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Res 98-034RESOLUTION NO. 98-034 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF POWAY, CALIFORNIA, AMENDING INVESTMENT POLICY FOR PUBLIC FUNDS AND RESCINDING RESOLUTION NO. 96-114 NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Poway, California, that the Statement of Investment Policy, attached as Exhibit A, is hereby adopted as the Investment Policy of the City of Poway. BE IT FURTHER RESOLVED, that Resolution No. 96-114 is hereby rescinded. PASSED, ADOPTED AND APPROVED by the City Council of the City of Poway, California, at a regular meeting thereof this 14th day of April, 1998. ATTEST: Marjoril~ K~ Wahlsten, City Clerk '..._j STATE OF CALIFORNIA ) COUNTY OF SAN DIEGO ) I, Marjorie K. Wahlsten, City Clerk of the City of Poway, do hereby certify under penalty of perjury that the foregoing Resolution No. 98-034 was duly adopted by the City Council at a meeting of said City Council held on the 14th day of April, 1998, and that it was so adopted by the following vote: AYES: CAFAGNA, EMERY, GOLDBY, REXFORD, HIGGINSON NOES: NONE ABSTAIN: NONE ABSENT: NONE Marjorle I~. Wahlsten, City Clerk City of P..~ay Resolution Page 2 CITY OF POWAY STATEMENT OF INVESTMENT POLICY APRIL 1998 No. 98-034 This statement is intended to outline the policies for maximizing the efficiency of the City of Poway's Cash Management System and for prudent investment of the City's funds, and to provide guidelines for suitable investments. The ultimate goal is to enhance the economic status of the City while protecting its funds. The City's Cash Management System is designed to accurately monitor and forecast expenditures and revenues, thus striving to maintain the level of investment of all idle funds as near 100% as possible, through daily and projected cash flow determinations. The City shall attempt to obtain the highest yield, provided that all investments meet the criteria established for safety and liquidity. The investment policies and practices, idle cash management and investment transactions are the joint responsibility of the City Treasurer and the Administrative Services Department. These City of Poway policies and practices are based upon federal, state, and local law and prudent money management. The primary goals of these policies are: To assure compliance with all federal, state and local laws governing the investment of monies under the control of the City Treasurer and the Administrative Services Department. 2. To protect the principal monies entrusted to these offices. 3. To ensure that money is always available when needed. To generate the maximum amount of investment income within the parameters of this Statement of Investment Policy and the guidelines for suitable investments. In accordance with City of Poway Resolution No. 98-034, the City Treasured Administrative Services Department are authorized to invest the City's funds in 1 EXHIBIT A Investment Policy Resolution No. 98-034 Page 3 accordance with the California Government Code Sections 53601.1, 53602 and 53635. This investment policy applies to all financial assets, investment activities and debt issues of the City of Poway (which are invested by trustees appointed under the indenture, Investment Policy with direction from the City Treasurer/Administrative Services Department), except for the employees' retirement and deferred compensation funds. All monies entrusted to the City Treasurer/Administrative Services Department will be pooled in an actively managed portfolio. The Investment Pool or "Portfolio" will be referred to as the "Fund" throughout the remainder of this document. The City's Fund will be invested by an investment manager. The investment of the Fund will be overseen by a City Investment Oversight Committee comprised of the Director of Administrative Services, the Deputy Director of Administrative Services, the Finance Manager, and the Senior Accountant. The investment manager will observe, review and react to changing conditions that affect the fund. The investment manager will keep the Investment Oversight Committee apprised of the changing investment environment and any potential restructuring of the portfolio which could result. II. A. SAFETY OF PRINCIPAL Safety of principal is the foremost objective of the City of Poway. Each investment transaction shall seek to ensure that capital losses are avoided, whether from institution default, broker-dealer default, or erosion of market value of securities. The City shall seek to preserve principal by mitigating the two types of risk-- credit risk and market risk. ~. Credit risk, defined as the risk of loss due to failure of an issuer of a security, shall be mitigated by investing in only very safe institutions and by diversifying the fund so that the failure of any one issuer would not unduly harm the City's cash flow. Market Risk. The risk of market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by limiting the weighted average maturity of the City's fund to less than five years. Investment Policy Resolution No. 98-034 Page 4 Liquidity is the second most important objective of