Agenda — Solvang City Council, March 27, 2023 (part 2 of 2)

1.0 1.0 Policy
The purpose of this document is to provide guidelines for the prudent investment of the City’s temporarily idle cash and outline policies for maximizing the efficiency of the City’s cash management system. The ultimate goal is to enhance the economic status of the City while protecting its pooled cash. The guidelines are intended to be broad enough to allow the investment officers to function properly within the parameters of responsibility and authority, yet specific enough to adequately safeguard the investment assets. The City of Solvang shall invest public funds in such a manner as to comply with state and local laws, ensure prudent money management, provide for daily cash flow requirements, and meet the objectives of the Policy, in priority order of Safety, Liquidity and Return on investment. California Government Code §53646 (a)(2) states the treasurer or chief fiscal officer of a local agency or district may submit an investment policy to the governing body and treasurer oversight committee should one exist. Any change in the policy shall also be considered by the legislative body of the local agency at a public meeting. The investment program shall be in conformance with federal, state, and other legal requirements, including California Government Code 53600 and 53630 et seq.

I. Governing Authority
The investment program shall be in conformance with federal, state, and other legal requirements, including California Government Code 53600 and 53630 et seq.

II. Scope

2. Scope
This investment policy applies to all funds and investment activities and financial assets of the City of Solvang. under the direct authority of the City.The covered funds, and any new funds created by the City of Solvang, unless specifically exempted by this policy, are defined in the City’s Comprehensive Annual Financial Report and include:The funds covered by this policy are accounted for and incorporated in the City of Solvang’s Annual Comprehensive Financial Report (ACFR) and include:
• General Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Project Funds
• Internal Service Funds
• Agency Funds
• Enterprise Funds
This investment policy does not apply to Bond Proceeds, Deferred Compensation Funds, Retirement or Retiree Health Care savings/trusts/plans. California Government Code Section 5922(d) authorizes proceeds of bonds to be invested in accordance with related offering documentation. These Code Sections recognize the unique needs and objectives of such proceeds.

Likewise, Deferred Compensation Plans are covered under California Government Code.

Funds excluded from this policy:
• Bond Proceeds. Proceeds of debt issuance shall be invested in accordance with the City’s general investment philosophy as set forth in this policy. The overriding policy for the investment of bond proceeds will be dictated by the bond documents governing such funds as long as the Formatted: Font: 14 pt
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documents are approved by the City Council.

Subject to the prior written consent and approval of the City Treasurer and City Manager, financial assets held and invested by trustees or fiscal agents are excluded from this policy. However, such assets are nevertheless subject to the regulations established by the State of California pertaining to investments by localagencies as well as the related bond indentures.

III. General Objectives

3. 0 Prudence: Reference: CA Govt. Code 53600.3 and 53646 The City Treasurer is authorized to make investment decisions on behalf of the City investing public funds subject to the prudent investment standard. The Prudent Investor Standard (California Government Code Section 53600.3 states, that “When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the City”. The standard of prudence to be used by investment officials shall be applied in the context of managing an overall portfolio.

4.0 Objective: Reference : CA Govt. Code 53600
The primary objectives, in priority order, of investment activities shall be safety, liquidity,and yieldreturn on investment.:

A. Safety
A. A. Safety: of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. Theo attain this objective the City will diversify its investments by investing funds among a variety of securities with independent returns.be to mitigate credit risk andmarket risk.

1. Credit Risk
Credit risk is the risk that a security or portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay itsdebt. The City will minimize credit risk by:
• Limiting investments to the safest types of securities • Pre-qualifying the financial institutions, broker/dealers, intermediaries, andadvisers with which the City will do business
• Diversifying the investment portfolio so that potential losses on individualsecurities will be minimized

2. Market Risk
Market risk is the risk that the portfolio value will fluctuate due to changes in the general level of interest rates. The City will minimize market risk by:
• Structuring the investment portfolio so that securities mature to meet cashrequirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity
• Investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools
B. Liquidity:

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that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity).

Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). A portion of the portfolio also will be placed in money market mutual funds or local government investment pools, which offer same-day liquidity for short-term funds.

C. YieldReturn on Investments:

The City investment portfolio shall have the objective of attaining a comparative performance measurement or an acceptable rate of return throughout budgetary and economic cycles. These measurements should be commensurate with the City’s investment risk constraints identified in the investment Policy and the cash flow characteristics of the portfolio. The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints of safety and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above.

