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Policy 7.1.2 Investment and Cash Management
POLICY PURPOSE:
The City establishes investment policies that meet its current investment goals. This policy is intended to establish objectives and criteria for the investment of the City’s temporarily idle funds and for the City’s Redevelopment Successor Agency and to provide guidelines for the City’s cash management system.
This policy is set forth by the City of Sunnyvale (City) for the following purposes:
1. To establish a clear unders tanding for the City Coun cil, City management, responsible employees, citizens and third parties of the objectives, policies and guidelines for the investment of the City’s temporarily idle funds;
2. To offer guidance to investment staff on the investment of City funds; and
3. To establish a basis for evaluating investment results.
POLICY STATEMENT:
Objectives
The City’s cash management system shall be designed to accurately monitor and forecast expenditures and revenues, to enable the City to invest funds to the fullest extent possible.
Idle funds of the City shall be invested in accord ance with principles of sound treasury management and in accordance with the pr ovisions of California Government C ode
Section 53600 et seq., the City Charter, the City’s Municipal Code and this policy.
The objectives of the City’s investment program are, in order of priority:
1. Safety – Saf ety of principal is the fore most objective of the investment program.
Investments of the City shal l be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.
2. Liquidity – The City’s investment portfolio will rema in sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated.
3. Return on Investment –The City’s investment portfolio shall be designed with the objective of attaining the safe ty and liquidity objectives fi rst, and then attaining a market rate of return throughout the budge tary and economic cycles, taking into account the City’s investment risk constraints and the cas h flow characteristics of the portfolio.
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Standard of Care – Prudent Investor
The governing body of the City and any staff members author ized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard. 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 City, that a prudent person acting in a like capacity and familiar 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. Within the limitations of this section and consider ing individual investments as part of an overall strategy, investments may be acquired as authorized by law.
The Director of Finance or his/her designee is authorized to manage the investment portfolio and act within the intent and scope of the investment policy and other written procedures and exercise due diligence, shall be relieved of personal responsibility and liability for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments.
Ethics and Conflicts of Interest
Officers and employees involved with the i nvestment process shall refrain from personal business activity that could c onflict with proper execution of the investment program, or which could impair their ability to make impar tial investment decisions. The Director of Finance or his/her designee and other designated employees are required to file applicable financial disclosures, as required by the Fair Political Practices Commission.
OPERATIONAL AND PROCEDURAL MATTERS:
Scope
This Investment Policy applies to all funds and investment activities of the City with the following exceptions:
1. The City’s Deferred Compensation Plan is excluded because it is managed by a third party administrator and invested by individual plan participants;
2. The City’s retirement funds, including any funds invested in a Section 115 Pension Rate Mitigation Trust. These funds are invested pursuant to California code and the Trust’s separate long-term investment policy as approved by Council under the Trust Agreement.
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3. Proceeds of debt issuance shall be i nvested in accordance with the general investment philosophy of th e City; however, such pr oceeds are invested in accordance with permitted investment provisions of their specific bond indentures.
4. Funds for the Other Post Employment Benefits (OPEB) Trust; shall be invested in accordance with the general investment philosophy of the City; however, these funds are invested pursuant to California code and the Trust’s se parate long-term investment policy as approved by Council under the Trust Agreement.
Authorized Financial Dealers and Institutions
1. The Director of Finance or his/her designee shall maintain a list of institutions qualified and authorized to transact inve stment business with the City. Eligible institutions include:
A. Primary government dealers as designated by the Federal Reserve Bank ; B. Regional broker/dealers;
C. Nationally or state-chartered banks;
D. The Federal Reserve Bank; and
E. Direct issuers of securities eligible for purchase by the City.
2. Public deposits shall be made only in qualified public depositories within the State of California as established by State law, or as permitted by Section III.A (4-7).
Deposits shall be insured by the Federal Deposit Insurance Corporation, or, to the extent the amount exceeds the insured ma ximum, shall be collateralized with securities in accordance with state law.
3. A sufficient pool of qualified financial institutions and dealers will be maintained using criteria based on credit worthi ness, experience, reference checks, and qualifications under the Securities and Exchange Commission. Unless working with a registered investment adviser, the City will issue a Request for Qualifications once every three years for these services. All broker/dealers who desire to become qualified must be registered with Financial Industry Regulatory Authority (FINRA) and supply the following as appropriate:
A. Audited financial statements
B. Completed broker/dealer questionnaire
C. Certification of having reviewed the City’s Investment Policy.
4. It is the policy of the City to requi re competitive bidding for investment transactions. Whenever possible, at leas t three authorized fi nancial dealers or institutions will be contacted to provide price quotations on security purchases and sales.
