HomeMy WebLinkAbout10 - Resolution No. 2020-11: Investment Policy UpdateQ �EwPpRT
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<,FORN'P City Council Staff Report
January 28, 2020
Agenda Item No. 10
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Dan Matusiewicz, Finance Director - 949-644-3123,
dmatusiewicz@newportbeachca.gov
PREPARED BY: Steve Montano, Deputy Finance Director,
smontano@newportbeachca.gov
PHONE: 949-644-3240
TITLE: Resolution No. 2020-11: Investment Policy Update
/_1 16"t I:7_T91 6
Consistent with Section K-2 of City Council Policy F-1, Statement of Investment Policy
(the Policy), the Finance Department has completed an annual review of the Policy to
ensure its consistency with the overall objectives of preservation of principal, liquidity and
return, and its relevance to current law and financial and economic trends. The investment
of City funds is governed by California Government Code (CGC) (Sections 53600-53610)
that prescribe the investment vehicles in which local agencies are permitted to invest
available funds. Staff, working with the City's investment advisor, Chandler Asset
Management (Chandler), has completed a comprehensive review of the Policy including
compliance with relevant sections of the Government Code, as well as incorporating best
investment practices. Staff is proposing a series of modifications to the Investment Policy
as recommended by the City's investment advisor, Chandler, and supported by the City's
Finance Director/Treasurer. All changes have been reviewed and approved by the City's
Finance Committee.
RECOMMENDATION:
a) Determine this action is exempt from the California Environmental Quality Act (CEQA)
pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because
this action will not result in a physical change to the environment, directly or indirectly;
and
b) Adopt Resolution No. 2020-11, A Resolution of the City Council of the City of Newport
Beach, California, Finding Consistency with Stated Investment Objectives and
Amending City Council Policy F-1 to Add Clarifying Language that is Consistent with
Government Code Section 53600, et seq.
FUNDING REQUIREMENTS:
There is no fiscal impact related to this item.
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Resolution No. 2020-11: Investment Policy Update
January 28, 2020
Page 2
DISCUSSION:
California Government Code (CGC) Section 53600.5 mandates that the City Treasurer
shall follow three objectives when investing, reinvesting, purchasing, acquiring,
exchanging, selling, or managing public funds. The primary objective of the City Treasurer
shall be to safeguard the principal of the funds under his or her control. The secondary
objective shall be to meet the liquidity needs of the City. The third objective shall be to
achieve a return on the funds under his or her control. Guided by the Policy and
constrained by California Government Code, the City's core investment objectives are to
provide safety of the invested principal by maintaining a well -diversified, high-quality
portfolio of liquid assets while earning a market rate of return commensurate with the
City's conservative risk profile.
The investment of City funds is governed by CGC (Sections 53600-53610) that prescribe
the investment vehicles in which local agencies are permitted to invest available funds.
Staff, working with its investment advisor, Chandler Asset Management, has completed
a comprehensive review of the City's Investment Policy including compliance with
relevant sections of the Government Code, as well as, incorporating best investment
practices.
The most significant recommended changes to the Investment Policy include:
Credit Rating (Section G, page 7, Attachment B) — Added clarifying language
specifying that credit quality minimums are applicable at the time the security is
purchased.
Mortgage -Backed Securities (MBS), Collateralized Mortgage Obligations (CMO)
and Asset -Backed Securities (ABS) (Section GAA, page 8, Attachment B) — Added
language to the Authorized Investments Section of the investment policy clarifying that
credit quality and portfolio percentage limitations for MBS, CMOs, and ABS only apply to
securities issued by issuers other than the U.S. Treasury or U.S. Agencies as defined in
Sections a, b and c of the "Investments Specifically Permitted" Section of the investment
policy, page 8.
Removed the minimum issuer rating of "A" category or higher by at least one nationally
recognized statistical rating organization (NRSRO) to be consistent with AB 1770 signed
by Governor Brown eliminating this requirement in CGC effective 1/1/19. The required
minimum "AX category credit rating by a NRSRO at the security level still applies per
CGC.
Diversification (Section H.1, page 14, Attachment B) — Added language stating the
exposure to any individual issuer is limited to 5% "unless otherwise specified in this
investment policy" to minimize the risk of contradictory limitations.
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Resolution No. 2020-11: Investment Policy Update
January 28, 2020
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Credit Quality (Section H.3, page 14, Attachment B) — Recommend removing the
restriction on purchasing securities rated Al and/or A+ that have been placed on negative
watch to be more consistent with CGC Section 53601(k). Removing this language will
allow the City to increase diversification to high quality issuers while not incurring undue
risk. The credit ratings of a security placed on negative watch may or may not receive a
downgrade. In the event the credit ratings of a security placed on negative watch by an
NRSRO are downgraded, the likely extent of the downgrade may be predictable in
advance of the downgrade or limited depending on the circumstances of each individual
situation. To mitigate credit risk in the portfolio, the policy already includes a maximum
exposure of 5% to any individual non-government issuer and a process to evaluate any
security whose credit ratings are downgraded below the minimum credit rating standard
of this policy to ensure staff is notified and can take appropriate action and avoid undue
risk.
Addition of a glossary section (pages 17-21) — Recommend including a glossary of
investment terms to promote greater clarity for the reader.
See the redline Statement of Investment Policy for recommended changes, included as
Attachment B.
All changes have been reviewed and approved by the City's Finance Committee. These
changes adhere to the City's investment objectives of safety, liquidity and return.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
ATTACHMENTS:
Attachment A — Resolution No. 2020-11 and City Council Policy F-1
Attachment B — Redline of City Council Policy F-1, Statement of Investment Policy
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ATTACHMENT A
RESOLUTION NO. 2020- 11
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH, CALIFORNIA, FINDING
CONSISTENCY WITH STATED INVESTMENT
OBJECTIVES AND AMENDING CITY COUNCIL POLICY F-
1 TO ADD CLARIFYING LANGUAGE THAT IS
CONSISTENT WITH GOVERNMENT CODE SECTION
53600, ET SEQ.
WHEREAS, the City Council of the City of Newport Beach ("City") through City
Council Policy F-1 has adopted a Statement of Investment Policy ("Investment Policy");
WHEREAS, City Council Policy F-1 requires the Director of Finance/ Treasurer to
review the Investment Policy with the City's Finance Committee at least annually to ensure
its consistency with the overall objectives of preservation of principal, liquidity, and return,
and its relevance to current law and financial and economic trends;
WHEREAS, the City's Finance Committee reviewed changes to the Investment
Policy at its November 14, 2019, meeting and found consistency with the stated objectives;
WHEREAS, City Council Policy F-1 requires the Director of Finance/Treasurer to
review the Investment Policy with the City Council at a public meeting if there are
recommended revisions to the Investment Policy;
WHEREAS, the Director of Finance/Treasurer has reviewed the written Statement
of Investment Policy and recommends revisions to better align the policy with State law and
allow for greater investment diversification; and
WHEREAS, the City Manager has reviewed the recommended revisions suggested
by the Director of Finance/Treasurer and recommends the City Council amend City Council
Policy F-1, Statement of Investment Policy as provided in this resolution.
NOW, THEREFORE, the City Council of the City of Newport Beach resolves as
follows:
Section 1: The City Council does hereby amend Council Policy F-1, Statement of
Investment Policy, in its entirety and replaces it with the attached Council Policy F-1,
Statement of Investment Policy, which is incorporated herein by this reference.
Section 2: All prior versions of Council Policy F-1 that are in conflict with the
revisions adopted by this resolution are hereby repealed.
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Resolution No. 2020 -
Page 2 of 2
Section 3: if any section, subsection, sentence, clause or phrase of this resolution
is, for any reason held to be invalid or unconstitutional, such decision shall not affect the
validity or constitutionality of the remaining portions of this resolution. The City Council
hereby declares that it would have passed this resolution and each section, subsection,
sentence, clause or phrase hereof, irrespective of the fact that any one or more sections,
subsections, sentences, clauses or phrases be declared invalid or unconstitutional.
Section 4: The recitals provided in this resolution are true and correct and are
incorporated into the substantive portion of this resolution.
Section 5: Except as expressly modified in this resolution, all other City Council
Policies, sections, subsections, terms, clauses and phrases set forth in the Council Policy
Manual shall remain unchanged and shall be in full force and effect.
Section 6: The City Council finds the adoption of this resolution is not subject to the
California Environmental Quality Act (" CEQX) pursuant to Sections 15060(c)(2) (the
activity will not result in a direct or reasonably foreseeable indirect physical change in the
environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of
the CEQA Guidelines, California Code of Regulations, Title 14, Division 6, Chapter 3,
because it has no potential for resulting in physical change to the environment, directly or
indirectly.
Section 7: This resolution shall take effect immediately upon its adoption by the
City Council, and the City Clerk shall certify the vote adopting the resolution.
ADOPTED this 28th day of January 2020,
Will O'Neill
Mayor
ATTEST:
Leilani I. Brown
City Clerk
APPROVED AS TO FORM:
CIAATTO R N EY'S O FILE
C-
A6ron
C. Harp
City Attorney
Attachment: Amended City Council Policy F-1
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STATEMENT OF INVESTMENT POLICY
PURPOSE:
F-1
The City Council has adopted this Investment Policy (the Policy) in order to establish the
scope of the investment policy, investment objectives, standards of care, authorized
investments, investment parameters, reporting, investment policy compliance and
adoption, and the safekeeping and custody of assets.
This Policy is organized in the following sections:
A. Scope of Investment Policy
1. Pooling of Funds
2. Funds Included in the Policy
3. Funds Excluded from the Policy
B. Investment Objectives
1. Safety
2. Liquidity
3. Yield
C. Standards of Care
1. Prudence
2. Ethics and Conflicts of Interest
3. Delegation of Authority
4. Internal Controls
D. Banking Services
E. Broker/ Dealers
F. Safekeeping and Custody of Assets
G. Authorized Investments
1. Investments Specifically Permitted
2. Investments Specifically Not Permitted
3. Exceptions to Prohibited and Restricted Investments
H. Investment Parameters
1. Diversification
2. Maximum Maturities
3. Credit Quality
4. Competitive Transactions
I. Portfolio Performance
J. Reporting
K. Investment Policy Compliance and Adoption
1. Compliance
2. Adoption
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F-1
A. SCOPE OF INVESTMENT POLICY
1. Pooling of Funds
All cash shall be pooled for investment purposes. The investment income
derived from the pooled investment shall be allocated to the contributing
funds, net of all banking and investing expenses, based upon the proportion
of the respective average balances relative to the total pooled balance.
Investment income shall be distributed to the individual funds not less than
annually.
2. Funds Included in the Policy
The provisions of this Policy shall apply to all financial assets of the City as
accounted for in the City's Comprehensive Annual Financial Report,
including;
a) General Fund
b) Special Revenue Funds
c) Capital Project Funds
d) Enterprise Funds
e) Internal Service Funds
f) Trust and Agency Funds
g) Permanent Endowment Funds
h) Any new fund created unless specifically exempted
If the City invests funds on behalf of another agency and, if that agency
does not have its own investment policy, this Policy shall govern the
agency's investments.
