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HomeMy WebLinkAboutRes 2017-43, SA-RDA 066, FA-68, HA-81 Statement Investment Policy 06/08/2017REQUEST: SUBMITTED BY: DATE: CONTENTS: Recommendation CITY OF PALM DESERT OFFICE OF THE CITY TREASURER STAFF REPORT RESOLUTION NOS. 2017-43 SA -RDA 066 FA- 68 HA-81 ADOPT RESOLUTIONS, APPROVING THE PALM DESERT "STATEMENT OF INVESTMENT POLICY," AS AMENDED: 1) CITY COUNCIL RESOLUTION NO. 2017 - 43 ; 2) SUCCESSOR AGENCY RESOLUTION NO. SA -RDA - 066 ; 3) FINANCING AUTHORITY RESOLUTION NO. FA - 68 ; 4) HOUSING AUTHORITY RESOLUTION NO. HA - 81 . Thomas J. Metz, Deputy City Treasurer June 8, 2017 Resolution No. 2017 - 43 Resolution No. SA -RDA - 066 Resolution No. FA - 68 Resolution No. HA - 81 Amended Palm Desert Statement of Investment Policy Waive further reading and adopt the following, approving the Palm Desert "Statement of Investment Policy," as amended: 1) City Council Resolution No. 2017 - _ 43 ; 2) Successor Agency Resolution No. SA -RDA - 066 ; 3) Financing Authority Resolution No. FA - 68 ; 4) Housing Authority Resolution No. HA - 81 . Strategic Plan Obiective Not applicable. Committee Recommendation At its May 23, 2017 meeting, the Audit, Investment & Finance Committee voted unanimously to recommend that the City Council adopt this resolution, provided that the following language is added to the Palm Desert Statement of Investment Policy: 1.0 Policy. ... "At its discretion pursuant to Minute order, the Palm Desert City Council ("City Council") may direct that funds be made available to facilitate other lawful investment actions that the City Council takes. In that case, either the City Manager or the Director of Finance / City Treasurer is authorized to invest the funds accordingly." Staff Report Amendments to Statement of Investment Policy June 8, 2017 Page 2 of 8 23.0 Reporting. "The City shall provide the City Council with a monthly investment report within 30 days after Finance Committee review of that report." Executive Summary The City's current investment policy, which was originally drafted in 1994, requires updating so that it addresses current market conditions. Previous amendments to this policy have been minor in nature. Key changes recommended include: • Dividing the City investment portfolio into two portfolios, a Liquidity Portfolio and an Income Portfolio. • Authorizing California State and Local Agency Debt as allowable investments. • Raising the total amount of corporate securities that may be purchased from 30% to 45%. • Raising the total amount of securities that may be purchased from a single corporate issuer from 5% to 10%. • Raising the total amount that may be invested in Local Government Investment Pools from 50% to 75%. These changes will align the City's investment policy with the California Government Code, California Debt and Investment Advisory Commission ("CDIAC") guidelines and Government Finance Officers Association ("GFOA") Best Practices. Background Pursuant to California Government Code Section 53646(a)(2), the City Treasurer must submit the City of Palm Desert ("City") "Statement of Investment Policy" to the Audit, Finance & Investment Committee and to the City Council annually for review and adoption. Proposed policy changes may be considered at that time. The City investment portfolio has the potential to be far more profitable that it has been. The following four factors have restricted its profit potential: 1) Restrictive Investment Policy. Palm Desert has one of the most restrictive municipal investment policies in California. Because of this, the City has not been able to buy several State -allowed investments that would have lowered overall portfolio risk, and increased portfolio return during a time of dysfunctional securities markets. In the last 25 years, the City has not lost any investment principal even though it has invested heavily in one of the higher -risk sectors — corporate securities. This is due to conservative risk management guidelines that are independent of the City investment policy. H:\1WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO Il.doc Staff Report Amendments to Statement of Investment Policy June 8, 2017 Page 3 of 8 2) Ban on Paving Premiums. For a number of years, the City avoided buying securities at a market price that was higher than the stated value of the investment. Otherwise, the City would be booking these transactions as a non -cash loss (unrealized paper loss) that could result in an allocation of negative interest annually. 3) Short -Term Investing. From 2010 through 2016, City surplus cash was not invested beyond 12 months. It was kept in short-term investment pools so that the City could ride interest rates up when they recovered, and not be caught with an underperforming portfolio. The downside, however, is that a significant amount of interest income may have been foregone by not investing farther out on the yield curve, and a portfolio with a short average maturity will not be insulated from an interest -rate downturn. 4) Assignment of Investment Staff to Other Full -Time Duties. Investment staff was assigned to property management from 2012-2016, overseeing leasing, leasehold improvements, and maintenance and repair at three City -owned commercial office buildings (57,000 square feet of commercial office space). Two of the buildings had substantial deferred maintenance. This left little time to invest. The City's investment policy, as currently configured, was successful in an era when the following market conditions existed: • Short-term interest rates were within a traditional range. • Traditional economic cycles occurred. • Corporate and Federal Agency securities were plentiful. • Primary dealers, as privately -held entities, could leverage their capital base to carry large securities inventories. As of December 2016: • Short-term interest rates have been at near -zero levels for 8 years — below the levels of the Great Depression. • The U.S. economy has had its weakest recovery since 1949. • Corporate securities issuance is at a historic low, with many medium -term notes trading at a premium. Corporations have also shifted from issuing 3(a)(3) commercial paper (under the federal Securities Act of 1933), which cities can buy, to 4(a)(2) ("private placement") commercial paper, which cities cannot buy, in order to save money. The trading volume of commercial paper is so thin that it is difficult to establish its market value. Federal Agency issuance has also shrunk due to the contraction of the housing agencies. • Many primary dealers can no longer leverage their capital base because they have converted into bank holding companies, and, as such, are subject to federal capital requirements. Consequently, primary dealers are carrying much smaller inventories. Staff believes that investment options should be expanded in order to meet these challenges; to enhance returns; and to be in keeping with the current best practices for H:\1WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO Il.doc Staff Report Amendments to Statement of Investment Policy June 8, 2017 Page 4 of 8 municipal governments. The City Treasurer's Office is therefore proposing that a number of amendments be made to the City investment policy. In that policy, text deletions are depicted with striker; and text additions are highlighted with redlining. The proposed amendments may be summarized as follows: Table of Contents A section on basic investment strategy would be added since this has never been explicitly addressed. The "Market Yield (Benchmark)" section would be retitled as "Portfolio Benchmark." Page 1, Section 1.0 Policy. This section would be reorganized to follow the more succinct style of the model investment policy offered by the Association of Public Treasurers of the United States & Canada. Definitions at the bottom of this section would be deleted since they appear elsewhere in the policy. Page 1-2, Section 2.0 Scope. There is a single declarative sentence confirming that the City investment policy does not apply to the City's Deferred Compensation Plan which is managed by a third party. The language requiring the City Treasurer to provide the Finance Committee with Deferred Compensation Plan reports would be deleted since City employees are responsible for investing their individual Plan assets. Page 2, Section 3.0 Page 3-4, Section 4.0.2 Prudence. "Investment Officers" would be defined. "Finance Committee" would be updated to "Audit, Investment & Finance Committee." Liquidity. Liquidity risk could be addressed by dividing the City investment portfolio into a Liquidity Portfolio and an Income Portfolio. The creation of a Liquidity Portfolio for unanticipated cash needs would insulate the Income Portfolio from liquidity risk and interest -rate risk by concentrating those risks in the highly liquid, low -duration Liquidity Portfolio. Consequently, there would be less concern about the Income Portfolio having a negative market value due to longer -term investments since the Liquidity Portfolio would cover any liquidity shortfalls. The cities of Los Angeles, Palo Alto, and Newport Beach have adopted this strategy. Page 5-8, Section 8.0 Authorized Financial Dealers and Institutions. The requirement that the City give authorized brokers an annual copy of the City investment policy would be revised so that authorized brokers would only receive a copy if a policy change has occurred. H:\1WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO II.doc Staff Report Amendments to Statement of Investment Policy June 8, 2017 Page 5 of 8 Page 8, Section 9.0 Page 8, No. 3 Page 9, No. 5 The requirement that the City Treasurer's Office keep on file an authorized broker's annual financial statements for the preceding three years would be deleted since this information is now available online. Authorized and Suitable Investments. The statement that the City investment policy is more conservative than state law would be deleted. State law sets a legal standard for "prudent" investing. The further the City goes beyond that standard, the less profitable the City investment portfolio will be. California State and Local Agency Debt. This would be a new investment. The proposed restrictions are taken from state law. Approximately 73% of the 70 surveyed California cities allow the purchase of State of California debt. Another 75% allow the purchase of California local agency debt. The City of Pasadena, for example, recently purchased City of Palm Desert debt. In both cases, Palm Desert is in the minority that does not authorize these investments. This minority typically consists of cities with a relatively small investment portfolio, and no full-time investment officer. Taxable state general obligation debt can have yields comparable to those of corporate securities. States cannot default on their debt by filing a Chapter 9 bankruptcy. State general obligation bonds are also backed by the full taxing power of the issuing state. State debt is, in fact, a safer investment than corporate debt. Local agency debt encompasses city, county, and special district debt. The general obligation debt of California's four largest cities (i.e., San Francisco, Los Angeles, Sacramento, and San Diego) might be an investment possibility. Large, well-known water districts such as the Metropolitan Water District of Los Angeles; the San Diego County Water Authority; and the Coachella Valley Water District might be investment possibilities. Commercial Paper. The combined corporate debt concentration limit for commercial paper ("CP") and medium - term notes ("MTNs") in the City investment policy would be increased from 30° to 45%. This combined limit is not required under state law. This is why 99% of 70 surveyed cities do not have a combined corporate debt concentration limit. State law H:\1 WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO II.doc Staff Report Amendments to Statement of Investment Policy June 8, 2017 Page 6 of 8 Page 11, No. 9 Page 12, No. 11 Page 12, No. 13 allows cities to invest 55% of their portfolios in corporate securities (25% CP; 30% MTNs). The City currently can only invest 30% of its portfolio in corporate securities. The corporate issuer concentration limit would also be increased from 5% to 10%. This limit is not required under state law. Approximately 75% of 70 surveyed cities either have no concentration limit or one of 10% or higher. The cities of Los Angeles, San Diego, San Jose, Huntington Beach, Davis, El Cajon, Santee, Milpitas, and Elk Grove currently have a combined corporate issuer concentration limit of 10 % or higher. An issuer increase is needed in order to offset the diminution of the portfolio capital base that would result from the City portfolio being divided into two portfolios. In the case of medium -term notes, for example, the capital base that concentration limits are measured against would shrink from approximately $280 million (undivided City portfolio) to $109 million (Income Portfolio only). In dollar terms, the issuer concentration limit would fall from $14 million to $5 million. In this situation, a 5% concentration limit might actually increase portfolio risk by diverting the City into lower -rated corporate issues with higher default risk. Commercial paper would be purchased for the Liquidity Portfolio. Medium -Term Notes. The corporate issuer concentration limit would be raised from 5% to 10% (see preceding discussion). Medium -term notes would be purchased for the Income Portfolio. State of California Local Agency Investment Fund ("LAIF"). The vague language on the maximum ceiling for LAIF deposits per account would be replaced with the specific dollar amount so that the limit is transparent. Local Government Investment Pools. This would increase the maximum amount that could be invested in local government investment pools, specifically the $6 billion Riverside County Treasurer's Pooled Investment Fund. The current maximum limit of 50% would be raised to 75%. This would allow the City to use the Riverside County Treasurer's Pool on a short-term basis to maximize profit — a stated goal of the City's investment policy. H:\1 WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO II.doc Staff Report Amendments to Statement of Investment Policy June 8,2017 Page 7 of 8 Riverside County has had a pooled investment fund since 1893. A five -person Investment Oversight Committee oversees the investment pool. Although State law no longer requires these committees, Riverside County has elected to retain its committee. The City of Palm Desert receives monthly investment reports on the Pool. The Pool is managed conservatively, with two-thirds of the assets invested in short- term securities, and the remaining one-third laddered in equal amounts over five years. The Treasurer's Pool has "AAA" credit ratings from Moody's and from Fitch. Page 14, Section 13.0 Safekeeping & Custody. The proposed change would minimize custodial credit risk and fraud by requiring that a "systemically important financial institution" be selected as the City's custodian. The custodian would be selected from one of the 20 largest commercial banks in the world, as measured by total assets. J.P. Morgan Chase & Co., Mitsubishi UFJ Financial Group (Union Bank), Bank of America, Citigroup Inc. and Wells Fargo & Co. fall into that category. Page 15, Section 16.0 Page 17, Section 20.0 Basic Investment Strategy. This would add a new section to the policy that would formally define the City's basic investment strategy. The City would adopt a "passive strategy" of "buying and holding" securities that would be organized in laddered maturities. Laddering is the fixed -income equivalent of "dollar - cost averaging" in stocks. Riverside County and most California local agencies ladder their portfolios. Internal Controls. The Finance Committee structure would be updated to reflect the merger of the City Manager and the Executive Director of the RDA Successor Agency — Palm Desert job titles, and the removal of the Deputy City Treasurer from the committee. Pages 17-18, Section 22.0 Portfolio Benchmark. The existing language in this section would be deleted, and replaced with a paragraph confirming that LAIF is the City's performance benchmark (which has been the case for the last 20 years). The cities of Los Angeles and Sacramento also use LAIF as a performance benchmark. Page 18, Section 23.0 Reporting. The requirement that the City Treasurer provide an investment report to the Finance Committee and to the City Council within 30 days of each month -end would be amended • to within 30 days after Finance Committee review. • H:\1WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO II.doc Staff Report Amendments to Statement of Investment Policy June 8, 2017 Page 8 of 8 Page 19, Section 24.0 Investment Policy Adoption. "Housing Authority Commission" is changed to "Housing Authority Board." Page 20, Appendix A List of Authorized Financial Institutions. J.P. Morgan Securities and Wells Fargo Securities would be added as primary securities dealers. Piper Jaffray & Company and Stifel, Nicolaus & Company would be added as secondary brokers. Citibank, a systemically important financial institution, would replace California Bank & Trust on the public depository list. California Bank & Trust is a wholly -owned subsidiary of Zions Bank (Salt Lake City, Utah). Zions Bank is not a systematically important financial institution. Union Bank, which is both a depository and a custodian, would have its name updated to reflect a recent Japanese merger. U.S. Bank Global Corporate Trust Services would be added as the City's trustee. Fiscal Impact Adding state and local agency securities