HomeMy WebLinkAbout2002-01-15 IFC Minutes COMMITTEE MEETING WORKSHEET
Meeting Description Investment Committee Meeting Date 1/15/02 Time 2:30 p.m.
Location North Wing Conference Room Mailed Agenda 1/09/02
Posted Agenda 1//109/02
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Convene Adjournment
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Staff Members Attending Yes No Others Attending Yes No
1 Paul Gibson, Chairperson 10 Dennis Coleman
2 Council Member S 11 Justin McCarthy ✓
3 Council Member ✓ 12 Recording Secretary
4 Dave Erwin, City Attorney t/
5 Carlos Ortega, City Mgr. i/
6 Thomas Jeffrey
Public Members Attending Guests Attending
7 Russ Campbell 12
8 Murray Magloff 13
9 Sill Veazie 14
15
16
17
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Finance Department
MEMORANDUM
To: Rachelle Klassen,Deputy City Clerk
From: Diana Leal,Administrative Secretary` r
Subject: Investment and Finance Committee
Date: March 1, 2002
Attached is a copy of the January 15, 2002 minutes of the Investment and Finance Committee
approved by the Committee on February 27,2002. Please place on the next City Council agenda for
approval thereof.
Additionally, attached is the attendance record of said Committee.
Thank you for your assistance.
Attachments (2)
G:Tinance\Diana LeaMpdocs\Investment Committee\2002 Memos\City Clerk\1-15-02 minutes.wpd
J
_ CITY OF PALM DESERT
FINANCE DEPARTMENT
MEMORANDUM
TO: INVESTMENT AND FINANCE COMMITTEE
FROM: PAUL S. GIBSON, DIRECTOR OF FINANCE
DATE: JANUARY 9, 2002
SUBJECT: INVESTMENT AND FINANCE COMMITTEE MEETING
The meeting forthe Investment and Finance Committee will be held on Tuesday,January
15, 2002at 2:30 p.m. in the North Wing Conference Room. Please call meat 346-0611,
Ext. 320 if you will not be able to attend the meeting as a quorum is necessary in order to
conduct business.
Thank you for your cooperation in this matter.
Sincerely,
O
PAUL S. GIBSON
Director of Finance
PSG:dcl
GAFinance\Diana LeaMpdocs\Investment Committee\2001 Memos\Membersl
_ CITY OF PALM DESERT
INVESTMENT & FINANCE COMMITTEE
Minutes
January 15, 2002
North Wing Conference Room
1. CALL TO ORDER
A regular meeting was called to order by Chairman Gibson on Tuesday, January
15, 2002, at 2:30 p.m.
II. ROLL CALL
Present: Absent:
Paul Gibson, Chairman None
Jean Benson, Mayor Pro-Tempore
Bob Spiegel, Council Member
Carlos Ortega, City Manager
Dave Erwin, City Attorney
Thomas Jeffrey, Investment Manager
Russ Campbell
Murray Magloff
Bill Veazie
Also Present:
Justin McCarthy, Redevelopment Agency ACM
Dennis Coleman, Redevelopment Finance Manager
Diana Leal, Recording Secretary
III. ORAL COMMUNICATIONS
Mr. Magloff inquired about a lawsuit he read about in relation to the work at
Highway 111 and Highway 74. Mr. Spiegel explained the circumstances
surrounding the lawsuit, and said that a settlement was reached.
1
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
IV. CONSENT CALENDAR
A. Approval of Minutes
Motion was made by Mr. Ortega and seconded by Mr. Campbell to
approve the Minutes of the November 21, 2001 meeting as submitted.
Motion carried, with Mr. Spiegel and Ms. Benson abstaining.
V. CONSENT ITEMS HELD OVER
None.
VI. NEW BUSINESS
A. City and Redevelopment Agency Investment Schedules and Summary of
Cash Reports for November and December 2001
Mr. Jeffrey gave a brief overview of the December Investment Reports.
For the month ended December 31, 2001, the book value of the City
Portfolio was approximately $163,537,000. The City earned
approximately $497,000 in interest during that month. The City Portfolio
yield-to-maturity was 3.94%.
For the month ended December 31, 2001, the book value of the RDA
Portfolio was approximately $85,132,000. The RDA Portfolio increased in
size during November due to bond proceeds. The RDA earned
approximately $193,000 in interest during that month. The RDA Portfolio
yield-to-maturity was 2.59%.
Mr. Jeffrey said that the City Portfolio yield currently exceeds the LAIF
yield because LAIF's entire portfolio is turning over and being reinvested
at current market rates, which are depressed. LAIF is also probably
reluctant to invest in higher-risk corporate securities (which local.agencies
cannot purchase), due to the current economic climate. The RDA portfolio
yield is below the LAIF yield, however, because the weighted-average
maturity of the RDA Portfolio is significantly less than that of LAIF.
The City's recent investment strategy has been to exit the corporate
market until there is some certainty about whether there will be a W"
economy recovery or a "W" economic recovery. The latter case, which is
a delayed economic recovery, might compel more individuals and
companies to file for bankruptcy.
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
B. Review Short-Term Investments Maturing in January 2002
Mr. Jeffrey gave a brief overview of maturing investments in January 2002
for the City and for the Redevelopment Agency.
C. Investment Lists and Instruments
(Mailed under separate cover on 1/02/02 for review by members)
1. Staff Report on Bank Notes
2. Staff Report on Domestic CDs
3. Staff Report on Yankee CDs
4. Staff Report on Asset-Backed Commercial Paper
5. Staff Report on Repurchase Agreements
Mr. Jeffrey said the following investments are currently authorized under
both the California Government Code and the Palm Desert Investment
Policy:
1) Bank Notes are a subset of medium-term notes. Staff requested
Finance Committee approval of the proposed list of bank note
issuers. Mr. Spiegel asked if local banks in Palm Desert were
eligible for consideration. Mr. Gibson replied that the local banks
lacked the necessary credit ratings in order to be eligible.
2) Domestic CDs are negotiable and can be resold on a secondary
market (they are far more liquid that time deposits). Staff would
most likely use CDs if double-digit inflation rates reappeared. Staff
requested Finance Committee approval of the proposed list of
Domestic CD issuers.
3) Yankee CDs are issued by foreign banks with subsidiaries
operating and incorporated in the United States. Many global
foreign banks have higher credit ratings than comparable U.S.
banks. Yankee CDs purchases would be limited to foreign banks
originating in Canada, Great Britain, France, Belgium, Germany,
Switzerland and Australia. These countries have stable
representative governments and developed market economies
(four of the five largest world economies are included). Staff
requested Finance Committee approval for the proposed list of
Yankee CD issuers.
Mr. Veazie enquired: 1) Are Yankee CDs more active than
Domestic CDs? 2) What are the guarantees behind each? 3) Are
3
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
Domestic CDs secured by collateral? Mr. Jeffrey responded that
both groups of CDs are active; there are no absolute guarantees for
either, in terms of the blocks that the City would buy; and both are
unsecured.
4) Asset-backed commercial paper("ABCP") is secured
commercial paper. Currently, the City buys only unsecured
commercial paper. The secured commercial paper market is
growing rapidly, however, and will soon be the dominant and most
profitable segment of the commercial paper market. Staff
requested Finance Committee approval of the proposed list of
ABCP issuers. Mr. Jeffrey stated that the list had been developed
by using the following screening criteria: (a) limiting issuers to large,
global commercial banks or finance companies (e.g., General
Electric Capital Corp.); (b) requiring the highest institutional credit
ratings on commercial paper (A-1+/P-1); (c) requiring 100 percent
backup liquidity for ABCP; and (d) requiring that ABCP be backed
by a diversified pool of receivables. Staff also studied private
sector money market mutual fund and LAIF portfolio holdings in
order to determine what companies they should recommend.
Mr. Gibson added that for the City to proceed further, it would be
necessary to subscribe to Moody's ABCP Rating Service, which
provides quarterly reports, in order to refine the risk analysis of
each ABCP structure. The annual subscription cost for this service
would be approximately $5,000.
Action: Motion made by B. Spiegel and seconded by
R. Campbell that the Finance Committee approve the
proposed issuer lists for bank notes, Domestic CDs, and
Yankee CDs. Also, that Staff be authorized to subscribe
to Moody's ABCP Ratings service in order to refine the
risk analysis of the proposed ABCP issuers. Staff is
directed to present their findings on ABCP issuers to
Finance Committee at a later date. Motion carried.
My Jeffrey said that the following security type is currently authorized
under the California Government Code, but not under the City Investment
Policy. Most local agencies in California authorize it as an investment.
1) A repurchase agreement("repo") is a secured transaction in
which, for example, the City might buy a U.S. Treasury Note from
Wells Fargo Bank for cash. One day later, Wells Fargo Bank would
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
repurchase the Treasury Note from the City for cash. The City's
custodian, Union Bank, would hold the Treasury Note as collateral
until the transaction cycle was complete. The City would earn
interest from the difference between the buying and selling prices.
Mr. Jeffrey stated that repos could be useful in selected situations,
where the City had to fund a short-term liability at an unknown point
in time and the City's LAIF accounts were maxed out (as is the
current case). Indeed, for several days after the September 11
bombing attack, repos were the only securities instrument that was
trading reliably. The City had $12 million that it had to leave in a
Union Bank Sweep Account, the lowest-yielding asset in the City
portfolio (on one date, overnight repos had a yield that was 0.87
percent higher than the Sweep Account yield).
Ms. Benson asked what safeguards against fraud would apply. Mr.
Jeffrey responded that "Statement of Investment Policy 2002"
specified that: (a) repos would be limited to a maximum maturity of
30 days; (b) Treasuries or Agencies would be used as collateral
(zero coupons were ineligible due to price volatility); (d) collateral
would be valued at 102% and adjusted weekly; (e) the City would
have a first lien and security interest in all collateral; (f) the City's
custodian, Union Bank, would hold all collateral; and (g) the broker
must have a master repo agreement on file with the City Treasurer
(that the City Attorney had reviewed), in advance of any
transaction.
Mr. Jeffrey added that any repo transactions would be limited to the
five brokers that the City currently authorizes, two of which are
commercial banks with national reputations. All five brokers have
long-term relationships with the City.
Action: Motion made by B. Veazie and seconded by R. Campbell
that the Finance Committee recommend to the Palm
Desert City Council that it approve repurchase
agreements as an authorized investment for the City of
Palm Desert. Motion carried. Report filed.
D. Palm Desert Statement of Investment Policy 2002
(Mailed under separate cover on 11/8/01 for review by members)
Mr. Jeffrey summarized the key changes on each page of the Policy. Mr.
Erwin requested that certain language be retained in order to preserve the
legal clarity of the document.
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
Key changes to the Policy were as follows. A table of authorized
investments was substituted for several pages of prose (a more user-
friendly way of presenting the same information). Language on federal
agency securities was abridged, and the commercial paper portfolio limit
raised from 15 percent to 25 percent, based upon AB 609 (Kelley), the
Palm Desert bill. The maximum maturity for corporate bonds was reduced
from five years to three years. Repos were included as an authorized
investment, with the controls approved by the Finance Committee. Asset-
backed commercial paper was represented separately as an authorized
investment since as a secured investmen
t, it required separate criteria.
The maximum limit on LAIF accounts was increased from $30 million to
$40 million, pursuant to a change that become effective January 1, 2002.
Action: Motion made by B. Veazie and seconded by R. Campbell
that the Finance Committee recommend to the Palm
Desert City Council that it approve the "Palm Desert
Statement of Investment Policy 2002", as amended.
Motion carried. Report filed.
E. State of California Local Agency nvestment Fund Monthly Report for
September and October 2001
Mr. Gibson said that the LAIF PMIA monthly average effective yield was
approximately 3.79 percent.
F. City and Redevelopment Agency Monthly Financial Reports for City
Council for December 2001
Mr. Gibson said that the sales tax for the third quarter was received in
December was up 4% versus the previous quarter where the City was
down. He said that he is still in line with the budget. As far as sales tax,
discount stores along with some of the department stores are up. There
are some projects in the works for 2003 which is expected to help.
Transient Occupancy Tax (TOT) was low in September and October,
however, year-to-date, this was the only time TOT was low. November
and December TOT made up for some of the October loss. He recently
received the report on property taxes which indicated a 4% increase.
Expenditures were higher than the previous year as was the budget.
Ms. Benson said that she was aware that Indian Wells was concerned
with their TOT as it had been lower than expected. Mr. Spiegel said that
this was due to the fact that larger hotels derive their revenues from
conventions and smaller hotels southern Californians.
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
Mr. Gibson said that one of the smaller hotels in the City has back
payments due for six months. They have agreed to pay monthly deposits
through a bank account which is in the City's name.
G. Parkview Professional Office Buildings - Financial Report for November
and December 2001
Mr. Gibson provided a brief summary of the financial reports for November
and December 2001. There being no questions, discussion ensued to the
next agenda item.
H. Palm Desert Golf Course Facilities Corporation Financial Information for
September October and November 2001
Mr. Gibson said that he asked Mr. Young not to attend the meeting
because members of the Committee were to attend a meeting at 3:00 p.m.
Unfortunately, there was confusion and the meeting is not scheduled until
tomorrow.
Mr. Gibson asked if there were any questions relative to the reports
presented. There being no questions, discussion ensued to the next
agenda item.
I. Audit Reports for City of Palm Desert
Mr Gibson said that the financials were converted to meet the new
Governmental Accounting Standards requirement GASB34. In the front,
there is a consolidated statement of all of the City funds into one fund like
a corporation/private sector on how they accrue their books which is 100%
accrual. It puts the debt onto the books instead of having a separate fund.
It takes all of the infrastructure and puts it on the books. It took an extra
two months to do all of the extra work required to transition over.
J. Audit Reports for Palm Desert Redevelopment Agency
Reference was made to the audit reports for the Palm Desert
Redevelopment Agency with no discussion.
VII. CONTINUED BUSINESS
None.
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INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
VIII. OLD BUSINESS
A. Status of Public and Private Partnerships Background Checks
There being no business issues to report, discussion ensued to the next
agenda item.
B. Bond Issuance by Palm Desert Financing Authority
Mr. Coleman said that at the last meeting he reported that he would be
coming back to council and this committee with two additional bond
issues. The first one deals with re-financing and obtaining savings in
Project Area No. 1 bonds. He said that in 1997 a portion of the $100
million bonds was refinanced. The remaining portion can now be
refinanced because of the IRS restriction. They are called a current
refunding. This is about $20 million dollars. Staff is proposing to issue
bonds up to the same debt service that we have and getting a little bit of
an interest rate savings, and some more new money. They want to
extend the maturities on the 92 bond issue to later years, so that when
they issue new debt, they are able to issue an additional $5 million, in
today's market rate, over what they could if they were able to issue the
debt for new money as they now have the capacity to do so. The second
bond issue they are looking at is one in housing. This is to help build the
affordable housing units. They are looking at doing housing bonds in the
neighborhood of about $22 million. They are doing a combination of tax
exempt and taxable to maintain IRS guidelines. They are looking to do this
bond issue to assist them in meeting their obligations with the
development agreement they have with Danovan Horn to build 162 units
of multi family housing approved by the Council. They are also looking at
acquiring some existing units and putting in infrastructure for single-family
development. They will be looking at borrowing money to acquire land for
future development. This will be paid for by the 20% set-aside fund and
not the project funds as there is sufficient coverage in this account. They
have looked at the structure based upon when they felt they would get the
projects done, keeping in mind the limitation and project to spend 80% of
the proceeds within a three-year period.
Staff hasn't looked at Project Area No. 2 given staffs limitation of handling
so many bond issues at one time plus accomplishing the normal tasks
assigned. Project Area No. 2 will come up sometime after these bonds
are due. It will be a much more complex structure as they will need to
look at refunding two bond issues. Project Area Number 1 will capitalize
the savings under refunding for the 92's which is about $900,000 new
money. They also have, through resolutions, permission to refund the
1995 bond. This will only be done if it makes sense. The interest rates
1150.wptl
INVESTMENT & FINANCE COMMITTEE
MINUTES January 15, 2002
have been sliding and are not as good as they were when the last bond
issue was done. They look to see if it is insured, non-insured and then
they make a comparison to feel where the market is at the time. They
give the underwriters a general okay once they run the scale by staff. If
the underwriters cannot get the orders at that price, staff allows them to
reprice until they are finally sold.
IX. NEXT MEETING - Wednesday, February 27, 2002 at 2:00 p.m. Meetings will be
held every fourth Wednesday at 2:00 p.m. commencing February 27, 2002
unless otherwise notified.
X. ADJOURNMENT
There being no further business, the meeting was adjourned by Mr. Gibson at 3:45 p.m.
Respecff Ily submitted,
DifiTiAea , Re ding ecretary
9
ii5oz.00
zFinance Department
Interoffice Memorandum
To: Investment and Finance Committee
From: Diana Leal, Administrative Secretary
Subject: Investment and Finance Committee Meeting Items
Date: January 10, 2002
Attached is a copy of the Short-Term Investments Maturing in January 2002 to be reviewed at
the January 15 meeting. Please insert the report in your sorter. In addition, I am forwarding to
you a Committee Membership Update form. Please fill out the form and return it to me at the
meeting. Thank you.
I look forward to seeing you at the meeting.
G�FinancMDiarm LeN\Wpaocs\Irnesimem CommideeUNVSTLOMNIemos\2CO1YnemosVnviymt wpa
Finance Department
Interoffice Memorandum
To: Investment and Finance Committee
From: Diana Leal, Administrative Secret
Subject: Investment and Finance Committee Meeting It s
Date: January 11, 2002
I am forwarding to you a Committee Membership Update form. Please fill out the form and
return it to me at the meeting. Thank you.
