1 CITY OF PLEASANT HILL
INVESTMENT POLICY
Effective July 1, 20212022
INTRODUCTION
The investment policy of the City of Pleasant Hill is based upon State of California Government Code, 5360153600 et seq., 53635 and the "prudent investor" rule. The primary goals of this policy are:
1. To ensure compliance with all State and Local laws governing the investment of monies in the custody of the City Treasurer.
2. To protect the principal monies entrusted to the City Treasurer.
3. To meet the daily cash flow demands of the City.
4. To generate the maximum amount of investment income within the parameters of prudent risk management.
The monies entrusted to the City Treasurer constitute the "Investment Portfolio" referred to in this document.
DELEGATION OF AUTHORITY
In the City of Pleasant Hill, management responsibility for investments is herewith delegated to the Elected City Treasurer pursuant to Gov. Code, 53607. The Treasurer shall establish procedures for the operation of an investment program consistent with this investment policy and shall perform investment transactions. The Treasurer may retain the services of an investment advisor. These procedures will include reference to safekeeping, wire transfer agreements, banking service contracts and collateral/depository agreements. The Treasurer shall be responsible for all transactions undertaken.
The Treasurer shall appoint a Deputy City Treasurer who shall perform the Treasurer's duties in the absence of the Treasurer.
SCOPE
The Treasurer is responsible for investing the unexpended cash in the City Treasury.
This investment policy applies to the investment activities of the City of Pleasant Hill. The invested assets of the City, with the following three exceptions, shall be administered in accordance with the provisions of this policy. The exceptions are the Public Employees Retirement System and Deferred Compensation Funds, which are administered 2 separately by trustees, and Bond proceeds which are invested according to the specifications of the bond indenture according to Government Code 53601(1).
OBJECTIVES
Objectives have been set in order to achieve the goals of this investment policy. The primary objectives, in priority order, of the City of Pleasant Hill's investment policy are:
A. Safety of Principal
Safety of principal is the foremost objective of the City of Pleasant Hill. With each investment transaction the Treasurer shall seek to ensure that capital losses are avoided, whether these losses are from securities default, broker-dealer default, or erosion of market value. The City shall seek to preserve principal by mitigating the two types of risk:
credit risk and market risk.
Further guidelines for safety of principal shall include:
1. Limiting the Portfolio's exposure to each issue and each issuer of debt.
2. Determining minimum credit requirements for firms that hold City monies.
B. Liquidity
The City of Pleasant Hill'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
Return on investment shall be an average market rate of return governed by the objectives of safety and liquidity in accord with prudent investment principles.
MATURITIES
Maturities shall be selected to anticipate cash needs, thereby eliminating the possibility of the need for forced investment liquidation. Cash flow estimates shall be prepared in a prudent manner.
The City will not invest in securities maturing more than five (5) years from the date of trade settlement, unless the City Council has granted authority to make such an investment. To insure that funds are always available when needed, the City shall maintain a position of investing no greater than 33% of the portfolio in maturities greater than one year. Further, each individual security shall be limited to one million dollars.
QUALIFIED DEALERS
3 To the extent practicable, the Treasurer shall endeavor to complete investment transactions using a competitive bid process whenever possible. The City’s Treasurer will determine which financial institutions are authorized to provide investment services to the City. It shall be the City’s policy to purchase securities only from authorized institutions and firms.
The Treasurer shall maintain procedures for establishing a list of authorized broker/dealers and financial institutions which are approved for investment purposes that are selected through a process of due diligence as determined by the City. Due inquiry shall determine whether such authorized broker/dealers, and the individuals covering the City are reputable and trustworthy, knowledgeable and experienced in Public Agency investing and able to meet all of their financial obligations. These institutions may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15c3-1 (uniform net capital rule).
In accordance with Section 53601.5, institutions eligible to transact investment business with the City include:
Institutions licensed by the state as a broker-dealer. Institutions that are members of a federally regulated securities exchange. Primary government dealers as designated by the Federal Reserve Bank and non-primary government dealers.
