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Item 4 - Adoption of Resolution Approving Updated Investment PolicyAugust 3, 2021, Item #4DATE: TO: FROM: CONTACT: SUBJECT: Summary: AGENDA REPORT CityofPoway August 3, 2021 Honorable Mayor and Members of the City Council Aaron Beanan, Director of Finance .6 Stacey Tang, Finance Manager 3(' 858-668-4426 or STang@poway.org Updated Investment Policy CITY COUNCIL Pursuant to California Government Code, Sec. 53646, and the City's Investment Policy (Policy), the Director of Finance serving in the capacity as City Treasurer is rendering the Policy to the City Council for its annual review. This Policy is an important tool for ensuring the stewardship of the City's financial resources. Staff is proposing to update the Approved Broker/Dealers list. The Policy requires that any amendments be approved by resolution of the City Council. Recommended Action: It is recommended that the City Council adopt the resolution approving the revised Investment Policy. Discussion: The City of Poway invests its funds according to parameters set forth in the City's adopted Investment Policy. The Policy is consistent with California Government Code Section 53600, et seq. which provides standards regarding investment policies and reports, securities, and repurchase agreements for local agencies. The Policy was last modified on August 4, 2020. Since July 1, 1996, the City has worked with an investment advisor to assist in the administration of the City's investment portfolio. The current investment advisor is Insight Investment, an investment firm of BNY Mellon Investment Management. The Policy defines the role of the City's investment advisor and the procedures to be followed. The Investment Oversight Committee (Committee) comprised of the Director of Finance, the Finance Manager, and the Senior Accountant, oversees the investment of the City's funds. This Committee works with the investment advisor to ensure that the Policy is being followed. 1 of 23 August 3, 2021, Item #4Based on a review of the Policy, the Committee and investment advisor have no proposed changes to the investment portion of the current investment policy but recommend making updates to the Approved Broker/Dealers list, which is to help ensure the City has a broad selection of credit worthy broker/dealers that can facilitate investments at competitive prices. The updated Policy is attached to the resolution as Exhibit A. A strike-out version is provided for review (Attachment B). Environmental Review: This action is not subject to review under the California Environmental Quality Act (CEQA). Fiscal Impact: The Investment Policy is designed to enhance the economic status of the City while protecting its funds. Public Notification: None. Attachments: A. Resolution Amending the Investment Policy for Public Funds B. Investment Policy (Strikeout Version) Reviewed/ Approved By: Wend aserman Assistant City Manager 2 of 23 Reviewed By: Alan Fenstermacher City Attorney City Manager August 3, 2021, Item #4RESOLUTION NO. 21-A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF POWAY, CALIFORNIA, AMENDING THE INVESTMENT POLICY FOR PUBLIC FUNDS WHEREAS, the City of Poway's Investment Policy (Policy) shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, yield, and diversification, and its relevance to current law and economic trends; WHEREAS, in accordance with the Policy provisions, the City of Poway has conducted a review of the Policy adopted on August 4, 2020 by Resolution No. 20-063; WHEREAS, the City of Poway proposes certain amendments to the Policy concerning the broker/dealers list; and WHEREAS, in accordance with the Policy provisions, amendments to the City's Policy shall be approved by resolution of the City Council. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Poway as follows: SECTION 1: The Investment Policy, attached hereto as Exhibit A, is hereby adopted as the Investment Policy of the City of Poway and supersedes all previous versions. SECTION 2: Resolution No. 20-063 is hereby rescinded. PASSED, ADOPTED AND APPROVED at a Regular Meeting of the City Council of the City of Poway, California on the 3rd day of August, 2021 by the following vote, to wit: AYES: NOES: ABSENT: DISQUALIFIED: Steve Vaus, Mayor ATTEST: Deborah Harrington, Interim City Clerk 3 of23 ATTACHMENT A August 3, 2021, Item #4EXHIBIT A CITY OF POWAY INVESTMENT POLICY Dated: August 3, 2021 Resolution No. 21-Page 2 The City of Poway (the City) has adopted this Investment Policy (the Policy) in order to establish the investment scope, objectives, delegation of authority, standards of prudence, reporting requirements, internal controls, eligible investments and transactions, diversification requirements, risk tolerance, and safekeeping and custodial procedures for the investment of the funds of the City. All City funds will be invested in accordance with this Policy and with applicable sections of the California Government Code. This Policy, dated August 3, 2021, replaces any previous Policy or investment procedures of the City. SCOPE The provisions