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CITY OF NEWPORT BEACH
FINANCE COMMITTEE AGENDA Newport Coast Conference Room, Bay 2E 100 Civic Center Drive, Newport Beach Monday, July 22, 2013 – 4:00 PM
Finance Committee Members: Staff Members:
Mike Henn, Council Member, Chair Keith Curry, Mayor
Tony Petros, Council Member
Dave Kiff, City Manager Dan Matusiewicz, Finance Director
Steve Montano, Deputy Finance Director
____________________________________________________ 1) CALL MEETING TO ORDER 2) ROLL CALL 3) PUBLIC COMMENTS
Public comments are invited on agenda and non-agenda items generally considered to be
within the subject matter jurisdiction of the Finance Committee. Speakers must limit comments
to 3 minutes. Before speaking, we invite, but do not require, you to state your name for the
record. The Finance Committee has the discretion to extend or shorten the speakers’ time limit on agenda or non-agenda items, provided the time limit adjustment is applied equally to all
speakers. As a courtesy, please turn cell phones off or set them in the silent mode.
4) APPROVAL OF MINUTES
Approval of the June 24, 2013 Finance Committee meeting minutes. 5) CURRENT BUSINESS
A. Investment Policy Review: Staff will present its annual review of the City's investment policy
and seek approval and guidance from the Finance Committee regarding the scope,
objectives, and standards that govern the City's investment portfolio.
B. Investment Portfolio Review: Staff and/or one or more investment advisors will describe the
performance of the City's investment portfolio. C. Investment Strategy Recommendations: Staff will discuss the merits and reasons for
considering an alternative investment portfolio management strategy.
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6) FINANCE COMMITTEE ANNOUNCEMENTS OR MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) 7) ADJOURNMENT
All documents distributed for this meeting are available in the
administration office of the Finance Department
1
CITY OF NEWPORT BEACH CITY COUNCIL FINANCE COMMITTEE
JUNE 24, 2013 MEETING MINUTES 1. CALL TO ORDER
The meeting was called to order at 4:02 p.m. in the Newport Coast Conference
Room, Bay 2E, 100 Civic Center Drive, Newport Beach, California 92660.
2. ROLL CALL
Present: Council Member Mike Henn (Chair), Mayor Keith Curry and Council
Member Tony Petros
Staff present: City Manager Dave Kiff, Finance Director Dan Matusiewicz,
Deputy Finance Director Steve Montano, Accounting Manager Rukshana Virany,
Revenue Manager Evelyn Tseng, Fire Chief Scott Poster, Deputy Chief Kevin
Kitch, Lifeguard Operations Assistant Chief Rob Williams, EMS Manager Cathy
Ord, Assistant City Attorney Leonie Mulvihill, HR/Risk Manager Lauren Farley and
Administrative Coordinator Tammie Frederickson
Outside entities: Nitin Patel, White Nelson Diehl Evans LLP; Erin Payton, MGT of
America, Inc.
Members of the public: Jim Mosher, Carl Cassidy
3. PUBLIC COMMENTS
No public comments were made.
4. APPROVAL OF MINUTES
Council Member Petros moved, Mayor Curry seconded to approve the minutes
of the May 13, 2013, meeting inclusive of Mr. Mosher’s suggested corrections
submitted in writing in advance of the meeting. 5. CURRENT BUSINESS
A. Audit Entrance Conference
Finance Director Matusiewicz noted that staff has met with the auditors to discuss
major transactions for the year. He further noted that this agenda item provides
Finance Committee members the opportunity to get a brief introduction from
the auditor on the audit planning process and to ask questions.
Mr. Patel spoke about auditor responsibilities in performance of the audit, the
most important of which is to form and express an opinion on the financial
statement. The audit is performed in accordance with governmental and
generally accepted audit standards and is designed to give reasonable
All documents distributed for this meeting are available in the
administration office of the Finance Department
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assurance that the financial statement is fairly presented in accordance with generally accepted accounting principles. When performing fieldwork the
auditors will consider the internal control structure and at the conclusion of the audit will communicate in writing any significant matters. Mr. Patel indicated that
his initial meeting with staff covered significant financial transactions, management operations and changes, and forthcoming pronouncements that
are applicable for the current year. The most significant pronouncements include Statement 63 - Financial Reporting of Deferred Outflows of Resources,
Deferred Inflows of Resources and Net Position; and Statement 65 - Items Previously Reported as Assets and Liabilities.
In response to Council Member Petros’ request, Mr. Patel further explained
Statement 63. He noted that the government-wide financial statement will now
show five elements that include assets; deferred outflow of resources, which is
similar to prepay; liabilities; deferred inflow of resources, which is similar to
unearned revenue; and net position.
Mr. Mosher commented that the audit process seems to be backward to what
the City Charter specifies, namely that the City will retain the auditor at the
beginning of the fiscal year instead of at the end of the year. Mr. Mosher
questioned whether the audit will reveal incidents of embezzlement or other
such behavior. Mr. Patel explained that the audit is not designed specifically for
detecting such behavior; however, transactions are tested on a randomized
basis and any findings would be reported to the Committee. He added that
under the current standards, auditors are required to identify fraud in the
financial statement audit and review internal control structure and segregation of duties in order to make such an identification. Council Member Henn noted
this is all in accordance with standard practice for conducting an audit.
B. City Insurance Renewals
Mr. Matusiewicz stated the City Council will consider approval on renewal of the City’s insurance policies at their June 25, 2013 meeting. This agenda item
provides Finance Committee members the opportunity to ask questions on the premiums being charged for next year’s coverage.
Mayor Curry questioned why there are significant increases in the premiums. Risk
Manager Farley addressed the property insurance increase and noted that the addition of the Civic Center complex increased the total insured value 53%
along with other property valuation assessments which gave a premium increase of about $320,000.
In discussing the excess general liability insurance premium, Ms. Farley explained
that for about the past 15 years the City has been able to maintain a $500,000 self-insured retention (SIR) which is uncommonly low for a coastal, full-service city.
Due to experiencing some recent losses and claims paid in excess of the $500,000 SIR limit, the quote from the current insurance carriers has a higher SIR of
All documents distributed for this meeting are available in the
administration office of the Finance Department
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$1 million. This was outlined as Option #1. Option #2 is a second tentative quote with a $500,000 SIR received from the CSAC Excess Insurance Authority. A
decision at an underwriters meeting on Tuesday is pending to determine whether Big Canyon Reservoir will be included in the coverage since it is designated as a
dam. Ms. Farley said if the outcome of the underwriters’ decision is to exclude the reservoir, staff would recommend Option #1 to the City Council.
Ms. Farley explained the increase in the workers’ comp insurance premium is due
to the fact that medical expenses continue to escalate and there have been some significant claims that resulted in disability retirements.
In response to a question raised by Council Member Henn, Ms. Farley clarified
that the deductible for earthquake and flood insurance is 10% of the insured
value of the asset.
