FOR THE COUNCIL MEETING OF JUNE 18, 2024
COUNCIL AGENDA REPORT
TO: City Council
FROM: Interim City Manager Alex Posada
BY: Interim Director of Finance Xenia Bradford
SUBJECT: 2024 Investment Policy
Description:
The City Council will consider approving the annual Investment Policy for which the primary objectives are for the safety, liquidity, and yield of the City’s investment activities.
Environmental Notice: The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
RECOMMENDATIONS:
Adopt a Resolution approving the City of Santa Maria’s 2024 Investment Policy.
BACKGROUND:
California Government Code Section 53646 requires the Treasurer or Chief Fiscal Officer to annually submit a written Investment Policy to the City Council at a public meet ing.
Typically, the Investment Policy is updated for changes in regulations and presented to the City Council every June.
DISCUSSION:
The Investment Policy incorporates objectives and policies from a variety of notable sources such as the California Mu nicipal Treasurers' Association, the California Association of County Treasurers and Tax Collectors, the California Society of Municipal Finance Officers, the State of California Local Agency Investment Fund (LAIF), and Joint Powers Authority (Local Government Investment Pools).
The City’s Investment Policy:
1. Appoints the Director of Finance as the Investment Officer of the City; and
2. Assigns responsibility for investments to the Investment Officer; and
3. Establishes an Investment Oversight Committee consisting of the City Manager, Director of Finance, City Attorney, and a City Councilmember; and
4. Defines the investment objectives as:
2 a. Safety: Safety of principal is the foremost objective of the investment program; and
b. Liquidity: The funds of the City sh all be maintained liquid enough to meet all anticipated requirements; and
c. Yield and Average Market Rate of Return: After considering safety and liquidity, the investment program shall seek a market-average rate of return; and
d. Diversification: The portfolio shall be sufficiently diversified to avoid unreasonable risk; and
e. Prudence: Sets standards to be used by the Investment Officer as "prudent investor" (Government Code Section 53600.3); and
f. Public Trust: All participants in the investment process are custo dians of public funds and trust.
5. Requires that the City Treasurer submit a monthly investment report to the City Council; and
6. Authorizes and defines the suitable investments for City funds; and
7. Requires that a written system of internal controls be designe d to prevent losses from fraud, employee error, misrepresentation of third parties, unanticipated changes in financial markets, or imprudent actions by investment officers of the City; and
8. Requires that the Investment Policy be annually reviewed by the City’s Investment Oversight Committee and submitted to the City Council for adoption.
The Investment Policy indicates that the types of authorized investments are those types of investments allowed in Government Code Section 53600.3, and limited to:
1. LAIF; and
2. Obligations of the Federal or State government; and
3. Certificates of Deposit; and
4. Bankers' Acceptances/Commercial Paper; and
5. Money Market Mutual Funds; and
6. Medium-term Corporate Notes; and
7. California and California Local Agency Municipal Obligations; and
8. Supranationals; and
9. Joint Powers Authority (Local Government Investment Pools).
In addition to the investments listed above, government statutes authorize the use of other investment instruments, such as reverse repurchase agreements and derivatives; however, the Investment Officer is not authorized to purchase or use reverse repurchase agreements or derivatives in any form. Reverse repurchase agreements constitute short- term borrowing using securities as collateral. Derivatives are contracts whose value is tied to the price of some other asset, such as stocks, bonds, commodities, or currencies.
Based on consultation with the City’s asset management advisor, the PFM Group, staff recommends three change s to the 2024 Investment Policy. Tracked changes showing specific language modifications can be reviewed in detail in Exhibit A to the Resolution.
3 1. Provide minor language clarifications in the Asset Backed Securities Section as follows.
Asset-backed Securities
As authorized in Government Code Section 53601(o), the City may invest in any mortgage pass -through securities, collateralized mortgage obligations, mortgage - backed or other pay -through bonds, equipment lease -backed certificates, consumer receivable pass -through certificates, and consumer receivable -backed bonds and for securities eligible for investment not issued or guaranteed by federal agencies and GSEs, the following limitations apply:
A maximum remaining settle of five years or less with no more than 5 percent of the portfolio may be invested in the notes of any one issuer. Securities shall be rated in a rating category of “AA” or its equivalent or higher by a NRSRO.
Asset-backed securities may not exceed 20 percent of the City’s portfolio
2. Change frequency of Policy Statement Review by the City Council from annual frequency to when any changes are made.
Statement of Investment Policy
The Statement of Investment Policy shall be reviewed when there are any changes made to the policy and submitted to the City Council for adoption by resolution. This is to ensure the Policy's consistency with the overall objectives of preservation of principal, liquidity of yield, and its relevance to current law and financial and economic trends. Any amendments to this Policy shall be forwarded to City Council for approval.
3. Modify reporting frequency from monthly to quarterly as follows.
Quarterly Reporting to City Council:
The Investment Officer shall submit quarterly reports to the City Council summarizing the status of the current investment portfolio and the individual transactions executed over the last quarter. The report shall be prepared by the Treasury Manager or the Investment Officer’s designee in a manner which shall allow the Investment Oversight Commit tee City Council to ascertain whether investment activities during the reporting period have conformed to the Policy.
California Government Code Section 53646(b) provides mandatory investment reporting requirements for California public agencies. The Treasury Manager or Investment Officer’s designee shall render a quarterly report within 45 days following the end of th e quarter covered by the report. Section 53646(d) allows the legislative body of a local agency to elect to require the report specified in subdivision (b) to be made on a monthly basis instead of quarterly. As was noted above, the Policy currently require s the Investment Officer to submit to City Council, within 45 days following the end of the month, an investment report that summarizes all securities in the portfolio. The report prepared by the Treasury Manager or the Investment Officer’s designee. The P olicy also directs 4 the Investment Oversight Committee to analyze the monthly Treasurer’s Report for adherence to established guidelines.
To streamline the process, staff recommends transitioning the reporting frequency to quarterly. The recommendation is in compliance with the California Government Code Section 53646(b). Quarterly reporting to the Investment Oversight Committee and the legislative body will continue to provide with timely updates on the City’s status of investments yet the less frequent re ports will lessen the burden of review. Staff will continue to work with the City’s Financial Advisor, PFM, and to closely monitor cash balances and investments on monthly basis in accordance with the City’s internal controls and policies.
Investment Oversight Committee
The members of the Investment Oversight Committee have reviewed the policy and recommend that the City Council approve the changes to the 2024 Investment Policy as presented.
Alternative(s)
The proposed changes to the policy are not requ ired by law and the City Council has discretion not to approve the changes as proposed.
Fiscal Considerations
There are no direct costs associated with the Investment Policy. Investments are earning a fair market rate of return. Issues of safety and liquidity of funds comply with the Investment Policy.
Impact to the Community
Adherence to the provisions of the Investment Policy will continue to provide for the safe investment of public funds. The policy authorizes conservative investments and provides a framework for a "buy and hold" philosophy, as opposed to that of a "market trader."
ATTACHMENT A: Memorandum dated June 1, 2024 (The PFM Group)