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HomeMy WebLinkAboutItem VIII.B.1WASHINGTON AGENDA BILL APPROVAL FORM A.qenda Subject: Resolution No. 3600 and Exhibit A --Investment Policy Date: April 23, 2003 Department: I Attachments: Budget Impact: FinanceI Resolution No. 3600 Administrative Recommendation: City Council to adopt Resolution No. 3600. Back.qround Summary: In order to invest funds in a manner that will provide the highest investment return with the maximum security while being responsive to financial obligations, it is appropriate that the City have a policy to define the parameters and processes used for investment practices. To achieve this goal, staff recommends the adoption of Resolution No. 3600 authorizing the Mayor to implement Investment Policy, 100-40, marked as Exhibit A of the resolution. N0505-1 F1.5.6 Reviewed by Council & Committees: Reviewed by Departments & Divisions: [] Arts Commission COUNCIL COMMITTEES: [] Airport [] Human Resources [] Hearing Examiner [] Finance [] Building [] M&O [] Human Services [] Municipal Serv. [] Cemetery [] Mayor [] Library Board [] Planning & CD [] Finance [] Parks [] Park Board [] Public Works [] Fire [] Planning [] Planning Comm. [] Other [] Legal [] Police [] Public Works Action: Committee Approval: []Yes DNo Council Approval: []Yes []No Call for Public Hearing / / Referred to Until / / Tabled Until __/ / Councilmember: Poe Staff: Coleman Meeting] Date: May 5, 2003 Item Number: VIII.B.1 AUBUP, N * MORE THAN YOU iMAGINED RESOLUTION NO. 3 6 0 0 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF AUBURN, WASHINGTON, APPROVING THE POLICY AND PROCEDURES FOR INVESTMENT PRACTICES WHEREAS, The City of Auburn has various responsibilities related to its many functions and activities; and financial and WHEREAS, The City of Auburn h as financial assets in various funds; WHEREAS, the City also has the practice of approving and endorsing policies and procedures via resolution of the City Council; and WHEREAS, in order to invest funds in a manner that will provide the highest investment return with the maximum security while being responsive to its financial obligations, it is appropriate that the City have a policy to define the parameters and processes used for investment practices. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF AUBURN, WASHINGTON, HEREBY RESOLVES as follows: Section 1. That the policy and procedures for investment practices, index number 100-40, a copy of which attached hereto, marked as Exhibit "A" and incorporated herein by this reference, is approved and the Mayor is authorized to implement the same. Section2. The Mayor is further authorized to implement such practices necessary to carry out the directives of this legislation. Resolution No. 3600 Apdl 17, 2003 Page I of 2 SeCtion 3. This resolution signature hereon. Dated and Signed this shall be effective upon day of April, 2003. passage and CITY OF AUBURN ATTEST: PETER B. LEWIS MAYOR Danielle E. Daskam, City Clerk City Attorney Resolution No. 3600 April 17, 2003 Page 2 of 2 INVESTMENT POLICY AND PROCEDURE TITLE: INVESTMENT POLICY Elqq~CTIYE DATE 4/10/2003 SUPERSEDES 1211411990 SUBJECT: INVESTMENTS INDEX NUMBER: 100-40 PAGE OF 1 9 PREPARED BY: SHELLEY COLEMAN IMAYOR'S APPROVAL 1.0 PURPOSE To establish a policy of the City of Auburn to invest public funds in a manner which will provide the highest investment return with the maximum security while meeting the daily cash flow demands on the Treasury and conforming to all Washington State statutes governing the investment of public funds. 2.0 SCOPE This investment policy applies to all financial assets of the City of Auburn. These funds are accounted for in City's Comprehensive Annual Financial Report and include: 2.1 Funds: 2.1.1 General Fund 2.1.2 Special Revenue Funds 2.1.3 Debt Service Funds 2.1.4 Capital Projects Funds 2.1.5 Enterprise Funds 2.1.6 Internal Service Funds 2.1.7 Cemetery EndOwed Care Fund 2.1.8 Fire Relief & Pension Fund 2.1.9 Any new fund created, by Council, unless specifically exempted by Council. 3.0 4.0 REFERENCES ACC 2.15 ACC 3.04.100 Auburn Ordinance No. 3034 RCW 35.39.030, RCW 36.29.020, as amended, RCW 35.39.034, as amended POLICY 4.1 Prudence: Investments shall be made with judgment and care--under circumstances then prevailing--which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. INVESTMENT TITLE: INDEX NO: PAGE NO: OF POLICY AND PROCEDURE iNVESTMENT POL]CY 100~40 2 9 4.1.1 The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. 4.2 Objective: The primary objectives, of the City of Auburn's investment activity shall be in priority order as follows: 4.2.1 Safety: Safety of principal, while achieving an appropriate level of earnings, is the fore- most objective of the City of Auburn in its investment program. Each investment transaction shall seek first to ensure that capital losses are avoided. To attain this objective, diversification is required in order that potential losses on individual securities · do not exceed the income generated from the remainder of the portfolio. 4.2.2 Liquidity: The City 'of Auburn's investment program shall ensure that sufficient liquidity exists to meet ongoing cash obligations. Only after these priorities are addressed will the program seek to optimize yields. 4.2.3 Return on Investments: The City of Auburn's investment portfolio shall be designed with the objective of attaining a rate of return throughout budgetary and economic cycles, commensurate with the City of Auburn's investment risk constraints and the cash flow characteristics of the portfolio. 4.3 Delegation of Authority: Authority to manage the City of Auburn's investment program is derived from ACC 2.15 and Ordinance No. 3034. Management responsibility for the investment program is hereby delegated to the Finance Director, who shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include reference to: safekeeping, repurchase agreement, wire transfer agreement, 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 procedures established by the Finance Director. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate activities of subordinate officials. 