Attachment AAttachment ACITY OF SALINAS
Attachment A
Attachment A
ANNUAL Investment Policy
PURPOSE
The purpose of this document is to set out policies and procedures that enhance opportunities for a prudent and systematic investment policy and to organize and formalize investment-related activities.
The investment policies and practices of the City of Salinas (the “City”) are, in every case, subject to and limited by applicable provisions of state law and to prudent money management principles. All funds will be invested in accordance with the City’s Investment Policy, and applicable provisions of Chapter 4 of Part 1 of Division 2 of Title 5 of the California Government Code (Section 53600 et seq.). The investment of bond proceeds must also meet the provisions of relevant bond documents.
SCOPE
It is intended that this policy cover all short-term operating funds and investment activities of the City and Redevelopment Agency. These funds are accounted for in the annual audit report, and includes:
General Fund
Special Revenue Funds
Debt Service Funds
Capital Projects Funds
Enterprise Funds
Internal Service Funds
Fiduciary Funds
This investment policy applies to all City and Successor Agency transactions involving the financial assets and related activity of the above-mentioned funds. Any additional funds that may be created from time to time shall also be administered with the provisions of this policy and comply with the California Government Code.
The City will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles.
OBJECTIVES
The City has a fiduciary responsibility to maximize the productive use of all the assets entrusted to its care and to invest and manage those public funds wisely and prudently. As such, the City shall strive to maintain the level of investment of all idle funds as near 100% as possible through daily and projected cash flow determinations, investing in those investment vehicles deemed prudent and allowable under current legislation of the State of California and the ordinances of the City of Salinas.
The investment of the funds of the City of Salinas is directed to the goals of, in order of priority, safety, liquidity and yield.
Safety of principal is the foremost objective of the City. Each investment transaction shall seek to ensure that capital losses are limited. However, it is recognized that market prices of securities will vary depending on economic and interest rate conditions at any point in time. It is further recognized, that in a well-diversified investment portfolio, occasional measured losses are inevitable due to security sales, economic, bond market, or individual security credit analysis. These occasional losses must be considered within the context of the overall investment program objectives and the resultant long-term rate of return.
The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated.
An amount of money deemed sufficient to meet one payroll and two weeks claims shall be maintained in highly liquid investment vehicles such as the State Local Agency Investment Fund, or other similar investment instrument The City’s investment portfolio shall be managed to attain a market average rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and cash flow requirements, and state and local law, ordinances or resolutions that restrict the placement of short term funds.
PRUDENT INVESTOR STANDARD
In managing its investment program, the City will observe the “Prudent Investor” standard as stated in Government Code Section 53600.3, applied in the context of managing an overall portfolio. Investments will be made with care, skill, prudence and diligence, taking into account the prevailing circumstances, including, but not limited to general economic conditions, the anticipated needs of the City and other relevant factors that a prudent person acting in a fiduciary capacity and familiar with those matters would use in the stewardship of funds of a like character and purpose.
PERFORMANCE EVALUATION
Investment performance is to be continually monitored and evaluated by the Finance Director. The City’s primary portfolio performance will be measured against an objective index with similar attributes to the City’s portfolio.
DELEGATION OF AUTHORITY
The City Council has delegated investment authority for a one-year period to the Director of Finance pursuant to Section 46 of the City Charter and Chapter 12 of the City Code. This delegation is further authorized by Section 53600, et seq. of the Government Code of the State of California, which specifies the various permissible investment vehicles, collateralization levels, portfolio limits, and reporting requirements. Subject to review, the City Council may renew the delegation of authority each year.
No person may engage in an investment transaction except as provided under the terms of the policy and the procedures established by the Finance Director. Portfolio management and transactions may be delegated to an independent investment advisor registered with the SEC. The advisor shall follow the investment policy, herein stated, and such other written instructions as are provided.
The Treasurer and the delegated investment 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.
ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business activity that conflicts with proper executions of the investment program, or impairs their ability to make impartial investment decisions. Additionally, the City Officials are required to annually file applicable financial disclosures as required by the Fair Political Practices Commission (FPPC).
