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CITY OF VISALIA
Statement of Investment Policy
INTRODUCTION
The City of Visalia (The City) strives to maintain the level of investment of all funds as near 100% as possible through daily and projected cash flow determinations. Investments are made so maturities match or precede the cash needs of the City. The City will insure that principal invested is protected from loss while maintaining adequate cash availability and maximizing yield on invested funds.
The basic premise underlying the City's investment philosophy is to insure that money is always available when needed. A minimum amount of 6% of the adopted operating budget is maintained in immediately available investments, such as the State Treasurer's Local Agency Investment Fund or other cash equivalents. This may include commercial paper, banker's acceptances, or new repurchase agreements.
The City’s portfolio will be limited to an average life of three years or less. When the market warrants purchase of longer maturities to capture a higher rate of return, purchases will be limited to United States Treasury Notes and Bonds, Federal Agencies, Medium Term Notes , and Mortgage Backed Securities.
The City will attempt to ladder the portfolio with staggered maturities so that a portion of the portfolio will mature each year. In addition, the economy and various markets are monitored carefully to assess the probable course of interest rates. In a market with low or increasing interest rates, the City will attempt to invest in securities with shorter maturities. This makes funds available for other investments when the interest rates are higher. When interest rates appear to be near a relative high rate, the City will attempt to purchase investments with medium to long -term maturities to lock in the higher rate of return. When interest rates are falling, the City will invest in securities with longer maturities to hold the higher rate for a longer period of time.
The City will also take advantage of any new investment instrument that becomes eligible for municipal investment only after a detailed review of the investment, and its safety, liquidi ty and yield are completed.
1.0 Policy
It is the policy of the City to invest public funds in a manner which will provide the greatest security with the maximum investment return while meeting the daily cash flow demands of the entity and conforming to all state and local statutes governing the investment of public funds.
2.0 Scope
It is intended that this Investment Policy cover all funds and investment activities under the direct authority of the City organization.
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3.0 Prudence
As a charter city, the City operates its pooled cash investments under the prudent investor rule.
Investments shall be made with the judgment and care, under the circumstances then prevailing which investors 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. This affords the City a broad spectrum of investment opportunities as long as the investment is deemed prudent and is allowable under current legislation of the State of California, the charter of the City, and this investment policy. Investments will be made in a ra nge of instruments to insure diversification of the City's portfolio and liquidity of assets in an emergency situation.
3.1 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 the investment polic y and exercising due diligence shall be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. Future State of California legislative actions affecting this investment policy (adding further restrictions to the type and length of investments) shall not apply to those investments held prior to the enactment of said legislation unless specifically identified in the legislative action.
4.0 Objective
The primary objectives, in priority order, of the City of Visalia’s investment activities shall be:
4.1 Safety: 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. The objective will be to mitigate credit risk and interest rate risk.
a. Credit Risk, which is the risk of loss due to the failure of the security issuer or backer, will be minimized by:
• Limiting investments to the types of securities listed in Section 8.0 of this Investment Policy • Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisers with which the City will do business in accordance with Section 7.0 • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized.
b. Interest Rate Risk, which is the risk that the market value of securities in the portfolio will fall due to changes in market interest rates, by:
• Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity
• Investing funds primarily in shorter -term securities, money market mutual funds, or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy as outlined in Section 13.0.
4.2 Liquidity: The City’s investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated.
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4.3 Return on Investments: The City’s investment portfolio shall be designed with the objective of attaining a rate of return throughout budgetary and economic cycles, commensurate with the City’s investment risk constraints and the cash flow characteristics of the portfolio. Securities shall generally be held until maturity with the following exceptions:
• A security with declining credit may be sold early to minimize loss of principal. • A security swap would improve the quality, yield, or target duration in the portfolio. • Liquidity needs of the portfolio require that the security be sold.
5.0 Delegation of Authority:
Authority to manage the City’s investment program is derived from the City’s Charter. On November 21, 1983 Council delegated responsibility (Resolution 83 -96) for the investment program is to the Finance Director (Treasurer), who shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include reference to: safekeeping, repurchase agreements, wire transfer agreements, banking service contracts and collateral/depository agreements. 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 Treasurer. The Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. Annually, Council will review and adopt by resolution the updated Investment Policy, in which Council will delegate responsibility for the investment program to the Treasurer.
6.0 Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employ ees and investment officials shall disclose to the Treasurer any material interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City, particularly with regard to the time of purchases and sales.
