HomeMy WebLinkAbout18-2039s:\legal\our documents\resolutions\l8\debt policy 2018.doc
RESOLUTION NO. 18-2039
A RESOLUTION REVISING ADMINISTRATIVE POLICY NO. 403.06 "1NVESTMENT
POLICY"; AND PROVIDING FOR AN EFFECTIVE DATE.
WHEREAS, the City Council passed Resolution No. F�96-061 on October 15, 1996, which
adopted an Investment Policy for the City, in compliance with the Public Fund�; �����;;�r�����:� Act,
74t" Leg., Ch. 402, 1995 Tex. Sess. Law Serv. 2958 (Vernon) (TEX. GOV'T �'C�I����. �����. Ch.
2256); and
WHEREAS, the Investment Policy was most recently amended 7th day of November 2017,
when the City Council passed Resolution No. R2017-046 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. This resolution shall become effective immediately upon its passage and
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second d b motion to �;� ��� cav� this Res ion ��� ����,�c�a,9 and approved
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Chris Watts, Mayor:
Gerard Hudspeth, District 1:
Keely G. Briggs, District 2:
Don Duff, District 3:
John Ryan, District 4:
Deb Armintor, At Large Place 5:
Paul Meltzer, At Large Place 6:
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Abstain Absent
PASSED AND APPROVED this the ��� �"-, day of ,�„,,�� m��.. , 2018.
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S:U.cgal\Our pocumm�lsUicsolulions\19\Dcbl Policy 201A doc
ATTEST:
JENNIFER WALTERS, CITY SECRETARY
BY: �. ����'�r^'�� ����.��������� ������ ,
APPROVED AS TO LEGAL FORM:
AARON LEAL, CITY ATTORNEY
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BY, � � �"�.
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SECTION: FINANCE POLICIES REFERENCE NUMBER:
403.06
SUBJECT: INVESTMENTS INITIAL EFFECTIVE DATE„
02/17/1987
REVISION DATE;
TrTL�; INVESTMENT POLICY 12/04/2018
It is the abjective of the City of Denton ta 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 canfarming ta all federal, state, and lacal statutes, rules, and regulatians gaverning the
investment of public funds. This Policy serves ta satisfy the statutory requirements of defining and
adopting a farmal investment policy. The Policy and investment strategies shall be reviewed
annually by the Audit/Pinance Committee and City Council who will farmally approve any
madifcatians. This Investment Palicy, as appraved, is in campliance with the provisions of the
Public Punds Investment Act af Tex. Gav't. Cade Chapter 2256.
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A. This Investment Palicy applies to the investment activities af the City of Denton, Texas. The
speciftc funds cited hereafter in Section II(D), shall be excluded from this Investment Palicy.
All financial assets of all funds, including the General Fund and any other accaunts af the City
nat specifically excluded in these policy guidelines are included. These funds are accaunted
far in the City's Comprehensive Annual Financial Repart (CAFR). These funds, as well as
others that may be created fram time-to-time, shall be administered in accordance with the
provisions of this Palicy. All funds will be paaled far investment purposes except far thase
listed under Sectian TI(C).
In additian ta this Policy, the investment af bond proceeds and ather bond funds (including
debt service and reserve funds) shall be governed and controlled by their gaverning
ordinance and by the provisions af the Tax Refarm Act of 19$6, including all regulations
and rulings pramulgated there under applicable to the issuance of tax-exempt obligations.
B. Punds covered by this Policy and managed as a poaled fund group;
General Fund - used ta account for resources traditianally assaciated with government,
which are not required ta be accounted for in another fund.
2, Special Revenue Funds — used to account far the praceeds fram specific revenue sources
which are restricted ar cammitted to expenditures for specific purposes other than debt
service or capital projects.
Debt Service Fund used ta account for resources to be used for the payment af principal,
interest and related costs on general abligatian debt.
4. Capital Praject Funds — used to account far resources to enable the acquisition ar
canstruction of major capital facilities which are nat financed by enterprise funds,
internal service funds, or trust funds.