SAFEKEEPING and custody
To protect against fraud or embezzlement of losses caused by collapse of an individual securities dealer, securities owned by the City shall be held in safekeeping by a third party bank / trust department.
All security transactions entered into by the City of Salinas shall be conducted on delivery-versus-payment (DVP) basis. All securities purchased or acquired shall be delivered to the City of Salinas by book entry, physical delivery, or by third party custodial agreement as required by CGC 53601.
All exceptions to this safekeeping policy must be approved by the City Manager in written form and included in monthly reporting to the City Council.
The only exception to the foregoing shall be depository accounts and securities purchases made with: (i) LAIF and other LGIPs; (ii) non-negotiable certificates of deposit, and, (iii) money market mutual funds, since the purchased securities are not deliverable. Evidence of each these investments will be held by the City.
DIVERSIFICATION
The City of Salinas will diversify its investments by security type and institution. It is the policy of the City of Salinas to diversify its investment portfolio. Assets shall be diversified to reduce the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer, or a specific class of securities. Diversification strategies shall be determined and revised periodically and approved by the City Manager and the City Council. In establishing specific diversification strategies, the following general policies and constraints shall apply:
(a) Maturities selected shall provide for stability of income and liquidity. (b) Disbursement and payroll dates shall be covered through maturity investments and marketable securities.
INTERNAL CONTROL
The Finance Director shall establish a system of written internal controls to regulate the City’s investment activities, including the activities of any subordinate officials acting on behalf of the City.
The investment portfolio and all related transactions are reviewed and balanced to appropriate general ledger accounts by the Finance Staff on a monthly basis.
An independent analysis by the City’s external auditor shall be conducted annually as part of the annual audit to review internal control, account activity, and compliance with the Government Code and with policies and procedures and reported to City Council.
REPORTING
The Finance Director will submit to City Council a monthly quarterly of investment transactions.
Every quarter, the Finance Director shall render to the City Manager and City Council an investment report, which shall include, at a minimum, the following information for each individual investment:
Type of investment instrument (i.e., Treasury Bill, medium term note); Issuer name (i.e., General Electric Credit Corporation); Credit rating, if any, by a Nationally Recognized Statistical Rating Organization Purchase date (trade and settlement date);
Maturity date;
Par value;
Purchase price;
Current market value and the source of the valuation;
Overall portfolio yield based on cost.
The quarterly report also shall (a) state compliance of the portfolio to the statement of investment policy, or manner in which the portfolio is not in compliance; (b) include a description of any of the City's funds, investments, or programs that are under the management of contracted parties, including lending programs; and (c) include a statement denoting the ability of the City to meet its expenditure requirements for the next six months, or provide an explanation as to why sufficient money shall, or may, not be available.
QUALIFIED BROKER DEALERS
Whenever practical, a competitive bid process will be used for the purchase and sale of investments. It shall be the City’s policy to execute investment transactions only with broker/dealers and financial institutions deemed eligible by the Finance Director or the City's Investment Advisor if applicable, will be used to place all investment purchases.
AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code sections 53601 et seq. Percentage holding limits listed in this section apply at the time the security is purchased. Ratings, where shown, specify the minimum credit rating category required at purchased without regard to +/- or 1,2,3 modifiers, if any. In the event a security held by the City is subject to a credit rating change that brings it below the minimum credit ratings specified in this policy, the Finance Director should notify the City Council of the change. The course of action to be followed will then be decided on a case-by-case basis, considering such factors as the reason for the change, prognosis for recovery or further rate drops, and the market price of the security.
The City shall strive to maintain the level of investment of all idle funds as near 100% as possible, through daily and projected cash flow determinations. Unless otherwise specified in this section, no investment shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement as authorized by this section, that at the time of the investment has a term remaining to maturity in excess of five years. The Finance Director, or designee, is authorized to purchase the following investment instruments:
Maximum
Permitted Investments/Deposits
Percentages
Maturity
U.S. Treasury Securities
Unlimited
5 Years*
Federal Agency/GSE Securities
Unlimited
5 Years*
California Municipal Securities
Unlimited
5 Years*
Non-California Municipal Securities
Unlimited
5 Years*
Repurchase Agreements
20%
92 Days
Reverse Repurchase Agreements
20%
92 Days**
Bankers Acceptances
40%
180 Days
Commercial Paper
25%
270 Days
Medium Term Notes
30%
5 Years
Bank Deposits
100%
5 Years*
Negotiable Certificates of Deposit
30%
5 Years*
Placement Service CDs
30%
5 Years*
LAIF
50 Million***
n/a
California Asset Management Program
100%
n/a
Money Market Funds
20%
n/a
*Maximum term unless expressly authorized by City Council and within the prescribed time frame for said approval. **City Council approval is required.
