HomeMy WebLinkAboutR2014-042\\codad\departments\legal\our documents\resolutions\14\investment policy.doc
RESOLUTION NO. R2014-042
A RESOLUTION REVIEWING AND ADOPTING REVISIONS TO THE INVESTMENT
POLICY REGARDING FUNDS FOR THE CITY OF DENTON; AND PROVIDING AN
EFECTIVE DATE.
WHEREAS, the City Council passed Resolution No. R96-061 on October 15, 1996,
which adopted an Investment Policy for the City, in compliance with the Public Funds
Investment Act, 74th Leg., ch. 402, 1995 Tex. Sess. Law Serv. 2958 (Vernon) (TEX. GOV'T
CODE Ann. Ch. 2256); and
WHEREAS, the Investment Policy was most recently amended on the 19th day of
November, 2013, when the City Council passed Resolution No. R2013-036 adopting the current
version of the Investment Policy; and
WHEREAS, the City Council desires to revise the Investment Policy in order to reflect
changes in the Public Funds Investment Act (PFIA), as well as incorporate needed administrative
and procedural modifications which have occurred over time; NOW, THEREFORE,
THE COUNCIL OF THE CITY OF DENTON HEREBY RESOLVES:
SECTION 1. The following policy entitled "Policy No. 403.06 "Investment Policy",
attached hereto and made a part hereof, is hereby adopted as an official policy of the City of Denton,
Texas and shall replace the existing Investment Policy.
SECTION 2. The attached Policy shall be filed in the official records with the City
Secretary.
SECTION 3 w This resolution shall become effective immediately upon its passage and
approval. �m� m���
PASSED AND APPROVED this the ____
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ATTEST:
JENNIFER WALTERS, CITY SECRETARY
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J�I��'�'�°����!l^�l) AS�1�:� LEGAL FORM:
ANITA BURG����"�", CITY ATTORNEY
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BY: �;�� �"�-���. �
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CITY OF DENTON
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POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE
sEC`r1oN: FINANCE POLICI . �,����������..._.... ..�
ES REFERENCE NUMBER:
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403.06
SUBJECT: lIVVESTMENTS INITIAL EPFECTIVE DATE;
.TITLE�o.... .INVESTME... ..�_�.... ________________ _____.
02/17/1987
NT POLICY VISION DATE:
iiilsizal4
I. PURPOSE
It is the objective of the City of Denton to invest public funds in a manner which will provide
maximum security and the best commensurate yield while meeting the daily cash flow demands of
the City and conforming to all federal, state, and local statutes, rules, and regulations governing the
investment of public funds. This Policy serves to satisfy the statutory requirements of defning
and adopting a formal investment policy. The Policy and investment strategies shall be reviewed
annually by the Audit/Finance Committee and City Council who will formally approve any
modifications. This Investment Policy, as approved, is in compliance with the provisions of the
Public Funds Investment Act of Tex. Gov't. Code Chapter 2256.
II. SCOPE
A. This Investment Policy applies to the investment activities of the City of Denton, Texas. The
specific funds cited hereafter in Section II(D), shall be excluded from this Investment Policy.
All financial assets of all funds, including the General Fund and any other accounts of the
City not specifcally excluded in these policy guidelines are included. These funds are
accounted for in the City's Comprehensive Annual Financial Report (CAFR). These funds,
as well as others that may be created from time-to-time, shall be administered in accordance
with the provisions of this Policy. All funds will be pooled for investment purposes except
for those listed under Section II(C).
In addition to this Policy, the investment of bond proceeds and other bond funds (including
debt service and reserve funds) shall be governed and controlled by their governing
ordinance and by the provisions of the Tax Reform Act of 1986, including all regulations
and rulings promulgated there under applicable to the issuance of tax-exempt obligations.
B. Funds covered by this Policy and managed as a pooled fund group:
General Fund - used to account for resources traditionally associated with government,
which are not required to be accounted for in another fund,
2. Special Revenue Funds — used to account for the proceeds from specific revenue
sources which are restricted or committed to expenditures for specific purposes other
than debt service or capital projects.
Debt Service Fund used to account for resources to be used for the payment of
principal, interest and related costs on general obligation debt.
4. Capital Project Funds — used to account for resources to enable the acquisition or
construction of major capital facilities which are not financed by enterprise fiinds,
internal service funds, or trust funds.
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Enterprise Funds — used to account for operations that are financed and operated in a
manner similar to private business enterprises.
Internal Service Funds — used to account for the cost of providing goods or services
between City departments.
7. Trust and Agency Funds — used to account for assets held by the City in a trustee
capacity or as an agent for individuals, private organizations, other governments, and/or
other funds.
8, Bond Reserve Funds — funds set at prescribed levels by certain bond ordinances to
pay principal and/or interest if required to prevent default.
9. New funds available for investment by the City, such as (but not limited to) resources
associated with Public Improvement Districts or Tax Increment Financing zones,
unless specifically excluded herein.