of this Policy shall apply to all financial assets and investment activities of the City as accounted for in the City's Comprehensive Annual Financial Report. The employees' retirement and deferred compensation funds are not covered by this Policy. Also, bond reserve funds will be invested in accordance with each bond issue's indenture agreement. All cash shall be pooled for investment purposes. The investment income derived from the pooled investment account shall be allocated to the General Fund, the Water Fund, the Sewer Fund, and other funds as budgeted or required by legislation 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. OBJECTIVES The City's funds shall be invested in accordance with all applicable City resolutions, California statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1 . Preservation of capital and protection of investment principal. 2. Maintenance of sufficient liquidity to meet anticipated cash flows. 3. Attainment of a market rate of return. 4. Diversification to avoid incurring unreasonable market risks. 4of23 August 3, 2021, Item #4DELEGATION OF AUTHORITY Resolution No. 21-Page 3 In accordance with City of Poway Resolution No. 21-xxx, the City Treasurer/Finance Department is authorized to invest the City's funds in accordance with the California Government Code Section 53607. The City's Director of Finance serves as the Treasurer. The Director of Finance may 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 Director of Finance shall develop administrative procedures and internal controls, consistent with this Policy, for the operation of the City's investment program. Such procedures shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the City. 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. If an investment advisor is selected to help manage the investment program, a City Investment Oversight Committee shall be kept informed of the changing investment environment and any potential restructuring of the portfolio which could result. This Investment Committee shall consist of the Director of Finance, the Finance Manager, and the Senior Accountant. 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 Director of Finance and authorized investment personnel acting in accordance with established procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that deviations from expectations are reported in a timely fashion to the City Council and appropriate action is taken to control adverse developments. 5 of23 August 3, 2021, Item #4ETHICS AND CONFLICTS OF INTEREST Resolution No. 21-Page 4 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 Councilmembers, the Director of Finance, the Finance Manager, and the Senior Accountant 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. AUTHORIZED SECURITIES AND TRANSACTIONS 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 shall not knowingly make any investments in any institution, company, corporation, subsidiary, or affiliate that practices or supports directly or indirectly through its actions, discrimination on the basis of race, religion, color, creed, national or ethnic origin, age, sex, sexual preference, or physical disability. The City has further restricted the eligible types of securities and transactions as follows: 1 . United States Treasury bills, notes, or bonds with a final maturity not exceeding five years from the date of trade settlement. There is no limit on the percentage of the portfolio that may be invested in U.S. Treasury securities. 2. Government Securities Government Securities in the aggregate shall not exceed 75% of the City's total portfolio. • Federal Instrumentality Obligations (government sponsored enterprises) with a final maturity not exceeding five years from the date of trade settlement. No more than 25% of the City's total portfolio shall be invested in any one issuer and the aggregate amount shall not exceed 75% of the City's total portfolio. • Federal Agency Obligations with a final maturity not exceeding five years from the date of trade settlement. No more than 25% of the City's total portfolio shall be invested in any one issuer and the aggregate amount shall not exceed 75% of the City's total portfolio. • Mortgage-Related Securities, including Federal Agency and Federal Instrumentality mortgage-backed securities and collateralized mortgage obligations. Such securities shall not exceed five years from the date of trade settlement and must be rated at least "AAA" by at least one Nationally Recognized Statistical Ratings Organization (NRSRO) and issued by an issuer rated at least "A" or the equivalent by an NRSRO. No more than 20% of the City's total portfolio shall be invested in the combination of Mortgage-Related Securities and Asset-Backed Securities. 6 of23 August 3, 2021, Item #4Resolution No. 21-Page 5 3. Supranationals are United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of "AA" or its equivalent or better by an NRSRO. No more than 30% of the City's total portfolio shall be invested pursuant to this section. 