I look forward to seeing you at the meeting.
G�ina Ziam LeMWWOMVMe meN Commift eMWSTCO"emos�WlV enm nMusel wy0
�'•� CITY OF PALM DESERT
COMMITTEE/COMMISSION
MEMBERSHIP UPDATE FORM
Committee/Commission
Name:
First Middle Last
Address (Please submit the address you wish notices be sent to:)
Street Address Apt./Unit No.
City Zip Code
Is this a business address: No ❑ Yes ❑
If yes, please print name of business:
Phone Number:
What is the best time to call:
CAWIN00WSITempolary Internet FIIe51OLK91811COmm@tee Update FarmAoc
POOLED MONEY INVESTMENT ACCOUNT
SUMMARY OF INVESTMENT DATA .
A COMPARISON OF SEPTEMBER 2001 WITH SEPTEMBER 2000
(DOLLARS IN THOUSANDS)
SEPTEMBER 2001 SEPTEMBS 2000.: CHANGE
Average Daily Portfolio $ 48,017,074 $ 41,468,674 +6,548,400
Accrued Earnings $ 169,237 $ 221,615 -52,378
Effective Yield 4.288 6.502 -2.214
Average Life-Month End (In Days) 169 192 -23
Total Security Transactions
Amount $ 21,343,348 $ 22,177,686 834,338
Number 466 481 -15
Total Time Deposit Transactions
Amount $ 1,388,500 $ 1,729,190 -340,690
Number 98 136 1 -38
Average Workday Investment Activity S 1,196,413 $ 1,195,344 +1,069
Prescribed Demand Account Balances
For Services $ 327,851 $ 159,223 +168,628
For Uncollected Funds $ 205,061 $ 231,139 -26,078
1
PHILIP ANGELIDES
TREASURER
STATE OF CALIFORNIA
INVESTMENT DIVISION SELECTED INVESTMENT DATA
ANALYSIS OF THE POOLED MONEY INVESTMENT ACCOUNT PORTFOLIO
(000 OMITTED)
September 30,2001
PERCENTAGE
CHANGE FROM
TYPE OF SECURITY AMOUNT PERCENT PRIOR MONTH
Government
Bills $1,634,760 3.34 +,56
Bonds 0 0.00 0.00
Notes 3,505,417 7.15 -.15
Strips 0 0.00 . 0.00
Total Government. $5,140,177 10.49 +.41
Federal Agency Coupons 4,039,026 8.24. -.47
Certificates of Deposit 6,960,234 14.21 -1.85
Bank Notes 1,425,012 2.91 -.47
Bankers'Acceptances 0 0.00 0.00 .
Repurchases 0 0.00 0.00
Federal Agency Discount Notes 11,063,188 22.58 +5.05
Time Deposits 4,844,045 9.89 -.30
GNMAs 898 0.00 0.00
Commercial Paper 9,840,250 20.08 -3.66
FHLMC 9,267 0.02 0.00
Corporate Bonds 2,403,564 4.91 4.02
Pooled Loans 3,266,473 6.67 +1.27
GF Loans 0 0.00 0.00
Reversed Repurchases 0 0 0
Total(All Types) $48,992,134 100.00
INVESTMENT ACTIVITY
SEPTEMBER2001 AUGUST2001
NUMBER AMOUNT NUMBER AMOUNT
Pooled Money 466 $ 21,343,348 542 $ 25,250,087
Other 26 189,693 25 477,781
Time Deposits 98 1,388,500 136 2,165,000
Totals 590 $ 22,921,541 703 $ 27,892,868
PMIA Monthly Average Effective Yield 4.288 4.502
Year to Date Yield Last Day of Month 4.482 4.571
2
POOLED MONEY INVESTMENT ACCOUNT
SUMMARY OF INVESTMENT DATA
A COMPARISON OF OCTOBER 2001 WITH OCTOBER 2000
(DOLLARS IN THOUSANDS)
OCTOBER.2001 OCTOBER 2000 CHANGE
Average Daily Portfolio $ 52,290,876 $ 40,550,588 +11,740,288
Accrued Earnings $ 168,087 $ 224,436 56,349
Effective Yield 3.785 6.517 -2.732
Average Life-Month End (In Days) 191 199 -8
Total Security Transactions
Amount $ 27,612,579 $ 24,354,092 +3,258,487
Number 686 533 +53
Total Time Deposit Transactions
Amount $ 2,108,800 $ 1,418,600 +690,200
Number 120 142 -22
Average Workday Investment Activity $ 1,350,972 $ 1,227,271 +123,701
Prescribed Demand Account Balances
For Services $ 554,994 $- 163,084 +391,910
For Uncollected Funds $ 146,011 $ 151,088 -5,077
1
PHILIP ANGELIDES
TREASURER
STATE OF CALIFORNIA
INVESTMENT DIVISION SELECTED INVESTMENT DATA
ANALYSIS OF THE POOLED MONEY INVESTMENT ACCOUNT PORTFOLIO
(000 OMITTED)
October 31, 2001
PERCENTAGE
CHANGEFROM
TYPE OF SECURITY AMOUNT PERCENT PRIOR MONTH
Government
Bills $2,178,900 4.25 +,91
Bonds 0 0.00 0.00
Notes 3,931,020 7.68 +.53
Strips 0 0.00 0.00
Total Government $6,109,920 11.93 +1.44
Federal Agency Coupons 4,994,430 9.75 +1.51
Certificates of Deposit 6,000,129 11.72 -2.49
Bank Notes 1,415,009 2.76 -.15
Bankers'Acceptances 0 0.00 0.00
Repurchases 0 0.00 0.00
Federal Agency Discount Notes 13,202,139 25.78 +3.20
Time Deposits 4,854,545 9.48 -.41
GNMAs 889 0.00 0.00
Commercial Paper 9,296,883 18.15 -1.93
FHLMC
9,028 0.02 0.00
Corporate Bonds 2,362,709 4.60 -.31
Pooled Loans 2,972,978 5.81 186
GF Loans 0 0.00 0.00
Reversed Repurchases. 0 0 0
Total (All Types) 51,208,659 100.00
INVESTMENT ACTIVITY
OCTOBER'2001 SEPTEMBER 2001
NUMBER AMOUNT NUMBER AMOUNT
Pooled Money 586 $ 27,612,579 466 $ 21,343,348
Other 21 14,948 26 189,693
Time Deposits 120 2,108,800 98 1,388,500
Totals 727 $ 29,736,327 590 $ 22,921,541
PMIA Monthly Average Effective Yield 3.785 4.288
Year to Date Yield Last Day of Month 4.301 4.482
2
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
INTEROFFICE MEMORANDUM
To: Investment and Finance Committee
From: Thomas Jeffrey, Investment Manager
Date: 15 January 2002
Subject: Review and Approval of Investment Lists and Instruments
Enclosed please find staff reports on the following topics:
1. Domestic Certificates of Deposit.
2. Bank Notes.
3. Yankee Certificates of Deposit.
4. Asset-Backed Commercial Paper.
5. Repurchase Agreements.
These reports are being sent to you in advance of the 15 January Finance Committee
meeting so that you will have sufficient time to review them.
The investment instruments in Topics #1,2,3, and 4 are currently authorized in the City's
investment policy. Consequently, approval is requested only for the related issuer lists.
The Finance Committee must recommend Topic #5 for approval to the City Council.
Please review these staff reports prior to reviewing Statement of Investment Policy 2002
which is also enclosed. The proposed investment policy contains language relating to
these topics. Discussion of these topics will precede discussion of the investment
policy on the meeting agenda.
TWJ:tj
Enclosures: (1) Staff Report on Bank Notes
(2) Staff Report on Domestic CDs
(3) Staff Report on Yankee CDs
(4) Staff Report on Asset-Backed Commercial Paper
(5) Staff Report on Repurchase Agreements
H:VjeffreyMorE 2000WEMORANDATINMCE COMMIT EE\SOIP COVER-2002.dot
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: Review and adopt the Approved Issuer List for Bank Notes.
APPLICANT: N/A
CASE NOS. N/A
DATE: 15 January 2002
CONTENTS: Exhibit "A": Approved Issuer List for Bank Notes
Recommendation:
By Minute Motion: That the Finance Committee adopt. the proposed Approved
Issuer List for Bank Notes.
Background:
"Bank Notes" are senior, unsecured promissory notes that are issued by domestic
banks. Such notes have maturities ranging from seven days to 15 years. They are
usually sold in minimum denominations of$5 million. Bank notes are not guaranteed.
Bank notes are similiar to medium-term notes. One of the distinguishing characteristics
of bank notes is that they are exempt from registration under section 3(a)2 of the
Securities Act of 1933. They also usually have a slightly higher credit rating than
medium-term notes.
H:VJeftyffoN 20001MEMORANDAONANCE COMMITTEEIBANK NOTES.dol
Staff Report
Approved Issuer List for Bank Notes
15 January 2002
Page 2 of 2
The Local Agency Investment Fund ("LAIF") and California counties, cities and special
districts with portfolios in excess of$100 million typically buy bank notes. Private-sector
money market funds are also active in this market.
The City Treasurer is authorized to purchase bank notes under California Government
Code Section 53601 Q) "Medium-Term Notes" and under the City of Palm Desert
"Statement of Investment Policy".
A proposed Approved Issuer List for Bank Notes is attached.
Submitted By:
�.O�p1an .W•
Thomas W. JeffreyjnVUtrr@nt Manager
Approved By:
Paul S. Gibson, C.C.M.T., City Treasurer
H:VjeNreyift d 2000WEMORANOAIFINANCE COMMITTEEIBANK NOTES.dot
EXHIBIT "A"
11/30/01 CITY OF PALM DESERT
12:25 PM
APPROVED ISSUER LIST FOR BANK NOTES
JANUARY 2002
2001
ASSETS S&P/MOODY'S S&P/MOODY'S
ISSUER 15 Billions) STD RATING LTD RATING STATE
Bank of America 584 A-1 +/P-1 AA-/Aa1 North Carolina
Bank of New York 74 A-1 +/P-1 AA-/Aa2 New York
Chase Manhattan Bank 377 A-1 +/P-1 AA/Aa2 New York
Citibank 382 A-1 +/P-1 AA/Aa1 New York
First Union National Bank 232 A-1/P-1 A+/Aa3 North Carolina
Fleet National Bank 166 A-1/P-1 A+/A1 Massachusetts
LaSalle Bank 49 A-1 +/P-1 AA-/Aa3 Illinois
Mellon Bank 42 A-1 +/P-1 AA-/Aa3 Pennsylvania
Morgan Guaranty Trust Co. 186 A-1 +/P-1 AA/Aa2 New York
Northern Trust Co. 30 A-1 +/P-1 AA-/Aa3 Illinois
State Street Bank & Trust 65 A-1 +/P-1 AA/Aa2 Massachusetts
SunTrust Bank 100 A-1 +/P-1 AA-/Aa3 Georgia
Toronto-Dominion Bank NY 173 A-1 +/P-1 AA-/Aa3 New York
Wells Fargo Bank 114 A-1 +/P-1 AA-/Aa1 California
0
I
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: Review and adopt the Approved Issuer List for Domestic
Certificates of Deposit.
APPLICANT: N/A
CASE NOS. N/A
DATE: 15 January 2002
CONTENTS: Exhibit "A": Approved Issuer List for Domestic Certificates of
Deposit
Recommendation:
By Minute Motion: That the Finance Committee adopt the proposed Approved
Issuer List for Domestic Certificates of Deposit.
Background:
Domestic certificates of deposit ("CDs") are negotiable, dollar-denominated instruments
that are issued by United States banks. These CDs have the following features:
➢ A minimum denomination of$100,000.
➢ A maximum maturity of five years.
➢ Greater liquidity than non-negotiable CDs, due to the possibility of resale in a
secondary market.
➢ A yield that is comparable to those offered by banker's acceptances, commercial
paper, Agency discount notes, and repurchase agreements (source: LAW Debt
Line).
➢ No guarantee.
Domestic CDs were first issued in the early 1960s.
H.Wellrey%WoN 20001MEMOR NDAIFINANCE COMMITTESDOMESTIC CDS.dof
Staff Report
Approved Issuer List for Domestic CDs
15 January 2002
Page 2 of 2
i
The Local Agency Investment Fund ( LAIF') and California counties, cities and special
districts with portfolios in excess of $100 million typically buy domestic CDs. Private-
sector money market funds are also active in this market.
The City Treasurer is authorized to purchase domestic CDs under California
Government Code Section 53601(h) and under the City of Palm Desert "Statement of
Investment Policy".
A proposed Approved Issuer List for Domestic CDs is attached.
Submitted By:
— YWT . j
Thomas W. Jeffr %Usoient Manager
Approved By:
O
Paul S. Gibson, C.C.M.T., City Treasurer
H:IgeftylWON 2000WEMORANOAIFINANCE COMMITTEEIDOMESTIC CDS.dol
EXHIBIT "A"
1ni02 CITY OF PALM DESERT
2:20 PM
APPROVED ISSUER LIST FOR DOMESTIC CDs
JANUARY 2002
2001
ASSETS S&P/MOODY'S S&P/MOODY'S
ISSUER IS Billions) STD RATING LTD RATING STATE
Bankers Trust 44 A-1 +/P-1 AA-/A1 New York
Bank of America 584 A-1 +/P-1 AA-/Aa1 North Carolina
Bank of New York 74 A-1 +/P-1 AA-/Aa2 New York
Chase Manhattan Bank 377 A-1 +/P-1 AA/Aa2 New York
Citibank 382 A-1 +/P-1 AA/Aa1 New York
HSBC Bank USA 80 A-1 +/P-1 AA-/Aa3 New York
Mellon Bank 42 A-1 +/P-1 AA-/Aa3 Pennsylvania
Morgan Guaranty Trust Co. 186 A-1 +/P-1 AA/Aa2 New York
Northern Trust Co. 30 A-1 +/P-1 AA-/Aa3 Illinois
State Street Bank & Trust 65 A-1 +/P-1 AA/Aa2 Massachusetts
SunTrust Bank 100 A-1 +/P-1 AA-/Aa3 Georgia
Wells Fargo Bank 114 A-1 +/P-1 AA-/Aa1 California
1
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: Review and adopt the Approved Issuer List for Yankee Certificates
of Deposit.
APPLICANT: N/A
CASE NOS. N/A
DATE: 15 January 2002
CONTENTS: Exhibit "A": Approved Issuer List for Yankee Certificates of Deposit
Recommendation:
By Minute Motion: That the Finance Committee adopt the proposed Approved
Issuer List for Yankee Certificates of Deposit.
Background:
"Yankee CDs" are dollar-denominated, negotiable certificates of deposit that are issued
by foreign banks domiciled in the United States. Yankee CDs have the following
features:
➢ A minimum denomination of$100,000.
➢ A maximum maturity of five years.
➢ Greater liquidity than, non-negotiable CDs, due to the possibility of resale in a
secondary market.
➢ A yield that is comparable to those offered by banker's acceptances, commercial
paper, Agency discount notes, and repurchase agreements (source: LAIF Debt
Line).
➢ No guarantee.
Yankee CDs were first issued in the 1970s.
H.Weft,lftrd 20001MEMORANDAL-INANCE COMMITTEEIYANKEE CDS.daf
Staff Report
Approved Issuer List for Yankee CDs
15 January 2002
Page 2 of 2
The New York branches of well-known, international Canadian, Australian, British,
German, French, Swiss, and Dutch banks are major issuers of Yankee CDs. They lend
the collected funds to their corporate customers in the United States. Many of these
foreign banks have credit ratings that exceed those of comparable American banks.
The Local Agency Investment Fund ("LAIF") and California counties, cities and special
districts with portfolios in excess of $100 million typically buy Yankee CDs. Private-
sector money market funds are also active in this market.
The City Treasurer is authorized to purchase Yankee CDs under California Government
Code Section 53601(h) and under the City of Palm Desert "Statement of Investment
Policy".
A proposed Approved Issuer List for Yankee CDs is attached.