IV. Standards of Care

5.0 Delegation of Authority: Reference CA Govt. Code 41006 and 53607 California Government Code Section 53601 states the legislative body of a local agency is authorized to invest surplus moneys as specified in that code section. In accordance with California Government Code Section 53607, the authority to invest or reinvest the funds of the City or to sell or exchange securities so purchased may be delegated to the City Treasurer/Administrative Services Director for a one-year period by the City Council. Subject to review, the City Council may renew the delegation of authority under this code section each year.

The City of Solvang City Council delegates its authority to invest or reinvest City funds to the City Treasurer, who is also the Administrative Services Director. The City Treasurer shall be responsible for all investment transactions undertaken and shall establish a system of controls to regulate the activities of City officials involved in any aspect of the investment program in the absence of the City Treasurer. In case of the City Treasurer’s absence, the City Council delegates investment authority to the City Manager. The City Council may renew the delegation of authority under this code section each year.

Duties and Responsibilities

5.1 City Treasurer (Administrative Services Director): Charged with the responsibility for all public funds and securities belonging to or under the control of the City, and for the deposit and investment of those funds in accordance with the principles of sound treasury management and in accordance with the applicable laws, ordinances and policies adopted by the City.

5.2 Administrative Service Staff: Charged with recording investment activity in the accounting records and with verifying the Treasurer’s records with broker confirmations, bank statements and safekeeping records.

5.3 City Council: May delegate to the City Treasurer for a one-year period, the authority to invest the City’s funds. Subject to review, the City Council may also annually consider and approve a written Statement of Investment Policy at a public meeting. Any change to the Investment Policy at any time shall also be considered by the City Council at a public meeting.

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A. Prudence
The standard of prudence to be used by investment officials shall be the “prudent person” standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and this investment policy and exercising due diligence shall be relieved of personal liability for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

The “prudent person” standard states that,
”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.”
B. 6.0 Ethics and Conflict of Interest

1. Officers and employees involved in the investment process Employees and Investment Officers shall refrainshall refrain from personal business activity that could conflict with the proper execution and management of the policy and investment program or that which could impair their ability to make impartial investment decisions. Employees and Investment Officers must provide a public disclosure document by February 1 of each year or when the material interest in the financial institutions or personal investment positions require it. Furthermore, Employees and Investment Officers must refrain from undertaking personal investment transactions with the same individual (s) employed by the financial institution with whom business is conducted on behalf of the City.

V. Investment Procedures

7.0 Authorized Dealers and Institutions: Reference: CA Govt. Code 53601.5

7.1. The Treasurer will maintain a list of approved financial institutions authorized to provide investment services to the City in the State of California. A competitive bid process, when practical, will be used to place all investment purchases, other than those that are classified as “new issue” securities. On an annual basis, the Treasurer shall recommend a list of at least two broker/dealers who are authorized to provide investment services. The list shall be approved by the City Council. All broker/dealers who wish to be considered for the list must meet the following minimum requirements:

7.1.a Must be a “primary” or regional dealer that qualifies under the Securities and Exchange Commission Rule 15C3Ͳ1 (Uniform Net Capital Rule)

7.1.b Must be experienced in public agency investing and investment products and familiar with the California Government Code as related to investments for local governmental agencies

7.1.c Must have been in business for at least three years

7.1.d Must supply the Treasurer with the following: • current audited financial statements, proof of Financial Industry Regulatory Authority (FINRA) certification, • trading resolution, • depository contracts, • proof of State of California registration, • completed broker/dealer questionnaire, and • certification of having read the City’s investment policy.

7.1.e The Treasurer shall consider the creditworthiness of institutions.

7.2. If a third party investment advisor is authorized to conduct investment transactions on Formatted: Font: 12 pt
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the City’s behalf, the investment advisor may use their own list of approved broker/dealers and financial institutions. The investment advisor’s approved list must be made available to the City upon request.

7.3. No public deposit shall be made except in a qualified public depository as established by the established state laws.

7.4. An annual review of the financial condition and registrations of qualified bidders will be conducted by the Treasurer. A current audited financial statement is required to be on file for each financial institution and broker/dealer in which the City invests.