7.0 Authorized Financial Dealers and Institutions:
The Treasurer will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness who are authorized to provide investment services in the State of California. These may include “primary” dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3- 1 (uniform net capital rule). No public deposit shall be made except in a qualified public deposito ry as established by State laws.
All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the Treasurer with the following:
• Audited Financial Statements
• Proof of National Association of Security Dealers certification • Completed broker/dealer questionnaire
• Certification of having read this investment policy
• Compliance with City of Visalia insurance requirements for professional services agreements for general, professional and automotive liability.
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An annual review of the financial condition and registrations of qualified bidders will be conducted by the Treasurer. In addition, a current audited financial statement is required to be on file for each financial institution and broker/dealer in which the City conducts investment transactions.
The City shall also be open to contracting investment management services for a portion of the portfolio.
That portion shall be limited to longer term investments of two years or longer. Any investment management firm contracted shall meet criteria estab lished by the Treasurer. All investments made under contract will be purchased in the City's name and in accordance with the guidelines established by the City's investment policy.
8.0 Authorized and Suitable Investments
The City is empowered by statute to invest in the following types of securities . Any instrument not expressly permitted is prohibited. Specific limitations are provided on the maximum allowable percentage per investment category and further limitations by issuer within each investment category.
With the exception of insured and/or collateralized bank deposits, overnight repurchase agreements, U.S. Government securities, including its agencies and instrumentalities, and authorized pools, no more than 10% of the City’s aggregate investment portfolio may be invested in securities of a single issuer regardless of sector. Any percentage limitation for a particular category of investment is only applicable at the time of purchase.
A. Securities of the U.S. Government
Securities of the U.S. Government include U.S. Treasury bills, notes and bonds.
U.S. Treasury Bills - are issued by the U.S. Treasury and are available in maturities out to one year.
They are non -interest bearing and sold on a discount basis. The face amount is paid at maturity.
Treasury Notes - are issued by the U.S. Treasury with maturities from two to ten years. They are issued in coupon form and many issues are also available in registered form. Interest is payable at six month intervals until maturity.
Treasury Bonds - are issued by the U.S. Treasury with maturities of ten years to thirty years. The City may purchase the interest and/or principal of a U.S. Treasury Bond. A principal only instrument is commonly called a "stripped" or "zero" coupon. Stripped coupons a re sold at a discount basis. The face amount is paid at maturity.
B. Securities of U.S. Government Agencies
The capital of U.S. government agencies was initially financed by the United States Treasury. As the agencies have grown and operated profitably over the years, the Treasury's investment has been replaced in a large measure by private capital. At the present time, obligations of only a few agencies are backed by the full faith and credit of the U.S. Government. The obligations of all the federal agencies described in the following sections are not guaranteed by the U.S. Government with the exception of Government National Mortgage Association, but are considered to be investments of the highest quality.
Federal National Mortgage Association - (Fannie Mae) Is a quasi- public corporation created by an act of Congress to assist the home mortgage market by purchasing mortgages insured by the Federal Housing Administration and the Farmers Home Administration, as well as those guaranteed by the Veterans Administration. FNMA issues Notes and Bonds. Notes are issued with maturities of less than one year with interest paid at maturity. Bonds are issued for 15 and 30 year maturities with interest paid semi-annually. Interest is computed on a 30/360 day basis. There is a strong secondary market in these securities. A secondary market means these instruments are actively traded; they are bought and sold daily.
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Government National Mortgage Association - (Ginnie Mae) is a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development. A certificate collateralized by FHA/VA residential mortgages represents a share in a pool of FHA or VA mortgages.
Ginnie Mae's are registered securities. Principal and interest are paid monthly and sent directly from the issuer of the pool, usually a mortgage banker, to the City. Original maturities range from 12 to 30 years with a 7 to 12 year assumed average life. (Assumed average life is due to prepayments of mortgages).
Federal Home Loan Banks - provide credit to member lending institutions such as savings and loan associations, cooperative banks, insurance companies and savings banks. The agency offers bonds in the public market with maturities of one year to ten years. These bonds are usual ly offered on a quarterly basis depending on the current demands of the housing industry. Interest is paid semi - annually on a 30/360 day basis.
Federal Farm Credit Banks - are debt instruments issued to meet the financial needs of farmers and the national agricultural industry. Discount notes are issued monthly with 6 and 9 month maturities.
Discount notes pay interest at maturity. Longer term debentures (2 -5 years) are also issued.
Debentures pay interest semi -annually on a 30/360 day basis. These issues enjoy an established secondary market.