Submitted By:
Thomas W. Jeffrey, lk,15bst%ent Manager
Approved By:
Paul S. Gibson, C.C.M.T., City Treasurer
MVjeftylWor02000MEMORANDAONANCE COMMRTEEIYANKEE CDS.d f
. EXHIBIT "A"
112i02 CITY OF PALM DESERT
2:21 PM
APPROVED ISSUER LIST FOR YANKEE CDs
JANUARY 2002
2001
ASSETS S&P/MOODY'S S&P/MOODY'S PARENT
ISSUER ($ Billions) STD RATING LTD RATING COUNTRY
Abbbey National 305 A-1 +/P-1 AA/Aa2 England
ABN-AMRO 510 A-1 + AA/Aa2 Netherlands
Australia & New Zealand Banking Group 93 A-1 +/P-1 AA-/Aa3 Australia
Bank Brussels Lambert 117 A-1 +/P-1 Aa3 Belgium
Bank of Nova Scotia 166 A-1/P-1 A+/Aa3 Canada
Bank of Montreal 153 A-1 +/P-1 AA-/Aa3 Canada
Bank of Scotland 127 A-1 +/P-1 AA/Aa2 Scotland
Barclays Bank 559 A-1 +/P-1 AA/Aa1 England
Bayerische Landesbank 282 A-1 +/P-1 AAA/Aaa Germany
Bayerische Hypo-und Vereinsbank 673 A-1/P-1 A+/Aa3 Germany
BNP Paribas 700 A-1 +/P-1 AA-/Aa3 France
Canadian Imperial Bank Commerce 175 A-1 +/P-1 AA-/Aa3 Canada
Credit Agricola Indosuez 143 A-1 +/P-1 AA/Aa1 France
Commonwealth Bank Australia 131 A-1 +/P-1 AA-/Aa3 Australia
Credit Suisse First Boston 416 A-1 +/P-1 AA/Al Switzerland
Danske Bank 171 A-1 +/P-1 AA-/Aa2 Denmark
Deutsche Bank 883 A-1 +/P-1 AA/Aa3 Germany
Dexia Bank 86 A-1 +/P-1 AA/Aa2 Belgium
Dresdner Bank 453 A-1 +/P-1 AA-/Aa2 Germany
ING Bank 350 A-1 +/P-1 AA-/Aa2 Netherlands
Lloyds TSB Bank 326 A-1 +/P-1 AA/Aaa England
Midland Bank PLC 277 A-1 +/P-1 AA-/Aa2 England
National Australia Bank 186 A-1 +/P-1 AA/Aa3 Australia
National Westminster Bank 278 A-1 +/P-1 AA-/Aa1 England
Norddeutsche Landesbank 128 A-1 +/P-1 Aa1 Germany
Rabobank Nederland 282 A-1 +/P-1 AAA/Aaa Netherlands
Royal Bank of Canada 193 A-1 +/P-1 AA-/Aa3 Canada
Royal Bank of Scotland 478 A-1 +/P-1 AA-/Aa1 Scotland
Societe Generale 407 A-1 +/P-1 AA-/Aa3 France
Svenska Handelsbanken 108 A-1/P-1 A+/Aa2 Sweden
Toronto Dominion Bank 174 A-1 +/P-1 AA-/Aa3 Canada
UBS 577 A-1 +/P-1 AA+/Aa2 Switzerland
Westdeutsche Landesbank 395 A-1 +/P-1 AA+/Aa1 Germany
WestPac Banking Corp. 91 A-1 +/P-1 AA-/Aa3 Australia
a
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: Review and adopt the Approved Issuer List for Asset-Backed Commercial
Paper.
APPLICANT: N/A
CASE NOS. NIA
DATE: 15 January 2002
CONTENTS: Exhibit "A": Approved Issuer List for Asset-Backed Commercial Paper
Exhibit "B": Moody's Report on Delaware Funding Corp. (J.P. Morgan)
Recommendation:
By Minute Motion: That the Finance Committee adopt the proposed Approved Issuer
List for Asset-Backed Commercial Paper.
Background:
Asset-backed commercial paper ("ABCP") is a high-quality, negotiable note that usually matures
within 270 days. ABCP may be distinguished from unsecured commercial paper in that it is: (1)
repaid from the cash flow of a corporate asset pool; and (2) backed by credit support facilities.
ABCP is basically a variation of receivables financing, which banks have been doing for two
centuries. Citibank created the first ABCP program in 1983 in order to recapture corporate
customers that were abandoning bank financing for the capital markets. Other global banks
subsequently developed their own ABCP programs. More recently, insurance companies and
finance companies, such as General Electric Capital Corporation, have entered the field.
Moody's, Standard & Poor's, and Fitch analyze and provide credit ratings for ABCP programs.
ABCP currently comprises 46% of the total U.S. commercial paper market, and 35% of all
money market investable funds in the U.S. There are over 280 ABCP programs. ABCP
outstandings are currently estimated at $700 billion.
Staff Reports
Asset-Backed Commercial Paper
15 January 2002
Page 2 of 6
Program Operation
In a typical ABCP program, a commercial bank ("Sponsor") establishes a special-purpose
company ("SPC") that issues commercial paper to finance the purchase of receivables or term
assets from corporations ("Seller"). Assets purchased may include trade receivables, credit
card receivables, auto and equipment loans and leases, collateralized bank obligations, and
securities. The Seller subsequently remits cash collections to the SPC, which uses them to buy
more receivables or to repay maturing ABCP.
Banks obtain significant fee income from ABCP, without increasing the size of their balance
sheets. If banks indirectly sell ABCP, then their reserve capital requirement fails from 8% to 4%,
thereby increasing return on assets. Consequently, ABCP has become an accepted balance
sheet management tool for controlling the growth of a bank's asset base.
Corporations benefit.from ABCP by obtaining a revolving credit facility, access to deep and
sustainable pockets of liquidity, and anonymous funding. For those reasons, ABCP has
become a preferred corporate financing tool.
Program Sponsors
Commercial banks continue to be the principal Sponsors of ABCP programs, as shown below.
Commercial Banks Non-Banks
Citigroup General Electric Capital Corp.
ABN-Amro Bank Liberty Hampshire
Bank One Credit Suisse First Boston
Bank of America General Motors Acceptance Corp.
J.P. Morgan-Chase BMO Nesbitt Burns Securities
Societe Generale
Westdeutsche Landesbank
Canadian Imperial Bank of Commerce
Barclays Bank
Rabobank Nederland
First Union National Bank
Bayerische Hypo-und Vereinsbank
Firstar Bank
Wachovia Bank
Abbey National Treasury Services
ING Bank
Royal Bank of Canada
PNC Bank
Bank of Tokyo-Mitsubishi
Commerzbank
Staff Reports
Asset-Backed Commercial Paper
15 January 2002
Page 3 of 6
The 25 ABCP Sponsors previously listed represent 74% of total U.S. ABCP outstandings.
Program Asset Types
The following types of assets are financed by ABCP programs:
Trade Receivables 26%
Credit Cards 17%
Securities 16%
Mortgages 12%
Automobiles 11%
Equipment 9%
Other 9%
Risk Assessment
Like unsecured commercial paper, ABCP programs are subject to the following risks:
➢ Credit Risk. The risk that receivables financed by the program will suffer losses and not
be fully collectible.
➢ Liquidity Risk. The risk that cash collections on receivables will not be received quickly
enough to repay maturing ABCP.
➢ Structural Risk. The risk that an ABCP program might be entangled in a bankruptcy and
might not be able to make fully and timely payments on its ABCP.
Risk Mitigation
The majority of ABCP programs are supported by two risk management facilities: (1) a credit
enhancement facility that principally addresses credit risk; and (2) a liquidity facility that
addresses liquidity risk.
The credit rating of ABCP is determined by the credit ratings of the credit enhancement and
liquidity providers since they will be obligated to provide funds to repay maturing ABCP should
the need arise. If a provider is downgraded below the level of the ABCP, then the provider may
be replaced with another qualified provider within 30 to 60 days.
Credit Risk. Credit enhancement facilities are intended to protect against losses on the ABCP
programs's underlying asset portfolios. Credit enhancement may take the form of
overcollateralization; a third-party guarantee; a letter of credit; a surety bond; recourse to a
qualified seller; loss reserves; an irrevocable loan facility; or subordinated debt. Credit
enhancement is generally sized according to the type and credit quality of the underlying assets.
Staff Reports
Asset-Backed Commercial Paper
15 January 2002
Page 4 of 6
Transactions involving revolving pools of assets have dynamic credit enhancement, whereby
the size of the credit enhancement fluctuates based upon the performance of the underlying
asset pool.
The size of credit enhancement facilities for the most common type of ABCP programs (bank-
sponsored, multiseller) typically ranges from 10% to 15% of total ABCP outstandings. This
structure is possible because portfolio asset diversification reduces credit risk exposure to any
single Seller. Receivables are bought from multiple, diverse Sellers, based upon industry,
geographic location, and asset type. Consequently, when credit rating agencies, such as
Moody's, Standard and Poor's, and Fitch, analyze an ABCP program, they focus on the quality
of the program receivables.
Liquidity Risk. External liquidity facilities are used to ensure full and timely repayment of
maturing ABCP. Typically, 100% liquidity is provided for ABCP programs by third-party financial
institutions in the form of loans or asset purchases.
ABCP programs would draw on an external liquidity facility if they could not repay maturing
ABCP by: (1) using cash collections from program receivables; (2) issuing new commercial
paper; or (3) liquidating a match-funded securities portfolio.
According to Moody's, ABCP liquidity facilities were stress-tested in the wake of the 11
September 2001 attack and performed well.
Structural Risk. ABCP programs are typically structured to be "bankruptcy remote" and have
the following five features:
➢ Orphan Subsidiaries. SPCs are established as "orphan subsidiaries" (technically not
owned by the Sponsor but by a third independent party). The Sponsor, however,
actually controls the SPC's activities by serving as its Managing Agent, and by
possessing a power of attorney to take all actions on the SPC's behalf.
➢ Independent Directors. Two independent directors are appointed to the SPC's board of
directors.
➢ Unanimous Consent. The unanimous consent of the SPC's board of directors is
required for a bankruptcy filing.
➢ True Sale. The SPC is required to obtain a fully perfected security interest in the
receivables that it acquires, or to own them as the result of a "true sale'.
➢ Non-Petition Convenant. The SPC's documents specify that interested parties cannot
file bankruptcy proceedings against the SPC until at least a year and a day after all
ABCP has been retired.
1 "Bankruptcy remote"means that the likelihood that the SPC would be consolidated into the Sponsor,in the event of the Sponsor's insolvency,
would be extremely remote. Likewise,the likelihood that the SPC would become the subject of its own bankruptcy proceeding,either
voluntarily or involuntarily,would be extremely remote.
Staff Reports
Asset-Backed Commercial Paper
15 January 2002
Page 5 of 6
Additional Protections. ABCP programs are also typically structured with mandatory "stop-
issuance" or "wind-down" triggers in order to minimize losses resulting from a deteriorating asset
portfolio or the SPC's inability to repay maturing ABCP in full. If breached, these triggers may
cause the SPC to cease issuing new ABCP immediately (stop-issuance trigger) or to begin
liquidating its asset portfolio (wind-down trigger).
The following events may breach one of these triggers:
➢ Insolvency or bankruptcy of the Seller.
➢ Downgrade of the Seller's credit rating below a specified level.
➢ Cross-default of the Seller under other debt obligations.
➢ Material adverse change in the Seller's ability to perform its duties as an asset servicer.
➢ Deterioration of portfolio assets below specified levels of write-offs, delinquencies, or
dilution.
➢ Depletion of credit enhancement below a required minimum amount.
➢ Default or breach of any covenant, representation, or warranty by the Seller or the SPC.
➢ Failure of the SPC to repay maturing ABCP or an outstanding liquidity advance when
due.
➢ Any program documents that cease to be in full force and effect.
➢ The net worth of the SPC falls below a certain level.
➢ Draws on programwide credit enhancement exceed a certain amount.
Closing Remarks
The following state and local agencies buy ABCP:
➢ Local Agency Investment Fund ("LAIF").
➢ Cities of Los Angeles, Long Beach, Anaheim, Oakland, and Sacramento.
➢ Counties of Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Kern.
➢ Metropolitan Water District of Southern California ("MWD").
➢ San Diego County Water Authority.
➢ Rancho California Water District.
➢ Vista Irrigation District.
➢ East Bay Municipal Utility District.
MWD invests up to 30% of its $1 billion portfolio in ABCP.
ABCP is allowable under both the California Government Code and the City of Palm Desert
"Statement of Investment Policy". It falls under the category of commercial paper.
On average, ABCP will yield 6-13 basis points more than the comparably rated, unsecured
commercial paper that the City has been buying.
Staff Reports
Asset-Backed Commercial Paper
15 January 2002
Page 6 of 6
A preliminary list of proposed ABCP programs has been prepared using public information that
is available from the three largest credit rating agencies (see Exhibit "A").
If the proposed Approved Issuer List for ABCP is adopted, then the City Treasurer's Office plans
to subscribe to Moody's Global Asset-Backed Commercial Paper Market Review which offers
detailed quarterly reports and portfolio updates on the 200 ABCP programs that Moody's rates.
This publication would provide the City Treasurer's Office with additional information on the
structure of each ABCP program (see Exhibit "B").
Submitted By:
g.
Thomas W. Jeffrey, IM&st&ent Manager
Approved By:
Paul S. Gibson, C.C.M.T., City Treasurer
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EXHIBIT "B"
Delaware Funding Corporation (DFC)
Closing Date: Structure Summary
Originally established
in November 1990; Rating: Prime-1
Securities: Asset-backed commercial paper (ABCP)
most recent material Program Type: Post review,partially supported, D
amendments in July 1996 multi-seller ABCP program
Authorized Amount: $17.5 billion (increased from$15 billion
Analyst: on April 15, 2001)
Swasi Bate Administrator: Morgan Guaranty Trust Company of New York
Assistant Vice President (Morgan Guaranty) (Aa2/Prime-1/B+)
Owner: JH Holdings Corporation
Analyst Collateral Agent: Morgan Guaranty
(212) 553-4163 Assets: Trade and term receivables
Swasi.Bare0moodys.com Dealers: Goldman Sachs &Co.,Merrill Lynch Money Markets,Inc.
and J.P. Morgan Securities
Contacts: Securities Act Exemption: Section 4(2)
Sam Pilcer Sellers
Managing Director
(212) 553-7418 Minimum Rating: None
Sam.Pilcer@moodys.com Maximum Size: $500 million if Baa3 or higher by Moody's;$200 million
if either not rated or rated below Baa3.Moody's reviews
Vernessa Poole exceptions prior to inclusion in the portfolio.
Investor Liaison Program Credit Enhancement
(212) 553-4796 Type: Irrevocable letter of credit
Pernessa.Poolegmoodys.com Provider: Morgan Guaranty
Support Percentage: 10%of the aggregate portfolio purchase limits
Minimum Dollar Amount: $200 million
Liquidity
Types: 1)General revolving loan agreement equal to 102%
of the maximum purchase limits in Asset Group I
2)Seller-specific asset purchase agreements (APAs)
in an amount equal to 100%of the maximum
purchase limits in each Asset Group
3)A general program-level revolving loan agreement
sized to cover ABCP discount, and liquidity bank
collateral reserves under the APAs
Provided by: Morgan Guaranty and other Prime-l-rated
financial institutions
Funding Basis: Liquidity may be drawn in an amount not exceeding
the non-defaulted balance of receivables under each
investment.
Out to Funding: Bankruptcy of DFC
Significant Program Wind Down Events
None
Administrator's
Other Conduits: Asset Portfolio Funding Corporation (Prime-1),
Revolving Commitment Vehicle (Prime-1)
CURRENT HIGHLIGHTS
• As of April 30, 2001, DFC had$12.7 billion of purchase commitments with ABCP outstandings of$11.2 billion.
• During March and April 2001, two transactions totaling about $240 million in purchase limits were added to DFC's
portfolio. Both transactions were trade receivable deals-one for$100 million to an unrated steel company and the
Moody"s Second Quarter 2001 ABCPMarket Review Delaware Funding Corporation (DFC) • 1
other for $140 million to a Baal-rated computer sized to cover the yield on ABCP. As a result, additional
peripherals and electronics manufacturer. One credit program-level liquidity support is provided by a revolving
card note purchase facility was completely paid down loan agreement from Morgan that picks up the yield on
in April. ABCP and provides funds in addition to the pool-specific
• Three facility limits were reduced. One facility, to APAs. Both asset-specific and program-level liquidity sup-
finance the purchase of a senior note from a credit ports are unavailable if DFC becomes bankrupt.
card master trust with a Aa2-rated financial services ABCP Investors Have Security Interest In Assets
company, was reduced to $372 million from $500 mil-
lion. A trade receivable facility was reduced to $250 Investors in DFC's ABCP benefit from a security interest
million from $225 million. Another trade receivable in the underlying assets being funded by DFC. In the
facility to a Aaa-rated plastics and resins manufacturer unlikely event that DFC were to become the subject of
was reduced to$130 million from$390 million. bankruptcy proceedings, ABCP investors would have a
• As of April 30, 2001, program-level enhancement was pari-passu interest with the liquidity banks in collections
on the underlying assets. In Moody's opinion, a security
$1.32 billion in the form of a letter of credit. interest in the assets is a very strong feature of DFC's pro-
• On December 31, 2000, The Chase Manhattan gram; however, because the Prime-1 rating addresses
Corporation and J.P. Morgan & Co., Incorporated timeliness of payment, the security interest does not add
completed the merger of their holding companies. any significant benefit from a short-term rating perspec-
Subsequent to the merger,JPMC will be a global finan- tive. The security interest would likely reduce investors'
cial services firm with assets of $715 billion and opera- losses under the extremely remote instance of DFC's
Lions in over 60 countries.The banks are scheduled to bankruptcy.
merge October 2001.
• The Chase Manhattan Bank and J.P. Morgan conduit RATING OPINION
platforms are very complementary. There is minimal
overlap in the clients of each bank's heritage conduit Moody's rating is based on the following:
business and this should lead to minimal overall • A program-level irrevocable letter of credit from Mor-
changes in each conduit's business focus and strategy. gan equal to 10% of the aggregate maximum net
investment in all assets in the DFC portfolio
PROGRAM OVERVIEW • The quality of the underlying portfolio of assets,includ-
ing first-loss protection supporting each asset pool
Partially Supported Multi-seller ABCP Program • The liquidity commitments provided by Morgan and
Delaware Funding Corporation is a partially supported other Prime-l-rated financial institutions
multi-seller ABCP program sponsored and administered . The ability of Morgan to administer the program
by Morgan Guaranty Trust Company. DFC is a post-
review program. That. is, Moody's does generally not ' Other structural features of the program, including
review DFC's investments prior to inclusion in its portfo- protections against the bankruptcy of DFC
lio. Overall asset quality is maintained by a comprehen-
sive credit and investment policy that establishes ASSET OVERVIEW
minimum credit and diversification standards for DFC's Post Review Criteria
portfolio. Unlike some other large post review programs
such as Citibank's Ciesco, CIBC's ASCC, and Bank One's DFC has established credit and investment policies
PREFCO, which purchase assets originated only by designed to generate and maintain a high quality asset
investment-grade sellers, DFC may purchase assets from portfolio. DFC may purchase new investments in compli-
investment-grade, non-investment-grade and unrated ance with DFC's policy without prior review by Moody's.
sellers. However, DFC limits its purchases to Morgan Is Moody's evaluates all other DFC investments in advance
corporate clients. of purchase.