8.0 Authorized and Suitable Investments: California Government Code Section 53601, 53601.6, 53601.8, 53635, 53635.2, 53638 and 53684 include a number of requirements on how and where public money may be invested. The City is empowered by statute to invest in the following types of securities:

Permitted Investments City Dollar Limit,
Maximum Percentage of
Portfolio Limit
Maturity Limit
Local Agency Investment
Fund
$50 million, 100% None
Agency Issues (Govt.
sponsored Enterprise, or GSE,
instruments)
50% 5 years
Negotiable Certificates of
Deposits
30% 5 years
Public Funds Checking or
Savings Account
100% None
Shares of Beneficial Interest
(i.e, money market mutual
funds)
20% (10% in any one mutual
fund)
None
U.S. Treasury Issues 100% 5 years
State of California Issues 30% 5 years
Issues of Entities outside of
California
30% 5 years
Issues of Other California
Entities
30% 5 years
City of Solvang Bonds 100% 5 years
Corporate Bonds 30% minimum rating by at
least one of the following and
a maximum of 10% per issuer:

S&P A, Moody’s A@, Fitch A
5 years
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Commercial Paper 25% or portfolio; 10% per
issuer; Rating of A1/P1’ or
higher from S & P Moody’s
270 days
Any State of California legislative action that further restricts allowable maturities, investment types or percentage allocations will be incorporated into the City’s Policy and supersedes any and all previous applicable language. If the City is holding an investment that is subsequently prohibited by a legislative change, the City may hold that investment, if it is deemed prudent by the Investment Officer, until the maturity date to avoid an unnecessary loss.

A. The City Treasurer shall establish internal control procedures for the operation of the investment program consistent with this policy. These procedures shall include, but are not limited to, the following items:

1. Internal Controls and Safekeeping

2. Wire Transfers

3. Master Repurchase Agreements

4. Collateral/Depository Agreements

5. Broker/Dealer Relationships
B. Cash handling and cash management are integral components of an effective management program. In keeping with the City of Solvang Policy on Cash Handling, the aforementioned procedures shall include references to:

1. Cash collection and handling

2. Depository practices

3. Cash flow issues

4. Cash flow projections

5. Anti-theft/Anti-fraud practices

6. Banking agreements

7. Accounting practices
C. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the City Treasurer.

9.0 Review if Investment Portfolio:

The securities held by the City must be in compliance with Section 8.0 Authorized and Suitable Investments at the time of purchase. Because some securities may not comply with Section 8.0 Authorized and Suitable Investments subsequent to the date of purchase, the City Treasurer shall at least quarterly review the portfolio to identify those securities that do not comply. The City Treasurer shall establish procedures to report to the City Council, major and critical incidences of noncompliance identified through the review of the portfolio.

10.0 Investment Pools/Mutual Funds
A thorough investigation of the pool/fund is required prior to investing, and on a continual basis.

There shall be a questionnaire developed which will answer the following general questions:

10.1. A description of eligible investment securities, and a written statement of investment policy and objectives.

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10.2. A description of interest calculations and how it is distributed, and how gains and losses are treated.

10.3. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited.

10.4. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.

10.5. A schedule for receiving statements and portfolio listings

10.6. A description of how the pool/fund maintain reserves, retained earnings, etc. or is all income after expenses distributed to participants

10.7. A fee schedule that discloses when and how fees are assessed.

10.8. The eligibility of the pool/fund to invest in bond proceeds and a description of its practices.

11.0 Collateralization Reference: CA Govt. Code 53601
Collateralization is required on certificates of deposits and sweep checking accounts. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be (110%) of market value of principal and accrued interest.

The City chooses to limit collateral to the following: certificates of deposits, sweep checking accounts, and agency issues. Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the entity and retained.

At the City Treasurer’s discretion, the collateral requirements may be waived for certificates of deposits up to $250,000 which are fully insured by the Federal Deposit Insurance Corporation.

12.0 Safekeeping and Custody Reference CA Govt. Code 53608 All securities will be received and delivered on a delivery versus payment (DVP) basis. Securities will be held by a third-party custodian/safekeeping account designated by the Treasurer and evidenced by safekeeping receipts. Said securities shall be held in a manner that establishes the government entity’s right of ownership. The only exception to the foregoing shall be depository accounts and securities purchases made with: LAIF, time certificates of deposit and money market mutual funds held directly with issuing institution, since the purchased securities are not deliverable.

13.0 Diversification
The City recognizes that investment risks can result from issuer defaults, market price changes, or various technical complications leading to temporary illiquidity. To minimize the City’s exposure to these types of risk, the portfolio should be diversified among several types of institutions, instruments, and maturities. The Treasurer shall minimize default risk by prudently selecting only instruments and institutions, which at the time of placement have been evaluated for their financial viability and compliance with this policy.

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No individual investment transaction shall be undertaken that jeopardizes the total capital position of the overall portfolio. Risk shall also be managed by subscribing to a portfolio management philosophy that helps to control market and interest rate risk by matching investments with cash flow requirements. See section 9.0 Authorized and Suitable Investments, which lists the City’s maximum percentage limits and promotes a diverse portfolio.