5. Selection of financial institutions and broker/dealers used by the City shall be at the sole discretion of the City, except where th e City utilizes an external investment Attachment 1
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adviser in which case the City may rely on the adviser for sele ction. Selection of broker/dealers used by an external investment adviser retained by the City will be at the sole discretion of the adviser. The adviser shall make available its list of approved broker/dealers to City staff upon request.
Delivery vs. Payment
All investment transactions of the City shall be conducted using standard delivery vs. payment procedures.
Safekeeping of Securities
To protect against potential losses by collapse of individual securities dealers, and to enhance access to securities, interest payments, and maturity proceeds, all securities owned by the City shall be held in safekeeping by a third party bank trust department, acting as agent for the City under the terms of a custody agreement executed by the bank and by the City.
The only exceptions to the foregoing shall be depository accounts and securities purchases made with: (i) local government investment pools; (ii) time certificates of deposit, and, (iii) money mutual funds, since the purchased securities are not deliverable.
PERMITTED INVESTMENTS AND GUIDELINES TO ACHIEVE POLICY
OBJECTIVES:
Authorized Investments
All investments shall be made in accordance with Sections 53600 et seq. of the Government Code of California and as described within this Investment Policy. In the event a discrepancy is found between this policy and the Code, the more restrictive parameters will take precedence. Percentage holding limits and minimum credit quality requirements listed in this section apply at the time the security is purchased. Maturity is measured from the date of trade settlement.
Any investment currently held at the time the policy is adopted which does not meet the new policy guidelines can be held until maturity and shall be exempt from the current policy. At the time of the investment’s matu rity or liquidation, such funds shall be reinvested only as provided in the current policy.
Permitted investments under this policy shall include:
1. Securities issued by the US Treasury, provided that:
A. There shall be no maximum allowa ble investment in US Treasury securities; and
B. As required by Section 53601 of the California Government Code, the City Council hereby grants express authority to the Director of Finance or his/her Attachment 1
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designee to invest in U.S. Treasury securities with final stated maturities up to seven years.
2. Securities Issued and fully guaranteed as to payment by a federal agency or issued by a United States Government Sponsored Enterprise, provided that:
A. No more than 30% of the total portfolio may be invested in federal agencies or government sponsored enterprises of any single issuer; and B. As required by Section 53601 of the California Government Code, the City Council hereby grants express authority to the Director of Finance or his/her designee to invest in U. S. Agency securities with final stated maturities up to seven years.
C. The maximum percent of agency callable securities in the portfolio will be 20%
3. Banker’s acceptances, provided that:
A. No more than 40% of the total portfolio may be invested in banker’s acceptances;
B. No more than 5% of the total portfolio may be invested per issuer; C. Their maturity does not exceed 180 days; and
D. They are issued by institutions with short term debt obligations rated a minimum of P-1 by Moody’s or A-1 by Standard and Poor’s, or the equivalent by a nationally recognized statistical-rating organization (NRSRO).
4. Federally Insured Bank Deposits (Non-negotiable certificates of deposit) in state or federally chartered banks, savings and lo ans, or credit unions in the state of California, provided that:
A. No more than 20% of the total portfolio may be invested in a combination of federally insured and collateralized time deposits;
B. The amount per institution is limited to the maximum covered under federal insurance; and
C. Their maturity does not exceed five years.
5. Collateralized Bank Deposits (Non-negotiable certific ates of deposit) in California banks in excess of insured amounts which are fully collateralized with securities in accordance with California law, provided that:
A. No more than 20% of the portfolio shall be invested in a combination of federally insured and collateralized time deposits;
B. No more than 5% may be invested per issuer; and
C. The maturity of such deposits does not exceed 365 days.
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6. Negotiable Certificates of Deposit (NCDs) issued by a na tionally or state- chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), or by a federally or state-licensed branch of a foreign bank, provided that:
A. No more than 30% of the total portfolio may be invested in investments made in accordance with this section plus deposits made under section III (7) of this policy;
B. No more than 5% of the total portfolio may be invested per issuer; C. The maturity does not exceed 5 years;
D. The amount of the NCD insured up to the FDIC limit does not require any credit ratings.
D. Any amount above the FDIC insured limi t must be issued by institutions which have long-term obligations which are rated in the rating category of “A” or its equivalent or higher by a nati onally recognized statistical rating organization; or have short-term debt obligations rated "A-1" or the equivalent or higher, by a nationa lly recognized statistical rating organization.