Small Business Administration Loans - (SBA) The Small Business Administration is an independent agency of the United States government which furnishes financial and management assistance to small businesses. The SBA guarantees the principal portion of the loans it approves. The City purchases the guaranteed portion of these loans. Maturity can be for 1 year to 30 years. These loans can be either set at a fixed rate or variable rate which is usually tied to the prime rate. Principal and interest are paid monthly on a 30/360 day basis.
Federal Home Loan Mortgage Corporation - (Freddie Macs) A publicly held government -sponsored enterprise created on July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970, as amended. Freddie Mac’s statutory mission is to provide stability in the secondary market for home mortgages, to respond appropriately to the private capital market and to provide ongoing assistance to the secondary market for home mortgages by increasing the liquidi ty of mortgage investments and improving the distribution of investment capital available for home mortgage financing. Maturity can be for 1 year to 30 years. These loans can be either set at a fixed rate or variable rate.
Other U.S. government securities available to the City for investment purposes include: Student Loan Marketing Association (SLMA or Sallie Mae), Aid for International Development (AID), and debentures of Tennessee Valley Authority (TVA). However, these instruments are not offered on a regular basis and do not offer the same liquidity as the before mentioned instruments.
C. Securities of the State of California or Its Sub-Divisions
The State of California and its sub -divisions occasionally provide a good investment alternative, such as notes, bonds and other evidences of indebtedness. They are used to meet the financial needs of State, or other agencies of the State. These investments, during certain market conditions, can provide a higher yield even without the tax benefit that the private sector takes advantage of. The City will only purchase California securities with credit ratings of A or better by a nationally recognized rating agency; and with maturities of 5 years or less. Their interest is calculated on a 30/360 day basis like Agency bonds. Interest is paid semi-annually.
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D. Time Deposits and Certificates of Deposit
Time Deposits are placed with commercial banks, savings association, or state or federal credit unions.
A time deposit is a receipt for funds deposited in a financial institution for a specified period of time at a specified rate of interest. Generally, the time is 3 months to 2 years. Denominations can be any agreed upon amount and interest is normally calculated using actual number of days o n a 360-day year and paid monthly. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) currently up to $250,000 per institution and Certificates of Deposit can be supported by either 110% U.S.
Government agency notes or 150% mortgages currently held by the bank or savings and loan. An institution must meet the following criteria to be considered by the City:
• The institution must maintain a net worth to asset ratio of at least 3% and a positive earnings record. • The institution must make available a current FDIC call report or FHLB report. A call report presents the solvency of the institution to the agency with oversight responsibility of that institution.
E. Negotiable Certificates of Deposit
Negotiable Certificates of Deposit are a form of Certificate of Deposit which have been an important money market instrument since 1961 when commercial banks began issuing them and a secondary market developed to provide liquidity. Since these certificates of deposit can be traded in the secondary market, they are negotiable instruments, hence their name negotiable certificate of deposit. They are supported only by the strength of the institution from which they are purchased. Interest is paid semi- annually computed on a 30/360 day basis. Maturities range from 3 months to 2 years. Negotiable Certificates of Deposit are generally issued in blocks of $1 million, $5 million, $10 million, etc.
The City will restrict its investments in Negotiable Certificates of Deposit to the 100 largest United States banks according to asset size. The profitability of the financial institution as well as its financial stability is also taken into account prior to placing the investment.
F. Banker's Acceptance Notes
A banker's acceptance (B.A.) is a unique credit instrument used to finance both domestic and international transactions. As a money market instrument, it is an attractive short -term investment.
When a bank "accepts" such a time draft, it becomes, in effec t, a predated certified check payable to the bearer at some future, specified date. Little risk is involved because the commercial bank assumes primary liability once the draft is accepted. Banker's acceptances are frequently in odd amounts.
Maturities normally range from 30 up to 180 days. Banker's acceptances are sold at a discount. This means the face amount is received at maturity. The City will purchase Banker’s acceptances from only the 100 largest United States banks according to asset size. The profitability of the financial institution as well as its financial stability is also taken into account prior to placing the investment.
G. Commercial Paper
Commercial paper is the trade name applied to unsecured promissory notes issued by finance and industrial companies to raise funds on a short term basis. Commercial paper can be purchased on an interest bearing or discount basis. Interest bearing instruments pay interest semi-annually. Discounted instruments pay interest at maturity. The City will invest in commercial paper only if the paper attains the highest ranking or attains the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (NRSRO). Maturities range from 30 to 180 days with interest computed on a 30/360 day basis.