14.0 Maximum Maturities
To the extent possible, the City will attempt to match its investments with anticipated cash flow requirements. Matching maturities with cash flow dates will reduce the need to sell securities prior to maturity, thus reducing market risk. Unless matched to a specific cash flow and approved by City Council, the City will not directly invest in securities maturing more than 5 years from the date of purchase.

15.0 Internal Controls
The City Treasurer shall establish an annual process of independent review by an external auditor.

This review will provide internal control by assuring compliance with policies and procedures.

Proper documentation obtained from confirmation and cash disbursement wire transfers is required for each investment transaction. •
Timely bank reconciliation is conducted to ensure proper handling of all transactions. • The investment portfolio and all related transactions are reviewed and balanced to appropriate general ledger accounts by the Administrative Services Department on a monthly and quarterly basis.

16.0 Performance Standards
The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with investment risk constraints and cash flow needs.

The City’s basic investment strategy is to buy and hold investments until maturity However, the City Treasurer may sell a security due to adverse changes in credit risk or due to unexpected cash flow needs.

The Market Yield benchmark used by the Treasurer istois to determine whether market yields are being achieved and shall be the rate of return from the following indices: Local Agency Investment Fund (LAIF) and 6Ͳmonth and 1Ͳyear Treasury Bills.

17.0 Investment Reporting
In accordance with California Government Code Section 53607, the Treasurer shall file a monthly investment report with the City Clerk who will place the report on the agenda of the next regular City Council meeting.

The City Treasurer shall review and render monthly and quarterly investment portfolio reports to the City Manager and City Council. •
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The monthly report shall include an accounting of all receipts, disbursements, and fund balances. • The quarterly reports shall include the book and market value of the cash investment, the classification of the investment, the name of the institution or entity, the rate of interest, and the maturity dates for all securities. •
The quarterly report will include a statement of compliance of the portfolio with the investment policy or an explanation as to why the portfolio is not in compliance per Government Code 53646(b)(2). •
The quarterly report will include a statement on availability of funds to meet its obligations within the next six months per Government Code 53646(b)(3)

18.0 Investment Policy Adoption Reference: CA Govt. Code 53646 The City’s Investment Policy shall be adopted by resolution annually by the City Council. The policy shall be reviewed annually by the City Council and any modifications made thereto must be approved by the City Council.

VI. Safekeeping and Custody
A. Delivery vs. Payment
All trades where applicable will be executed (cleared and settled) on a delivery vs. payment (DVP) basis, to ensure thatsecurities are deposited in an eligible financialinstitution prior to the release of funds.

B. Third-Party Safekeeping
Securities will be held by an independent third-party safekeeping institution selected by the City of Solvang.

All securities will be evidenced by safekeeping receipts in the City of Solvang’s name. The safekeeping institution shall provide on request by the City of Solvang, a copy of its most recent report on internal controls –Service Organization Control Reports prepared in accordance with the Statement on Standards for Attestation Engagements (SSAE) No. 16 (effective June 15, 2011).

All bank deposits will be FDIC insured or deposited with institutions that comply with the State collateral requirements for public funds.

A. Selection of Eligible Depositories

1. All financial institutions who desire to become depositories must supply the following (as appropriate)
a. Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines
b. Proof of state registration
c. Evidence of adequate insurance coverage

2. Deposits
The City will only deposit funds with an institution that has a rating of at least “A” as assigned by an established rating service based on quarterly financial information provided by the Federal Reserve Board and the Federal Home Loan Bank Board (i.e., The Financial Directory). Ratings will be monitored on a quarterly basis and any downgrade in rating below “A” will be reported to the City Council together with a recommendation for possible action.

B. Selection of Brokers/Dealers
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securities exchange, or from a brokerage firm designated as a primary government dealer by the Federal Reserve Bank. Broker/dealers shall be selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least five years of operation).

C. A periodic review of the financial condition and registration of all qualified financial institutions and broker/dealers will be conducted by the investment officer.

D. In selecting financial institutions for deposit or investment of funds, the authorized Investment Officers shall consider the credit-worthiness of the institution.

E. From time to time, the investment officer may choose to invest in instruments offered by minority and community financial institutions. In such situations, a waiver to the above criteria may be granted. All terms and relationships will be fully disclosed prior to purchase and will be reported to the appropriate entity on a consistent basis and should be consistent with state or local law. These types of investment purchases should be approved by City Council in advance.

