HomeMy WebLinkAbout13 - Statement of Investment Policy for FY2011CITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 13
August 10, 2010
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Administrative Services Department
Tracy McCraner, City Treasurer
(949) 644 -3123 or tmccraner @newportbeachca.gov
Dan Matusiewicz, Deputy City Treasurer
(949) 644 -3126 or danm @newportbeachca.gov
SUBJECT: STATEMENT OF INVESTMENT POLICY FOR FISCAL YEAR 2011
ISSUE:
Annual review of the Investment Policy, as amended, and adopt said policy for the
upcoming fiscal year.
RECOMMENDATION:
Approve the Statement of Investment Policy, as amended by the City Treasurer and the
Finance Committee, and adopt amended policy for Fiscal Year 2011.
DISCUSSION:
California Government Code (CGC) Sections 53600.53609 and Sections 53630.53686
govern how local governments oversee and maintain investments of all public funds.
Per CGC Section 53607, the City Council may delegate authority for investing public
funds to the City Treasurer. City Charter Section 605 (j) requires the Finance Director
to assume the title of and act as City Treasurer for the City of Newport Beach.
The CGC specifies permitted investments for local governments; however, the City's
Statement of Investment Policy defines the suitable and authorized investments for the
City and is more restrictive than the Government Code. Although the CGC does not
contain provisions for what to include in an Investment Policy, CGC Section 53646
states that a City Treasurer 'may' annually render a statement of investment policy to
the governing board which should be considered at a public meeting. This section also
states that any changes to the policy should be considered by the governing board at a
public meeting.
Statement of Investment Policy
August 10, 2010
Page 2
The Investment Policy had not been significantly updated for several years, staff in the
Administrative Services Department revised format and streamlined the policy, notated
possible changes to eligible investments, then took before Finance Committee on July
26, 2010 for discussion and comments. The changes recommended at Finance
Committee are attached on the red -lined version of the Investment Policy.
Environmental Review:
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.
Public Notice:
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).
Funding Availability:
No funding impact with this action.
Alternatives:
City Council may elect to not adopt the Statement of Investment Policy as presented,
suggest additional changes, and request the City Treasurer to return with an amended
policy.
Prepared by:
ban-wet
c ewicz
\" Deputy City Treasurer
Submitted by:
Tracy McC a ti1er
City Treas rah
Attachments:
F -1 Statement of Investment Policy (red -lined version)
F -1
STATEMENT OF INVESTMENT POLICY
PURPOSE:
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:
1. Scope of Investment Policy
a) Pooling of Funds
b) Funds Included in the Policy
c) Funds Excluded from this Policy
2. Investment Objectives
a) Safety
b) Liquidity
c) Yield
3. Standards of Care
a) Prudence
b) Ethics and Conflicts of Interest
c) Delegation of Authority
d) Internal Controls
4. Safekeeping and Custody of Assets
5. Authorized Investments
a) Investments Specifically Permitted
b) Investments Specifically Not Permitted
c) Exceptions to Prohibited and Restricted Investments
6. Investment Parameters
a) Diversification
b) Maximum Maturities
c) Credit Quality
7. Reporting
8. Investment Policy Compliance and Adoption
a) Compliance
b) Adoption
City of Newport Beach Investment Policy Page 1
1. SCOPE OF INVESTMENT POLICY
a) 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.
b) 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 listed below. If
the City invests funds on behalf of another agency and, if that agency does not have
its own investment policy, the City's Policy shall govern the agency's investments.
i. General Fund
ii. Special Revenue Funds
iii. Capital Project Funds
iv. Enterprise Funds
V. Internal Service Funds
vi. Trust and Agency Funds
vii. Permanent Endowment Funds
viii. Any new fund created unless specifically exempted
c) Funds Excluded from this Policy
Bond Proceeds — Investment of bond proceeds will be made in accordance with
applicable bond indentures.
2. 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:
a) 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 several financial institutions and a variety
of securities offering independent returns.
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 hioher credit risks. to the
safest securities
• Pre - qualifying the financial institutions, broker /dealers, intermediaries,
and advisers 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
City of Newport Beach Investment Policy Page 2
i Formatt
Formatt,d Font: Bold
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
• Investing in securities of varying maturities
_ _ _ _ _ rt, n _ _ _ . - _ - Frmtted Fooe Bold
In stn at nn funds primarily chnrter -tn v.iiesmae
market mutual funds, and the State of California's Loral Agen
Investment Fund (I=A!F-)
b) 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.
c) 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.
3. STANDARDS OF CARE
a) 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.
City of Newport Beach Investment Policy
The Director of Finance 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.
b) 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 Director of Finance 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.
c) Delegation of Authority
Authority to manage the City's investment program is derived from the Charter of
the City of Newport Beach section 605 0). The Director of Finance 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 Director of Finance 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 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.
d) 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
City of Newport Beach Investment Policy Page 4
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.
4. SAFEKEEPING AND CUSTODY OF ASSETS
The Director of Finance 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 be delivered by
either book entry or physical delivery 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."
5. 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.
A. Investments Specifically Permitted
1) United States Treasury bills, notes, or bonds with a final maturity not exceeding
five years from the date of trade settlement.
2) 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.
Beach Investment Policy Page 5
3) Federal Agency mortgage- backed securities and debentures with a final maturity
not exceeding five years from the date of trade settlement.