Program Credit Enhancement The salient features of DFC's credit and investment pol-
icy include the following:
In addition to asset-specific credit support and structural The maximum investment in receivables of any single
protections,DFC is supported by a program-level, irrevo-
cable letter of credit from Morgan. The amount of the lion, and
seller nonBaa3 or higher) is de s mil-
program letter of credit is targeted at 10% of the aggre- lion, and for any single non-investment-grade seller,
gate maximum purchase limits of all of the asset interests $200 million
owned by DFC and is subject to a$200 million minimum. Each receivable pool shall have no fewer than 10 unaf-
filiated obligors (unless the obligors are rated in the
Seller-Specific Liquidity Facilities highest commercial paper rating categories);
Morgan and other Prime-l-rated financial institutions Dilution, delinquency, and loss performance of the
provide most liquidity support for the program on an underlying assets must be stable and aligned, with
asset-specific basis. As is common in most ABCP pro- industry standards. Asset pools are dynamically struc-
grams, DFC's asset-specific liquidity is structured so that tured with a reserve Floor, to mitigate default, dilution
some credit-related asset risk, such as dilution risk, is and concentration risk in a manner consistent with
shifted to the liquidity support providers. Unlike most DFC's Prime-1 rating
other programs, asset-specific liquidity support is not
2 • Delaware Funding Corporation (DFC) - Moody's Second Quarter 2001 ABCP Market Review
• Transactions are structured as bankruptcy-remote are well structured to mitigate risk of losses to ABCP
true sales investor as discussed in further detail below. -
' Sellers must meet minimum Morgan credit standards DFC's investment portfolio remains only somewhat diver-
• The receivables underlying each asset interest must sifted as compared to some other large ABCP programs
meet uniform eligibility criteria such as Citibank's CAFCO and Ciesco, and Bank One's
' Termination events (including those related to the PREFCO.
performance of the underlying assets) shall be Although DFC may purchase assets from either invest-
included in each transaction ment-grade or non-investment-grade originators, most of
Recent Activity its assets continue to be originated by investment-grade
DFC's total purchase limits were $12.7 billion as of April companies (see Chart 3). This is a strong point of DFC's
2001, down from $13.5 billion as of February. During portfolio in that it reduces the risk of loss resulting from
March and April 2001, two transactions totaling about the financial condition of the originator.
$240 million in purchase limits were added to DFC's There is no limitation on DFC's ability to acquire term
portfolio. Both transactions were trade receivable deals-- asset interests, other than real estate assets, which cannot
one for $100 million to an notated steel company and be purchased by DFC. The majority of DFC's asset inter-
the other for $140 million to a Baal-rated computer ests are of a longer-term nature.
peripherals and electronics manufacturer. One credit
card note purchase facility was completely paid down in Credit Cards
April. Three facility limits were reduced. One facility, to DFC owns thirteen interests backed by credit card receiv-
finance the purchase of a senior note issued by a credit ables with aggregate purchase limits of approximately
card master trust with a Aa2-rated financial services com- $3.78 billion.This segment of DFC's portfolio has leveled
pany, was reduced to $372 million from $500 million. A at about 30% in the last three months.
trade receivable facility for an investment-grade-rated The largest credit card exposure in DFC's portfolio is a
tine-haul operating company was reduced from $250 mil- $500 million facility to fund a senior note issued by the
lion to$225 million. Another trade receivable facility for credit card master trust of an A2-rated financial institu--
a Aaa-rated plastics and resins manufacturer company tion. Credit enhancement is in the form of a minimum
was reduced from$390 million to$130 million. seller's interest and a subordinated class at 7%. The cur-
DFC's portfolio composition by asset type (see Chart 1) rent level of enhancement is 8.99%. The early amortiza-
shifted marginally since February. There were no per- tion events for this series are typical for credit card
centage changes except in trade receivables, decreasing transactions and include an amortization event when
by 1%to 24%and auto loans and leases increasing by 1% excess spread is reduced below zero on a three-month
to 23%. The portfolio's quality by seller rating also rolling average basis.
slightly shifted with investment-grade sellers decreasing Other facilities over$450 million include a$492 million
from 75% to 74%, and the non-investment grade sellers senior note purchase from a credit card master trust
increasing to 14.1%from 12.9%. backed by private label retail credit card receivables. The
Asset Type Concentration receivables are generated by accounts with various retail-
The program administrator's growth strategy and focus ers. Credit enhancement is the form of a cash collateral
n maintaining credit quality result in a portfolio
account with a 5/o minimum and excess spread account.
invested in a limited number of asset types.The portfolio master trust allows for automatic account additions with-
is concentrated in well-established asset classes that out Moody's prior review provided the accounts meet
include high quality, well-diversified consumer assets certain eligibility criteria. Early amortization events for
with primarily investment-grade-rated servicers. More-
over, the investments are generally the senior classes and this series are typical of most credit card securitizations
and include an excess spread[rigger.
Table 1
DFC's Liquidity Providers Over$100 million
As of April 30, 2001
Providers of more than$100 million in Commitment %of Total
transaction-specific liquidity ($million) Commitments Short-Term Rating Long-Term Rating BFSR'
------- -----m-e-1- -- -----M2 _ --
Morgan Guaranty Trust Company of New York' 12,554 94.9 Pri Aa2 8+
Toronto Dominion Bank 155 1.2 Prime-1 Aa3 B
Lloyds TSB Bank PLC 121 0.9 Prime-1 Aaa A
The Bank of Nova Scotia 125 1.0 Prime-1 Aa3 B
Total 12,955 98.0
Bank Financial Strength Rating
I Ratings upgraded December 2000
Source:DFC Monthly Report
Moody's Second Quarter 2001 ABCP Market Review Delaware Funding Corporation (DFC) • 3 _
Among the larger transactions is a $462.5 million senior mately two years. This potentially exposes DFC to
note purchase facility for a credit card master trust increased risk as loss rates on each pool could Fluctuate
backed by Visa and MasterCard credit card receivables with changing economic conditions. As an added fea-
issued by an established issuer. Credit enhancement is a ture,to reduce DFC's exposure to long-term losses, each
combination of overcollateralization and excess spread deal has performance-based triggers that require DFC to
with a minimum of 7.5%. Current enhancement is at cease issuing ABCP in the event of a deterioration in
8.11%. This series also has early amortization events typi- credit quality. These cease-issuance triggers effectively
cal of most credit card transactions. shift the long-term risk of a deteriorating asset pool away
One credit card note purchase facility, which reduced from ABCP investors.
from$244 million in February,was completely paid down Trade Receivables
in April. Another facility, to finance the purchase of a DFC owns a total of seventeen interests in revolving pools
senior note from a credit card master trust with a Aa2- of trade receivables, with total purchase limits of $3.26
rated financial services company, was reduced to $372 billion, representing 24% of the total purchase limits at
million from$500 million. the end of April 2001.
Of the remaining credit card assets, $2.32 billion are
backed by receivables generated from the use of private Chart I
label, retail credit cards. Private label credit card receiv- DPC Portfolio by Asset Type
ables can be somewhat riskier than VISA and MasterCard AS of April 30, 2001
receivables because retailers sometimes relax their credit (Total: $12.7 billion)
quality standards in order to generate merchandise sales.'
Moreover, the performance of the receivables may be r
closely correlated with the fortunes of the retailer. DFC's
pools of private label credit cards do tend to have higher Egmpment= Student
levels of overcollateralization, however, than would a typ- ;Recejvables; ' Loans
ical VISA/MasterCard pool. R eivable 115°(0 � P%
Each of DFC's credit card-backed asset interests is struc-
tured similarly. Each is supported either by Dealer - ulp nS
overcollateralization, an excess spread account, a cash Financing 'y
collateral account or by subordination ranging from 6%
15.16%to 45.35%. 3
Credit lards
Auto Finance 30%
The auto sector contains ten pools of auto loans or leases _.
totaling $2.82 billion, representing 23% of DFC's portfo-
lio.The largest facility is for a non-investment grade Japa- Source:DFC Monthly Report
nese auto manufacturer for$850 million. The revolving
facility is backed by retail auto loans extended by the cap- Four of the five largest trade receivable deals (ranging
tive finance arm of the auto manufacturer. Cumulative from $250 million to $400 million) are with investment
expected losses are less than 1%. Credit enhancement is grade companies.There are three deals that each repre-
a combination of a cash collateral account and overcol- sents $400 million in purchase commitments. The first
lateralization with a minimum of 12%. Enhancement is deal finances a diversified pool of quick turning (less
currently 13.49/o. This deal is currently under review than 20 days) trade receivables originated by a Ba2-rated
and is scheduled to be refinanced before the end of July. medical products wholesaler.The transaction has a mini-
DFC also has three auto lease facilities that are fully guar- mum of 18%enhancement in the form of overcollateral-
anteed either by a Aa2-rated financial institution (a $834 ization. Enhancement is currently at 23.88% compared
million facility) or by a letter of credit from an A2-rated to annualized loss rates of 0.24%. (DFC calculates loss
entity (two amortizing facilities totaling$164.83 million), rates for trade deals as the company's write-offs divided
The auto portfolio includes three amortizing auto loan by one-month collections.) The second transaction is a
pools totaling$809.14 million from a Aal-rated financial Five-conduit co-purchase facility that finances receivables
institution. The pools consist of loans for new and used generated by an A3-rated telecom company.The transac-
autos.The smallest pool, at $130.15 million,is scheduled tion has a minimum enhancement of 16%in the form of
to be fully paid by over year-end. It is a Aaa-rated senior overcollateralization and is currently at 31.65% com-
note supported by a subordinated class and a cash collat- pared to an annualized loss rate of 10.28%. The high
eral account. Credit enhancement--initially 9%-- is annualized loss rate is a result of a one-time management
31.85%. The other two pools have similar loan charac- decision to take action and write-off a book of long-dated
teristics,although the more recent addition has a slightly receivables which have always been significantly past due
higher expected loss rate. Credit enhancement consists and were never purchased by DFC and the other co-pur-
of funded reserve accounts, set at 5.25% and 9%. Both chasers when the transaction closed in 1999.The level of
deals include provisions to trap excess spread when cer- overcollateralization was adjusted as a function of the
tain performance triggers are breached. DFC's auto loan loss rate. The third transaction is another co-purchase
pools, taken together, have an average life of approxi- facility that finances receivables generated by an A3-rated
4 • Delaware Funding Corporation (DFC) Moody's Second Quarter 2001 ABCPMarker Review
entertainment company. Credit enhancement is in the largest facility in the nine equipment lease deals is a$500
form of overcollateralization with a minimum of 20% million co-purchase in a $3.1 billion facility to an invest-
and is currently at 25.85% against an annualized loss ment-grade seller.This facility is credit enhanced by over-
ratio of 0.6%. collateralization with a floor of 8% and is currently at
11.32%against an annualized loss rate of 4%.The facility
Chart 2 was renewed in June with structural amendments includ-
DFC Trade Receivable Portfolio by Seller Industry ing an increased enhancement floor of 11% (from 8%),
As of April 30, 2001 reallocation of obligor concentration limits and exten- -
(Total: $3.26 Billion) sion of performance trigger period coverage. There are D
five amortizing equipment lease transactions from a
Other major, investment-grade manufacturer of agricultural
Chemicals& 5% Machinery& equipment totaling $738.3 million. . There is also a
Drugs Services $262.4 million amortizing facility to a non-investment
14% 8% grade duplicating company (that also has a$145 million
trade facility in DFC) with a minimum credit enhance-
ment level of 10%. As of April 2001, credit enhancement
via overcollateralization was at 33.74% with an annual-
Computer, ized loss rate of 5.5%. The final asset type is a $250 mil-
, lion student loan facility, which is composed of loans
partially guaranteed by the federal government.
Chart 3
DFC Portfolio by Seller Rating
hTelecom Entertainment As of April 30, 2001
13% (Total: $12.7 Billion)
Plastics
6%
Source:DFC Monthly Report
Unrated Non-Investment.
As Chart 2 indicates, DFC's trade receivable portfolio is - Grade
well diversified by seller industry. Other than the trans- „ 14%
portation sector at 26%, no other industry accounts for k :
more than 15/0 of the portfolio. Purchase commitments
range in size from$40 million to $400 million. } lovestment- -
Grade
All of DFC's trade receivable interests are structured in a 73%.
similar manner. Each asset interest is supported by credit
enhancement in the form of asset overcollateralization.
The asset overcollateralization is dynamic:the amount of
collateralization is recalculated each month based upon
portfolio performance. Each pool also has a pre-set mini- Source:DFC Monthly Report
mum loss reserve. In addition to credit enhancement,
asset interests are structured with performance-based CREDIT ENHANCEMENT
triggers that require DFC to cease purchasing new receiv-
ables and liquidate its investment when performance One or more types of pool-specific credit enhancement
deteriorates to certain predetermined levels. generally support assets in DFC. These include overcol-
Another important risk in trade receivable deals is the lateralization (which is sized typically under dynamic
risk of non-cash adjustments to the trade receivable bal- reserve calculations),subordinated classes of receivables,
ance, or dilution. Dilution arises from a number of excess yield, surety agreements, and in one case, direct
sources, including special discounting programs for cash recourse to an A2-rated seller.
or volume purchases, returns and warranty claims. In Program Letter Of Credit Sized At 10%Of
DFC deals,dilution risk is not assumed by ABCP investors Purchase Facility Limits
but by the liquidity providers under the asset-specific
APA facilities. DFC has the benefit of a program-level irrevocable letter
of credit issued by Morgan (Aa2/Prime-1/B+) for a fixed
Other Assets amount. It is generally equal to the greater of (a) $200
The remainder of DFC's portfolio consists of one $250 million and (b) 10% of the sum of(i) the maximum net
million student loan deal; three dealer financing facili- investment across all assets plus (ii) an interest compo-
ties totaling $750 million; and nine equipment lease nent. The $200 million floor provides protection against
facilities totaling$1.82 billion. the loss of diversity among pools in the event of a wind
down or termination of the program.The letter of credit
All dealer financing facilities are for investment-grade dollar amount freezes upon DFC's bankruptcy or if more
sellers and represent 6%of the total purchase limit. The
Moody"s Second Quarter 2001 ABCPMarket Review Delaware Funding Corporation (DFC) • 5
than 20%of the letter of credit is drawn. In addition, the gated by the presence of the general revolving loan
amount of the letter of credit is reinstated as recoveries - agreement provided by Morgan.This program-wide facil-
are made. The Morgan letter of credit funds against ity is designed to (1) cover yield on ABCP and (ii) com-
maturing ABCP and explicitly covers risk of preferential pensate for the fact that 50%of each assets floor amount
clawbacks resulting from the bankruptcy of an asset origi- of first loss structural credit protection is typically
nator. The letter of credit may also be drawn upon to reserved for liquidity providers under the APAs.The pro-
cover any unforeseen liabilities DFC may incur. gram level liquidity funds similarly to the APAs, as it .
funds against the non-defaulted value of receivables, but
LIQUIDITY it does not reserve 50%of the seller-level loss protection
for itself. In other words, it funds up to the full amount
Asset Group I Liquidity of non-defaulted assets.
Until recently, all of the assets were assigned to "asset Effective October 1, 1998, Morgan altered the mechanic
groups. The asset interests purchased prior to September for sizing the program liquidity loan commitment to
1993 were designated as Asset Group I. A general revolv- more efficiently provide program protection against the
ing loan agreement provides liquidity of up to 100/o of the first loss position reserved for the liquidity banks, and
maximum aggregate net investment associated with Asset ABCP discount. The liquidity loan commitment is now
Group I and additionally, a reserve percentage for associ- sized at the greater of.
ated Asset Group I ABCP discount. Morgan provides this
general revolving liquidity. Since assets designated under 1) 10%of the aggregate Asset Group II purchase commit-
Asset Group I have terminated and are no longer part of ments, and
the portfolio,there are currently no commitments under 2)50%of the aggregate floor amount of the Asset Group
Asset Group I. The program still allows for Asset Group 1 1I portfolio's first loss protection, plus an ABCP dis-
transactions, although it is unlikely that DFC will utilize count reserve equal to 90 days discount (i.e. the maxi-
this asset group in the future. mum allow-able weighted average DFC ABCP term)
based on a weighted average rate plus 1%.
Seller-Specific Liquidity Facilities
The program liquidity commitment is re-sized at least
All DFC purchase commitments are supported o asset monthly,whenever the DFC aggregate purchase commit-
purchase agreements (APAs) as their primary form d- - ments are adjusted, or, when an asset's first loss protec-
party commit-
liquidity protection. The APAs are syndicated to third- tion is increased or decreased.
party financial institutions rated Prime-1; however, Mor-
gan retains a percent-age of the syndicated APA liquidity The only condition precedent to all liquidity coverage is
facilities. Currently, Morgan and other Prime-l-rated that DFC not be bankrupt.
banks as listed in Table 1 provide DFC's APA liquidity
support. WIND DOWN EVENTS
Even though the APAs are intended to be used to sup- Each purchase facility has its own set of termination
port only a specified asset groups receivables, the event that could cause a seller to lose its ability to obtain
amounts available under the APAs for each asset group funding from DFC. These trigger events can include
are actually available to cover any maturing ABCP. An delinquency, default and/or rating downgrade thresh-
APA bank can be asked to make a purchase of its related olds. All the purchase facilities offered by DFC are com-
assets as needed to pay the ABCP associated with any mitted facilities; therefore, the triggers have to be
other asset group, breached before a seller program could be prematurely
Risk-Shifting Liquidity Funding Formulas terminated within DFC.