***Limit set by LAIF Governing Board, not the Government Code.
A. U.S. Treasury, notes, bonds, bills, or other certificates of indebtedness, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest.
B. Federal agency or United States government-sponsored enterprise obligations, participation, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises including debt guaranteed under the FDIC’s Temporary Liquidity Guarantee Program, which is backed by the full faith and credit of the U.S. Government. No more than 40% of the City's portfolio may be invested in any one federal agency.
C. Obligations of the State of California or any local agency within the state, including bonds payable solely out of revenues from a revenue producing property owned, controlled or operated by the state or any local agency or by a department, board, agency or authority of the state or any local agency.
D. Registered treasury notes or bonds of any of the other 49 United 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 United States, in addition to California.
E. Repurchase Agreements. Repurchase agreements are to be used solely as short-term investments not to exceed 92 days. The City may enter into repurchase agreements with primary government securities dealers rated "A" or better by two nationally recognized statistical rating organization (NRSRO). Counterparties should also have (i) a short-term credit rating in the highest category by a NRSRO; (ii) minimum assets and capital size of $25 billion in assets and $350 million in capital; (iii) five years of acceptable audited financial results; and (iv) a strong reputation among market participants.
The following collateral restrictions will be observed: Only U.S. Treasury securities or Federal Agency securities will be acceptable collateral. All securities underlying repurchase agreements must be delivered to the City's custodian bank versus payment or be handled under a properly executed tri-party repurchase agreement. The total market value of all collateral for each repurchase agreement must equal or exceed 102% of the total dollar value of the money invested by the City for the term of the investment. For any repurchase agreement with a term of more than one day, the value of the underlying securities must be reviewed on an on-going basis according to market conditions. Market value must also be calculated each time there is a substitution of collateral. Since the market value of the underlying securities is subject to daily market fluctuations, the investments in repurchase agreements shall be in compliance if the value of the underlying securities is brought back up to 102% no later than the next business day.
The City or its trustee shall have a perfected first security interest under the Uniform Commercial Code in all securities subject to repurchase agreement. The City shall have properly executed a Master Repurchase Agreement with each counter party with which it enters into repurchase agreements.
F. Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met:
The security to be sold on reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the City for a minimum of 30 days prior to sale.
The total of all reverse repurchase agreements and securities lending agreements on investments owned by the City does not exceed 20 percent of the market value of the portfolio.
The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty by way of a reverse repurchase agreement or securities lending agreement shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
Investments in reverse repurchase agreements, securities lending agreements, or similar investments in which the City sells securities prior to purchase with a simultaneous agreement to repurchase the security may only be made upon prior approval of the City Council and shall only be made with primary dealers of the Federal Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a significant banking relationship with the City. The City may not invest more than 20% of its portfolio in reverse repurchase agreements, and must always match its maturities to the reinvestment.
G. Bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers' acceptances. Purchases of bankers' acceptances may not exceed 180 days' maturity, or 40% of the City's surplus money that may be invested. However, no more than 30% of the City's surplus funds may be invested in the bankers' acceptances of any one commercial bank. Eligible bankers' acceptances are restricted to issuing financial institutions with short-term paper rated in the highest category by one NRSRO.
H. Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided for by a NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2) below:
1. The entity meets the following criteria: (A) is organized and operating in the United States as a general corporation. (B) has total assets in excess of five hundred million dollars ($500,000,000). (C) has debt other than commercial paper, if any, that is rated "A" or higher by a NRSRO.
2. The entity meets the following criteria: (a) is organized within the United States as a special purpose corporation, trust, or limited liability company. (b) Has program wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond. (c) Has commercial paper that is rated "A-1" or higher, or the equivalent, by a NRSRO.