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TITLE: INVESTMENT POLICY ��������� ������'
403.06
Enterprise Funds — used ta account for aperations that are financed and operated in a
manner similar ta private business enterprises.
6. Internal Service Funds — used to accaunt far the cost of praviding goods ar services
between City departments.
Trust and Agency Funds — used to accaunt for assets held by the City in a trustee capacity
or as an agent for individuals, private arganizatians, other gavernments, and/or other
funds.
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 ta) resources
assaciated with Public Improvement Districts ar Tax Increment Financing zanes, unless
specifically excluded herein.
C. Funds cavered by this Policy and managed as separately invested assets:
1. Bond Funds — funds established with the praceeds from specific bond issues when it is
determined that segregating these funds from the pooled funds' portfolia wiil result in
maximum interest earning retention under the provisions of the Tax Reform Act af
1986.
Endowment Funds — funds given to the City with the instructians that the principal is
to remain intact, unless atherwise agreed ta, and the income generated by the
investments will be used for specified purpases.
Trust, Bscrowed Funds & Security Deposits — funds held outside the City by a trust,
escrow agent, or other entity but belonging ta the City.
D. This Policy shall nat gavern funds, which are managed under separate investment pragrams
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 emplayee compensation, and certain private danations. The City shall and will
maintain respansibility for these funds to the extent requ ired by federal and state law, the City
Charter, and donar stipulatians. This Policy alsa does not apply to manies held in escrow to
retire bonds which are subject to defeasance requirements stated under their respective bond
ardinances.
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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 band ordinance requirements, adapted Investment Palicy and investment strategies.
In accordance with the Public Funds Investment Act, the follawing prioritized objectives (in order
of importance) in accordance with the Tex. Gov't. Code Sec. 2256,005(d) apply far each of the
City's investment strategies.
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REFERENCE NUMBER:
TITLE; INVESTMBNT POLICY 403.06
A. Surtability — Understanding the suitability of the investment to the financial requirements af
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 af the Investment
Policy. All investments will be in high quality securities with no perceived default risk.
C. Lrquzdity — The City's investment portfolia 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. Shart-term investment paols and money market mutual funds
pravide daily liquidity and may be utilized as a competitive investment alternative to fixed
income instruments.
D. Marketabiltty — Securities with active and efficient secondary markets are necessary in the
event of an unanticipated cash requirement. Histarical market "spreads" between the bid and
offer prices of a particular security type of less than a quarter of a percentage paint shall define
an efficient secondary market.
E. Diver°sification — Investment maturities shall be staggered to provide cash flaw based an 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 gaal
of the City's investment portfolio is to regularly meet or exceed the average rate of return on
U.5. Treasury bills at a maturity level comparable ta the portfolio's weighted average maturity
in days. The yield of an equally weighted, ralling twelve month moving average of a one year
U.S. Treasury bill portfalio shall be the minimum yield objective or "henchmark". 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 gavernment investment paol 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
follaw 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 transactians that might impair public confidence in the
City's ability to govern effectively. The governing body recagnizes that in adequately
diversifying the maturity structure within the portfolia to meet the City's expenditure needs,
occasional measured unrealized losses due to market volatility and rising interest rates are
inevitable, and must be cansidered within the context af the overall portfolia'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},
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In arder to better diversify, maximize interest earnings and otherwise meet stated objectives, fund
graups may be combined into ane or more internal investment pools. Although fund manies may be
cambined into a single asset portfolia, proportional fund ownership will be accounted for separately.
The City maintains separate portfalias for same individual funds or groups of funds (as listed under
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TITLE: INVESTMENT POLICY REFERENCE NUMBER:
403.06
Section IT) that are managed in accardance with the terms of this Policy and by the corresponding
investment strategies listed belaw.