Nationally or state-chartered banks.
The Federal Reserve Bank.
Direct issuers of securities eligible for purchase.
If the City Treasurer chooses to purchase investments indirectly, the City shall transact business only with banks, savings and loans, and investment securities dealers. The dealers must be primary dealers regularly reporting to the Federal Reserve Bank. The Treasurer shall approve dealers wishing to do business with the City and determine if they are adequately capitalized, market securities appropriate to the City's needs, and are recommended by managers of portfolios similar to the City's.
Selection of financial institutions and broker/dealers authorized to engage in transactions will be at the sole discretion of the City, except where the City utilizes an external investment adviser in which case the City may rely on the adviser for selection.
All financial institutions and securities dealers who desire to engage in investment transactions with the City of Pleasant Hill shall certify that the supervising officer has reviewed the City's investment policy and agrees to disclose potential conflicts or risks to public funds that might arise out of business transactions between the firm/depository and the City of Pleasant Hill. Employers Employees of any financial institution offering securities or investments to the City of Pleasant Hill shall be trained in the precautions appropriate to public sector investments and shall be required to familiarize themselves 4 with the City's Investment Policy.
The City shall at least annually send a copy of the current investment policy to all dealers approved to do business with the City. Confirmation of receipt of this policy shall be considered evidence that the dealer understands the City's investment policies, and intends to offer the City only appropriate investments.
Public deposits will be made only in qualified public depositories as established by State law. Deposits will be insured by the Federal Deposit Insurance Corporation, or, to the extent the amount exceeds the insured maximum, will be collateralized in accordance with State law.
Selection of broker/dealers used by an external investment adviser retained by the City will be at the sole discretion of the adviser. Where possible, transactions with broker/dealers shall be selected on a competitive basis and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, best efforts will be made to document quotations for comparable or alternative securities. When purchasing original issue instrumentality securities, no competitive offerings will be required as all dealers in the selling group offer those securities at the same original issue price.
DELIVERY, SAFEKEEPING OF SECURITIES, AND CUSTODY
To protect against potential losses by collapse of individual securities dealers, all securities owned by the City (including collateral on repurchase agreements), shall be held in the City's name in safekeeping by a third party bank trust departmentcustodian.
Said trust department shall act as agent for the City of Pleasant Hill pursuant to a custody agreement between the bank and the City. All securities shall be received and delivered using standard delivery-versus-payment procedures. The Custodian shall provide safekeeping receipts of all securities held. A monthly report will be received by the City from the custodian listing all securities held in safekeeping with current market data and other information.
The only exceptions to the foregoing shall be depository accounts and securities purchases made with: (i) local government investment pools; (ii) time certificates of deposit, and, (iii) mutual funds and money market mutual funds, since these securities are not deliverable.
COLLATERALIZATION
Certificates of Deposit: The City shall require any commercial bank or savings and loan association to deposit eligible securities with an agency of a depository approved by the State Banking Department to secure any uninsured portion of a Non-Negotiable Certificate of Deposit. The value of eligible securities as defined pursuant to California Government Code, Section 53651, pledged against a Certificate of Deposit shall be equal to 150% of the face value of the CD if the securities are classified as mortgages and 110% of the face value of the CD for all other classes of security. 5 Collateralization of Bank Deposits: This is the process by which a bank or financial institution pledges securities, or other deposits for the purpose of securing repayment of deposited funds. The City shall require any bank or financial institution to comply with the collateralization criteria defined in California Government Code, Section 53651.
Repurchase Agreements: The City requires that Repurchase Agreements be collateralized only by securities authorized in accordance with California Government Code:
The securities which collateralize the repurchase agreement shall be priced at Market Value, including any Accrued Interest plus a margin. The Market Value of the securities that underlie a repurchase agreement shall be valued at 102% or greater of the funds borrowed against those securities. Financial institutions shall mark the value of the collateral to market at least monthly and increase or decrease the collateral to satisfy the ratio requirement described above.
The City shall receive monthly statements of collateral.