as authorized investments, raising the combined corporate debt concentration limit to 45%, raising the corporate issuer concentration limit to 10% and raising the local government investment pool concentration limit to 75% will enhance portfolio profitability. Prepared by: r hirrnA4d 91: faki, Thomas J. Metz Deputy City Treasurer Approved by: Lauri Aylaian City Manager tjm Attachments (as noted) Department ad: Foik Janet . Poore Direct of Finance/City Treasurer H:\1 WORD 2007\CORRESPONDENCE\INTERNAL\CITY COUNCIL\SOIP 2017 - STAFF MEMO II.doc RESOLUTION NO. 2017- 43 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM DESERT APPROVING THE PALM DESERT STATEMENT OF INVESTMENT POLICY, AS AMENDED WHEREAS, pursuant to California Government Code Section 53646, the Treasurer of the City of Palm Desert (hereafter referred to as the "City Treasurer") has proposed a Statement of Investment Policy for consideration by the City Council of the City of Palm Desert, California ("hereafter referred to as the "City Council"), which is attached hereto, and incorporated herein by reference; and WHEREAS, pursuant to Palm Desert Municipal Code Section 3.08.020, the City Council has delegated the authority to invest all public funds that the City holds, to the City Treasurer. NOW, THEREFORE BE IT RESOLVED, by the City Council, as follows: Section 1. The City of Palm Desert Statement of Investment Policy is hereby approved and adopted. Section 2. The authority to invest and reinvest all public funds that the City of Palm Desert holds, and to sell or exchange the securities so purchased, in compliance with the terms of the approved Statement of Investment Policy, is hereby delegated to the City Treasurer. RESOLUTION NO. 2017- 43 PASSED, APPROVED, AND ADOPTED at a regular meeting of the Palm Desert City Council, held on this 8th day of June, 2017, by the following vote to wit: AYES: NOES: ABSENT: ABSTAIN: JAN C. HARNIK, MAYOR ATTEST: RACHELLE D. KLASSEN, CITY CLERK CITY OF PALM DESERT APPROVED AS TO FORM: ROBERT W. HARGREAVES, CITY ATTORNEY BEST, BEST & KRIEGER, LLP Page 2 RESOLUTION NO. SA -RDA - 066 A RESOLUTION OF THE SUCCESSOR AGENCY TO THE PALM DESERT REDEVELOPMENT AGENCY APPROVING THE PALM DESERT STATEMENT OF INVESTMENT POLICY, AS AMENDED WHEREAS, pursuant to Califomia Govemment Code Section 53646, the Treasurer has proposed a Statement of Investment Policy for consideration by the Successor Agency to the Palm Desert Redevelopment Agency (hereafter referred to as the "Successor Agency"), which is attached hereto, and incorporated herein by reference; and WHEREAS, pursuant to Palm Desert Municipal Code Section 3.08.020, the Agency Board has delegated the authority to invest all public funds that the Agency holds, to the Treasurer. NOW, THEREFORE BE IT RESOLVED, by the Successor Agency, as follows: Section 1. The Palm Desert Statement of Investment Policy is hereby approved and adopted. Section 2. The authority to invest and reinvest all public funds that the Successor Authority holds, and to sell or exchange the securities so purchased, in compliance with the terms of the approved Statement of Investment Policy, is hereby delegated to the Treasurer. RESOLUTION NO. SA -RDA - 066 PASSED, APPROVED, AND ADOPTED at a regular meeting of the Successor Agency to the Palm Desert Redevelopment Agency, held on this 8th day of June, 2017, by the following vote to wit: AYES: NOES: ABSENT: ABSTAIN: JAN C. HARNIK, CHAIR ATTEST: RACHELLE D. KLASSEN, SECRETARY CITY OF PALM DESERT APPROVED AS TO FORM: ROBERT W. HARGREAVES, CITY ATTORNEY BEST, BEST & KRIEGER, LLP Page 2 RESOLUTION NO. FA-68 A RESOLUTION OF THE PALM DESERT FINANCING AUTHORITY APPROVING THE PALM DESERT STATEMENT OF INVESTMENT POLICY, AS AMENDED WHEREAS, pursuant to California Government Code Section 53646, the Treasurer has proposed a Statement of Investment Policy for consideration by the Palm Desert Financing Authority (hereafter referred to as the "Financing Authority"), which is attached hereto, and incorporated herein by reference; and WHEREAS, pursuant to Palm Desert Municipal Code Section 3.08.020, the Agency Board has delegated the authority to invest all public funds that the Agency holds, to the Treasurer. NOW, THEREFORE BE IT RESOLVED, by the Financing Authority, as follows: Section 1. The Palm Desert Statement of Investment Policy is hereby approved and adopted. Section 2. The authority to invest and reinvest all public funds that the Financing Authority holds, and to sell or exchange the securities so purchased, in compliance with the terms of the approved Statement of Investment Policy, is hereby delegated to the Treasurer. RESOLUTION NO. FA- 68 PASSED, APPROVED, AND ADOPTED at a regular meeting of the Palm Desert Financing Authority, held on this 8th day of June, 2017, by the following vote to wit: AYES: NOES: ABSENT: ABSTAIN: JAN C. HARNIK, PRESIDENT ATTEST: RACHELLE D. KLASSEN, SECRETARY CITY OF PALM DESERT APPROVED AS TO FORM: ROBERT W. HARGREAVES, CITY ATTORNEY BEST, BEST & KRIEGER, LLP Page 2 RESOLUTION NO. HA- 81'. A RESOLUTION OF THE PALM DESERT HOUSING AUTHORITY APPROVING THE PALM DESERT STATEMENT OF INVESTMENT POLICY, AS AMENDED WHEREAS, pursuant to California Govemment Code Section 53646, the Treasurer has proposed a Statement of Investment Policy for consideration by the Palm Desert Housing Authority (hereafter referred to as the "Housing Authority"), which is attached hereto, and incorporated herein by reference; and WHEREAS, pursuant to Palm Desert Municipal Code Section 3.08.020, the Agency Board has delegated the authority to invest all public funds that the Agency holds, to the Treasurer. NOW, THEREFORE BE IT RESOLVED, by the Housing Authority, as follows: Section 1. The Palm Desert Statement of Investment Policy is hereby approved and adopted. Section 2. The authority to invest and reinvest all public funds that the Housing Authority holds, and to sell or exchange the securities so purchased, in compliance with the terms of the approved Statement of Investment Policy, is hereby delegated to the Treasurer. RESOLUTION NO. HA- 81 PASSED, APPROVED, AND ADOPTED at a regular meeting of the Palm Desert Housing Authority, held on this 8th day of June, 2017, by the following vote to wit: AYES: NOES: ABSENT: ABSTAIN: JAN C. HARNIK, CHAIRMAN ATTEST: RACHELLE D. KLASSEN, SECRETARY CITY OF PALM DESERT APPROVED AS TO FORM: ROBERT W. HARGREAVES, CITY ATTORNEY BEST, BEST & KRIEGER, LLP Page 2 CITY OF PALM DESERT STATEMENT OF INVESTMENT POLICY PREPARED BY THE CITY TREASURER'S OFFICE Thomas J. Metz, J.D., M.B.A. ❑eputy City Treasurer REVIEWED AND APPROVED BY Raul C. Gibson, C.C.M.T. Janet M. Moore City Treasurer Revision No. 9 20 Adopted by the City Council on Mach E, 2012 June 8, 2017 Palm Desert Treasury Policies and Procedures Revision No. 19 No. 2: "Statement of Investment Policy" Adopted: 31842 TABLE OF CONTENTS OVERVIEW PAGE 1.0 Policy 1 2.0 Scope 1 3.0 Prudence 2 4.0 Objectives 3 INVESTMENT AUTHORITY 5.0 Delegation of Authority .. 5 6.0 Investment Procedures 5 7.0 Ethics and Conflicts of Interest 5 INVESTMENTS 8.0 Authorized Financial Dealers and Institutions 6 9.0 Authorized and Suitable Investments 9 10.0 Prohibited Investments 14 11.0 Investment Pools/Mutual Funds 14 PORTFOLIO MANAGEMENT 12.0 Collateralization 15 13.0 Safekeeping and Custody 15 14.0 Diversification 16 15.0 Maximum Maturities 16 16.0 Basic Investment Strategy 16 17.0 Portfolio Rebalancing 16 18.0 Credit Downgrading 17 19.0 Bond Proceeds 17 20.0 Internal Controls 18 PERFORMANCE MEASUREMENT 21.0 Performance Standards 18 22.0 Markot Yiold (✓onohma4} Portfolio Benchmark 18 23.0 Reporting 19 LEGAL REQUIREMENTS 24.0 Investment Policy Adoption 20 APPENDICES A: List of Authorized Financial Institutions 21 B: Glossary 22 Palm Desert Treasury Policies and Procedures Revision No. T8 No. 2: "Statement of Investment Policy" Adopted: 31842 1.0 Policy It is the rr lioy of tho: I- City of Palm Desert; or Agency _ Palm Desert' 3...--Palm-DesertHousing Authority• i -Palm Desert Financing A�.thority; and the 3. Palm_ Desert Recreational Facilities Corporation It is the policy of the City of Palm Desert; the RDA Successor Agency - Palm Desert; the Palm Desert Housing Authority; the Palm Desert Financing Authority; and the Palm Desert Recreational Facilities Corporation (hereafter referred to collectively as the "City") to: (1) comply with applicable law governing the investment of public monies under the City Treasurer's control; (2) protect the principal monies entrusted to the City; and (3) maximize profit within the parameters of prudent risk management. At its discretion pursuant to minute order, the Palm Desert City Council ("City Council") may direct that funds be made available to facilitate other lawful investment actions that the City Council takes. In that case, either the City Manager or the Director of Finance & City Treasurer is authorized to invest the funds accordingly. For tho purpor❑ of thio policy: "Invootmont Officers" sha;I be LVi od av tho Cty Trctc& ru a e the Deputy City "Finanso Committoc" ohaaI dofinod co the Audit, Invootmont, and Finanoo Commicc. t y Counoil" cha!I bo dofinod so tho Pa!t Qooed City Counoil. 