4.4 Ethics and Conflicts of Interest: Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the Mayor and the State of Washington any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City of Auburn, particularly with regard to the time of purchase and sales. 4.5 Authorized Finance Dealers and Institutions: The Finance Director will maintain a list of financial institutions ·authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness who are INVESTMENT TITLE: INDEX NO: PAGE NO: OF POLICY AND PROCEDURE INVEST[~ENT POLICY 100-~0 3 9 authorized to provide investment services in the State of Washington. These may include "primary" dealers of regional dealers that qualify under Securities & Exchange Commission Rule 15c3-1 (uniform net capital rule). No public deposit shall be made except in a qualified public depository as established by state laws. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the treasurer with the following: A. Audited Financial Reports. B. Certification of having read Auburn's investment policy. C. · Firms and financial institutions are expected to familiarize themselves with the City of Auburn's investment objectives, policies and constraints. The investment officer may only utilize other types of security dealers (as distinguished from the public depositories) who are located within the state of Washington and have a firmly established record of working with Washington local governmental funds., All dealers shall be a primary dealer as registered with the State of Washington and the Federal Reserve Bank. ~This policy may be satisfied by an in-state office of a broker firm, irrespective of whether the individual broker is stationed in the state; provided that the broker can demonstrate (to the Finance Director as reviewed by the Mayor) an appropriated level of knowledge of Washington State Law pertaining to investments. 4.6 Authorized and Suitable Investments: Acceptable investments under this policy shall be limited to the instruments listed below. The investments are to be chosen in a manner that promotes diversity or market sector and maturity. The choice of high-grade government investments and high-grade, money market instruments are designed to ensure the marketability of those investments should liquidity needs arise. Under Ordinance 3034, the investment portfolio may make use of all the various instruments permitted to the City as authorized by state law (P,CW 35.39.030, P,CW 36.29.020, as amended, P,CW 35.39.034, as amended). These include: 1. United States bonds; 2. United States Certificates of indebtedness; 3. Bonds or warrants of this State; 4. General Obligation or utility revenue bonds or warrants of its own (see separate internal investment policies) or of any other city or town in the state; 5. Its own bonds or warrants of a local improvement district which are within the protection of the local improvement guaranty fund (see internal investment policies); and 6. In any other investment authorized by law; which would include: a). savings or time accounts in designated qualified public depositories (P, CW 36.29.020), b). or in certificates, notes, or bonds of United States agencies, or corporations wholly owned by the United States (RCW 36.29.020), c). repurchase agreements, Master P,epurchase Agreement must be signed with the bank or dealer, d). banker's acceptances purchased on the secondary market (P,CW 36.29.020), INVESTMENT TITLE: INDEX NO: PAGE NO: OF POLICY AND PROCEDURE INVESTMENT POLICY 100-40 4 9 e). federal home loan bank notes and bonds, federal land bank bonds and federal national mortgage association notes, debentures and guaranteed certificates of participation, or obligations of any other government sponsored corporation whose obligations are or may be eligible as collateral for advances to member banks as determined by the board of governors of the federal reserve system or any portion thereof in investment deposits as defined in RCW 39.58.010 secured by collateral in accordance with RCVV 39.58 (RCVV 36.29.020), 0. Interim financing warrants of local improvement districts (RCW 35.39.034), g). State Local Government Investment Pool, Use of these instruments shall be made on the basis of each instrument's ability, at any particular time, to meet the objectives of this policy as stated above. In evaluating these instruments the following scales should be used in the process of making investment decisions: Priority Investment Instrument or Collateral By Risk (less dsky investments at the top): 1. US TreasurY Bills, Notes and Bonds, 2. US Government Guaranteed Investments, 3. US Government Agencies, 4. State Local Government Investment Pool, 5. US TreasurY Repos, 6. US Government Instrumentalities, 7. Banker's Acceptances, 8. Collateralized Bank CDs, and 9. Municipal forms of debt, Since these instruments tend to also be listed in reverse order of potential yield, investments at the 7 and 8 level would not be uncommon but should be associated with significant diversification. Priority of investment method by Liquidity (More liquid methods at the top): 1. Overnight Repurchase agreements, 2. State Pool, 3. US TreasurY Bills, 4. Other Treasuries, 5. US Government Instrumentalities, '6. Banker's Acceptances, 7. Negotiable CDs, 10. Non-negotiable CDs, 11. Long Term Government Bonds, and 12. US Agency Bonds. 4.7 Safekeeping and Custody: All security transactions, including collateral for repurchase agreements, entered into by the City shall be conducted on a delivery-versus-payment {DVP) basis. Securities will be held by a third party custodian designated by the Finance Director. INVESTMENT TITLE: INDEX NO: PAGE NO: OF roL~cY Ar~) PROC~)~ INVESTMENT POLICY 100-40 5 9 4.8 Diversification: The City will diversify its investments by security type and institution. With the exception of U.S. Treasury securities and the State Investment Pool, no more than 20% of the City's total investment portfolio will be invested in a single security type or with a single financial institution. 