The City may invest no more than 25% of its portfolio in eligible commercial paper, and the City may purchase no more than 10% of the outstanding commercial paper of any single issuer.
I. Medium term notes 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. Notes eligible for investment under this subsection must be rated "A" or higher by a NRSRO. Purchases of medium term notes may not exceed 30% of the City's portfolio.
J. FDIC insured or fully collateralized demand deposit accounts, savings accounts, market rate accounts, time certificates of deposits (“TCDs”) and other types of bank deposits in financial institutions located in California. The amount on deposit in any financial institution shall not exceed the shareholder’s equity. To be eligible to receive City deposits, the financial institution must have received a minimum overall satisfactory rating, under the Community Redevelopment Act, for meeting the credit needs of California Communities in its most recent evaluation. Bank deposits are required to be collateralized as specified under Government Code Section 53630 et. seq. The Treasurer, at his/her discretion, may waive the collateralization requirements for any portion that is covered by federal deposit insurance. The City shall have a signed agreement with any depository accepting City funds per Government Code Section 53649. There is no limit on the percentage of the portfolio that may be invested in bank deposits. However, a maximum of 30 percent of the portfolio may be invested in TCDs.
K. Negotiable Certificates of Deposit issued by a nationally or state-chartered bank or a state or federal savings and loan association or by a state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit, in combination with placement service CDs, may not exceed 30% of the City's portfolio.
L. Certificates of deposit placed through a deposit placement service shall meet the requirements under Government Code Section 53601.8. The full amount of the principal and the interest that may be accrued during the maximum term of each certificate of deposit shall at all times be insured by federal deposit insurance. Purchased of placement service CDs, in combination with negotiable CDs, may not exceed 30 percent of the City’s portfolio.
M. State of California's Local Agency Investment Fund (LAIF). Investment in LAIF may not exceed $50 million. Whenever the City has any funds invested in LAIF, a copy of LAIF’s Answer Book shall be maintained on file. In addition, the Finance Director should review the LAIF portfolio periodically.
N. Local Government Investment Pool. Shares of beneficial interest issued by a joint powers authority organized pursuant to Government Code Section 6509.7. To be eligible for purchase, the pool must meet the requirements of California Government Code Section 53601(p), the pool must seek to maintain a stable Net Asset Value (“NAV”), and the pool must rated at least AAAm, or its equivalent, by a NRSRO.
Whenever the City has any funds invested in a LGIP, a copy of the pool’s current information statement shall be maintained on file. In addition, the Finance Director should review the pool’s summary portfolio holdings periodically.
O. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, et seq.). The purchase price of shares shall not exceed 20 percent of the investment portfolio of the City. To be eligible for investment pursuant to this subdivision these companies shall either:
1. Attain the highest ranking letter or numerical rating provided by not less than two of the three largest NRSRO or
2. Have 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 and with assets under management in excess of $500,000,000.
Whenever the City has any funds invested in a money market fund, a copy of the money market fund’s current information statement shall be maintained on file. In addition, the Finance Director should review the money market fund’s summary portfolio holdings periodically.
PROHIBITED INVESTMENTS
Any security type or structure not specifically approved by this policy is hereby specifically prohibited. Security types which are thereby prohibited include, but are not limited to, inverse floaters, derivatives, range notes, interest only strips that are derived from a pool of mortgages, or in any investment that could result in zero interest accrual if held to maturity.
INVESTMENT OF BOND PROCEEDS
Bond proceeds shall be invested in the securities permitted by the applicable bond documents. If the bond documents are silent as to the permitted investments, bond proceeds will be invested in the securities permitted by this policy. Notwithstanding the other provisions of this policy, the percentage or dollar portfolio limitations listed in elsewhere in this policy do not apply to bond proceeds. In addition to the securities listed in this Policy, bond proceeds may be invested in a structured investment product if approved by the Finance Director.
LEGISLATIVE CHANGES
Any State of California legislative action that further restricts allowable maturities, investment type or percentage allocations will be deemed to be incorporated into the City of Salinas’s investment policy and will supersede any and all applicable language.