2.0 Scope Thic p`I cy ohgIl gpply to all Linda the arc under tho City Troao:.3r'o 3oTro-1 This policy ch&.:I apply to all funds that zero undor tho City Troas?,:Gr's oontrol including, but not I:mited to, tho gone -al fund; opoaial rovenuc fi►ri �cw`1 �c vice fNndo; ocpital projoot funds; enterprise Endo; and truot and cgonoy fizdo. Th000 fNndo am acxounttd for in tho City'o Comprehensive AnnL.'l r inanoial Ronort: Tho City'o Dcfo; rod Compensation Plan ("Plcn") °hall bo oAlluded from the 000po of thio policy if t o f conditions exist: (1) a t}1ir a-dminiotrator manages the Plan; (2) individ�\al plan pa,1ioiponto havo oontrol over Page 1 Palm Desert Treasury Policies and Procedures Revision No. 19 No. 2: "Statement of Investment Policy" Adopted: 31842 the -selection of irwootmonto; and (3) the City has no fiduciary rozpanoibility to act as a "truJ;oo" for the Plan. tion to tho foregoing ❑hall bo that if the City rotoino tho fiduciary rocponc.4-1-ity-to acc, ao a truotca:. for the Plan, then tho Plan shall bo doomed to -be within the scopo of thic polioy. The City Troacirer shall provide the Finanoo Committee with a quarterly report on the invo^fmontt of Plan accns. This investment policy shall apply to all financial assets of the City of Palm Desert as accounted for in the City's Comprehensive Annual Financial Report, including, but not limited to, the following funds: 1. General Fund. 2. Special Revenue Funds. 3. Debt Service Funds. 4. Capital Project Fund. 5. Enterprise Funds. 6. Internal Service Funds. 7. Trust and Agency Funds. This policy does not cover funds held by the California Public Employees Retirement System or funds of the Deferred Compensation Plan. 3.0 Prudence Pursuant to California Government Code Section 53600.3, fne‘emcnt Officero the City Treasurer and the Deputy City Treasurer (hereafter collectively referred to as "Investment Officers"). as trustees of public monies, shall adhere to the "prudent investor" standard when managing the City's investment portfolios. They shall invest "...with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency." Investment Officers who follow the provisions of this policy and who exercise due diligence shall be relieved of personal responsibility for a security's credit risk or market price risk; provided that they report substantial deviations from expectations to the City Manager and to the Audit. Investment & Finance Committee ('Finance Committee-) in a timely manner, and that they take appropriate action to control adverse developments. Page 2 Palm Desert Treasury Policies and Procedures Revision No. 4-9 No. 2: "Statement of Investment Policy" Adopted: 3/8112 "Substantial deviations" shall be defined as either a decline of 10 percent or more in the market value of a security due to issuer default or a credit risk downgrade, or the sale of a security prior to maturity at 10 percent or more below its acquisition cost. 4.0 Objectives The City's investment objectives, in order of priority, shall be: 4.0.1 Safety. Safety of principal shall be the foremost objective. Investments shall be made with the aim of avoiding capital losses due to issuer default; broker default; or market value erosion. Principal shall be preserved by mitigating: Credit Risk, the risk of loss due to the failure of the issuer of the security, shall be mitigated by investing in only the highest quality securities; by diversifying investments; and by pre -qualifying securities brokers and public depositories; and Market Risk, the risk of Toss due to a decline in bond prices because of rising market interest rates, shall be mitigated by structuring the portfolios so that issues mature concurrently with the City's anticipated cash requirements, thereby eliminating the need to sell securities prematurely on the open market. It is recognized, however, that in a diversified portfolio, occasional measured losses are inevitable, and must be considered within the context of overall investment return. 4.0.2 Liquidity. An adequate percentage of the portfolios shall be maintained in liquid, short-term securities that can be converted to cash, if necessary, to meet disbursement requirements. Since all cash requirements cannot be anticipated, the portfolios should consist Iatgely of relatively low -duration securities with active secondary markets. The City shall seek to minimize liquidity risk by dividing its investment portfolio into two separate portfolios: the Liquidity Portfolio and the Income Portfolio. The Liquidity Portfolio shall consist of short-term investments that mature within one year. Its purpose shall be to ensure that there is sufficient liquidity to fund 12 months of City expenditures. The Income Portfolio shall consist of long-term investments that mature in one -to -five years. Its purpose shall be to maximize profit. Liquidity Portfolio investments shall be in short-term assets including, but not limited to, commercial paper, repurchase agreements, negotiable Page 3 Palm Desert Treasury Policies and Procedures Revision No. 14 No. 2: "Statement of Investment Policy" Adopted: 3181 certificates of deposit, the State of California Local Agency Investment Fund ("LAIF). and California local government investment pools. The Liquidity Portfolio shall be subdivided into primary and secondary sub -portfolios. The primary sub -portfolio shall contain the equivalent of three months' of City expenditures which shall be invested either in LAIF or in a local agency investment pool. All assets shall mature in 90 days or less. The secondary sub -portfolio shall contain an amount equal to nine months' of City expenditures which may be invested in short-term assets that are laddered in equal amounts, on a monthly basis, starting four months out. Alf assets shall have 91-to-360 day maturities. Since not all possible cash demands can be anticipated, an amount equal to the City's annual expenditures shall be invested in securities that mature in less than one year. 4.0.3 Yield. Yield shall be considered only after the basic requirements of safety and liquidity have been met. Whenever possible and in a manner consistent with the objectives of safety and liquidity, a yield higher than the market rate of return shall be sought. 5.0 Delegation of Authority California Government Code Sections 53607 and 53608 authorize the legislative body of a local agency to invest, deposit, and provide for the safekeeping of the local agency's funds or to delegate those responsibilities to the treasurer of the local agency. City of Palm Desert Municipal Code Section 3.08.010 delegates the authority to invest, deposit, and provide for the safekeeping of City public monies to the City Treasurer. City of Palm Desert Municipal Code Section 2.16.010 authorizes the City Director of Finance to serve ex officio as City Treasurer. The City Treasurer shall be responsible for all investment transactions that are executed on behalf of the City. The City Treasurer and the Deputy City Treasurer shall have exclusive authority to buy and sell securities on behalf of the City. The Deputy City Treasurer may execute investment transactions on behalf of the City only if the City Treasurer has previously authorized the transactions. If the City Treasurer is unavailable, then the Assistant Finance Director must authorize the investment transactions prior to execution. Page 4 Palm Desert Treasury Policies and Procedures Revision No. I-9 No. 2: "Statement of Investment Policy" Adopted: 3/842 6.0 Investment Procedures The City Treasurer shall establish written procedures for the operation of the City's investment program that are consistent with the provisions of this policy. The procedures shall include reference to: safekeeping, PSA repurchase 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 under the procedures that the City Treasurer establishes. 