7. Certificates of Deposit Placement Service (e.g. CDARS or like services) using private sector entity to assist in the placement of deposits above federal insurance amounts in increments less than federal insurance at participa ting banks, savings and loans, or credit unions nationally through a “selected depository institution” in California, provided that:
A. No more than 30% of the City’s tota l portfolio may be invested in such deposits plus negotiable certificates of deposit purchased pursuant to Section III (6) of this policy;
B. The full amount of the principal and the interest that may be accrued during the maximum term of each certificate shall at all times be insured by the FDIC or the NCUA;
C. The selected depository institution sha ll be a nationally or state-chartered bank, savings and loan, or credit union in California and shall serve as the custodian for each certificate of deposit issued by the placement service for the City’s account;
D. At the same time the City’s funds are deposited and the certificates of deposit are issued, the selected depository institution shall receive an amount of deposits from ot her commercial banks, savings banks, savings and loan associations or credit unions that, in total, are equal to or greater than the full amount of th e principal that the City initially deposited with the selected depository institution;
E. No credit union may act as a selected depository institution unless:
I) The credit union offers federal depository insurance through the NCUA; and
II) The credit union is authorized by the NCUA in the deposit placement services, an d affirms that moneys held by those credit Attachment 1
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unions while participating in a deposit placement service will at all times be insured by a federal government entity.
F. The maximum maturity does not exceed five (5) years.
8. Repurchase agreements collateralized with securities authorized under Sections III (A1-2) of this policy maintained at a le vel of at least 102% of the market value of the repurchase agreements, provided that:
A. No more than 10% of the portfolio shall be invested in repurchase agreements;
B. The maximum maturity of repurchase agreements shall be 15 days; C. Securities used as collateral for repurchase agreements shall be delivered to the City’s custodian bank, except that securities used as collateral for the one to seven day repurchase agreemen ts with the City’s depository bank may be held in sa fekeeping by an independent third part y bank trustee in the name of the City, as evidenced by appropriate receipts of trust; and D. The repurchase agreements are the subject of a master repurchase agreement between the City and the provider of the repurchase agreement. The master repurchase agreement shall be substan tially in the form developed by the Securities Industry and Financial Markets Association (SIFMA).
9. Commercial paper, provided that:
A. No more than 25% of the total portfolio may be invested in commercial paper.
Under a provision sunsetting on January 1, 2026, no more than 40% of the portfolio may be invested in Commercial Paper if the Agency’s investment assets under management are greater than $100,000,000;
B. No more than 5% of the total portfolio may be invested per issuer.
C. The City may purchase no more than 10% of the outstanding commercial paper of any single issuer.
D. The maturity does not exceed 270 days from the date of purchase; E. The paper is of "prime" quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical- rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following cond itions in either paragraph (1) or paragraph (2):
I) Is organized and operating in th e United States as a general corporation. Has total assets in excess of five hundred million dollars ($500,000,000). Has debt othe r than commercia l paper, if any, that is rated in the rating cate gory of "A" or its equivalent or higher by a nationally recognized statistical-rating organization (NRSRO).
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II) Is organized within the United States as a special purpose corporation, trust, or limited liability company. Has program wide credit enhancements incl uding, but not limited to,
overcollateralization, letters of credit, or surety bond. Has commercial paper that is rated "A-1" or higher, or the equivalent, by a nationally recognized statistical-rating organization (NRSRO).
10. State of California Local Agency Investment Fund (LAIF), provided that:
A. The Agency may invest up to the maximum amount permitted by LAIF.
B. It is recognized that LAIF has authority to invest in some instruments that are not permitted for Cities under the California Government Code; and C. A thorough investigation of the pool/fund is required prior to investing and on a continual basis. City staff will annually perform due diligence analysis of LAIF based on a standardized questionnaire developed to address investment policy and practices.
11. Corporate medium-term notes, provided that:
A. No more than 30% of the total portfolio may be invested in medium-term notes;
B. No more than 5% of the total portfolio may be invested per issuer.
C. Such notes have a maximum maturity of 5 years;
D. Such notes are issued by corporatio ns 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; and
E. Such notes are rated in the rating category of "A" or its equivalent or higher by a nationally recognized statistical rating organization.