C. Funds covered by this Policy and managed as separately invested assets:
Bond Funds — funds established with the proceeds from specifc bond issues when it is
determined that segregating these funds from the pooled funds' portfolio will result in
maximum interest earning retention under the provisions of the Tax Reform Act of
1986.
2. Endowment Funds — funds given to the City with the instructions that the principal is
to remain intact, unless otherwise agreed to, and the income generated by the
investments will be used for specifed purposes.
Trust, Escrowed Funds & Security Deposits — funds held outside the City by a trust,
escrow agent, or other entity but belonging to the City.
D. This Policy shall not govern funds, which are managed under separate investment programs
in accordance with the Tex. Gov't. Code Sec. 2256.004. Such programs currently include
all funds related to employee retirement programs, other funds established by the City for
deferred employee compensation, and certain private donations. The City shall and will
maintain responsibility for these funds to the extent required by federal and state law, the
City Charter, and donor stipulations. This Policy also does not apply to monies held in
escrow to retire bonds which are subject to defeasance requirements stated under their
respective bond ordinances.
III. INVESTMENT OBJECTIVES & STRATEGIES
It is the policy of the City that, giving due regard to the safety and risk of investments, all
available funds shall be invested in conformance with state and federal regulations,
applicable bond ordinance requirements, adopted Investment Policy and investment strategies.
In accordance with the Public Funds Investment Act, the following prioritized objectives (in order
of importance) in accordance with the Tex. Gov't. Code Sec. 2256.005(d) apply for each of the
City's investment strategies.
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A. Suitabiliry — Understanding the suitability of the investment to the iinancial requirements of
the City is important. Any investment eligible in the Investment Policy is suitable for all
City funds.
B. Safety — Preservation and safety of principal are the primary objectives of the Investment
Policy. All investments will be in high quality securities with no perceived default risk.
C, Liquidity — The City's investment portfolio will remain sufficiently liquid to meet operating
requirements that might be reasonably anticipated. Liquidity shall be achieved by matching
investment maturities with forecasted cash flow requirements and by investing in securities
with active secondary markets. Short-term investment pools and money market mutual
funds provide daily liquidity and may be utilized as a competitive investment alternative to
fixed income instruments.
D. Marketability — Securities with active and efficient secondary markets are necessary in the
event of an unanticipated cash requirement. Historical market "spreads" between the bid
and offer prices of a particular security type of less than a quarter of a percentage point shall
de�ine an efficient secondary market.
E, Diversification — Investment maturities shall be staggered to provide cash flow based on the
anticipated needs of the City. Diversifying the appropriate maturity structure will reduce
market cycle risk.
F, Yield — Attaining a competitive market yield, commensurate with the City's investment risk
constraints and the cash flow characteristics of the portfolio, is the desired objective. The
goal of the City's investment portfolio is to regularly meet or exceed the average rate of
return on U.S. Treasury bills at a maturity level comparable to the portfolio's weighted
average maturity in days. The yield of an equally weighted, rolling twelve month moving
average of a one year U.S. Treasury bill portfolio shall be the minimum yield objective or
"benchmark". One year U.S. Treasury bill information is derived from the Federal Reserve
Statistical Release H.15 for constant maturities. A secondary objective will be to obtain a
yield equal to or in excess of a local government investment pool or money market mutual
fund.
The first measure of success in this area will be the attainment of enough income to offset
inflationary increases. Although steps will be taken to obtain this goal, the City's staff will
follow the "Prudent Person" statement relating to the standard of care that must be exercised
when investing public funds as expressed in the Tex. Gov't. Code Sec. 2256.006(a-b). The
Investment Officers shall avoid any transactions that might impair public con�dence in the
City's ability to govern effectively. The governing body recognizes that in adequately
diversifying the maturity structure within the portfolio to meet the City's expenditure needs,
occasional measured unrealized losses due to market volatility and rising interest rates are
inevitable, and must be considered within the context of the overall portfolio's investment
return. The prudence of the investment decisions shall be measured in accordance with the
tests set forth in the Tex. Gov't. Code Sec. 2256.006(b).
IV. INVESTMENT STRATEGY FOR SPECIFIC FUND GROUPS
In order to better diversify, maximize interest earnings and otherwise meet stated objectives, fund
groups may be combined into one or more internal investment pools. Although fund monies may be
combined into a single asset portfolio, proportional fund ownership will be accounted for
POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE
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REFERENCE NUMBER:
403.06
separately. The City maintains separate portfolios for some individual funds or groups of funds (as
listed under Section II) that are managed in accordance with the terms of this Policy and by the
corresponding investment strategies listed below.
A. Investment Pool Strategy — The City's Investment Pool is an aggregation of the majority of
City funds which includes tax receipts, enterprise fund revenues, fine and fee revenues,
reserve funds for outstanding utility system revenue bonds, as well as some, but not
necessarily all, bond proceeds, grants, gifts and endowments. This portfolio is maintained to
meet anticipated daily cash needs for the City's operations, capital projects and debt service.