A. Investment Pool Strategy — The City's Investment Pool is an aggregatian of the majority of
City funds which includes tax receipts, enterprise fund revenues, fine and fee revenues, as well
as some, but not necessarily all, bond proceeds, grants, gifts and endowments. This partfolio
is maintained ta 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 abligations and ta minimize
potential liquidatian losses, the dollar-weighted average stated maturity ofthe investment pool
shall not exceed 1.5 years ar 550 days. The objectives of this partfolia are to:
Ensure safety of principal by investing in anly high quality securities for which a
strong secondary market exists.
2, Ensure that anticipated cash flow needs are matched with adequate investment liquidity.
3. Limit market and credit risk through diversification.
4. Attain the best feasible yield commensurate with the abjectives and restrictions set farth
in this Policy by actively managing the portfolio to meet or exceed the twelve month
rnoving average yield on a one year U.S. Treasury bill as derived from the Federal
Reserve Statistical Release H,15 for constant maturities.
B„ Band Funds Strategy - Occasionally, separate nan-paaled portfolios are established with the
proceeds from bond sales in order to maximize earnings within the constraints af arbitrage
regulatians. The objectives of the portfolios are to:
a. Ensure safety of principal by investing in only high quality securities for which a
strong secondary market exists.
Ensure that anticipated cash flaw needs are matched with adequate investment
liquidity.
3. Limit market and credit risk thraugh diversification.
4, Attain the best feasible yield commensurate with the objectives and restrictions set forth
in this Palicy and the bond ordinance by actively managing the portfolio to meet or
exceed the band yield.
C. Endowment Fund Strategy - Funds received as gifts to the City with instructions that the
incame generated by the investment af said funds be used for specified purposes are invested
as separate nan-pooled portfolios in order to maximize return. The objectives af the
portfalios are to:
Ensure safety of principal by investing in only high quality securities for which a
strong secondary market ex►sts.
2. Ensure that anticipated cash flow needs are matched with adequate investment
liquidity.
3. Limit market and credit risk through diversification.
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TITLE: INVESTMENT POLICY REFERENCE NUMBER:
403.06
4. Attain the best feasible yield cammensurate with the abjectives and restrictions set
forth in this Policy.
D, Trust, Escrowed Funds & Security Deposit Strategy - Funds that are held autside the City by
a trust, escrow agent, ar as a security deposit, but belonging to the City are governed by their
respective trust, escrow, ar security deposit agreement and are subject to the pravisions of
this Policy. The abjectives of the portfolios are ta:
Ensure safety of principal by investing in anly high quality securities far which a
strong secondary market exists.
Ensure that anticipated cash flow needs are matched with adequate investment
liquidity.
3. Limit market and credit risk through diversification.
Attain the best feasible yield cammensurate with the objectives and restrictions set
forth in this Palicy and the trust, escraw, or security deposit agreement.
Members — The Investment Committee will consist af the City Manager, Deputy City Manager, Chief
Financial Officer, Assistant Director of Finance, Controller, and Treasury Manager. The investment
advisor and City Tnternal Auditor will serve as nan-voting members of the Investment Committee.
When needed, the City Attarney will act as a legal advisar to the Investment Cammittee.
Scope — The Investment Committee shall meet at least quarterly to determine general strategies,
investment guidelines, and ta monitar results. Included in ►ts deliberations will be such topics as:
economic autlook, partfalio diversificatian, maturity structure, potential risk ta the City's funds,
authorized broker/dealers (if applicable) and depository institutians, as well as the target rate of return
on the investment portfalio.
Pr°ocedures - The Treasury Manager shall provide meeting summations to all members. Any two
members of the Investment Committee may request a special meeting, and faur members shall
constitute a quorum. A quarum may be achieved by a member designating a substitute participant ta
serve in his ar her absence. That substitute participant will nat be granted voting rights. The
Investment Committee shall establish its own rules of procedures.