The maximum amount of funds received from any There are, in addition, two program-wide trigger events
source of liquidity is equal to DFC's investment in the that would cause a termination of DFC's ability to issue
underlying asset interest less the value of any defaulted ABCP, including DFC's bankruptcy or use of more than
receivables. Diluted receivables are explicitly covered 20% of the program letter of credit. Neither of these
under the APAs, as is cash collected by the seller but not events causes an automatic permanent termination of
yet remitted to DFC, and other types of seller risk. In the program,as Morgan can waive them.
addition,most of the APAs provide for a rapid funding of
all related outstanding ABCP by the APA banks if certain PROGRAM ADMINISTRATOR
receivable and/or seller-specific financial performance
trigger events are breached. This rapid funding mecha- Morgan is an experienced and capable program adminis-
nism effectively shifts the risk of loss associated with the trator. To date, DFC has principally purchased assets
assets to the liquidity providers. from long-standing Morgan customers. Morgan estab-
lished DFC in 1990. As administrator of one of the earli-
Half Of Seller-Level Loss Protection Benefits est ABCP programs in the market, Morgan has
Liquidity Banks developed substantial experience through a dedicated,
Due in part to the credit support provided by the APAs, highly professional conduit group and has deep insight
the APA banks have the benefit of half of the respective into the assets and customers DFC finances. Morgan also
seller's floor level of overcollateralization to support their provides indemnification to DFC for any losses and for
obligations to fund.This reduction in pool-specific credit other liabilities that DFC might incur if Morgan should
enhancement available to ABCP investors is fully miti- fail to perform its many duties (including those of
6 • Delaware Funding Corporation(DFC) Moody"s Second Quarter 2001 ABCP Market Review
administrator to DFC) as specified in the program docu- early detection of asset pool performance deterioration
mentsMorgan's multiple roles as liquidity support and and regularly update seller and support provider ratings.
credit enhancement provider also give it a strong incen- The system also prepares customized reporting for inves-
tive to con-duct DFC's affairs prudently. tors, placement agents and other DFC constituencies.
Morgan has recently implemented a highly sophisticated, Contacts: Robert S.Jones, Vice President
internally developed conduit management information Morgan Guaranty Trust Company
system, STATS. The system provides comprehensive and (302) 634-5485
detailed monitoring of DFC's investments. As part of the
monitoring system, STATS has programs that provide D.
Moody's Second Quarter 2001 ABCP Market Review Delaware Funding Corporation (DFC) • 7
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: Approval of repurchase agreements as an authorized investment.
APPLICANT: N/A
CASE NOS. N/A
DATE: 15 January 2002
CONTENTS: Exhibit "A": Approved Issuer List for Repurchase Agreements
Exhibit "B": Master Repurchase Agreement (BOA Sample)
Recommendation:
By Minute Motion: That the Finance Committee recommend that the City Council
approve repurchase agreements as an authorized investment
instrument.
Background:
A repurchase agreement ("repo") is a secured transaction in which an investor buys securities
from a financial institution for cash. The financial institution later repurchases the securities from
the investor for cash plus interest. Repos trade off the Federal Funds Rate.
The two-sided nature of a repo transaction is shown below:
INVESTOR FINANCIAL INSTITUTION
1. Buys securities with cash Sells securities
2. Resells securities Buys back securities with cash + interest
Staff Report
_ Repurchase Agreements
15 January 2002
Page 2 of 2
The majority of repos mature overnight or within 30 days ("term repos"). The minimum repo
denomination is usually $1 million.
Local agencies typically buy repos under the following conditions:
1. U.S. Treasury or Agency securities are offered for sale.
2. The counterparty is a primary securities dealer that reports to the NY Federal Reserve Bank.
3. A Master Repurchase Agreement (Exhibit "A") is executed by both parties.
4. Securities and cash are exchanged on a delivery-versus-payment ("DVP") basis.
5. Independent, third-party custodians administer the DVP process.
6. Term repos are overcoI lateral ized at 102 to 105 percent in order to protect the buyer from an
erosion in the market value of the collateral.
Although local agencies are authorized to buy repos under California Government Code Section
53601 (i), the City Treasurer is currently not authorized to buy them under the City of Palm
Desert "Statement of Investment Policy".
In selected situations, the City could benefit from the use of repos. After the 11 September
2001 attack, for instance, the City was unable to invest $7 million in individual securities for two
weeks, due to unstable market conditions. Consequently, this money remained in the main
sweep account. It could, however, have been invested in the one securities instrument that was
still being widely traded — repos.
Submitted By:
rn
Thomas W. Jeffrey, v Manager
Approved By:
Paul S. Gibson, C.C.M.T., City Treasurer
EXHIBIT "A"
11/30/01 CITY OF PALM DESERT
12:24 PM
APPROVED ISSUER LIST FOR REPURCHASE AGREEMENTS
JANUARY 2002
2000
ASSETS S&P/MOODY'S S&P/MOODY'S HDOTRS
ISSUER ($ Billions) STD RATING LTD RATING STATE
Banc of America 584 A-1 +/P-1 AA-/Aa1 North Carolina
Merrill Lynch 328 A-1 +/P-1 AA-/Aa3 New York
Morgan Stanley 427 A-1 +/P-1 AA-/Aa3 New York
Salomon Smith Barney 902 A-1 +/P-1 AA-/Aa1 New York
Wells Fargo 114 A-1 +/P-1 AA-/Aa1 California
I
EXHIBIT "B"
Master Repurchase
Agreement
September 1996 Version
Dated as of
Banc of America Securities LLC
Between:
and
1. Applicability
From time to time the parties hereto may enter into transactions in which one party ("Seller")
agrees to transfer to the other ("Buyer") securities or other assets ("Securities") against the transfer
of funds by Buyer,with a simultaneous agreement by Buyer to transfer to Seller such Securities at a
date certain or on demand,against the transfer of funds by Seller.Each such transaction shall be
referred to herein as a"Transaction"and,unless otherwise agreed in writing,shall be governed by
this Agreement,including arty supplemental terms or conditions contained in Annex I hereto and
in any other annexes identified herein or therein as applicable hereunder.
2. Definitions
(a) "Act of Insolvency",with respect to any party, (i) the commencement by such party as debtor of
any case or proceeding under any bankruptcy,insolvency,reorganization,liquidation,moratori-
um, dissolution,delinquency or similar law,or such party seeking the appointment or election
of a receiver,conservator,trustee,custodian or similar official for such party or any substantial
part of its property,or the convening of any meeting of creditors for purposes of commencing
any such case or proceeding or seeking such an appointment or election, (ii) the commence-
ment of arty such case or proceeding against such party,or another seeking such an appoint-
ment or election,or the filing against a party of an application for a protective decree under the
provisions of the Securities Investor Protection Act of 1970,which (A) is consented to or not
timely contested by such party, (B) results in the entry of an order for relief,such an appoint- "
ment or election,the issuance of such a protective decree or the entry of an order having a sim-
ilar effect,or (C) is not dismissed within 15 days, (III) the making by such party of a general
assignment for the benefit of creditors,or (tv) the admission in writing by such party of such
party's inability to pay such party's debts as they become due;
(b) "Additional Purchased Securities",Securities provided by Seller to Buyer pursuant to Paragraph
4(a) hereof;
(c) "Buyer's Margin Amount",with respect to any Transaction as of any date,the amount
obtained by application of the Buyer's Margin Percentage to the Repurchase Price for
such Transaction as of such date;
(d) "Buyer's Margin Percentage",with respect to any Transaction as of any date;a percentage
(which may be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or,
in the absence of any such agreement,the percentage obtained by dividing the Market
Value of the Purchased Securities on the Purchase Date by the Purchase Price on the
Purchase Date for such Transaction;
(e) "Confirmation",the meaning specified in Paragraph 3(b) hereof;
(f) "Income",with respect to any Security at any time,any principal thereof and all interest,
dividends or other distributions thereon;
(g) "Margin Deficit",the meaning specified in Paragraph 4(a) hereof;
(h) "Margin Excess",the meaning specified in Paragraph 4(b) hereof;
(i) "Margin Notice Deadline",the time agreed to by the parties in the relevant Confirmation,
Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfac-
tion of margin maintenance obligations as provided in Paragraph 4 hereof (or,in the
absence of any such agreement,the deadline for such purposes established in accordance
with market practice);
O "Market Value",with respect to any Securities as of any date,the price for such Securities
on such date obtained from a generally recognized source agreed to by the parties or the
most recent closing bid quotation from such a source,plus accrued Income to the extent
not included therein (other than any Income credited or transferred to,or applied to the
obligations of,Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities);
(k) "Price Differential",with respect to any Transaction as of any date,the aggregate amount
obtained by daily application of the Pricing Rate for such Transaction to the Purchase
Price for such Transaction on a 360 day per year basis for the actual number of days dur-
ing the period commencing on (and including) the Purchase Date for such Transaction
and ending on (but excluding) the date of determination(reduced by any amount of
such Price Differential previously paid by Seller to Buyer with respect to such
Transaction);
(1) "Pricing Rate",the per annum percentage rate for determination of the Price Differential;
(m)"Prime Rate",the prime rate of U.S.commercial banks as published in The Wall Street
Journal (or,if more than one such rate is published, the average of such rates);
(n) "Purchase Date",the date on which Purchased Securities are to be transferred by Seller to
Buyer;
2 September 1996' Master Repurchase Agreement
(o) "Purchase Price", (i) on the Purchase Date,the price at which Purchased Securities are
transferred by Seller to Buyer,and (ii) thereafter,except where Buyer and Seller agree oth-
erwise,such price increased by the amount of any cash transferred by Buyer to Seller pur-
suant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by
Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations
under clause (ii) of Paragraph 5 hereof;
(p) "Purchased Securities",the Securities transferred by Seller to Buyer in a Transaction here-
under,and any Securities substituted therefor in accordance with Paragraph 9 hereof.The
term"Purchased Securities"with respect to arty Transaction at any time also shall include
Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall
exclude Securities returned pursuant to Paragraph 4(b) hereof;
(q) "Repurchase Date",the date on which Seller is to repurchase the Purchased Securities
from Buyer,including any date determined by application of the provisions of Paragraph
3(c) or 11 hereof;
(r) "Repurchase Price" the price at which Purchased Securities are to be transferred from
Buyer to Seller upon termination of a Transaction,which will be determined in each case
(including Transactions terminable upon demand) as the sum of the Purchase Price and
the Price Differential as of the date of such determination;
(s) "Seller's Margin Amount",with respect to arty Transaction as of any date,the amount
obtained by application of the Seller's Margin Percentage to the Repurchase Price for
such Transaction as of such date;
(t) "Seller's Margin Percentage",with respect to arty Transaction as of any date,a percentage
(which may be equal to the Buyer's Margin Percentage) agreed to by Buyer and Seller or,
in the absence of any such agreement,the percentage obtained by dividing the Market
Value of the Purchased Securities on the Purchase Date by the Purchase Price on the
Purchase Date for such Transaction.
3. Initiation; Confirmation; Termination
(a) An agreement to enter into a Transaction may be made orally or in writing at the initia-
tion of either Buyer or Seller.On the Purchase Date for the Transaction,the Purchased
Securities shall be transferred to Buyer or its agent against the transfer of the Purchase
Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder,Buyer or Seller (or both),as shall
be agreed,shall promptly deliver to the other party a written confirmation of each
Transaction (a"Confirmation").The Confirmation shall describe the Purchased
Securities (including CUSIP number,if any),identify Buyer and Seller and set forth (i)
the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date,unless the
Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price
applicable to the Transaction,and (v) any additional terms or conditions of the
Transaction not inconsistent with this Agreement.The Confirmation,together with this
Agreement,shall constitute conclusive evidence of the terms agreed between Buyer and
Seller with respect to the Transaction to which the Confirmation relates,unless with
September 1996. Master Repurchase Agreement• 3
respect to the Confirmation specific objection is made promptly after receipt thereof In
the event of any conflict between the terms of such Confirmation and this Agreement,
this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand,such demand shall be made by
Buyer or Seller,no later than such time as is customary in accordance with market prac-
tice,by telephone or otherwise on or prior to the business day on which such termination
will be effective.On the date specified in such demand, or on the date fixed for termina-
tion in the case of Transactions having a fixed term,termination of the Transaction will
be effected by transfer to Seller or its agent of the Purchased Securities and any Income in
respect thereof received by Buyer (and not previously credited or transferred to,or
applied to the obligations of,Seller pursuant to Paragraph 5 hereof) against the transfer
of the Repurchase Price to an account of Buyer.
4. Margin Maintenance
(a) If at any time the aggregate Market Value of all Purchased Securities subject to all
Transactions in which a particular party hereto is acting as Buyer is less than the aggre-
gate Buyer's Margin Amount for all such Transactions (a"Margin Deficit"),then Buyer
may by notice to Seller require Seller in such Transactions,at Seller's option,to transfer to
Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional
Purchased Securities"),so that the cash and aggregate Market Value of the Purchased
Securities,including any such Additional Purchased Securities,will thereupon equal or
exceed such aggregate Buyer's Margin Amount(decreased by the amount of any Margin
Deficit as of such date arising from any Transactions in which such Buyer is acting as
Seller).
(b) If at any time the aggregate Market Value of all Purchased Securities subject to all
Transactions in which a particular party hereto is acting as Seller exceeds the aggregate
Seller's Margin Amount for all such Transactions at such time (a"Margin Excess"),then
Seller may by notice to Buyer require Buyer in such Transactions,at Buyer's option,to
transfer cash or Purchased Securities to Seller,so that the aggregate Market Value of the
Purchased Securities,after deduction of arty such cash or any Purchased Securities so
transferred,will thereupon not exceed such aggregate Seller's Margin Amount (increased
by the amount of any Margin Excess as of such date arising from any Transactions in
which such Seller is acting as Buyer).
(c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph
at or before the Margin Notice Deadline on any business day,the party receiving such
notice shall transfer cash or Additional Purchased Securities as provided in such subpara-
graph no later than the close of business in the relevant market on such day.If any such
notice is given after the Margin Notice Deadline,the party receiving such notice shall
transfer such cash or Securities no later than the close of business in the relevant market
on the next business day following such notice.
(d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions
as shall be agreed upon by Buyer and Seller.
4 September 1996' Master Repurchase Agreement
(e) Seller and Buyer may agree,with respect to any or all Transactions hereunder,that the
respective rights of Buyer or Seller (or both) under subparagraphs(a) and (b) of this
Paragraph may be exercised only where a Margin Deficit or Margin Excess,as the case
may be,exceeds a specified dollar amount or a specified percentage of the Repurchase
Prices for such Transactions (which amount or percentage shall be agreed to by Buyer
and Seller prior to entering into any such Transactions).
(f) Seller and Buyer may agree,with respect to any or all Transactions hereunder,that the
respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph
to require the elimination of a Margin Deficit or a Margin Excess,as the case may be,
may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to
any single Transaction hereunder (calculated without regard to any other Transaction
outstanding under this Agreement).
5. Income Payments
Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in
respect of the Securities that is not otherwise received by Seller,to the full extent it would be
so entitled if the Securities had not been sold to Buyer.Buyer shall,as the parties may agree
with respect to any Transaction (or,in the absence of any such agreement,as Buyer shall rea-
sonably determine in its discretion),on the date such Income is paid or distributed either (1)
transfer to or credit to the account of Seller such Income with respect to any Purchased
Securities subject to such Transaction or (ii)with respect to Income paid in cash,apply the
Income payment or payments to reduce the amount,if any,to be transferred to Buyer by
Seller upon termination of such Transaction.Buyer shall not be obligated to take any action
pursuant to the preceding sentence (A) to the extent that such action would result in the cre-
ation of a Margin Deficit,unless prior thereto or simultaneously therewith Seller transfers to
Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit,or
(B) if an Event of Default with respect to Seller has occurred and is then continuing at the
time such Income is paid or distributed.
6.- Security Interest
Although the parties intend that all Transactions hereunder be sales and purchases and not
loans,in the event any such Transactions are deemed to be loans,Seller shall be deemed to
have pledged to Buyer as security for the performance by Seller of its obligations under each
such Transaction,and shall be deemed to have granted to Buyer a security interest in,all of
the Purchased Securities with respect to all Transactions hereunder and all Income thereon
and other proceeds thereof
7. Payment and Transfer
Unless otherwise mutually agreed,all transfers of funds hereunder shall be in immediately
available funds.All Securities transferred by one party hereto to the other party(i) shall be in
suitable form for transfer or shall be accompanied by duly executed instruments of transfer
or assignment in blank and such other documentation as the party receiving possession may
reasonably request, (it) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (W) shall be transferred by any other method mutually acceptable to Seller and
Buyer.