F. The authorized Investment Officers will maintain a file of the broker/dealers with which it is currently doing business, which will include the firm name, contact person, telephone number, and current audited financial statements.

G. Collateralization
Where allowed or required by California Government Code and state or federal law, full collateralization will be required on all demand deposit accounts, including checking accounts and negotiable and non-negotiable certificates of deposit.

19.0 Glossary
ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official financial annual report of the City. It includes five combined 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.

AGENCIES: Federal agency securities and/or Government Ͳ sponsored enterprises.

ASK PRICE: The price at which securities are offered.

BEAR MARKET: A period of generally pessimistic attitudes and declining market prices.

BENCHMARK: A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investments.

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BID PRICE: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer.

BOND: An interest-bearing security issued by a corporation, quasi-governmental agency or other body, which can be executed through a bank or trust company. A bond is a form of debt with an interest rate, maturity, and face value, and is usually secured by specific assets. Most bonds have a maturity of greater than one year, and generally pay interest semiannually.

BOND RATING: The classification of a bond’s investment quality.

BOOK VALUE: The amount at which a security is carried on the books of the holder or issuer. The book value is often the cost, plus or minus amortization, and may differ significantly from the market value.

BROKER: A broker brings buyers and sellers together for a commission.

BULL MARKET: A period of generally optimistic attitudes and increasing market prices.

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 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.

COMMERCIAL PAPER: Short term obligations with maturities ranging from 2 to 270 days issued by banks, corporations, and other borrowers to investors with temporarily idle cash. Such instruments are unsecured and usually discounted, although some are interest Ͳbearing.

COMMISSION: The broker’s or agent’s fee for purchasing or selling securities for a client.

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.

DEFAULT RISK: This is the risk that a company or individual will be unable to make the required payments on their obligation. Standard measurement tools to gauge default risk include credit ratings by Nationally Recognized Statistical Rating Organizations (NRSROs).

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.

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 Formatted: Font: 12 pt
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considered to be at a discount.

FEDERAL RESERVE SYSTEM: The central bank of the United States which consists of a seven member Board of Governors, 12 regional banks and approximately 5,700 commercial banks that are members.

DISCOUNT SECURITIES: Non interest bearing money market instruments that are issued a discount and redeemed at maturity for full face value (e.g., U.S. Treasury Bills).

DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns.

DURATION: A measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

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 entity.

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 OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve 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 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.

FISCAL YEAR: An accounting or tax period comprising any twelve-month period. The City’s fiscal year begins on July 1.

FULL FAITH AND CREDIT:The unconditional guarantee of the United States government backing a debt for repayment.

INTEREST RATE: The interest payable each year on borrowed funds, expressed as a percentage of the principal.

INVESTMENT: Use of capital to create more money, either through income producing vehicles or through more risk oriented ventures designed to result in capital gains.

INVESTMENT PORTFOLIO: A collection of securities held by a bank, individual, institution, or government agency for investment purposes. LAIF: trade name for the California State Local Agency Investment Fund. Chapter 730, Statutes of 1976 of the State of California, established the LAIF. The LAIF enables local governmental agencies to remit money not required for immediate needs to the State Treasurer for the purpose of investment. In order to derive the maximum rate of return possible, the State Treasurer has elected in invest these monies with State monies as a part of the Pooled Money Investment Account. Each local governmental unit has the exclusive Formatted: Font: 12 pt
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determination of the length of time its money will be on deposit with the State Treasurer. At the end of each calendar quarter, all earnings derived from investments are distributed by the State respective amounts deposited in the LAIF and the length of time such amounts remained therein.

Prior to the distribution, the State’s cost of administering the program are deducted from the earnings. The California Government Code states that monies placed for deposit in LAIF are in trust in the custody of the State Treasurer and cannot be borrowed or be withheld from the City. Further, the right of the City to withdraw its deposited money from the LAIF upon demand may not be altered, impaired, or denied in any way by any State official or agency based upon the State’s failure to adopt a budget by July 1 of each new fiscal year.

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.

MARKET RISK: This is the risk that the value of a security will raise or decline as a result of changes in market conditions.

MARKET VALUE: the price at which a security is currently being sold in the market.

MATURITY: the date that the principal or stated value of debt instrument becomes due and payable.

MONEY MARKET: The market in which shortͲtermshort-term debt instruments (bills, commercial paper, bankers’ acceptances, etc.) are issued and traded.

MUTUAL FUND: An investment company that pools money and can invest in a variety of securities, including fixed income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of 1940 and must abide by Securities and Exchange Commission (SEC) disclosure guidelines.

