due on a payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: (1) delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery of securities with an exchange of money for the securities. DVR is delivery of securities with an exchange of a signed receipt for the securities.
DISCOUNT: The difference between the acquisition cost of a security and its value at maturity when quoted at lower than face value. A security that sells below original offering price shortly after sale, is also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest-bearing money market instruments that are issued a discount and that are redeemed at maturity for full face value (e.g., U.S. Treasury Bills).
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DIVERSIFICATION: Dividing investment funds among a variety of securities that offer independent returns.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION (“FAMC” or “FMAC”): A federal agency established in 1988 to provide a secondary market for fa rm mortgage loans.
Informally called Farmer Mac.
FEDERAL CREDIT AGENCIES: Agencies of the Federal Government that were established to supply credit to various classes of institutions and individuals (e.g., S&Ls, small business firms, students, farmers, farm cooperatives, and exporters).
FEDERAL DEPOSIT INSURANCE CORPORATION (“FDIC”): A federal agency that insures all types of deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account (MMDA) or time deposit such as a certificate of deposit (CD). FDIC insurance covers depositors' accounts at each insured bank, dolla r-for-dollar, including princi pal and any accrued interest through the date of the insured bank's closing, up to the insurance limit.
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank. The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government.
The standard maximum deposit insurance amount is described as the “SMDIA” in FDIC regulations. The SMDIA is $250,000 per depositor, per insured bank.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (“FHLB”): Government-sponsored wholesale banks (currently 12 regional banks) which lend funds a nd provide correspondent banking services to member commercial banks, thrift institutions, credit unions, and insurance companies. The mission of the FHLBs is to liquefy the housing-related assets of its members, who must purchase stock in their District Bank.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (“FNMA”): FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the ausp ices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is calle d, is a private stockholder-owne d corporation. The corporation’s purchases include a variety of ad justable mortgages and second loan s, in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (“FOMC”): T h e F O M C c o n s i s t s o f s e v e n
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members of the Federal Reserve Board and five of the 12 Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Commit tee periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market, as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven-member Board of G overnors in Washington, D.C., 12 regional banks, and about 5,700 commercial banks that are members of the system.
GOVERNMENT NATIONAL MORTGAGE A SSOCIATION (“GNMA” or “Ginnie Mae”): Securities that influence the volume of bank credit that is guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. A security holder is protected by th e full faith and credit of the U.S. Government.
Ginnie Mae securities are backed by the FHA, VA, or FMHM mortgages. The term “pass- throughs” is often used to describe Ginnie Maes.
LIQUIDITY: A liquid asset is one that can be convert ed easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow, and reasonable amount can be done at those quotes.
LOCAL GOVERNMENT AGENCY: A local government agency is any city, county, city and county, district, or other local governmental body or corporati on, including the California State Universities (CSU) and University of Califor nia (UC) systems, K-12 schools and community colleges empowered to expend public funds.
LOCAL GOVERNMENT INVESTMENT FUND (“LAIF”): Monies from local governmental units may be remitted to the Cali fornia State Treasurer for deposit in this special fund for the purpose of investment.
MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establish each party’s rights in the transactions. A master agreement will of ten specify, among other th ings, 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 stat ed value of an inve stment becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (e.g., bills, commercial paper, and bankers’ acceptances) are issued and traded.
OFFER: The price asked by a seller of securities (when one buys securities, one asks for an offer).
See “Asked” and “Bid”.
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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 econom y. 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.
PORTFOLIO: A collection of securities that an investor holds.
PRIMARY DEALER: A group of government securities deal ers that submit daily reports of market activity and positions, an d monthly financial st atements to the Federal Reserve Bank of New York, and are subject to it s informal oversight. Primar y dealers include Securities and Exchange Commission (SEC) -- registered securities broker-dealers, banks, and a few unregulated firms.
PRUDENT INVESTOR RULE: An investment standard cite d in the California Government Code Section 53600 et seq. Under this standard, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, rei nvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trus tee shall act with care, skill, prudence, and diligence under the circumstances then prevai ling, 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 thos e 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.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution that: (1) does not claim exemption from the payment of any sales, compen sating use, or ad valorem taxes under the laws of this state; (2) has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability; and (3) has been approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price.
SAFEKEEPING: A service to customers rendered by ba nks for a fee whereby securities and valuables of all types and descriptions are held in the bank’s vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution.
SECURITIES AND EXCHANGE COMMISSION: An agency created by Congress to administer securities legislation for the purpose of protecting investors in securities transactions.
STRUCTURED NOTES: Notes issued by instrumenta lities (e.g., FHLB, FNMA, SLMA) and by corporations, that have imbedded options (e .g., call features, step-u p coupons, floating rate
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coupons, derivative-based returns) in their debt stru cture. The market performance of structured notes is affected by fluctuating interest rates; the volatility of imbedded options; and shifts in the yield curve.
SUPRANATIONALS: International institutions that prov ide development financing, advisory services and/or financial services to their member countries to achieve the overall goal of improving living standards through sustainable economic growt h. The California Government Code Section 53601 allows local agencies to purchase the United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter-American Development Bank (IADB).
TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificat e of deposit, which cannot be sold prior to maturity.
TREASURY BILLS: A non-interest-bearing discount security that is issued by the U.S. Treasury to finance the national debt. Most T-bills are issued to mature in three months, six months, or one year.
TREASURY BONDS: Long-term, coupon-bearing U.S. Treasur y securities that are issued as direct obligations of the U.S. Government, and having initial maturities of more than 10 years.
TREASURY NOTES: Medium-term, coupon-bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of two to 10 years.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
YIELD-TO-CALL (YTC): The rate of return an investor earns from a bond assuming the bond is redeemed (called) prior to its nominal maturity date.
YIELD-TO-MATURITY: The current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity.
ZERO-COUPON SECURITIES: Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity.