HomeMy WebLinkAboutPalm Desert Statement of Investment PolicyCITY OF PALM DESERT
OFFICE OF THE CITY TREASURER
STAFF REPORT
REQUEST: Approval of "Palm Desert Statement of Investment Policy"
DATE: 16 November 2006
CONTENTS: Palm Desert Statement of Investment Policy
Recommendation:
By minute motion: That the City Council approve the "Palm Desert Statement of
Investment Policy", as amended.
Background:
State law requires that the City review and update its investment policy annually.
Several amendments are currently being proposed. In the policy text, deletions are
highlighted with striker; additions are highlighted with redlining.
Significant policy changes are listed below:
Page 12, "No. 13":
The concentration limit for Local Government Investment
Pools ("LGIPs") would be increased from 20% to 30%. This
is more conservative than State law. Under California
Government Code Section 53601 (o), local agencies can
invest up to 100% of their portfolio in LGIPs that have been
established by Joint Powers Authorities.
This amendment would enable Staff to move large amounts
of short-term cash between LAIF and CAMP in order to
maximize profit. CAMP's yield is currently 19 basis points
(0.19%) higher than LAIF's. In a period of rising interest
rates, CAMP will have a higher yield due to its shorter
portfolio maturity. Conversely, in a period of declining
interest rates, LAIF will have a higher yield due to its longer
portfolio maturity. CAMP is a "AAA" -rated money market
fund. The City Treasurer sits on CAMP's Board of Trustees.
Staff Report
Statement of Investment Policy
16 November 2006
Page 2of2
Page 5, "Section 18.0" This unfunded State mandate is being eliminated.
Pages 20, "Appendix A": Morgan Stanley has been dismissed as a broker.
First Tennessee Bank has been approved as a broker by
the Palm Desert City Council on 12 October 2006.
California Bank & Trust ("CB&T") is recommended for
approval as a depository. CB&T is one of the largest banks
in California with $8 billion in assets, and 100 branch offices.
CB&T is owned by Zions Bank of Salt Lake City, Utah.
The Palm Desert Audit, Investment, and Finance Committee has voted unanimously to
recommend that City Council adopt all of the proposed amendments.
Submitted By:
Paul S. Gibson, C.C.M.T., City Treasurer
Approved By:
, City Manager
( (01)ei . BY RDA
ON 11 10v
;•t_.c.Oi-3YE:D BY .O .d
Original on file w t -i City Clsrk' Oti;cs.
J�. n .I.7, /ACT1.0N:
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OTHER
X�.rison}rThelij
;.:'TAINT _ ,l One.,
CITY OF PALM DESERT
STATEM ENT OF
INVESTMENT ��LICY
Certified by the Municipal Treasurers' Associafion of the United
Sfates and Canada on March 10, 2004
PREPARED BY THE CITY TREASURER'S OFFICE
Thomas W. Jeffrey, J.D., M.B.A.
Deputy City Treasurer
REVIEWED AND APPROVED BY
Paul S. Gibson, C.C.M.T.
City Treasurer
Adopted by the City Council on
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
TABLE OF CONTENTS
Revision No. 14
Adopted:
OVERVIEW PAGE
1.0 Policy ................................................................................ 1
2.0 Scope ............................................................................... 1
3.0 Prudence ........................................................................... 2
4.0 Objectives .......................................................................... 2
INVESTMENT AUTHORITY
5.0 Delegation of Authority ....................................................... 3
5.1 Investment Procedures ........................................................ 4
6.0 Ethics and Conflicts of Interest ............................................. 4
INVESTMENTS
7.0 Authorized Financial Dealers and Institutions ............................ 4
8.0 Authorized and Suitable Investments ...................................... 7
8.1 Prohibited Investments ......................................................... 13
9.0 Investment Pools/Mutual Funds ............................................. 13
PORTFOLIO MANAGEMENT
10.0 Collateralization ....................................................................
11.0 Safekeeping and Custody ......................................................
12.0 Diversification .....................................................................
13.0 Maximum Maturities ............................................................
13.1 Portfolio Rebalancing ............................................................
13.2 Credit Downgrading .............................................................
13.3 Bond Proceeds ....................................................................
14.0 Internal Controls ..................................................................
14
14
15
15
15
16
16
17
PERFORMANCE MEASUREMENT
15.0 Performance Standards ......................................................... 17
15.1 Market Yield (Benchmark) ..................................................... 18
16.0 Reporting 18
LEGAL REQUIREMENTS
17.0 Investment Policy Adoption ................................................. 18
. ........................................................ 19
APPENDICES
A: List of Authorized Financial Institutions ................................. 20
B: Glossary ........................................................................... 21
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
�.o Poi��y
Revision No. 14
Adopted:
It is the policy of the City of Palm Desert; Palm Desert Redevelopment Agency;
Palm Desert Housing Authority; Palm Desert Financing Authority; and Palm
Desert Recreational Facilities Corporation (hereafter referred to collectively as the
��Ciltj/ �� t0. , , � �1'aEilr^�6-ki�Afl-�k}6
: (1) sral, E�at , omply with
applicable law governing the investment of public monies under the City Treasurer's
control; (2) $�e�es�+e�e# protect the principal monies entrusted to the City; and (3)
���# maximize profit within the parameters of prudent risk management. as
For the purposes of this policy:
"Investment Officers" shall be defined as the City Treasurer and the Deputy City
Treasurer.
"Finance Committee" shall be defined as the Audit, Investment, and Finance
Committee.
"City Council" shatl be defined as tF�e Palm Desert City Councii.
.. _ - - �• -
2.0 Scope
This policy shall apply to all funds that are under the City Treasurer's control
including, but not limited to, the general fund; special revenue funds; debt service
funds; capital project funds; enterprise funds; and trust and agency funds. These
funds are accounted for in the City's Comprehensive Annual Financial Reqort.
The City's Deferred Compensation Plan ("Plan") shall be excluded from the
scope of this policy if the following three conditions exist: (1) a third-party
administrator manages the Plan; (2) individual plan participants have control over
the selection of investments; and (3) the City has no fiduciary responsibility to act
as a"trustee" for the Plan.
The only exception to the foregoing shall be that if the City retains the fiduciary
responsibility to act as a trustee for the Plan, then the Plan shall be deemed to be
within the scope of this policy.
The City Treasurer shall provide the Finance Committee aad the
'"' '" with a quarterly report on the
investment of Plan assets.
Page 1 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
3.0
4.0
Prudence
Revision No. 14
Adopted:
Pursuant to California Government Code Section 53600.3, Investment Officers,
as trustees of public monies, shall adhere to the "prudent investor" standard
when managing the City's investment portfolios. They shall invest "...with care,
skill, prudence, and diligence under the circumstances then prevailing, including,
but not limited to, the general economic conditions and the anticipated needs of
the agency, that a prudent person acting in a like capacity and familiarity with
those matters would use in the conduct of funds of a like character and with like
aims, to safeguard the principal and maintain the liquidity needs of the agency."
Investment Officers who follow the provisions of this policy and who exercise due
diligence shall be relieved of personal responsibility for a security's credit risk or
market price risk: provided, that they report substantial deviations from
expectations to the City Manager and to the ��es#�e�-a�►d 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.
Objectives
The City's investment objectives, in order of priority, shall be:
4.0.1 Safety. Safety of principal shall be the foremost objective. Investments
shall be made with the aim of avoiding capital losses due to issuer default;
broker default; or market value erosion. Principal shall be preserved by
mitigating:
Credit Risk, the risk of loss due to the failure of the issuer of the security,
shall be mitigated by investing in only the highest quality securities; by
diversifying investments; and by pre-qualifying bfe�ceF- dea�e�� securities
brokers and public depositories; and
Market Risk, the risk of loss due to a decline in bond prices because of
rising market interest rates, shall be mitigated by structuring the portfolios
so that issues mature concurrently with the City's anticipated cash
requirements, thereby eliminating the need to sell securities prematurely
on the open market.
Page 2 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 14
Adopted:
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.
5.0
5.1
4.0.2 Liquidity. An adequate percentage of the portfolios shall be maintained
in liquid, short-term securities that can be converted to cash, if necessary,
to meet disbursement requirements. Since all cash requirements cannot
be anticipated, the portfolios should consist largely of reiatively iow-
duration securities with active secondary markets.
. r.im�m aare�a�l
, .
4.0.3 Yield. Yield shall be considered only after the basic requirements of
safety and liquidity have been met. Whenever possible and in a manner
consistent with the objectives of safety and liquidity, a yield higher than the
market rate of return shall be sought.
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.
Citv 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.
Citv of Palm Desert Municipal Code Section 2.16.010 authorizes the City Director
of Finance to serve ex officio as City Treasurer. The City Treasurer shall be
responsible for all investment transactions that are executed on behalf of the
City.
The City Treasurer and the Deputy City Treasurer shall have exclusive authority
to buy and sell securities on behalf of the City.
The Deputy City Treasurer may execute investment transactions on behalf of the
City only if the City Treasurer has previously authorized the transactions. If the
City Treasurer is unavailable, then the Assistant Finance Director must authorize
the investment transactions prior to execution.
Investment Procedures
The City Treasurer shall establish written procedures for the operation of the
City's investment program that are consistent with the provisions of this policy.
Page 3 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
6.0
7.0
Revision No. 14
Adopted:
The procedures shall include reference to: safekeeping, PSA repurchase
agreements, banking service contracts, and collateral/depository agreements.
Such procedures shall include explicit delegation of authority to persons
responsible for investment transactions. No person may engage in an
investment transaction except as provided under the terms of this policy and
under the procedures that the City Treasurer establishes.
Ethics and 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.
Authorized Financial Dealers and Institutions
The City Treasurer shall maintain an authorized list (see page 20) of all securities
brokers that the Finance Committee and the City Council have
authorized to transact securities business with the City. This list shall be
provided to all members of the City Council and the �wes#�ea��d Finance
Committee.
Only primary government securities dealers ("primary dea/ers") 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 J�es#�e� aad
Finance Committee and the City Council may, at their discretion, accept, review,
and approve Requests for Information ("RFI") from secondary brokers that: (1)
have been in existence for more than five years; (2) have a net capital position in
excess of $100 million; (3) are licensed as brokers by the State of California; and
(4) are headquartered or have a branch office in California.
Page 4 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
The total number of primary dealers and secondary brokers on the authorized list
shall not exceed five at any s�e time. The City shall accept
and review new broker applications only when there is an immediate need to fill a
vacancy on the authorized list. In all cases, the City shall only accept RFIs from
and transact business with the institutional securities sa/es departments of
primary dealers and secondary brokers. The City shall not transact business
with an authorized securities firm until all of the documentation that both parties
require, has been executed and delivered.
All brokers that wish to apply for inclusion on the authorized list must, at a
minimum, provide the City Treasurer with a copy of the following documents,
unless otherwise noted:
7.0.1 Completed "Primary Dealer Request for Information" (signed original
on/y).
7.0.2 The firm's most recent Annual Report and Securities and ExchanQe
Commission ("SEC") Form 10-K or 20-F.
7.0.3 The firm's National Association of Securities Dealers ("NASD") Form BD —
Uniform Application for Broker-Dealer Reqistration or, in the case of an
investment department within a commercial bank, SEC Form MSD.
7.0.4 The firm's current NASD Form BD Status Report.
7.0.5 NASD Form U-4 -- Uniform Application for Securities Industry Reqistration
or Transfer for each employee would who might be trading with the City.
7.0.6 Current NASD Form U-4 Status Report on each employee who might be
trading with the City.
7.0.7 A resume from each of the firm's employees who might be trading with
the City.
7.0.8 The firm's delivery and wiring instructions.
7.0.9 An executed corporate resolution that identifies employees who are
authorized to trade, and who might be trading with the City.
In addition to the above documents, secondary brokers must also submit:
7.0.10 The firm's most recent SEC Form X-17 A-5 or, in the case of an
investment department within a commercial bank, SEC Consolidated
Reports of Condition and Income for A Bank With Domestic and Foreiqn
Offices — FFIEC 031.
Page 5 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 14
Adopted:
Investment Officers shall investigate all broker applicants in order to determine if
they: (1) are adequately capitalized; (2) are subject to pending legal action
(either the firm or the trader); (3) make markets in securities that are appropriate
for the City's needs; (4) are licensed as a broker by the State of California
Department of Corporations; and (5) are a member of the A�A�9 National
Association of Securities Dealers. Broker applicants shall be required to provide
state or local government references from within California.
Any broker that has made a political contribution within any consecutive four-year
period following 1 January 1996 in an amount that exceeds the limits in Municipal
Securities Rulemaking Board ("MSRB") Rule G-37, to any member of or
candidate for the City Council, the Redevelopment Agency Board, the Housing
Authority Commission, or the Finance Committee shall not be
eligible to transact business with the City.
The ��est�e►�,and Finance Committee and the City Council shall review the
submitted documents, along with the Investment Officers' recommendations, and
decide if any new brokers should be added to the authorized list. If, in the City's
opinion, a broker's RFI is missing, incomplete, late (submitted after the specified
deadline), or contains false or misleading information, or if the broker has not
submitted all of the documents that the City requires, then the City shall
automatically reject that broker's RFI, and the broker shall not be eligible to
submit another RFI to the City for three years.
The City Treasurer shall provide all authorized brokers annually, in AAa� January,
with a copy of the City's s�e� investment policy for that calendar year. aa�a
. s��-�k►e
f �hs� i� ha '
, ,
•:1 It. CGb1t17Ft�ft�� 5110 I QI�
. The City Treasurer's Office
shalt retain, on file, the annual financial statements of each authorized broker for
the preceding three years.
The City Treasurer shall maintain an authorized list (see page 20) of all
commercial banks, savings associations, and federal associations (as defined by
California Financial Code Section 5102) and trust companies that the J�ves#pe�
aad Finance Committee and the City Council have authorized as public
depositories of City monies. This List shall be provided to all members of the
City Council and the Finance Committee.
The City shall only deposit public monies in financial institutions that have:
7.0.11 At least $5 billion in total assets.
Page 6 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
7.0.12 A core capital-to-total assets ratio of at least five percent.
7.0.13 Favorable statistical ratings from a nationally recognized rating
service, as determined by the City Treasurer.
7.0.14 A federal or a state charter.
7.0.15 A branch office within Riverside County.
7.0.16 A"satisfactory" overall rating in their most recent evaluation by the
appropriate federal financial supervisory agency, in terms of
meeting the credit needs of Califomia 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.
8.0 Authorized and Suitable Investments
The City Treasurer shall be authorized to invest in the following financial
instruments pursuant to California Government Code Section 53600 et seq. The
City's investment policy is more conservative than state law.
Page 7 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
�
Type of Investment
% of Portfolio
Authorized
Revision No. 14
Adopted:
Other Restrictions
1. United States Treasury bills, notes, bonds, 100% Maximum maturity: 5 years
or certificates of indebtedness, or those for
which the full faith and credit of the United
States are pledged for the payment
of principal and interest.
2. Federal Agency or United States
government-sponsored enterprise ("GSE")
obligations, participations, or other
instruments, including those issued by or
fully guaranteed as to principal and
interest by Federal Agencies or by
GSE.
3. Banker's Acceptances ("BA") issued by
commercial banks.
100%
40%
Maximum maturity: 5 years
No more than 30% of the portfolio
may be invested in any one issuer
(excluding the proceeds of tax-
exempt bonds).
Rated "A-1" or higher by S&P or
"P-1" by Moody's.
Maximum maturity: 180 days
No more than 30% of the portfolio
may be invested in any one BA
issuer.
4. Commercial Paper ("CP") issued by general
corporations organized and operating in
the United States with assets exceeding
$500 million.
25%
Rated "A-1 +" by S&P or
"P-1" by Moody's.
Maximum maturity: 270 days
No more than 10% of the
outstanding CP of any one
issuer may be purchased.
Page 8 of 26
No.
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Type of Investment
5. Negotiable Certificates of Deposit ("NCD")
issued by a nationally- or state-chartered
bank, a savings association, a federal
association, or by a state-licensed branch
of a foreign bank.
r�
Time Certificates of Deposit ("TCD")
issued by qualified public depositories.
% of Portfolio
Authorized
30%
15%
Revision No. 14
Adopted:
Other Restrictions
Long-term debt rated "AA-" higher
by S8�P or by Moody's.
Maximum maturity: 5 years
Maximum maturity: 1 Year.
TCDs exceeding $100,000 must
be collateralized.
TCDs must be centralized at one
location for each bank or S&L.
If TCD is uncollateralized, then no
more than $90,000 may be
invested per TCD.
Issuing public depository must
meet qualifying criteria on page 7,
section 1.7 of this SOIP.
7
Repurchase Agreements ("RP") sold by
authorized brokers.
20%
Maximum maturity: 30 days
Collateral must be United States
Treasury, Federal Agency, or
GSE obligations.
Zero coupon and stripped coupon
instruments are not acceptable as
collateral.
Page 9 of 26
No.
7.
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Type of Investment
Repurchase Agreements (continued)
% of Portfolio
Authorized
Revision No. 14
Adopted:
Other Restrictions
20% Collateral must be valued at
102% of cost and adjusted
weekly.
City must have first lien and
security interest in all collateral.
City's custodian must hold
collateral.
An authorized broker must file a
Public Securities Association
(PSA) Master Repurchase
Agreement with the City
Treasurer, and the City Attorney
must review the agreement, prior
to the transaction of RP business
with that broker.
8. Medium-Term Notes issued by 30%
corporations organized and operating in the
United States, or by depository institutions
operating in the United States and licensed
by the United States or by any state.
Rated "A" or higher by S8�P or by
Moody's.
Maximum maturity: 5 Years
No more than 15% of the portfolio
may be invested in any
one issuer.
Page 10 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
No
Type of Investment
9. Money Market Mutual Funds ("MMF") that
are registered with the SEC under the
Investment Act of 1940.
% of Portfolio
Authorized
Revision No. 14
Adopted:
Other Restrictions
20% Either rated "AAA" by S&P, "Aaa"
(exc/uding by Moody's, or "AAA-V-1 +" by
bond Fitch (2 of 3), or retains
proceeds) an investment advisor registered
or exempt from registration with
SEC, with at least 5 years of
experience managing a MMF with
$500 million or more in assets.
MMF must have dollar-weighted
average maturity of 90 days or
less.
MMF must buy securities that
mature in 13 months or less.
No commission may be charged.
10. State of California Local Agency See note � $40 million limit per account with
Investment Fund ("LAIF") that is managed LAIF, except for bond trustee
by the State Treasurer's Office. accounts (no limit).
City Council and Redevelopment
Agency approved participation in
LAIF on 12/12/81 in Resolution
No. 81-161.
Page 11 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
No.
Type of tnvestment
11. Structured Notes in the form of callable
securities or "STRIPS" issued by the
United States Treasury or by Federal
Agencies or government-sponsored
enterprises ("GSE").
12. Asset-Backed Commercial Paper ("ABCP")
issued by special purpose corporations
("SPC"), trusts, or limited liability
companies ("LLC") organized and operating
in the United States with assets exceeding
$500 million, that is supported by credit
enhancement facilities (e.g., over-
collateralization, letters of credit, surety
bonds, etc.).
% of Portfolio
Authorized
20%
25%
Revision No. 14
Adopted:
Other Restrictions
Maximum maturity: 5 years
Rated "A1 +" by S&P or
"P1" by Moody's.
Restricted to programs sponsored
by commercial banks or finance
companies.
Foreign banks limited to those of
Canada, United Kingdom,
Australia, France, Belgium,
Netherlands, Switzerland, and
Germany.
Program must have credit
facilities that provide at least
100% liquidity.
Serialized ABCP programs are
not eligible.
Maximum maturity: 270 days
Unsecured commercial paper
holdings must be included when
calculating the 25% maximum
concentration limit.