In order to ensure the ability of the City to meet obligations and to minimize potential
liquidation losses, the dollar-weighted average stated maturity of the investment pool shall
not exceed 1.5 years or 550 days. The objectives of this portfolio are to:
Ensure safety of principal by investing in only high quality securities for which a
strong secondary market exists.
�nsure that anticipated cash flow needs are matched with adequate investment
liquidity.
Limit market and credit risk through diversification.
4, Attain the best feasible yield commensurate with the objectives and restrictions set
forth in this Policy by actively managing the portfolio to meet or exceed the twelve
month moving average yield on a one year U.S. Treasury bill as derived from the
Federal Reserve Statistical Release H.15 for constant maturities.
B, Bond Funds Strategy - Occasionally, separate non-pooled portfolios are established with
the proceeds froin bond sales in order to maximize earnings within the constraints of
arbitrage regulations. The objectives of the portfolios are to:
Ensure safety of principal by investing in only high quality securities for which a
strong secondary market exists.
Ensure that anticipated cash flow needs are matched with adequate investment
liquidity.
Limit market and credit risk through diversification.
4, Attain the best feasible yield commensurate with the objectives and restrictions set
forth in this Policy and the bond ordinance by actively managing the portfolio to meet
or exceed the bond yield.
C. Endowment Fund Strategy - Funds received as gifts to the City with instructions that the
income generated by the investment of said funds be used for specified purposes are invested
as separate non-pooled portfolios in order to r�aximize return. The objectives of the
portfolios are to:
S. Ensure safety of principal by investing in only high quality securities for which a
strong secondary market exists.
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2. Ensure that anticipated cash flow needs are matched with adequate investment
liquidity.
Limit market and credit risk through diversification.
4. Attain the best feasible yield commensurate with the objectives and restrictions set
forth in this Policy.
D, Trust, Escrowed Funds & Security Deposit Strategy - Funds that are held outside the City by
a trust, escrow agent, or as a security deposit, but belonging to the City are governed by
their respective trust, escrow, or security deposit agreement and are subject to the
provisions of this Policy. The objectives of the portfolios are to:
Ensure safety of principal by investing in only high quality securities for which a
strong secondary market exists.
Ensure that anticipated cash flow needs are matched with adequate investment
liquidity.
Limit market and credit risk through diversification.
Attain the best feasible yield commensurate with the objectives and restrictions set
forth in this Policy and the trust, escrow, or security deposit agreement.
V. INVESTMENT COMMITTEE
Members — The Investment Committee will consist of the City Manager, Assistant City Manager
for Finance, Assistant City Manager for Utilities, Director of Finance, Assistant Director of
Finance, City Controller, Treasury Administrator, and the City's investment advisor. The
investment advisor is a non-voting member. When�needed, the City Attorney will act as a legal
advisor to the Investment Committee.
Scope — The Investment Committee shall meet at least quarterly to determine general strategies,
investment guidelines and to monitor results. Included in its deliberations will be such topics as:
economic outlook, portfolio diversification, maturity structure, potential risk to the City's funds,
authorized broker/dealers (if applicable) and depository institutions, as well as the target rate of
return on the investment portfolio.
Procedures - The Investment Committee shall provide meeting summations to all members. Any
two members of the Investment Committee may request a special meeting, and four members sllall
constitute a quorum. The Investment Committee shall establish its own rules of procedures.
VI. RESPONSIBILITY AND STANDARD OF CARE
A. Delegation & Training — The management responsibility for the investment program is
delegated to the Director of Finance. The primary individual who shall be involved in
investment activities will be his designee. The designee may delegate the day to day
activities to a responsible individual(s) who has received the appropriate training required by
state statute. The Director of Finance and department designees will use this Policy as the
primary guideline for the City's investment program, procedures, and internal control issues.
The Assistant City Manager who oversees financial operations and the Director of Finance
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are designated as the Investment Offcers, pursuant to Tex Gov't. Code Sec. 2256.005(fl.
Accordingly, the Investment Officers and persons authorized to execute investment
transactions shall attend at least one training session relating to their responsibilities under
the Public Funds Investment Act within 12 months after assuming duties and receive no less
than 10 hours of instruction relating to investment functions every two year period that
begins on the first day of the fiscal year and consists of the two consecutive fiscal years after
that date. The training must include education in investment controls, security risks,
strategy risks, market risks, and compliance with the Public Funds Investment Act. The
investment training session shall be provided by an independent source approved by the
Investment Committee. For purposes of this policy, an "independent source" from which
investment training shall be obtained shall include a professional organization, an institute of
higher learning or any other sponsor other than a business organization with whom the City
may engage in an investment transaction. Thus, these independent sources will be training
sessions sponsored, accredited or endorsed by the Government Treasurers Organization of
Texas (GTOT), Center For Public Management at the University of North Texas (UNT),
Government Finance Officers Association of Texas (GFOAT), Texas Municipal League
(TML), North Central Texas Council of Governments (NCTCOG), Association of Public
Treasurers United States & Canada (APT US & C), and Government Finance Officers'
Association (GFOA).