4. Corporate Securities No more than 5% of the City's portfolio shall be invested in the obligations of any one corporate issuer. Rule 144A (private placement) securities are prohibited from purchase. • 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. Such securities shall have a final maturity not exceeding five years from the date of trade settlement and shall be rated at least "A", or the equivalent, by an NRSRO. No more than 30% of the City's total portfolio shall be invested in Medium-term Notes. • Asset-Backed Securities including equipment lease-backed certificates, consumer receivable pass-through certificates, or consumer-receivable-backed bonds. Such securities shall not exceed five years from the date of trade settlement and must be rated at least "AAA" by at least one NRSRO and issued by an issuer rated at least "A" or the equivalent by an NRSRO. No more than 20% of the City's total portfolio shall be invested in Mortgage-Related Securities and Asset-Backed Securities. • Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement and rated at least "A-1", or the equivalent, by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either sub-paragraph A. or sub-paragraph B. below: A. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated at least "A" or the equivalent by an NRSRO. B. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond and (3) have commercial paper that is rated at least "A-1" or the equivalent by an NRSRO. Investment in commercial paper shall not exceed 25% of the City's total portfolio. 5. Municipal Bonds 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. 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. 7 of23 August 3, 2021, Item #4Resolution No. 21-Page 6 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 5% of the City's portfolio shall be invested in the obligations of any one issuer, and the aggregate investment in municipal bonds shall not exceed 30% of the City's total portfolio. 6. Negotiable Certificates of Deposits (CDs) of commercial banks rated at least "A-1", or the equivalent, with maturities not exceeding five years from the date of trade settlement. In addition, the City may not invest in the CD of a state or federal credit union where any person with investment decision making authority at the City also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit. No more than 5% of the portfolio may be invested in the CDs of any one issuer, and the aggregate investment in CDs shall not exceed 30% of the portfolio. 7. Non-negotiable Certificates of Deposit and savings deposits with a maturity not exceeding five 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 in excess of the insured amount shall be secured pursuant to California Government Code Section 53651 and 53652. The City shall comply with and act to secure compliance with the security (collateralization) system specified in the Government Code Section 53649 and 53652. 8. 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. No more than 5% of the City's total portfolio shall be invested in banker's acceptances of any one bank and the aggregate investment in banker's acceptances shall not exceed 40% of the City's total portfolio. 9. 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. No more than 10% of the portfolio may be invested in any one fund and the aggregate investment in money market funds shall not exceed 20% of the City's total portfolio. 10. Shares of Beneficial Interest issued by a joint powers authority (e.g., CalTRUST) organized pursuant to Section 6509. 7 that invest in the securities and obligations authorized in subdivisions (a) to (o}, inclusive, of California Government Code Section 53601. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment advisor that: 8 of23 (1) is registered or exempt from registration with the Securities and Exchange Commission. (2) has at least five years of experience investing in the securities and obligations authorized in subdivisions (a) to (o), inclusive, of California Government Code Section 53601. (3) has assets under management in excess of $500,000,000. August 3, 2021, Item #4Resolution No. 21-Page 7 11. State of California's Local Agency Investment Fund (LAIF). pursuant to California Government Code Section 16429.1. 12. The San Diego County Investment Pool. The City may invest in this investment pool, established by the San Diego County Treasurer for the benefit of local public agencies. The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be preapproved by resolution of the City Council. INVESTMENT MANAGEMENT If the City has employed an external investment advisor to help manage its portfolio, the investment advisor shall be bound by the aforementioned list of authorized securities, the state and local laws and regulations that govern the investment activity of the City, and the following additional parameters. • While it is understood that occasionally it may be in the best interest of the City to take losses in its security portfolio, losses taken to increase the yield in the portfolio may only be taken if the increased yield results in the loss being recouped in one year or