Mr. Mosher commented that the public would benefit from knowing what claims
have been paid and he questioned whether the $50 million limit in excess
general liability is sufficient. Ms. Farley reported that the City raised the general
liability limit to $50 million based on a jury award of $50 million for a Dana Point
bicycling claim. She stated the level is prudent and there is no cause to increase
it to a higher limit based on actuarial review and comparison to benchmarking
cities. She added that in the property insurance limit the City is in the upper band
relative to benchmarked cities. There is no recommendation at this time to
increase the limit.
Mr. Cassidy referred to the old City Hall and questioned whether it would be useful to have an account for discontinued assets. He asked what mechanism is
used to track major variances to the budget. Mr. Matusiewicz noted he would report any major changes in the financial status as they occur to the Finance
Committee. City Manager Kiff added the Quarterly Financial Report is another tool used to communicate financial status. Mr. Kiff stated that staff budgets
revenues and expenditures in a conservative manner. This is a prudent practice and can result in having extra funds to report to Council at the end of the year.
It was suggested that next year it may be helpful to schedule a Finance
Committee meeting with the insurance actuaries in January at the beginning of the application process and in advance of when the policies are up for review.
On a final note, Ms. Farley pointed out that if the Big Canyon Reservoir is
approved by the CSAC underwriters committee, staff will prepare a Resolution
for Council approval and bring it to the June 25, 2013 meeting.
C. Fire Fee Schedule
Mr. Matusiewicz introduced the item with an explanation of the cost study review
of Fire Department fees that was prepared by MGT in conjunction with staff from the Fire and Finance Departments. An in-depth and comprehensive look at all
All documents distributed for this meeting are available in the
administration office of the Finance Department
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the fees was completed resulting in major changes to planning and development fees, and the addition of new fees representing best practice
industry standards. The inclusion of these new fees is consistent with the fees applied by a majority of Orange County cities and is closest to the model of
Orange County Fire Authority. He noted the paramedic subscription fee, which had not been adjusted for 10 years, is proposed to increase from $48 a year to
$60 a year.
In response to a question raised by Mayor Curry, Deputy Chief Kitch stated that new fees for service included in the proposed fee schedule are better aligned
with the costs of performing the service. Chief Kitch explained the fees are broken into two components to cover planning and development for issuance
on project approvals and inspection services for ongoing required annual
maintenance. He noted that planning and development fees are reflective of
the Fire Authority fee schedule which the building industry developers are familiar
and comfortable with in Orange County. He commented the proposed fees are
more fair and equitable because the fee is more representative of the service
time it takes to provide the service. Mayor Curry expressed concern about
adding new fees and said the staff report needs to better explain the new fees
relative to what the fee structure was previously and answer how much more or
less it will cost for a given service.
Council Member Henn agreed the fees have been expanded so much it may
not be possible to show a breakdown comparison of the amount of revenue
collected in the old categories against the expanded new categories. It was
suggested to identify how the proposed fees stack up against Fire Authority fees and to have a representative of the building industry speak in support of the new
fee structure. This would likely help people understand the new fee structure. Mr. Kiff suggested showing what the cost would be using the new fee schedule as a
comparison on some actual projects that were done over the past year.
Council Member Petros stated if this is considered an impacting subject to the Government Code 66000 provisions, it should be demonstrated how these fees
go up against the five findings in the Government Code section. He indicated that he wants to see how the fees were derived and he directed the structure
be simplified if possible.
Council Member Henn commented that he would like to see a report at the end
of fiscal year 2014 that will show a comparison of the aggregate difference in
the fees collected, with an adjustment for volume, in the new structure
compared to the old fee structure.
Mr. Matusiewicz spoke about the Junior Lifeguard fees and pointed out an error
on the schedule for resident participants which lists the fee as $697 but should be
$725 which is a 15% subsidy. Assistant Chief Williams said the current fee is $695
and the fee increase captures this year’s CPI because as the fees were still being
studied there was not a CPI increase. There was discussion about the resident fee
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administration office of the Finance Department
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increase and the amount of the subsidy. Council Member Petros questioned whether a higher subsidy should be considered given that the program is so
popular and teaches children about ocean safety. Mayor Curry suggested raising the fee to $700 and increasing the amount of the subsidy percentage.
Mr. Matusiewicz went on to address fees for Emergency Medical Services that
are currently subsidized at 80% and elimination of the subsidy is proposed to achieve full cost recovery. EMS Manager Ord explained the difference between
Advanced Support and Basic Life Support (ALS and BLS) and the billing that occurs when a patient is transported by the paramedics or by ambulance. The
Fire Medics program is voluntary for Newport Beach residents and she stated Fire Medics members would have no out of pocket costs for transports. Chief Poster
gave further details about the analysis of the costs and noted the Orange
County fee approved by the Board of Supervisors is higher than the City’s costs.
He said the proposed fees are 1) completely justifiable given the City’s actual
costs, 2) more simply structured, and 3) less than what the County charges.
Council Member Henn stated the staff report should spell out those comparisons.
There was further discussion about the subsidy and Council Member Henn asked
for better clarity in the staff report. Mayor Curry said that staff should
demonstrate how the fees are based on the results of the study, how the
proposed fees compare to the fees of the County and neighboring cities, how
insurance or the lack thereof impacts cost recovery, and how the subsidy works
and is applied.
Mayor Curry noted this proposed fee schedule revision should be brought to the
City Council at a Study Session prior to placing it on an agenda for adoption.
Mr. Mosher suggested it would be helpful to know what fraction of Fire Department activity is covered by property taxes and how much is not funded.
He asked if he would be billed for a fire at his house and does it matter whether he called or somebody else reported the fire, and how aggressive is the City
about collecting payment if he did get a bill and whether the Council thinks the City should be aggressive about that. He questioned whether the proposed fees
will change as a result of the study by the consultant hired by Council to review the Fire Department and services. Council Member Henn commented that every
department’s fees are studied on a 3-year cycle and the impact of any strategic changes in the fire service will be reflected in a future fee schedule update.
D. Third Review of Facilities Financial Planning Tool (FFPT)
Mr. Matusiewicz explained minor revisions made to the FFPT are the result of
recent year-end budget action. He pointed out the average General Fund contribution over a 30-year period amounts to $10.6 million. Mr. Matusiewicz
proposed bringing the FFPT to a City Council Study Session for review, if Finance Committee members are in agreement with the current iteration of the FFPT.
All documents distributed for this meeting are available in the
administration office of the Finance Department
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Council Member Henn questioned the timing for branch library projects. Mr. Kiff commented that community use of libraries is changing and it would be
beneficial to wait a few years to include planning for rebuilding branch libraries after determining future usage of libraries. Mayor Curry and Council Member
Henn were in agreement that the libraries should be reflected in the plan after 2024.
Council Member Henn noted it is important to show these important points in the
staff report: include development fee contributions as a key planning highlight; note this iteration does not fully represent the potential for surplus asset
disposition or monetization; and point out that although there is $20 million borrowing represented in the out years associated with rebuilding the Police
headquarters, it is entirely possible that the plan will be cash funded and no
borrowing will be needed.