3. Funds Excluded from this Policy
Bond Proceeds - Investment of bond proceeds will be made in accordance
with applicable bond indentures.
B. INVESTMENT OBJECTIVES
The City's funds shall be invested in accordance with all applicable City policies
and codes, State statutes, and Federal regulations, and in a manner designed to
accomplish the following objectives, which are listed in priority order:
1. Safety
Preservation of principal is the foremost objective of the investment
program. Investments of the City shall be undertaken in a manner that
seeks to ensure the preservation of capital in the overall portfolio. The
objective shall be to mitigate credit risk and interest rate risk. To attain this
objective, the City shall diversify its investments by investing funds among
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several financial institutions and a variety of securities offering
independent returns.
a) Credit Risk
The City shall minimize credit risk, the risk of loss due to the
failure of the security issuer or backer, by:
■ Limiting investments in securities that have higher credit risks,
pre -qualifying the financial institutions, broker/ dealers,
intermediaries, and advisors with which the City will do
business
■ Diversifying the investment portfolio so as to minimize the
impact any one industry/ investment class can have on the
portfolio
b) Interest Rate Risk
To minimize the negative impact of material changes in the market
value of securities in the portfolio, the City shall:
■ Structure the investment portfolio so that securities mature
concurrent with cash needs to meet anticipated demands,
thereby avoiding the need to sell securities on the open
market prior to maturity
■ Invest in securities of varying maturities
2. Liquidity
The City's investment portfolio shall remain sufficiently liquid to enable the
City to meet all operating requirements which might be reasonably
anticipated without requiring a sale of securities. Since all possible cash
demands cannot be anticipated, the portfolio should consist largely of
securities with active secondary or resale markets. A portion of the portfolio
also may be placed in money market mutual funds or LAIF which offer
same-day liquidity for short-term funds.
3. Yield
The City's investment portfolio shall be designed with the objective of
attaining a benchmark rate of return throughout budgetary and economic
cycles, commensurate with the City's investment risk constraints and the
liquidity characteristics of the portfolio. Return on investment is of
secondary importance compared to the safety and liquidity objectives
described above. The core of investments is limited to relatively low risk
securities in anticipation of earning a fair return relative to the risk being
assumed.
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M:
F-1
C. STANDARDS OF CARE
1. Prudence
The standard of prudence to be used for managing the City's investment
program is California Government Code Section 53600.3, the prudent
investor standard, which states that "when investing, reinvesting,
purchasing, acquiring, exchanging, selling, or managing public funds, a
trustee shall act 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."
The City's overall investment program shall be designed and managed with
a degree of professionalism that is worthy of the public trust. The City
recognizes that no investment is totally without risk and that the
investment activities of the City are a matter of public record. Accordingly,
the City recognizes that occasional measured losses may occur in a
diversified portfolio and shall be considered within the context of the
overall portfolio's return, provided that adequate diversification has been
implemented and that the sale of a security is in the best long-term interest
of the City.
The Finance Director and authorized investment personnel acting in
accordance with established procedures and exercising due diligence shall
be relieved of personal responsibility for an individual security's credit risk
or market price changes, provided that deviations from expectations are
reported in a timely fashion to the City Council and appropriate action is
taken to control adverse developments.
2. Ethics and Conflicts of Interest
Elected officials and employees involved in the investment process shall
refrain from personal business activity that could conflict with proper
execution of the City's investment program or could impair or create the
appearance of an impairment of their ability to make impartial investment
decisions. Employees and investment officials shall subordinate their
personal investment transactions to those of the City. In addition, Citv
Council members, the City Manager, and the Finance Director shall file a
Statement of Economic Interests each year as required by California
Government Code Section 87203 and regulations of the Fair Political
Practices Commission.
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3. Delegation of Authority
Authority to manage the City's investment program is derived from the
Charter of the City of Newport Beach section 605 (j). The Finance Director
shall assume the title of and act as City Treasurer and with the approval of
the City Manager appoint deputies annually as necessary to act under the
provisions of any law requiring or permitting action by the City Treasurer.
The Finance Director may then delegate the authority to conduct
investment transactions and to manage the operation of the investment
portfolio to other specifically authorized staff members. No person may
engage in an investment transaction except as expressly provided under the
terms of this Policy.
The City may engage the support services of outside investment advisors
with respect to its investment program, so long as it can be demonstrated
that these services produce a net financial advantage or necessary financial
protection of the City's financial resources. Such companies must be
registered under the Investment Advisors Act of 1940, be well-established
and exceptionally reputable. Members of the staff of such companies who
will have primary responsibility for managing the City's investments must
have a working familiarity with the special requirements and constraints of
investing municipal funds in general and this City's funds in particular.
These firms must insure that the portion of the portfolio under their
management complies with various concentration and other constraints
specified herein, and contractually agree to conform to all provisions of
governing law and the collateralization and other requirements of this
Policy. Selection and retention of broker/ dealers by investment advisors
shall be at their sole discretion and dependent upon selection and retention
criteria as stated in the Uniform Application for Investment Advisor
Registration and related Amendments (SEC Form ADV 2A).
4. Internal Controls
The Finance Director is responsible for establishing and maintaining a
system of internal controls. The internal controls shall be designed to
prevent losses of public funds arising from fraud, employee error, and
misrepresentation by third parties, unanticipated changes in financial
markets, or imprudent action by City employees and officers. The internal
structure shall be designed to provide reasonable assurance that these
objectives are met. The concept of reasonable assurance recognizes that (1)
the cost of a control should not exceed the benefits likely to be derived, and
(2) the valuation of costs and benefits requires estimates and judgments by
management.
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D. BANKING SERVICES
Banking services for the City shall be provided by FDIC insured banks approved
to provide depository and other banking services. To be eligible, a bank shall
qualify as a depository of public funds in the State of California as defined in
California Government Code Section 53630.5 and shall secure deposits in excess of
FDIC insurance coverage in accordance with California Government Code Section
53652.
E. BROKER/DEALERS
In the event that an investment advisor is not used to purchase securities, the City
will select broker/dealers on the basis of their expertise in public cash
management and their ability to provide service to the City's account.
Each approved broker/dealer must possess an authorizing certificate from the
California Commissioner of Corporations as required by Section 25210 of the
California Corporations Code.
To be eligible, a firm must meet at least one of the following criteria:
1. Be recognized as Primary Dealers by the Federal Reserve Bank of New York
or have a primary dealer within their holding company structure, or
2. Report voluntarily to the Federal Reserve Bank of New York, or
3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3-1
(Uniform Net Capital Rule).
F. SAFEKEEPING AND CUSTODY OF ASSETS
The Finance Director shall select one or more banks to provide safekeeping and
custodial services for the City. A Safekeeping Agreement approved by the City
shall be executed with each custodian bank prior to utilizing that bank's
safekeeping services.
Custodian banks will be selected on the basis of their ability to provide services
for the City's account and the competitive pricing of their safekeeping related
services.
The purchase and sale of securities and repurchase agreement transactions shall
be settled on a delivery versus payment basis. All securities shall be perfected in
the name of the City. Sufficient evidence to title shall be consistent with modern
investment, banking and commercial practices.
All investment securities, except non-negotiable Certificates of Deposit, Monev
Market Funds and local government investment pools, purchased by the Citv will
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be delivered by book entry and will be held in third -party safekeeping by a City
approved custodian bank, its correspondent bank or its Depository Trust
Company (DTC) participant account.
All Fed wireable book entry securities owned by the City shall be held in the
Federal Reserve system in a customer account for the custodian bank which will
name the City as "customer."
All DTC eligible securities shall be held in the custodian bank's DTC participant
account and the custodian bank shall provide evidence that the securities are held
for the City as "customer."
G. AUTHORIZED INVESTMENTS
All investments and deposits of the City shall be made in accordance with
California Government Code Sections 16429.1, 53600-53609 and 53630-53686. Any
revisions or extensions of these code sections will be assumed to be part of this
Policy immediately upon being enacted. The City has further restricted the eligible
types of securities and transactions. The foregoing list of authorized securities and
transactions shall be strictly interpreted. Any deviation from this list must be pre -
approved by resolution of the City Council. In the event an apparent discrepancy
is found between this Policy and the Government Code, the more restrictive
parameter(s) will take precedence.
Where this section specifies a percentage limitation or minimum credit rating for
a particular security type, that percentage or credit rating minimum is applicable
only at the date of purchase.
1. Investments Specifically Permitted
a) United States Treasury bills, notes, or bonds with a final maturity not
exceeding five years from the date of trade settlement. There is no
limitation as to the percentage of the City's portfolio that may be
invested in this category.
b) Federal Instrumentality (government-sponsored enterprise)
debentures, discount notes, callable and step-up securities, with a
final maturity not exceeding five years from the date of trade
settlement. There is no limitation as to the percentage of the portfolio
that can be invested in this category.
c) Federal Agency Obligations for which the full faith and credit of the
United States are pledged for the payment of principal and interest
and which have a final maturity not exceeding five years from the
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date of trade settlement. There is no limitation as to the percentage
of the portfolio that can be invested in this category.
d) Mortgage-backed Securities, Collateralized Mortgage Obligation
(CMO) and Asset-backed Securities from issuers not defined in
sections a), (b), and (c) of this Section are limited to bonds with a
final maturity not exceeding five years from the date of trade
settlement. The security itself shall be rated at least "AAA" or the
equivalent by a Nationally Recognized Statistical Rating
Organization ("NRSRO"). No more than five percent (5%) of the
City's total portfolio shall be invested in any one issuer of mortgage-
backed and asset-backed securities listed above, and the aggregate
investment in mortgage-backed and asset-backed securities shall not
exceed twenty percent (20%) of the City's total portfolio.
e) Medium -Term Notes issued by corporations organized and
operating within the United States or by depository institutions
licensed by the United States or any state and operating within the
United States, with a final maturity not exceeding five years from the
date of trade settlement, and rated in at least the "A" category or the
equivalent by an NRSRO. No more than five percent (5%) of the
City's total portfolio shall be invested in any one issuer of medium-
term notes, and the aggregate investment in medium-term notes
shall not exceed thirty percent (30%) of the City's total portfolio.
f) Municipal Bonds: including bonds issued by the City of Newport
Beach, including bonds payable solely out of the revenues from a
revenue-producing property owned, controlled, or operated by the
City or by a department, board, agency, or authority of the City.
State of California registered warrants or treasury notes or bonds,
including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by the state or
by a department, board, agency, or authority of the state.
Registered treasury notes or bonds of any of the other 49 states in
addition to California, including bonds payable solely out of the
revenues from a revenue producing property owned, controlled, or
operated by a state or by a department, board, agency, or authority
of any of the other 49 states, in addition to California.
Bonds, notes, warrants, or other evidences of indebtedness of a local
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agency within California, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or
operated by the local agency, or by a department, board, agency, or
authority of the local agency.