September.1996' Master Repurchase Agreement 5
8. Segregation of Purchased Securities
To the extent required by applicable law,all Purchased Securities in the possession of Seller
shall be segregated from other securities in its possession and shall be identified as subject to
this Agreement.Segregation may be accomplished by appropriate identification on the books
and records of the holder,including a financial or securities intermediary or a clearing corpo-
ration.All of Seller's interest in the Purchased Securities shall pass to Buyer on the Purchase
Date and,unless otherwise agreed by Buyer and Seller,nothing in this Agreement shall pre-
clude Buyer from engaging in repurchase transactions with the Purchased Securities or other-
wise selling,transferring,pledging or hypothecating the Purchased Securities,but no such
transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pur-
suant to Paragraph 3,4 or 11 hereof,or of Buyer's obligation to credit or pay Income to,or
apply Income to the obligations of,Seller pursuant to Paragraph 5 hereof.
Required Disclosure for Transactions in Which the Seller
Retains Custody of the Purchased Securities
Seller is not permitted to substitute other securities for those subject to this
Agreement and therefore must keep Buyer's securities segregated at all times,unless
in this Agreement Buyer grants Seller the right to substitute other securities.If
Buyer grants the right to substitute,this means that Buyers securities will likely be
commingled with Seller's own securities during the trading day.Buyer is advised
that,during any trading day that Buyer's securities are commingled with Seller's
securities,they[will]* [may]**be subject to liens granted by Seller to [its clearing
bank]* [third parties]**and may be used by Seller for deliveries on other securities
transactions.Whenever the securities are commingled,Seller's ability to resegregate
substitute securities for Buyer will be subject to Seller's ability to satisfy[the clear-
ing]* [arty]**lien or to obtain substitute securities.
*Language to be used under 17 C.F.R.6403.4(e)if Seller is a government securities broker
or dealer other than a financial Institution.
**Language to be used under 17 C.F.R.8403.5(d) if Seller is a financial institution.
9. Substitution
(a) Seller may,subject to agreement with and acceptance by Buyer,substitute other Securities -
for any Purchased Securities.Such substitution shall be made by transfer to Buyer of such
other Securities and transfer to Seller of such Purchased Securities.After substitution,the
substituted Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which Seller retains custody of Purchased Securities,the parties
expressly agree that Buyer shall be deemed,for purposes of subparagraph (a) of this
Paragraph,to have agreed to and accepted in this Agreement substitution by Seller of
other Securities for Purchased Securities;provided,however,that such other Securities
shall have a Market Value at least equal to the Market Value of the Purchased Securities
for which they are substituted.
6• September 1996' Master Repurchase Agreement
10.Representations
Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to
execute and deliver this Agreement,to enter into Transactions contemplated hereunder and
to perform its obligations hereunder and has taken all necessary action to authorize such exe-
cution,delivery and performance, (it) it will engage in such Transactions as principal (or,if
agreed in writing,in the form of an annex hereto or otherwise,in advance of any Transaction
by the other party hereto,as agent for a disclosed principal), (!it) the person signing this
Agreement on its behalf is duly authorized to do so on its behalf(or on behalf of any such
disclosed principal), (iv) it has obtained all authorizations of any governmental body
required in connection with this Agreement and the Transactions hereunder and such autho-
rizations are in full force and effect and (v) the execution,delivery and performance of this
Agreement and the Transactions hereunder will not violate any law, ordinance,charter,by-
law or rule applicable to it or any agreement by which it is bound or by which any of its
assets are affected.On the Purchase Date for any Transaction Buyer and Seller shall each be
deemed to repeat all the foregoing representations made by it.
11.Events of Default
In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities
upon the applicable Purchase Date, (h)Seller fails to repurchase or Buyer fails to transfer
Purchased Securities upon the applicable Repurchase Date, (III)Seller or Buyer fails to com-
ply with Paragraph 4 hereof, (iv) Buyer fails,after one business day's notice,to comply with
Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any
representation made by Seller or Buyer shall have been incorrect or untrue in any material
respect when made or repeated or deemed to have been made or repeated,or (vii) Seller or
Buyer shall admit to the other its inability to,or its intention not to,perform any of its oblig-
ations hereunder (each an"Event of Default"):
(a) The nondefaulting party may,at its option (which option shall be deemed to have been
exercised immediately upon the occurrence of an Act of Insolvency),declare an Event of
Default to have occurred hereunder and,upon the exercise or deemed exercise of such
option,the Repurchase Date for each Transaction hereunder shall,if it has not already
occurred,be deemed immediately to occur (except that,in the event that the Purchase
Date for any Transaction has not yet occurred as of the date of such exercise or deemed
exercise,such Transaction shall be deemed immediately canceled).The nondefaulting
party shall (except upon the occurrence of an Act of Insolvency) give notice to the
defaulting party of the exercise of such option as promptly as practicable.
(b) In all Transactions in which the defaulting party is acting as Seller,if the nondefaulting
party exercises or is deemed to have exercised the option referred to in subparagraph (a)
of this Paragraph, (i) the defaulting party's obligations in such Transactions to repurchase
all Purchased Securities,at Repurchase Price therefor on the Repurchase Date deter-
mined in accordance with subparagraph (a) of this Paragraph,shall thereupon become
immediately due and payable, (it) all Income paid after such exercise or deemed exercise
shall be retained by the nondefaulting party and applied to the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party hereunder,and
(III) the defaulting party shall immediately deliver to the nondefaulting party any
Purchased Securities subject to such Transactions then in the defaulting party's posses-
sion or control.
September 1996. Master Repurchase Agreement• 7
(c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the
nondefaulting party of payment of the aggregate Repurchase Prices for all such
Transactions,all right,title and interest in and entitlement to all Purchased Securities
subject to such Transactions shall be deemed transferred to the nonciefaulting party,and
the defaulting party shall deliver all such Purchased Securities to the nondefaulting party.
(d) If the nondefaulting party exercises or is deemed to have exercised the option referred to
In subparagraph (a) of this Paragraph,the nondefaulting party,without prior notice to
the defaulting party,may:
(i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately
sell,in a recognized market (or otherwise in a commercially reasonable manner) at
such price or prices as the nondefaulting party may reasonably deem satisfactory,any
or all Purchased Securities subject to such Transactions and apply the proceeds
thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by
the defaulting party hereunder or (B) in its sole discretion elect,in lieu of selling all
or a portion of such Purchased Securities,to give the defaulting party credit for such
Purchased Securities in an amount equal to the price therefor on such date,obtained
from a generally recognized source or the most recent closing bid quotation from
such a source,against the aggregate unpaid Repurchase Prices and any other
amounts owing by the defaulting party hereunder;and
(ii) as to Transactions in which the defaulting party is acting as Buyer, (A) immediately
purchase,in a recognized market (or otherwise in a commercially reasonable man-
ner) at such price or prices as the nondefaulting party may reasonably deem satisfac-
tory,securities ("Replacement Securities") of the same class and amount as any
Purchased Securities that are not delivered by the defaulting party to the nondefault-
ing party as required hereunder or (B) in its sole discretion elect,in lieu of purchas-
ing Replacement Securities,to be deemed to have purchased Replacement Securities
at the price therefor on such date,obtained from a generally recognized source or the
most recent closing offer quotation from such a source.
Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the
Securities subject to any Transaction hereunder are instruments traded in a recognized
market, (2) in the absence of a generally recognized source for prices or bid or offer quo-
tations for any Security,the nondefaulting party may establish the source therefor in its
sole discretion and (3) all prices,bids and offers shall be determined together with
accrued Income (except to the extent contrary to market practice with respect to the rel-
evant Securities).
(e) As to Transactions in which the defaulting party is acting as Buyer,the defaulting party
shall be liable to the nondefaulting party for any excess of the price paid (or deemed
paid) by the nondefaulting party for Replacement Securities over the Repurchase Price
for the Purchased Securities replaced thereby and for any amounts payable by the
defaulting party under Paragraph 5 hereof or otherwise hereunder.
(f) For purposes of this Paragraph 11,the Repurchase Price for each Transaction hereunder
in respect of which the defaulting party is acting as Buyer shall not increase above the
8 September 1996° Master Repurchase Agreement
amount of such Repurchase Price for such Transaction determined as of the date of the
exercise or deemed exercise by the nondefaulting party of the option referred to in sub-
paragraph (a) of this Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all
reasonable legal or other expenses incurred by the nondefaulting party in connection
with or as a result of an Event of Default, (ii) damages in an amount equal to the cost
(including all fees,expenses and commissions) of entering into replacement transactions
and entering into or terminating hedge transactions in connection with or as a result of
an Event of Default,and (III) any other loss,damage,cost or expense directly arising or
resulting from the occurrence of an Event of Default in respect of a Transaction.
(h) To the extent permitted by applicable law,the defaulting party shall be liable to the non-
defaulting party for interest on any amounts owing by the defaulting party hereunder,
from the date the defaulting party becomes liable for such amounts hereunder until such
amounts are (i) paid In full by the defaulting party or (H) satisfied in full by the exercise
of the nondefatddng party's rights hereunder.Interest on any sum payable by the default-
ing party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to
the greater of the Pricing Rate for the relevant Transaction or the Prime Rate.
(i) The nondefaulting party shall have,in addition to its rights hereunder,any rights other-
wise available to it under any other agreement or applicable law.
12.Single Agreement
Buyer and Seller acknowledge that,and have entered hereinto and will enter into each
Transaction hereunder in consideration of and in reliance upon the fact that,all Transactions
hereunder constitute a single business and contractual relationship and have been made in
consideration of each other.Accordingly,each of Buyer and Seller agrees (i) to perform all of
its obligations in respect of each Transaction hereunder,and that a default in the perfor-
mance of any such obligations shall constitute a default by it in respect of all Transactions
hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by
them in respect of any Transaction against obligations owing to them in respect of any other
Transactions hereunder and (III) that payments,deliveries and other transfers made by either
of them in respect of any Transaction shall be deemed to have been made in consideration of
payments,deliveries and other transfers in respect of any other Transactions hereunder,and
the obligations to make any such payments,deliveries and other transfers may be applied
against each other and netted.
13.Notices and Other Communications
Any and all notices,statements,demands or other communications hereunder may be given
by a party to the other by mail,facsimile,telegraph,messenger or otherwise to the address
specified in Annex II hereto,or so sent to such party at any other place specified in a notice of
change of address hereafter received by the other.All notices,demands and requests hereun-
der may be made orally,to be confirmed promptly in writing,or by other communication as
specified in the preceding sentence.
September 1996' Master Repurchase Agreement• 9
14.Entire Agreement; Severability
This Agreement shall supersede any existing agreements between the parties containing gen-
eral terms and conditions for repurchase transactions.Each provision and agreement herein
shall be treated as separate and independent from any other provision or agreement herein
and shall be enforceable notwithstanding the unenforceability of any such other provision or
agreement.
15.Non-assignability; Termination
(a) The rights and obligations of the parties under this Agreement and under any
Transaction shall not be assigned by either party without the prior written consent of the
other party, and any such assignment without the prior written consent of the other
party shall be null and void.Subject to the foregoing,this Agreement and any
Transactions shall be binding upon and shall inure to the benefit of the parties and their
respective successor;and assigns.This Agreement may be terminated by either party
upon giving written notice to the other,except that this Agreement shall,notwithstanding
such notice,remain applicable to any Transactions then outstanding.
(b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning,charg-
ing or otherwise dealing with all or any part of its interest in any sum payable to it under
Paragraph 11 hereof.
16.Governing Law
This Agreement shall be governed by the laws of the State of New York without giving effect
to the conflict of law principles thereof
17.No Waivers,Etc.
No express or implied waiver of any Event of Default by either party shall constitute a waiver
of any other Event of Default and no exercise of any remedy hereunder by any party shall
constitute a waiver of its right to exercise any other remedy hereunder.No modification or
waiver of any provision of this Agreement and no consent by arty party to a departure here-
from shall be effective unless and until such shall be in writing and duly executed by both of
the parties hereto.Without limitation on any of the foregoing,the failure to give a notice pur-
suant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a
later date.
18.Use of Employee Plan Assets
(a) If assets of an employee benefit plan subject to any provision of the Employee Retirement
Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto
(the"Plan Party") in a Transaction,the Plan Party shall so notify the other party prior to
the Transaction.The Plan Party shall represent in writing to the other party that the
Transaction does not constitute a prohibited transaction under ERISA or is otherwise
exempt therefrom,and the other party may proceed in reliance thereon but shall not be
required so to proceed.
10, September 1996' Master Repurchase Agreement
r'
(b) Subject to the last sentence of subparagraph (a) of this Paragraph;any such Transaction
shall proceed only if Seller furnishes or has furnished to Buyer its most recent available.
audited statement of its financial condition and its most recent subsequent unaudited
statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph,Seller shall be deemed (i) to
represent to Buyer that since the date of Seller's latest such financial statements,there has
been no material adverse change in Seller's financial condition which Seller has not dis-
closed to Buyer,and (if) to agree to provide Buyer with future audited and unaudited
statements of its financial condition as they are issued,so long as it is a Seller in any out-
standing Transaction involving a Plan Party.
19.Intent
(a) The parties recognize that each Transaction is a"repurchase agreement"as that term is
defined in Section 101 of Title 11 of the United States Code,as amended (except insofar
as the type of Securities subject to such Transaction or the term of such Transaction
would render such definition inapplicable),and a"securities contract"as that term is -
defined in Section 741 of Title 11 of the United States Code,as amended (except insofar
as the type of assets subject to such Transaction would render such definition inapplica-
ble).
(b) It is understood that either party's right to liquidate Securities delivered to it in connec-
tion with Transactions hereunder or to exercise any other remedies pursuant to
Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in
Sections 555 and 559 of Title 11 of the United States Code,as amended.
(c) The parties agree and acknowledge that if a party hereto is an"insured depository insti-
tution,"as such term is defined in the Federal Deposit Insurance Act,as amended
("MIX),then each Transaction hereunder is a"qualified financial contract,",as that term
is defined in FDIA and any rules,orders or policy statements thereunder (except insofar
as the type of assets subject to such Transaction would render such definition Inapplica-
ble).
(d) It is understood that this Agreement constitutes a"netting contract"as defined in and
subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") and each payment entitlement and payment obligation under any
Transaction hereunder shall constitute a"covered contractual payment entitlement"or
"covered contractual payment obligation",respectively,as defined in and subject to FDI-
CIA (except insofar as one or both of the parties is not a"financial institution"as that
term is defined in FDICIA).
20.Disclosure Relating to Certain Federal Protections
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a broker or dealer registered
with the Securities and Exchange Commission ("SEC') under Section 15 of the Securities
Exchange Act of 1934 ("1934 Act"),the Securities Investor Protection Corporation has
September 1996• Master Repurchase Agreement- I I
taken the position that the provisions of the Securities Investor Protection Act of 1970
("SIPA) do not protect the other party with respect to any Transaction hereunder;
(b) in the case of Tiansactions in which one of the parties is a government securities broker
or a government securities dealer registered with the SEC under Section 15C of the 1934
Act,SIPA will not provide protection to the other party with respect to any Transaction
hereunder,and
(c) in the case of Transactions in which one of the parties is a financial institution,funds
held by the financial institution pursuant to a Transaction hereunder are not a deposit
and therefore are not insured by the Federal Deposit Insurance Corporation or the
National Credit Union Share Insurance Fund,as applicable.
Banc of America Securities LLC
[Name of Party] [Name of Party]
By: By:
Demetria Bell
Title: Aarai ctant Vi Prezid 'nt Title:
Date: Date:
12■Septenber 1996 w Master Repurchase Agreement
ANNEXI
Supplemental Terms and Conditions
This Annex I forms a part of the Master Repurchase Agreement dated as of .(the
"Agreement')between
and Banc of America Securities LLC
Capitalized terns used but not defined in this Annex I shall have the meanings ascribed to them in the Agreement.
1. Other Applicable Annexes. In addition to this Annex I and Annex II,the following Annexes and say Schedules thereto shall
fora a part of the Agreement and shall be applicable thereunder.
!��eomats,rn�r�/
(_Annex III (International Transactions)
[_ ]Annex IV (Party Acting as Agent(agent,manager,investment adviser or trustee)) -
[_]Annex V (Margin for Forward Transactions)
(_Annex VI (Buy/Sell Back Transactions)
]Annex VII (Transactions Involving Registered Investment Companies)
L^j INITIAL HERE IF NONE OF THE ABOVE
2. Amendment to PamPranh 9 (.Substitudonl The parties hereto hereby agree to amend Section 9 of the Master Repurchase
Agreement by adding at the end thereto the following paragraphs (c)and(d):
(c) In the case of any Transaction for which the Repurchase Date is other than the business day immediately following the
Purchase Day and with respect to which seller does not have an existing right to substitute substantially the some Securities
for the Purchased Securities,Seller shall have the right,subject to the proviso to this sentence,upon notice to Buyer,which
notice shall be given at or prior to 10:00 am (New York time) on such business day,to substitute substantially the same
Securities for any Purchased Securities;pniti&d boaasr,that Buyer may elect,by the close of business on the business day
notice is received,or by the dose of the next business day if notice is given after 10:00 am. (New York time)on such day,
not to accept such substitution. In the event such substitution is accepted by Buyey such substitution shall be made by
Seller's transfer to. Buyer of such other Securities and Buyers transfer to Seller of such Purchased Securities, and after
substitution,the substituted Securities shall be deemed to be Purchased Securities. In the event Buyer elects not to accept
such substitution,Buyer shall offer Seller the right to terminate the Transaction.