less. Credit-related losses on the other hand are taken to prevent potentially larger losses in the future. When possible, the investment advisor will get prior approval of the City before taking credit-related losses. In any case, the City will be notified as soon as possible about any losses taken in the portfolio. • Securities that are downgraded by one or more rating agency to below the ratings required by this Policy do not have to be sold. However, the investment advisor will immediately notify the City of the downgrade. The advisor will prepare a credit report on the downgraded security and forward it to the City. While the City entrusts its investment portfolio to the advisor, the City retains the right to ultimately make the decisions on how to invest its monies. INVESTMENT DIVERSIFICATION The City shall diversify its investments to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities. 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. PORTFOLIO MATURITIES AND LIQUIDITY 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. 9 of23 August 3, 2021, Item #4SELECTION OF BROKER/DEALERS Resolution No. 21-Page 8 The Finance Manager shall maintain a list of broker/dealers approved for investment purposes, and it shall be the policy of the City to purchase securities only from those brokers and the firms they represent. 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). The City may engage the services of investment advisory firms to assist in the management of the portfolio and investment advisors may utilize their own list of approved broker/dealers. Such broker/dealers will comply with the selection criteria above and the list of approved firms shall be provided to the City on an annual basis or upon request. In the event that an external investment advisor is not used in the process of recommending a particular transaction in the City's portfolio, authorized broker/dealers shall attest in writing that they have received a copy of this Policy and each authorized broker/dealer shall be required to submit and annually update a City approved Broker/Dealer Information Request form that includes the firm's most recent financial statements. The City may purchase commercial paper from direct issuers even though they are not on the approved broker/dealers list as long as they meet the criteria outlined in Item 4 of the Authorized Securities and Transactions section of this Policy. COMPETITIVE TRANSACTIONS All investment transactions shall be conducted competitively with authorized broker/dealers. At least three broker/dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If the City is offered a security for which there is no other readily available competitive offering, then the Finance Manager will document quotations for comparable or alternative securities. SELECTION OF BANKS The Finance Manager shall maintain a list of FDIC insured banks approved to provide depository and other banking services for the City. 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. 10 of 23 August 3, 2021, Item #4SAFEKEEPING AND CUSTODY Resolution No. 21-Page 9 The Finance Manager 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 deliverable securities purchased by the City will be delivered by book entry and will be held in third-party safekeeping by a City approved custodian bank or its Depository Trust Company (OTC) participant account. 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 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 net of all fees and expenses. REPORTING Quarterly, the Director of Finance shall submit to the City Council a report of the investment earnings and performance results of the City's investment portfolio. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value and dollar amount invested in all securities, and investments and monies held by the City; 2. A description of the funds, investments, and programs; 3. A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with the Investment Policy or an explanation for non-compliance; and 5. A statement of the City's ability to meet expenditure requirements for six months, and an explanation of why money will not be available if that is the case. 11 of 23 August 3, 2021, Item #4POLICY REVIEW Resolution No. 21-Page 10 This Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, yield and diversification, and its relevance to current law and economic trends. Amendments to this Policy shall be approved by resolution of the City Council. SEGREGATION OF RESPONSIBILITIES FUNCTION 1.0 Investment Policy: 1.1 Preparation and annual review of Investment Policy 1.2 Approval of Investment Policy 2.0 Investment Transactions: 2.1 Calculation of cash position 2.2 If applicable, notify investment advisor of current available cash to be invested 2.3 Investment recommendation: Determination of amount to be invested, selection of type of investment, and term of investment 2.4 Review of investment recommendation and execution of transaction 3.0 Recording of Transactions: 3.1 In investment subsidiary ledgers 3.2 In accounting records 3.3 Match investment confirmation