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HomeMy WebLinkAbout09 - Investment Policy Review and Update CITY OF 1 . � NEWPORT BEACH -- City Council Staff Report September 8, 2015 Agenda Item No. 9 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 PHONE: 949-644-3124 TITLE: Investment Policy Review and Update ABSTRACT: In accordance with Section K-2 of Council Policy F-1, Statement of Investment Policy (Investment Policy), the Finance Department has completed its annual review of the Investment Policy. The purpose of the review is to ensure the Investment Policy's consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. Staff is proposing two changes to the Investment Policy as recommended by the City's investment advisors. These changes are supported by both the City's Finance Director/Treasurer and the City's Finance Committee. The changes are: 1. To allow the City to invest in supranational bonds; and 2. To make applicable the Investment Policy's percentage limitations for all types of securities only on the date of purchase, consistent with California Code Section 53601. RECOMMENDATION: With the Finance Committee's incorporated recommendations, staff recommends that Council formally approve the proposed changes by adopting Resolution No. 2015-74, 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, Statement of Investment Policy, to Allow the City to Invest in Supranational Bonds; and to Make Applicable the Investment Policy's Percentage Limitations for All Types of Securities only on the Date of Purchase, Consistent with California Code Section 53601. These changes are in furtherance of the City's investment objectives. FUNDING REQUIREMENTS: There is no fiscal impact related to these items. 9-1 DISCUSSION: The investment of City funds is governed by California Code Sections 53600-53609, which prescribe the types of securities that local agencies are permitted to invest. Staff, working with the City's investment advisors, Chandler Asset Management and Public Financial Management, has completed a comprehensive review of the City's Investment Policy. This review included both evaluating the Investment Policy's compliance with relevant sections of the California Code, and considering changes to incorporate best investment practices. As a result of this review, two changes to the Investment Policy are proposed. Both changes have been reviewed and approved by the City's Finance Committee. Supranational Bonds Supranational organizations are international development institutions that provide financing and financial services to member countries to promote sustainable local economic growth. Effective January 1, 2015, California Assembly Bill 1933 added subsection (q) to California Code Section 53601 that allows local agencies to invest in the senior debt obligations of three supranational bond issuers: 1. International Bank for Reconstruction and Development (IBRD) 2. International Finance Corporation (IFC) 3. Inter-American Development Bank (IADB) These three entities represent the entirety of allowable supranational bond issuers and purchases are limited to U.S. dollar denominated senior notes. The inclusion of supranational bonds opens up a new asset class for the City's portfolio providing the City with broader investment opportunities as the mandated winding down of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) will result in reduced availability of these U.S. agency securities in the future. In the current market, supranational bonds offer a comparable yield to traditional U.S agency securities. Large supranational debt is rated AAA by most Nationally Recognized Statistical Rating Organizations (NRSROs), is highly liquid, available in a wide range of maturities, and the United States is a shareholder of all three organizations. Staff and the Finance Committee recommend an amendment to the Investment Policy, similar to the California Code, to add supranational bonds issued by IBRD, IFC, and IADB as authorized investments. Additionally, Staff and Finance Committee recommend that no more than 10 percent of the City's total portfolio shall be invested in any one issuer of supranational obligations and purchases of supranational obligations shall not exceed 20 percent of the investment portfolio of the City, less than the 30 percent maximum allowed per California Code. Overall Investment Limits Staff also recommends including a statement that the Investment Policy's percentage limitations for all types of securities are applicable only on the date of purchase, consistent with California Code Section 53601. This may become applicable if a sector allocation is near its percentage limit and the overall size of the portfolio decreases. The City should not be required to bring the sector back under the limitation under any specific timeline, but may not purchase any additional investments in the sector until it falls back under the limit. See the red-lined Statement of Investment Policy for recommended changes, included after the Resolution in Attachment A. POLICY LANGUAGE Staff recommends that the City incorporate the following language into its Policy and establish the following restrictions: G.) Where this section specifies a percentage limitation for a particular security type, that percentage is applicable only at the date of purchase. 9-2 G.1.o) Supranationals 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 "AV, its equivalent, or better by at least one NRSRO. No more than 10 percent of the City's total portfolio shall be invested in any one issuer of supranational obligations. Purchases of supranational obligations shall not exceed 20 percent of the investment portfolio of the City. 