13. Local Government Investment Pools
("LGIPS")
30%
�A°�O
(excluding
bond
proceedsJ
Must meet above criteria for
MMFs (except for LAIF).
Page 12 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
8.1 Prohibited Investments
Investment Officers shall not invest public monies in financial instruments that
are not authorized under this policy.
Prohibited investments shall include, but shall not be limited to, equity securities,
bond mutual funds, reverse repurchase agreements, and derivative contracts
(forwards, futures, and options). The purchase of derivative securities shall be
prohibited, unless specifically authorized in this policy.
Investment Officers shall not engage in securities lending, short selling, or other
hedging strategies.
LAIF and MMFs shall be exempt from the prohibitions on derivative contracts,
derivative securities, reverse repurchase agreements, securities lending, short
selling, and other hedging strategies.
9.0 Investment Pools/Mutual Funds
A thorough investigation of the pool/fund is required prior to investing, and on a
continual basis. There shall be a questionnaire developed which will answer the
following general questions:
9.0.1 A description of eligible investment securities, and a written statement of
investment policy and objectives.
9.0.2 A description of interest calculations and how it is distributed, and how
gains and losses are treated.
9.0.3 A description of how the securities are safeguarded (including the
settlement processes), and how often the securities are priced and the
program audited.
9.0.4 A description of who may invest in the program, how often, what size
deposit and withdrawal are allowed.
9.0.5 A schedule for receiving statements and portfolio listings.
9.0.6 A verification on whether or not reserves or retain earnings are utilized by
the pool/fund.
9.0.7 A fee schedule, and when and how it is assessed.
Page 13 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 14
Adopted:
9.0.8 The eligibility of the pool/fund for bond proceeds and whether it will accept
such proceeds.
10.0 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.
11.0 Safekeeping and Custody
Investment Officers shall conduct all security transactions on a delivery-versus-
payment ("DVP") or on a receipt-versus-payment ("RVP") basis. A third-party
bank trust department ("Custodian") that acts as an agent for the City under the
terms of a custody agreement executed between both parties shall hold the
securities. The City's Custodian shall be represented on the authorized list (see
page 20).
The only exception to the foregoing shall be securities purchases made with:
11.0.1
11.0.1
11.0.2
Local government investment pools.
Money market mutual funds.
Federal Reserve Banks ("Treasury Direct Program") since the
purchased securities are not deliverable.
No securities broker or investment advisor shall have access to City monies,
accounts, or investments. Any transfer of monies to or through a securities
broker must have the City Treasurer's prior written approval. If the City
Page 14 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 14
Adopted:
Treasurer is unavailable, then the Assistant Finance Director must authorize the
transfer, in writing.
The City shall require Broker Trade Confirmations for all trades. Investment
Officers shall review these confirmations immediately upon receipt, for conformity
with the terms of the City's Trade Sheets.
12.0 Diversification
Investment Officers shall diversify the City's investment portfolios by security type
and by issuer, except for bond reserve monies; bond escrow monies; and any
other monies that the City Councii or the Finance Committee
designates.
13.0 Maximum Maturities
Investment Officers shall not invest in securities with maturities exceeding five
years. The Finance Committee and the City Council, however,
may approve longer maturities for the investment of bond reserve, bond escrow,
and other funds if the maturities of such investments are expected to coincide
with the expected use of the funds.
The weighfied-average maturity of the City portfolio shal/ not exceed 540 days.
13.1 Portfolio Rebalancing
If portfolio percentage constraints are violated due to a temporary imbalance in
the portfolio, then Investment Officers shall hold the affected securities to
maturity in order to avoid capital losses.
If no capital losses would be realized
Officers shall consider rebalancing tf�e
length of time that it will be imbalanced.
upon sale, however, then Investment
portfoiio after evaivating the expected
Portfolio percentage limits are in place in order to ensure diversification of the
City investment portfolio; a small, temporary imbalance will not significantly
impair that strategy.
13.2 Credit Downgrading
This policy sets forth minimum credit risk criteria for each type of security. This
credit risk criteria app(ies to the initiai purchase of a security; it does not
automatically force the sale of a security if its credit risk ratings fall below policy
limits.
