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HomeMy WebLinkAboutR2009-006FILE REFERENCE FORM R2009-006 X Additional File Exists Additional File Contains Records Not Public, According to the Public Records Act Other FILES Date Initials Amended by Resolution No. R2009-028 11/03/09 R sAour documents\resol utions\09\in vestment policy.doc RESOLUTION NO.b~ 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. 96-061 on October 15, 1996, which adopted an Investment Policy for Funds for the City, in compliance with the Public Funds Investment Act, 74`h Leg., ch. 402, 1995 Tex. Sess. Law Serv. 2958 (Vernon) (TEX. GOV'T CODE Ann. Ch. 2256); and WHEREAS, by Resolution No. 97-026, passed by the City Council on June 10, 1997, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 97-077, passed by the City Council on December 16, 1997, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 98-067, passed by the City Council on December 15, 1998, the City's Investment Policy was reviewed and adopted; and WHEREAS, by Resolution No. 99-047, passed by the City Council on September 21, 1999, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2000-065, passed by the City Council on December 19, 2000, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2001-072, passed by the City Council on December 18, 2001, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2002-055, passed by the City Council on December 10, 2002, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2004-008, passed by the City Council on February 3, 2004, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2005-008, passed by the City Council on February 22, 2005, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2005-047, passed by the City Council on November 15, 2005, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2007-028, passed by the City Council on September 25, 2007, the City's Investment Policy was amended; and WHEREAS, by Resolution No. 2008-009, passed by the City Council on March 4, 2008, the City's Investment Policy was amended; and sAour documents\resolutions\09\investment policy.doc 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 City Council has reviewed the attached City of Denton Investment Policy, which contains the City's investment policies and investment strategies for each of the funds under its control and hereby adopts the attached Investment Policy, which is made a part of this Resolution for all purposes. SECTION 2. The City Council authorizes the City's designated Investment Officers 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. SECTION 3. All resolutions or parts of resolutions in force when the provisions of this Resolution became effective which are inconsistent or in conflict with the terms or provisions contained in this Resolution are hereby repealed to the extent of any such conflict only. The non-conflicting sections, sentences, paragraphs, and phrases shall remain in full force and effect. SECTION 4. Save and except as amended hereby, all the provisions, sections, subsections, paragraphs, sentences, clauses, and phrases of Resolution No. 96-061, Resolution No. 97-026, Resolution No. 97-077, Resolution No. 98-067, Resolution No. 99-047, Resolution No. 2000-065, Resolution No. 2001-072, Resolution No. 2002-055, Resolution No. 2004-008, Resolution No. 2005-008, Resolution No. 2005-047, Resolution No. 2007-028, and Resolution No. 2008-009 shall remain in full force and effect. SECTION 5. This Resolution shall become effective immediately upon its passage and approval. PASSED AND APPROVED this the ,day of 2009. M A. URR G S, MAYOR ATTEST: JENNIFER WALTERS, CITY SECRETARY BY:14 L_ I I )a ~ h~ 4-1) APPR ED iA TO LEGAL FORM: ANITA BURGESS, CITY ATTORNEY zl~,BY: Page 2 of 2 CITY OF DENTON Page 1 of 15 POLICY/ADAHMSTRATIVE PROCEDURE/ADM MSTRATIVE DIRECTIVE SECTION: FINANCE POLICIES REFERENCE NUMBER: 403.06 INITIAL EFFECTIVE DATE:SUBJECT: INVESTMENTS 02/17/87 REVISION DATE: TITLE:INVESTMENT POLICY 03/03/09 1. 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 defining and adopting a formal investment policy. The Policy and investment strategies shall be reviewed annually by the Investment 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. H. SCOPE A. This Investment Policy applies to the investment activities of the City of Denton, Texas. The specific funds cited hereafter in Section IID, 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 specifically 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 funds 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. Currently the City employs a strategy developed for this pooled fund group that addresses the varying needs, goals, and objectives of each fund by dividing blocks of securities into particular funds and employing inter-fund sales and purchases. Although not currently implemented, it is the City's objective to combine the majority of its fund groups into an internal investment pool to facilitate investment management and allow for a more equitable allocation of interest earnings. This Policy is written with this goal in mind. Until an internal investment pool is realized, the City will continue with its current fund allocation process. 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: 1. 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 to expenditures for specific purposes. Page 2 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADM NISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 3. 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 funds, internal service funds, or trust funds. 5. Enterprise Funds - used to account for operations that are financed and operated in a manner similar to private business enterprises. 6. 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. 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: 1. Bond Funds - funds established with the proceeds from specific 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. Bond Reserve Funds - funds set at prescribed levels by certain bond ordinances to pay principal and/or interest if required to prevent default. 3. 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 specified purposes. 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. 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 adopted 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. Page 3 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 A. Suitability - Understanding the suitability of the investment to the financial 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 yield alternative to fixed income investments. 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 define an efficient secondary market. E. Diversification - Investment maturities shall be staggered throughout the budget cycle 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 six-month Treasury Bill portfolio shall be the minimum yield objective or "benchmark". Six-month 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 confidence in the City's ability to govern effectively. The governing body recognizes that in diversifying the portfolio, occasional measured unrealized losses due to market volatility are inevitable, and must be considered within the context of the overall portfolio's investment return, provided that adequate diversification has been implemented. The prudence of the investment decision 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 Page 4 of IS POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY 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. (It should be noted that until an internal investment pool is realized, the City will continue with its current fund allocation process.) 