HomeMy WebLinkAboutStatement of Investment Policy 03/12/2015X- U
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: RECEIVE AND FILE THE CITY OF PALM DESERT "STATEMENT OF
INVESTMENT POLICY" AS PRESENTED
SUBMITTED BY: PAUL S. GIBSON, CITY TREASURER
DATE: MARCH 12, 2015
CONTENTS: PALM DESERT "STATEMENT OF INVESTMENT POLICY"
Recommendation
By Minute Motion, that the City Council receive and file the City of Palm Desert
"Statement of Investment Policy" as presented.
Committee Recommendation
At its February 24, 2015 regular meeting, the Audit, Investment and Finance Committee
voted unanimously to recommend that the City Council receive and file the report as
presented.
Background
The City of Palm Desert ("City") has a "Statement of Investment Policy" that discusses the
following topics: (1) Duties and responsibilities of Treasury staff; (2) Investment Objectives; (3)
Authorized Investments; (4) Safekeeping and Custody; and (5) Investment Reporting.
This policy is reviewed annually in order to ensure that it is current and that it complies with
State law. No policy changes are needed at this time.
Sub it d by:
aul S. Gibson, City Treasurer
by:
n M. Wohlmuth, City Manager
CITY OF PALM DESERT
STATEMENT OF
INVESTMENT POLICY
Certified by the Municipal Treasurers' Association of the United
States and Canada on March 10, 2004
PREPARED BY THE CITY TREASURER'S OFFICE
Thomas W. Jeffrey, J.D., M.B.A.
Deputy City Treasurer
REVIEWED AND APPROVED BY
Paul S. Gibson, C.C.M.T.
City Treasurer
Revision No. 19
Adopted by the City Council on March 8, 2012
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
TABLE OF CONTENTS
Revision No. 19
Adopted: 3/8/12
OVERVIEW PAGE
1.0 Policy......................................................................................................... 1
2.0 Scope........................................................................................................1
3.0 Prudence................................................................................................... 2
4.0 Objectives.................................................................................................2
INVESTMENT AUTHORITY
5.0 Delegation of Authority.............................................................................. 3
6.0 Investment Procedures............................................................................. 3
7.0 Ethics and Conflicts of Interest.................................................................. 4
INVESTMENTS
8.0 Authorized Financial Dealers and Institutions...........................................4
9.0 Authorized and Suitable Investments........................................................ 7
10.0 Prohibited Investments........................................................................... 11
11.0 Investment Pools/Mutual Funds.............................................................. 12
PORTFOLIO MANAGEMENT
12.0
Collateralization......................................................................................
12
13.0
Safekeeping and Custody.......................................................................
13
14.0
Diversification..........................................................................................
13
15.0
Maximum Maturities................................................................................
13
16.0
Portfolio Rebalancing..............................................................................14
17.0
Credit Downgrading................................................................................
14
18.0
Bond Proceeds.......................................................................................14
19.0
Internal Controls......................................................................................
15
PERFORMANCE MEASUREMENT
20.0 Performance Standards.......................................................................... 15
21.0 Market Yield (Benchmark)....................................................................... 16
22.0 Reporting................................................................................................ 16
LEGAL REQUIREMENTS
23.0 Investment Policy Adoption..................................................................... 17
APPENDICES
A: List of Authorized Financial Institutions...................................................18
B: Glossary .................................................................................................. 19
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
1.0 Policy
It is the policy of the:
➢ City of Palm Desert;
➢ RDA Successor Agency — Palm Desert;
➢ Palm Desert Housing Authority;
➢ Palm Desert Financing Authority; and the
➢ Palm Desert Recreational Facilities Corporation
Revision No. 19
Adopted: 3/8/12
(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.
For the purposes of this policy:
➢ "Investment Officers" shall be defined as the City Treasurer and the Deputy
City Treasurer.
➢ "Finance Committee" shall be defined as the Audit, Investment, and Finance
Committee.
➢ "City Council" shall be defined as the Palm Desert City Council.
2.0 Scope
This policy shall apply to all funds that are under the City Treasurer's control
including, but not limited to, the general fund; special revenue funds; debt service
funds; capital project funds; enterprise funds; and trust and agency funds. These
funds are accounted for in the City's Comprehensive Annual Financial Report.
The City's Deferred Compensation Plan ("Plan") shall be excluded from the
scope of this policy if the following three conditions exist: (1) a third -party
administrator manages the Plan; (2) individual plan participants have control over
the selection of investments; and (3) the City has no fiduciary responsibility to act
as a "trustee" for the Plan.