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A, Delegation & Training — The management responsibility far the investment pragram is
delegated to the Chief Financial Officer. The prirnary individual who shall be invalved in
investment activities will be his designee. The designee may delegate the day ta day activities
ta a responsible individual(s) wha has received the apprapriate training required by state
statute. The Chief Financial Officer and department designees will use this Palicy as the
primary guideline for the City's investment program, pracedures, and internal control issues.
The Chief Financial Officer and the Treasury Manager are designated as the Investment
Officers, pursuant to Tex. Gov't. Code Sec. 2256.005(f}. Accordingly, the Investment
Officers and persans authorized ta execute investment transactions shall attend at least one
training session relating to their responsibilities under the Public Funds Investment Act within
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TITLE: INVESTMENT POLICY REFERENCE NUMBER:
403.06
12 months after assuming duties and receive no less than 10 haurs of instruction relating ta
investment functions. Thereafter, eight haurs af investment training is required in every two
year period that begins on the first day of the fiscal year and consists of the two consecutive
fscal 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. Far purposes of this Palicy, an "independent saurce" for
investment training shall include a professional organization, an institute of higher learning ar
any other spansor ather than a business organization with whom the City may engage in an
investment transaction. Thus, these independent saurces will be training sessions spansored,
accredited or endarsed by the Government Treasurers Organization of Texas (GTOT), Center
For Public Management at the University of North Texas (UNT), Gavernment 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 Offcers' Assaciation (GFOA).
Na persons may engage in investment transactions except as provided under the terms of this
Palicy. The Chief Financial Officer shall require an annual compliance review by an external
auditar that will cansist of an audit af management controls on investments, adherence to this
Palicy and a review of the quarterly investment reparts. The reviews will provide internal
control by assuring compliance with policies and procedures. The Deputy City Manager, Chief
Financial Officer, Treasury Manager, Mayar, City Council, City Manager and ather Finance
Department employees shall be personally indemnified in the event of investment loss
provided the Investment Policy has been followed.
B, Conflicts of Interest — All participants in the investment process shall seek ta act responsibly
as custodians of public assets. Officers and employees invalved in the investment process
shall refrain from personal business activity that could conflict with proper execution of the
investment pragram, ar 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 autlined in Section VI(C) below.
C. Disclosure — Anyone involved in investing City funds shall file with the Investment
Committee a statement disclosing any persanal business relationship with a business
organization offering to engage in investment transactions with the City ar 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 Offcer or emplayee owns 10% ar more of the voting stock or shares
af the business organization or owns $5,000 or mare 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 afficers gross income for the prior year.
The Investment Officer or employee has acquired from the business arganization
during the priar year investments with a boak value of $2,500 or more for their persanal
accaunt.
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TITLE: INVESTMENT POLICY REFERENCE NUMBER:
403.06
D„ Prudence — The standard af prudence to be used by the investment officials shall be the
"Prudent Person Rule", as set forth in Tex. Gov't. Cade 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 persan's awn affairs, nat far speculation, but for
investment, considering the prabable safety of their capital as well as the prabable income to
be derived,"
Investment officials acting in accordance with the Investment Policy and exercising due
diligence shall be relieved af 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 ta cantrol adverse developments. In determining whether an
investment official has exercised prudence with respect to an investment decision, the
determination shall be made taking inta consideratian the investment of all funds over which
the official had respansibility rather than consideration as to the prudence af a single
investment and whether the investment decision was cansistent with the City's Investment
Palicy.
E. Reporting
Quarterly — Nat less than quarterly, the Chief Financial Officer 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 ofthe preceding reporting period. The repart shall: 1) describe
in detail the investment position ofthe City as ofthe end ofthe 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 poaled fund group including a} beginning market value far the reporting period; b)
additions and changes ta 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 paaled 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 canduct an annual review af
the quarterly reparts in canjunction with the annual financial 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.