Mr. Cassidy affirmed it is important to reflect all revenue such as for reuse of the
old City Hall property and he spoke in support of the decision to build the Civic
Center. Council Member Henn pointed out there is a line item for City Hall reuse
represented. He agreed that there is some other revenue that isn’t reflected but
the key issue to convey is the money that was borrowed for building the Civic
Center may well be the only borrowing associated with a 30-year plan to
completely redo all of the City’s key facilities.
E. Demonstration of Long-Range Fiscal Forecasting Tool
Deputy Director Montano demonstrated the MuniCast forecast trend analysis
model which is used as an analytical tool to create baselines and alternative
annual forecast of revenues and expenditures. He stated only General Fund is
currently loaded in the model but it can also be used for Enterprise Funds. The
goal is to further refine the model during the budget year for use in the decision
making process.
Using the 32 revenue and 29 expenditure categories in the General Fund, Mr.
Montano showed how the baseline assumptions can be adjusted +/- 5% to change the forecast picture. He also demonstrated how the interactive scenario
assumptions can be used to reflect sensitivity analysis and estimate potential impacts of budget decisions moving forward.
Council Member Henn acknowledged use of this tool will be helpful in starting
the financial planning cycle with the development of a strategic plan followed by developing the budget. Mr. Matusiewicz welcomed input on categories to
include in the model that will help with making better informed decisions. 6. FINANCE COMMITTEE ANNOUNCEMENTS OR MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM)
All documents distributed for this meeting are available in the
administration office of the Finance Department
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No future agenda items were discussed.
7. ADJOURNMENT
The Finance Committee adjourned at 6:00 p.m.
Filed with these minutes are copies of all material distributed at the meeting.
Attest:
Mike Henn, Chair Date
Finance Committee Chair
Agenda Item 5A
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
July 22, 2013
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or danm@newportbeachca.gov
SUBJECT: ANNUAL INVESTMENT POLICY REVIEW AND UPDATE
ABSTRACT:
Consistent with Section K-2 of Council Policy F-1, Statement of Investment Policy (the
Policy), the Finance Department has completed an annual review of the Policy. The
proposed changes better align the policy with California Government Code, allow for
more flexibility to achieve an effective return through diversification, and provide greater
clarity to the advisors while still achieving the paramount objectives of safety and
liquidity. With Finance Committee concurrence, Finance staff will bring the suggested
revisions to Council for formal approval. These changes do not materially affect, and are
in furtherance of, the City’s investment objectives. The recommendations do include
changes to the maximum credit concentration, credit quality and allowable investments
to provide more flexibility to diversify investments across asset classes.
BACKGROUND:
Pursuant to California Government Code Section 53600.5, 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/her control. The secondary objective shall be to meet the liquidity needs of the
depositor. The third objective shall be to achieve a return on the funds under his/her
control. The City’s universe of available investments is limited by California law, and
further limited to those types of securities the City deems appropriate in relation to its
fiduciary duties of safety. Approximately 51% of the Medium-Term Investment Portfolio
(MTIP) consists of agency securities, which are bonds and notes issued by government-
sponsored enterprises, or GSEs, including Fannie Mae, Freddie Mac and the Federal
Home Loan Bank. They are the highest-quality debt instruments after Federal Treasury
securities, which make up approximately 23% of the City’s MTIP.
Finance staff recently met with representatives from each of the City’s financial
investment advisory firms to solicit suggested changes to the Investment Policy. There
is consensus among the advisors that suitable investment opportunities in agency
securities and other investment grade securites are diminishing. This is largely due to
Annual Investment Policy Review and Update
July 22, 2013
Page 2
the Federal Government’s anticipated orderly transition of the mortgage market to
private capital through a winding down of Fannie Mae and Freddie Mac and Federal
Agency obligations becoming more expensive due to a shrinking supply. The proposed
changes, described in detail below, better align the policy with State Code and provide
greater clarity to the advisors. The proposed changes also allow for greater flexibility to
diversify the City’s investment portfolio to the extent permissible by State Code. In
consultation with the City’s investment advisors, Finance Staff recommends these
changes to receive the highest rate of return reasonably available while also taking into
account the primary goals of achieving safety and liquidity.
Below is a summary of the suggested changes by policy section. A comparison of
these changes with what is allowable according to State Code is summarized in
Attachment B.
Section C.3. Delegation of Authority – Finance staff proposes that the policy explicitly
require the City’s investment advisors be registered under the Investment Advisors Act
of 1940 as promulgated by the Securities and Exchange Commission.
Section F. Safekeeping and Custody of Assets – Finance staff proposes to eliminate
the reference to the physical delivery of securities since the City’s bank custodian now
only keeps electronic records of security certificates on the City’s behalf.
Section G. Authorized Investments – Finance staff proposes to add language that in
the event that an apparent discrepancy is found between this Policy and the
Government Code, the more restrictive parameter(s) will take precedence. Additional
proposed changes are as follows:
Proposed Change Explanation
Section G.1.a: Proposed language explicitly
states no limits to percentage invested in US
treasury bills.
Provides greater clarity
Section G.1.b: Proposed language explicitly
states no limits to the percentage of the portfolio
that can be invested in federal instrumentality
investments.
Provides greater clarity.
Section G.1.c: Proposed language explicitly
states no limits to the percentage of the portfolio
that can be invested in this category. Also re-
categorizes and strikes certain language from
G.1.c relating to mortgage backed securities and
debentures to section G.1.d.
Provides greater clarity.
Section G.1.d: Consistent with State Code, the
proposed change explicitly allows investment in
collateralized mortgage obligation (CMOs).
Provides greater clarity
Annual Investment Policy Review and Update
July 22, 2013
Page 3
Proposed Change
Explanation
Section G.1.e: Proposed language extends
maturities of medium term notes from four to five
years and strikes authorization of AAA rated
FDIC guaranteed corporate bonds due to
expiration of Total Liqudity Guarantee Program
(TLGP ).
Provides for more flexibility to achieve greater
investment diversification and opportunity.
Deletes reference to expired TLGP program.
Section G.1.f: Proposed change allows for
investment of notes or bonds of any of the 50
states, and increases limit from 15% to 30% of
portfolio allowed to be invested in this category.
Also allows for a minimum credit exposure of A
as opposed to AA.
Provides for more flexibility to achieve greater
diversification and investment opportunity. This
change is allowed under State Code and
provides better alignment with the policy
constraints on a corporate medium-term note.
Section G.1.h: Proposed change provides
authorization to invest negotiable certificates of
deposit in federally or state licensed foreign
savings institutions with senior long-term debt
rated at least A or short-term debt rated at least
A-1.
Change is allowed under state code and
provides for more flexibility to achieve greater
diversification and investment opportunity.
Section G.1.i: Proposed additional language to
clarify acceptable rating of A-1 or equivalent for
prime commercial paper investments.