In addition, these securities must be rated in at least the "A" category
or the equivalent by a NRSRO with maturities not exceeding five
years from the date of trade settlement. No more than five percent
(5%) of the City's total portfolio shall be invested in any one
municipal issuer. In addition, the aggregate investment in municipal
bonds may not exceed thirty percent (30%) of the portfolio.
g) Non-negotiable Certificates of Deposit and savings deposits with a
maturity not exceeding two years from the date of trade settlement,
in FDIC insured state or nationally chartered banks or savings banks
that qualify as a depository of public funds in the State of California
as defined in California Government Code Section53630.5. Deposits
exceeding the FDIC insured amount shall be secured pursuant to
California Government Code Section 53652. No one issuer shall
exceed more than five percent (5%) of the portfolio, and investment
in negotiable and nonnegotiable certificates of deposit shall be
limited to thirty percent (30%) of the portfolio combined.
h) Negotiable Certificates of Deposit only with a nationally or state -
chartered bank, a savings association or a federal association (as
defined by Section 5102 of the Financial Code), a state or federal
credit union, or by a federally licensed or state -licensed branch of
a foreign bank whose senior long-term debt is rated in at least the
"A" category, or the equivalent, or short-term debt is rated at least
"A-1" or the equivalent by an NRSRO and having assets in excess of
$10 billion, so as to ensure security and a large, well- established
secondary market. Ease of subsequent marketability should be
further ascertained prior to initial investment by examining
currently quoted bids by primary dealers and the acceptability of the
issuer by these dealers. No one issuer shall exceed more than five
percent (5%) of the portfolio, and maturity shall not exceed two
years. Investment in negotiable and non- negotiable certificates of
deposit shall be limited to thirty percent (30%) of the portfolio
combined.
i) Prime Commercial Paper with a maturity not exceeding 270 days
from the date of trade settlement that is rated "A-1", or the
equivalent, by an NRSRO. The entity that issues the commercial
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paper shall meet all of the following conditions in either sub-
paragraph i. or sub -paragraph ii. below:
i The entity shall (1) be organized and operating in the United
States as a general corporation, (2) have total assets in excess
of $500,000,000 and (3) have debt other than commercial
paper, if any, that is rated in at least the "A" category or the
equivalent by an NRSRO.
ii The entity shall (1) be organized within the United States asa
special purpose corporation, trust, or limited liability
company, (2) have program wide credit enhancements,
including, but not limited to, over collateralization, letters of
credit or surety bond and (3) have commercial paper that is
rated at least "A-1" or the equivalent, by an NRSRO.
m No more than five percent (5%) of the City's total portfolio
shall be invested in the commercial paper of anv one issuer,
and the aggregate investment in commercial paper shall not
exceed twenty-five percent (25%) of the City's total portfolio.
J) Eligible Banker's Acceptances with a maturity not exceeding 180
days from the date of trade settlement, drawn on and accepted by a
commercial bank whose senior long-term debt is rated in at least the
"A" category or the equivalent by an NRSRO at the time of purchase.
Banker's Acceptances shall be rated at least "A-1", or the equivalent
at the time of purchase by an NRSRO. If the bank has senior debt
outstanding, it must be rated in at least the "A" category or the
equivalent by an NRSRO. The aggregate investment in banker's
acceptances shall not exceed forty percent (40%) of the City's total
portfolio, and no more than five percent (5%) of the City's total
portfolio shall be invested in banker's acceptances of any one bank.
k) Repurchase Agreements and Reverse Repurchase Agreements with
a final termination date not exceeding 30 days collateralized by U.S.
Treasury obligations or Federal Instrumentality securities listed in
items 1 and 2 above with the maturity of the collateral not exceeding
ten years. For the purpose of this section, the term collateral shall
mean purchased securities under the terms of the City's approved
Master Repurchase Agreement. The purchased securities shall have a
minimum market value including accrued interest of onehundred and two
percent (102%) of the dollar value of the funds borrowed. Collateral shall
be held in the City's custodian bank, as safekeeping agent, and the market
value of the collateral securities shall be marked -to -the -market dailv.
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Repurchase Agreements and Reverse Repurchase Agreements shall
be entered into only with broker/ dealers and who are recognized as
Primary Dealers with the Federal Reserve Bank of New York, or with
firms that have a Primary Dealer within their holding company
structure. Primary Dealers approved as Repurchase Agreement
counterparties shall have a short-term credit rating of at least "A-1"
or the equivalent and a long-term credit rating of at least "A" or the
equivalent. Repurchase agreement counterparties shall execute a
City approved Master Repurchase Agreement with the City. The
Finance Director shall maintain a copy of the City's approved Master
Repurchase Agreement and a list of the broker/ dealers who have
executed same.
In addition, the City must own assets for more than 30 days before
they can be used as collateral for a reverse repurchase agreement.
No more than ten percent (10%) of the portfolio can be involved in
reverse repurchase agreements.
1) State of California's Local Agency Investment Fund (LAIF),, pursuant
to California Government Code Section 16429.1.
m) County Investment Funds: Los Angeles County provides a service
similar to LAIF for municipal and other government entities outside
of Los Angeles County, including the City. Investment in this pool is
intended to be used as a temporary repository for short-term funds
used for liquidity purposes. The Finance Director shall maintain on
file appropriate information concerning the county pool's current
investment policies, practices, and performance, as well as its
requirements for participation, including, but not limited to,
limitations on deposits or withdrawals and the composition of the
portfolio. At no time shall more than five percent (5%) of the City's
total investment portfolio be placed in this pool.
n) Mutual Funds and Money Market Mutual Funds registered under
the Investment Company Act of 1940, provided that:
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i MUTUAL FUNDS that invest in the securities and obligations as
authorized under California Government Code, Section 53601 (a)
to (k) and (m) to (q) inclusive and that meet either of the
following criteria:
1) Attained the highest ranking or the highest letter and
numerical rating provided by not less than two (2) NRSROs;
or
2) Have retained an investment adviser registered or exempt
from registration with the Securities and Exchange
Commission with not less than five years' experience
investing in the securities and obligations authorized by
California Government Code, Section 53601 and with assets
under management in excess of $500 million.
3) No more than 10% of the total portfolio may be invested in
shares of any one mutual fund.
J
i MONEY MARKET MUTUAL FUNDS registered with the Securities
and Exchange Commission under the Investment Company Act
of 1940 and issued by diversified management companies and
meet either of the following criteria:
1) Have attained the highest ranking or the highest letter and
numerical rating provided by not less than two (2) NRSROs;
or
2) Have retained an investment adviser registered or exempt
from registration with the Securities and Exchange
Commission with not less than five years' experience
managing money market mutual funds with assets under
management in excess of $500 million.
3) No more than 20% of the total portfolio may be invested in
Money Market Mutual Funds.
R No more than 20% of the total portfolio may be invested in these
securities.
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o) Supranationals which are United States dollar denominated senior
unsecured unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and
Development (IBRD), International Finance Corporation (IFC), or
Inter -American Development Bank (IADB), with a maximum
remaining maturity of five years or less, and eligible for purchase
and sale within the United States. Investments under this paragraph
shall be rated in the "AA" category, its equivalent, or better by at least
one NRSRO.
No more than ten percent (10%) of the City's total portfolio shall be
invested in any one issuer of supranational obligations. Purchases of
supranational obligations shall not exceed twenty percent (20%) of
the investment portfolio of the City.
2. Investments Specifically Not Permitted
Any security type or structure not specifically approved by this policy is
hereby prohibited. Security types, which are thereby prohibited include,
but are not limited to: "exotic" derivative structures such as range notes,
dual index notes, inverse floating rate notes, leveraged or de -leveraged
floating rate notes, interest only strips that are derived from a pool of
mortgages and any security that could result in zero interest accrual if held
to maturity, or anv other complex variable or structured note with an
unusually high degree of volatility risk.
The City shall not invest funds with the Orange County Pool.
3. Exceptions to Prohibited and Restricted Investments
The City shall not be required to sell securities prohibited or restricted in
this policy, or any future policies, or prohibited or restricted by new State
regulations, if purchased prior to their prohibition and/or restriction.
Insofar as these securities provided no notable credit risk to the City,
holding of these securities until maturity is approved. At maturity or
liquidation, such monies shall be reinvested as provided by this policy.
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H. INVESTMENT PARAMETERS
1. Diversification
The Citv shall diversifv its investments to avoid incurring unreasonable
risks inherent in over -investing in specific instruments, individual financial
institutions or maturities. As such, no more than five percent (5%) of the
City's portfolio may be invested in the instruments of any one issuer, except
governmental issuers, supranationals, investment pools, mutual funds and
money market funds, or unless otherwise specified in this investment
policy. This restriction does not apply to any type of Federal Instrumentality
or Federal Agency Security listed in Sections G1 (b) and G1 (c) above.
Nevertheless, the asset allocation in the investment portfolio should be
flexible depending upon the outlook for the economy, the securities
markets and the City's anticipated cash flow needs.
2. Maximum Maturities
To the extent possible, investments shall be matched with anticipated cash
flow requirements and known future liabilities. The City will not invest in
securities maturing more than five years from the date of trade settlement,
unless the City Council has by resolution granted authority to make such
an investment at least three months prior to the date of investment.
3. Credit Quality
Each investment manager will monitor the credit quality of the securities in
their respective portfolio. In the event a security held by the City is the
subject of a rating downgrade which brings it below accepted minimums
specified herein, or the security is placed on negative credit watch, where
downgrade could result in a rate drop below acceptable levels, the
investment advisor who purchased the security will immediately notify the
Finance Director. The City shall not be required to immediately sell such
securities. The course of action to be followed will then be decided on a case
by case basis, considering such factors as the reason for the rate drop,
prognosis for recovery or further drop, and market price of the security.
The City Council will be advised of the situation and intended course of
action.
4. Competitive Transactions
Investment advisors shall make best effort to price investment transactions
on a competitive basis with broker/ dealers selected consistent with their
practices disclosed in form ADV 2A filed with the SEC. Where possible, at
least three broker/ dealers shall be contacted for each transaction and their
bid or offering prices shall be recorded. If there is no other readily available
competitive offering, the investment advisor shall make their best efforts to
document quotations for comparable or alternative securities. If qualitative
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characteristics of a transaction, including, but not limited to, complexity of
the transaction, or sector expertise of the broker, prevent a competitive
selection process, investment advisors shall use brokerage selection
practices as described above.
I. PORTFOLIO PERFORMANCE
The investment portfolio shall be designed to attain a market rate of return
throughout budgetary and economic cycles, taking into account prevailing market
conditions, risk constraints for eligible securities, and cash flow requirements. The
performance of the City's investments shall be compared to the total return of a
benchmark that most closely corresponds to the portfolio's duration, universe of
allowable securities, risk profile, and other relevant characteristics. When
comparing the performance of the City's portfolio, its rate of return will be
computed consistent with Global Investment Performance Standards (GIPS).
J. REPORTING
Monthly, the Finance Director shall produce a treasury report of the investment
portfolio balances, transactions, risk characteristics, earnings, and performance
results of the City's investment portfolio available to City Council and the public
on the City's Website. The report shall include the following information:
1. Investment type, issuer, date of maturity, par value and dollar amount
invested in all securities, and investments and monies held by the City;
2. A description of the funds, investments and programs;
3. A market value as of the date of the report (or the most recent valuation as
to assets not valued monthly) and the source of the valuation;
4. A statement of compliance with this Policy or an explanation for non-
compliance
K. INVESTMENT POLICY COMPLIANCE AND ADOPTION
1. Compliance
Any deviation from the policy shall be reported to Finance Committee as
soon as practical, but no later than the next scheduled Finance Committee
meeting. Upon recommendation of the Finance Committee, the Finance
Director shall review deviations from policy with the City Council.