NEGOTIABLE CERTIFICATES OF DEPOSIT: Fixed deposit certificate that may be negotiated (traded) to a third party. The institution issuing the certificate promises to pay face value plus accrued interest at maturity or semiannually if maturity is over one year.

NRSRO: This acronym stands for Nationally Recognized Statistical Rating Organization, which is a credit rating agency that issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes. NRSROs include Standard & Poor’s, Moody’s, and Fitch ratings.

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: The collection of securities held by an individual or institution. The combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset. The purpose of a portfolio is to reduce risk by diversification.

PRINCIPAL: The face or par value of an instrument.

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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 include Securities and Exchange Commission (SEC)Ͳregistered securities broker dealers, banks, and a few unregulated firms.

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 Public Deposit Protection Commission to hold public deposits.

RATE OF RETURN: 1) The yield which can be attained on a security based on its purchase price or its current market price. 2) Income earned on an investment, expressed as a percentage of the cost of the investment.

RATING: The designation used by investors’ services to rate the quality of a security’s creditworthiness. Moody’s ratings range from the highest Aaa, down through Aa, A, Bbb, Ba, B, etc. while Standard and Poor’s rating range from the highest AAA, down through AA, A, BBB, BB, B, etc.

REFINANCING: Rolling over the principal on securities that have reached maturity or replacing them with the sale of new issues. The object may be to save interest costs or to extend the maturity of the loan.

SAFEKEEPING: A service offered to customers for a fee, where securities are held in the vaults for protection.

SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution.

SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation.

SEC RULE 15(C)3Ͳ1: See Uniform Net Capital Rule.

SECURITIES: investment instruments such as bonds, stocks and other instruments of indebtedness or equity.

SPREAD: The difference between two figures or percentages. For example, it may be the difference between the bid and asked prices of a quote, or between the amount paid when bought and the amount received when sold.

TREASURY BILLS (TͲBILL): U.S. Treasury Bills are short term, direct obligations of the U.S.

Government issued with original maturities of 13 weeks, 26 weeks and 52 weeks; sold in minimum amounts of $10,000 in multiples of $5,000 above the minimum. Treasury Bills are issued in book entry form only and are sold on a discount basis.

TRUSTEE: A bank designated as the custodian of funds and the official representative for bondholders.

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of a large batch of securities and assumes the responsibility for paying the net purchase price.

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 members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.

U.S. GOVERNMENT AGENCIES: Instruments issued by various U.S. government agencies most of which are secured only by the credit worthiness of the particular agency.

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.

Appendix 1: Glossary
The following is a glossary* of key investing terms, many of which appear in GFOA’S Sample Investment Policy.

Accrued Interest - The accumulated interest due on a bond as of the last interest payment made by the issuer.

Agency - A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full faith and credit of the U.S. Government. Federally sponsored agencies (FSAs) are backed by each particular agency with a market perception that there is an implicit government guarantee. An example of federal agency is the Government National Mortgage Association (GNMA). An example of a FSA is the Federal National Mortgage Association (FNMA).

Amortization - The systematic reduction of the amount owed on a debt issue through periodic payments of principal.

Average Life - The average length of time that an issue of serial bonds and/or term bonds with a mandatory sinking fund feature is expected to be outstanding.

Basis Point - A unit of measurement used in the valuation of fixed-income securities equal to 1/100 of 1 percent of yield, e.g., “1/4” of 1 percent is equal to 25 basis points.

Bid - The indicated price at which a buyer is willing to purchase a security or commodity.

Book Value - The value at which a security is carried on the inventory lists or other financial records of an investor. The book value may differ significantly from the security’s current Formatted: Font: 12 pt
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value in the market.

Callable Bond - A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions.

Call Price - The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight premium to the bond’s original issue price to compensate the holder for loss of income and ownership.

Call Risk - The risk to a bondholder that a bond may be redeemed prior to maturity. *This glossary has been adapted from an article, entitled “Investment terms for everyday use,” that appeared in the April 5, 1996, issue of Public Investor, GFOA’s subscription investment newsletter.

Cash Sale/Purchase - A transaction, which calls for delivery and payment of securities on the same day that the transaction is initiated.

Collateralization - Process by which a borrower pledges securities, property, or otherdeposits for the purpose of securing the repayment of a loan and/or security.

Commercial Paper - An unsecured short-term promissory note issued by corporations, with maturities ranging from 2 to 365 days.

Convexity - A measure of a bond’s price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond’s price to interest rate changes.