7.0 Ethics and Conflicts of Interest Investment Officers shall fefrain from not conduct any personal business activity that could conflict with the proper execution of the City's investment program or impair their ability to make impartial investment decisions. They shall disclose to the City Council any material financial interest in financial institutions that conduct business within the City's jurisdiction. They shall also disclose any personal investment positions that could be related to the performance of the City's investment portfolios. Investment Officers shall subordinate their personal investment transactions to those of the City, particularly with regard to the timing of securities purchases and sales, and shall avoid transactions that might impair public confidence. Investment Officers and their immediate relatives shall not accept or solicit any gifts, gratuities, honorariums, or favors from persons or entities who provide or who are seeking to provide financial services to the City. 8.0 Authorized Financial Dealers and Institutions The City Treasurer shall maintain an authorized list (see Page 18 20) of all securities brokers that the Finance Committee and .the City Council have authorized to transact securities business with the City. This list shall be provided to all members of the City Council and the Finance Committee. Only primary government securities dealers ("primary dealers") that regularly report to the Federal Reserve Bank of New York shall be eligible for inclusion on the City's authorized list. The only exception to the foregoing roquiramont shall be that the Finance Committee and the City Council may, at their discretion, accept, review, and approve Requests for Information ("RFI") from secondary brokers that: (1) have been in existence for more than five years; (2) have a net capital position in excess of $100 million; (3) are licensed as brokers by the State of California; and (4) are headquartered or have a branch office in California. Page 5 Palm Desert Treasury Policies and Procedures Revision No. 19 No. 2: "Statement of Investment Policy" Adopted: 3/8/12 The total number of primary dealers and secondary brokers on the authorized list shall not exceed five four at any time. The City shall accept and review new broker applications only when there is an immediate need to fill a vacancy on the authorized list. In all cases, the City shall only accept RFIs from and transact business with the institutional securities sales departments of primary dealers and secondary brokers. The City shall not transact business with an authorized securities firm until all of the documentation that both parties require has been executed and delivered. All brokers who wish to apply for inclusion on the authorized list must, at a minimum, provide the City Treasurer with a copy of the following documents, unless otherwise noted: 8.0.1 Completed "Primary Dealer Request for Information" (signed original only). 8.0.2 The firm's most recent Annual Report and Securities and Exchange Commission f"SEC") Form 10-K or 20-F. 8.0.2 The firm's National Association of Securities Dealers ("NASD") Form BD — Uniform Application for Broker -Deafer Registration or, in the case of an investment department within a commercial bank, SEC Form MSD. 8.0.3 The firm's current NASD Form BD Status Report. 8.0.4 NASD Form U-4 -- Uniform Application for Securities Industry Registration or Transfer for each employee would who might be trading with the City. 8.0.5 Current NASD Form U-4 Status Report on each employee who might be trading with the City. 8.0.6 A resume from each of the firm's employees who might be trading with the City. 8.0.7 The firm's delivery and wiring instructions. 8.0.8 An executed corporate resolution that identifies employees who are authorized to trade, and who might be trading with the City. 8.0.9 The firm's current investment policy. In addition to the above documents, secondary brokers must also submit: 8.0.10 The firm's most recent SEC Form X-17 A-5 or, in the case of an investment department within a commercial bank, SEC Consolidated Page 6 Palm Desert Treasury Policies and Procedures Revision No.1-9 No. 2: "Statement of Investment Policy" Adopted: 2 Reports of Condition and Income for A Bank With Domestic and Foreign Offices — FFIEC 031. Investment Officers shall investigate all broker applicants in order to determine if they: (1) are adequately capitalized; (2) are subject to pending legal action (either the firm or the trader); (3) make markets in securities that are appropriate for the City's needs; (4) are licensed as a broker by the State of California Department of Corporations; and (5) are a member of the National Association of Securities Dealers. Broker applicants shall be required to provide state or local government references from within California. Any broker that has made a political contribution within any consecutive four-year period following January 1, 1996 in an amount that exceeds the limits in Municipal Securities Rulemaking Board ("MSRB") Rule G-37, to any member of or candidate for the City Council, the RDA Successor Agency — Palm Desert Board, the Housing Authority Commission, or the Finance Committee shall be ineligible to transact business with the City. The Finance Committee and the City Council shall review the submitted documents, along with the Investment Officers's recommendations, and decide if any new brokers should be added to the authorized list. If, in the City's opinion, a broker's RFI is missing, incomplete, late (submitted after the specified deadline), or contains false or misleading information, or if the broker has not submitted all of the documents that the City requires, then the City shall automatically reject that broker's RFI, and the broker shall not be eligible to submit another RFI to the City for three years. Tho City Traaciffor:hall provido all authori od brol<orc annually, in January, with a—eopy---9f—the--C-itys—ihvesti:nont policy for that aalondar year. Tho C4ty authorized broker for tho pr000ding throo ycarc. The City Treasurer shall provide all authorized brokers with a copy of the City's investment policy if it has been amended. The City Treasurer shall maintain an authorized list (see Page 1-8 20) of all commercial banks, savings associations, and federal associations (as defined by California Financial Code Section 5102), and trust companies that the Finance Committee and the City Council have authorized as public depositories of City monies, in the form of checking, savings, and money market accounts, and certificates of deposit. This list shall be provided to all members of the City Council and the Finance Committee. The City shall only deposit public monies in financial institutions that have: 8.0.11 At least $5 billion in total assets. Page 7 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 3/8?12 8.0.12 A core capital -to -total assets ratio of at least five percent. 8.0.13 Favorable statistical ratings from a nationally recognized rating service, as determined by the City Treasurer. 8.0.14 A federal or a state charter. 8.0.15 A branch office within Riverside County. 8.0.16 A "satisfactory" overall rating in their most recent evaluation by the appropriate federal financial supervisory agency, in terms of meeting the credit needs of California communities, pursuant to federal law. Under no circumstances shall the City's deposits in a financial institution exceed the total shareholders' equity of that institution. 9.0 Authorized and Suitable Investments The City Treasurer shall be authorized to invest in the following financial instruments pursuant to California Government Code Section 53600 et seq. The City'c nwesthient policy rn re cencr,rativrt than ii,atc law. No. Type of Investment °A of Portfolio Authorized Other Restrictions 1. United States Treasury bills, 100% Maximum maturity: 5 Years notes, bonds, or certificates of indebtedness, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest. 2. Federal Agency or United States government -sponsored enterprise ("GSE") obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by Federal Agencies or by GSE. 100% Maximum maturity: 5 years No more than 30% of the portfolio may be invested in any one issuer (excluding the proceeds of tax-exempt bonds). Page 8 Palm Desert Treasury Policies and Procedures Revision No.1-9 No. 2: "Statement of Investment Policy" No. Type of Investment 3. California State and Local Agency debt obligations that are general obligation bonds or revenue bonds that are issued by the state or local agency or by a department, board, agency, or authority of the state or a local agency. 4. Banker's Acceptances("BA") issued by commercial banks. 5. Commercial Paper ("CP") (Non -Pooled Fund) issued by general corporations organized and operating in the United States with assets exceeding $500 million. °IQ of Portfolio Authorized 100c Adopted: 318/1-2 Other Restrictions Maximum maturity: 5 Years Rated "A" or higher by S&P or by Moody's. 40% Rated "A-1" or higher by S&P or "P-1" by Moody's. Maximum maturity: 180 days No more than 30% of the portfolio may be invested in any one BA issuer. 