12. Asset-backed securities, Mortgage-backed, Mortgage pass-through securities, and collateralized mortgage obligations not defined in paragraphs 1 and 2 of the Authorized Investments Section of this policy, provided that:
A. No more than 20% of the total portfolio may be invested in Mortgage pass- through, mortgage-backed, co llateralized mortgage obligations securities and asset-backed securities;
B. No more than 5% of the portfolio ma y be invested in any single Asset- Backed or Commercial Mortgage security issuer.
C. Such securities shall have a maximum legal final maturity of 5 years; E. Such securities are rated in the rating category of “AA” or its equivalent or higher by a nationally recognized statistical rating organization.
13. Money market mutual funds, provided that:
A. No more than 20% of the total portfolio may be invested in Money market mutual funds.
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B. Such funds are registered with th e Securities and Exchange Commission and have attained the highest ranking or the highest letter and numerical rating provided by not less than two nationally recognized statistical rating organizations;
C. Such funds have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience investi ng in the securities and obligations authorized by California Government Code Section 53601 (a through j) and with assets under management in excess of $500 million; D. Such funds include in th eir prospectus the stat ement that one of the investment fund’s investment objectives is to seek to maintain a net asset value of $1; and
E. Such funds invest only in US Treasury and federal agency securities, and in repurchase agreements backed by US Treasury and federal agency securities.
14. Municipal Securities . These include obligations of the state of California, the treasuries or agencies of any other 49 states in addition to California, and any local Agency within the state of California including the City of Sunnyvale to the extent permitted by federal law, provided that:
A. No more than 30% of the portfolio may be in Municipal Securities.
B. No more than 5% of the portfolio may be invested in any single issuer.
C. The maturity does not exceed 5 years from the date of purchase; D. The rating by a nationally recognized statistical rating organization is in the "A" category or its equivalent or better; and
E. For Municipal Obligations in the form of variable rate demand obligations, the obligations shall be s upported by a third-party li quidity facility from a financial institution with short-term ra tings of at least A-1 by S&P or P-1 by Moody’s. The right of the bondholder to tender the obligation converts these obligations to a short term investment.
15. Local Government Investment Pools (LGIP), provided that:
A. The LGIP is organized pursuant to CGC Section 6509.7; B. The Pool invests only in securities and obligations authorized in CGC Section 53601;
C. The Pool is managed by an investment adviser registered with the SEC or exempt from registration; and
D. Such adviser has not less than five years of experience investing in securities and obligations authorized in CGC Section 53601 and has assets under management in excess of five hundred million dollars ($500,000,000).
16. Supranational Securities. CGC 53601 defines allowable Supranational Securities as United States dollar denominated senior unsecured unsubordinated obligations Attachment 1
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issued or unconditionally guaranteed by: the International Bank for Reconstruction and Development, the International Finance Corporation, or Inter-American Development Bank, provided that:
A. No more than 30% of the total portfolio may be invested in Supranational securities;
B. No more than 10% of the portfolio may be invested in any single issuer.
C. The maturity does not exceed 5 years from the date of purchase.
D. The instruments are eligible for purchase and resale within the United States; and
E. The rating by a nationally recognized statistical rating organization is in the "AA" category or its equivalent or better.
Prohibited Investment Vehicles and Practices
1. State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to, mu tual funds (other than government money market funds as described in this policy, unregulate d and/or unrated investment pools or trusts, and futures and options.
2. In accordance with Government Code Section 53601.6, investment in inverse floaters, range notes, or mortgage derived interest-only strips is prohibited.
3. Investment in any security that could result in a zero interest accrual if held to maturity is prohibited. Under a provision sunsetting on January 1, 2026, securities backed by the U.S. Government that coul d result in a zero- or negative-interest accrual if held to maturity are permitted.
4. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited.
5. Purchasing or selling securities on margin is prohibited.
6. Agencies that are not Qualified Institu tional Buyers (QIB) as defined by the Securities and Exchange Commission are prohibited from purchasing Private Placement Securities. The SEC define s a QIB as having at least $100,000,000 in securities owned and invested.
6.7. Securities with a forward settlement date exceeding 45 days are prohibited.
Investment Pools/Mutual Funds
The City shall conduct a thorough investigation of any pool or mutual fund prior to making an investment, and on a continual basis thereafter. The Treasurer shall develop a questionnaire which will answer the following general questions:
1. A description of eligible investment securities, and a wr itten statement of Attachment 1
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investment policy and objectives.
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2. A description of interest calculations and how it is distributed, and how gains and losses are treated.
3. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited.
4. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.
5. A schedule for receiving statements and portfolio listings.
6. Are reserves, retained earnings, etc. utilized by the pool/fund?
7. A fee schedule, and when and how is it assessed.
8. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
Social and Environmental Responsibility
The City has a desire to encourage investment s that support sound environmental, social and governance (ESG) investing. While the portfolio may not be classified as an ESG portfolio, investments in entities that support community well-being through safe and environmentally sound practices and fair labor practices a nd equality of rights regardless of sex, race, age, disability, or sexual orientation is encouraged. Investments are discouraged in entities that manufacture tobacco products, or firearms or nuclear weapons not used in the national defense of the United States, and are direct or indirect investments to support the production or drilling of fossil fuels.
Risk/Safety
The City recognizes that it is subject to the ri sks of investing in fi xed income securities, especially “market risk” and “call risk” which ar e risks that the value of the portfolio will fluctuate with changes in the general level of in terest rates, and “credit risk,” which is the risk that a security or a portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt.
1. Mitigating market risk in the portfolio
The City recognizes that, over time, longer-term portfolios achieve higher returns.
On the other hand, longer-term portfolios have higher volatility of return. The City shall mitigate market risk by providing adequate liquidity for short-term cash needs, and by making longer term investments with funds which are not needed for current cashflow purposes. The City further recogni zes that certain t ypes of securities, including variable rate s ecurities, securities with principal paydowns prior to maturity, and securities with embedded options (callable securities), will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
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A. The City shall maintain a percentage of the portfolio in short term securities to provide for cash flows.
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B. The maximum stated final maturity of i ndividual securities in the portfolio will be five (5) years, except as otherwise stated in this policy.
C. The duration of the portfolio will generally be approximately equal to the duration (typically, plus or minus 20%) of a Market Benchmark, an index selected by the City based on the City ’s investment objectives, constraints and risk tolerances.
2. Mitigating credit risk in the portfolio
A. The diversification requirements incl uded in the Authorized Investments section are designed to mitigate credit risk in the portfolio.
B. No more than 5% of the total portfolio may be invested in securities of any single issuer unless otherwise specified.
C. The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the City’s risk preferences; and D. If a security owned by the City is downgraded to a level below the minimum quality required by this Investment Policy, it will be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. If the City employs the services of an investment advisor, it is the duty of the advisor to communicate any actions related to the downgrade to the Treasurer in a timely manner. *If a security is downgraded, the Treasurer will use discretion in determining whether to sell or hold the security based on its current maturity, the economic outlook for the issuer, and other relevant factors.
*If a decision is made to retain a downgraded security in the portfolio, its presence in the portfolio will be monitored and reported quarterly to the City Council.
Liquidity
1. A schedule of major revenues and expenditures for a rolling 12-month period shall be maintained and coordinated with investments to the extent feasible.
2. Investment maturities may be timed to provide funds for scheduled expenditures not met by anticipated major revenue receipts.
3. To the extent possible, the Twenty Year Resource Allocation Plan shall be used for the cash flow projection purposes and shall be taken into account in determining long term investment strategy.
Return Objectives
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1. Overall objective. The investment portfolio shall be designed to attain a market- average rate of return throughout budge tary and economic cycles, taking into account the City’s risk constraints, the cas h flow characteristic s of the portfolio, and state and local laws, ordinances or resolutions that restrict investments.
2. Specific objective . The Treasurer shall monitor and evaluate the portfolio’s performance relative to the chosen market benchmark(s), which will be included in the Treasurer’s quarterly report. The Treasur er shall select an appropriate, readily available index to use as a market
RESPONSIBILITY AND REPORTING:
Delegation of Authority
The City Manager is responsible for directing and supervising the Director of Finance and is also responsible to keep the City Council fully advised as to the fi nancial condition of the City.
The Director of Finance is responsible, by Council delegation, for the custody and investment of City funds and the development of procedures to implement this Investment Policy. This delegation requires that the Director of Finance submit a monthly transaction report to the Council accounting for the investme nt of funds. The Dire ctor of Finance is further responsible for the duties and powers imposed on City Treasurers by the laws of the State of California.
The Director of Finance or his/her designee is responsible for monitoring investment market information, recommending investment strategy for portfolio diversity and timing of maturities, as well as en suring compliance with the Ci ty’s Investment Policy. The Investment staff shal l maintain current knowledge of t echnical and legal requirements regarding municipal invest ments through continued edu cation and maintain active membership in the California Municipal Treasurers Association (CMTA).