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H. Medium Term Notes
In recent years, this financing mechanism has grown, providing capital to the private sector, and diminishing the Negotiable Certificate of Deposit market. The trend towards medium term notes is related to buyer and seller flexibility and convenience. Th e notes are issued on any given date and maturing on a negotiated date. They generally range from 2 to 5 years in maturity. This market provides an excellent alternative to Negotiable C.D.'s. The City will only purchase Medium Term Notes with credit ratings of A or better by a nationally recognized rating agency; and with maturities of 5 years or less. Their interest is calculated on a 30/360 day basis like Agency bonds. Interest is paid semi - annually.
I. Local Agency Investment Fund
The Local Agency Investment Fund (LAIF) was established by the State to enable treasurers to place funds in a pool for investment. The LAIF has been particularly beneficial to those jurisdictions with small portfolios. Each agency is limited to an invest ment of $75.0 million per account. The City uses this fund for short term liquidity, investment , and yield when rates are declining. Funds are available on demand and interest is paid quarterly.
J. Repurchase Agreement
Closely associated with the functioning of the Federal funds market is the negotiation of repurchase agreements or repo’s . Banks may buy temporarily idle funds from a customer by selling U.S.
Government or other securities with the contractual agreement to repurchase the same security on a future date determined by negotiation. For the use of funds, the customer receives an interest payment from the bank; the interest rate reflects both the prevailing demand for Federal funds and the maturity of the repo. Repurchase Agreements are usually executed for $100,000 or more. The City will require physical delivery of the securities backing the repo to its safekeeping agent. The institution from which the City purchases a repo must transfer on an ongoing basis sufficient securities to compensate for changing market conditions and to insure that the market value of securities is valued at 102 percent or greater of the funds borrowed against those securities . Generally, maturities range from 1 to 90 days with interest paid at maturity , and may not exceed one year . A Master Repurchase Agreement is required.
K. Reverse Repurchase Agreements
Reverse Repurchase Agreements, on the other hand simply reverses the above process of purchasing repurchase agreements. The City, in effect, sells a particular security to a firm for a stated period of time, not to exceed 92 days. Interest is paid at maturity. The City pays the firm interest on the cash it receives while receiving the interest on original security. The City will in turn purchase a short term security at a higher rate of interest. Reverse repurchase agreements may also be used to alleviat e a temporary cash shortage. The City of Visalia will never utilize the reverse repurchase agreement in order to meet its cash needs. Reinvestment of reverse repurchases will be in securities of shorter or equal maturities to a reverse repurchase agreement. Reverse repurchase agreements cannot exceed 20% of the investment portfolio.
L. Money Market Mutual Funds
Money Market Mutual Funds are shares issued by diversified management companies who invest in the securities and obligations as authorized by subdivisions (a) to (j), inclusive, or subdivisions (m) or (n) of Government Code Section 53630 and comply with the investment restrictions of Article 2 (commencing with Section 53630 of the California Government Code ). To be eligible for investment 8 | P a g e
pursuant to this subdivision, these companies shall either: (1) attain the highest ranking or the highest letter and numerical rating provided by not less than two nationally recognized rating services, or (2) have an investment adviser registered with the Securities and Exchange Commission with not less than five year's experience investing in the securities and obligations as authorized by subdivisions (a) to (j), inclusive, or subdivisions (m) or (n) of Government Code section 53630, and with assets und er management in excess of five hundred million dollars ($500,000,000). The purchase price of shares purchased pursuant to this subdivision shall not include any commission that these companies may charge and shall not exceed 20 percent of the investment portfolio.
M. Investment Pools other than LAIF
Managed Investment Pool’s pursuant to California Government Code Section 53601 (p) for which shares of beneficial interest issued by a joint powers authority organized pursuant to California Government Code Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (q), inclusive. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
1. The advisor is registered or exempt from registration with the Securities and Exchange Commission.
2. The advisor has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive.
3. The advisor has assets under management in excess of five hundred million dollars ($500,000,000).
9.0 Other Investment Pools:
A thorough investigation of investment pools, as authorized by statute, shall be conducted prior to the City’s investment. Any pool shall provide the following:
• A description of eligible investment securities, and a written statement of i nvestment policy and objectives (i.e. are reserves, retained earnings, etc. utilized by the pool and is the pool eligible for bond proceeds and/or will it accept such proceeds)
• A description of interest calculations and distribution methods, and how gains and losses are treated • A description of how the securities are safeguarded (including the settlement processes), and how often securities are priced and the program audited
• A description of who may invest in the program
• A description of how deposits and withdrawals will be made, how often they are allowed and any minimum or maximum limitations
• A reporting schedule for receiving statements and portfolio activity • A fee schedule and method of assessment
10.0 Collateralization:
Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse) agreements. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) currently up to $250,000 per institution and Certificates of Deposit can be supported by either 9 | P a g e
110% U.S. Government agency notes or 150% mortgages currently held by the bank or savings and loan.