2. Adoption
The Finance Director shall review the Investment Policy with the Finance
Committee at least annually to ensure its consistency with the overall
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objectives of preservation of principal, liquidity and return, and its
relevance to current law and financial and economic trends.
The Finance Director shall review the Investment Policy with City Council
at a public meeting if there are changes recommended to the Investment
Policy.
This Policy was endorsed and adopted by the City Council of the City of
Newport Beach on September 8, 2015. It replaces any previous investment
policy or investment procedures of the City.
Adopted - April 6,1959
Amended - November 9,1970
Amended - February 11, 1974
Amended - February 9,1981
Amended - October 27,1986
Rewritten - October 22,1990
Amended - January 28,1991
Amended - January 24,1994
Amended - January 9,1395
Amended - April 22,19%
Corrected - January 27,1997
Amended - February 24,1997
Amended - May 26,1998
Reaffirmed - March 22,1999
Reaffirmed - March 14, 2000
Amended & Reaffirmed - May 8, 2001
Amended & Reaffirmed - April 23, 2002
Amended & Reaffirmed - April 8, 2003
Amended & Reaffirmed - April 13, 2004
Amended & Reaffirmed - September 13, 2005
Amended - August 11, 2009
Amended & Reaffirmed - August 10, 2010
Amended & Reaffirmed - September 28, 2010
Reaffirmed - June 28, 2011
Amended & Reaffirmed - October 9, 2012
Amended - August 13, 2013
Amended - September 8, 2015
Amended - March 28, 2017
Amended - January 28, 2020
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Glossary of Investment Terms
AGENCIES. Shorthand market terminology for any obligation issued by a government-
sponsored entity (GSE), or a federally related institution. Most obligations of GSEs are
not guaranteed by the full faith and credit of the US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the
agricultural industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing
market. FHLB issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit
and liquidity in the housing market. FHLMC, also called "FreddieMac" issues
discount notes, bonds and mortgage pass-through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was
established to provide credit and liquidity in the housing market. FNMA, also
known as "FannieMae," issues discount notes, bonds and mortgage pass-
through securities.
GNMA. The Government National Mortgage Association, known as "GinnieMae,"
issues mortgage pass-through securities, which are guaranteed by the full faith
and credit of the US Government.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations of
PEFCO are not guaranteed by the full faith and credit of the US government.
TVA. The Tennessee Valley Authority provides flood control and power and
promotes development in portions of the Tennessee, Ohio, and Mississippi River
valleys. TVA currently issues discount notes and bonds.
ASKED. The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or
by pools of revolving lines of credit.
AVERAGE LIFE. In mortgage -related investments, including CMOs, the average time to
expected receipt of principal payments, weighted by the amount of principal
expected.
BANKER'S ACCEPTANCE. A money market instrument created to facilitate international
trade transactions. It is highly liquid and safe because the risk of the trade transaction
is transferred to the bank which "accepts" the obligation to pay the investor.
BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial
market index, which reflects the mix of securities allowed under a specific
investment policy.
BID. The price at which a buyer offers to buy a security.
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BROKER. A broker brings buyers and sellers together for a transaction for which the broker
receives a commission. A broker does not sell securities from his own position.
CALLABLE. A callable security gives the issuer the option to call it from the investor prior to
its maturity. The main cause of a call is a decline in interest rates. If interest rates
decline since an issuer issues securities, it will likely call its current securities and
reissue them at a lower rate of interest. Callable securities have reinvestment risk as
the investor may receive its principal back when interest rates are lower than when
the investment was initially made.
CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a
certificate. Large denomination CDs may be marketable.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement
service that allows local agencies to purchase more than $250,000 in CDs from a
single financial institution (must be a participating institution of CDARS) while still
maintaining FDIC insurance coverage. CDARS is currently the only entity providing
this service. CDARS facilitates the trading of deposits between the California
institution and other participating institutions in amounts that are less than $250,000
each, so that FDIC coverage is maintained.
COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or
repurchase agreement. Also, securities pledged by a financial institution to secure
deposits of public monies.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the
cash flows of mortgage securities (and whole loans) to create securities that have
different levels of prepayment risk, as compared to the underlying mortgage
securities.
COMMERCIAL PAPER. The short-term unsecured debt of corporations.
COST YIELD. The annual income from an investment divided by the purchase cost. Because
it does not give effect to premiums and discounts which may have been included in
the purchase cost, it is an incomplete measure of return.
COUPON. The rate of return at which interest is paid on a bond.
CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a
timely manner due to changes in the condition of the issuer.
CURRENT YIELD. The annual income from an investment divided by the current market
value. Since the mathematical calculation relies on the current market value rather
than the investor's cost, current yield is unrelated to the actual return the investor
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will earn if the security is held to maturity.
DEALER. A dealer acts as a principal in security transactions, selling securities from and
buying securities for his own position.
DEBENTURE. A bond secured only by the general credit of the issuer.
DELIVERY VS. PAYMENT (DVP). A securities industry procedure whereby payment for a
security must be made at the time the security is delivered to the purchaser's agent.
DERIVATIVE. Any security that has principal and/or interest payments which are subject to
uncertainty (but not for reasons of default or credit risk) as to timing and/or amount,
or any security which represents a component of another security which has been
separated from other components ("Stripped" coupons and principal). A derivative
is also defined as a financial instrument the value of which is totally or partially
derived from the value of another instrument, interest rate, or index.
DISCOUNT. The difference between the par value of a bond and the cost of the bond, when
the cost is below par. Some short-term securities, such as T-bills and banker's
acceptances, are known as discount securities. They sell at a discount from par, and
return the par value to the investor at maturity without additional interest. Other
securities, which have fixed coupons, trade at a discount when the coupon rate is
lower than the current market rate for securities of that maturity and/or quality.
DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid
excessive exposure to any one source of risk.
DURATION. The weighted average time to maturity of a bond where the weights are the
present values of the future cash flows. Duration measures the price sensitivity of a
bond to changes in interest rates. (See modified duration).
FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other
banks. The Federal Reserve Bank through open -market operations establishes it.
FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that
establishes monetary policy and executes it through temporary and permanent
changes to the supply of bank reserves.
LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay
earnings at a rate higher than the cost of borrowing.
LIQUIDITY. The speed and ease with which an asset can be converted to cash.
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LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to
government entities and certain non-profit organizations in California that is
managed by the State Treasurer's Office.
LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State
Treasurer's Office Local Agency Investment Fund (LAIF) to county pools, to Joint
Powers Authorities (JPAs). These funds are not subject to the same SEC rules
applicable to money market mutual funds.
MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the
remaining debt early. Unlike a call option, with a make whole call provision, the
issuer makes a lump sum payment that equals the net present value (NPV) of future
coupon payments that will not be paid because of the call. With this type of call, an
investor is compensated, or "made whole."
MARGIN. The difference between the market value of a security and the loan a broker makes
using that security as collateral.
MARKET RISK. The risk that the value of securities will fluctuate with changes in overall
market conditions or interest rates.
MARKET VALUE. The price at which a security can be traded.
MARKING TO MARKET. The process of posting current market values for securities in a
portfolio.
MATURITY. The final date upon which the principal of a security becomes due and payable.
MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major
corporations which are sold in relatively small amounts on either a continuous or an
intermittent basis. MTNs are highly flexible debt instruments that can be structured
to respond to market opportunities or to investor preferences.
MODIFIED DURATION. The percent change in price for a 100 basis point change in yields.
Modified duration is the best single measure of a portfolio's or security's exposure
to market risk.
MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes,
commercial paper, and banker's acceptances) are issued and traded.
MORTGAGE PASS-THROUGH SECURITIES. A securitized participation in the interest and
principal cash flows from a specified pool of mortgages. Principal and interest
payments made on the mortgages are passed through to the holder of the security.
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MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and
operating expenses.
MUTUAL FUND. An entity which pools the funds of investors and invests those funds in a
set of securities which is specifically defined in the fund's prospectus. Mutual funds
can be invested in various types of domestic and/or international stocks, bonds, and
money market instruments, as set forth in the individual fund's prospectus. For most
large, institutional investors, the costs associated with investing in mutual funds are
higher than the investor can obtain through an individually managed portfolio.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO).
A credit rating agency that the Securities and Exchange Commission in the United
States uses for regulatory purposes. Credit rating agencies provide assessments of
an investment's risk. The issuers of investments, especially debt securities, pay
credit rating agencies to provide them with ratings. The three most prominent
NRSROs are Fitch, S&P, and Moody's.
NEGOTIABLE CD. A short-term debt instrument that pays interest and is issued by a bank,
savings or federal association, state or federal credit union, or state -licensed branch
of a foreign bank. Negotiable CDs are traded in a secondary market.
PREMIUM. The difference between the par value of a bond and the cost of the bond, when
the cost is above par.
PREPAYMENT SPEED. A measure of how quickly principal is repaid to investors in mortgage
securities.
PREPAYMENT WINDOW. The time period over which principal repayments will be received
on mortgage securities at a specified prepayment speed.
PRIMARY DEALER. A financial institution (1) that is a trading counterparty with the Federal
Reserve in its execution of market operations to carry out U.S. monetary policy, and
(2) that participates for statistical reporting purposes in compiling data on activity
in the U.S. Government securities market.
PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies
to fiduciaries. In California, the rule is stated as "Investments shall be managed with
the care, skill, prudence and diligence, under the circumstances then prevailing, that
a prudent person, acting in a like capacity and familiar with such matters, would use
in the conduct of an enterprise of like character and with like aims to accomplish
similar purposes."
REALIZED YIELD. The change in value of the portfolio due to interest received and interest
earned and realized gains and losses. It does not give effect to changes in market
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value on securities, which have not been sold from the portfolio.
REGIONAL DEALER. A financial intermediary that buys and sells securities for the benefit of
its customers without maintaining substantial inventories of securities and that is
not a primary dealer.
REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous
agreement to sell the securities back at a higher price. From the seller's point of view,
the same transaction is a reverse repurchase agreement.
SAFEKEEPING. A service to bank customers whereby securities are held by the bank in the
customer's name.
STRUCTURED NOTE. A complex, fixed income instrument, which pays interest, based on a
formula tied to other interest rates, commodities or indices. Examples include
inverse floating rate notes which have coupons that increase when other interest
rates are falling, and which fall when other interest rates are rising, and "dual index
floaters," which pay interest based on the relationship between two other interest
rates - for example, the yield on the ten-year Treasury note minus the Libor rate.
Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate
swap agreements.
SUPRANATIONAL. A Supranational is a multi -national organization whereby member states
transcend national boundaries or interests to share in the decision making to
promote economic development in the member countries.
TOTAL RATE OF RETURN. A measure of a portfolio's performance over time. It is the internal
rate of return, which equates the beginning value of the portfolio with the ending
value; it includes interest earnings, realized and unrealized gains, and losses in the
portfolio.