to subsidiary ledgers 4.0 Safeguarding of Assets and Records: 4.1 Reconciliation of subsidiary records to the accounting records 4.2 Reconciliation of subsidiary records to bank statements and safekeeping records 4.3 Review of financial institutions and investment brokers' reputation and financial condition 4.4 Review of collaterals 5.0 Investment portfolio: 5.1 Preparation of investment report 5.2 Review of portfolio for compliance with stated Investment Policy 5.3 Approval of investment report 12 of 23 RESPONSIBILITY Director of Finance/ Oversight Committee City Council Sr. Accountant/Finance Mgr. Written approval by 2 members of Oversight Committee Investment Advisor/ Director of Finance/Finance Mgr. Written approval by member of Oversight Committee Sr. Accountant/Accountant Sr. Accountant/Accountant Senior Accountant Senior Accountant Senior Accountant Investment Advisor/ Oversight Committee Investment Adv./Oversight Comm. Senior Accountant Oversight Committee City Council August 3, 2021, Item #4Resolution No. 21-Page 11 APPROVED BROKER/DEALERS The following Broker/Dealers are approved for execution of trades. Amherst Pierpont ANZ Securities Barclays Capital BB&T Securities Blaylock Van BMO Capital Markets BNP Paribas Securities BofA Securities Cantor Fitzgerald & Co. Citigroup Global Markets Credit Agricole Securities (USA) Credit Suisse Securities (USA) Daiwa Capital Markets America Deutsche Bank Securities FHN Financial Securities Goldman Sachs & Co. HSBC Securities (USA) Inca pita I I NTL FCStone Financial Jefferies JP Morgan Securities Keybanc Capital Markets Mizuho Securities (USA) Broker/Dealers Morgan Stanley & Co. MUFG Securities Americas NAB Securities NatWest Markets Securities Nomura Securities International Oppenheimer & Co. Piper Jaffray & Co. Raymond James & Associates RBC Capital Markets Robert W. Baird & Co. Samuel A. Ramirez & Co. Scotia Capital (USA) SMBC Nikko Securities America SG America Securities Stifel Nicolaus & Co. TD Securities (USA) Truist Securities UBS Securities US Bancorp Investments Wells Fargo Securities Vining Sparks This list of approved broker/dealers is subject to change at any time based upon periodic recommendations of the investment advisor throughout the year. 13 of 23 August 3, 2021, Item #4CITY OF POWAY INVESTMENT POLICY Dated: August 4, 2020 August 3, 2021 The City of Poway (the City) has adopted this Investment Policy (the Policy) in order to establish the investment scope, objectives, delegation of authority, standards of prudence, reporting requirements, internal controls, eligible investments and transactions, diversification requirements, risk tolerance, and safekeeping and custodial procedures for the investment of the funds of the City. All City funds will be invested in accordance with this Policy and with applicable sections of the California Government Code. This Policy, dated August 4, 2020 August 3, 2021, replaces any previous Policy or investment procedures of the City. SCOPE The provisions of this Policy shall apply to all financial assets and investment activities of the City as accounted for in the City's Comprehensive Annual Financial Report. The employees' retirement and deferred compensation funds are not covered by this Policy. Also, bond reserve funds will be invested in accordance with each bond issue's indenture agreement. All cash shall be pooled for investment purposes. The investment income derived from the pooled investment account shall be allocated to the General Fund, the Water Fund, the Sewer Fund, and other funds as budgeted or required by legislation 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. OBJECTIVES The City's funds shall be invested in accordance with all applicable City resolutions, California statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1. Preservation of capital and protection of investment principal. 2. Maintenance of sufficient liquidity to meet anticipated cash flows. 3. Attainment of a market rate of return. 4. Diversification to avoid incurring unreasonable market risks. 14 of 23 ATTACHMENT B August 3, 2021, Item #4DELEGATION OF AUTHORITY In accordance with City of Poway Resolution No. 20 063 21-xxx, the City Treasurer/Finance Department is authorized to invest the City's funds in accordance with the California Government Code Section 53607. The City's Director of Finance serves as the Treasurer. The Director of Finance may 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 Director of Finance shall develop administrative procedures and internal controls, consistent with this Policy, for the operation of the City's investment program. Such procedures shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the City. 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. If an investment advisor is selected to help manage the investment program, a City Investment Oversight Committee shall be kept informed of the changing investment environment and any potential restructuring of the portfolio which could result. This Investment Committee shall consist of the Director of Finance, the Finance Manager, and a-the Senior Accountant. 