11.0 Safekeeping and Custody:
Securities purchased with invested funds that are in a negotiable, bearer, registered, or nonregistered format, shall require delivery of all the securities to the City, including those purchased for the City by financial advisors, consultants, or managers using the City’s funds, by book entry, physical delivery, or by third party custodial agreement. The transfer of securities to the counterparty bank’s customer book entry account may be used for book-entry delivery.
To insure the safety and internal accounting controls necessary to establish a stable and accurate investment system, the City uses an investment confirmation document. This document is prepared by Treasury and approved by accounting personnel. Copies are also distributed to the City accounting department, Treasury investment file, and the institutions with which the order to transfer funds was placed (safekeeping). This transaction control document, or "Confirmation" form, contains information regarding the type of investment; amount invested; interest rate; purchase and maturity dates; and any delivery instructions. This confirmation is matched to the Broker's Confirmation and held in the Treasury's file until the security is sold or matures.
12.0 Diversification:
The City operates its investment pool with many State and self -imposed constraints. It does not buy stocks and it does not speculate. Currently Government Code Section 53600 (et seq) restricts the City portfolio to:
o 30% in Negotiable Certificates of Deposit o 40% in Bankers Acceptance Notes o 25% in Commercial Paper o 30% in Medium Term Notes o 20% in Money Market Mutual Funds o 20% in Repurchase Agreements
These restrictions primarily apply to short-term investments and are interpreted to apply at the time of investment. If, as the portfolio mix changes over time, a particular segment exceeds these restrictions the prudent investor rule shall apply.
The City will be selective in purchasing long -term negotiable certificates of deposit and medium term notes, placing such an investment only with a large stable institution.
13.0 Maximum Maturities
To the extent possible, the City will attempt to match its investments with anticipated cash flow requirements. The City will operate a portfolio with an average life of three years or less. This is to insure liquidity and the ability to move with changing markets and interest rates.
No investments shall be made in investments with maturities greater than five (5) years without specific Council approval not less than ninety days prior to the investment . Exception: Mortgage Backed Securities, such as Federal National Mortgage Association (Fannie Mae) and Government National Mortgage Association (Ginnie Mae) which have maturities greater than five (5) years, and not to exceed 30 years may be purchased. While the final maturity on these investments is greater than five (5) years, 10 | P a g e
the return of principal and interest is received on a monthly basis (as mortgages are being paid, refinanced, and pre-paid), therefore minimizing the investment risk. At no point, will investments with maturities greater than five (5) years exceed 20% of the portfolio value.
14.0 Internal Control
To assure compliance with policies and procedures, the Treasurer, along with finance staff, shall form an investment committee. The committee will meet to review the investment portfolio and collectively establish investment goals and parameters for purchases. The committee will also collectively decide on investment purchases and sales of holdings.
15.0 Performance Standards
The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs.
15.1 Market Yield (Benchmark): The City’s investment strategy is passive. Passive investment portfolio management generally indicates that the Treasurer will purchase an instrument and hold it through maturity, and then reinvest the monies. Although the City’s investment strategy is passive, this will not restrict the Treasurer from evaluating when swaps are appropriate or if the sale of an instrument is prudent prior to final maturity. Given this strategy, a series of appropriate benchmarks shall be established against which portfolio performance shall be compared on a regular basis. The benchmarks shall be reflective of the actual securities being purchased and risks undertaken and the benchmarks shall have a similar weighted average maturity as the portfolio.
16.0 Reporting
Quarterly, the Treasurer will issue a report for Council’s review of the City's current investment portfolio, detailing securities purchase and maturity date, face and market value, credit quality, and any reverse activities.
Periodically, the long-term investments will be reviewed in order to determine if it is advantageous to sell those securities and purchase others. The review will consider current market conditions and various spread relationships among security types. Additionally, a statement will be issued indicating the findings of the analysis. The monitoring of the conditions set forth in this policy statement is the responsibility of the Treasurer.
17.0 Investment Policy Adoption
The City’s investment policy shall be adopted by resolution. The policy shall be reviewed annually by the City Council and any modifications made thereto must be approved by them.