U.S. TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full
faith and credit of the United States. Treasuries are considered to have no credit risk,
and are the benchmark for interest rates on all other securities in the US and
overseas. The Treasury issues both discounted securities and fixed coupon notes and
bonds.
TREASURY BILLS. All securities issued with initial maturities of one year or less are issued
as discounted instruments, and are called Treasury bills. The Treasury currently
issues three- and six-month T-bills at regular weekly auctions. It also issues "cash
management" bills as needed to smooth out cash flows.
TREASURY NOTES. All securities issued with initial maturities of two to ten nears are called
Treasury notes, and pay interest semi-annually.
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TREASURY BONDS. All securities issued with initial maturities greater than ten years are
called Treasury bonds. Like Treasury notes, they pay interest semi-annually.
VOLATILITY. The rate at which security prices change with changes in general economic
conditions or the general level of interest rates.
YIELD TO MATURITY. The annualized internal rate of return on an investment which equates
the expected cash flows from the investment to its cost.
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ATTACHMENT B
STATEMENT OF INVESTMENT POLICY
PURPOSE:
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The City Council has adopted this Investment Policy (the Policy) in order to establish the
scope of the investment policy, investment objectives, standards of care, authorized
investments, investment parameters, reporting, investment policy compliance and
adoption, and the safekeeping and custody of assets.
This Policy is organized in the following sections:
A. Scope of Investment Policy
1. Pooling of Funds
2. Funds Included in the Policy
3. Funds Excluded from the Policy
B. Investment Objectives
1. Safety
2. Liquidity
3. Yield
C. Standards of Care
1. Prudence
2. Ethics and Conflicts of Interest
3. Delegation of Authority
4. Internal Controls
D. Banking Services
E. Broker/ Dealers
F. Safekeeping and Custody of Assets
G. Authorized Investments
1. Investments Specifically Permitted
2. Investments Specifically Not Permitted
3. Exceptions to Prohibited and Restricted Investments
H. Investment Parameters
1. Diversification
2. Maximum Maturities
3. Credit Quality
4. Competitive Transactions
I. Portfolio Performance
J. Reporting
K. Investment Policy Compliance and Adoption
1. Compliance
2. Adoption
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A. SCOPE OF INVESTMENT POLICY
1. Pooling of Funds
All cash shall be pooled for investment purposes. The investment income
derived from the pooled investment shall be allocated to the contributing
funds, net of all banking and investing expenses, based upon the proportion
of the respective average balances relative to the total pooled balance.
Investment income shall be distributed to the individual funds not less than
annually.
2. Funds Included in the Policy
The provisions of this Policy shall apply to all financial assets of the City as
accounted for in the City's Comprehensive Annual Financial Report,
including;
a) General Fund
b) Special Revenue Funds
c) Capital Project Funds
d) Enterprise Funds
e) Internal Service Funds
0 Trust and Agency Funds
g) Permanent Endowment Funds
h) Any new fund created unless specifically exempted
If the City invests funds on behalf of another agency and, if that agency
does not have its own investment policy, this Policy shall govern the
agency's investments.
3. Funds Excluded from this Policy
Bond Proceeds - Investment of bond proceeds will be made in accordance
with applicable bond indentures.
B. INVESTMENT OBJECTIVES
The City's funds shall be invested in accordance with all applicable City policies
and codes, State statutes, and Federal regulations, and in a manner designed to
accomplish the following objectives, which are listed in priority order:
1. Safety
Preservation of principal is the foremost objective of the investment
program. Investments of the City shall be undertaken in a manner that
seeks to ensure the preservation of capital in the overall portfolio. The
objective shall be to mitigate credit risk and interest rate risk. To attain this
objective, the City shall diversify its investments by investing funds among
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several financial institutions and a variety of securities offering
independent returns.
a) Credit Risk
The City shall minimize credit risk, the risk of loss due to the
failure of the security issuer or backer, by:
■ Limiting investments in securities that have higher credit risks,
pre -qualifying the financial institutions, broker/ dealers,
intermediaries, and advisors with which the City will do
business
■ Diversifying the investment portfolio so as to minimize the
impact any one industry/ investment class can have on the
portfolio
b) Interest Rate Risk
To minimize the negative impact of material changes in the market
value of securities in the portfolio, the City shall:
■ Structure the investment portfolio so that securities mature
concurrent with cash needs to meet anticipated demands,
thereby avoiding the need to sell securities on the open
market prior to maturity
■ Invest in securities of varying maturities
2. Liquidity
The City's investment portfolio shall remain sufficiently liquid to enable the
City to meet all operating requirements which might be reasonably
anticipated without requiring a sale of securities. Since all possible cash
demands cannot be anticipated, the portfolio should consist largely of
securities with active secondary or resale markets. A portion of the portfolio
also may be placed in money market mutual funds or LAIF which offer
same-day liquidity for short-term funds.
3. Yield
The City's investment portfolio shall be designed with the objective of
attaining a benchmark rate of return throughout budgetary and economic
cycles, commensurate with the City's investment risk constraints and the
liquidity characteristics of the portfolio. Return on investment is of
secondary importance compared to the safety and liquidity objectives
described above. The core of investments is limited to relatively low risk
securities in anticipation of earning a fair return relative to the risk being
assumed.
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C. STANDARDS OF CARE
1. Prudence
The standard of prudence to be used for managing the City's investment
program is California Government Code Section 53600.3, the prudent
investor standard, which states that "when investing, reinvesting,
purchasing, acquiring, exchanging, selling, or managing public funds, a
trustee shall act 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."
The City's overall investment program shall be designed and managed with
a degree of professionalism that is worthy of the public trust. The City
recognizes that no investment is totally without risk and that the
investment activities of the City are a matter of public record. Accordingly,
the City recognizes that occasional measured losses may occur in a
diversified portfolio and shall be considered within the context of the
overall portfolio's return, provided that adequate diversification has been
implemented and that the sale of a security is in the best long-term interest
of the City.
The Finance Director and authorized investment personnel acting in
accordance with established procedures and exercising due diligence shall
be relieved of personal responsibility for an individual security's credit risk
or market price changes, provided that deviations from expectations are
reported in a timely fashion to the City Council and appropriate action is
taken to control adverse developments.
2. Ethics and Conflicts of Interest
Elected officials and employees involved in the investment process shall
refrain from personal business activity that could conflict with proper
execution of the City's investment program or could impair or create the
appearance of an impairment of their ability to make impartial investment
decisions. Employees and investment officials shall subordinate their
personal investment transactions to those of the City. In addition, City
Council members, the City Manager, and the Finance Director shall file a
Statement of Economic Interests each year as required by California
Government Code Section 87203 and regulations of the Fair Political
Practices Commission.
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3. Delegation of Authority
Authority to manage the City's investment program is derived from the
Charter of the City of Newport Beach section 605 (j). The Finance Director
shall assume the title of and act as City Treasurer and with the approval of
the City Manager appoint deputies annually as necessary to act under the
provisions of any law requiring or permitting action by the City Treasurer.
The Finance Director may then delegate the authority to conduct
investment transactions and to manage the operation of the investment
portfolio to other specifically authorized staff members. No person may
engage in an investment transaction except as expressly provided under the
terms of this Policy.
The City may engage the support services of outside investment advisors
with respect to its investment program, so long as it can be demonstrated
that these services produce a net financial advantage or necessary financial
protection of the City's financial resources. Such companies must be
registered under the Investment Advisors Act of 1940, be well-established
and exceptionally reputable. Members of the staff of such companies who
will have primary responsibility for managing the City's investments must
have a working familiarity with the special requirements and constraints of
investing municipal funds in general and this City's funds in particular.
These firms must insure that the portion of the portfolio under their
management complies with various concentration and other constraints
specified herein, and contractually agree to conform to all provisions of
governing law and the collateralization and other requirements of this
Policy. Selection and retention of broker/ dealers by investment advisors
shall be at their sole discretion and dependent upon selection and retention
criteria as stated in the Uniform Application for Investment Advisor
Registration and related Amendments (SEC Form ADV 2A).
4. Internal Controls
The Finance Director is responsible for establishing and maintaining a
system of internal controls. The internal controls shall be designed to
prevent losses of public funds arising from fraud, employee error, and
misrepresentation by third parties, unanticipated changes in financial
markets, or imprudent action by City employees and officers. The internal
structure shall be designed to provide reasonable assurance that these
objectives are met. The concept of reasonable assurance recognizes that (1)
the cost of a control should not exceed the benefits likely to be derived, and
(2) the valuation of costs and benefits requires estimates and judgments by
management.
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D. BANKING SERVICES
Banking services for the City shall be provided by FDIC insured banks approved
to provide depository and other banking services. To be eligible, a bank shall
qualify as a depository of public funds in the State of California as defined in
California Government Code Section 53630.5 and shall secure deposits in excess of
FDIC insurance coverage in accordance with California Government Code Section
53652.
E. BROKER/ DEALERS
In the event that an investment advisor is not used to purchase securities, the City
will select broker/dealers on the basis of their expertise in public cash
management and their ability to provide service to the City's account.
Each approved broker/dealer must possess an authorizing certificate from the
California Commissioner of Corporations as required by Section 25210 of the
California Corporations Code.
To be eligible, a firm must meet at least one of the following criteria:
1. Be recognized as Primary Dealers by the Federal Reserve Bank of New York
or have a primary dealer within their holding company structure, or
2. Report voluntarily to the Federal Reserve Bank of New York, or
3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3-1
(Uniform Net Capital Rule).
F. SAFEKEEPING AND CUSTODY OF ASSETS
The Finance Director shall select one or more banks to provide safekeeping and
custodial services for the City. A Safekeeping Agreement approved by the City
shall be executed with each custodian bank prior to utilizing that bank's
safekeeping services.
Custodian banks will be selected on the basis of their ability to provide services
for the City's account and the competitive pricing of their safekeeping related
services.
The purchase and sale of securities and repurchase agreement transactions shall
be settled on a delivery versus payment basis. All securities shall be perfected in
the name of the City. Sufficient evidence to title shall be consistent with modern
investment, banking and commercial practices.
All investment securities, except non-negotiable Certificates of Deposit, Money
Market Funds and local government investment pools, purchased by the City will
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be delivered by book entry and will be held in third -party safekeeping by a City
approved custodian bank, its correspondent bank or its Depository Trust
Company (DTC) participant account.
All Fed wireable book entry securities owned by the City shall be held in the
Federal Reserve system in a customer account for the custodian bank which will
name the City as "customer."
All DTC eligible securities shall be held in the custodian bank's DTC participant
account and the custodian bank shall provide evidence that the securities are held
for the City as "customer."
All investments and deposits of the City shall be made in accordance with
California Government Code Sections 16429.1, 53600-53609 and 53630-53686. Any
revisions or extensions of these code sections will be assumed to be part of this
Policy immediately upon being enacted. The City has further restricted the eligible
types of securities and transactions. The foregoing list of authorized securities and
transactions shall be strictly interpreted. Any deviation from this list must be pre -
approved by resolution of the City Council. In the event an apparent discrepancy
is found between this Policy and the Government Code, the more restrictive
parameter(s) will take precedence.