the City of Poway. The basic premise underlying the City's investment policy is to ensure that money is always available when needed and at the same time reaping the highest and best return. In order to maintain liquidity, a periodic cash flow analysis of the City's sources and uses of funds will be conducted. The investment portfolio will be structured so that it complements the City's cash flow requirements. A prudent reserve of highly liquid, short-term assets maturing in six months or less will be established to ensure that unforeseen cash requirements of the City can be met. C. RETURN ON INVESTMENT The City's fund shall be designed to attain a market-average rate of return through economic cycles. The market-average rate of return is defined as the average return on one-year U.S. Treasury Bills. Whenever possible, and consistent with risk limitations as defined herein and prudent investment principles, the City shall seek to augment returns above the market-average rate of return. The performance of the portfolio will be reviewed monthly versus the one- year U.S. Treasury Bill Index. Periodically, the investment manager and the Investment Oversight Committee will review the appropriateness of the reference index and change it as necessary. III. AUTHORIZEDINVESTMENTS The City of Poway has a fiduciary responsibility to maximize the productive use of assets entrusted to its care and to invest and manage those public funds wisely and prudently. The City of Poway operates its pooled idle cash to afford a broad spectrum of investment opportunities that are deemed prudent and are legally allowable under both state legislation and local ordinances. These investment decisions shall be made using the trust principles and general "prudent man theory" outlined below: "In acquiring, investing, reinvesting, exchanging, selling and managing property for the benefit of another, a fiduciary shall exercise the judgment and care under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of Investment Policy Resolution No. 98-034 Page 5 their funds, considering the probable income as well as the probable safety of their capital. Within the limitations of the foregoing standard, and subject to any express provisions or limitations contained in any particular trust instrument, a fiduciary is authorized to acquire and retain every kind of property-real, personal or mixed-and every kind of investment specifically including, but not by way of limitation, debentures and other corporate obligations, and stocks--preferred or common-which men of prudence, discretion and intelligence acquire for their own account." In addition, the City recognizes that it has an equal obligation to be aware of the social and political impacts of its investments, and subsequently to act responsibly in making its financial decisions. 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. As stated above, the City is governed by the California Government Code, Sections 53601.1,53602 and 53635. Within the context of these limitations, the following investments are authorized, as further limited herein: United States Treasury Bills, Notes and Bonds, or those for which the full faith and credit of the United States are pledged for payment of principal and interest with remaining maturities of five years or less. There is no limitation as to the percentage of the fund which can be invested in this category as they are both safe and liquid. Obligations issued by the Government National Mortgage Association (GNMA), the Federal Farm Credit Bank System (FFCB), the Federal Home Loan Bank Board (FHLB), the Federal National Mortgage Association (FNMA), those insured by the Federal Housing Association (FHA), and other U.S. government agency obligations with remaining maturities of five years or less. Despite the implied government guarantee, "Agencies" that are not direct obligations of the U.S. government will be limited to 50% of the portfolio in aggregate and no more than 25% of the portfolio may be in any one Agency. Bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as banker's acceptances with a maximum maturity of 270 days. No more than 5% of the market value of the fund may be 4 Investment Policy Resolution No. 98-034 Page 6 invested in banker's acceptances issued by any one bank. No more than 30% of the portfolio may be in bankers acceptances. Issuing banks must be rates "P1" by Moody's Investor Services and "Al" by Standard and Poor's. Commercial paper with a maximum maturity of 180 days, rated "PI" by Moody's Investor Services and "Al" by Standard and Poor's, and issued by a domestic corporation having assets in excess of $500,000,000, and having an "A" or better rating on its long-term debentures as provided by Moody's or Standard and Poor's. No more than 3% of the market value of the fund may be invested in commercial paper issued by any one corporation. Investment in one issuer's commercial paper may not exceed 10% of that issuer's outstanding commercial paper. Total investments in commercial paper may not exceed 15% of the portfolio except if the dollar weighted average maturity of all commercial