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 Director of Finance and authorized investment personnel acting in accordance with established procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that deviations from expectations are reported in a timely fashion to the City Council and appropriate action is taken to control adverse developments. 15 of 23 August 3, 2021, Item #4ETHICS 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 Councilmembers, the Director of Finance, the Finance Manager, and the Senior Accountant 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. AUTHORIZED SECURITIES AND TRANSACTIONS 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 shall not knowingly make any investments in any institution, company, corporation, subsidiary, or affiliate that practices or supports directly or indirectly through its actions, discrimination on the basis of race, religion, color, creed, national or ethnic origin, age, sex, sexual preference, or physical disability. The City has further restricted the eligible types of securities and transactions as follows: 1. United States Treasury bills, notes, or bonds with a final maturity not exceeding five years from the date of trade settlement. There is no limit on the percentage of the portfolio that may be invested in U.S. Treasury securities. 2. Government Securities Government Securities in the aggregate shall not exceed 75% of the City's total portfolio. • Federal Instrumentality Obligations (government sponsored enterprises) with a final maturity not exceeding five years from the date of trade settlement. No more than 25% of the City's total portfolio shall be invested in any one issuer and the aggregate amount shall not exceed 75% of the City's total portfolio. • Federal Agency Obligations with a final maturity not exceeding five years from the date of trade settlement. No more than 25% of the City's total portfolio shall be invested in any one issuer and the aggregate amount shall not exceed 75% of the City's total portfolio. • Mortgage-Related Securities, including Federal Agency and Federal Instrumentality mortgage-backed securities and collateralized mortgage obligations. Such securities shall not exceed five years from the date of trade settlement and must be rated at least "AAA" by at least one Nationally Recognized Statistical Ratings Organization (NRSRO) and issued by an issuer rated at least "A" or the equivalent by an NRSRO. No more than 20% of the City's total portfolio shall be invested in the combination of Mortgage-Related Securities and Asset-Backed Securities. 16 of 23 August 3, 2021, Item #43. Supranationals are United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of "AA" or its equivalent or better by an NRSRO. No more than 30% of the City's total portfolio shall be invested pursuant to this section. 4. Corporate Securities No more than 5% of the City's portfolio shall be invested in the obligations of any one corporate issuer. Rule 144A (private placement) securities are prohibited from purchase. • 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. Such securities shall have a final maturity not exceeding five years from the date of trade settlement and shall be rated at least "A", or the equivalent, by an NRSRO. No more than 30% of the City's total portfolio shall be invested in Medium-term Notes. • Asset-Backed Securities including equipment lease-backed certificates, consumer receivable pass-through certificates, or consumer-receivable-backed bonds. Such securities shall not exceed five years from the date of trade settlement and must be rated at least "AAA" by at least one NRSRO and issued by an issuer rated at least "A" or the equivalent by an NRSRO. No more than 20% of the City's total portfolio shall be invested in Mortgage-Related Securities and Asset-Backed Securities. • Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement and rated at least "A-1 ", or the equivalent, by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either sub-paragraph A. or sub-paragraph B. below: A. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated at least "A" or the equivalent by an NRSRO. B. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond and (3) have commercial paper that is rated at least "A-1" or the equivalent by an NRSRO. Investment in commercial paper shall not exceed 25% of the City's total portfolio. 5. Municipal Bonds 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. 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. 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 5% of the City's portfolio 17 of 23 August 3, 2021, Item #4shall be invested in the obligations of any one issuer, and the aggregate investment in municipal bonds shall not exceed 30% of the City's total portfolio. 6. Negotiable Certificates of Deposits (CDs) of commercial banks rated at least "A-1 ", or the equivalent, with maturities not exceeding five years from the date of trade settlement. In addition, the City may not invest in the CD of a state or federal credit union where any person with investment decision making authority at the City also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit. No more than 5% of the portfolio may be invested in the CDs of any one issuer, and the aggregate investment in CDs shall not exceed 30% of the portfolio. 