INTEREST EARNINGS
All moneys earned and collected from investments authorized in this policy shall be allocated monthly to various fund accounts based on the pooled cash balance in each fund as a percentage of the entire pooled portfolio.
POLICY REVIEW
The City of Salinas’s investment policy shall be adopted by the City Council on an annual basis. This investment policy shall be reviewed at least annually to insure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends. Any amendments to the policy shall be forwarded to the City Council for approval.
Glossary
Agency: Federal agency securities and /or Government-sponsored enterprises.
Bankers’ Acceptance (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.
Broker: A broker brings buyers and sellers together for a commission.
California Local Government Debt: Is bonds, notes, warrants, or other evidences of indebtedness of any local agency within California. California local government debt is a permitted investment under the California Government Code. The Government Code does not specify minimum credit ratings for local government debt in which local agencies may invest.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CD’s are typically negotiable.
Collateral: Securities, evidence of deposit of 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.
Comprehensive Annual Financial Report (CAFR): The official annual report for the City of Salinas. It includes five combine statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section.
Coupon: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value. (b) A 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: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities.
Derivatives: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities).
Discount: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount.
Diversification: Dividing investment funds among a variety of securities offering independent returns.
Federal Credit Agencies: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L’s, small business firms, students, farmers, farm cooperatives, and exporters.
Federal Deposit Insurance Corporation (FDIC): A federal agency that insures bank deposits, currently up to $250,000 per deposit.
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 and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLB 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 auspices 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 called, is a private stockholder-owned corporation. The corporation’s purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.
Federal Open Market Committee (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve and Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee 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 Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system.
Government National Mortgage Association (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or FmHA mortgages. The term “pass-throughs” is often used to describe Ginnie Maes.
Issuer: Any corporation, government unit or financial institution which borrows money through the sale of securities.
Liquidity: A liquid asset is one that can be converted 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 size can be done at those quotes.
Local Agency Investment Fund (LAIF): A special fund in the State Treasury which local agencies may use to deposit funds for investment. All interest is distributed to those agencies participating on a proportionate share determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly via direct deposit to the LAIF account. The State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one per cent of the earnings.
Local Government Investment Pool (LGIP): The aggregate of all funds from political subdivisions that are pooled together for investment and reinvestment.
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 establishes each party’s rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.
Maturity: The date upon which the principal or stated value of an investment becomes due and payable.
Money Market: The market in which short-term debt instruments (bills, commercial paper, bankers’ acceptances, etc.) are issued and traded.
Mutual Funds: Referred to in the Government Code, Section 53601(l) as “shares of beneficial interest issued by diversified management companies.” The Mutual Fund must be restricted by its by-laws to the same investments as the local agency by the Government Code. These investments are Treasury issues, Federal Agency issues, State of California and City (within California) debt obligations, Bankers Acceptances, Commercial Paper, Certificates of Deposit, Negotiable Certificates of Deposit, Repurchase Agreements, Reverse Repurchase Agreements, and Medium Term Corporate Notes. The quality rating and percentage restrictions in each investment category applicable to the local agency also apply to the Mutual Fund.
Negotiable: Term used to designate a security, the title to which is transferable by delivery.
Offer: The price asked by a seller of securities. (When you are buying securities, you ask for an offer). See Asked and Bid.
Open Market Operations: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve’s most important and most flexible monetary policy tool.
Portfolio: Collection of securities held by an investor.
Primary Dealer: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers included Securities and Exchange Commission (SEC) – registered securities broker-dealers, banks, and a few unregulated firms.
Principal: Describes the original cost of a security. It represents the amount of capital or money which the investor pays for the investment.
Prudent Person Rule: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state – the so-called legal list. In other states the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital.
Qualified Public Depositories: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the State to hold public deposits.
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 the current income return.
Repurchase Agreement (RP or Repo): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank services.
Safekeeping: A service to customers rendered by banks 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.
Security: An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity.
Securities & Exchange Commission: Agency created by Congress to protect investors in securities transactions by administering securities legislation.
SEC Rule 15C3-1: See Uniform Net Capital Rule.
Structured Notes: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, SLMA, etc.) and Corporations which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve.