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Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
If a security is downgraded below the minimum credit risk criteria specified in this
policy, then Investment Officers shall evaluate the downgrade on a case-by-case
basis in order to determine the security should be held or sold.
The City Treasurer shall inform the Finance Committee at its
next monthly meeting of the credit downgrade and of the Investment Officers's
decision to hold or sell the downgraded security.
Investment Officers shall review the credit standing of all securities in the City's
investment portfolios annually, at a minimum.
13.3 Bond Proceeds
The City Treasurer shall segregate the gross proceeds of tax-exempt bonds from
the City general pool and shall keep them in a separate pool. They shall be
invested pursuant to the instructions in the respective bond indentures of trust. If
the bond indenture authorizes investments that conflict with this policy, then such
investments shall be made only with the Finance Committee's
prior approval. All securities shall be held in third-party safekeeping with the
bond trustee ("Trustee") and all DVP and RVP rules shall apply. The Trustee
shall be represented on the authorized list (see page 20).
Investment Officers shall use competitive offerings, whenever practical, for all
investment transactions that involve the gross proceeds of tax-exempt bonds.
The City shall obtain a minimum of three competitive offers. Any exceptions to
this policy shall be documented and shall be reported to the
Finance Committee at its next monthly meeting.
The City is required under the "U.S. Tax Reform Act of 1986" to perform annual
arbitrage calculations and to rebate excess earnings to the United States
Treasury from the investment of the gross proceeds of tax-exempt bonds that
were sold after the effective date of that law. The City Treasurer may contract
with qualified outside financial consultants to provide the necessary technical
expertise that is required to comply with this law.
14.0 Internal Controls
The City Treasurer shall ensure that all investment transactions comply with the
City's policy, and shall establish internal controls that are designed to
prevent losses due to fraud, negligence, and third-party misrepresentation.
Internal controls deemed most important shall include: avoidance of collusion;
separation of duties and administrative controls; separating transaction authority
from accounting and record keeping; custodial safekeeping; clear delegation of
authority; management approval and review of investment transactions; specific
Page 16 of 26
Palm Desert Treasury Policies and Procedures
No. 2: "Statement of Investment Policy"
Revision No. 14
Adopted:
telephone transactions; documentation of investment transactions and
strategies; and monitoring of results.
The City Treasurer shall establish a process of independent review by an
external audit firm of the City's investment program every three years. The
external auditor shall review the program's management in terms of compliance
with the internal controls that are specified in the City's Treasury Policies and
Procedures Manual.
An 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 Attomey; the
Redevelopment Agency Executive Director; the City Treasurer; the Deputy City
Treasurer; and various citizens who are appointed by the City Council pursuant
to City ordinance, shall sit on this committee.
15.0 Performance Standards
15.1
16.0
The investment portfolio shall be designed with the objective of obtaining a rate
of retum throughout budgetary and economic cycles, commensurate with
investment risk constraints and cash flow needs.
Market Yield (Benchmark)
The City's investment portfolios 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:
Exceed the return that would be realized by holding the security to
maturity; and
15.1.1
More than offset any income reduction due to reinvestment rate risk.
15.1.2
The City shall adopt a benchmark that approximates the composition and
weighted-average maturity of each City portfolio, in order to measure whether or
not the City's portfolio yields are matching or surpassing the market yield.
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
Page 17 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
or at the next scheduled City Council meeting following aa �res#�e�a� a
Finance Committee meeting.
Pursuant to Governmental Accounting Standards Board ("GASB") Statement
Number 40, as amended March 2003, the monthly investment report shall:
16.0.1 Organized individual securities by investment type (e.g., U.S. Treasuries,
corporate bonds, commercial paper, etc.). Dissimilar investments (e.g.,
U.S. Treasury bills and Treasury strips) should not be aggregated.
16.0.2 List credit risk ratings for each security, mutual fund, or investment pool
from at least finro nationally recognized statistical rating organizations
("NRSRO"). If the security, mutual fund, or investment pool has not
rating, then it shall be shown as "unrated".