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Exhibit A
City of Visalia - Summary of Eligible Investments
Type of Issue Original Maturities Interest Payments U.S. Govt.
Guaranteed?
_______________________________________________________________________ U.S. Treasury 91 day and 182 day Issued at a discount Yes Bills Bills auctioned each from par. Paid at Monday for settlement maturity.
on Thursday.
52 week bills auctioned Discount is based on every fourth Thursday the actual number of for settlement on the days on a 360 day basis. following Thursday. Paid at maturity. ________________________________________________________________________________ U.S. Treasury 2 to 10 years. Paid semi-annual based Yes Notes on the actual days in the month and half-year.
________________________________________________________________________________ U.S. Treasury 10 to 30 years. Paid semi-annual based Yes Bonds on the actual days in the month and half-year.
Strips or 10 to 30 years. Issued at a discount Yes Zeros from par. Paid at maturity on a 30/360
day basis.
________________________________________________________________________________ FNMA(Federal Discount notes are Issued at a discount No National Mortgage issued with maturities from par. Paid at Association) less than one year. maturity on a 30/360 day basis.
15 year and 30 year Principal and interest No mortgage-backed paid semi-annually on a
securities with a 30/360 day basis.
7 and 15 year assumed
average life.
_________________________________________________________________________________ GNMA(Gov’t Various maturities Principal and interest Yes National Mortgage from 12 to 30 years paid monthly on a 30/360 Association) with an assumed day basis. average life of
7 to 12 years.
______________________________________________________________________________ FHLB(Fed Home Bonds of maturities Paid semi-annually on No Loan Bank) from 1 to 10 years. 30/360 day basis. 12 | P a g e
Exhibit A
City of Visalia - Summary of Eligible Investments
Type of Issue Original Maturities Interest Payments U.S. Govt.
Guaranteed?
________________________________________________________________________________ FFCB(Fed Farm 6 and 9 month Paid at maturity No Credit Bank) offered monthly. on a 30/360 day basis.
Debentures are Paid semi-annually No issued with 2 to on a 30/360 day basis.
5 years maturities.
________________________________________________________________________________ SBA(Small Bus. Loans to Small Principal and interest No Administration) Businesses. The paid monthly. On a principal portion 30/360 day basis. Can
of the loan is be a fixed or variable
guaranteed by the rate which is usually
SBA. 1 to 30 years. tied to prime rate.
________________________________________________________________________________ FHLMC(Fed. Home 30 year final with Principal and interest No Loan Mortgage 12 year assumed paid monthly on a 30/360 Corporation) average life. day basis.
California Securities Debentures are Paid semi-annually No issued with 2 to on a 30/360 day basis.
5 years maturities.
________________________________________________________________________________ CD(Certificate 3 months to 5 years. Paid monthly on a No of Deposit) actual/360 day basis. ________________________________________________________________________________ NCD(Negotiable 3 months to 2 years. Paid semi-annually. No Certificates of Some issues have Floaters pay quarterly.
Deposit) quarterly floating
rates.
________________________________________________________________________________ BA Notes(Banker's 30 to 180 days. Issued at a discount No Acceptance Notes) from par. Paid at maturity.
__________________________________________________________________________________ Commercial Paper Unsecured promissory Can be interest bearing No note issued by finance or a discounted note.
and industrial companies If interest bearing,
to raise short term paid semi-annually. If
capital. Generally 30 discounted, paid at
to 180 days. maturity.
__________________________________________________________________________________ MTN(Medium Term 2 to 5 years. Paid semi-annually No Notes) Extended maturity on a 30/360 day basis. commercial paper.
___________________________________________________________________________________ LAIF(Local Agency Funds are available Paid quarterly. No Investment Fund) on demand. Investments
State Pool are restricted by Gov't.
Code, same as the City's.
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Exhibit A
City of Visalia - Summary of Eligible Investments
Type of Issue Original Maturities Interest Payments U.S. Govt.
Guaranteed?
___________________________________________________________________________________ Repurchase Negotiated. Paid at maturity. No Agreements A short term investment
transaction with a
contractual agreement
to repurchase the same
securities at a future
date. In essence, the
City loans the Bank
money for a specified
time collateralized by
marketable securities.
Terms are from 1
to 90 days.
_____________________________________________________________________________________ Reverse Negotiated. Paid at maturity. No Repurchase This transaction
Agreements is the mirror image
of the repurchase
agreement. Instead
of the City loaning
the Bank money, the
Bank loans the City
funds. The City
then "repurchases"
securities with
matched maturities
to the end of the
contract. Terms are
from 1 to 90 days.