Coupon Rate - The annual rate of interest received by an investor from the issuer of certain types of fixed-income securities. Also known as the “interest rate”.

Credit Quality - The measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer’s ability to make timely interest payments and repay the loan principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies.

Credit Risk - The risk to an investor that an issuer will default in the payment of interest and/or principal on a security.

Current Yield (Current Return) - A yield calculation determined by dividing the annual interest received on a security by the current market price of that security.

Delivery Versus Payment (DVP) - A type of securities transaction in which the purchaser pays Formatted: Heading 1, Indent: Left: 0", Space Before:

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for the securities when they are delivered either to the purchaser or his/her custodian.

Derivative Security - Financial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values.

Discount - The amount by which the par value of a security exceeds the price paid for the security.

Diversification - A process of investing assets among a range of security types by sector, maturity, and quality rating.

Duration - A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates.

Fair Value - The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Federal Funds (Fed Funds) - Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same-day basis through the Federal Reserve banking system. Fed funds are considered to be immediately available funds.

Federal Funds Rate - Interest rate charged by one institution lending federal funds to the other.

Government Securities - An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See “Treasury Bills, Notes, and Bonds.” Interest Rate - See “Coupon Rate”.

Interest Rate Risk - The risk associated with declines or rises in interest rates which cause an investment in a fixed-income security to increase or decrease in value.

Internal Controls - An internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that 1) the cost of a control should not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points:

1. Control of collusion - Collusion is a situation where two or more employees are Formatted: Heading 1, Indent: Left: 0", Space Before:

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workingin conjunction to defraud their employers.

2. Separation of transaction authority from accounting and record keeping - By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved.

3. Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping.

4. Avoidance of physical delivery securities - Book-entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities.

5. Clear delegation of authority to subordinate staff members - Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities.

Written confirmation of transactions for investments and wire transfers - Due to the potential for error and improprieties arising from telephone and electronic transactions, all transactions should be supported by written communications and approved by the appropriate person.

Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures.

6. Development of a wire transfer agreement with the lead bank and third-party custodian - The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers.

Inverted Yield Curve - A chart formation that illustrates long-term securities having lower yields than short-term securities. This configurations usually occurs during periods of high inflation coupled with low levels of confidence in the economy and a restrictive monetary policy.

Investment Company Act of 1940 - Federal legislation which sets the standards by which investment companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and securities valuations.

Investment Policy - A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities.

Investment-grade Obligations - An investment instrument suitable for purchase by institutional investors under the prudent person rule. Investment-grade is restricted to those obligations rated BBB or higher by a rating agency.

Liquidity - An asset that can be converted easily and quickly into cash.

Local Government Investment Pool (LGIP) - An investment by local governments in which their money is pooled as a method for managing local funds.

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Mark-to-market - The process whereby the book value or collateral value of a security is adjusted to reflect its current market value.

Market Risk - The risk that the value of a security will rise or decline as a result of changes in market conditions.

Market Value - Current market price of a security.

Maturity - The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bondholder. See “Weighted Average Maturity.”
Money Market Mutual Fund - Mutual funds that invest solely in money market instruments (short-term debt instruments, such as Treasury bills, commercial paper, bankers’ acceptances, repos and federal funds).

Mutual Fund - An investment company that pools money and can invest in a variety of securities, including fixed-income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of 1940 and must abide by the following Securities and Exchange Commission (SEC) disclosure guidelines:

1. Report standardized performance calculations.

2. Disseminate timely and accurate information regarding the fund’s holdings, performance, management and general investment policy.

3. Have the fund’s investment policies and activities supervised by a board of trustees, whichare independent of the adviser, administrator or other vendor of the fund.

4. Maintain the daily liquidity of the fund’s shares.

5. Value their portfolios on a daily basis.

6. Have all individuals who sell SEC-registered products licensed with a selfregulating organization (SRO) such as National Association of Securities Dealers (NASD).

7. Have an investment policy governed by a prospectus which is updated and filed by theSEC annually.

Mutual Fund Statistical Services - Companies that track and rate mutual funds, e.g., IBC/Donoghue, Lipper Analytical Services, and Mornignstar.

National Association of Securities Dealers (NASD) - A self-regulatory organization (SRO)of brokers and dealers in the over-the-counter securities business. Its regulatory mandate includes authority over firms that distribute mutual fund shares as well as other securities.