ETHICS AND CONFLICTS OF INTEREST
The Investment Officers, i.e., the City Treasurer and the Deputy City Treasurer, shall be governed by the "Code of Ethics" and the "Code of Professional Conduct" of the California Municipal Treasurers Association. The Investment Officers shall refrain from personal business activity that could conflict with proper execution of the investment program, or which would impair their ability to make impartial investment decisions.
PRUDENCE
Generally, investments shall be made in the context of the "prudent investor" rule, which states:
"...investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived." Officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility 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.
AUTHORIZED INVESTMENTS
The City is governed by California Government Code, Sections 53600 et. seq. Within the 6 context of these limitations, the City seeks to further restrict eligible investments to the guidelines listed below. In the event a discrepancy is found between this policy and the Code, the more restrictive parameters will take precedence. Percentage holding limits and minimum credit quality listed in this section apply at the time the security is purchased. Any investment currently held at the time the policy is adopted which does not meet the new policy guidelines can be held until maturity and shall be exempt from the current policy. At the time of the investment’s maturity or liquidation, such funds shall be reinvested only as provided in the current policy.
An appropriate risk level shall be maintained by primarily purchasing securities that are of high quality, liquid, and marketable. The portfolio shall be diversified by security type and institution to avoid incurring unreasonable and avoidable risks regarding specific security types or individual issuers.
the The following investments are authorized:
1. United States Treasury Bills, Bonds, and Notes, and other government obligations for which the full faith and credit of the United States are pledged for the payment of principal and interest. There are no limits on the dollar amount or percentage that the City may invest in U.S. Treasuries, provided that the maximum maturity is five (5) years.
2. Obligations issued by United States GovernmentFederal Agencies or United States Government-Sponsored Enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
There are no limits on the dollar amount or percentage that the Agency may invest in Federal Agency or Government-Sponsored Enterprises (GSEs), provided that:
a) No more than 30% of the portfolio may be invested in any single Agency/GSE issuer.
b) The maximum maturity does not exceed five (5) years. c) The maximum percent of agency callable securities in the portfolio will be 20%.
3. Municipal securities, including obligations of the City, the State of California and any local agency within the State of California, provided that:
a) The securities are rated in a rating category of “A” or its equivalent or better by at least one nationally recognized statistical rating organization (“NRSRO”).
b) No more than 5% of the portfolio may be invested in any single issuer. c) No more than 30% of the portfolio may be in Municipal Securities. d) The maximum maturity does not exceed five (5) years.
4. Municipal securities (Registered Treasury Notes or Bonds) of any of the other 49 states in addition to California, including bonds payable solely out of the revenues 7 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:
a) The securities are rated in a rating category of “A” or its equivalent or better by at least one nationally recognized statistical rating organization (“NRSRO”).
b) No more than 5% of the portfolio may be invested in any single issuer. c) No more than 30% of the portfolio may be in Municipal Securities. d) The maximum maturity does not exceed five (5) years.
5. Banker’s Acceptances, provided that:
a) They are issued by institutions which have short-term debt obligations rated “A-1” or its equivalent or better by at least one NRSRO; or long-term debt obligations which are rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
b) No more than 40% of the portfolio may be invested in Banker’s Acceptances.
c) No more than 5% of the portfolio may be invested in any single issuer. d) The maximum maturity does not exceed 180 days.
6. Commercial Paper, provided that the securities are issued by an entity that meets all of the following conditions in either paragraph (a) or (b) and other requirements specified below:
a) Securities issued by corporations:
o A corporation organized and operating in the United States with assets more than $500 million.
o The securities are rated “A-1” or its equivalent or better by at least one NRSRO.
o If the issuer has other debt obligations, they must be rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
b) Securities issued by other entities:
o The issuer is organized within the United States as a special purpose corporation, trust, or limited liability company. o The securities must have program-wide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond.
o The securities are rated “A-1” or its equivalent or better by at least one NRSRO.
No more than 10% of the outstanding commercial paper of any single issuer.