(d) In the event Seller exercises its right to substitute or terminate under sub-paragraph (c), Seller shall be obligated to pay to
Buyer,by the dose of the business day of such substitution or termination, as the case may be, an amount equal to,(A)
Buyer's actual cost(including all fees,expenses and commissions) of n enuring into replacement transactions;(n)entering
into or terminating hedge transactions; and/or(W)terminating transaction or substituting securities in like transactions with
third parties in connection with or as a result of such substitution or termination, and(B) to the extent Buyer determines
not to enter into replacement transactions,the loss incurred by Buyer directly arising or resulting from such substitution or
termination. The foregoing amounts shall be solely determined and calculated by Buyer in good faith."
This Amendment shall not be effective prior to January 1,1998.
.Banc of America Securities LLC aam..rr.,yt
By. Demetria Bell By
Assistant Vice President
3. Other Terms and Conditions. ( PLEASE INITIAL IF NONE.
(earerrmempnge s(-eeded)
ANNEX 11
Names and Addresses for Communications Between Parties
Corporate Headquarters:
Banc of America Securities LLC
Bank of America Corporate Center
100 North Tryon Street
NCI-007-06-06
Charlotte, North Carolina 28255
Documentation Issues:
Banc of America Securities LLC
200 North College Street, 3rd Floor
NCI-004-03-45
Charlotte, North Carolina 28255
Attn: Rachel L. Scott
Phone: (704) 388-4976
Fax (704) 388-5723
Operational Issues:
Banc of America Securities LLC
200 North College Street, 3rd Floor
NCI-004-03-44
Charlotte, North Carolina 28255
Attn: Stuart Baugh,Vice President
Phone: (704) 388-4970
Fax (704) 388-5719/5720
CITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
INTEROFFICE MEMORANDUM
To: Investment and Finance Committee
From: Thomas Jeffrey, Investment Manager�J
Date: 15 January 2001
Subject: Proposed Changes to Statement of Investment Policy 2002
Enclosed please find the proposed Palm Desert Statement of Investment Policy 2002.
This was not included in the Treasury Policies and Procedures Manual that the Finance
Committee reviewed and recommended for approval last November.
New language relating to bank notes, asset-backed commercial paper, and repurchase
agreements is being proposed. The staff reports on these topics should be reviewed
prior to examining this policy draft.
Deletions to existing policy text are represented by stfike ; additions by redlining`.
Per existing law, the City must forward an approved investment policy to the State
Treasurer's Office by no later than 28 February 2002.
Significant proposed policy changes are highlighted below.
1. Page 1, paragraph 3: Unnecessary language eliminated by combining two
paragraphs.
2. Page 1, paragraph 5: Duplicate language eliminated. .
3. Page 4, paragraph 6: References to specific internal controls eliminated since
separate policies have been approved to implement these internal controls.
4. Page 4, paragraph 7: Triennial investment audit review policy implemented
(approved by Finance Committee in November 2001).
5. Page 5, paragraph 6: "Broker-dealers" replaced by "brokers" since latter term is
more inclusive. Requirement of providing authorized broker list to City Council
eliminated since each City Council member automatically receives this list when
he or she receives a copy of the City's annual investment policy (Appendix "A" of
the policy).
Interoffice Memorandum
Proposed Changes to Statement of Investment Policy 2002
15 January 2002
Page 2 of 3
6. Page 6, paragraph 4: Maximum number of authorized brokers reduced from six
to five (current number).
7. Page 7, paragraph 5: Requirement that City Treasurer annually review financial
condition of brokers narrowed to submission of annual reports and certification
forms by brokers. Internal financial review of brokers's financial condition
unnecessary since Federal Reserved Bank of New York does this annually in
order to recertify primary dealers.
8. Page 10, No. 2: Listing of specific federal agency names eliminated to conform
to Government Code changes (AB 609). Concentration limits on callables
eliminated since only one callable security has been purchased in last three
years.
9. Page 11, No. 4: Maximum, overall commercial paper concentration limit
increased from 15% to 25% (AB 609). S&P credit rating increased to "A-1+" per
Code.
10. Page 11, No. 5: Long-term debt rating commercial banks that issue negotiable
certificates of deposit dropped from "AA" to "AA-" in order to expand potential list
of issuer banks.
11. Page 12, No. 7: Repurchase agreements added as an authorized investment.
12. Page 13, No. 8: Existing dual concentration limits (5% or 15%) on medium-term
notes issued by a single company replaced by flat 10% limit (same as
commercial paper limit). Overall concentration limit on medium-term notes
decoupled from commercial paper holdings. Maximum maturity on medium-term
notes shortened from five to three years.
13. Page 15, No. 11: Zero coupon bonds, STRIPS, and callable agencies (all
currently authorized investments under City policy) reorganized under new
.'structured notes" heading.
14. Page 15, No. 12: Detailed criteria for asset-backed commercial paper added.
15. Pages 10-15: Long paragraphs on authorized investments replaced by table.
Easier to read and follows drafting trend for local agency investment policies.
16. Page 18, paragraph 3: Prohibited investments language updated.
Interoffice Memorandum
Proposed Changes to Statement of Investment Policy 2002
15 January 2002
Page 3 of 3
17. Page 18, paragraph 6: Local government investment pools eliminated.
18. Page 20, paragraph 1: Internal credit review of corporate securities issuers
changed from semiannual to annual basis.
19. Page 21, paragraph 4: Specific deadline for annual review of investment policy
replaced by general annual review language.
TWJ:tj
Enclosure: Statement of Investment Policy 2002
i
CITY OF PALM DESERT
'STATMEN,T OF'
I�NVESTMEN;T POLICY
200.2
r
Certified by the Municipal Treasurers's Association of the United States
and Canada on 4 June 1996
PREPARED BY THE CITY TREASURER'S OFFICE
Thomas W. Jeffrey, J.D., M.B.A.
Investment Manager
REVIEWED AND APPROVED BY
Paul S. Gibson, C.C.M.T.
City Treasurer
Adopted by the City Council on
City of Palm Desert Revision No.
Statement of Investment Policy
TABLE OF CONTENTS
OVERVIEW
1.0 Scope ............................................................................
1.1 Standard of Care .............................................................
1.2 Investment Objectives ......................................................
INVESTMENT AUTHORITY
1.3 Delegation of Authority ....................................................
1.4 Internal Controls ..............................................................
1.5 Conflicts of Interest .........................................................
FINANCIAL INSTITUTIONS
1.6 Authorized Brokers ..........................................................
1 .7 Authorized Public Depositories ..........................................
1.8 Safekeeping and Custody .................................................
1.9 Collateralization ...............................................................
INVESTMENTS
2.0 Authorized Investments .:..................................................
2.1 Prohibited Investments ......................................................
PORTFOLIO MANAGEMENT
2.2 Diversification .................................................................
2.3 Maximum Maturity ..........................................................
2.4 Portfolio Rebalancing .......................................................
2.5 Credit Downgrading .........................................................
2.6 Bond Proceeds ................................................................
PERFORMANCE MEASUREMENT
2.7 Portfolio Benchmark .........................................................
2.8 Investment Reporting .......................................................
LEGAL REQUIREMENTS
2.9 Annual Policy Review .......................................................
3.0 Regulatory Submission .....................................................
APPENDICES
A: List of Authorized Financial Institutions .............................
B: Glossary ........................................................................
City of Palm Desert Revision No.
Statement of Investment Policy
POLICY
It is the policy of the:
➢ City of Palm Desert;
➢ Palm Desert Redevelopment Agency;
� Palm Desert Housing Authority;
➢ Palm Desert Financing Authority; and the Palm ^^^eh Reereati, nal Fae'lities
➢ City-of Palm Desert Golf Course Facilities-Corporation
(hereafter referred to collectively as the "City") to pred'eate that their investment
policies, procedures, and practicesth
Iegislativ"edles. shall be incompliance with. federal,,state, and locallaws governing
the investment of public monies under the City"s Treasurer?s control. 'Further, that_all
related'investment activities:shall be-undertaken to maximize-profit, witIhin.the
parameters of prudent risk management r
neiples! (1) cernplienee with federal, state, and leeal laws goveming the
pefametefs of pfudent risk fnanagernent, as defined On this Statement of investrn
Pelmey u "
For the purposes of this policy, "Investment Officers" shall be defined as the City
Treasurer and the City Investment Manager.
1.0 Scope
This SOIP 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 SOIP if the following three conditions exist:
1.0.1 A third-party administrator manages the Plan.
1
i
City of Palm Desert Revision No.
Statement of Investment Policy
1 .0.2 Individual plan participants have control over the selection of
investments.
1.0.3 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 SOIP.
Under all circumstances, the City Treasurer shall provide the Finance
Committee and the City Council with a quarterly report on the investment of
Plan assets.
1.1 Standard of Care
Pursuant to'Galrfornia'Govemment Code Section 536003 ; 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 SOIP 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 City Finance Committee
("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.
1.2 Investment Objectives
The City's investment objectives, in order of priority, shall be:
2
City of Palm Desert Revision No.
Statement of Investment Policy
1 .2.1 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 broker-
dealers 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.
1.2.2 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 securities with active secondary markets. These securities
should have a relatively low sensitivity to market risk. Maximum
overall portfolio maturities are referenced on page _, paragraphs
and of this SLIP.
1 .2.3 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.
1.3 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.
3
City of Palm Desert Revision No.
Statement of Investment Policy
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 Investment Manager shall have exclusive
authority to buy and sell securities on behalf of the City. They she" engage
The Investment Manager 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 Finance Operations Manager
must authorize the investment transactions prior to execution.
1.4 Internal Controls
The City Treasurer shall ensure that all investment transactions comply with
the City's SOIP, and shall establish internal controls that are designed to
prevent losses due to fraud, negligence, and third-party misrepresentation.
Accordingly, the City Treasurer shall establish written procedures for the
operation of the City's investment program that are consistent with the
provisions of this SOIP.
internal eentrols deemed mest important she" avoidance of
eellusion; separation of duties and administrative eontrels: separating
of investment transae'e-s'- Specific limitations- regaFding seeWities losses
deetimentat'an of investment transeetions and strategies; and monitoring of
results.
The City Treasurer shall establish an annual a process of independent review
by an external audit firm of the City'`s1nvestment program_ every three years.
The external auditor shall review the program's management e' 'Z s
investment in terms of compliance with the internal controls previously
4
City of Palm Desert Revision No.
Statement of Investment Policy
established 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 Redevelopment Agency Executive Director; the City Treasurer;
the Investment Manager; and various citizens who are appointed by the Palm
Desert City Council ("City Council") pursuant to City ordinance, shall sit on
this committee.
1.5 Conflicts of Interest
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.
1.6 Authorized Broker Dealers Brokers
The City Treasurer shall maintain an ?kpproved authorized list (see page _)
of all securities broker dealers brokers that the Finance Committee and the
City Council have authorized to toes trading transact
securities business with the City. This list she" be
Any broker-dealer that has made a political contribution within any
consecutive four-year period following 1 January 1996 in an amount that
exceeds the limits in Municipal Securities Rulemaking Board ("MSRB") Rule
5
City of Palm Desert Revision No.
Statement of Investment Policy
G-37, to any member of or candidate for the City Council, the
Redevelopment Agency Board, the Housing Authority Commission, or the
Finance Committee shall not be eligible to transact business with the City.
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 applications 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 13Fel(er dealers brokers by the State of
California; and (4) are headquartered or have a branch office in California.
The number of primary dealers and secondary brokers on the Appreved
authorized. list shall not exceed a combined total of five six at any single
time. The City shall accept and review new broker dealer applications only
when there is an immediate need to fill a vacancy on the Appreved
authorized list. In all cases, the City shall only accept applications from and
transact business with the institutional securities sales departments of
primary dealers and secondary brokers.
All breker dealers brokers that wish to apply for inclusion on the fkppreved
authorized, list must, at a minimum, provide the City Treasurer with a copy of
the following documents, unless otherwise noted:
1 .6.1 Completed Broker-Beater Questionnaire and Certification (signed
original only).
1.6.2 Most recent Annual Report and most recent Securities and Exchange
Commission ("SEC") Form 10-K.
1.6.3 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.
1 .6.4 Current NASD Form BD Status Report.
1 .6.5 NASD Form U-4 -- Uniform Application for Securities Industry
Registration or Transfer for each employee with whom the City would
be trading.
1.6.6 Current NASD Form U-4 Status Report on each employee with whom
the City would be trading.
1 .6.7 A resume from each employee with whom the City would be trading.
6
City of Palm Desert Revision No.
Statement of Investment Policy
1.6.8 Delivery instructions.
1 .6.9 A resolution that identifies employees who are authorized to trade.
In addition to the above documents, secondary brokers must also submit:
1.6.10 Most recent SEC Form X-17 A-5 or, in the case of an investment
department within a commercial bank, most recent SEC
Consolidated Reports of Condition and Income for A Bank With
Domestic and Foreign Offices — FFIEC 031.
Investment Officers shall investigate all broker dealer 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-dealer by
the State of California Department of Corporations; and (5) are a member of
the NASD. Broker dealer applicants may be requested to provide local
government or other client references from within California.
The Finance Committee and the City Council shall review the submitted
documents, along with the Investment Officers's recommendations, and shall
decide if any broker-deafer applicants should be added to the droved
authorized list. If a broker dealer applicant fails to complete and submit the
required documents on time, then its application shall be deemed to have
been automatically rejected.
The Gity Treasurer she" conduct an annual feview, in , of the financial
condition and the registrations ei ail approved broltef dealers in erder Wo
determine vvhetlger they should remain an the Approved Lost. In addition te
other
submission of the eert*fieation form by an approved bF0keF deelef she"
eenstitute pfeef that it has reeeived the Gity's SGIP, read it, and intends to
eemply with it. The Gity Tfeaftffef she" keep cuffent audited annual
finane6al statements on file faf each approved brakef dealeF With which the
Gity does business.
The City Treasurer shall.-provide all,.authorized brol(ers annually, in -March,
With a copy of the City's •current, SOIP,and a certification form..':Each broker,
shall be required_to-complete and submit the certification .form as proof that
it has received the City's 'SOIP, read, it, and intends to comply with it. Each
broker shall also submit its annual financial statements to the City Treasurer.
7
City of Palm Desert Revision No.
Statement of Investment Policy
for review and filing.
1.7 Authorized Public Depositories
The City Treasurer shall maintain an Approved authorized list (see page _)
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. This List shall be provided to all members of the
The City shall only deposit public monies in financial institutions that have:
1.7.1 At least $5 billion in total assets.
1.7.2 A core capital-to-total assets ratio of at least five percent.
1.7.3 Favorable statistical ratings from a nationally recognized rating service,
as determined by the City Treasurer.
1.7.4 A federal or a state charter.
1 .7.5 A branch office within Riverside County.
1.7.6 reeeived 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's equity of that institution.
1.8 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 City's Custodian shall be represented on the
approved list (see page _).
The only exception to the foregoing shall be securities purchases made with:
1.8.1 Local government investment pools.
1 .8.2 Money market mutual funds.
1.8.3 Federal Reserve Banks ("Treasury Direct Program") since the
8
City of Palm Desert Revision No.
Statement of Investment Policy
purchased securities are not deliverable.
No securities broker dealer or investment advisor shall have access to City
monies, accounts, or investments. Any transfer of monies to or through a
securities broker dealer must have the City Treasurer's prior written
approval. If the City Treasurer is unavailable, then the Finance Operations
Manager 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.
1.9 Collateralization
Investment Officers shall ensure that all demand deposits and all non-
negotiable certificates of deposit that exceed $100,000 shall be fully
collateralized with securities authorized under state law and under this SOIP.
Collateral may be waived for the first $100,000 since this will be insured by
the Federal Deposit Insurance Corporation. Any amount on deposit over
$100,000 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
security.
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.
2.0 Authorized Investments
The City Treasurer is 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.
9
City of Palm Desert Revision No.
Statement of Investment Policy
Summary of Authorized Investments
% of Portfolio
No. Type of Investment Authorized Other Restrictions
1 . United States Treasury bills, notes, bonds, 100% Maximu m.maturity; Syears
or certificates of indebtedness, or those for (unl'ess-the City.Council
Which the full faith and credit of the_United approVes_a.longer period)..
States are pledged for:the payment
of_principal and°interest;
2. Federal Agency or United -States 100% Maximum maturity: 5 years.
government-sponsored enterprise
obligatlons _participations,,or other, No more than 30% of the
instruments;;including those'issued by or portfolio may be invested in any
fully guaranteed as.to-principal-and, one issuer.
interest by FederalAgencies_o_rby
GSE4' 209 on Iffifnit on
callable
1096 eeneentratmen 'knot an
year:
3. Banker's Acceptances ("BA") issued by 40% Rated "A-1 " or higher by S&P or
commercial banks. "P-1 " by Moody's.
Maximum maturity: 180 days.
No more than 30% of the
portfolio may be invested in any
one BA issuer.
10
City of Palm Desert Revision No.
Statement of Investment Policy
Summary of Authorized Investments
4. Commercial Paper ("CP") issued by 25% Rated "A-1 " "A71.+;" by S&P or
corporations organized and operating in 4§% "P-1 " by Moody's.
the United States with assets exceeding
$500 million. Maximum maturity: 270 days.
No more than 10% of the
outstanding CP of any one
issuer may be purchased.
5. Negotiable Certificates of Deposit ("NCD") 30% Long-term debt rated or
issued by a nationally- or state-chartered "AA-=" higher by S&P or by
bank, a savings association, a federal Moody's.
association, or by a state-licensed branch
of a foreign bank. Maximum maturity: 5 years.
6. Time Certificates of Deposit ("TCD") 15% TCDs exceeding $100,000 must
issued by qualified public depositories. be collateralized.
TCDs must be centralized at one
location for each bank or S&L.
Maximum maturity: 1 year.