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, 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: 1. Ensure safety of principal by investing in only high quality securities for which a strong secondary market exists. 2. Ensure that anticipated cash flows are matched with adequate investment liquidity. 3. 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 six month moving average yield on a six month 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 from bond sales in order to maximize earnings within the constraints of arbitrage regulations. The objectives of the portfolios are to: 1. Ensure safety of principal by investing in only high quality securities for which a strong secondary market exists. 2. Ensure that anticipated cash flows are matched with adequate investment liquidity. 3. 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. Bond Reserve Fund Strategy - Non-pooled reserve funds for outstanding- revenue bonds are set at levels required by their respective bond ordinances. These funds will be used to pay principal and/or interest, if required, to prevent default. Securities should be of high quality and, except as may be required by the bond ordinance specific to an individual issue, of short to intermediate-term maturities with stated final maturities not exceeding five (5) years or a dollar weighted average maturity of 650 days or less. The objectives of the portfolios are to: 1. Ensure safety of principal by investing in only high quality securities for which a strong secondary market exists. Page 5 of 15 POLICY/ADM MSTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 2. Create a dependable revenue stream from securities with a low degree of volatility. 3. 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. D. 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 maximize return. The objectives of the portfolios are to: 1. Ensure safety of principal by investing in only high quality securities for which a strong secondary market exists. 2. Ensure that anticipated cash flows are matched with adequate investment liquidity. 3. Limit market and credit risk through diversification. 4. Attain the best feasible yield commensurate with the objectives and restrictions set forth in this Policy. V. INVESTMENT COMMITTEE Members - The Investment Committee will consist of the City Manager, Assistant City Manager, Director of Finance, Mayor, and one member of the City Council. 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 the target rate of return on the investment portfolio. Procedures - The Investment Committee shall provide minutes of its meetings. Any two members of the Investment Committee may request a special meeting, and four members shall 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, who shall establish written procedures for the operation of the investment program, consistent with this Investment Policy. Such procedures shall include explicit delegation of authority to the individual(s) responsible for investment transactions. The primary individual who shall be involved in investment activities will be the Treasury & Debt Manager. The Treasury & Debt Manager may delegate the day to day activities to a responsible individual(s) who has received the appropriate training required by state statute. The Assistant City Manager and Director of Finance are designated as the Investment Officers, pursuant to Tex Gov't. Code Sec. 2256.005(f). 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 Page 6 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE F,TLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 relating to investment functions every two years. 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 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 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 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. 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 are met: 1. 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. 3. 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 Page 7 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 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 official 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 Investment Committee 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 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. The guidelines of retaining records for seven years as recommended in the Texas State Library Municipal Records Manual should be followed. 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 similar qualified successor agency. POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Page 8 of 15 TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 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 - 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. 1. Direct obligations of the United States of America, its agencies and instrumentalities maturing in less than five (5) 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 maturing in less than five (5) years). 3. 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 (maturing in less than two (2) 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 (maturing in less than two (2) years). 5. 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 office 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; and secured by obligations in accordance with Section XII herein (maturing in less than two (2) 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 depository institution that has its main office or a branch office in this state and that is selected by the City; 2) the depository institution selected by the City under Subdivision (1) arranges for Page 9 of 15 POLICY/ADMIIVISTRATIVE PROCEDURE/ADM MSTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 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 certificates of deposit is insured by the United States or an instrumentality of the United States; (4) the depository institution selected by the City under Subdivision (1) acts as custodian for the City with respect to the certificates of deposit issued for the account of the City; and (5) at the same time that the funds are deposited and the certificates of deposit are issued for the account of the City, the depository institution selected by the City under Subdivision (1) receives an amount of deposits from customers of other federally insured depository institutions, wherever located, that is equal to or greater than the amount of the funds invested by the City through the depository institution selected under Subdivision (1). 6. 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 defined 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 (termination date must be thirty (30) days or less). 7. Commercial paper that has a stated maturity of 270 days or less from the date of issuance and is rated A-1 or P-1 or an equivalent rating by at least two nationally recognized rating agencies. 