Where this section specifies a percentage limitation or minimum credit ratir ( for
a particular security type, that percentage Or crcc.iit rating minimurrl is applicable
only at the date of purchase.
1. Investments Specifically Permitted
a) United States Treasury bills, notes, or bonds with a final maturity not
exceeding five years from the date of trade settlement. There is no
limitation as to the percentage of the City's portfolio that may be
invested in this category.
b) Federal Instrumentality (government-sponsored enterprise)
debentures, discount notes, callable and step-up securities, with a
final maturity not exceeding five years from the date of trade
settlement. There is no limitation as to the percentage of the portfolio
that can be invested in this category.
c) Federal Agency Obligations for which the full faith and credit of the
United States are pledged for the payment of principal and interest
and which have a final maturity not exceeding five years from the
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date of trade settlement. There is no limitation as to the percentage
of the portfolio that can be invested in this category.
d) Mortgage-backed Securities, Collateralized Mortgage Obligation
(CMO) and Asset-backed Securities from not , e r i ri c L3 '111
Section seEt ,-(4--t1� _ are limited to mor-tgage-
,
ef Eensumer receivable pass through certificates or bonds with a
final maturity not exceeding five years from the date of trade
settlement. Seeur-ities eligible for iavestment under this subdivi'sion
shall be issuedby an issuer whose debt is i:ated—in ati- lea4 the'�"'Aff
Rating Organization (NRSR01.The security itself shall be rated at
least "AAA" or the equivalent by aR-- \-atiunally RO.cogni/ed
Statistical Patin, (:)rgjriiation ("NRSRO_). No more than five
percent (5%) of the City's total portfolio shall be invested in any one
issuer of mortgage-backed and asset-backed securities listed above,
and the aggregate investment in mortgage-backed and asset-backed
securities shall not exceed twenty percent (20%) of the City's total
portfolio.
e) Medium -Term Notes issued by corporations organized and
operating within the United States or by depository institutions
licensed by the United States or any state and operating within the
United States, with a final maturity not exceeding five years from the
date of trade settlement, and rated in at least the "A" category or the
equivalent by an NRSRO. No more than five percent (5%) of the
City's total portfolio shall be invested in any one issuer of medium-
term notes, and the aggregate investment in medium-term notes
shall not exceed thirty percent (30%) of the City's total portfolio.
f) Municipal Bonds: including bonds issued by the City of Newport
Beach, including bonds payable solely out of the revenues from a
revenue-producing property owned, controlled, or operated by the
City or by a department, board, agency, or authority of the City.
State of California registered warrants or treasury notes or bonds,
including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by the state or
by a department, board, agency, or authority of the state.
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Registered treasury notes or bonds of any of the other 49 states in
addition to California, including bonds payable solely out of the
revenues from a revenue producing property owned, controlled, or
operated by a state or by a department, board, agency, or authority
of any of the other 49 states, in addition to California.
Bonds, notes, warrants, or other evidences of indebtedness of a local
agency within California, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or
operated by the local agency, or by a department, board, agency, or
authority of the local agency.
In addition, these securities must be rated in at least the "A" category
or the equivalent by a NRSRO with maturities not exceeding five
years from the date of trade settlement. No more than five percent
(5%) of the City's total portfolio shall be invested in any one
municipal issuer. In addition, the aggregate investment in municipal
bonds may not exceed thirty percent (30%) of the portfolio.
g) Non-negotiable Certificates of Deposit and savings deposits with a
maturity not exceeding two years from the date of trade settlement,
in FDIC insured state or nationally chartered banks or savings banks
that qualify as a depository of public funds in the State of California
as defined in California Government Code Section 53630.5. Deposits
exceeding the FDIC insured amount shall be secured pursuant to
California Government Code Section 53652. No one issuer shall
exceed more than five percent (5%) of the portfolio, and investment
in negotiable and nonnegotiable certificates of deposit shall be
limited to thirty percent (30%) of the portfolio combined.
h) Negotiable Certificates of Deposit only with a nationally or state -
chartered bank, a savings association or a federal association (as
defined by Section 5102 of the Financial Code), a state or federal
credit union, or by a federally licensed or state -licensed branch of
a foreign bank whose senior long-term debt is rated in at least the
"A" category, or the equivalent, or short-term debt is rated at least
"A-1" or the equivalent by an NRSRO and having assets in excess of
$10 billion, so as to ensure security and a large, well- established
secondary market. Ease of subsequent marketability should be
further ascertained prior to initial investment by examining
currently quoted bids by primary dealers and the acceptability of the
issuer by these dealers. No one issuer shall exceed more than five
percent (5%) of the portfolio, and maturity shall not exceed two
years. Investment in negotiable and non- negotiable certificates of
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deposit shall be limited to thirty percent (30%) of the portfolio
combined.
i) Prime Commercial Paper with a maturity not exceeding 270 days
from the date of trade settlement that is rated "A-1", or the
equivalent, by an NRSRO. The entity that issues the commercial
paper shall meet all of the following conditions in either sub-
paragraph i. or sub -paragraph ii. below:
i The entity shall (1) be organized and operating in the United
States as a general corporation, (2) have total assets in excess
of $500,000,000 and (3) have debt other than commercial
paper, if any, that is rated in at least the "A" category or the
equivalent by an NRSRO.
ii The entity shall (1) be organized within the United States asa
special purpose corporation, trust, or limited liability
company, (2) have program wide credit enhancements,
including, but not limited to, over collateralization, letters of
credit or surety bond and (3) have commercial paper that is
rated at least "A-1" or the equivalent, by an NRSRO.
m. No more than five percent (5%) of the City's total portfolio
shall be invested in the commercial paper of any one issuer,
and the aggregate investment in commercial paper shall not
exceed twenty-five percent (25%) of the City's total portfolio.
1) Eligible Banker's Acceptances with a maturity not exceeding 180
days from the date of trade settlement, drawn on and accepted by a
commercial bank whose senior long-term debt is rated in at least the
"A" category or the equivalent by an NRSRO at the time of purchase.
Banker's Acceptances shall be rated at least "A-1", or the equivalent
at the time of purchase by an NRSRO. If the bank has senior debt
outstanding, it must be rated in at least the "A" category or the
equivalent by an NRSRO. The aggregate investment in banker's
acceptances shall not exceed forty percent (40%) of the City's total
portfolio, and no more than five percent (5%) of the City's total
portfolio shall be invested in banker's acceptances of any one bank.
k) Repurchase Agreements and Reverse Repurchase Agreements with
a final termination date not exceeding 30 days collateralized by U.S.
Treasury obligations or Federal Instrumentality securities listed in
items 1 and 2 above with the maturity of the collateral not exceeding
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ten years. For the purpose of this section, the term collateral shall
mean purchased securities under the terms of the City's approved
Master Repurchase Agreement. The purchased securities shall have a
minimum market value including accrued interest of onehundred and two
percent (102%) of the dollar value of the funds borrowed. Collateral shall
be held in the City's custodian bank, as safekeeping agent, and the market
value of the collateral securities shall be marked -to -the -market daily.
Repurchase Agreements and Reverse Repurchase Agreements shall
be entered into only with broker/ dealers and who are recognized as
Primary Dealers with the Federal Reserve Bank of New York, or with
firms that have a Primary Dealer within their holding company
structure. Primary Dealers approved as Repurchase Agreement
counterparties shall have a short-term credit rating of at least "A-1"
or the equivalent and a long-term credit rating of at least "A" or the
equivalent. Repurchase agreement counterparties shall execute a
City approved Master Repurchase Agreement with the City. The
Finance Director shall maintain a copy of the City's approved Master
Repurchase Agreement and a list of the broker/dealers who have
executed same.
In addition, the City must own assets for more than 30 days before
they can be used as collateral for a reverse repurchase agreement.
No more than ten percent (10%) of the portfolio can be involved in
reverse repurchase agreements.
1) State of California's Local Agency Investment Fund (LAIa pursuant
to California Government Code Section 16429.1.
m) County Investment Funds: Los Angeles County provides a service
similar to LAIF for municipal and other government entities outside
of Los Angeles County, including the City. Investment in this pool is
intended to be used as a temporary repository for short-term funds
used for Iiquidity purposes. The Finance Director shall maintain on
file appropriate information concerning the county pool's current
investment policies, practices, and performance, as well as its
requirements for participation, including, but not limited to,
limitations on deposits or withdrawals and the composition of the
portfolio. At no time shall more than five percent (5%) of the City's
total investment portfolio be placed in this pool.
n) Mutual Funds and Money Market Mutual Funds registered under
the Investment Company Act of 1940, provided that:
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i MUTUAL FUNDS that invest in the securities and obligations as
authorized under California Government Code, Section 53601 (a)
to (k) and (m) to (q) inclusive and that meet either of the
following criteria:
1) Attained the highest ranking or the highest letter and
numerical rating provided by not less than two (2) NRSROs;
or
2) Have retained an investment adviser registered or exempt
from registration with the Securities and Exchange
Commission with not less than five years' experience
investing in the securities and obligations authorized by
California Government Code, Section 53601 and with assets
under management in excess of $500 million.
3) No more than 10% of the total portfolio may be invested in
shares of any one mutual fund.
iL MONEY MARKET MUTUAL FUNDS registered with the Securities
and Exchange Commission under the Investment Company Act
of 1940 and issued by diversified management companies and
meet either of the following criteria:
1) Have attained the highest ranking or the highest letter and
numerical rating provided by not less than two (2) NRSROs;
or
2) Have retained an investment adviser registered or exempt
from registration with the Securities and Exchange
Commission with not less than five years' experience
managing money market mutual funds with assets under
management in excess of $500 million.
3) No more than 20% of the total portfolio may be invested in
Money Market Mutual Funds.
ii No more than 20% of the total portfolio maybe invested in these
securities.
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o) Supranationals which are United States dollar denominated senior
unsecured unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and
Development (IBRD), International Finance Corporation (IFC), or
Inter -American Development Bank (IADB), with a maximum
remaining maturity of five years or less, and eligible for purchase
and sale within the United States. Investments under this paragraph
shall be rated in the "AA" category, its equivalent, or better by at least
one NRSRO.
No more than ten percent (10%) of the City's total portfolio shall be
invested in any one issuer of supranational obligations. Purchases of
supranational obligations shall not exceed twenty percent (20%) of
the investment portfolio of the City.
2. Investments Specifically Not Permitted
Any security type or structure not specifically approved by this policy is
hereby prohibited. Security types, which are thereby prohibited include,
but are not limited to: "exotic" derivative structures such as range notes,
dual index notes, inverse floating rate notes, leveraged or de -leveraged
floating rate notes, interest only strips that are derived from a pool of
mortgages and any security that could result in zero interest accrual if held
to maturity, or any other complex variable or structured note with an
unusually high degree of volatility risk.
The City shall not invest funds with the Orange County Pool.
3. Exceptions to Prohibited and Restricted Investments
The City shall not be required to sell securities prohibited or restricted in
this policy, or any future policies, or prohibited or restricted by new State
regulations, if purchased prior to their prohibition and/or restriction.
Insofar as these securities provided no notable credit risk to the City,
holding of these securities until maturity is approved. At maturity or
liquidation, such monies shall be reinvested as provided by this policy.