8 No more than 25% of the City’s investment assets under management may be invested in Commercial Paper.
No more than 5% of the portfolio may be invested in any single issuer. The maximum maturity does not exceed 270 days.
7. Negotiable Certificates of Deposit (NCDs), issued by a nationally or statechartered bank, a savings association or a federal association, a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank, provided that:
a) The amount of the NCD insured up to the FDIC limit does not require any credit ratings.
b) Any amount above the FDIC insured limit must be issued by institutions which have short-term debt obligations rated “A-1” or its equivalent or better by at least one NRSRO; or long-term obligations rated in a rating category of “A” or its equivalent or better by at least one NRSRO. c) No more than 30% of the total portfolio may be invested in NCDs. d) No more than 5% of the portfolio may be invested in any single issuer. e) The maximum maturity does not exceed five (5) years.
8. Federally Insured Time Deposits (Non-Negotiable Certificates of Deposit) in state or federally chartered banks, savings and loans, or credit unions, provided that:
a) The amount per institution is limited to the maximum covered under federal insurance.
b) No more than 20% of the portfolio will be invested in a combination of federally insured and collateralized time deposits.
c) The maximum maturity does not exceed five (5) years.
9. Collateralized Time Deposits (Non-Negotiable Certificates of Deposit) in state or federally chartered banks, savings and loans, or credit unions in excess of insured amounts which are fully collateralized with securities in accordance with California law, provided that:
d) No more than 20% of the portfolio will be invested in a combination of federally insured and collateralized time deposits.
e) The maximum maturity does not exceed five (5) years.
10. Collateralized Bank Deposits. City’s deposits with financial institutions will be collateralized with pledged securities per California Government Code, Section 53651. There are no limits on the dollar amount or percentage that the City may invest in collateralized bank deposits.
11. Repurchase Agreements collateralized with securities authorized under California Government Code, maintained at a level of at least 102% of the market value of the Repurchase Agreement. There are no limits on the dollar amount or 9 percentage that the City may invest, provided that:
a) Securities used as collateral for Repurchase Agreements will be delivered to an acceptable third party custodian.
b) Repurchase Agreements are subject to a Master Repurchase Agreement between the City and the provider of the repurchase agreement. The Master Repurchase Agreement will be substantially in the form developed by the Securities Industry and Financial Markets Association (SIFMA). c) The maximum maturity does not exceed one (1) year.
12. Medium Term Corporate Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States, provided that:
a) The securities are rated in a rating category of “A” or its equivalent or better by at least one NRSRO.
b) No more than 30% of the total portfolio may be invested in medium term notes.
c) No more than 5% of the portfolio may be invested in any single issuer. d) The maximum maturity does not exceed five (5) years.
2. Repurchase Agreements (repos) - with banks and dealers with which the City has entered into a master repurchase contract, which specifies terms and conditions of repurchase agreements
Time Deposits (CDs) - nonnegotiable time certificates of deposit issued by a national or state chartered bank or federal savings and loan association. CDs are collateralized.
13. Money Market Mutual Funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and issued by diversified management companies and meet either of the following criteria:
a) Have attained the highest ranking or the highest letter and numerical rating provided by not less than two (2) NRSROs; or
b) Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of $500 million.
No more than 20% of the total portfolio may be invested in the shares of any one Money Market Mutual Fund.
3. Mutual Funds - pools of authorized investments, authorized only as part of the City's banking service agreement, i.e., a sweep account.
4.14. Local Agency Investment Fund (LAIF) - pool established by the State 10 Treasurer for the benefit of local agencies, up to the maximum amount permitted by LAIF.
15. Supranational obligations, provided that:
Issues are US dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank.
The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO.
No more than 30% of the total portfolio may be invested in these securities. No more than 10% of the portfolio may be invested in any single issuer. The maximum maturity does not exceed five (5) years.
16. Asset-Backed, Mortgage-Backed, Mortgage Pass-Through Securities, and Collateralized Mortgage Obligations from issuers not defined in sections 1 and 2 of the Authorized Investments section of this policy, provided that:
The securities are rated in a rating category of “AA” or its equivalent or better by a NRSRO.