F, As recommended by the Texas State Library and Archives Cammission, the guidelines of
retaining recards for five years from the applicable fiscal year end shauld be followed far
investment funds other than bond proceeds. Since the City manages the majority of its
investments, including band funds, using an internal pool consisting of combined fund groups,
records shall be retained in accordance with the Administrative Policy Na. 403.07 "Debt
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TITLE: INVESTMENT POLICY REFERENCE NUMBER:
403.06
Service Management." The Chief Financial Officer shall oversee the filing and/ar staring of
investment records.
G. Market prices for all public fund investments will be obtained and manitored thraugh the use
of Interactive Data Inc., an on-line data service or a similarly qualified successor agency ar
experienced competitor.
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A, Active Portfolzo 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 canditions present an opportunity for the City to benefit fram the trade. (Refer to
Section VIII of this Policy.) In addition, the Investment Offcers may at times restrict or
prohibit the purchase of specific types af investments ar issuers due to current market
conditions.
The City shall take all prudent measures consistent with this Investment Palicy to liquidate an
investment that no longer meets the required minimum rating standards, as per the Tex. Gav'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 accardingly. The City is not required to liquidate investments
that were authorized investments at the time of purchase. (Tex. Gav't. Code Sec. 2256.017)
B„ Authorzzed Investments & Maximum Maturities — City funds governed by this Policy may be
invested in the instruments described below, all of which are autharized by the Public Funds
Investment Act.
Direct obligations of the United States af America, its agencies and instrumentalities
and maturing in less than fve years.
Other obligations, the principal and interest of which are unconditionally guaranteed
ar insured by, or backed by the full faith and credit af, the United States af America, or
any obligation fully guaranteed ar insured by the Federal Deposit Insurance Corporatian
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 recagnized
investment rating firm not less than AA ar 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 ta
investment quality by a nationally recognized investment rating firm not less than AA
or its equivalent and maturing in less than three years.
5, Fully insured or callateralized certificates of deposit/share certifcates issued by state
and national banks or savings bank or a state or federal credit union (having its main or
branch affice in Texas) guaranteed ar insured by the Federal Depasit Insurance
Corporation or its successar or the National Credit Union Share Insurance Fund or its
successor. Any uninsured portion af callateralized certificates af deposit must be
secured by obligations in accordance with Section XII herein. Banks ar credit unions
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REFERENCE NUMBER:
TITLE: TNVESTMENT POLICY 403.06
offering collateralized certificates of deposit/share certificates, or are proposing a
standby letter of credit as security far depasits, must be pre-approved by the Investment
Committee. Certificates of deposits/share certificates fully insured by the Federal
Depasit Insurance Corporatian ar National Credit Union Share Insurance Fund
(including successor organizations) da not require prior approval by the Investment
Committee. Both insured and callateralized instruments, including thase 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 certificates of deposit and share
certificates 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 ofitce or a branch
office in this state; (2) the selected broker or depository institutian arranges for the
deposit af the funds in certificates of deposit in ane or more federally insured depasitory
institutions, wherever located for the account af the City; (3} the full amount of the
principal and accrued interest of each of the certificates of deposit is insured by the
United States or an instrumentality of the United States; (4) the selected broker or
depository institution acts as custadian for the City with respect to the certificates of
deposit issued far the account of the City.
6. Interest bearing bank savings deposits issued by state and national banks or savings
bank or a state or federal credit union (having a main or branch office in Texas) that are
guaranteed or insured by the Federal Deposit Insurance Corporation or the National
Credit Union Share Insurance Fund (ar successar organizatians}. Included also are
collateralized interest bearing savings deposits that have secured the uninsured portian
of deposits with obligations in accordance with Section XII herein. Offering banks of
both insured and collateralized savings accounts, including those backed by a standby
letter af credit, require prior approval by the Tnvestment Committee.
In addition to the City's autharity to invest funds in savings deposits as described above,
an investment in savings accounts in accardance with the following conditians is an
autharized investment under Tex. Gavt. Cade Sec. 2256.009(a) :(1) the funds are
invested by the City thraugh a clearing broker registered with the Securities and
Exchange Commission (SEC} and operating pursuant to SEC rule 15c3-3 (17 C.F,R.