Treasury Bills: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year.
Treasury Notes: Medium-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to ten years.
Uniform Net Capital Rule: Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among member of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.
Yield: The rate of annual income return on an investment, expressed as a percentage. (a) Income Yield is obtained by dividing the current dollar income by the current market price for the security. (b) Net Yield or Yield to Maturity is 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 of the bond.
CITY OF SALINAS
INVESTMENT GUIDELINES AND STRATEGY
I. GUIDELINES - Guidelines are established to direct and control activities in such a manner that previously established goals are achieved.
1. Investment Transaction. Every investment transaction must be authorized and reviewed by the Finance Director or his/her designee.
2. Pooled Cash. Whenever practical, local agency cash is consolidated into one bank account and invested on a pooled concept basis. Interest earnings are allocated monthly according to month-end cash and investment balances for each fund.
3. Competitive Bids. Purchase and sales of securities are made on the basis of competitive offers and bids when practical.
4. Cash Forecast. The cash flow for the City is analyzed with the receipt of revenues and maturity of investments scheduled so that adequate cash will be available to meet disbursement requirements.
5. Investment Limitations. Security purchases and holdings are maintained within statutory limits imposed by the California Government Code. Current limits are:
Bankers’ Acceptances 40% Section 53601(f)
Commercial Paper 25% Section 53601(g)
Negotiable Certificates of Deposit 30% Section 53601(h) Medium Term Notes 30% Section 53601(j)
Money Market Mutual Funds 20% Section 53601(k)
Asset-Backed/Mortgage-Backed Securities 20% Section 53601(n) Federal Agency restriction 60% per Agency Section 14 of Policy Local Agency Investment Fund $50,000,000 per Section 14 of Policy CAMP no limit per Section 14 of Policy
Portfolio Maturing within one year 20% per Section 14 of Policy
6. Liquidity. The marketability of a security is considered at the time of purchase, as the security may have to be sold at a later date to meet unanticipated cash demands.
7. Diversification. The portfolio should consist of a mix of various types of securities, issuers, and maturities.
CITY OF SALINAS
INVESTMENT GUIDELINES AND STRATEGY
(Continued)
II. STRATEGY - Strategy refers to the ability to manage financial resources in the most advantageous manner.
1. Economic Forecasts. Economic Forecasts are obtained periodically from economists and financial experts through bankers and brokers to assist the Finance Director or his/her designee with the formulation of an investment strategy for the local agency.
2. Implementing Investment Strategy. Investment transactions are executed which conform with anticipated interest rate trends and the current investment strategy plan.
3. Rapport. A close working relationship is maintained with large vendors of the city. The objective is to pinpoint when large disbursements will clear the city's bank account. It is essential for good cash control that such large expenditures be anticipated, estimated as to dollar amount, and communicated to the Finance Director or his/her designee for liquidity planning purposes.
4. Preserve Portfolio Value. Field standards are developed in order to maintain earnings near the market and to preserve the value of the portfolio.
CITY OF SALINAS
INVESTMENT PROCEDURES
INTERNAL CONTROL - GUIDELINES
OBJECTIVES OF INTERNAL CONTROL
Internal control is the plan of organization and all the related systems established by the management's objective of ensuring, as far as practicable:
The orderly and efficient conduct of its business, including adherence to management policies.
The safeguarding of assets.
The prevention or detection of errors and fraud.
The accuracy and completeness of the accounting records.
The timely preparation of reliable financial information.
LIMITATIONS OF INTERNAL CONTROL
No internal control system, however elaborate, can by itself guarantee the achievement of management's objectives. Internal control can provide only reasonable assurance that the objectives are met, because of its inherent limitations, including:
Management's usual requirement that a control be cost-effective.
The direction of most controls at recurring, rather than unusual, types of transactions.
Human error due to misunderstanding, carelessness, fatigue, or distraction.
Potential for collusion that circumvents controls dependent on the segregation of functions.
Potential for a person responsible for exercising control abusing that responsibility; a responsible staff member could be in a position to override controls which management has set up.