Specificity adds greater clarity for advisors.
Section G.1.j: Proposed increase to the
maximum allocation in bankers' acceptances
from 20% to 40% of the City’s total portfolio.
Changes are permissible by state code and
allow for more flexibility to achieve greater
diversification and investment opportunity.
Section G.1.n: Proposed change allows up to
10% (maximum allowable by law) of total
portfolio be invested in any individual money
market fund.
Changes are permissible by state code and
allow for more flexibility to achieve greater
diversification and liquidity.
Section H. Investment Parameters
Proposed Change
Explanation
Section 1: Proposed change in diversification
language more clearly specifies the types of
issues that are excepted from the 5% portfolio
exposure limitation. These exceptions include:
governmental issuers, investment pools, and
money market funds.
Makes language consistent with state code and
provides greater clarity.
Section 2: Proposed change more clearly
specifies that advisors will monitor their own
portfolios and not that of the other investment
advisors.
Specificity adds greater clarity for advisors.
Annual Investment Policy Review and Update
July 22, 2013
Page 4
Proposed Change
Explanation
Section 3: Proposed change allows for less than
three quotes for competitive transactions when it
is not possible to obtain three quotes.
Specificity adds greater clarity for advisors when
three quotes are not obtainable.
Section I. Portfolio Performance – Historically the City has evaluated portfolio
performance against the Bank of America Merrill Lynch (BAML) 1-3 Treasury Index.
Since the BAML 1-3 Treasury Index does not include agencies or corporate securities,
staff is considering an alternative benchmark that more closely resembles the City’s
current investment mix. Therefore, staff recommends revising the policy to include
language that allows for using comparative benchmark indexes that more closely
correspond to the portfolio’s duration, universe of allowable securities, risk profile, and
other relevant characteristics. These indexes will be used as reference points to assess
the performance of the City’s investment portfolio. Based on the composition of the
available alternatives, staff believes the Bank of America Merrill Lynch (BAML) 1-3 Year
AAA-A Corporate and Government Index (Bloomberg index number “B110”) is more
generally representative of our medium turn portfolio. Staff also recommends the use of
a short-term performance benchmark such as the BAML 91 day Treasury Index and the
BAML 0-1 Year Treasury index to assess the performance of the City’s short-term
portfolio.
Section J. Reporting – Finance staff proposes additional language that requires the
inclusion of investment buy/sell transactions to the monthly treasury report. This will
provide a greater level of transparency.
CONCLUSION:
For purposes of ensuring 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 changes to Council Policy F-1, Statement of
Investment Policy. These changes do not materially affect investment objectives. The
recommendations do include changes to the maximum credit concentration, credit
quality and allowable investments to provide more flexibility to diversify investments
across asset classes. With Finance Committee concurrence, Finance staff will bring the
suggested revisions to Council for formal approval.
Annual Investment Policy Review and Update
July 22, 2013
Page 5
Prepared by: Submitted by:
/s/Steve Montano
/s/Dan Matusiewicz
Steve Montano Dan Matusiewicz
Deputy Finance Director Finance Director
Attachments: A. Redline Investment Policy Amendment
B. CA Gov. Code & Proposed Changes to Authorized Investments
F-1
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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
F-1
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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
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
F-1
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objective, the City shall diversify its investments by investing funds
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.
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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
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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 (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
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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
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.
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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.”
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.
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
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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 faith and credit of the
United States are pledged for the payment of principal and interest
and which have a mortgage-backed securities and debentures with
a final maturity not exceeding five years from the date of trade
settlement.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
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 four 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. In
addition, AAA rated FDIC-guaranteed corporate bonds are herein
authorized, within the aforementioned diversification and maturity
requirements.
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f) Municipal Bonds: General and Revenue obligations of the State of
California and local agencies within the State. Municipal bonds
must be rated at least AA by two NRSROs with maturities not
exceeding three years. No more than five percent (5%) of the City’s
total portfolio shall be invested in any one issuer and the aggregate
investment in municipal bonds shall not exceed fifteen percent
(15%) of the City’s total portfolio. including registered notes or
bonds of any of the 50 states, 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 50 states. Investments of local
agencies not at State treasury level are not permitted.
In addition, bonds, notes, warrants, or other evidences of
indebtedness of any local agency in 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 are
permitted.
Municipal bonds must be rated at least “A” or the equivalent by an
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 “A” rated bonds or in the bonds of
any one municipality.
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.
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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 U.S. Banks whose senior long-term debt is rated
at least “A”, or the equivalent, or short-term debt is rated at least
“A-1”underlying securities are rated A-1 or the equivalent by an
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 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 are rated “A-1”, or the
equivalent, with the highest letter and number rating as provided
for 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 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.
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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”, P-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 twenty forty percent (240%) 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
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.
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No more than ten percent (10%) of the portfolio can be involved in
reverse repurchase agreements.
l) 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
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.
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.
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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
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
non-governmental 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 “A1” 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
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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, Aat 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.