Sectian 240.i5c3-3) with its main office or branch office in Texas and selected fram a
list adopted by the Investment Committee as required by Sectian 2256.025; or a selected
depasitory institution that has its main offce ar a branch affce in this state; (2) the
selected broker or depasitory institution arranges for the savings deposits in ane ar
more federally insured depository institutions, wherever located for the accaunt of the
City; (3) the full amount of the principal and accrued interest of each af the savings
accounts 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 savings deposits issued for the account of the City.
7, Fully collateralized repurchase agreements pravided the City has on file a signed
Master Repurchase Agreement, approved by the City Attorney, which details eligible
callateral, callateralizations ratios, standards for callateral custody and control,
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I2�F'EIS�NCE NiJ1Ui��Ft:
TTTLE: INVESTMENT POLICY 4Q3,06
collateral valuation, and canditions for agreement terminatian. The repurchase
agreement must have a defined termination date and be secured by obligations in
accordance with Section XII af 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 ar with a third party selected and appraved by the
City. Repurchase agreements must be purchased through a primary government
securities dealer, as defined by the Federal Reserve or a financial institutian doing
business in this State and the terminatian 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 autharize 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 appravals from bond insurers.
8. 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.
9. Public (lacal) fund investment pools with a dollar weighted average maturity of 60 days
or less. The paol must be approved through resolution by the City Council to pravide
services to the City and be continuously rated no lower than Aaa or AAAm or at an
equivalent rating by at least one nationally recagnized rating service. A public funds
investment poal created to function as a money market mutual fund must mai•k to
market daily and stabilize at a$1 net asset value. The City may nat invest an amount
that exceeds 10 percent af the total assets af any one local government investment paol.
Ta be eligible ta receive funds from and invest funds on behalf af the City, an
investment pool must furnish to the Investment Officer or ather authorized
representative an offering circular or other similar disclasure 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 tharough investigatian af the pool
and approval by the Investment Committee which shall at least annually review, revise
and adopt the local government investment poal(s).
10, A Securities and Exchange Cammission (SEC} registered and regulated, no load U.S.
gavernment money market mutual fund that camplies with SEC Rule 2a7 and which
has a dallar weighted average stated maturity of 60 days or less and whose investment
objectives includes the maintenance of a stable net asset value of $1 far each share, A
rating will nat be required of money market mutual funds that invest exclusively in U.S.
government securities or a combinatian af U.S. government securities and repurchase
agreements backed by U.S. gavernment securities. The City must be provided with a
prospectus and other information required by the SEC Act of 1934 ar the Investment
Company Act of 1940. This may be supplied either through website access ar in hard
capy form. The City may not invest an amount that exceeds 10 percent ofthe total assets
af any one fund. Investments will be made in a money market mutual fund anly after a
thorough investigation af 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
distributian and sale of electric energy ta 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 relatian to fuel oil, natural gas, coal, nuclear fuel, and electric energy to
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protect against loss due to price fluctuations. "Hedging99 is defined by the buying and selling
of futures, options or similar contracts and related transportatian casts af the aforementioned
commodities as a protection against adverse price mavements. A hedging transaction must
camply with the regulations of the Cammodity Futures Trading Commission and the
Securities and Exchange Commission.
A payrrrent 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. Cade Sec. 2256.0201(c).
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:
Obligations, whose payment represents the coupan payments on the outstanding
principal balance af the underlying mortgage-backed security collateral and pays na
principal.
2� Obligations whase payment represents the principal stream af cash flow from the
underlying martgage-hacked security collateral and bears no interest.
All collateralized mortgage obligations.
4, Reverse repurchase agreements.
1�, 17iversification — It is the policy af the City ta diversify its investment portfalios. The
diversification will protect interest income from the valatility of interest rates and the
avoidance of undue cancentration af assets in a specific maturity sector; therefore, partfolia
maturities shall be staggered. In establishing specific diversifcatian strategies, the following
general policies and constraints shall apply:
Risk of market price volatility shall be cantrolled through maturity diversificatian and
by cantralling unacceptable maturity extensians and a mismatch of liabilities and assets.