25% Maximum maturity: 270 days Rated "A-1" by S&P or"P-1" by Moody's. No more than 10% of the outstanding CP of any one issuer may be purchased. No more than 5% 10°• of the portfolio may be invested in the commercial paper and medium -term notes of any one issuer. No more than 30% 45% of the portfolio may be invested in commercial paper and medium -term notes. Asset -backed commercial paper is ineligible for purchase. Page 9 Palm Desert Treasury Policies and Procedures Revision No.1-9 No. 2: "Statement of Investment Policy" No. Type of Investment 6. Negotiable Certificates of Deposit ("NCD") issued by a nationally- or state -chartered bank, a savings association, a federal association, or by a state -licensed branch of a foreign bank. % of Portfolio Authorized 7. Time Certificates of Deposit ("TCD") issued by qualified public depositories. 8. Repurchase Agreement ("RP") sold by authorized brokers. Adopted: 31842 Other Restrictions 30% Maximum maturity: 5 years Long-term debt rated "AA-" higher by S&P or by Moody's. 15% Maximum maturity: 1 year TCDs exceeding the FDIC limit must be collateralized. TCDs must be centralized at one location for each bank or S&L. If TCD is uncollateralized, then no more than 90 percent of the FDIC limit may be invested per TCD. Issuing public depository must meet qualifying criteria on Page 6-an-e14 7 and 8 of this SoIP. 206/o Maximum maturity: 30 days Collateral must be United States Treasury, Federal, Agency, or GSE obligations. Zero coupon and stripped coupon instruments are not acceptable as collateral. Collateral must be valued at 102% of cost and adjusted weekly. Page 10 Palm Desert Treasury Policies and Procedures Revision No.1-9 No. 2: "Statement of Investment Policy" Adopted: 31842 1 No. Type of Investment 9. 10. Medium -Term Notes issued by Corporations organized and operating in the United States, or by depository institutions operating in the United States and licensed by the United States or by any state. Money Market Mutual Funds ("MMF") that are registered with the SEC under the Investment Act of 1940. % of Portfolio Authorized Other Restrictions City must have first lien and security interest in all collateral. City's custodian must hold collateral. An authorized broker must file a Public Securities Association (PSA) Master Repurchase Agreement with the City treasurer, and the City Attorney must review the agreement, prior to the transaction of RP business with that broker. 30% Maturity maturity: 5 years 20% (excluding bond proceeds) Rated "A" or higher by S&P or by Moody's. No more than 59,4, 10°I0 of the portfolio may be invested in the commercial paper and medium -term notes of any one issuer. No more than 30°X, 45% of the portfolio may be invested in commercial paper and medium -term notes. Either rated "AAA" by S&P, "Aaa" by Moody's, or "AAA-V- 1 +" by Fitch (2 of 3), or retains an investment advisor registered or exempt from registration with SEC, with at least 5 years of experience Page 11 Palm Desert Treasury Policies and Procedures Revision No. a-8 No. 2: "Statement of Investment Policy" Adopted: 3J842 No. Type of Investment 11. State of California Local Agency Investment Fund ("LAIF") that is managed by the State Treasurer's Office. 12, Structured Notes in the form of callable securities or "STRIPS" issued by the United States Treasury or by Federal Agencies or government - sponsored enterprises ("GSE") 13. Local Government Investment Pools ("LGIP") °/o of Portfolio Authorized Soo noto 4- $50,000,000 per account (except for bond trustee accounts which have no deposit limit) Other Restrictions managing a MMF with $500 million or more in assets. MMF must have dollar - weighted average maturity of 90 days or Tess. MMF must buy securities that mature in 13 months or Tess. No commission may be charged. .Maximum dopooit limit per aeoount allowod by Stsk law, except for bord trustee accounts -(no dopo:it limit). City Council and Redevelopment Agency approved participation in LAIF on 12/12/81 in Resolution No. 81-161. 20% Maximum maturity: 5 years 50°J�, 75°•0 (excluding bond proceeds) Must meet above criteria for MMFs (except for the Riverside County Treasurer's Pooled Investment Fund). Page 12 Palm Desert Treasury Policies and Procedures Revision No.1-9 No. 2: "Statement of Investment Policy" Adopted: 3442 10.0 Prohibited Investments Investment Officers shall not invest public monies in financial instruments that are not authorized under this policy. Prohibited investments shall include, but shall not be limited to, equity securities, bond mutual funds, reverse repurchase agreements, and derivative contracts (forwards, futures, and options). The purchase of derivative securities shall be prohibited, unless specifically authorized in this policy. Investment Officers shall not engage in securities lending, short selling, or other hedging strategies. LAIF and MMFs shall be exempt from the prohibitions on derivative contracts, derivative securities, reverse repurchase agreements, securities lending, short selling, and other hedging strategies. 11.0 Investment Pools/Mutual Funds A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. There shall be a questionnaire developed which will answer the following general questions: 11.0.1 A description of eligible investment securities, and a written statement of investment policy and objectives. 11.0.2 A description of interest calculations and how it is distributed, and how gains and losses are treated. 11.0.3 A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. 11.0.4 A description of who may invest in the program, how often, what size deposit and withdrawal are allowed. 11.0.5 A schedule for receiving statements and portfolio listings. 11.0.6 A verification on whether or not reserves or retain earnings are utilized by the pool/fund. 11.0.7 A fee schedule, and when and how it is assessed. 11.0.8 The eligibility of the pool/fund for bond proceeds, and whether it will accept such proceeds. Page 13 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 2 12.0 Collateralization Investment Officers shall ensure that all demand deposits and all non-negotiable certificates of deposit that exceed the Federal Deposit Insurance Corporation ("FDIC') limit shall be fully collateralized with securities authorized under state law and under this SOIP. Collateral may be waived for the amount of the FDIC limit. Any amount on deposit that exceeds the FDIC limit plus accrued interest, however, shall be collateralized with United States Treasury or federal agency securities at a constant margin ratio of 110 percent or with mortgage -backed collateral at a constant margin ratio of 150 percent. Collateralized investments and demand deposits may require substitution of collateral. The City Treasurer must approve all requests from financial institutions for substitution of collateral that involve interchanging classes of securities. An independent third party with which the City has a current custodial agreement shall always hold the collateral. The independent third party shall provide the City Treasurer with a safekeeping receipt that he shall retain. 13.0 Safekeeping and Custody Investment Officers shall conduct all security transactions on a delivery -versus - payment ("DVP") or on a receipt -versus -payment ("RVP") basis. A third -party bank trust department ("Custodian") that acts as an agent for the City under the terms of a custody agreement executed between both parties, shall hold the securities. The custodial bank shall be one of the 20 largest commercial banks in the world, as measured by total assets. The City's Custodian shall be represented on the authorized list (see Page 4-8 21). The only exception to the foregoing shall be securities purchases made with: 13.0.1 Local government investment pools. 13.0.2 Money market mutual funds. 13.0.3 Federal Reserve Banks ("Treasury Direct Program") since the purchased securities are not deliverable. No securities broker or investment advisor shall have access to City monies, accounts, or investments. Any transfer of monies to or through a securities broker must have the City Treasurer's prior written approval. If the City Treasurer is unavailable, then the Assistant Finance Director must authorize the transfer, in writing. Page 14 Palm Desert Treasury Policies and Procedures Revision No. 19 No. 2: "Statement of Investment Policy" Adopted: 31811-2 The City shall require Broker Trade Confirmations for all trades. Investment Officers shall review these confirmations immediately upon receipt, for conformity with the terms of the City's Trade Sheets. 14.0 Diversification Investment Officers shall diversify the City's investment portfolios by security type and by issuer, except for bond reserve monies; bond escrow monies; and any other monies that the City Council or the Finance Committee designates. 15.0 Maximum Maturities Investment Officers shall not invest in securities with maturities exceeding five years. The Finance Committee and the City Council, however, may approve longer maturities for the investment of bond reserve, bond escrow, and other funds if the maturities of such investments are expected to coincide with the expected use of the funds. 