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. The performance of the City’s investments shall be compared to
the average yield on the U.S. Treasury security that most closely corresponds to
the portfolio’s weighted average effective maturity. 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;
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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
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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
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 October 9, 2012. 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
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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
City of Newport Beach
Attachment B
CA Gov. Code & Proposed Changes to Authorized Investments
July, 2013
NB Policy Ref. INVESTMENT TYPE CA GOV. CODE
CURRENT NEWPORT BEACH
POLICY
PROPOSED CHANGES TO CNB
POLICY
G.1. a) 5 YEARS MAX MATURITY 5 YEARS MAX MATURITY
NO MAX %OF PORTFOLIO NOT STATED NO MAX %OF PORTFOLIOU.S. TREASURY NO MAX % OF PORTFOLIO NOT STATED NO MAX % OF PORTFOLIO
NO MAX % OF ONE ISSUER NOT STATED NO MAX % OF ONE ISSUER
b)5 YEARS MAX MATURITY 5 YEARS MAX MATURITY
NO MAX % OF PORTFOLIO NOT STATED NO MAX % OF PORTFOLIO
NO MAX % OF ONE ISSUER NOT STATED NO MAX % OF ONE ISSUER
c)5 YEARS MAX MATURITY 5 YEARS MAX MATURITY
NO MAX % OF PORTFOLIO NOT STATED NO MAX % OF PORTFOLIO
NO MAX % OF ONE ISSUER NOT STATED NO MAX % OF ONE ISSUER
d)5 YEARS MAX MATURITY 5 YEARS MAX MATURITY Clarification that investments in
OBLIGATIONS
FEDERAL INSTRUMENTALITY
FEDERAL AGENCY
OBLIGATIONS
)
20% MAX OF PORTFOLIO 20% MAX OF PORTFOLIO
NO MAX % OF ONE ISSUER 5% MAX ONE ISSUER
RATED AT LEAST AA RATED AT LEAST AAA
e)5 YEARS MAX MATURITY 4 YEARS MAX MATURITY 5 YEARS MAX MATURITY
30% MAX OF PORTFOLIO 30% MAX OF PORTFOLIO
NO MAX % OF ONE ISSUER 5% MAX ONE ISSUER
RATED AT LEAST ARATED AT LEAST A
f)5 YEARS MAX MATURITY 3 YEARS MAX MATURITY
Clarification that investments in
collateralized mortgage obligation
(CMOs) ‐ permissible under Cal Gov
Code Sect 53601 (o)
MORTAGE PASS ‐ THROUGH
SECURITIES
MEDIUM ‐ TERM NOTES
NO MAX % OF PORTFOLIO 15% MAX OF PORTFOLIO 30% MAX OF PORTFOLIO
NO MAX % OF ONE ISSUER 5% MAX ONE ISSUER ANY OF THE 50 STATES
NO MIN CREDIT QUALITY RATED AT LEAST AA RATED AT LEAST A
g)5 YEARS MAX MATURITY 2 YEARS MAX MATURITY
NO MAX % OF PORTFOLIO 30% MAX OF PORTFOLIO
NO MAX % OF ONE ISSUER 5% MAX ONE ISSUER
h)5 YEARS MAX MATURITY 2 YEARS MAX MATURITY
30% MAX OF PORTFOLIO 30% MAX OF PORTFOLIO
NO MAX %OF ONE ISSUER 5%MAXONE ISSUER
Authorization to invest in licensed
foreign saving institutions w/ senior
long‐term debt rated at leastAor
LOCAL AGENCY BONDS
NON‐NEGOTIABLE
CERTIFICATES OF DEPOSIT
NEGOTIABLE CERTIFICATES
NO MAX % OF ONE ISSUER 5% MAX ONE ISSUER
NO MIN CREDIT QUALITY RATED AT LEAST A‐1
I)270 DAYS MAX MATURITY 270 DAYS MAX MATURITY
25% MAX OF PORTFOLIO 25% MAX OF PORTFOLIO
10% MAX ONE ISSUER 5% MAX ONE ISSUER
RATED AT LEAST A‐1RATED AT LEAST A‐1
J)180 DAYS MAX MATURITY 180 DAYS MAX MATURITY
%%%
long term debt rated at least A or
short‐term debt rated at least A‐1 ‐
permissible under Cal Gov Code Sect
53601 (i)
Clarifies acceptable rating of A‐1 or
equivalent for prime commercial
paper investments.
OF DEPOSIT/CD PLACEMENT
SERVICE
PRIME COMMERCIAL PAPER
40% MAX OF PORTFOLIO 20% MAX OF PORTFOLIO 40% MAX OF PORTFOLIO
30% MAX ONE ISSUER 5% MAX ONE ISSUER
NO MIN CREDIT QUALITY RATED AT LEAST A‐1
k)1 YEAR MAX MATURITY 30 DAYS MAX MATURITY
NO MAX % OF PORTFOLIO NOT STATED
NO MAX % OF ONE ISSUER NOT STATED
NO MIN CREDIT QUALITY SHORT TERM AT LEAST A‐1
NO MIN CREDIT QUALITY LONG TERM AT LEAST A
92 DAYS MAXMATURITY 30 DAYS MAX MATURITY
BANKERS' ACCEPTANCES
REPURCHASE AGREEMENTS
92 DAYS MAX MATURITY 30 DAYS MAX MATURITY
20% MAX OF PORTFOLIO 10% MAX OF PORTFOLIO
NO MAX % OF ONE ISSUER NOT STATED
NO MIN CREDIT QUALITY NOT STATED
l)N/A N/A
NO MAX % OF PORTFOLIO NO MAX % OF PORTFOLIO
N/A N/A
m)N/A SHORT TERM
NO MAX % OF PORTFOLIO 5% MAX OF PORTFOLIO
LOCAL AGENCY INVESTMENT
FUND (LAIF)
LA COUNTY POOLED
INVESTMENT FUNDS
REVERSE REPURCHASE
AGREEMENTS
N/A N/A
N/A N/A
NO MAX % OF PORTFOLIO PROHIBITED
N/A N/A
n)N/A N/A
20% MAX OF PORTFOLIO 20% MAX OF PORTFOLIO
10% MAX ONE ISSUER NOT STATED 10% MAX ONE ISSUER
RATED AAA RATED AAA
MUTUAL FUNDS AND
MONEY MARKET MUTUAL
FUNDS
INVESTMENT FUNDS
OC COUNTY POOLED
INVESTMENT FUNDS
Agenda Item 5B
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
July 22, 2013
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or Danm@newportbeachca.gov
SUBJECT: ANNUAL INVESTMENT PORTFOLIO PERFORMANCE REVIEW
ABSTRACT:
The purpose of this report is to summarize the performance of the City’s investment
portfolios relative to the City’s investment objectives and pertinent performance
benchmarks. With the prospect of long-term interest rates rising, investors have
recently reacted by selling bonds and driving yields up. This caused fixed income
portfolios to decline in value during May and June as interest rates rose across the yield
curve. The City’s medium-term portfolio annual average total return fell from 1.22% to
0.21% during the fiscal year, while the benchmark’s total return fell from 1.06% to
0.66%. This is largely attributable to negative monthly returns in May and June of
-0.27% and -0.35%, respectively, due to rapidly rising interest rates. While “total return”
reflects the recent rapid change in market value, the portfolio’s yield, if held to maturity,
is currently .77% (at cost). If the rising interest environment is sustained, the prospect
of higher future portfolio yields will return as new securities are purchased.
BOND MARKET OVERVIEW:
Throughout the fiscal year the yield on two year treasury notes has remained under
0.35%. The policy of the Federal Reserve (Fed) has been to keep short-term rates at
record lows until unemployment reaches 6.5% and inflation is under 2.0%. In late April
of 2013, officials predicted that unemployment will fall to 6.5% by the end of 2014,
sooner than previous projections, and that inflation will run between 1.4% and 2.0%
next year. Comments from Fed Chairman Ben Bernanke at a congressional hearing in
May indicated the Fed could begin reducing bond purchases as early as September
2013.
Annual Investment Portfolio Performance Review
July 22, 2013
Page 2
With the prospect of long-term interest rates rising, investors reacted by selling bonds
and driving yields up in recent months. This caused fixed income portfolios to decline in
value during May and June as interest rates rose across the yield curve. Unrealized
gains and losses are not realized unless securities are sold prior to maturity. However,
they do have an immediate impact on the market value of the portfolio and total monthly
return.
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
Yi
e
l
d
2 Yr Treasury Yield
Operation twist
announced
Operation Twist
extended
QE3 QE4 FOMC Announces it
could slow bond buying
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr
Yi
e
l
d
Three Month Change in Treasury Yield Curve
April
May
June
Av
e
r
a
g
e
Du
r
a
t
i
o
n
Steepening
Yield Curve
Annual Investment Portfolio Performance Review
July 22, 2013
Page 3
Not surprising, the City saw a decline in its medium-term portfolio for the first time in the
past several years. These declines are short-term in nature and are consistent with the
overall market move. This higher interest rate environment signifies that new
investments should result in higher yields than the previous fiscal year.