Net Asset Value - The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund’s assets which includes securities, cash, and any accrued earnings, subtracting this from the fund’s liabilities and dividing this total by the Formatted: Heading 1, Indent: Left: 0", Space Before:

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number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund’s portfolio. (See below.)
[(Total assets) - (Liabilities)]/(Number of shares outstanding) No Load Fund - A mutual fund which does not levy a sales charge on the purchase of its shares.

Nominal Yield - The stated rate of interest that a bond pays its current owner, based on par value of the security. It is also known as the “coupon,” “coupon rate,” or “interest rate.” Offer - An indicated price at which market participants are willing to sell a security or commodity. Also referred to as the “Ask price.”
Par - Face value or principal value of a bond, typically $1,000 per bond.

Positive Yield Curve - A chart formation that illustrates short-term securities having lower yields than long-term securities.

Premium - The amount by which the price paid for a security exceeds the security’s par value.

Prime Rate - A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate.

Principal - The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a given security.

Prospectus - A legal document that must be provided to any prospective purchaser of a new securities offering registered with the SEC. This can include information on the issuer, the issuer’s business, the proposed use of proceeds, the experience of the issuer’s management, and certain certified financial statements.

Prudent Person Rule - An investment standard outlining the fiduciary responsibilities of public funds investors relating to investment practices.

Regular Way Delivery - Securities settlement that calls for delivery and payment on the third business day following the trade date (T+3); payment on a T+1 basis is currently under consideration. Mutual funds are settled on a same day basis; government securities are settled on the next business day.

Reinvestment Risk - The risk that a fixed-income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently generated by that holding.

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Repurchase Agreement (Repo or RP) - An agreement of one party to sell securities at a specified price to a second party and a simultaneous agreement of the first party to repurchase the securities at a specified price or at a specified later date.

Reverse Repurchase Agreement (Reverse Repo) - An agreement of one party to purchase securities at a specified price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price to the second party on demand or at a specified date.

Rule 2a-7 of the Investment Company Act - Applies to all money market mutual funds and mandates such funds to maintain certain standards, including a 13-month maturity limit and a 90-day average maturity on investments, to help maintain a constant net asset value of one dollar ($1.00).

Safekeeping - Holding of assets (e.g., securities) by a financial institution.

Serial Bond - A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired.

Sinking Fund - Money accumulated on a regular basis in a separate custodial account that is used to redeem debt securities or preferred stock issues.

Swap - Trading one asset for another.

Term Bond - Bonds comprising a large part or all of a particular issue which come due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity.

Total Return - The sum of all investment income plus changes in the capital value of the portfolio. For mutual funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains. This is calculated by taking the following components during a certain period.
(Price appreciation) + (Dividends paid) + (Capital gains) = Total Return Treasury Bills - Short-term U.S. government non-interest bearing debt securities with maturities of no longer than one year and issued in minimum denominations of $10,000.

Auctions of three- and six-month bills are weekly, while auctions of one-year bills are monthly. The yields on these bills are monitored closely in the money markets for signs of interest rate trends.

Treasury Notes - Intermediate U.S. government debt securities with maturities of one to ten years and issued in denominations ranging from $1,000 to $1,000,000 or more.

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Treasury Bonds - Long-term U.S. government debt securities with maturities of ten years or longer and issued in minimum denominations of $1,000. Currently, the longest outstanding maturity for such securities is 30 years.

Uniform Net Capital Rule - SEC Rule 15C3-1 outlining capital requirements for broker/dealers.

Volatility - A degree of fluctuation in the price and valuation of securities. “Volatility Risk” Rating - A rating system to clearly indicate the level of volatility and other non-credit risks associated with securities and certain bond funds. The rating for bond funds range from those that have extremely low sensitivity to changing market conditions and offer the greatest stability of the returns (“aaa” by S&P; “V-1” by Fitch) to those that are highly sensitive with currently identifiable market volatility risk (“ccc-“ by S&P, “V-10” by Fitch).

Weighted Average Maturity (WAM) - The average maturity of all the securities that comprise a portfolio. According to SEC rule 2a-7, the WAM for SEC registered money market mutual funds may not exceed 90 days and no one security may have a maturity that exceeds 397 days.

When Issued (WI) - A conditional transaction in which an authorized new security has not been issued. All “when issued” transactions are settled when the actual security is issued.

Yield - The current rate of return on an investment security generally expressed as a percentage of the security’s current price.

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 rate of return yielded by a debt security held to maturity when both interest payments and the investor’s potential capital gain or loss are included in the calculation of return.

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.

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Solvang City CouncilMarch 27, 2023

Solvang City Council
March 27, 2023