16.0 Basic Investment Strategy The City portfolio shall be invested using a passive strategy of "buying and holding" fixed -income securities. Whenever possible, a bond ladder shall be constructed with laddered maturities that support anticipated cash flow dates. Securities may be sold prior to maturity only to: 1) address an actual or potential deterioration in credit quality; 2) rebalance the portfolio; or 3) meet unanticipated financial obligations. Active strategies, such as market timing, sector rotation, or indexing to a benchmark are prohibited. 17.0 Portfolio Rebalancing If portfolio percentage constraints are violated due to a temporary imbalance in the portfolio, then Investment Officers shall hold the affected securities to maturity in order to avoid capital losses. If no capital losses would be realized upon sale, however, then Investment Officers shall consider rebalancing the portfolio after evaluating the expected length of time that it will be imbalanced. Portfolio percentage limits are in place in order to ensure diversification of the City investment portfolio; a small, temporary imbalance will not significantly impair that strategy. Page 15 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 318/42 18.0 Credit Downgrading This policy sets forth minimum credit risk criteria for each type of security. This credit risk criteria applies to the initial purchase of a security; it does not automatically force the sale of a security if its credit risk ratings fall below policy limits. If a security is downgraded below the minimum credit risk criteria specified in this policy, then Investment Officers shall evaluate the downgrade on a case -by -case basis in order to determine the security should be held or sold. The City Treasurer shall inform the Finance Committee at its next monthly meeting of the credit downgrade and of the Investment Officers's decision to hold or sell the downgraded security. Investment Officers shall review the credit standing of all securities in the City's investment portfolios annually, at a minimum. 19.0 Bond Proceeds The City Treasurer shall segregate the gross proceeds of tax-exempt bonds from the City general pool and shall keep them in a separate pool. They shall be invested pursuant to the instructions in the respective bond indentures of trust. If the bond indenture authorizes investments that conflict with this policy, then such investments shall be made only with the Finance Committee's prior approval. All securities shall be held in third -party safekeeping with the bond trustee ("Trustee") and all DVP and RVP rules shall apply. The Trustee shall be represented on the authorized list (see Page 1--8 20). Investment Officers shall use competitive offerings, whenever practical, for all investment transactions that involve the gross proceeds of tax-exempt bonds. The City shall obtain a minimum of three competitive offers. Any exceptions to this policy shall be documented and shall be reported to the Finance Committee at its next monthly meeting. The City is required under the "U.S. Tax Reform Act of 1986" to perform annual arbitrage calculations and to rebate excess earnings to the United States Treasury from the investment of the gross proceeds of tax-exempt bonds that were sold after the effective date of that law. The City Treasurer may contract with qualified outside financial consultants to provide the necessary technical expertise that is required to comply with this law. Page 16 Palm Desert Treasury Policies and Procedures Revision No.1-9 No. 2: "Statement of Investment Policy" Adopted: 31842 20.0 Internal Controls The City Treasurer shall ensure that all investment transactions comply with the City's policy, and shall establish internal controls that are designed to prevent losses due to fraud, negligence, and third -party misrepresentation. Internal controls deemed most important shall include: avoidance of collusion; separation of duties and administrative controls; separating transaction authority from accounting and record keeping; custodial safekeeping; clear delegation of authority; management approval and review of investment transactions; specific limitations regarding securities losses and remedial action; written confirmation of telephone transactions; documentation of investment transactions and strategies; and monitoring of results. The City Treasurer shall establish a process of independent review by an external audit firm of the City's investment program every three years. The external auditor shall review the program's management in terms of compliance with the internal controls that are specified in the City's Treasury Policies and Procedures Manual. A Finance Committee consisting of City officials and community representatives shall be responsible for reviewing the City investment reports, transactions, policies and procedures, and strategies on a monthly basis, or less frequently if the Finance Committee determines that a less -frequent schedule would not diminish its effectiveness. The Mayor, the Mayor Pro Tempore, the City Manager & Executive Director of the RDA Successor Agency - Palm Desert, the City Attorney, the-i DA ,S cescorr-°g ert E-xe utive Di rectr r; the City Treasurer, the Deputy City Treasurer; and various citizens who are appointed by the City Council pursuant to City ordinance, shall sit on this committee. 21.0 Performance Standards The investment portfolio Shall be designed with the objective of obtaining a rate of retum throughout budgetary and economic cycles, commensurate with investment risk constraints and cash flow needs. 22.0 Market Yiold (Bonchrnerk) Portfolio Benchmark The City investment portfolio shall be-passively-managed-with-partfetio 000uritioo being hod to maturity. On oolootod oocao'ranc, howo or, tho Cty portfolio may be actively managed for purpocra: of improving portfolio rick struoturo, liq�or yield in rosponso to markot conditions or to moat Cty roquiromonts. Profit tak+ng mare only be done if the capital gains wourrld• v-v a 22.0.1 Exceed the return that would be realized by holding tho coourity to maturity; and Page 17 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 3J842 22.0.2 Moro than offDot--an-+ecomo reduction due to roinvoctme-nt rate risk. The City shall adopt a benohmark that a.p exima : tho compocitic\n and weighted_avorago maturity of eaeh aty portfolio, in ardor to moasure whether or not tho City's portfolio yields are-Fnatohing or :larpascing the market yield. The City shall adopt the average monthly effective yield of the LAIF Pooled Money Investment Account as a performance benchmark for the City investment portfolio. 23.0 Reporting The City Treasurer shall provide tho Finance Cccrnmi tno an -el the City Council with a monthly investment report within 30 days of each month end or at the next sohodulod C;ty Council mooting follewing a Finance Committee meeting after Finance Committee review of the report. Pursuant to Governmental Accounting Standards Board ("GASB") Statement Number 40, as amended March 2003, the monthly investment report shall: 23.0.1 Organized individual securities by investment type (e.g., U.S. Treasuries, corporate bonds, commercial paper, etc.). Dissimilar investments (e.g., U.S. Treasury bills and Treasury strips) should not be aggregated. 23.0.2 List credit risk ratings for each security, mutual fund, or investment pool from at least two nationally recognized statistical rating organizations ("NRSRO"). If the security, mutual fund, or investment pool has not rating, then it shall be shown as "unrated". 23.0.3 Disclose the amount of individual securities and corresponding issuers if they exceed five percent of net plan assets, except for securities guaranteed by the U.S. Government, money market mutual funds, and external investment pools. 