No persons may engage in investment transactions except as provided under the terms of this
Policy. The Assistant City Manager shall require an annual compliance review by an
external auditor that will consist of an audit of management controls on investments,
adherence to the City's Investment Policy and a review of the quarterly investment reports.
The reviews will provide internal control by assuring compliance with policies and
procedures. The Assistant City Manager, Director of Finance, Mayor, City Council, City
Manager and other Finance Department employees shall be personally indemnified in the
event of investment loss provided the Investment Policy has been followed.
B. ConfZicts of Interest — All participants in the investment process shall seek to act responsibly
as custodians of public assets. Officers and employees involved in the investment process
shall refrain from personal business activity that could conflict with proper execution of the
investment program, or which could impair their ability to make impartial investment
decisions. Investment Committee members shall be required to complete an annual ethics
statement noting any known conflicts of interest as outlined in Section VI(C) below.
C. Disclosure — Anyone involved in investing City funds shall file with the Investment
Committee a statement disclosing any personal business relationship with a business
organization offering to engage in investment transactions with the City or is related within
the second degree by affinity or consanguinity as determined under the Tex. Gov't. Code Ch.
573, to an individual seeking to transact investment business with the City. A disclosure
statement must also be filed with the Texas Ethics Commission and the City Council. An
Investment Officer or other employee has a personal business relationship with a business
organization if any one of the following three conditions is met:
The Investment Officer or employee owns 10% or more of the voting stock or shares
of the business organization or owns $5,000 or more of the fair market value of the
business organization.
2, Funds received by the Investment Officer or employee from the business
organization exceed 10% of the investment officers gross income for the prior year.
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The Investment Officer or employee has acquired from the business organization
during the prior year investments with a book value of $2,500 or more for their
personal account.
D. Prudence — The standard of prudence to be used by the investment officials shall be the
"Prudent Person Rule", as set forth in Tex. Gov't. Code Sec. 2256.006, and will be applied
in the context of managing an overall portfolio: "Investments shall be made with judgment
and care under prevailing circumstances, that a person of prudence, discretion and
intelligence would exercise in the management of the person's own affairs, not for
speculation, but for investment, considering the probable safety of their capital as well as the
probable income to be derived."
Investment officials acting in accordance with the Investment Policy and exercising due
diligence shall be relieved of personal responsibilities for an individual security's credit risk
or market price change, provided deviations from expectations are reported in a timely
fashion and appropriate action is taken to control adverse developments. In determining
whether an investment offcial has exercised prudence with respect to an investment
decision, the determination shall be made taking into consideration the investment of all
funds over which the official had responsibility rather than consideration as to the prudence
of a single investment and whether the investment decision was consistent with the City's
Investment Policy.
E. Reporting
Quarterly — Not less than quarterly, the Director of Finance shall submit to the City
Manager, Mayor and City Council a written report of the City's investment transactions
within one hundred twenty (120) days of the preceding reporting period. The report shall: 1)
describe in detail the investment position of the City as of the end of the reporting period, 2)
be prepared jointly by all Investment Officers, 3) be signed by each Investment Officer, 4)
contain a summary statement, prepared in compliance with generally accepted accounting
principles, of each pooled fund group including a) beginning market value for the reporting
period; b) additions and changes to the market value during the period; c) ending market
value for the period; and d) fully accrued interest for the reporting period, 5) state the book
value and market value of each separately invested asset at the beginning and end of the
reporting period by type of asset and fund type invested, 6) state the maturity date of each
separately invested asset that has a maturity date, 7) state the account or fund or pooled fund
group for which each individual investment was acquired, and 8) state the compliance of the
investment portfolio as it relates to the investment strategy expressed in the Investment
Policy and with relevant provisions of the Tex. Gov't, Code Ch. 2256.
Annually - The City Council shall review and approve the Investment Policy and investment
strategies at least annually and be documented by rule, order, ordinance or resolution which
shall include any changes made.
Compliance Audit — The City's external independent auditor will conduct an annual review
of the quarterly reports in conjunction with the annual fnancial audit. The results of the
audit will be reported to City Council. The audit will also review compliance with
management controls on investments and adherence to this Policy.
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��, As recommended by the Texas State Library and Archives Commission, the guidelines of
retaining records for five years from the applicable fiscal year end should be followed for
investment funds other than bond proceeds. Since the City manages the majority of its
investments, including bond funds, using an internal pool consisting of combined fund
groups, records shall be retained in accordance with the Administrative Policy No. 403.07
"Debt Service Management." The Director of Finance shall oversee the filing and/or storing
of investment records.
G, Market prices for all public fund investments will be obtained and monitored through the use
of Interactive Data Inc., an on-line data service or a similarly qualified successor agency or
experienced competitor.
VII. SUITABLE AND AUTHORIZED INVESTMENT SECURITIES
A, Active Portfolio Management — The City intends to pursue an active versus a passive
investment management philosophy. That is, securities may be sold before they mature if
market conditions present an opportunity for the City to benefit from the trade. (Refer to
Section VIII of this Policy.) In addition, the Investment Officers may at times restrict or
prohibit the purchase of specific types of investments or issuers due to current market
conditions.