The City may employ an investment adviser to invest all or a portion of the City's cash.
Such Adviser shall be granted discretion to invest and reinvest the portfolio in accordance with this Investment Policy a nd must be registered under the Investment Advisers Act of 1940. Selection of broker/dealers used by an ex ternal investment adviser retained by the City will be at the sole discretion of the investment adviser.
Reporting, Disclosure and Program Evaluation
The Director of Finance, as Chief Financial Officer and City Treasurer, shall file a quarterly investment report with the C ity Council and the City Manage r within 45 days following the end of the quarter covered by the repo rt. The report shall include the following information:
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1. An asset listing showing par value, cost and accurate and complete market value of each security, type of investment, issuer, and interest rate;
2. The Director of Finance shall provide a monthly transaction report to the City Council;
3. A statement of compliance with the Investment Policy; and
4. A statement that the City has adequate funds to meet its cash flow requirements for the next six months.
Annual Reports
1. The investment policy shall be reviewed and adopted at least annually within 120 days of the end of the fiscal year to ensure its consistency with the overall objectives of preservation of principal, liquidity a nd return, and its rele vance to current law and financial and economic trends.
2. A report of portfolio performance for the immediately preceding fiscal year shall be presented as part of the annual inve stment policy review. This report shall include comparisons of the City’s perform ance compared to the return objectives and shall include a section on compliance with the investment policy.
INTERNAL CONTROL:
The Director of Finance has established a system of internal controls to ensure compliance with the Investment Policies of the City and the California Government Code. The internal control procedures include segregation of dutie s in the different phases of an investment transaction, monthly reconcilia tion of the investment report to the general ledger, and annual policy compliance review by the City’s outside auditor. An independent audit is conducted by the City’s outside auditors which includes a compliance review of the City’s investment activities to the City’s Investment Policy, the California Government Code, and Government Accounting Standards Board ( GASB) requirements regarding investment disclosures.
The Finance staff has established written investment procedures. These procedures include the process for projecting future cash flows, obtaining and documenting quotes, the review process for purchasing a new investment, how to select a broker when multiple brokers offer the same investment at the same price and other procedures relating to investments.
These procedures are reviewed annually.
OVERSIGHT
The Investment Committee consisting of the C ity Manager, the Assistant City Manager, and the Director of Finance with staff support , will meet at least a nnually to evaluate the portfolio performance and establish current investment strategies and allocations in accordance with the adopted Policy and its objectives.
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(Adopted: RTC 85-388 (7/30/1985); Amended: RTC 86-387 (7/22/1986), 87- 421 (8/11/1987), 88-379 (07-26/88), [No RTC] (7/18/1989), 90-342 (7/17/1990), 91- 303 (7/23/1991), 92-370 (7/28/1992), 93- 363 (7/27/ 1993), 94-410 (8/9/1994), 95- 301 (7/25/1995), 96-300 (7/23/1996), 97- 338 (7/29/ 1997), 98-273 (8/4/1998), 99- 383 (8/17/1999), 00-320 (9/12/2000), 01- 272 (7/31/ 2001), 02-296 (7/23/2002), 03- 277 (8/12/2003), 04-290 (8/17/2004), 05-242 (8/16/05), (Clerical/clarity update, Policy Update Project 11/2005), 06-262 (8/22/06), 07-286 (8/21/2007), 08-256 (8/26/2008), 08-307 (10/14/2008) 09-213 (8/11/2009), 10-225 (8/31/2010), 11-176 (8/23/2011), 12-211 (9/11/2012), 13-252 (10/22/2013), 14-0804 (10/28/2014), 15-0864 (10/13/2015), 16-0693 (10/25/2016), 17-0775 (10/3/2017), 18-0609 (8/14/2018), 19-0971 ( 11/5/2019), 20-797 (10/13/2020), 21-0901 (10/26/2021), 22-0816 (9/27/2022), 23-0186 (10/10/2023.
Lead Department: Department of Finance
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GLOSSARY OF INVESTMENT TERMS
Agencies. Shorthand market terminology fo r any obligation issued by a government- sponsored entity (GSE), or a federally related institution. Most obligations of GSEs are not guaranteed by the full faith and credit of the US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in the housing mark et. FHLMC, also called “FreddieMac” issues discount notes, bonds and mortgage pass-through securities.