paper owned is 31 days or less. If the average maturity is 31 days or less, the limitation is 30% of the portfolio. Negotiable Certificates of Deposits of "Al" and "PI" rated commercial banks with maturities of five years or less. Eligible banks must also have no long- term ratings below "A" or equivalent. No more than 5% of the fund may be invested in CD's of one issuer. No more than 20% of the portfolio may be invested in CD's. Repurchase agreements. The City may enter into repurchase agreements with banks and dealers with which the City has entered into a master repurchase contract which specifies terms and conditions of repurchase agreements, and are fully collateralized by delivery to an independent third party custodian for the City's account or to the City's custodian. In order to conform with provisions of the Federal Bankruptcy Code which provides for the liquidation of securities held as collateral for repurchase agreements, only those marketable securities eligible for investment by the City are permitted as collateral. Treasuries, Agencies, and eligible money market instruments will collateralized at 102%. Corporates and other eligible collateral will be collateralized at 105%. Repurchase agreements will be conducted with only primary dealers. Repurchase agreements shall not exceed 90 days. Reverse repurchase agreements. The City may enter into reverse repurchase agreements only with those primary dealers with which the City has entered into a master repurchase contract outlining terms and conditions of reverse repurchase agreements. The City may enter into reverse repurchase agreements for the following purpose: when an unanticipated cash outflow can, in the judgment of the City Treasurer/Administrative Services Department, be met more advantageously by entering into a Investment Policy Resolution No. 98-034 Page 7 reverse repurchase agreement than by selling securities outright. In such a case, the reverse repurchase shall not exceed 30 days, and shall be matched to a known cash inflow of sufficient size to repay the principal and interest of the reverse repurchase agreement. Reverse repurchase agreements will be limited to 20% of the unleveraged portfolio. Only securities that have been owned and paid for by the City for 30 days are eligible to be used for collateral. Collateralization must be maintained at 102%. No reverse repurchase agreements will be entered into by the investment advisor without the prior written permission of the City. Local Agency Investment Fund Demand Deposits. The City may invest in the local Agency Investment Fund (LAIF) established by the State Treasurer for the benefit of local agencies up to the maximum permitted by State law. The County of San Diego's Investment Pool. The City may invest in this investment pool established by the San Diego County Treasurer for the benefit of local public agencies. Certificates of Deposit. The City may invest in non-negotiable (CD's which cannot be sold in the secondary market) insured, or collateralized time deposits in accordance with the California Government Code, in commercial banks, savings and loan companies and industrial thrift associations. The City shall deposit funds only with financial institutions which operate in California. These institutions must be insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Savings and Loan Insurance Corporation (FSLIC), or other federal government insurance banking systems. The City's policy shall be to waive security for the amount insured. Deposits in excess of the insured amount shall be secured with eligible securities specified in Government Code Section 53651. The City shall comply with and act to secure compliance with the security (collateralization) system specified in the Government Code Section 53649 and 56652. Insured passbook savings account demand deposits in commercial banks and savings and loan companies. Medium-term notes and other corporate notes of a maximum of five years maturity issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state Investment Policy Resolution No. 98-034 Page 8 and operating within the United States. Notes eligible for investment shall be rated in a rating category of "^" or its equivalent or better by a nationally recognized rating service. No more than 30% of the fund may be invested in medium-term notes or other corporates. No more than 5% of the portfolio may be invested in the obligations of one issuer. Shares of beneficial interest issued by diversified management companies, otherwise known as mutual funds and as defined in Section 23701(m) of the Revenue and Taxation Code. Mutual funds must consist of securities and obligations of the U.S. government authorized by Section 53601 of the California Government Code as amended. Said companies shall either: Attain the highest ranking or the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services, or Have an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience investing in the securities and obligations as authorized above, and with assets under management in excess of $500,000,000. The price of shares of beneficial interest (mutual funds) shall not include any commission that these companies may charge at the time of purchase or redemption. No more than 20% of the fund may be invested in mutual funds. The limit for one mutual fund is 10% of the fund. 3. Mutual Fund investments will be limited to Money Market Mutual Funds with a par value of $1.00. Obligations of state or municipal governments or their public agencies, which are rated in the three highest categories of a national rating service. Any mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-back certificate, consumer-receivable pass-through certificate, or consumer- receivable-backed bond of a maximum of five years' expected maturity. These securities must be rated "AAA" or equivalent. Total investment in this category may not exceed 20% of the fund. Other prudent investment instruments, approved prior to purchase by a two- thirds majority of the governing body. Investment Policy Resolution No. 98-034 Page 9 Ineligible investments. Investments not described herein, including but not limited to common stocks, are prohibited from use in this fund. Derivatives such as inverse floaters, mismatched floaters, yield curve notes and other securities that magnify interest rate risk are expressly prohibited. In determining the amount of investment for compliance purposes, the book value of the security will be used. For instance, if the City purchases $1 million of a medium-term note at a price of 103% (1.03), the investment for compliance purposes will be $1,030,000 since this is the City's actual exposure to the issuer. Private placements are not acceptable investments. Commercial paper of six months or less maturity issued under the 4(2) exemption is acceptable as long as it is an acceptable investment for Money Market Mutual Funds. Corporates including MTN's rated single "A" may not be purchased if they are currently on the downgrade list at either Moody's or S&P. Commercial Paper of issuers with long-term ratings of single "A" may not be purchased if the issuer is currently on the downgrade list of either S&P or Moody's. Effective January 1, 1989, all new investments must have a remaining life to maturity of no more than five years without specific approval from the City Council. Investments held at December 31, 1988, with maturities greater than five years may be held until maturity or until they are sold. IV. INVESTMENT MANAGEMENT AND REPORTING The City has employed an investment advisor to manage its portfolio. The investment advisor will be bound by this policy and the various state and local laws and regulations that govern the investment activity of 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. Besides the other parts of this policy, the investment advisor will be bound by the following: 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 manager 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. Investment Policy Resolution No. 98-034 Page 10 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. The investment advisor will prepare monthly reports for the City on its investment portfolio. The reports will include all information required by the City and applicable state and local laws and regulations. The investment advisor may be requested by the City to prepare periodically such special reports as may reasonably be required of the investment advisor. It is expected that the investment advisor will make at least a quarterly visit to the City to discuss the investment performance of the City's portfolio. The City expects the investment advisor to make such additional trips as necessary to develop investment strategy, discuss investment performance, or to review investment policy. These additional trips will be scheduled at the convenience of the City and the investment advisor. At least annually, the investment advisor will review the City's investment policy and make recommendations to the City on changes in the policy necessary to bring it into compliance with state and local laws and regulations and to generally update the policy for the changing investment environment. All changes are subject to City approval. The investment advisor will, as necessary, revise the list of approved broker/dealers. All changes are subject to City approval. V. QUALIFIED DEALERS AND INSTITUTIONS The City shall transact business only with banks, savings and loans, and registered investment securities dealers. The purchase by the City of any investment, other than those purchased directly from the issuer, shall be purchased either from an institution licensed by the State as a broker-dealer, as defined in Section 25004 of the Corporations Code, who is a member of the National Association of Securities Dealers, or a member of a federally regulated securities exchange, a national or state-chartered bank, a federal or state association (as defined by Section 5102 of the Financial Code), or a brokerage firm designated as a primary government dealer by the Federal Reserve Bank. A list of approved broker/dealers is attached. All trades must be done with approved broker/dealers. Investment Policy Resolution No. 98-034 