PORTFOLIO OVERVIEW:
Guided by Council Policy F-1 and constrained by state law, 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. California State Code 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 its 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.
Short-Term Portfolio
The City uses a combination of demand deposit accounts (DDA) and the Local Agency
Investment Fund (LAIF) in its short-term portfolio to provide sufficient liquidity to meet its
operating requirements. Per California Government Code section 16429.3, the State
may not impound, seize, transfer or borrow funds in order to resolve their budget
deficits. The average investment life of the LAIF fund is approximately 278 days. The
average effective yield is 0.25%. Due to the low interest rate environment, larger DDA
balances were maintained than usual due to attractive compensating balance credits
utilized to offset banking costs.
The chart on the following page illustrates the LAIF and DDA balances maintained
during the year.
Annual Investment Portfolio Performance Review
July 22, 2013
Page 4
Prior to the recent construction activities related to the Civic Center, the City’s short-
term investment portfolio averaged $20M. Over the past year it has increased to over
$50M based on both current and anticipated liquidity needs related to the capital
improvement projects identified in the Facilities Financing Planning Program.
Medium-Term Portfolio
Funds that are unlikely to be spent in the foreseeable future are kept in a medium-term
portfolio actively managed by three individual investment advisors in accordance with all
applicable City policies and codes, State statutes, and Federal regulations. The City has
proceeds from bonds are issued for a specific purpose and are governed by their own
bond indentures.
‐
10,000,000.00
20,000,000.00
30,000,000.00
40,000,000.00
50,000,000.00
60,000,000.00
70,000,000.00
Short‐Term Portfolio
LAIF DDA
Annual Investment Portfolio Performance Review
July 22, 2013
Page 5
The City’s entire investment portfolio as of June 30, 2013 is summarized as follows:
The City’s investment portfolio is expected to generate a return of a benchmark that
most closely corresponds to the portfolio’s duration, universe of allowable securities,
risk profile and other relevant characteristics. The City’s medium-term portfolio average
annual total return fell from 1.22% to 0.21% during the fiscal year, while the
benchmark’s total return fell from 1.06% to 0.66%. This is largely attributable to a
monthly loss in May and June of -0.27% and -0.35%, respectively, due to rapidly rising
interest rates.
Amortized Unrealized Fair Accrued Market % YTM @ YTM @
Operating Portfolios Cost Gains/(Loss) Value Interest Value Total Cost Market Notes
Short-term Portfolio
Demand Deposit Accounts 14,695,497$ -$ 14,695,497$ -$ 14,695,497$ 7.16% 0.54% 0.54% (1)
Local Agency Investment Fund 30,901,523 - 30,901,523 - 30,901,523 15.06% 0.24% 0.24% (2)
Medium-term Portfolio
Cash Equivalents 3,642,967 - 3,642,967 - 3,642,967 1.78% 0.06% 0.06%
Marketable Securities 155,565,300 (348,757) 155,216,542 676,711 155,893,254 76.00% 0.77% 0.69%
TOTAL OPERATING FUNDS 204,805,287$ (348,757)$ 204,456,529$ 676,711$ 205,133,240$ 100.00%
Bond Fund Portfolios
2011 Civic Center COPs 7,838,995$ -$ 7,838,995$ -$ 7,838,995$ 59.63% 0.01% 0.01%
Assessment Districts 2,211,870 - 2,211,870 - 2,211,870 16.82% 0.01% 0.01%
Special Improvement Districts 3,096,212 - 3,096,212 - 3,096,212 23.55% 0.01% 0.01%
TOTAL BOND FUNDS WITH FISCAL AGENT 13,147,076$ -$ 13,147,076$ -$ 13,147,076$ 100.00%
TOTAL CASH & INVESTMENTS 217,952,363$ (348,757)$ 217,603,606$ 676,711$ 218,280,317$
Portfolios June 30, 2013
QTR#1 QTR#2 QTR#3 QTR#4 MAY JUNE
Fiscal Year
2011‐12
Fiscal Year
2012‐13
Medium‐Term Total Return 0.39% 0.12% 0.19%‐0.48%‐0.27%‐0.35% 1.22% 0.21%
Index Total Return 0.48% 0.14% 0.18%‐0.14%‐0.15%‐0.12% 1.06% 0.66%
Excess Total Return ‐0.09%‐0.03% 0.01%‐0.35%‐0.12%‐0.23% 0.16%‐0.45%
‐0.50%
0.00%
0.50%
1.00%
1.50%
TO
T
A
L
RE
T
U
R
N
Medium‐Term Portfolio Trend
Annual Investment Portfolio Performance Review
July 22, 2013
Page 6
Although all investments contain an element of risk, the City’s Investment Policy is
designed to limit exposure to risk. Each of the three professional investment advisors
has unique strategies to minimize risk and take positions on key variables within the
constraints of the City’s investment policy. Despite the City realizing negative returns
throughout the fiscal year, the medium-term portfolio has historically fell between the 1-
3 Year Treasury index and 1-3 Year Government/Corporate AAA-A Rated benchmarks
as indicated in the table below.
A more robust summary of portfolio characteristics and performance by each
investment advisor is summarized and attached for your review.