7. Non-negotiable Certificates of Deposit and savings deposits with a maturity not exceeding five 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 in excess of the insured amount shall be secured pursuant to California Government Code Section 53651 and 53652. The City shall comply with and act to secure compliance with the security ( collateralization) system specified in the Government Code Section 53649 and 53652. 8. 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. No more than 5% of the City's total portfolio shall be invested in banker's acceptances of any one bank and the aggregate investment in banker's acceptances shall not exceed 40% of the City's total portfolio. 9. 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. No more than 10% of the portfolio may be invested in any one fund and the aggregate investment in money market funds shall not exceed 20% of the City's total portfolio. 10. Shares of Beneficial Interest issued by a joint powers authority (e.g., CalTRUST) organized pursuant to Section 6509.7 that invest in the securities and obligations authorized in subdivisions (a) to (o), inclusive, of California Government Code Section 53601. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment advisor that: (1) is registered or exempt from registration with the Securities and Exchange Commission. (2) has at least five years of experience investing in the securities and obligations authorized in subdivisions (a) to (o), inclusive, of California Government Code Section 53601. (3) has assets under management in excess of $500,000,000. 11. State of California's Local Agency Investment Fund (LAIF). pursuant to California Government Code Section 16429.1. 18 of 23 August 3, 2021, Item #412. The San Diego County Investment Pool. The City may invest in this investment pool, established by the San Diego County Treasurer for the benefit of local public agencies. The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be preapproved by resolution of the City Council. INVESTMENT MANAGEMENT If the City has employed an external investment advisor to help manage its portfolio, the investment advisor shall be bound by the aforementioned list of authorized securities, the state and local laws and regulations that govern the investment activity of the City, and the following additional parameters. • While it is understood that occasionally it may be in the best interest of the City to take losses in its security portfolio, losses taken to increase the yield in the portfolio may only be taken if the increased yield results in the loss being recouped in one year or less. Credit-related losses on the other hand are taken to prevent potentially larger losses in the future. When possible, the investment advisor will get prior approval of the City before taking credit-related losses. In any case, the City will be notified as soon as possible about any losses taken in the portfolio. • Securities that are downgraded by one or more rating agency to below the ratings required by this Policy do not have to be sold. However, the investment advisor will immediately notify the City of the downgrade. The advisor will prepare a credit report on the downgraded security and forward it to the City. While the City entrusts its investment portfolio to the advisor, the City retains the right to ultimately make the decisions on how to invest its monies. INVESTMENT DIVERSIFICATION The City shall diversify its investments to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities. 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. PORTFOLIO MATURITIES AND LIQUIDITY 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. 19 of 23 August 3, 2021, Item #4SELECTION OF BROKER/DEALERS The Finance Manager shall maintain a list of broker/dealers approved for investment purposes, and it shall be the policy of the City to purchase securities only from those brokers and the firms they represent. 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). The City may engage the services of investment advisory firms to assist in the management of the portfolio and investment advisors may utilize their own list of approved broker/dealers. Such broker/dealers will comply with the selection criteria above and the list of approved firms shall be provided to the City on an annual basis or upon request. In the event that an external investment advisor is not used in the process of recommending a particular transaction in the City's portfolio, authorized broker/dealers shall attest in writing that they have received a copy of this Policy and each authorized broker/dealer shall be required to submit and annually update a City approved Broker/Dealer Information Request form that includes the firm's most recent financial statements. The City may purchase commercial paper from direct issuers even though they are not on the approved broker/dealers list as long as they meet the criteria outlined in Item 4 of the Authorized Securities and Transactions section of this Policy. COMPETITIVE TRANSACTIONS All investment transactions shall be conducted competitively with authorized broker/dealers. At least three broker/dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If the City is offered a security for which there is no other readily available competitive offering, then the Finance Manager will document quotations for comparable or alternative securities. SELECTION OF BANKS The Finance Manager shall maintain a list of FDIC insured banks approved to provide depository and other banking services for the City. 