8. Public (Local) Fund Investment Pools with a dollar weighted average maturity of 60 days or less. The pool must be approved (by resolution) by the City Council to provide services to the City. The pool must 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. 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 Committee 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 90 days or less and whose investment objectives includes the maintenance 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 and 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. Investments will be made in a money POLIMADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Page 10 of 15 TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 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. 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: 1. Obligations, whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal. 2. Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest. 3. All collateralized mortgage obligations. 4. Reverse repurchase agreements. D. 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 specific maturity sector; therefore, portfolio maturities shall be staggered. In establishing specific diversification strategies, the following general policies and constraints shall apply: 1. 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 and the bond reserve fund to 650 days. All long-term maturities will be intended to cover long-term liabilities. In addition, at least five (5%) percent of the funds in the investment pool portfolio will be liquid at all times. 2. 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, and insured/collateralized certificates 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. 3. Risk of principal loss in the portfolio as a whole shall be minimized by diversifying investment types according to the following limitations: Investment Tune ofPortfolio U.S. Treasury Notes/Bills 100% U.S. Agencies & Instrumentalities 100% State of Texas Obligations, Agencies & Local Gov't.15% Local Government Investment Pools 50% POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Page 1 1 of 15 TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 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 10% All Other No more than 35% 4. Purchases of securities with stated maturities greater than the maximum authorized under this section require prior City Council approval. With respect to bond proceeds, the City may specifically authorize in the bond ordinance investments in repurchase agreements with maturities in excess of 30 days subject to any required approvals from bond insurers. 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 of the portfolio. 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 except for: A. Transactions with money market mutual funds and local government investment pools which are deemed to be made at prevailing market rates. B. Treasury and agency securities purchased as new issues through an approved broker/dealer, financial institution or investment advisor. C. 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. 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 strategy. Page 12 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 X. ARBITRAGE The Tax Reform Act of 1986 provided limitations restricting the City's investing of tax-exempt General Obligation Bond proceeds and debt service income. 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 five 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 competitive bid and evaluation of bids will be based on the following criteria: 1. Qualified as a depository for public funds in accordance with state and local laws. 2. Provided requested information or financial statements for the periods specified. 3. Complied with all requirements in the banking RFP. 4. Completed responses to all required items on the bid form. 5. 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 - 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 150-1 (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: I. Financial condition, strength and capability to fulfill commitments. POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Page 13 of 15 EE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 2. Overall reputation with other broker/dealers or investors. 3. Regulatory status of the broker/dealer. 4. Background and expertise of the individual representatives. 5. Ability to provide additional advisory services. The Investment Committee must annually review 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 cash flow requirements, the formulation of investment strategies, and the execution of security purchases, sales and deliveries. The investment advisory contract with the City 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 City's Investment Policy. Investments shall only be made with those business organizations (including money market mutual funds and local government investment pools) which have provided the City with this written instrument executed by a qualified representative of the firm, acknowledging that the business organization has: I. 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 City's 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. XH. 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 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 Page 14 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE TITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 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 rations, 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: 1. 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. 3. Direct obligations of agencies or instrumentalities of the United States government, including letters of credit. The City will reject adjustable rate mortgages (ARMS), collateralized mortgage obligations CMOs), Step-ups, variable rate 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 receipts clearly detailing that the securities are owned by the City. Safekeeping and custody of collateral shall be in accordance with state law. Collateral will be held by a third party custodian designated by the City, and pledged to the City as evidenced by safekeeping receipts from the institution holding the securities. 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. IOII. MANAGEMENT AND INTERNAL CONTROLS 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. Page 15 of 15 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE FITLE: INVESTMENT POLICY REFERENCE NUMBER: 403.06 Controls and managerial emphasis deemed most important that shall be employed include the following: Imperative Controls Custodian safekeeping receipts records management Avoidance of bearer-form securities Documentation of investment bidding events Written confirmation of telephone transactions Reconcilements and comparisons of security receipts with the investment records Compliance with Investment Policy Verification of all interest income and security purchase and sell computations Controls Where Practical Control of Collusion Separation of duties Separation of transaction authority from 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 Officials Review of financial conditions of all brokers/dealers, and depository institutions Staying informed 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 and reviewed annually in accordance with the provisions of the Public Funds Investment Act of the Texas Government Code Chapter 2256.