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: Description Attachment A- Resolution 9-3 ATTACHMENT A Proposed Resolution No. 2015-_ and Council Policy F-1 Statement of Investment Policy 9-4 ATTACH ME NT A RESOLUTION NO. 2015- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH FINDING CONSISTENCY WITH STATED INVESTMENT OBJECTIVES AND AMENDING CITY COUNCIL POLICY F-1, STATEMENT OF INVESTMENT POLICY, TO ALLOW THE CITY TO INVEST IN SUPRANATIONAL BONDS; AND TO MAKE APPLICABLE THE INVESTMENT POLICY'S PERCENTAGE LIMITATIONS FOR ALL TYPES OF SECURITIES ONLY ON THE DATE OF PURCHASE, CONSISTENT WITH CALIFORNIA CODE SECTION 53601 WHEREAS, the City Council of the City of Newport Beach ("City") through City Council Policy F-1 adopted a Statement of Investment Policy; and WHEREAS, City Council Policy F-1 requires the Director of Finance/Treasurer to review the Investment Policy with the 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; and WHEREAS, the Finance Committee reviewed changes to the written Statement of Investment Policy at its August 13, 2015, meeting and found consistency with the stated objectives; and WHEREAS, the Director of Finance/Treasurer shall review the Investment Policy with the City Council at a public meeting if there are changes recommended to the Investment Policy; and WHEREAS, the Director of Finance/Treasurer has reviewed the written Statement of Investment Policy and recommends changes to better align policy with State Code and allow for greater investment diversification; and WHEREAS, the City Manager reviewed the recommended revisions suggested by the Director of Finance/Treasurer and recommends the City Council amend the City's written Statement of Investment Policy. NOW, THEREFORE, the City Council of the City of Newport Beach resolves as follows: Section 1: After considering the City's written Statement of Investment Policy at a public meeting, and reviewing all associated written and oral testimony, the City Council finds the City's written Statement of Investment Policy is consistent with the overall objectives of preservation of principal, liquidity and return, and is relevant to current law and financial and economic trends. 9-5 Section 2: City Council Policy F-1, Statement of Investment Policy is hereby amended in its entirety and replaced with the attached Statement of Investment Policy, which is incorporated by reference into this resolution. This amendment will align the policy with State Code and allow for greater investment diversification. Section 3: The City Council finds 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. Section 4: 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 8th day of September 2015. Edward D. Selich, Mayor ATTEST: Leilani Brown, City Clerk Attachment: Amended Statement of Investment Policy F-1 s-s ATTACHMENT Amended Statement of Investment Policy F-1 9-7 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: 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 1 9-8 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 2 9-9 F-1 among 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. C. STANDARDS OF CARE 1. Prudence 3 9-10 F-1 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. 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 0). The Finance Director 4 9-11 F-1 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. 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 5 9-12 F-1 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 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. 6 9-13 F-1 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 for a particular security type, that percentage 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 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 limited to mortgage-backed 7 9-14 F-1 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 an 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 at least"A" 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 agency within California, including bonds payable solely out of the revenues from a revenue-producing property owned, 8 9-15 F-1 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 at least "A" 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 at least "A", 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 9 9-16 F-1 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 at least "A" or the equivalent by an NRSRO. ii. 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 an NRSRO. iii. 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. 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 at least "A" 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 at least "A" 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 one hundred and two percent (102%) of the dollar value of the funds borrowed. Collateral shall be held in the City's 10 9-17 F-1 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 (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) 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 11 9-18 F-1 funds shall not exceed twenty percent (20%) of the City's total portfolio and no more than ten percent (10%) of the City's total portfolio shall be invested in any one fund. o) Supranationals which are United States dollar denominated senior unsecured unsubordinated obligations issued or unconditiona4 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 "AA", 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 supranationals obligations shall not exceed tweM 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. H. INVESTMENT PARAMETERS 12 9-19 F-1 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, investment pools and Money Market Funds. 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 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 an NRSRO. 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 13 9-20 F-1 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. 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 14 9-21 F-1 The Finance Director shall review the Investment Policy with the 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. 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 Oeteber 9, 2012 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 15 9-22