16.0.3 Disclose the amount of individual securities and corresponding issuers if
they exceed five percent of net plan assets, except for securities
guaranteed by the U.S. Government, money market mutual funds, and
external investment pools.
16.0.4 Use the specific identification method to reflect interest-rate risk by
investment type and amount.
This report shall include a complete portfolio inventory with details on issue, par
value, book value, coupon/rate, original settlement date of purchase, final
maturity date, CUSIP number, average weighted yield, average days to maturity,
and market value (including source of market valuation). The report will include a
statement on compliance or noncompliance with the City's SOIP and a statement
on whether there are or are not sufficient funds to meet the City's anticipated
cash requirements for the next six months.
17.0 Investment Policy Adoption
The City Treasurer shall submit a Statement of Investment Policy 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.
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Page 18 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
a-�.s.�
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Page 19 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
Appendix A: List of Authorized Financial Institutions
The City Treasurer's Office is authorized to transact investment and depository
business with the following financial institutions. Investment and depository
transactions with firms other than those appearing on this list are prohibited.
UNITED STATES GOVERNMENT
1. Federal Reserve Bank
PRIMARY DEALERS
1. Merrill Lynch 8� Company, Inc.
2. , .
3. Citigroup Global Markets, Inc.
SECONDARY BROKERS
1. First Tennessee Bank
2. Wells Fargo Institutional Securities, LLC
3. Zions Bank
PUBLIC DEPOSITORIES
1. Bank of America
2. Califomia Bank & Trust
3. California Federal Bank
4. Downey Savings & Loan
5. Northern Trust Bank
6. Union Bank of Califomia
7. Washington Mutual Bank
8. Wells Fargo Bank
CUSTODIAN
1. Union Bank of California
TRUSTEE
1. Wells Fargo 6ank
Page 20 of 26
Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
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 finro methods of delivery of securities: (1)
delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery
of securities with an exchange of money for the securities. DVR is delivery of securities
with an exchange of a signed receipt for the securities.
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Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
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 Iower 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 ASSOClATION ("FNMA"). FNMA, like GNMA,
was chartered under the Federal National Mortgage Association Act in 1938. FNMA is
a federal corporation working under the auspices of the Department of Housing and
Urban Development (HUD). It is the largest single provider of residential mortgage
funds in the United States. Fannie Mae, as the corporation is called, is a private
stockholder-owned corporation. The corporation's purchases include a variety of
adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's
securities are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and interest.
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Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
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.
LOCAI GOVERNMENT INVESTMENT FUND ("LAIF"). Monies from local
governmental units may be remitted to the California State Treasurer for deposit in this
special fund for the purpose of investment.
MARKET VALUE. The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT. A written contract covering all future
transactions between the parties to repurchase-reverse repurchase agreements, that
establishes each party's rights in the transactions. A master agreement will often
specify, among other things, the right of the buyer (lender) to liquidate the underlying
securities in the event of default by the seller (borrower).
MATURITY. The date upon which the principal or stated value of an investment
becomes due and payable.
MONEY MARKET. The market in which short-term debt instruments (e.g., bills,
commercial paper, bankers's acceptances) are issued and traded.
OFFER. The price asked by a seller of securities (when one buys securities, one asks
for an offer}. See "Asked" and "Bid".
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Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
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 or
its current market price.
REPURCHASE AGREEMENT ("RP" OR "REPO"). A holder of securities seNs 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.
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Palm Desert Treasury Policies and Procedures Revision No. 14
No. 2: "Statement of Investment Policy" Adopted:
SEC RULE 15c3-1. See "Uniform Net Capifal 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 non-
member broker-dealers in securities, maintain a maximum ratio of indebtedness-to-
liquid capital of 15 to one. Also called net capital rule and net capita ratio.
Indebtedness covers all money that is owed to a firm, including margin loans and
commitments to purchase securities (one reason that new public issues are spread
among members of underwriting syndicates). Liquid capital includes cash and assets
easily converted into cash.
YIELD. The rate of annual income return on an investment, expressed as a
percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by
the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is
the current income yield minus any premium above par or plus any discount from par in
purchase price, with the adjustment spread over the period from the date of purchase to
the date of maturity of the bond.
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