4.9 Maximum Maturities: To the extent possible, the City will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than three years from the date of purchase.' Cemetery Endowed Care Fund, Fire Relief and Pension Fund, Reserves and CIP funds may be invested in securities exceeding, three years if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds. 4.10 Internal Control: The Finance Director shall establish a process of independent review by an external auditor. This review will provide internal control by assuring that policies and procedures are being complied with. Such review may also result in recommendations to change operating procedures to improve intemal control. All investment procedures and practices should be reviewed by an independent auditor at least annually. In Washington this review procedure is assured through the annual audit process by the State Auditor's office. 4.11 Performance Standards: The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. 4.11.1 Market Yield (Benchmark): The basis used by the Finance Director to determine whether market yields are being achieved shall be the six-month U.S. Treasury Bill. 4.12 Reporting: The Finance Director Treasurer is charged with the responsibility of including a report on investment activity and returns in the City's quarterly Financial Report. 4.13 Investment Policy Adoption: The City of Auburn's investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed on an annual basis by the Finance Director and any modifications made thereto must be approved by the City Council. INVESTMENT TITLE: INDEX NO: PAGE NO: OF POLICY AND PROCEDURE INVESTMENT POLICY 100-40 6 9 5:0 GLOSSARY AGENCIES: Federal agency securities. ASKED: The price at which securities are offered. BANKER' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust comPany. The accepting institution guarantees payment of the bill, as well as the issuer. BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. BROKER: A broker brings buyers and sellers together for a commission. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CD's are typically negotiable. ' COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAR): The official annual report for the City of Auburn. It includes five combined statements and basic financial statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, 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 evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his 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: delivery versus payment and delivery verSus receipt (also called free). Delivery versus payment is delivery of securities with an exchange of a signed receipt for the securities. DERIVATIVES: (1) Financial instruments whose .return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contrasts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities). DISCOUNT: The difference between the cost price of a security selling below original offering pdce shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U.S. Treasury bills. INVESTMENT TITLE: INDEX NO: PAGE NO: OF POLICY AND PROCEDURE INVESTMENT POLICY 100-40 7 9 DIVERSIFICATION: 'Dividing investment funds among a vadety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $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): The institutions that regulate and lend t° savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-a-vis member commercial banks. 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 & Urban Development, H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned Corporation. The corporation's purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The president of the New York Federal Reserve .Bank is a permanent member while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market 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 guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by 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 POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. INVESTMENT ~i'ITLE: INDEX NO: PAGE NO: OF ~'oucY A~ P~OC~tr~ INVESTMENT POLICY 100-40 8 9 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 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 instrument (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. OFFER: The price asked by a seller of securities (when you are buying securities, you ask for an offer.) See Asked and Bid. OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: A group of government securities dealers 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, and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the state-the so called legal list. In other state the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of sales or compensating use or ad valorem taxes under the laWs of this state, which has segregated for the benefits of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be amortized yield to maturity on a bond or the current income return. REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed pdce 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, that is, 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. INVESTMENT TITLE: INDEX NO: PAGE NO: OF POLICY AND PROCEDURE INVESTMENT POLICY 100-40 9 9 SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See uniform net capital rule. STRUCTURED NOTES: Notes issued by Government SPonsored Enterprises (FHLB, FNMA, SLMA, etc.) and Corporations which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivatives-based returns) into their debt structure. Their market performance is impacted by the fluctuation if interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BOND: Long-term U. S. Treasury securities having initial maturities of more than ten years. TREASURY NOTES: Intermediate term coupon bearing U. S. Treasury securities having initial maturities of from one to ten years. UNIFORM NET CAPITAL RULE: -Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase secur'rties, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) Income yield is obtained by dividing the current dollar income by the current market price for the security. (b) Income 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.