Prepared by: Submitted by:
/s/Cory Pearson
/s/Dan Matusiewicz
Cory Pearson Dan Matusiewicz
Accountant Finance Director
Attachments: A. FY 2012-13 Summary of Medium-Term Investment Portfolio Characteristics
Month Market Value Duration Total Return Duration Total Return Duration Total Return Duration Total Return
July 163,172,824 1.698 0.277% 1.675 0.278% 1.615 0.275% 1.800 0.277%
August 154,469,444 1.610 0.065% 1.584 0.071% 1.455 0.068% 1.766 0.054%
September 151,933,613 1.746 0.043% 1.747 0.050% 1.682 0.046% 1.798 0.034%
October 151,907,166 1.833 ‐0.017% 1.771 0.005% 1.952 ‐0.019% 1.792 ‐0.037%
November 148,086,476 1.840 0.119% 1.736 0.107% 1.889 0.146% 1.902 0.108%
December 148,112,054 1.789 0.017% 1.697 0.006% 1.860 ‐0.014% 1.818 0.058%
January 148,114,928 1.855 0.009% 1.746 0.009% 1.979 ‐0.016% 1.854 0.031%
February 148,330,457 1.729 0.139% 1.728 0.143% 1.688 0.182% 1.767 0.095%
March 148,393,672 1.848 0.043% 1.800 0.031% 1.981 0.075% 1.777 0.025%
April 162,596,924 1.801 0.133% 1.620 0.148% 2.218 0.151% 1.570 0.101%
May 160,598,855 1.884 ‐0.266% 1.794 ‐0.229% 2.111 ‐0.439% 1.747 ‐0.128%
June 159,536,221 1.963 ‐0.351% 1.715 ‐0.256% 2.453 ‐0.673% 1.722 ‐0.122%
Fiscal Year 153,771,053 1.800 0.211% 1.718 0.363% 1.907 ‐0.222% 1.776 0.497%
City of Newport Beach Medium-Term Portfolio
Cutwater PFMChandlerMedium‐Term
Total Rate of Return Current Latest
As of 06/30/2013 Month 3 Months 1 Yr 3 Yrs 5 Yrs 10 Yrs
Chandler ‐0.22%‐0.31% 0.37% 1.20% 2.52% 2.99%
Cutwater ‐0.77%‐0.99%‐0.24% 0.61% 1.94% 2.78%
PFM ‐0.10%‐0.14% 0.50% 1.15% 2.45% 2.95%
1‐3 Yr Treasury ‐0.07%‐0.11% 0.33% 0.82% 1.90% 2.59%
1‐3 Gov/Corp A or Above ‐0.12%‐0.14% 0.66% 1.17% 2.24% 2.78%
Annualized
Summary Chandler Cutwater PFM
1-3 Yr
Gov/Corp
AAA-A
Cash 1,848,223 1,226,718 473,061 N/A
Fixed Income 56,411,499 53,054,587 57,962,067 N/A
Duration*1.715 2.453 1.722 1.905
Weighted Avg Life*1.768 2.638 1.843 N/A
Weighted Avg Maturity*1.810 2.990 1.816 1.966
Weighted Avg Eff Maturity*1.740 1.803 1.766 1.966
Avg Credit Rating*AA AA-AA AAA
Yield to Maturity @ Market*1.014% 0.788% 0.467% N/A
Yield to Maturity @ Cost*0.555% 1.011% 0.464% 0.538%
* as of 06/30/13
Duration Allocation Chandler Cutwater PFM
1-3 Yr
Gov/Corp
AAA-A
0.00 - 0.25 20.32% 24.63% 6.28% 0.25%
0.25 - 0.50 8.56% 0.52% 0.12% 0.15%
0.50 - 0.75 11.92% 5.21% 7.24% 0.41%
0.75 - 1.00 6.67% 10.43% 6.22% 4.37%
1.00 - 2.00 25.53% 20.97% 65.74% 55.90%
2.00 - 3.00 18.22% 15.83% 14.23% 38.92%
3.00 - 4.00 6.95% 13.57% 0.18% 0.00%
4.00 - 5.00 1.83% 8.85% 0.00% 0.00%
Total %100.0%100.0%100.0%100.0%
Security Type Allocation Chandler Cutwater PFM
1-3 Yr
Gov/Corp
AAA-A
Agency 47.96% 61.91% 42.72% 18.04%
Agency Discount Note 0.55% 0.00% 0.00% 0.00%
Asset-Backed Security 1.71% 0.00% 0.00% 0.00%
Cash 0.20% 0.44% 0.31% 0.00%
Commercial Paper 3.31% 0.08% 0.48% 0.00%
Corporate Notes 26.55% 27.17% 14.66% 15.33%
MM Fund 1.46% 1.98% 1.31% 0.00%
Municipal Bonds 0.00% 0.00% 1.11% 0.54%
U.S. Government 18.26% 8.43% 39.42% 66.10%
Total %100.0%100.0%100.0%100.0%
Market Sector Allocation Chandler Cutwater PFM
1-3 Yr
Gov/Corp
AAA-A
Agency 48.51% 61.91% 42.72% 18.04%
Asset Backed 1.71% 0.00% 0.00% 0.00%
Cash 1.66% 2.42% 1.62% 0.00%
Financial 16.34% 18.24% 9.64% 8.69%
Government 18.26% 8.43% 39.42% 66.10%
Industrial 13.21% 9.00% 5.50% 6.21%
Municipal 0.00% 0.00% 1.11% 0.54%
Utility 0.31% 0.00% 0.00% 0.43%
Total %100.0%100.0%100.0%100.0%
Medium-Term Investment Portfolio Characteristics
Average FY2012-13
Agenda Item 5C
CITY OF NEWPORT BEACH
FINANCE COMMITTEE STAFF REPORT
July 22, 2013
TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE
FROM: Finance Department
Dan Matusiewicz, Finance Director
(949) 644-3123 or Danm@newportbeachca.gov
SUBJECT: INVESTMENT STRATEGY REVIEW
ABSTRACT:
The City’s short-term investment portfolio has grown in recent years relative to the medium-
term investment portfolio in order to provide sufficient liquidity for funding large scale capital
projects. This has diluted the average duration of the medium term portfolio. Staff recently
met with the City’s investment advisors to discuss investment strategy and the following three
strategies were considered: 1) create a new actively managed short-term portfolio, 2) consider
increasing the duration of the City’s medium-term portfolio when market conditions are
favorable, and 3) establish benchmarks that generally represent the universe of investable
securities for both the short-term and medium-term portfolios. Combined, the first two
strategies will better manage short-term cash flow demands without causing undue disruption
in the investment strategies of the medium-term portfolio, while the third strategy will provide
meaningful reference points for evaluating portfolio performance. Finance staff is seeking
feedback and/or approval on the investment management strategies and recommendations
discussed below.
DISCUSSION:
The Council has directed staff in recent years to pursue an ambitious agenda to rehabilitate,
replace, or develop new community serving facilities. This initiative has necessitated an
increase in the amount of funds the City maintains in its short-term investment portfolio. The
short-term investment portfolio provides a readily available source of funds to pay for the City’s
short-term liquidity needs. These short-term funds have traditionally been held in the State
Treasury administered Local Agency Investment Fund (LAIF), which offers daily liquidity and
low volatility due to the relatively short duration. The shorter duration also results in a
commensurately lower return. The quarter ended June 30, 2013 LAIF yield was approximately
0.25% (See Exhibit A). Prior to the recent construction activities related to the Civic Center, the
City’s the short-term investment portfolio averaged $20M. In recent years it has increased up
to anywhere between $45M and $60M, based on both current and anticipated liquidity needs
related to the capital improvement projects identified in the Facilities Financing Planning
Program . This change has resulted in the dilution of the portfolio’s overall duration. The chart
Annual Investment Portfolio Strategy Review
July 22, 2013
Page 2
below demonstrates the increasing balance of the short-term portfolio relative to the medium-
term portfolio.
Funds that are unlikely to be spent in the foreseeable future are kept in a medium-term
investment portfolio actively managed by three individual investment advisors in accordance
with all applicable City policies and codes, State statutes, and Federal regulations. Finance
staff is tasked with efficiently managing the short-term cash flow demands without causing
undue disruption to the investment strategies of the medium-term portfolio. This task is made
more difficult in our current rising interest rate environment where investment losses may result
if securities are liquidated prior to maturity. An over-reliance on cash flow from the medium-
term portfolio may hinder the investment advisors’ ability to achieve the benchmark rate of
return, seize market opportunities, or rebalancing the portfolio.