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. SAFEKEEPING AND CUSTODY 20 of 23 August 3, 2021, Item #4The Finance Manager 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 deliverable securities purchased by the City will be delivered by book entry and will be held in third-party safekeeping by a City approved custodian bank or its Depository Trust Company (OTC) participant account. 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 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 net of all fees and expenses. REPORTING Quarterly, the Director of Finance shall submit to the City Council a report of the investment earnings and performance results of the City's investment portfolio. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value and dollar amount invested in all securities, and investments and monies held by the City; 2. A description of the funds, investments, and programs; 3. A market value as of the date of the report ( or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with the Investment Policy or an explanation for non-compliance; and 5. A statement of the City's ability to meet expenditure requirements for six months, and an explanation of why money will not be available if that is the case. 21 of 23 August 3, 2021, Item #4POLICY REVIEW This Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, yield and diversification, and its relevance to current law and economic trends. Amendments to this Policy shall be approved by resolution of the City Council. SEGREGATION OF RESPONSIBILITIES FUNCTION 1.0 Investment Policy: 1.1 Preparation and annual review of Investment Policy 1.2 Approval of Investment Policy 2.0 Investment Transactions: 2.1 Calculation of cash position 2.2 If applicable, notify investment advisor of current available cash to be invested 2.3 Investment recommendation: Determination of amount to be invested, selection of type of investment, and term of investment 2.4 Review of investment recommendation and execution of transaction 3.0 Recording of Transactions: 3.1 In investment subsidiary ledgers 3.2 In accounting records 3.3 Match investment confirmation to subsidiary ledgers 4.0 Safeguarding of Assets and Records: 4.1 Reconciliation of subsidiary records to the accounting records 4.2 Reconciliation of subsidiary records to bank statements and safekeeping records 4.3 Review of financial institutions and investment brokers' reputation and financial condition 4.4 Review of collaterals 5.0 Investment portfolio: 5.1 Preparation of investment report 5.2 Review of portfolio for compliance with stated Investment Policy 5.3 Approval of investment report 22 of 23 RESPONSIBILITY Director of Finance/ Oversight Committee City Council Sr. Accountant/Finance Mgr. Written approval by 2 members of Oversight Committee Investment Advisor/ Director of Finance/Finance Mgr. Written approval by member of Oversight Committee Sr. Accountant/Accountant Sr. Accountant/Accountant Senior Accountant Senior Accountant Senior Accountant Investment Advisor/ Oversight Committee Investment Adv./Oversight Comm. Senior Accountant Oversight Committee City Council August 3, 2021, Item #4APPROVED BROKER/DEALERS The following Broker/Dealers are approved for execution of trades. Amherst Pierpont ANZ Securities Barclays Capital BB&T Securities Blaylock Van BMO Capital Markets BNP Paribas Securities BofA Securities Cantor Fitzgerald & Co. Citigroup Global Markets Credit Agricole Securities (USA) Credit Suisse Securities (USA) Daiwa Capital Markets America Deutsche Bank Securities FHN Financial Securities Goldman Sachs & Co. HSBC Securities (USA) lncapital INTL FCStone Financial Jefferies JP Morgan Securities Keybanc Capital Markets Mizuho Securities (USA) Morgan Stanley & Co. Broker/Dealers MUFG Securities Americas NAB Securities NatWest Markets Securities Nomura Securities International Oppenheimer & Co. Piper Jaffray & Co. Raymond James & Associates RBC Capital Markets Robert W. Baird & Co. Samuel A. Ramirez & Co. Scotia Capital (USA) SMBC Nikko Securities America SG America Securities Stifel Nicolaus & Co. SunTrust Robinson Humphrey TD Securities (USA) Truist Securities UBS Securities US Bancorp Investments Wells Fargo Securities Vining Sparks This list of approved broker/dealers is subject to change at any time based upon periodic recommendations of the investment advisor throughout the year. 23 of 23