____________________________________________________________________________________ Money Market Funds are available Paid Monthly No Mutual Funds on demand. Shares
issued by a diversified
management company.
____________________________________________________________________________________ Other Funds are available Paid quarterly No
Investment on demand.
Pools
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GLOSSARY
AGENCIES: Federal agency securities
ANNUAL COMPREHENSIVE FINANCIAL
REPORT (Annual Financial Report): The
official annual report for the City of Visalia. 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, and a detailed Statistical Section.
ASKED: The price at which securities are
offered.
ARBITRAGE: Transactions by which securities
are bought and sold in different markets at the
same time for the sake of the profit arising from a
yield difference in the two markets.
BANKERS ACCEPTANCE (BA): A draft of bill
or exchange by a bank or trust company. The
accepting institution guarantees payment of the
bill, as well as the issuer.
BID: The price offered by a buyer of securities.
(When you are selling securities, you ask for a
bid.) See Offer.
BROKER: A broker brings buyers and sellers
together for a commission.
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.
COUPON: (a) The annual rate of interest 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/her own account.
DEBENTURE: A bond secured only by the
general credit of the issuer.
DELIVERY VERSUS PAYMENT (DVP): There
are two methods of delivery of securities: delivery
versus payment and delivery versus receipt.
Delivery versus payment is delivery of securities
with an exchange of money for the securities.
Delivery versus receipt is delivery of securities
with an exchange of a signed receipt for the
securities.
DERIVATIVES: (1) Financial instruments whose
return profile is linked to, or derived from, the
movement of one or more underlying index or
security, and may include a leveraging factor, or
(2) financial contracts based upon notional
amounts whose value is derived from an
underlying index or security (interest rates,
foreign exchange rates, equities or commodities).
DISCOUNT: The difference between the cost
price of a security and its maturity when quoted at
lower than face value. A security selling below
original offering price shortly after sale also is
considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing
money market instruments that are issued at 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.
FEDERAL CREDIT AGENCIES: Agencies of the
Federal government set up to supply credit to
various classes of institutions and individuals,
e.g., S&L’s, small business firms, students,
farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC): A federal agency that
insures bank deposits, currently up to $250,000
per deposit.
FEDERAL FUNDS RATE: The rate of interest at
which Fed funds are traded. This rate is currently
pegged by the Federal Reserve through open-
market operations.
FEDERAL HOME LOAN BANKS (FHLB):
Government sponsored wholesale banks
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(currently 12 regional banks) which lend funds
and provide correspondent banking services to
member commercial banks, thrift institutions,
credit unions and insurance companies. The
mission of the FHLB’s is to liquefy the housing
related assets of its members who must purchase
stock in their district Bank.
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA): FNMA, like GNMA was
chartered under the Federal National Mortgage
Association Act in 1938. FNMA is a federal
corporation working under the auspices of the
Department of Housing and Urban Development
(HUD). It is the largest single provider of
residential mortgage funds in the United States.
Fannie Mae, as the corporation is called, is a
private stockholder-owned corporation. The
corporation’s purchases include a variety of
adjustable mortgages and second loans, in
addition to fixed-rate mortgages. FNMA’s
securities are also highly liquid and are widely
accepted. FNMA assumes and guarantees that
all security holders will receive timely payment of
principal interest.
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 and a
means of influencing the volume of bank credit
and money.
FEDERAL RESERVE SYSTEM: the central
bank of the United States created by Congress
and consisting of a seven member Board of
Governors in Washington, DC, 12 regional banks
and about 5,700 commercial banks that are
members of the system.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPALS (GAAP): The standard established
by the National Council on Governmental
Accounting which establishes the minimum
requirements for a fair presentation of financial
data in external financial reports. GAAP also
assures a degree of comparability in financial
reporting among different governments.
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank credit
guaranteed by GNMA and issued by mortgage
bankers, commercial banks, savings and loan
associations, and other institutions. Security
holder is protected by full faith and credit of the
U.S. Government. Ginnie Mae securities are
backed by the FHA, VA or FMHM mortgages.
The term “passthroughs” is often used to describe
Ginnie Mae's.
LIQUIDITY: A liquid asset is one that can be
converted easily and rapidly into cash without a
substantial loss of value. In the money market, a
security is said to be liquid if the spread between
bid and asked prices is narrow and reasonable
size can be done at those quotes.