4) Mortgage- backed Securities and Asset - backed Securities limited to mortgage -
backed pass- through securities issued by a US government agency, or
consumer receivable pass- through certificates or bonds with a final maturity not
exceeding five years from the date of trade settlement. Securities eligible for
investment under this subdivision shall be issued by an issuer whose debt is
rated at least A or the equivalent by a Nationally Recognized Statistical Rating
Organization ( NRSRO). The security itself shall be rated at least AAA or the
equivalent by a NRSRO. The aggregate investment in mortgage - backed and
asset - backed securities shall not exceed 20% of the City's total portfolio.
5) 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
four years from the date of trade settlement, and rated at least A or the
equivalent by a NRSRO. The aggregate investment in medium -term notes shall
not exceed 30% of the City's total portfolio. In addition, AAA rated FDIC -
guaranteed corporate bonds are herein authorized, within the aforementioned
diversification and maturity requirements.
6) Municipal Bonds: General and Revenue obligations of the State of California and
local agencies within the State. Municipal bonds must be rated at least AAA by
two NRSROs with maturities not exceeding three years. The aggregate
investment in municipal bonds shall not exceed 15% of the City's total portfolio.
7) 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.
8) Negotiable Certificates of Deposit only with U.S. Banks whose underlying
securities are rated A -1 or the equivalent by a NRSRO and having assets in
excess of $10 billion, so as to insure security and a large, well - established
secondary market. Ease of subsequent marketability is 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 10 percent of the portfolio, and maturity shall not exceed two years.
The California Government Code Section 53601 limits investment in negotiable
certificates of deposit to 30 percent of the portfolio.
9) Prime Commercial Paper with a maturity not exceeding 270 days from the date
of trade settlement with the highest letter and number rating as provided for by a
NRSRO. The entity that issues the commercial paper shall meet all of the
following conditions in either sub - paragraph A. or sub - paragraph B. below:
City of Newport Beach Investment Policy Page 6
a. 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 at least A or the
equivalent by a NRSRO.
b. The entity shall (1) be organized within the United States as a 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 a NRSRO.
c. No more than 10% 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 25% of the City's total portfolio.
10) 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 at least A or the equivalent by a NRSRO at the
time of purchase. Banker's Acceptances shall be rated at least A -1. P -1 or the
equivalent at the time of purchase by a NRSRO. If the bank has senior debt
outstanding, it must be rated at least A or the equivalent by a NRSRO. The
aggregate investment in banker's acceptances shall not exceed 20% of the
City's total portfolio, and no more than 10% of the City's total portfolio shall be
invested in banker's acceptances of any one bank.
11)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 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 10% of
the portfolio can be involved in reverse repos.
City of Newport Beach Investment Policy
12) State of California's Local Aoencv Investment Fund (LAIF), pursuant to California
Government Code Section 16429.1.
13) 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
5% of the City's total investment portfolio be placed in this pool.
14) Money Market Funds registered under the Investment Company Act of 1940 that
(1) are "no -load" (meaning no commission or fee shall be charged on purchases
or sales of shares); (2) have a constant net asset value per share of $1.00; (3)
invest only in the securities and obligations authorized in the applicable California
statutes and (4) have a rating of at least AAA or the equivalent by at least two
NRSROs. The aggregate investment in money market funds shall not exceed
20% of the City's total portfolio.
B. 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.
C. 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 on as provided by this policy.
6. INVESTMENT PARAMETERS
a) Diversification
The City shall diversify its investments to avoid incurring unreasonable risks
inherent in over - investing in specific instruments, individual financial institutions
or maturities. 504 of the City's po4qlia may be invested
In the instruments of a one _ governments! issuer. Neyenhel . .T_he asset
allocation in the investment portfolio should be flexible depending upon the
City of Newport Beach Investment Policy Page 8
outlook for the economy, the securities markets and the City's anticipated cash
flow needs.
b) 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.
c) Credit Quality
The City shall not purchase any security rated Al and / or A+ or below if that
security has been placed on "credit watch" for a possible downgrade by a
NRSRO.
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 Director of Finance. 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.
7. REPORTING
Monthly, the Director of Finance shall submit to the City Council a report of the
investment earnings and performance results of the City's investment portfolio. 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
City of Newport Beach Investment Policy Page 9
INVESTMENT POLICY COMPLIANCE AND ADOPTION
a) Compliance
Any deviation from the policy shall be reported to Finance Committee at the next
scheduled meeting and to City Council as part of the monthly review of the
portfolio. The Director of Finance shall promptly notify Finance Committee and
City Council of any material change in the policy and any modifications to the
policy must be approved by Finance Committee and City Council.
b) Adoption
The Treasurer shall render a written Statement of Investment Policy that shall be
reviewed at least annually by Finance Committee and City Council 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. City
Council shall consider the annual Statement of Investment Policy and any
changes therein at a public meeting. T4- �,.e -&ta, + ^ + ^me^ +m-�+ ,�^ • ^^ +^• ^ ^+ �[
be adopted by re6oluties-of-4aity-GGunGi�.
This Policy was endorsed and adopted by the City Council of the City of Newport
Beach on , 2010. 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 S, 2003
Amended & Reaffirmed - April 13, 2004
Amended & Reaffirmed - September 13, 2005
Amended - August 11, 2009
Amended & Reaffirmed August 10. 2010
City of Newport Beach Investment Policy Page 10