If TCD is uncollateralized, then
no more than $90,000 may be
invested.
Issuing public depository must
meet qualifying criteria on page
paragraph _ of this SOIP.
11
City of Palm Desert Revision No.
Statement of Investment Policy
Summary of Authorized Investments
7. Repurchase Agreements ("RP") sold b 20% Maximum maturity:
P 9 y y: 30 days..
authorized brokers.
Collateral must be..,United States
Treasury,; Federal Agency,, or;
GSE obligations.
Zero coupon and stripped
coupon :instrumen=ts are,not
acceptab1e._as collateral..
Collateral-must be;valued, at
102% ofcost and_adiusted.
weekly_+
City must:`have first1,lien and ji
security- interest in;'all`collateral:
City's custodian must hold
collaterafi
%an_adthorized,broker mustfile a
Public SecuritiesAssoc'iation`�
(PSA) Master RepurchaseT
Agreemenv'vvith the CrtyT
Treasurer''in orderto be=abl to o
sell:RPs_to_the.Gity?
12
City of Palm Desert Revision No.
Statement of Investment Policy
Summary of Authorized Investments
8. Medium-Term Notes, Deposit Notes, or 30% Rated "A" or higher by S&P of
Bank Notes issued by corporations by Moody's.
organized and operating in the United
States, or by depository institutions Maximum maturity: .53, years
operating in the United States and licensed
by the United States or by any state. INo'more than 1006
f the `LL
,portfolio,may be invested in,any.,
!one issuer.
"AAA"
AAA" fated
notes
Gernmercial paper Fnust be
for any on.
13
City of Palm Desert Revision No.
Statement of Investment Policy
Summary of Authorized Investments
9. Money Market Mutual Funds ("MMF'') that 20% Rated "AAA" by S&P, "Aaa" by
are registered with the SEC under the (excluding Moody's, or "AAA-V-1 + " by
Investment Act of 1940. bond Fitch (must be 2 of 3)
proceeds)
MMF must have $500 million or
more in total assets or an
investment advisor with 5
years' experience investing for 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 Agency See note $40,million limit per account
Investment Fund ("LAIF") that is managed with LAIF, except for bond
by the State Treasurer's Office. trustee accounts (no limit).
City Council and Redevelopment
Agency approved participation
in LAIF on 12/12/81 in
Resolution No. 81-161 .
14
City of Palm Desert Revision No.
Statement of Investment Policy
Summary of Authorized Investments
11 . Structured'Notes in the form of callable 20% Maximum-maturity: .5 years.
securities, iero,coupon securities, or,
"STRIPS" issued by the United States'
Treasury or by Federal Agencies or
government-sponsored enterprises
(,„GSE")
12. Asset-Backed Commercial Paper ("ABCP") 25% Rated "AT+ by S&P_or
issued,by special purpose, corporations (must:include "P1 by_:Moody_'s:
("SPC11organized and operating,in the unsecured
UniiedStates.`with assets exceeding-$500 CP) Restricted;.to,programs
Million, that is supported by credit sponsored- by commercial banks
enhancement facilities:(e.g.,; or finance companies.
overcollateralizatlon;,:letters-of.crediv.
suretybonds ;etc,): Forelgn ,banks Ilmitedito those
of Canada; United Kingdon ;r
Australia, France,, BE
Netherlands Switzerland;_and
Germany_:
Program must have.-tired ii
facilities that provide at least,
j100%,'liquidity_±
Serialized ABCP programs are
hot eligible.
Maxlmu`mmmaturity jJr6 days._?
Unsecured'commerclal papers
holdings:must be_incldded1when
calculating the'25% maximum
concentration limit...
15
• 'r
.•
•
City of Palm Desert Revision No. 1
Statement of Investment Policy
she# be invested in NNGDs. « ,._n.... __rzeti_.. ...:e not be involved, then no
6. "
organized and operating in the YNted States; have total assets of *50G)
rninwon or n9ore, and have debt, other than commercial papef, if any, that has
been Fated "A" of higher by Standard & POOF'S Of by MOOdy'S. Pumhoses of
boolf value of the Gity�3 investment poftfo#b she# be invested in Gl� No
n9ofe then 10 pefeent of the out-stending GP of any one issuef shah' be
pumhesea
7. Negotiable Geftifleates of Deposot FWD") that are issued by
state elgarteFed bank; 8 SaViMgS 88SOCiElti0fl OF a federal association; or a
state Heensed brameh of a foreign bank, with long terrn debt that 19as been
Fated "AA or higher by Standard & Poor's and by Moody's. No fnefe than
8. Money Market Funds FMMF")
pfiee of 01 .00, the MMF she have a dollar weighted average niaturity of 90
days or less and she" purelgese seeurities with an effeetive ngaturity of 13
Frionths OF less. Gemmission (e.g., sales lead on pulachases, reinvested
dividends, redefnptions, and exelganges) shall not be ineluded in the purchase
Gity she" require audited annual fifganeial statements and a "Statement of
9. Local Ageney investment Fund ("LAIF"), a pool that is organized and
17
City of Palm Desert Revision No. t
Statement of Investment Policy
-2 Deeel=Mbff 19981 On Resolution Number 81 161 . investment shah' be
2.1 Prohibited Investments and Practice
Investment Officers shall not invest public monies in financial instruments
that are not authorized under this SOIP.
Prohibited investments shall include, but shall not be limited to, equity
securities, bond mutual funds, repUFChase agreements, reverse repurchase
agreements, and derivative contracts (forwards, futures, and options). The
purchase of derivative securities shall be prohibited, exeept fef callable an
unless_specifically authorized
in-this SOIP...
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.
INVESTMENT POOLS
meet the efateFiS specified for FrIeney FnaFket funds in his S011P.
2.2 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.
2.3 Maximum Maturity
18
City of Palm Desert Revision No. 1
Statement of Investment Policy
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.
At least 50 percent of the City portfolio shall mature in three years or less;
30 percent in two years or less; and 20 percent in one year or less. The
only exception to these maturity limits shall be the investment of the gross
proceeds of tax-exempt bonds.
2.4 Portfolio Rebalancing
In the event '`-` 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.
2.5 Credit Downgrading
This SOIP 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 SOIP, 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
19
City of Palm Desert Revision No. 1
Statement of Investment Policy
City's investment portfolio
s annually, at a°mrnlmum.
2.6 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
SOIP, 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 Appfoved authoriii d list
(see page
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.
2.7 Portfolio Benchmark
The City's investment portfolios, f0F the rnest peft-, shall be passively
managed with portfolio securities being held to maturity. On selected
occasions, however; the City's portfolios 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:
2.7.1 Exceed the return that would be realized by holding the security to
maturity; and
2.7.2 More than offset any income reduction due to reinvestment rate risk.
The City shall adopt a benchmark that approximates the composition and
20
City of Palm Desert Revision No. 1
Statement of Investment Policy
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.
2.8 Investment 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.
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.
2.9 Annual Policy Review
The City Treasurer shall submit a SOIP to the Finance Committee; the City
Council; the Redevelopment Agency Board; the Housing Authority
Commission; the Financing Authority Commission; and the Recreational
Facilities Corporation Board of Directors annually for their review and
adoption.
3.0 Regulatory Submission
The City Treasurer shall provide the California Debt and Investment Advisory
Commission ("CDIAC") with:
3.0.1 Second- and fourth-quarter fiscal year investment reports within 60
days of those quarter-ends.
3.0.2 The City's SOIP within 60 days of calendar year-end or within 60 days
of any amendment thereto.
All submissions to CDIAC shall be sent_return receipt,,certified mail
21
City of Palm Desert Revision No. 1
Statement of Investment Policy
Ill THE CITY
OF PALM.,
1'f/11 M DESERT A n ��noonvc
Appendix A: List
Giof. Authorized Financial Institutions
The Gity of Palm Desert, the Palfn Desert Redevelopment Ageney, the Pa rn De
Housing Authafity, the Palm Desert Financing Authofity, and the Palm Be
- - -_ . - _- _w y.
finaneial it
The City Treasurer's Office is authorized`to transact Investment-and depository,
business with the following financial institutions..!- Investment and- depository,
I ransactions with firms other tharn those appearing on this list are-,prohibited.
UNITED STATES GOVERNMENT
1 . Federal Reserve Bank
PRIMARY DEALERS
1 . Banc of America Securities, LLC
2. Ghas . Sectifities, 'me.
3. Merrill Lynch & Company, Inc.
Morgan_Stanley,& Company,rincv,
5. Salomon Smith Barney, Inc.
SECONDARY BROKERS
1 . Wells Fargo Bank Institutional .-ecurities LL_C
COMMERCIAL BANKS
1 . Bank of America
2. California Federal Bank
3. Downey Savings & Loan
4. Northern Trust Bank
5. Union Bank of California
6. Washington Mutual Bank
7. Wells Fargo Bank
CUSTODIAN
1 . Union Bank of California
TRUSTEE
1 . Bank of New York
22
City of Palm Desert Revision No. t
Statement of Investment Policy
IV GLOSSARY
AC INVESTMENT
TERM
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:
23
City of Palm Desert Revision No. 1
Statement of Investment Policy
(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.
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, currently up to $100,000 per deposit.
FEDERAL FUNDS RATE. The rate of interest at which Fed funds are traded. This
rate is currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS ("FHLB"). Government-sponsored wholesale banks
(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
24
City of Palm Desert Revision No. 1
Statement of Investment Policy
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
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,
25
City of Palm Desert Revision No. 1
Statement of Investment Policy
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 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
26
City of Palm Desert Revision No. 1
Statement of Investment Policy
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 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 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
27
City of Palm Desert Revision No. 1
Statement of Investment Policy
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.
28
Y ' City of Palm Desert
STAFF REPORT
Investment & Finance Committee
Meeting of January 16, 2002
TO: MEMBERS OF THE FINANCE COMMITTEE
FROM: PAUL S. GIBSON, DIRECTOR OF FINANCE/CITY TREASURER
SUBJECT: City of Palm Desert Audited Financial Reports for the Fiscal Year
Ending June 30, 2001
DATE: January 16, 2002
RECOMMENDATION:
By Minute Motion, receive and file the audited Comprehensive Annual Financial Report
(CAFR) for the City of Palm Desert for the fiscal year ending June 30, 2001.
BACKGROUND:
Diehl, Evans and Company in joint venture with a local Certified Public Accountant, Oscar
G.Armijo, CPA, performed and completed the annual independent audit for the fiscal year
ending June 30, 2001, for the City of Palm Desert in September 2001, in accordance with
generally accepted auditing standards. In the auditor's opinion, the basic financial
statements present fairly, in all material respects, the financial position of the City of Palm
Desert as of June 30, 2001, and the results of its operations and the cash flows of its
proprietary funds for the year then ended in conformitywith accounting principles generally
accepted in the United States of America.
In conducting their audit, the auditors test the City's internal controls. For the year ended
June 30, 2001, the auditors did not issue a management letter forthe City of Palm Desert,
indicating that the current City's internal controls are adequate.
The CAFR will be submitted for the Certificate ofAchievement for Excellence in Financial
Reporting from the Government Finance Officers Association, as well as the Certificate for
Outstanding Financial Reporting from the California Society of Municipal Finance Officers.
In order to be awarded a Certificate of Achievement, a government must publish an easily
readable and efficiently organized comprehensive annual financial report.This report must
satisfy both general accepted accounting principles and applicable legal requirements. We
believe that our current comprehensive annual financial report continues to meet the
Certificate of Achievement Program's requirements.
The City elected to early implement the new financial reporting model developed by the
Governmental Accounting Standards Board (GASB) Statement 34. In addition to the
customary fund statements included in the CAFR, Statement 34 requires that the City
prepare government-wide financial statements which include, a Statement of Net Assets
and a Statement of Activities. These statements are prepared using the accrual basis of
accounting, which is consistent with private business accounting, in contrast to the
modified basis of accounting that is used in accounting for fund financial statements.
GASB Statement 34 also requires that management provide a narrative introduction,
overview, and analysis to accompany the basic financial statements in the form of
Management's Discussion and Analysis (MD&A).
Staff recommends that the Investment and Finance Committee receive and file the audited
financial statements for the City of Palm Desert for the Fiscal Year Ended June 30, 2001.
Respectfully submitted,
Gj
PAUL IBS N,
DIRECTOR OF FINANCE/TREASURER
H:4esµmuaatpotwWXottslalfrepor1l001autli4meslmemmmmillee.wpJ
Palm Desert Redevelopment Agency
STAFF REPORT
Investment & Finance Committee
Meeting of January 16, 2002
TO: MEMBERS OF THE FINANCE COMMITTEE
FROM: PAUL S. GIBSON, DIRECTOR OF FINANCE/CITY TREASURER
SUBJECT: Palm Desert Redevelopment Agency Audited Financial Reports for
the Fiscal Year Ending June 30, 2001
DATE: January 16, 2002
RECOMMENDATION:
By Minute Motion, receive and file the audited Component Unit Financial Statement for
the Palm Desert Redevelopment Agency for the fiscal year ending June 30, 2001.
BACKGROUND:
Diehl, Evans and Company in joint venture with a local Certified Public Accountant, Oscar
G.Armijo, CPA, performed and completed the annual independent audit forthe fiscal year
ending June 30, 2001,for the Redevelopment Agency in September 2001, in accordance
with generally accepted auditing standards. In the auditor's opinion, the basic financial
statements present fairly, in all material respects, the financial position of the
Redevelopment Agency as of June 30, 2001, and the results of its operations for the year
then ended in conformitywith accounting principles generally accepted in the United States
of America.
In conducting their audit, the auditors test the Agency's internal controls. For the year
ended June 30, 2001, the auditors did not issue a management letter for the Agency,
indicating that the current Agency's internal controls are adequate.
The Redevelopment Agency elected to early implement the new financial reporting model
developed by the Governmental Accounting Standards Board (GASB) Statement 34. In
addition to the customary fund statements included in the CAFR, Statement 34 requires
that the Agency prepare government-wide financial statements which include,a Statement
of Net Assets and a Statement of Activities. These statements are prepared using the
accrual basis of accounting, which is consistent with private business accounting, in
contrast to the modified basis of accounting that is used in accounting for fund financial
statements.
GASB Statement 34 also requires that management provide a narrative introduction,
overview, and analysis to accompany the basic financial statements in the form of
Management's Discussion and Analysis (MD&A).
Staff recommends that the Investment and Finance Committee receive and file the audited
financial statements for the Palm Desert Redevelopment Agency for the Fiscal Year
Ended June 30, 2001.
Respec ully submitted,
PAUL S. GIBBON,
DIRECTOR OF FINANCE/TREASURER
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France's BNP Paribas Expedites Push f
Into U.S. With Deal for United California
\� �l By ROBIN SIDEL Boards of BNP Paribas and UFJ Hold- ;
Staff Reporter of THE We,.i.SinEer JOUaN ings approved the transaction over the
French bank BNP Paribas SA,moving weekend; it is expected to close by the end
to accelerate its U.S.expansion,agreed to of the first quarter. United California
buy United California Bank from Tokyo's Bank will then be merged into Bank of the
UFJ Holdings for$2.4 billion. West by the end of the third quarter.It will
The move comes as Paribas is in the operate under the Bank of the West name.
process of acquiring the 55%of Honolulu- UFJ Holdings/United California Bank
based BancWest Corp. it doesn't already was advised by Morgan Stanley and law
own.That deal is expected to be completed firm Shearman&Sterling.Lehman Broth-
later this month. ,. ers Holdings Inc. advised BNP Paribas.
The latest transaction calls foriUnited The French bank was also advised by law
California to be merged into BancWest sub- .firms Cleary, Gottlieb, Steen & Hamilton
sidiary Bank of the West, which operates and Pillsbury Winthrop.
193 branches in northern and central Cali- Although the pace of regional bank con-
fornia, Oregon, New Mexico, Nevada, solidation has slowed in recent months,
Washington and Idaho. BancWest's other European banks have been eager to grab
major subsidiary is First Hawaiian Bank. pieces of the U.S.market.In July,Citizens
The purchase of United. California, Financial Group, a unit of Royal Bank of
with$11 billion in assets and 117 branches Scotland PLC, agreed to buy the retail
in California, will more than double Bank bank operations of Mellon Financial Corp.
of the West's California presence. Upon i for about $2 billion.
completion of the deal, Bank of the West
will have$15 billion in deposits in Califor-
nia, making it the state's fourth-largest
bank based on deposits.
When it announced the BancWest pur-
chase in May, BNP Paribas, the largest
publicly traded bank in France, made it
clear it would he pursuing other acquisi-
tions. BNP Paribas has assets of$646 bil-
lion and posted net income of$3.86 billion ,
for last year.
For UFJ,which formed United Califor-
nia earlier this year from the merger of
Sanwa Bank California and.Tokai Bank of
California,the sale represents an exit at a
time of intense financial'difficulties for
Japanese banks. UFJ and other banks re-
cently have taken huge write-offs for bad ,
loans as they struggle to convince the mar-
kets that their problems are over.The bad
loans have been.blamed for part of Ja-
pan's economic problems.
With the sale of United California
Bank, UFJ will focus its operations on -
the retail and midsize corporate sectors'
in Japan.
Meanwhile,Bank of the West has been
attracted to the Southern California mar-
ket for some time. The company also is '
planning to expand in the northern and i
central regions of the state.
"We have waited patiently tp enter the
Southern California market until we could
do so with the scale to compete success-
fully. With this step, we have done that,"
said Don J."McGrath,president and chief
operating officer of BancWest. Mr.
McGrath also is president and chief execu-
tive of Bank of the West.
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