The only exception to the foregoing shall be that if the City retains the fiduciary
responsibility to act as a trustee for the Plan, then the Plan shall be deemed to be
within the scope of this policy.
The City Treasurer shall provide the Finance Committee with a quarterly report
on the investment of Plan assets.
Page 1
Palm Desert Treasury Policies and Procedures Revision No. 19
No. 2: "Statement of Investment Policy" Adopted: 3/8/12
3.0 Prudence
Pursuant to California Government Code Section 53600.3, 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 Finance Committee in a timely
manner, and that they take appropriate action to control adverse developments.
"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 loss 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.
Page 2
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
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 largely
of relatively low -duration securities with active secondary markets.
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.
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.
Page 3
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
7.0 Ethics and Conflicts of Interest
Revision No. 19
Adopted: 3/8/12
Investment Officers shall refrain from 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) 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 requirement 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.
The total number of primary dealers and secondary brokers on the authorized list
shall not exceed five 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.
Page 4
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
All brokers that 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 ("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 -Dealer 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
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
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
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 not
be eligible 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.
The City Treasurer shall provide all authorized brokers annually, in January, with
a copy of the City's investment policy for that calendar year. The City
Treasurer's Office shall retain, on file, the annual financial statements of each
authorized broker for the preceding three years.
The City Treasurer shall maintain an authorized list (see Page 18) 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.
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.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8112
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's investment policy is more conservative than state law.
% of
No.
Type of Investment
Portfolio
Other Restrictions
Authorized
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
100%
Maximum maturity: 5 years
States government -sponsored
enterprise ("GSE") obligations,
No more than 30% of the
participations, or other
portfolio may be invested in
instruments, including those
any one issuer (excluding the
issued by or fully guaranteed as
proceeds of tax-exempt
to principal and interest by
bonds).
Federal Agencies or by GSE.
3.
Banker's Acceptances("BA")
40%
Rated "A-V or higher by S&P
issued by commercial banks.
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.
Page 7
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8112
% of
No.
Type of Investment
Portfolio
Other Restrictions
Authorized
4.
Commercial Paper ("CP")
25%
Maximum maturity: 270 days
issued by general corporations
organized and operating in the
Rated "A-V by S&P or"P-1"
United States with assets
by Moody's.
exceeding $500 million.
No more than 10% of the
outstanding CP of any one
issuer may be purchased.
No more than 5% of the
portfolio may be invested in
the commercial paper and
medium -term notes of any
one issuer.
No more than 30% of the
portfolio may be invested in
commercial paper and
medium -term notes.
Asset -backed commercial
paper is ineligible for
purchase.
5.
Negotiable Certificates of
30%
Maximum maturity: 5 years
Deposit ("NCD") issued by a
nationally- or state -chartered
Long-term debt rated "AA-"
bank, a savings association, a
higher by S&P or by Moody's.
federal association, or by a
state -licensed branch of a
foreign bank.
6.
Time Certificates of Deposit
15%
Maximum maturity: 1 year
("TCD") issued by qualified
public depositories.
TCDs exceeding the FDIC
limit must be collateralized.
TCDs must be centralized at
one location for each bank or
S&L.
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
No.
Type of Investment
% of
Portfolio
Authorized
Other Restrictions
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
Pages 6 and 7 of this SOI P.
7.
Repurchase Agreement ("RP")
20%
Maximum maturity: 30 days
sold by authorized brokers.
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.
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.
Page 9
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
% of
No.
Type of Investment
Portfolio
Other Restrictions
Authorized
8.
Medium -Term Notes issued by
30%
Maturity maturity: 5 years
Corporations organized and
operating in the United States,
Rated "A" or higher by S&P or
or by depository institutions
by Moody's.
operating in the United States
and licensed by the United
No more than 5% of the
States or by any state.
portfolio may be invested in
the commercial paper and
medium -term notes of any
one issuer.
No more than 30% of the
portfolio may be invested in
commercial paper and
medium -term notes.
9.
Money Market Mutual Funds
20%
Either rated "AAA" by S&P,
("MMF") that are registered with
(excluding
"Aaa" by Moody's, or "AAA-V-
the SEC under the Investment
bond
1+" by Fitch (2 of 3), or retains
Act of 1940.
proceeds)
an investment advisor
registered or exempt from
registration with SEC, with at
least 5 years of experience
managing a MMF with $500
million or more in assets.
MMF must have dollar -
weighted average maturity of
90 days or less.
MMF must buy securities that
mature in 13 months or less.
No commission may be
charged.
10.