The City shall take all prudent measures consistent with this Investment Policy to liquidate
an investment that no longer meets the required minimum rating standards, as per the Tex.
Gov't. Code Sec. 2256.021. However, if it is determined by the Investment Committee that
the City would benefit from holding the securities to maturity to recapture its initial
investment then the Investment Officers may act accordingly. The City is not required to
liquidate investments that were authorized investments at the time of purchase. (Tex. Gov't.
Code Sec. 2256.017)
B, Authorized Investments & Maximum Maturities — City funds governed by this Policy may be
invested in the instruments described below, all of which are authorized by the Public Funds
Investment Act.
�, Direct obligations of the United States of America, its agencies and instrumentalities
and maturing in less than five years.
2. Other obligations, the principal and interest of which are unconditionally guaranteed
or insured by, or backed by the full faith and credit of, the United States of America,
or any obligation fully guaranteed or insured by the Federal Deposit Insurance
Corporation and maturing in less than five years.
Direct obligations of the State of Texas or its agencies thereof, Counties, Cities and
other political subdivisions rated as to investment quality by a nationally recognized
investment rating firm not less than AA or its equivalent and maturing in less than
three years.
4. Other obligations, the principal and interest of which are unconditionally guaranteed
or insured by, or backed by the full faith and credit of, the State of Texas, rated as to
investment quality by a nationally recognized investment rating firm not less than AA
or its equivalent and maturing in less than three years.
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TITLE: INVESTMENT POLICY 403.06
Fully insured or collateralized certificates of deposit/share certificates issued by state
and national banks or savings bank or a state or federal credit union (having its main
or branch offce in Texas) guaranteed or insured by the Federal Deposit Insurance
Corporation or its successor or the National Credit Union Share Insurance Fund or its
successor. Any uninsured portion of collateralized certificates of deposit must be
secured by obligations in accordance with Section XII herein. Banks or credit unions
offering collateralized certificates of deposit/share certificates, or are proposing a
standby letter of credit as security for deposits, must be pre-approved by the
Investment Committee. Certificates of deposits/share certificates fully insured by the
Federal Deposit Insurance Corporation or National Credit Union Share Insurance
Fund (including successor organizations) do not require prior approval by the
Investment Committee. Both insured and collateralized instruments, including those
backed by a standby letter of credit, must mature in less than three years.
In addition to the City's authority to invest funds in certiitcates of deposit and share
certifcates stated above, an investment in certificates of deposit made in accordance
with the following conditions is an authorized investment under Tex. Govt. Code Sec.
2256.010(b): (1) the funds are invested by the City through a clearing broker
registered with the Securities and Exchange Commission (SEC) and operating
pursuant to SEC rule 15c3-3 (17 C.F.R. Section 240.15c3-3) with its main office or
branch office in Texas and selected from a list adopted by the Investment Committee
as required by Section 2256.025; or a selected depository institution that has its main
office or a branch office in this state; (2) the selected broker or depository institution
arranges for the deposit of the funds in certificates of deposit in one or more federally
insured depository institutions, wherever located for the account of the City; (3) the
full amount of the principal and accrued interest of each of the certifcates of deposit
is insured by the United States or an instrumentality of the United States; (4) the
selected broker or depository institution acts as custodian for the City with respect to
the certificates of deposit issued for the account of the City.
Fully collateralized repurchase agreements provided the City has on file a signed
Master Repurchase Agreement, approved by the City Attorney, which details eligible
collateral, collateralizations ratios, standards for collateral custody and control,
collateral valuation, and conditions for agreement termination. The repurchase
agreement must have a defned termination date and be secured by obligations in
accordance with Section XII of this Policy. It is required that the securities purchased
by the City be assigned to the City, held in the City's name and deposited at the time
the investment is made with the City or with a third party selected and approved by
the City. Repurchase agreements must be purchased through a primary government
securities dealer, as defined by the Federal Reserve or a financial institution doing
business in this State and the termination date must be 30 days or less. An exception
to the 30 days or less termination date may be made with respect to bond proceeds.
The City may specifically authorize in the bond ordinance investments in repurchase
agreements, such as a flexible repurchase agreement, with maturities in excess of 30
days subject to any required approvals from bond insurers.
7. Commercial paper that has a stated maturity of 270 days or less from the date of
issuance and is rated not less than A-1 or P-1 or an equivalent rating by at least two
nationally recognized rating agencies.
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Public (local) fund investment pools with a dollar weighted average maturity of 60
days or less. The pool must be approved through resolution by the City Council to
provide services to the City and be continuously rated no lower than Aaa or AAAm or
at an equivalent rating by at least one nationally recognized rating service. A public
funds investment pool created to function as a money market mutual fund must mark
to market daily and stabilize at a$1 net asset value. The City may not invest an
amount that exceeds 10 percent of the total assets of any one local government
investment pool.