FNMA. Like FHLB and FreddieMac, the Fede ral National Mortgage Association was established to provide credit and liquidity in the housing market. FNMA, also known as “FannieMae,” issues discount notes, bonds and mortgage pass-through securities.
GNMA. The Government National Mortgage Association, known as “GinnieMae,” issues mortgage pass-through securities, which are guaranteed by the full faith and credit of the US Government.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not guaranteed by the full faith and credit of the US government.
TVA. The Tennessee Valley Authority prov ides flood control and power and promotes development in portions of th e Tennessee, Ohio, and Mississippi River valleys. TVA currently issues discount notes and bonds.
Asked. The price at which a seller offers to sell a security.
Average Life. In mortgage-related investments, in cluding CMOs, the average time to expected receipt of principal payments, weighted by the amount of principal expected.
Banker’s Acceptance. A money market instrument created to facilitate international trade transactions. It is highly liquid and safe be cause the risk of the trade transaction is transferred to the bank which “accepts” the obligation to pay the investor.
Benchmark. A comparison security or portfolio. A performance benchmark is a partial market index, which reflects the mix of secu rities allowed under a specific investment policy.
Bid. The price at which a buyer offers to buy a security.
Broker. A broker brings buyers and sellers together for a transaction for which the broker receives a commission. A broker does not sell securities from his own position.
Callable. A callable security gives the issuer the option to call it from the investor prior to its maturity. The main cause of a call is a decline in interest ra tes. If interest rates decline since an issuer issues securities, it will likely call its current securities and reissue them at a lower rate of interest. Callable securities have reinvestment risk as the investor may receive its principal back when interest ra tes are lower than when the investment was initially made.
Certificate of Deposit (CD). A time deposit with a specif ic maturity evidenced by a certificate. Large denomination CDs may be marketable.
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Collateral. Securities or cash pledged by a borrower to secure repaymen t of a loan or repurchase agreement. Also, securities pledged by a financial institution to secure deposits of public monies.
Collateralized Mortgage Obligations (CMO). Classes of bonds that redistribute the cash flows of mortgage securities (and whole loans) to create securities that have different levels of prepayment risk, as compared to the underlying mortgage securities.
Commercial Paper. The short-term unsecured debt of corporations.
Cost Yield. The annual income from an investment divided by the purchase cost. Because it does not give e ffect to premiums and discounts which may have been included in the purchase cost, it is an incomplete measure of return.
Coupon. The rate of return at which interest is paid on a bond.
Credit Risk. The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer.
Current Yield. The annual income from an investme nt divided by the current market value. Since the mathematical calculation relies on the current market value rather than the investor’s cost, current yield is unrelated to th e actual return the investor will earn if the security is held to maturity.
Dealer. A dealer acts as a principal in security transactions, selling securities from and buying securities for his own position.
Debenture. A bond secured only by the general credit of the issuer.
Delivery vs. Payment (DVP). A securities industry procedure whereby payment for a security must be made at the time the security is delivered to the purchaser’s agent.
Derivative. Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, or any security which represents a component of another security which has been separated from other components (“Stripped” coupons and prin cipal). A derivative is also defined as a financial instrument the value of which is to tally or partially deri ved from the value of another instrument, interest rate, or index.
Discount. The difference between the par value of a bond and the cost of the bond, when the cost is below par. Some short-term securities, such as T-bills and banker’s acceptances, are known as discount securities. They sell at a discount from par, and return the par value to the investor at maturity without additional interest. Other securities, which have fixed coupons, trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality.
Diversification. Dividing investment funds among a va riety of investments to avoid excessive exposure to any one source of risk.
Duration. The weighted average time to matur ity of a bond where the weights are the present values of the future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. (See modified duration).
Federal Funds Rate. The rate of interest charged by ba nks for short-term loans to other banks. The Federal Reserve Bank through open-market operations establishes it.
Federal Open Market Committee. A committee of the Federal Reserve Board that establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves.
Haircut. The margin or difference between the actu al market value of a security and the value assessed by the lending side of a transaction (i.e. a repo).
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Leverage. Borrowing funds in order to invest in s ecurities that have th e potential to pay earnings at a rate higher than the cost of borrowing.
Liquidity. The speed and ease with which an asset can be converted to cash.
Make Whole Call. A type of call provision on a bond that allows the issuer to pay off the remaining debt early. Unlike a call option, with a make whole call pr ovision, the issuer makes a lump sum payment that equals the net present value (NPV ) of future coupon payments that will not be paid because of the call. With this type of call, an investor is compensated, or "made whole."