State of California Local
See note 4
Maximum deposit limit per
Agency Investment Fund
account allowed by State law,
("LAIF') that is managed by the
except for bond trustee
State Treasurer's Office.
accounts no deposit limit).
Page 10
Palm Desert Treasury Policies and Procedures "
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
% of
No.
Type of Investment
Portfolio
Other Restrictions
Authorized
City Council and
Redevelopment Agency
approved participation in LAW
on 12/12/81 in Resolution No.
81-161.
11.
Structured Notes in the form of
20%
Maximum maturity: 5 years
callable securities or "STRIPS"
issued by the United
States Treasury or by Federal
Agencies or government -
sponsored enterprises ("GSE")
12.
Local Government Investment
50%
Must meet above criteria for
Pools ("LGIPS")
(excluding
MMFs (except for the
bond
Riverside County Treasurer's
proceeds)
Pooled Investment Fund).
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.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
11.0 Investment Pools/Mutual Funds
Revision No. 19
Adopted: 3/8/12
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.
12.0 Collateral ization
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.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
An independent third party with which the City has a current custodial agreement
shall always hold the collateral. The independent third parry 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 -parry
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 City's Custodian shall be represented on the authorized list (see
Page 18).
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.
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.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
16.0 Portfolio Rebalancing
Revision No. 19
Adopted: 3/8/12
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
Officers shall consider rebalancing the
length of time that it will be imbalanced.
upon sale, however, then Investment
portfolio after evaluating the expected
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.
17.0 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.
18.0 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 18).
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
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No.19
Adopted: 3/8112
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.
19.0 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. The Mayor; the
Mayor Pro Tempore; the City Manager; the City Attorney; the RDA Successor
Agency — Palm Desert Executive Director; 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.
20.0 Performance Standards
The investment portfolio shall be designed with the objective of obtaining a rate
of return throughout budgetary and economic cycles, commensurate with
investment risk constraints and cash flow needs.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
21.0 Market Yield (Benchmark)
Revision No. 19
Adopted: 3/8/12
The City investment portfolio shall be passively managed with portfolio securities
being held to maturity. On selected occasions, however, the City portfolio may
be actively managed for purposes of improving portfolio risk structure, liquidity, or
yield in response to market conditions or to meet City requirements. Profit-taking
may only be done if the capital gains would:
21.0.1 Exceed the return that would be realized by holding the security to
maturity; and
21.0.2 More than offset any income reduction due to reinvestment rate risk.
The City shall adopt a benchmark that approximates the composition and
weighted -average maturity of each City portfolio, in order to measure whether or
not the City's portfolio yields are matching or surpassing the market yield.
22.0 Reporting
The City Treasurer shall provide the Finance Committee and the City Council
with a monthly investment report within 30 days of each month -end or at the next
scheduled City Council meeting following a Finance Committee meeting.
Pursuant to Governmental Accounting Standards Board ("GASB") Statement
Number 40, as amended March 2003, the monthly investment report shall:
22.0.1 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.
22.0.2 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".
22.0.3 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.
22.0.4 Use the specific identification method to reflect interest -rate risk by
investment type and amount.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 19
Adopted: 3/8/12
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.
23.0 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 Commission; the Financing Authority Commission; and the
Recreational Facilities Corporation Board of Directors annually for their review
and adoption.
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Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Appendix A: List of Authorized Financial Institutions
Revision No. 19
Adopted: 3/8/12
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. Citigroup
SECONDARY BROKERS
1. First Tennessee Bank
2. Wells Fargo Bank
3. Zions Bank
PUBLIC DEPOSITORIES
1. California Bank & Trust
2. JPMorgan Chase & Co.
3. Northern Trust Bank
4. Rabobank
5. Union Bank of California
6. Wells Fargo Bank
CUSTODIAN
1. Union Bank of California
TRUSTEE
1. Wells Fargo Bank
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No. 2: "Statement of Investment Policy" Adopted: 3/8/12
Appendix B: Glossary
AGENCIES. Federal agency and instrumentality securities.
ASKED. The price at which securities are offered.
BANKERS'S 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.
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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
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Palm Desert Treasury Policies and Procedures Revision No. 19
No. 2: "Statement of Investment Policy" Adopted: 3/8/12
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.
Purchases inject reserves into the bank system and stimulate growth of money and
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Palm Desert Treasury Policies and Procedures Revision No. 19
No. 2: "Statement of Investment Policy" Adopted: 3/8/12
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 banks 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 150-1. See "Uniform Net Capital Rule':
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
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Palm Desert Treasury Policies and Procedures Revision No. 19
No. 2: "Statement of Investment Policy" Adopted: 3/8/12
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.
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