To be eligible to receive funds from and invest funds on behalf of the City, an
investment pool must furnish to the Investment Officer or other authorized
representative an offering circular or other similar disclosure instrument that contains
information required by the Tex. Gov't. Code Sec. 2256.016. Investments will be
made in a local government investment pool only after a thorough investigation of the
pool and approval by the Investment Cornmittee which shall at least annually review,
revise and adopt the local government investment pool(s).
9. A Securities and Exchange Commission (SEC) registered, no load money market
mutual fund which has a dollar weighted average stated maturity of 60 days or less
and whose investment objectives includes the maintenanc.e of a stable net asset value
of $1 for each share. Furthermore, it must be rated not less than Aaa, AAAm or an
equivalent rating by at least one nationally recognized rating service. A rating will not
be required of money market mutual funds that invest exclusively in U.S. government
securities or a combination of U.S. government securities and repurchase agreements
backed by U.S. government securities. The City must be provided with a prospectus
and other information required by the SEC Act of 1934 or the Investment Company
Act of 1940. This can be supplied either through website access or in hard copy form.
The City may not invest an amount that exceeds 10 percent of the total assets of any
one fund. Investments will be made in a money market mutual fund only after a
thorough investigation of the fund and approval by the Investment Committee which
shall, at least annually, review, revise and adopt the money market mutual fund(s).
C. Denton Municipal Electric (DME) Authorized Investments — DME engages in the
distribution and sale of electric energy to the public and, in accordance with Tex. Gov't
Code Sec. 2256.0201, may enter into a hedging contract and related security and insurance
agreements in relation to fuel oil, natural gas, coal, nuclear fuel, and electric energy to
protect against loss due to price fluctuations. "Hedging" is defned by the buying and selling
of futures, options or similar contracts and related transportation costs of the aforementioned
commodities as a protection against adverse price movements. A hedging transaction must
comply with the regulations of the Commodity Futures Trading Commission and the
Securities and Exchange Commission.
A payment received under a hedging contract or related agreement in relation to fuel
supplies or fuel reserves is a fuel expense, and, thus, DME may credit any amounts received
against fuel expenses.
The City Council may set and review policies regarding hedging transactions, as per Tex.
Gov't. Code Sec. 2256.0201(c).
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D, Prohibited Investments — The City's authorized investment options are more restrictive than
those allowed by state law. Furthermore, this Policy specifically prohibits investment in the
securities listed below:
V. Obligations, whose payment represents the coupon payments on the outstanding
principal balance of the underlying mortgage-backed security collateral and pays no
principal.
Obligations whose payment represents the principal stream of cash flow from the
underlying mortgage-backed security collateral and bears no interest.
All collateralized mortgage obligations,
4. Reverse repurchase agreements.
E. Diversification — It is the policy of the City to diversify its investment portfolios. The
diversification will protect interest income from the volatility of interest rates and the
avoidance of undue concentration of assets in a specifc maturity sector; therefore, portfolio
maturities shall be staggered. In establishing specific diversification strategies, the
following general policies and constraints shall apply:
Risk of market price volatility shall be controlled through maturity diversification and
by controlling unacceptable maturity extensions and a mismatch of liabilities and
assets. The maturity extension will be controlled by limiting the weighted average
maturity of the internal investment pool portfolio to 550 days. All long-term
maturities will be intended to cover long-term liabilities. In addition, at least 5
percent of the funds in the investment pool portfolio will be liquid at all times.
Investment pool liquidity, which consists of immediately available funds, is defined as
shares in a local government investment pool and money market mutual fund, as well
as bank demand deposit balances. Although there is no maximum defined portfolio
liquidity position, it is the intent of this Policy to seek out higher yielding alternative
investments in accordance with the prioritized objectives of preservation and safety of
principal, meeting liquidity needs and yield enhancement as stated throughout the
Public Funds Investment Act.
The Investment Committee shall establish strategies and guidelines for the percentage
of the total portfolio that may be invested in U.S. Treasury securities, federal
agencies/instrumentalities, repurchase agreements, insured/collateralized certifcates
of deposit and other securities or obligations. The Investment Committee shall
conduct a quarterly review of these guidelines, and shall evaluate the probability of
market and default risk in various investment sectors as part of its considerations.
Risk of principal loss in the portfolio as a whole shall be minimized by diversifying
investment types according to the following limitations based on book values:
Investment Tvpe % ofPortfolio
• U.S. Government Treasury Notes/Bills & Obligations 100%
• U.S. Government Agencies & Instrumentalities 100%
• State of Texas Obligations, Agencies & Local Gov't. 15%
• Local Government Investment Pools 50%
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• Repurchase Agreements 20%
• Certificates of Deposit (fully insured or collateralized) 35%
• U.S. Money Market Mutual Fund 35%
• Callable U.S. Agencies/Instrumentalities 20%
• Commercial Paper 5%
By Institution:
Repurchase Agreements No more than 15%
Collateralized Certificates of Deposit No more than 15%
All Other (except U.S. Treasuries) No more than 35%
4. Purchases of securities with stated maturities greater than the maximum authorized
under Section VII(B) require prior City Council approval.