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H. INVESTMENT PARAMETERS
1. Diversification
The City shall diversify its investments to avoid incurring unreasonable
risks inherent in over -investing in specific instruments, individual financial
institutions or maturities. As such, no more than five percent (5%) of the
City's portfolio may be invested in the instruments of any one issuer, except
governmental issuers, supranationals, investment pools, mutual funds and
money market funds. oi- Linlc,, offici- Itis' specificd in this im ci itm(2.nl
This restriction does not apply to any type of Federal Instrumentality
or Federal Agency Security listed in Sections G1 ibi and G1 � c � above.
Nevertheless, the asset allocation in the investment portfolio should be
flexible depending upon the outlook for the economy, the securities
markets and the City's anticipated cash flow needs.
2. Maximum Maturities
To the extent possible, investments shall be matched with anticipated cash
flow requirements and known future liabilities. The City will not invest in
securities maturing more than five years from the date of trade settlement,
unless the City Council has by resolution granted authority to make such
an investment at least three months prior to the date of investment.
3. Credit Quality
TheGity shall notPUFEha5e any -sec yratedA4a and 11 or A " er- belov.
if that seetir-it-y has been placed on "eredit 6vateh" for- a possible downgrade
by an NRSRC).
Each investment manager will monitor the credit quality of the securities in
their respective portfolio. In the event a security held by the City is the
subject of a rating downgrade which brings it below accepted minimums
specified herein, or the security is placed on negative credit watch, where
downgrade could result in a rate drop below acceptable levels, the
investment advisor who purchased the security will immediately notify the
Finance Director. The City shall not be required to immediately sell such
securities. The course of action to be followed will then be decided on a case
by case basis, considering such factors as the reason for the rate drop,
prognosis for recovery or further drop, and market price of the security.
The City Council will be advised of the situation and intended course of
action.
4. Competitive Transactions
Investment advisors shall make best effort to price investment transactions
on a competitive basis with broker/ dealers selected consistent with their
practices disclosed in form ADV 2A filed with the SEC. Where possible, at
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least three broker/ dealers shall be contacted for each transaction and their
bid or offering prices shall be recorded. If there is no other readily available
competitive offering, the investment advisor shall make their best efforts to
document quotations for comparable or alternative securities. If qualitative
characteristics of a transaction, including, but not limited to, complexity of
the transaction, or sector expertise of the broker, prevent a competitive
selection process, investment advisors shall use brokerage selection
practices as described above.
PORTFOLIO PERFORMANCE
The investment portfolio shall be designed to attain a market rate of return
throughout budgetary and economic cycles, taking into account prevailing market
conditions, risk constraints for eligible securities, and cash flow requirements. The
performance of the City's investments shall be compared to the total return of a
benchmark that most closely corresponds to the portfolio's duration, universe of
allowable securities, risk profile, and other relevant characteristics. When
comparing the performance of the City's portfolio, its rate of return will be
computed consistent with Global Investment Performance Standards (GIPS).
J. REPORTING
Monthly, the Finance Director shall produce a treasury report of the investment
portfolio balances, transactions, risk characteristics, earnings, and performance
results of the City's investment portfolio available to City Council and the public
on the City's Website. The report shall include the following information:
1. Investment type, issuer, date of maturity, par value and dollar amount
invested in all securities, and investments and monies held by the City;
2. A description of the funds, investments and programs;
3. A market value as of the date of the report (or the most recent valuation as
to assets not valued monthly) and the source of the valuation;
4. A statement of compliance with this Policy or an explanation for non-
compliance
K. INVESTMENT POLICY COMPLIANCE AND ADOPTION
1. Compliance
Any deviation from the policy shall be reported to Finance Committee as
soon as practical, but no later than the next scheduled Finance Committee
meeting. Upon recommendation of the Finance Committee, the Finance
Director shall review deviations from policy with the City Council.
2. Adoption
The Finance Director shall review the Investment Policv with the Finance
Committee at least annually to ensure its consistency with the overall
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objectives of preservation of principal, liquidity and return, and its
relevance to current law and financial and economic trends.
The Finance Director shall review the Investment Policy with City Council
at a public meeting if there are changes recommended to the Investment
Policy.
This Policy was endorsed and adopted by the City Council of the City of
Newport Beach on September 8, 2015. It replaces any previous investment
policy or investment procedures of the City.
Adopted - April 6,1959
Amended -- November 9,1970
Amended - February 11, 1974
Amended - February 9,1981
Amended - October 27,1986
Rewritten - October 22,1990
Amended - January 28,1991
Amended - January 24,1994
Amended - January 9,1995
Amended - April 22,1996
Corrected - January 27,1997
Amended - February 24,1997
Amended - May 26,1998
Reaffirmed -- March 22,1999
Reaffirmed - March 14, 2000
Amended & Reaffirmed - May 8, 2001
Amended & Reaffirmed - April 23, 2002
Amended & Reaffirmed - April 8, 2003
Amended & Reaffirmed - April 13, 2004
Amended & Reaffirmed - September 13, 2005
Amended - August 11, 2009
Amended & Reaffirmed - August 10, 2010
Amended & Reaffirmed - September 28, 2010
Reaffirmed - June 28, 2011
Amended & Reaffirmed - October 9, 2012
Amended - August 13, 2013
Amended - September 8, 2015
Amended -- March 28, 2017
Amended - linuary 28,202
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Glossary of Investment Terms
AGENCIES. Shorthand market terminology for an\, obiigatiun issued by a go-cernment-
5eon, pared entztal ref F'r, or a tederallil related zn tituticm. Most ubligatiuns of GSEs are
not LLlaranteed b%- the full faith and credit of the L5 L-uVernment. E\amriles are:
FFCB. I he Federal Farm Credit Banc. 5y -stern pruVidcs credit and licluidlty in the
al'ricultural induStry. FFCB i5sueti discount nutcS and bunds.
FHLB. [he FedcraI l lory-ic Loan Dank pl-OVidcti credit and liquidity in the housing
market. FHLB issues discount notes and bund,.
FHLNIC. 1_ike FHLB, the Federal Horne Loan Mortgage Curpuration prov ideti crcdit
and liquidity- in the housing market. Fl also called "FrcddieMac i-sucl,
diSCOUnt notes, bunds and rnortga,ge pass-through Securities.
FNMA. Like FHLB and 1-rcddioNlac, the Federal National Nlortga g(-, :V'socl atiun WE)s
established to provide credit and liquidity in the housing market. FVMA, also
known as "FannieNlae," issues discount notes, bundti and mortgage ass -
through sccuritieS.
GNNIA. the Government \ationa[_�lurt.�a�e .\„ociation, l:no�,vn as "Ginnie Mae,
issues mortgage pass-through Securities, �111ch arc ;guaranteed by the full faith
and credit of the US Government.
PEFCO. 1 -he Private L\purt Funding- Lorporatiun assists e\porters. Obligations of
PEFCQ are not guaranteed by the full faith and credit of the US �4ovc nment.
TVA. J he l c rinessee Vollev Authority pruV idcS flood control and power and
promote; develupmcnt in portions of the Tennessee, Ohio, and Mli ,sissippi Ri% c:r
v [A-.1 currentk; issctcs discount nutc,, and. bunds.
AsKLD. File nr•icc at which a Seller ufferS to sell a securi
ASSET B:�c,t:En SECURITIES. �Iectarities - rLtppurted b�. LNA) s of installment loans or leases or
b,j_pouls of rev_ulving lirlcti of credit.
AyERAGE LTE. In murt,age-related ins estments, including CM01, the average time to
e\pcctcc.l receipt of principal payments, i\eightcd by the amount of principal
e\pected.
BANKL:Ws ACCEPTANCE. A money r-riarket_ instrument created to facilitate international
trade transactions. It is highly liquid and Safc bCCaU ,C the ritik ut the trad4 trantiactiun
is transferred to the bank which "accents., the ublig-atiun to nay the in%estur.
BLACH:NrARh. A Comparison Security or portfolio. A performance benchmark is a partial
market indo, %vhich reflect~ the mi\ of securities allowed under a specific
investment Policy.
SID. The price at which a buyer offers to buy a Security
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BROKER. '♦ broker brincgs buyers and Sellers to;tTcther for a tr•ansactiun for which the broker
recei cs a commission. A broker dues not 11211 SCCLlrltreti from h1S own oo-,ition.
CALLABLE. A Callable SCCLlrity' the ItitiLler the Option to Call it from the investur priur to
its FlatLlrity. The main C lLP U Of a Call is a dO.l_inc in Interest rate~. if interest rates
decline since an issuer iSSLleti scCLirities, it will likely call its Current securities and
rei,SLre them at a lower rate of interest. Callable SeCuritieS have reinvestment ride as
the investor may rec:ck c it,, principal bac:l, when interest rate are log\ er than when
the ins cstment was initially made.
CERTIFIC.NTE OF DEPOSIT (CD). A time depo4it with a specifiC matLrritti e� idenced by a
certificate. LarLe denomination CDS mai he marketable.
CI It I II lc \ i+ OIl DI lOSIT ,ac-< ()t \ i RI (,I-,rRZ SYSTEM (CDARS). A private Dlacement
vr�icc th'3t allows local aucn+ ic, rr 1ra�e more than 1)23l1,()llll in CDs from a
Single - MLNt bC L ,! Jr fiCipatin,, institution of CDARS) while Still
maintaining FDIC inyLrranCe Coy erage. CDARS i', Currently the onk, entity_ providing
this Service. CD_aRS facilitates the trading of deposits bettivoen the California
institution and other participating institutions in amounts that are legis than 5250,000
each, so that FDIC coverage is maintained.
COLL.\TFRAL. S(Curltles or cash pledged by a burrol%or to SeCLlre repayment of a loan or
repurchase agreement. A[So, securities k'd�Ted h a finanCial inStitLltiOn to SeCure
CIODOSitS Of DLIHIC monk~.
COLL.ITEI ALAZW NJORTGAGI. OL'I.IGm-lu\-S (Ci IO). Classes of bonds that redistribute the
cash flow of mortgage SCCLtritiCS and whole lOar-rs)o cruatc. scCuritic5 that have
different Ic%cls of prepayment risk, a> compared to the underlYing morttgagre
SeCLu•itics.
CO)EIILI:CIAL PAPER. The short-term unsecured debt of Corrurations.
COL, L YILLD. I he annual income from an in` eStment dig, idcd by the pLIFChaSC Cult. BCCaLISe
it CIOCS nut -rive. effect to PrCrniLIMS and diSCOunts which may hay c been included in
the purCh&W COst_it_is an incomplete mcasure ut return.
COUPON. The rat(- of return at which interest i�- L aid on a bund.
CREDIT RISK. 1 -he risk that principal and/or interest on a i invcstment will not be paid in a
timer manner due to change~ in the cundition of the issuer.
CURRENT YIELD. The annual inCome from an ins c,,,tment divided by th(, Current market
V aloe. Since the mathematical CaICulatiun relies on the Current market v aluc rathcr
than the ins estor'S CUSt Currant \, icld i, unrelated to the aCtuaI return the ins cstor
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will earn if the Secrarity is held tLl maWfi
DEALER. ;A dealer acts as a principa[ in securit`, transactions, selling, securities from and
bLIVing securities for his Own position.