23.0.4 Use the specific identification method to reflect interest -rate risk by investment type and amount. This report shall include a complete portfolio inventory with details on issue, par value, book value, coupon/rate, original settlement date of purchase, final maturity date, CUSIP number, average weighted yield, average days to maturity, and market value (including source of market valuation). The report will include a statement on compliance or noncompliance with the City's SOIP and a statement on whether there are or are not sufficient funds to meet the City's anticipated cash requirements for the next six months. Page 18 Palm Desert Treasury Policies and Procedures Revision No. 19 No. 2: "Statement of Investment Policy" Adopted: 3/842 24.0 Investment Policy Adoption The City Treasurer shall submit a Statement of Investment Policy to the Finance Committee; the City Council; the RDA Successor Agency — Palm Desert Board; the Housing Authority Gefnmiocion Board; the Financing Authority Commission; and the Recreational Facilities Corporation Board of Directors annually for their review and adoption. Page 19 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 318/-1-2 Appendix A: List of Authorized Financial Institutions The City Treasurer's Office is authorized to transact investment and depository business with the following financial institutions. Investment and depository transactions with firms other than those appearing on this list are prohibited. UNITED STATES GOVERNMENT 1. Federal Reserve Bank PRIMARY DEALERS 1. atigroup SECONDARY BROKERS 1. Firot Tonn00000 Prank 2. Walls Fargo Bank 3. Zions Bank J.P. Morgan Securities LLC Wells Fargo Securities LLC Piper Jaffray & Company Stifel, Nicolaus & Company PUBLIC DEPOSITORIES 1. California Bank & Truo Citibank, N.A. 2. JP Morgan Chase & Co. 3. Northern Tray Bank 4. Rabobank, N.A. 5 JJninn 13ank of Galifornia MUFG Union Bank, N.A. B. Wells Fargo Bank, N.A. CUSTODIAN 1. Union- Bank of California MUFG Union Bank Global Custody Services TRUSTEE 1. VIVIc Fargo Bank U.S. Bank Global Corporate Trust Services Page 20 Palm Desert Treasury Policies and Procedures Revision No. 1s9 No. 2: "Statement of Investment Policy" Adopted: 3/8112 Appendix 6: Glossary AGENCIES. Federal agency and instrumentality securities. ASKED. The price at which securities are offered. BANKERS' ACCEPTANCE ("BA"). A draft, bill, or exchange accepted by a bank or a trust company. Both the issuer and the accepting institution guarantee payment of the bill. BID. The price offered by a buyer of securities (when one sells securities, one asks for a bid). See "Offer". BROKER. A broker brings buyers and sellers together so that he can earn a commission. CERTIFICATE OF DEPOSIT ("CD"). A time deposit with a specific maturity, as evidenced by a certificate. Large -denomination CDs 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. COMPREHENSIVE ANNUAL FINANCIAL REPORT ("CAFR"). The official annual report for the City of Palm Desert. It includes five combined statements for each individual fund and account group, that are prepared in conformity with GAAP. It also includes supporting schedules that are necessary to demonstrate compliance with finance -related legal and contractual provisions, extensive introductory material, and a detailed statistical section. COUPON. (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond, that evidences interest due on a payment date. DEALER. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE. A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT. There are two methods of delivery of securities: (1) delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery of securities with an exchange of money for the securities. DVR is delivery of securities with an exchange of a signed receipt for the securities. Page 21 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 318/1-2 DERIVATIVES. (1) Financial instruments that are linked to, or derived from, the movement of one or more underlying indexes or securities, and may include a leveraging factor; or (2) financial contracts based upon a notional amount whose value is derived from an underlying index or security (e.g., interest rates, foreign exchange rates, equities, or commodities). DISCOUNT. The difference between the acquisition cost of a security and its value at maturity, when quoted at lower than face value. A security that sells below original offering price shortly after sale, is also is considered to be at a discount. DISCOUNT SECURITIES. Non -interest bearing money market instruments that are issued a discount and that are redeemed at maturity for full face value (e.g., U.S. Treasury Bills). DIVERSIFICATION. Dividing investment funds among a variety of securities that offer independent returns. FEDERAL CREDIT AGENCIES. Agencies of the Federal Government that were established to supply credit to various classes of institutions and individuals (e.g., S&Ls, small business firms, students, farmers, farm cooperatives, and exporters). FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"). A federal agency that insures bank deposits. FEDERAL FUNDS RATE. The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open -market operations. FEDERAL HOME LOAN BANKS ("FHLB"). Government -sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions, and insurance companies. The mission of the FHLBs is to liquefy the housing -related assets of its members, who must purchase stock in their District Bank. FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA"). FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder -owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE ("FOMC"). The FOMC consists of seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent Page 22 Palm Desert Treasury Policies and Procedures Revision No. T9 No. 2: "Statement of Investment Policy" Adopted: 3142 member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market, as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM. The central bank of the United States created by Congress and consisting of a seven -member Board of Governors in Washington, D.C., 12 regional banks, and about 5,700 commercial banks that are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA" or "Ginnie Mae"). Securities that influence the volume of bank credit that is guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. A security holder is protected by the full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA, or FMHM mortgages. The term "pass-throughs" is often used to describe Ginnie Maes. 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 GOVERNMENT INVESTMENT FUND ("LAIF"). Monies from local governmental units may be remitted to the California State Treasurer for deposit in this special fund for the purpose of investment. 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 (e.g., bills, commercial paper, bankers's acceptances) are issued and traded. OFFER. The price asked by a seller of securities (when one buys securities, one asks for an offer). See `Asked" and "Bid" OPEN MARKET OPERATIONS. Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank, as directed by the FOMC in order to influence the volume of money and credit in the economy. Page 23 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 318.11-2 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. A collection of securities that an investor holds. PRIMARY DEALER. A group of government securities dealers that 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 INVESTOR RULE. An investment standard. A fiduciary, such as a trustee, may invest in a security if it is one that would be bought by a prudent investor acting in like capacity, who is seeking reasonable income and preservation of capital. QUALIFIED PUBLIC DEPOSITORIES. A financial institution that: (1) does not claim exemption from the payment of any sales, compensating use, or ad valorem taxes under the laws of this state; (2) has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability; and (3) 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. REPURCHASE AGREEMENT ("RP" OR "REPO"). A holder of securities sells them to an investor with an agreement to repurchase the securities at a fixed price on a fixed date. The security "buyer", in effect, lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: when the Fed is said to be doing RP, it is lending money (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 AND EXCHANGE COMMISSION. An agency created by Congress to administer securities legislation for the purpose of protecting investors in securities transactions. SEC RULE 15c3-1. See "Uniform Net Capital Rune". Page 24 Palm Desert Treasury Policies and Procedures Revision No. 1-9 No. 2: "Statement of Investment Policy" Adopted: 31842 STRUCTURED NOTES. Notes issued by instrumentalities (e.g., FHLB, FNMA, SLMA) and by corporations, that have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative -based returns) in their debt structure. The market performance of structured notes is affected by fluctuating interest rates; the volatility of imbedded options; and shifts in the yield curve. TREASURY BILLS. A non -interest bearing discount security that is issued by the U.S. Treasury to finance the national debt. Most T-bills are issued to mature in three months, six months, or one year. TREASURY BONDS. Long-term, coupon -bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of more than 10 years. TREASURY NOTES. Medium -term, coupon -bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of two to 10 years. UNIFORM NET CAPITAL RULE. SEC requirement that member firms, as well as non- member broker -dealers in securities, maintain a maximum ratio of indebtedness -to - liquid capital of 15-to-one. Also called net capital rule and net capita ratio. Indebtedness covers all money that is owed to a firm, including margin loans and commitments to purchase securities (one reason that 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. Page 25