The maturity extensian will be controlled by limiting the weighted average maturity of
the internal investment pool portfolio to 550 days. All lang-term maturities will be
intended ta cover long-term liabilities. In additian, at least 5 percent of the funds in the
investment pool portfolia will be liquid at all times. Investment pool liquidity, which
cansists of immediately available funds, is defined as shares in a local government
investment pool and maney market mutual fund, as well as bank demand and savings
deposit balances. Although there is na maximum defined partfolio liquidity positian,
it is the intent af this Policy to seek out higher yielding alternative investments in
accordance with the prioritized objectives, af preservation and safety of principal,
meeting liquidity needs and yield enhancement as stated throughaut the Public Funds
Tnvestment Act.
2. The Investment Cammittee shall establish strategies and guidelines far the percentage
of the total portfalio that may be invested in U.5. Treasury securities, federal
agencies/instrumentalities, repurchase agreements, insured/collateralized certificates of
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REFERENCE NUMBER:
403.06
deposit and ather securities or obligatians. The Investment Committee shall conduct a
quarterly review of these guidelines, and shall evaluate the probability of market and
default risk in variaus 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 limitatians based an book values:
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• U.S. Government Treasury Nates/Bills & Obligations 100%
• U.S. Government Agencies & Instrumentalities 100%
• State of Texas Obligatians, Agencies & Local Gov't.
• Local Gavernment Investment Poals (Gov't Securities}
• Lacal Government Investment Pools (Prime Securities)
• Repurchase Agreements
• Certificates af Depasit (insured/collateralized/SLOC*}
• Savings Depasits (insured/callateralized/SLOC*)
• U.S. Government Money Market Mutual Funds
• Callable U.S. Agencies/Instrumentalities
� Cammercial Paper
By Institution:
Repurchase Agreements
Callateralized Certificates of Deposit
SLOC* Backed Certificates of Depasit
Commercial Paper
All Other (except U.S. Treasuries)
*Standby Letter af Credit
15%
50%
15%
20%
35%
15%
50%
20%
15%
No more than 15%
No more than 15%
No more than 15%
No mare than 5%
No more than 35%
4. Purchases af securities with stated maturities greater than the maximum autharized
under Sectian VII(B) require priar City Council approval.
� '
The City's policy is ta hald all securities to maturity. Hawever, securities may be sold to minimize
the patential loss of principal an a security whose credit quality has declined, to swap inta anather
security which would improve the quality, yield ar target duration of the portfolio ar 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.
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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. Exceptians include:
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A, Transactians with money market mutual funds and local gavernment investment paols which
are deemed ta be made at prevailing market rates.
B, Treasury and agency securities purchased as new issues thraugh an approved braker/dealer,
fnancial institution or investment advisor.
C, Automatic overnight "sweep99 transactions with the City's depository bank,
D, Interest bearing savings deposits deemed to be made at prevailing market rates.
At least three bids or offers must be solicited for all other transactians involving individual securities,
The City's investment advisar is alsa required to solicit at least three bids or affers when transacting
trades on the City's behalf. In situations where the exact security is nat 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 af depasit purchase, at least two other affers 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 purpases. The quotes may be
accepted arally, in writing, electronically, or any combinatian of these methads. The Investment
Committee may approve exceptions on a case by case basis or an a general basis in the form af
guidelines. These guidelines shall take into cansideration the investment type, maturity date, amaunt
and potential disruptiveness to the City's investment program.