DFBENTURF. A bund Secclreci on11, by the Qencral credit of the iSILIer.
DELIVERI vs. PAYMENT (DVP). A securities industry procedure whereby payment for a
security must be made at the time the security i4 delivered to the purchase'r's went.
DERIVATIVE. Ani Sccurity' that has principal and, or intere-,t payments wlilch are Subject to
uncertainty (but not for reasons of default or crec{it ris;) as to timing-and;� ter jams lnt,
or any Security which represcnt5 a component of another security w hi.:h has been
separated from other components ("Stripped" coupons and principal). A derivatiVc
is also defined as a financial instrument the Value of �,%-hich is totally or partially,
derived from the value of another instrument, interest rate, or indcv
DISCOUNT. The difference between the par Value of a bund and th(' Gust of the band, when
the ci)St is below par. Some tihort-term SUCK as -I -b'ltt,and bankcr',�
acceptances, are known as discount conu
t Secrities. They sell at a diSCOUnt from par, and
return the par Value to the invcstor at maturity withocrt additional interest, Other
tiecuritics, which have fi\ed coupons, trade at a discount when the „CoUpon rate is
lower than the current market rate for Securities of that maturit4 anti ; or crualit4.
DI\ I-It511 i( .\I ioy Dividing investment funds among a variety of ins cstments to av uid
c\poSure to an one source of ri51..
DURATION. Fhe ti\ Bighted avera Tc time to maturit of a bond where the weights are the
present values of the future dash fIL-m-_ DUration measures the price sensitivity of a
band to changes in intcrest I-ateS. (See modified dul.ation)L
FEDERAL FUNDS RATE. The rates of interest char,-,�ed by banks for Shurt-term loan-, to other
bLmk.,. 1 he Federal Pesci c bank through omen -market operationti c'Stabli�hcs it.
FEDERAL OPEN MARKET CO3ti1h11TTI-E. A cul-In)itte'e of the Federal Reser, e Board that
establishes monetary policy and eXecutc5 it through temporary and permanent
Chan ;es to the suRply of banl. reserve,,
LEVERAGE. Borrowing fundti in or•dc,r to invest in Securities that have, the potential to
earninQ5 at a rate h'whcr- than the cost of borrowin�T.
TAQUIDITY. [.he speed and case with which an asset can be converted to cash.
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LOCAL AGENCY 1NVESTNIEN , FDNC) (LAIF), A wluntary in%estment fund open to
4overnment entities and curtain nun -profit organization, in California that i,
manaL-ed by the State l rcasurcr's Office.
LOCAL Peri. Ing e,tment pools that range, from the State
Trea,urer', Office Local : g nc� Investment Fund (LAIF) tz, county pools, to Joint
PLM CI_, Authorities (I P,\ ;). ]"he -;C' funds are not SLII)�CO to the same SEL rules
aoolicable Lo mono, market mutual fund,.
MAKE WHOI I: CALL. A t4 pe of C,111 PI-OVI.SiOn un a bund that allOWS the i,sLM' to paw' off the
remainin debt early. Unlike a call option, with a make ti,vhole call Provision, the
issuer mares a lump sum payment that aqua], the net present value (NP`) of fUture
coupon payments that will not be paid because of khe call. With this type of call, an
Ind c',tur r, curnoen,ated, or "made. whole."
MARGIN. I he difference between the market value (-)[a security and the loan a broker male,
L€sin,�' that sccurit� a, collateral.
NIARKI.'t, RISi:. l he risk that the v aloe of setur•ities Will tluctuate with change, in overall.
market ck,nditions or interest rates.
NIARKEr VAI UL. 1 he price at which a ,ccurity can be traded.
MARKING YO MARKET. ]he pl"l?ie„ Of POStrnk? %Llrrt'nt market',a]L€CS Fur securitic, In a
Portfolio. --
MAYURI-1Y. l he final date upon which the principal of a sccLIrity becorne�, due and oavablc.
NIEOIt ,i TrRYi Ne}rEs. Ur,ccured, ins c skment-rade senior debt ,;Ccurities of major
curja€"atitrns which are sold in relatir elf small aIMOLIntSun c2.`her a continuous or an
intermittent basis. MI N, arc highly fletible debt instrument- that can be structured
to re,pond to market opportunities or tea in% c,tor preference,.
ylODIi; ;u DURATION. ]'he percent chance in price for a WO basis point change in yields.
Modified durpt_ion is the best of a portfolru', or ,ucuritv's e\pu,Llrc
to market risk.
bIONEY MARKET. The market in which,hort-term debt in,trL€ments (I -hills, di�,Collnt note,
commercial pacer, and hankers acceptancu,) are issued and tradi _.J.
MORTGAGE P:as.s-TinwuGfi SLcum i,il-:s. A sCCLlriti/ed participation in the interest and
principal cash flow from a specified pouf of snort ages. Principal and interest
oar mcnts made on the morti*aLIes arcs na,scd thr"ou�h to the holder of the,ecur"It',;.
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MUNICIFAL SECURITIES. SeCurities isSued by ~tate.: and local agencies to finance capital and
opurating expenses.
MUTUAL FUND. An entity which pool~ the funds of investor-,' and lrvc"ts thine fund~ in a
Set of securitieti which is S ccificall y defincd in the fund's prospcctu,. Mutual funds
can be in\-csted in %ariouS t�'pCs of dumCstIC anti/or international stuc:ks, bonds, and
muncy' market instruments, as yet forth in the incliv ideal fund's pr-ospeCtLrs. Fur most
larIC, institutional investors, the costs associated with investing in mutual funds are
hic-her than the investor can obtain throe<LTh an individualk, manaL�cd ourtfolio.
N.1I I(-1NALl.I RECOGNIZE❑ STAI-IS'I"IC:II. RATING ORGANIZATION (NRSRO).
A credit rating agency that the Securities and I=\chan4;c. Commission in the United
`?tate-, for I,CgUIatk11-1, Idc assessments of
an lnt't:titl?lents risk. Mo.. 1ssuo.rs of inyestrylents, c'speclallydebt'uCLIC1t1C5-pay
credit rating agencies to proVidc them with ratings. The three mo,,t prominent
NRSRO s are Fitch, 5&P, and Nloody's.
NEGOTIABLE CD. A short-term -Icbt instrument that pays interest and is issued b4- a bank,
savings or fcdcral association, state or federal credit union, or state -licensed branch
Of a f}rei,–n hank. Ne�-,otiable CDs are traded in a scCondary market.
PREN,IIUm. I he difference bete een the par value. of Ll llund Lind the Cost Ot the bond, when
the c:(_)st is above par. --
PREPAYHIEN I SPIED. A measurc of hOW ilUiCkk principal is reoald to Im t'stor.,, in rnort�--raLe
sO-C LI rf t ICS.
PREPA) '.I1:\'I- VVINDO4\. the time period uvcr 1\ lii h principal repayments will he received
on illortgage sCcuritics at a specified prepay ment'Pekc d.
PRIMARI DLALER. A financial institution (I) that is a trading counterpart)- with the Federal
Reserve in its ewcution of market uperations to Carry- Out L.S. monetary policy, and
(2) that participates for statistical reportin)Z purposes in compiling data on actin itk
in the U.S. Government securities market.
PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of resounsibilit� which aDc)lics
to ridLICial'ieS. In California, the I-Llle is StatCd a, _' Ing estmcnts shall be managed with
the Care, si:ill, pruderlCC and Bili{ enCe, under the cirCLlmstance�, then prevailinj that
a prudent person, acting in a like capacity and familiar with such Matters, WOUld use
in the cc,ndLICt Of an enterpri,,u of 11ke charactcr and with Iikc aims to accomplish
similar purposes."' —
REALIZED YIELD. The change. in value of the portfolio due.: to interc,st rcccivcd and interest
earned and reale/ed galn� and lc�ysCy. It doe, not -k e effect to L ham-eti In market
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VOILW on SecLlritie,, which have nut been sold from the purtfolio.
REGIONAi- DLAI..[:tt. A financial intermediary that bins and sells securities for the benefit ,.)f
its customers withoL[t maintainim_- substantial in%entorieS of ,cCLU-itiCS and that is
not a primary dealer.
REPURCFIASF AGREEMENT. Short-term pLIrChase, of SCCUritics with a simultancoL[S
— agreement tO sCll the Securities hack at a higher price. From the Se]Ier'S point of v ie\ -v,
thL2 Same transaction is a reverse repurchase aq-reement.
SAFEKFFPING. A Scrvice to hank Customers whercbv SeCLIritieS are held bv the bank in the
customer's name.
STRUCTURES) Nan-'-'. A complex, fixed income in'trtirnent, which pays interest, bascd on a
formula tied to other interest rates, commodities or indices. L\amples inClude
inverse floating rate notes which ha�C Coupons that increase \\-hen other interest
rates are falling, and which fall �\ hen other interest rates are rising, and 'dual inde\
floaters," WhICh pav interest based on the relationship between two other interest
rates - for example, the yield un the ten-year Tr•ea,Llry note mina~ the Libor rata.
I,sLrl'a s ill "I[Ch note, lock 'In a rC!dL[COCf CLI -,t Of hurl-OWIM�' b� mirc:ha,mLLy interest rate
s ap agreements.
SUPRANA FIO:NAL. _\ Supranational is a multi -national Organization N\-hereb,y member states
transcend national boundaries or interests to share in the decision making to
promote economic development in the member countries.
TOrAL RATEOF RETURN. A measure of a portfulio'-, performance over time. It is the internal
rate of return, which QgLlateS the bc,innin ; Value of the portfolio k\ ith the ending
\aluc; it includes inter<.St earnings, reale/ed al-ld Unrealized Tains, and losses in the
portf�}Iicf.
.. � � _.---....-
U.S. TREASURY OBLIGATIONS. SCCUrities iSSLIed by the U.S. I rcaSury and backed by the full
faith and Credit of the United Statcs. Treasuries are considered to ha-vc no credit risk,
and are the benchmark for interest rates on all other SCCUI-iticS in the US and
overSea,. The Trea,Lfry iSSLIOS both dISCOLIntOLI ,Ll L[[ ltIeS and f]\ed l OLl L)n notes and
bunds.
TREASLRY SILLS. All securities istiUCd With initial maturities of one year or 1Css are iSSL[ed
as disCOLInted instrLIMOntS, and arc CallCd 1 [easL[ry bills. The I reasUry CUrrently
is,ucS three- and --;i\-month 1-l,ilI, at rCI Lllal- weekly auction, It also issues "cash
majaaQement" bill, as needed to smooth uUt CLISh flow s.
TREASURY NOTES. AH Securities issued with initial maturities of tW o to tc°n years are
TreaSUry note,, and pay interest semi-annually
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TRFASURI BONDS. Alt Securities iSSued with initial maturities grcater than ten ye.ar4 are.
called Treasury bonds. Like Treasury notes, they pay interest eml-annually.
VOLATILITY. The rate at which Securit prices change Leith changes in general economic
conditions or the general level of interest rates.
YILLDTO MATURITY. The annualized internal rate of return on an investment w hich e�uatcs
the expected cash flows from the investment to its cost.
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