Finance staff recently met with all three investment advisors to discuss alternative approaches
to balancing the needs and objectives of the short-term and medium-term portfolios with a
strategy that also optimizes yield. There was consensus among the advisors and staff that the
following strategies are worthy of consideration:
Strategy Consideration 1 – Create an Actively Managed Segment of the Short-Term Portfolio
This strategy would assign one of the City’s existing advisors the responsibility of buying
securities with specific maturity dates to meet the short-term (operating and capital) cash flow
demands of the City, and establish a suitable performance benchmark comparable with the
characteristics of the portfolio. Staff would work with advisors to further develop schedules for
‐
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
180,000,000
Ju
l
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Se
p
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Ja
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Ma
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Ma
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Ma
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Ma
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Market Value Market Value of Short and Medium Term Portfolios
Medium Term Portfolio
Short‐term Portfolio
Annual Investment Portfolio Strategy Review
July 22, 2013
Page 3
cash out-flows related to major capital projects, and refine our cash forecasting techniques to
minimize short-term portfolio balances.
Strategy Consideration 2 – Increase the Duration of the Medium-Term Investment Portfolio
Since the gradual increase of the short-term portfolio balance dilutes the portfolio’s overall
duration and opportunity for investment return, staff believes that extending the duration of our
medium-term portfolio to a 1-5 year duration could also produce desirable results over the
long-term. A large component of the City’s portfolio does not rely on immediate liquidity due to
reserve restrictions, long-term funding programs and permanent endowments so the additional
short-term volatility associated with a longer duration strategy is fiscally tolerable.
A comparative risk/benefit analysis of duration’s impact on total return was prepared on a
$50M segment of the City’s investment portfolio over a 5 and 10 year period in Exhibits B & C
respectively. In the ten year example, a 1-3 year Treasury-only strategy realized an annual
return of 2.59% and experienced negative returns 7 out of 40 quarters. The 1-5 year Treasury-
only strategy realized a 3.08% annual return but experienced negative returns 12 of 40
quarters. The City’s current strategy of an actively managed 1-3 year portfolio produced a
2.95% return and experienced negative returns only 5 out of 40 quarters. Exhibit D further
demonstrates a simulated shock analysis comparing the 1-3 yr and 1-5 yr strategies over four
consecutive quarters. While we believe the City has the fiscal discipline and wherewithal to
endure short-term interest rate volatility, due to the current rising interest rate environment,
staff recommends revisiting this option in a year, or when market conditions exist that indicate
a more stable environment. If such a strategy is deployed in the future, staff recommends
incrementally extending the duration over time in order mitigate interest rate risk.
Strategy Consideration 3 - Establish Generally Representative Benchmarks for the Medium-
Term Portfolio
The City has evaluated portfolio performance against a Treasury-only Index even though
historically, the portfolio has also included government sponsored agency and corporate
securities. Since the composition of the City’s portfolio most often differs from a Treasury-only
investment strategy, this type of benchmark does not always provide an apples to apples
comparison. Staff is considering an alternative benchmark that more closely resembles the
City’s current investment mix. Staff recommends that the performance of the City’s
investments be compared to the total return that most closely corresponds to the portfolio’s
duration, universe of allowable securities, risk profile, and other relevant characteristics.
Based on the composition of the available alternatives, staff believes the Bank of America
Merrill Lynch (BAML) 1-3 Year AAA-A Corporate and Government Index (Bloomberg index
number “B110”) is more generally representative of our medium turn portfolio as demonstrated
in the charts below:
Annual Investment Portfolio Strategy Review
July 22, 2013
Page 4
Summary Actions to Implement the Strategies
Finance staff is seeking input from the Finance Committee on the proposed investment
strategies described above and the following specific actions:
1. Create a new custodial account at the Bank of New York so that one of the City’s
current investment advisors can buy securities with specific maturity dates to meet the
short-term cash flow demands of the City associated with larger construction projects
and seasonal cash flow needs. This alternative would only be exercised when it can be
demonstrated that the City’s investment objectives can be better achieved with
individual short-term securities compared to alternatives such as LAIF or other local
government investment pools.
2. Maintain the current duration for the medium-term portfolio at 1-3 years and revisit
extending the duration to a 1-5 year strategy in a year or so, or when market conditions
are more stable.
3. Recognize and utilize the BAML 1-3 Year AAA-A Corporate and Government Index
(Bloomberg index number “B110”) and the BAML 1-3 Treasury Index as reference
points to assess the performance of the City’s medium-term portfolio. Taken together,
these benchmarks better represent the duration, universe of allowable securities, risk
profile, and other relevant characteristics of the City’s medium term investment portfolio.
4. Utilize a short-term performance benchmark such as the BAML 91 day Treasury Index
and the BAML 0-1 Year Treasury index that best corresponds to the City’s short-term
portfolio characteristics to assess the performance of the City’s short-term investment
portfolio strategy.
In consultation with the City’s investment advisors, Finance Staff recommends consideration of
these changes because they allow staff to better manage short-term cash flow demands
without causing undue disruption in the investment strategies and provide meaningful
reference points for evaluating the performance of the City’s investment portfolio.
100%
BAML 1‐3 Treasury index
Treasuries
Agencies
Corporates
Other
68%
17%
15%
(BAML) 1‐3 Year AAA‐A Corp and Gvnmt
Index
Treasuries
Agencies
Corporates
Other
22%
51%
24%
3%
City of Newport Beach Medium Term
Portfolio
Treasuries
Agencies
Corporates
Other
Annual Investment Portfolio Strategy Review
July 22, 2013
Page 5
Prepared by: Submitted by:
/s/Sandra Wilcox
/s/Dan Matusiewicz
Sandra Wilcox Dan Matusiewicz
Senior Accountant Finance Director
Exhibits: A. LAIF Performance Report
B. Risk/Return Comparisons of Various Benchmarks (5 Years)
C. Risk/Return Comparisons of Various Benchmarks (10 Years)
D. Interest Rate Shock Analysis
Annual Investment Portfolio Strategy Review
July 22, 2013
Page 6
Exhibit A
Annual Investment Portfolio Strategy Review
July 22, 2013
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Exhibit B
Annual Investment Portfolio Strategy Review
July 22, 2013
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Exhibit C
Annual Investment Portfolio Strategy Review
July 22, 2013
Page 9
Exhibit D
Analysis performed with data as of June 30, 2013.
Base level security pricing was provided in the City’s statement.
Historical yield curves, as of June 30, were used for U.S. Treasuries, federal agencies and corporate securities independently and with the relevant yield
curve applied to each investment by sector.
Yields for maturities between yield curve points were interpolated using cubic interpolation methods.
Interest rate shifts are parallel and applied to the base yields as of June 30, 2013.
Fair market values and accrued interest values were determined using industry standard calculation methods.
Assumes that each interest rate scenario occurs gradually over the course of the tested time period.
Excludes reinvestment of maturities and coupon payments.
Benchmark does not include Corporate AAA to A in order to isolate the risk due to Duration.