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The Tax Reform Act of 1986 provided limitations restricting the City's investment of tax-exempt band
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. Ta determine the
City's arbitrage position, the City is required to perform specific calculations relative ta 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
periadically (not less than once every five years, and not later than sixty days after maturity of the
bonds}, the City is required ta pay the U.S. Treasury a rebate of excess earnings based on the City's
positive arbitrage position. The Tax Refarm restrictions require precision in the manitoring and
recording facets of investments as a whole, and particularly as they relate to yields and camputations
sa as to insure compliance. Failure ta camply 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 cantinued pursuit of
maximizing yield on applicable investments while ensuring the safety af capital and liquidity. It is
fiscally prudent to continue the maximization af yield and rebate excess earnings, if necessary.
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A. Depository — City Council shall, by ordinance, "select and designate one or more banking
institutians as the depository for the monies and funds of the City99 in accardance 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:
Qualified as a depasitory for public funds in accardance with state and lacal laws.
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2. Provided requested infarmation or financial statements for the periads specified.
Complied with all requirements in the banking RFP.
4. Completed responses ta all required items on the propasal form.
5. Offered lowest net banking service cast, consistent with the ability to provide an
appropriate level of service.
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 shail base its evaluation of
security broker/dealers and financial institutions upon:
Financial condition, strength and capability to fulfill commitments.
Overall reputation with other broker/dealers or investors.
3. Regulatory status of the broker/dealer,
4, Background and expertise of the individual representatives.
Ability to pravide 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 canduct business with any firm with
whom public entities have sustained realized losses an investments or whose name the
Investment Committee has removed from an appraved 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. Sectian 80b-1 et seq.} or
with the State Securities Board to assist in the review of the investment policy, cash flaw
requirements, the formulation of investment strategies, the executian of security purchases,
sales and deliveries, as well as attend quarterly investment meetings, provide periodic security
valuations, market updates, and ta generally service the investment needs of the City. The
investment advisor will alsa be respansible for performing braker/dealer financial due
diligence an the City's behalf and provide a list of its authorized broker/dealers on an annual
basis. The City, however, retains ultimate responsibility as fiduciary af its assets. The
investment advisory cantract may nat be far a term langer than two years and its renewal or
extension must be approved by the City Council by ordinance or resalution as required by the
Tex. Gov't. Code Sec. 2256,003(b).
D, Compliance — A qualified representative from any frm offering ta engage in investment
transactions with the City is required ta sign a written instrument upon receiving and
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reviewing a copy of the Investment Policy. Investments shall only be made with those
business organizations (including 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.
2, 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.
It will be at the Treasury Manager's discretion to accept any additional caveats to the above
stated required acknowledgements. The written compliance document must, at a minimum,
conform to Tex. Gov't. Code Sec. 2256 (k) as amended.
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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. This requirement is applicable to both demand and savings deposits.
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
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 certi�cates 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.
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I7irect 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 variable rate instruments),
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 rrrarket 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 Chief Financial
Officer, or designee, as well as the City's independent auditors.
Controls shall be designed to prevent losses of public funds arising from fraud, employee error,
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:
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- Custodian safekeeping confirmation notices records management
- Avoidance of bearer-form securities
- Documentation of investment bidding events
- Written confrmation of telephone transactions
- Reconcilements and comparisons of security confirmation notices with the
investment records
- Compliance with Investment Policy�
- �/erification of all interest income and security purchase and sell computations
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POLICY/ADMINIST TIVE PROCEDURE/ADMINIST TIVE D
TITLE: INVESTMENT POLICY � REFERENCE NUMBER:
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Controls Where Practical
- Control of Collusion
- Separation af duties
- Separation of transaction authority between accounting and record-keeping
- Clear delegatian of authority
- Accurate and timely reparts
- Validation af investment maturity decisians with supporting cash flow data
- Adequate training and development af Investment Officers and staff autharized to
execute investment transactians
- Review of financial conditions of all braker/dealers and depository institutions
� Access ta informatian about market conditians, changes and trends that require
adjustments to investment strategies.
XIV. INVESTMENT POLICY ADOPTION
The Investment Policy shall be formally appraved and adopted by resolution of the City Council
and reviewed annually in accordance with the provisians of the Public Funds Investment Act of the
Texas Government Code Chapter 2256.