CITY OF SALINAS
INVESTMENT PROCEDURES
INTERNAL CONTROL - GUIDELINES
(Continued)
ELEMENTS OF INTERNAL CONTROL
Elements of a system of internal control are the means by which an organization can satisfy the objectives of internal control. These elements are:
1. ORGANIZATION
Specific responsibility for the performance of duties should be assigned and lines of authority and reporting clearly identified and understood.
2. PERSONNEL
Personnel should have capabilities commensurate with their responsibilities. Personnel selection and training policies together with the quality and quantity of supervision are thus important.
3. SEGREGATION OF FUNCTIONS
Segregation of incompatible functions reduces the risk that a person is in a position both to perpetrate and conceal errors or fraud in the normal course of duty. If two parts of a transaction are handled by different people, collusion is necessary to conceal errors or fraud. In particular, the functions that should be considered when evaluating segregation of functions are authorization, execution, recording, custody of assets, and performing reconciliations.
4. AUTHORIZATION
All transactions should be authorized by an appropriate responsible individual. The responsibilities and limits of authorization should be clearly delineated. The individual or group authorizing a specific transaction or granting general authority for transactions should be in a position commensurate with the nature and significance of the transactions. Delegation of authority to authorize transactions should be handled very carefully.
5. CONTROLS OVER AN ACCOUNTING SYSTEM
Controls over an accounting system include the procedures, both manual and computerized, carried out independently to ascertain that transactions are complete, valid, authorized, and properly recorded.
CITY OF SALINAS
CASH CONTROLS
PROCEDURES PERFORMED BY EXTERNAL AUDITORS WITH RESPECT TO CASH RECEIPTS A. City procedures and controls are reviewed. Some of the system strengths are:
1. Receipts are controlled upon receipt by proper registration devices.
2. Receipts are reconciled on a daily basis.
3. Amounts batched and deposited intact.
4. Bank reconciliations are reviewed.
5. Prompt posting of cash receipt entries in books.
6. Proper approval required for write-off's of customer accounts.
7. Checks are restrictively endorsed upon receipt or when run through cash register.
8. Adequate physical security over cash.
9. Individuals that handle cash do not post to customer account records or process billing statements.
10. Adequate supervision of Finance Department operations.
B. Significant revenues are confirmed directly with payer and compared with City books to make sure amounts are recorded properly.
C. Cash balances are substantiated by confirming all account balances recorded in books. Bank reconciliations are reviewed for propriety and recalculated by the auditor. All significant reconciling items on bank reconciliations are verified as valid reconciling items by proving to subsequent bank statements.
CITY OF SALINAS
SEGREGATION OF RESPONSIBILITIES OF
THE TREASURY FUNCTIONS
Function Responsibility
1. Formal Investment Policy should be:
Prepared By: Finance Director
Approved By: City Council
2. Develop Investment Strategy Finance Director or Registered Investment Advisor
3. Investment Strategy should be Finance Director
approved by
4. Execution of investment transactions:
Investments other than LAIF and Deposits Finance Director or Registered Investment Advisor Execution of LAIF and Deposit transfers Accounting Manager
5. Timely recording of investment transactions:
Recording of investment transactions Senior Accountant in the City's accounting records (but reviewed by Accounting Manager)
6. Verification of investment, Senior Accountant
i.e., match broker confirma-
tion to City's records
7. Confirmation of LAIF and Bank Wires Assistant Finance Director
8. Safeguarding of Assets and Records:
Reconciliation of City's Senior Accountant
records to bank statements and (but reviewed by Assistant safekeeping records Finance Director)
CITY OF SALINAS
SEGREGATION OF RESPONSIBILITIES OF
THE TREASURY FUNCTIONS
(Continued)
Function Responsibility
8. Safeguarding of Assets and Records
(continued):
Annual review of (a) financial Finance Director
institution's financial condition,
(b) safety, liquidity, and potential
yields of investment instruments.
9. No less than an annual Independent Auditors
review of investment
portfolio as prepared by
Senior Accountant and reviewed by
Finance Director
23 1
The details of the FDIC guarantee are provided in the FDIC’s regulations, 12 CFR Part 370, and at the FDIC’s website http://www.fdic.gov/regulations/resources/TLGP.
City of Salinas Statement of Investment Policy