No more than 20% of the total portfolio may be invested in these securities. No more than 5% of the portfolio may be invested in any single AssetBacked or Commercial Mortgage security issuer. The maximum legal final maturity does not exceed five (5) years.
INELIGIBLE INVESTMENTS
State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to futures and options. In accordance with Government Code, Section 53601.6, investment in inverse floaters, range notes, or mortgage derived interest-only strips is prohibited.
Investment in any security that could result in a zero interest accrual if held to maturity is prohibited Under a provision sunsetting on January 1, 2026, securities backed by the U.S. Government that could result in a zero- or negative-interest accrual if held to maturity are permitted. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited.
Purchasing or selling securities on margin is prohibited. 11 The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited.
The purchase of foreign currency denominated securities is prohibited. Agencies that are not Qualified Institutional Buyers (QIB) as defined by the Securities and Exchange Commission are prohibited from purchasing Private Placement Securities. The SEC defines a QIB as having at least $100,000,000 in securities owned and invested.
Ineligible investments include, but not limited to, common stocks, reverse repurchase agreements, inverse floaters and "derivatives." Leveraging shall not be used.
INVESTMENT POOLS/MUTUAL FUNDS
The City shall conduct a thorough investigation of any pool or mutual fund prior to making an investment, and on a continual basis thereafter. The City Treasurer shall develop a questionnaire which will answer the following general questions:
A description of eligible investment securities, and a written statement of investment policy and objectives.
A description of interest calculations and how it is distributed, and how gains and losses are treated.
A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited.
A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.
A schedule for receiving statements and portfolio listings. Are reserves, retained earnings, etc. utilized by the pool/fund? A fee schedule, and when and how is it assessed.
Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
RISK MANAGEMENT AND DIVERSIFICATION
Mitigating Credit Risk in the Portfolio
Credit risk is the risk that a security or a portfolio will lose some or all its value due to a real or perceived change in the ability of the issuer to repay its debt. The City will mitigate credit risk by adopting the following strategies:
The diversification requirements included in the “Authorized Investments” section of this policy are designed to mitigate credit risk in the portfolio. 12 No more than 5% of the total portfolio may be deposited with or invested in securities issued by any single issuer unless otherwise specified in this policy.
The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to manage the quality, liquidity or yield of the portfolio in response to market conditions or City’s risk preferences. If a security owned by the City is downgraded to a level below the requirements of this policy, making the security ineligible for additional purchases, the following steps will be taken:
o Any actions taken related to the downgrade by the investment manager will be communicated to the City Treasurer in a timely manner. o If a decision is made to retain the security, the credit situation will be monitored and reported to the City Council.
Mitigating Market Risk in the Portfolio
Market risk is the risk that the portfolio value will fluctuate due to changes in the general level of interest rates. The City recognizes that, over time, longer-term portfolios have the potential to achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The City will mitigate market risk by providing adequate liquidity for short-term cash needs, and by making longer-term investments only with funds that are not needed for current cash flow purposes.
The City further recognizes that certain types of securities, including variable rate securities, securities with principal paydowns prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
The City will maintain a minimum of six months of budgeted operating expenditures in short term investments to provide sufficient liquidity for expected disbursements.
The maximum stated final maturity of individual securities in the portfolio will be five (5) years, except as otherwise stated in this policy. The duration of the portfolio will generally be approximately equal to the duration (typically, plus or minus 20%) of a Market Benchmark, an index selected by the City based on the City’s investment objectives, constraints and risk tolerances.
REPORTING
According to state law, the City Treasurer shall render an investment report no less than quarterly to the chief executive officer and the legislative body of the City. 13 POLICY REVIEW
This investment policy shall be reviewed by the City Council at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, rate of return, and its relevance to current law and financial and economic trends. Amendments and modifications to the policy shall be accepted by the City Council prior to implementation.
Respectfully submitted,
Mark W. CelioAndrew Kalinowski
City Treasurer
July 1, 20202022