VIII. SALE OF SECURITIES
The City's policy is to hold all securities to maturity. However, securities may be sold to minimize
the potential loss of principal on a security whose credit quality has declined, to swap into another
security which would improve the quality, yield or target duration of the portfolio or to meet
unanticipated liquidity needs. A horizon analysis is required for each swap proving benefit to the
City before the trade decision is made, and will be held in the file for record keeping.
IX. COMPETITIVE BIDDING
It is the policy of the City to require competitive bidding for all individual security purchases and
sales, as well as for certificates of deposit. Exceptions include:
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C.
Transactions with money market mutual funds and local government investment pools
which are deemed to be made at prevailing market rates.
Treasury and agency securities purchased as new issues through an approved broker/dealer,
fnancial institution or investment advisor.
Automatic overnight "sweep" transactions with the City's depository bank.
At least three bids or offers must be solicited for all other transactions involving individual
securities. The City's investment advisor is also required to solicit at least three bids or offers when
transacting trades on the City's behalf. In situations where the exact security is not offered by other
broker/dealers, offers on the closest comparable investment may be used to establish a fair market
price for the security. In the case of a certificate of deposit purchase, at least two other offers
should be solicited to provide a comparison. When few, if any, banks wish to participate then staff
may use another authorized investment of similar maturity for evaluation purposes. The quotes may
be accepted orally, in writing, electronically, or any combination of these methods. The Investment
Committee may approve exceptions on a case by case basis or on a general basis in the form of
guidelines. These guidelines shall take into consideration the investment type, maturity date,
amount and potential disruptiveness to the City's investment program.
X. ARBITRAGE
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The Tax Reform Act of 1986 provided limitations restricting the City's investment of tax-exempt
bond proceeds. Revised arbitrage rebate provisions require that the City compute earnings on
investment from each issue of bonds on an annual basis to determine if a rebate is required. To
determine the City's arbitrage position, the City is required to perform specific calculations relative to
the actual yield earned on the investment of the funds and the yield that could have been earned if the
funds had been invested at a rate equal to the yield on the bonds sold by the City. The rebate
provision states that periodically (not less than once every fve years, and not later than sixty days
after maturity of the bonds), the City is required to pay the U.S. Treasury a rebate of excess earnings
based on the City's positive arbitrage position. The Tax Reform restrictions require precision in the
monitoring and recording facets of investments as a whole, and particularly as they relate to yields
and computations so as to insure compliance. Failure to comply may dictate that the bonds become
taxable, retroactively from the date of issuance.
The City's investment position, relative to the revised arbitrage restrictions, is the continued pursuit
of maximizing yield on applicable investments while ensuring the safety of capital and liquidity. It is
fiscally prudent to continue the maximization of yield and rebate excess earnings, if necessary.
XI. SELECTION OF BANKS, BROKER/DEALERS AND INVESTMENT ADVISORS
A. Depository — City Council shall, by ordinance, "select and designate one or more banking
institutions as the depository for the monies and funds of the City" in accordance with the
requirement of Tex. Loc. Gov't. Code Ch. 105. At least every five years a depository shall
be selected through the City's banking services procurement process, which shall include a
formal request for proposal (RFP). The selection of a depository will be determined by a
competitive process and evaluated on the following criteria:
Qualifed as a depository for public funds in accordance with state and local laws.
2. Provided requested information or financial statements for the periods specifed.
3. Complied with all requirements in the banking RFP.
4. Completed responses to all required items on the proposal form.
Offered lowest net banking service cost, consistent with the ability to provide an
appropriate level of service.
6. Met credit worthiness and financial standards.
B. Investment Broker/Dealers — If the City has not retained an investment advisor, then the
Investment Committee shall be responsible for adopting the list of qualified brokers/dealers
and financial institutions authorized to engage in investment transactions with the City.
Authorized firms may include primary dealers or regional broker/dealers that qualify under
SEC Rule 15C3-1 (uniform net capital rule) and qualified depositories as established by the
Tex. Loc. Gov't. Code Ch. 105. The Investment Committee shall base its evaluation of
security broker/dealers and financial institutions upon:
1. Financial condition, strength and capability to fulfill commitments.
Overall reputation with other broker/dealers or investors.
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Regulatory status of the broker/dealer.
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4. Background and expertise of the individual representatives.
5. Ability to provide additional advisory services.
The Investment Committee must annually review, revise, and adopt the list of qualified
broker/dealers authorized to engage in investment transactions with the City. Investment
Officers, or their authorized representatives, shall not conduct business with any firm with
whom public entities have sustained realized losses on investments or whose name the
Investment Committee has removed from an approved list.
C. Investment Advisor — The City may retain the services of an investment advisory firm
registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or
with the State Securities Board to assist in the review of the investment policy, cash flow
requirements, the formulation of investment strategies, the execution of security purchases,
sales and deliveries, as well as attend quarterly investment meetings, provide periodic
security valuations, market updates, and to generally service the investment needs of the
City. The investment advisor will also be responsible for performing broker/dealer flnancial
due diligence on the City's behalf and provide a list of its authorized broker/dealers on an
annual basis. The investment advisory contract may not be for a term longer than two years
and its renewal or extension must be approved by the City Council by ordinance or
resolution as required by the Tex. Gov't. Code Sec.2256.003(b).