LOCAL AGENCY INVESTMENT FUND: The
Local Agency Investment Fund (LAIF) was
established by the State to enable treasurers to
place funds in a pool for investments. The LAIF
has been particularly beneficial to those
jurisdictions with small portfolios. Each account is
limited to an investment of $75.0 million.
MARKET VALUE: The price at which a security
is trading and could presumably be purchased or
sold.
MASTER REPURCHASE AGREEMENT: A
written contract covering all future transactions
between the parties to repurchase—reverse
repurchase agreements that establishes each
party’s rights in the transactions. A master
agreement will often specify, among other things,
the right of the buyer-lender to liquidate the
underlying securities in the event of default by the
seller-borrower.
MATURITY: The date upon which the principal
or stated value of an investment becomes due
and payable.
MONEY MARKET: The market in which short-
term debt instruments (bills, commercial paper,
bankers’ acceptances, etc.) are issued and
traded.
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
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economy. Purchases inject reserves into the
bank system and stimulate growth of money and
credit; sales have the opposite effect. Open
market operations are the Federal Reserve’s
most important and most flexible monetary policy
tool.
PORTFOLIO: Collection of securities held by an
investor.
PRIMARY DEALER: A group of government
securities dealers who submit daily reports of
market activity and positions and monthly
financial statements to the Federal Reserve Bank
of New York and are subject to its informal
oversight. Primary dealers include Securities and
Exchange Commission (SEC)-registered
securities broker-dealers, banks, and a few
unregulated firms.
PRUDENT PERSON RULE: An investment
standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money
only in a list of securities selected by the custody
state--the so-called legal list. In other states the
trustee may invest in a security if it is one which
would be bought by a prudent person of
discretion and intelligence who is seeking a
reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A
financial institution which does not claim
exemption from the payment of any sales or
compensating use or ad valorem taxes under the
laws of this state, which has segregated for the
benefit of the commission eligible collateral
having a value of not less than its maximum
liability and which has been approved by the
Public Deposit Protection Commission to hold
public deposits.
RATE OF RETURN: The yield obtainable on a
security based on its purchase price or its current
market price. This may be the amortized yield to
maturity on a bond the current income return.
REPURCHASE AGREEMENT (REPO): A holder
of securities sells these securities to an investor
with an agreement to repurchase them at a fixed
price on a fixed date. The security “buyer” in
effect lends the “seller” money for the period of
the agreement, and the terms of the agreement
are structured to compensate him for this.
Dealers use Repos extensively to finance their
positions. Exception: When the Fed is said to be
doing Repos, it is lending money, increasing bank
reserves.
SAFEKEEPING: A service to customers
rendered by banks for a fee whereby securities
and valuables of all types and descriptions are
held in the bank’s vaults for protection.
SECONDARY MARKET: A market made for the
purchase and sale of outstanding issues following
the initial distribution.
SECURITIES & EXCHANGE COMMISSION:
Agency created by Congress to protect investors
in securities transactions by administering
securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital
Rule.
STRUCTURED NOTES: Notes issued by
Government Sponsored Enterprises (FHLB,
FNMA, SLMA, etc.) and corporations which have
imbedded options (e.g. call features, step-up
coupons, floating rate coupons, derivative-based
returns) into their debt structure. Their market
performance is impacted by the fluctuation of
interest rates, the volatility of the imbedded
options and shifts in the shape of the yield curve.
TREASURY BILLS: A non-interest bearing
discount security issued by the U.S. Treasury to
finance the national debt. Most bills are issued to
mature in three months, six months, and one
year.
TREASURY BONDS: Long-term coupon-bearing
U.S. Treasury securities issued as direct
obligations of the U.S. Government and having
initial maturities of more than 10 years.
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TREASURY NOTES: Long-term coupon-bearing
U.S. Treasury securities issued as direct
obligations of the U.S. Government and having
initial maturities from two to 10 years.
UNIFORM NET CAPITAL RULE: Securities and
Exchange Commission requirement that member
firms as well as nonmember broker-dealers in
securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also
called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm,
including margin loans and commitments to
purchase securities, one reason new public
issues are spread among members of
underwriting syndicates. Liquid capital includes
cash and assets easily converted into cash.
YIELD: The rate of annual income return on an
investment, expressed as a percentage. (a)
INCOME YIELD is obtained by dividing the
current dollar income by the current market price
for the security. (b) NET YIELD or YIELD TO
MATURITY is the current income yield minus any
premium above par or plus any discount from par
in purchase price, with the adjustment spread
over the period from the date of purchase to the
date of maturity of the bond.