Margin. The difference between the market value of a security and the loan a broker makes using that security as collateral.
Market Risk. The risk that the value of securities will fluctuate with changes in overall market conditions or interest rates.
Market Value. The price at which a security can be traded.
Marking to Market. The process of posting current mark et values for securities in a portfolio.
Maturity. The final date upon which the principal of a security becomes due and payable.
Medium Term Notes. Unsecured, investment-grade seni or debt securities of major corporations which are sold in relatively small amounts on either a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.
Modified Duration. The percent change in price for a 100 basis point change in yields.
Modified duration is the best single measure of a portfolio’s or security’s exposure to market risk.
Money Market. The market in which short-term debt instruments (Tbills, discount notes, commercial paper, and banker’s acceptances) are issued and traded.
Mortgage Pass-Through Securities. A securitized participation in the interest and principal cash flows from a specified pool of mortgages. Principal and interest payments made on the mortgages are passed through to the holder of the security.
Mutual Fund. An entity which pools the funds of inve stors and invests those funds in a set of securities which is specifically defined in the fund’s prospect us. Mutual funds can be invested in various types of domestic and/or intern ational stocks, bonds, and money market instruments, as set forth in the indi vidual fund’s prospectus. For most large, institutional investors, the costs associated w ith investing in mutual funds are higher than the investor can obtain through an individually managed portfolio.
Premium. The difference between the par value of a bond and the cost of the bond, when the cost is above par.
Prepayment Speed. A measure of how quickly principal is repaid to investors in mortgage securities.
Prepayment Window. The time period over which principal repayments will be received on mortgage securities at a specified prepayment speed.
Primary Dealer. A financial institution (1) that is a trading counterparty with the Federal Reserve in its execution of market operations to carry out U.S. monetary policy, and (2) that participates for statistical reporting purposes in compiling data on activity in the U.S.
Government securities market.
Prudent Person (Prudent Investor) Rule. A standard of responsibility which applies to fiduciaries. In California, the rule is stated as “Investments shall be managed with the care, Attachment 1
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skill, prudence and diligence, under the circumstances then prevailing, that a prudent person, acting in a like capacity and familiarity with such matters, would use in the conduct of an enterprise of like character and with like aims to accomplish similar purposes.” Realized Yield. The change in value of the portfolio due to interest received and interest earned and realized gains and losses. It does not give effect to changes in market value on securities, which have not been sold from the portfolio.
Regional Dealer. A financial intermediary that buys and sells securities for the benefit of its customers without maintainin g substantial inventories of s ecurities and that is not a primary dealer.
Repurchase Agreement (RP, Repo). Short-term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller’s point of view, the same transaction is a reverse repurchase agreement.
Safekeeping. A service to bank customers whereby s ecurities are held by the bank in the customer’s name.
Structured Note. A complex, fixed income instrument , which pays interest, based on a formula tied to other interest rates, commodities or indices. Examples include inverse floating rate notes which have coupons that increase when othe r interest rates are falling, and which fall when other interest rates are rising, and "dual index floaters," which pay interest based on the relationship between two other interest rates - for example, the yield on the ten-year Treasury note minus the Libor rate. Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements.
Supranational Debt. Supranational debt is the term for debt (unsecured unsubordinated obligations issued or unconditionally guaranteed) of an in ternational or multi-lateral financial agency. Supranationals are well capitalized and in mo st cases have strong credit support from contingent capital calls from their member countries. CGC 53601 was amended effective January 1, 2015 to allow loca l agencies to invest in the senior debt obligations of three supranational issuers which are eligible for purchase and resale within the United States, specifically the International Bank for Reconstruction and Development, International Finance Corporation, and Inter-American Development Bank.
Total Rate of Return. A measure of a portfolio’s performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains, and losses in the portfolio.
U.S. Treasury Obligations. Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk, and are the benchmark for interest rates on all ot her securities in the US and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds.
Treasury Bills. All securities issued with initial maturities of one year or less are issued as discounted instruments, a nd are called Treasury bills. The Treasury currently issues three- and six-month Tbills at regular weekly auctions. It also issues “cash management” bills as needed to smooth out cash flows.
Treasury Notes. All securities issued with initial maturities of two to ten years are called Treasury notes, and pay interest semi-annually.
Treasury Bonds. All securities issued with initial maturities greater than ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually.
Volatility. The rate at which security prices ch ange with changes in general economic conditions or the general level of interest rates.
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Yield to Maturity. The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost.
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