D. Compliance — A qualified representative from any firm offering to engage in investment
transactions with the City is required to sign a written instrument upon receiving and
reviewing a copy of the Investment Policy. Investments shall only be made with those
business organizations (including money market mutual funds, local government investment
pools, and investment advisory firms) which have provided the City with this written
instrument executed by a qualified representative of the firm, acknowledging that the
business organization has:
Received and reviewed the City's Investment Policy„
Implemented reasonable procedures and controls in an effort to preclude investment
transactions conducted between the City and the organization that are not authorized
by the Investment Policy, except to the extent that this authorization is dependent on
an analysis of the makeup of the City's entire portfolio or requires an interpretation
of subjective investment standards.
XII. COLLATERALIZATION, SAFEKEEPING AND CUSTODY
A. Collateralization - The City requires that all uninsured collected balances plus accrued
interest, if any, in depository accounts be secured in accordance with the requirements of
state law. Financial institutions serving as City depositories will be required to sign a
depository agreement with the City which details eligible collateral, collateralization ratios,
standards for collateral custody and control, collateral valuation, rights of substitution and
conditions for agreement termination.
The City requires that all securities purchased under the terms of a repurchase agreement be
assigned to the City in accordance with state law. Dealers and financial institutions wishing
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to transact repurchase agreements with the City will be required to sign a Master Repurchase
Agreement which details eligible collateral, collateralization ratios, standards for collateral
custody and control, collateral valuation, rights of substitution, and conditions for agreement
termination.
The City requires that all uninsured certificates of deposit plus accrued interest held with a
depository be secured in accordance with the requirements of state law. Financial
institutions will be required to sign a written depository and security agreement which
stipulates eligible collateral, collateralization ratios, standards for collateral custody and
control, collateral valuation, rights of substitution, and conditions for agreement termination.
Collateral will always be held by an independent third party with which the City has a
current custodial agreement and shall be reviewed at least monthly to ensure that the market
value of the pledged securities is adequate. All deposits and investments of City funds (other
than direct security purchases, money market mutual funds and local government investment
pools) shall be secured by pledged collateral set at no less than 102 percent of the market
value of the principal and accrued interest on the deposits or investments, less an amount
insured by FDIC. Eligible collateral to secure the City's deposits include:
Direct obligations of the United States government.
2, Other obligations, the principal and interest of which are unconditionally guaranteed
or insured by, or backed by the full faith and credit of, the United States government.
Direct obligations of agencies or instrumentalities of the United States government,
including standby letters of credit.
4. Cash
The City will reject adjustable rate mortgages (ARMs), collateralized mortgage obligations
(CMOs), step-ups, variable rate instruments (except U.S. Treasury inflation protected
securities), or securities that are not found on common pricing systems.
B. Safekeeping and Custody — Safekeeping and custody of the City's investment securities shall
be in accordance with state law. All security transactions, except local government
investment pool and money market mutual fund transactions, shall be conducted on a
delivery versus payment (DVP) basis. Investment securities will be held by a third party
custodian designated by the City, and be required to issue safekeeping confirmation notices
clearly detailing that the securities are owned by the City.
Safekeeping and custody of collateral pledged to the City shall be in accordance with state
law. Collateral will be held by a third party custodian designated by the City. The custodian
is required to issue safekeeping confirmation notices clearly showing that the securities are
pledged to the City.
C. Subject to Audit — All collateral shall be subject to inspection and audit by the Director of
Finance, or designee, as well as the City's independent auditors.
XIII. MANAGEMENT AND INTERNAL CONTROLS
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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 actions
by employees or Investment Officers of the City.
Controls and managerial emphasis deemed most important that shall be employed include the
following:
Imperative Controls
- Custodian safekeeping confirmation notices records management
- Avoidance of bearer-form securities
- Documentation of investment bidding events
- Written confirmation of telephone transactions
- Reconcilements and comparisons of security confirmation notices with the
investment records
- Compliance with Investment Policy
- Verifcation of all interest income and security purchase and sell computations
Controls Where Practical
- Control of Collusion
- Separation of duties
- Separation of transaction authority between Accounting and record-keeping
- Clear delegation of authority
- Accurate and timely reports
- Validation of investment maturity decisions with supporting cash flow data
- Adequate training and development of Investment Officers and staff authorized to
execute investment transactions
- Review of financial conditions of all broker/dealers and depository institutions
- Access to information about market conditions, changes and trends that require
adjustments to investment strategies.
XIV. INVESTMENT POLICY ADOPTION
The Investment Policy shall be formally approved and adopted by resolution of the City Council
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and reviewed annually in accordance with the provisions of the Public Funds Investment Act af the
Texas Ciovernment Code Chapter 2256.