Page 11 VI. SAFEKEEPING OF SECURITIES To protect against potential losses caused by collapse of individual securities dealers, all securities owned by the City, except securities used as collateral for repurchase and reverse repurchase agreements, shall be kept in safekeeping with "perfected interest" by a third party bank trust department acting as agent for the City under the terms of a custody agreement executed by the bank and by the City. All securities will be received and delivered using standard delivery- vs-payment procedures. VII. ~ Under provision of Section 53646 of the California Government Code, the Treasurer or chief fiscal officers shall render a monthly report to the City Council showing the type of investment, the institution, date of maturity, amount of deposit, current market value for all securities, rate of interest, and such data as may be required by the City Council, state of California, or the federal government. The report shall also detail all repurchase and reverse repurchase agreements, and shall state its relationship to this Statement of Investment Policy, as directed under the Code. The report shall be submitted to the City Council within 30 days following the month being reported. The investment manager will submit its report to the Investment Oversight Committee no later than 15 days after the end of the month being reported. vi. INVESTMENT CONTROLS The City Treasurer/Administrative Services Department have developed a system of internal investment controls and a segregation of responsibilities of investment functions in order to assure an adequate system of internal control over the investment function. VIII. 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. Director of Admin. Services/ Oversight Committee City Council Senior Accountant/ Finance Manager 10 Investment Policy Resolution No. 98-034 Page 12 2.2 Investment recommendation: Determination of amount to be invested, selection of type of investment, and term of investment. 2.3 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. Investment Managed Finance Manager Oversight Committee Accountant/Account Clerk Accountant/Account Clerk Senior Accountant/ Accountant Senior Accountant Senior Accountant Investment Managed Oversight Committee Senior Accountant Oversight Committee City Council X. INVESTMENT INCOME ALLOCATION Investment income shall be shared by the General Fund, the Water Fund, the Sewer Fund, and other funds as budgeted or required by legislation. This income shall be a proportionate ratio of balances to total pooled cash and investment income credited accordingly on a monthly basis. Xl. CALIFORNIA CODE OF ECONOMIC INTEREST Additionally, the investment responsibility carries with it the added duties of ensuring that investments placed are done so without the appearance of improper influence. The personnel in Administrative Services or the Treasurer's Office involved in the investment function shall adhere to the State's Code of Economic Interest and to the following: 11 Investment Policy Resolution No. 98-034 Page 13 All persons authorized to place or approve investments shall not personally nor through a close relative maintain any accounts, interest, or private dealings with any firm with which the City places investments, except for regular savings accounts, checking accounts, money market accounts, or other similar transactions which are offered on a non-negotiable basis to the general public. Such accounts shall be disclosed annually to the City Clerk in conjunction with annual disclosure statements of economic interest. All persons authorized to place or approve investments shall report quarterly to the City Clerk kinship relations with principal employees of firms with which the City places investments. All persons authorized to place or approve investments shall report quarterly to the City Clerk any meals, entertainment, gifts, or other items of monetary value in excess of $50.00 received from any person employed by a firm with which the City places investments. This Investment Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of SAFETY OF PRINCIPAL, LIQUIDITY, and RETURN ON INVESTMENT, and its relevance to current law, financial and economic trends, and to meet the needs of the City of Poway. c:\data\wpfiles\policy, rpt 12 Investment Policy Resolution No. 98-034 Page 14 APPROVED BROKER/DEALERS 3/2/98 The following BrokedDealers are approved for execution of trades, repurchase agreements and reverse repurchase agreements. Repurchase and reverse repurchase agreements require a signed PSA Agreement prior to execution. Reverse repurchase agreements may not be executed without the prior written approval of the City. BancAmerica Robertson Stephens Securities Bear Stearns Chase Securities C.S. First Boston Deutsche Morgan Grenfell Donaldson, Lufkin & Jenrette Goldman Sachs Greenwich Securities HSBC Securities J.P. Morgan Securities Lehman Brothers Merrill Lynch Miller & Schroeder Financial Inc. Morgan Stanley Dean Witter Nomura Securities PaineWebber Prudential Securities Salomon Smith Barney SBC Warburg Dillon Read Smith Barney UBS Securities 13