HomeMy WebLinkAboutAdopt Resolution No. 2018-06 approving the Fiscal Year 2018/ Dept. ID CT 18-002 Page 1 of 2
Meeting Date:2/5/2018
,
_ CITY OF HUNTINGTON BEACH
REQUEST FOR. CITY COUNCIL ACTION
MEETING DATE: 2/5/2018
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Fred A. Wilson, City Manager
PREPARED BY: Alisa Cutchen, City Treasurer
SUBJECT: Adopt Resolution No. 2018-06 approving the Fiscal Year 2018/2019 Investment
Policy
Statement of Issue: Pursuant to California Government Code, the Treasurer of the local agency
may render an annual statement of investment policy to the legislative body for consideration and
adoption. The City Treasurer, with the assistance of the Investment Advisory Board, has prepared
an updated investment policy.
Financial Impact: Not Applicable.
Recommended Action:
Adopt Resolution No. 2018-06, "A Resolution of the City Council of the City of Huntington Beach,
Approving the Statement of Investment Policy 2018."
Alternative Action(s): Do not approve the attached Resolution and adopt the Investment Policy
and advise staff how to proceed.
Analysis: The City Treasurer is responsible for the administration of the investments of the City of
Huntington Beach. The purpose of the Investment Policy is to establish cash management and
investment guidelines for the investment of the City's unexpended cash balances, which exclude
employee retirement funds, funds governed by bond indenture agreements and other funds
managed separately. This policy shall apply to each investment transaction and the entire portfolio,
which must comply with the California Government Code, Sections 53600 through 53683, and all
other applicable laws and regulations.
The City's Investment Policy may be rendered annually to the City Council to ensure its consistency
with the overall objectives of preservation of principal, liquidity and return. The attached Investment
Policy has been reviewed by the City's Investment Advisory Board and approved as to form by the
City Attorney.
The Investment Policy has been certified by the California Municipal Treasurers Association stating
that it complies with the current State statutes governing the investment practices of local
government entities located within the State of California.
As approved by the City Council on December 18, 2017, the City of Huntington Beach will change
its fiscal reporting year to July 1 through June 30t" beginning July 1, 2018. This change to the fiscal
year will allow the City to prepay the annual Calpers unfunded liability cost in July, resulting in an
annual cost savings of approximately $900,000, rising to over $1,000,000 in subsequent years.
Item 6. - I HB -1 18-
Dept. ID CT 18-002 Page 2 of 2
Meeting Date:2/5/2018
In order that funds for the approximately $24.9 million Calpers prepayment be available in July of
2018, such funds must be invested in a short-term manner. This change to the investment strategy
will provide that an additional 12-14% of the investment portfolio will be invested in opportunities
with a maturity of six months or less in order to match the liability due in July. Consequently, the
Investment Policy benchmark must be adjusted as the investment portfolio will be invested with a
shorter duration to meet the City's liquidity obligations.
Section 17.1 Market Yield (Benchmark) of the City's Investment Policy states:
"The investment portfolio shall be managed to attain a market-average rate of return through
budgetary and economic cycles, taking in to account the City's investment risk constraints and cash
flow." With the liquidity requirements of the Calpers prepayment, the benchmark shall now be the
12-month moving average of the interpolated 1.5-Year Constant Maturity Treasury ("CM7) rate.
This will better match the decreased duration of the investment portfolio going forward due to the
requirement of the Calpers lump sum prepayment on an annual basis.
All other aspects of the Investment Policy remain substantially unchanged.
Environmental Status: Not Applicable
Strategic Plan Goal:
Strengthen economic and financial sustainability
Attachment(s):
1. Resolution No.2018-06 of the City Council of the City of Huntington Beach adopting the
2018 Investment Policy
2. Exhibit A to Resolution No. 2018-06: 2018 Investment Policy
HB -119- Item 6. - 2
RESOLUTION NO. 2018-06
A RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF HUNTINGTON BEACH APPROVING THE
STATEMENT OF INVESTMENT POLICY 2018
WHEREAS, the City Council of the City of Huntington Beach is required to
approve an annual statement of investment policy; and
The duly elected City Treasurer has recommended approval of the City of
Huntington Beach Statement of Investment Policy, attached hereto as Exhibit"A" and
incorporated herein by this reference; and
The duly appointed Investment Advisory Board has reviewed the City Treasurer's
recommended policy and also recommends approval thereof, and
The policy is consistent with California Government Code §53600, et seq.
NOW, THEREFORE, the City Council of the City of Huntington Beach does
hereby resolve as follows:
The City Council of the City of Huntington Beach hereby approves and adopts the
attached City of Huntington Beach Statement of Investment Policy for Fiscal Year
2018/2019 so long as applied in a manner consistent with state and local law as amended
from time to time.
PASSED AND ADOPTED by the City Council of the City of Huntington Beach
at a regular meeting thereof held on the day of \, /j-zUzU,1
2018.
b
Mayor
REVIE WrD PPROVED: APPROVED AS RM.
-7 City anager ity Attorney Am/
TIATED AND ROVED:
City Treasurer
18-6206/172009/mv
CITY OF HUNTINGTON BEACH
STATEMENT OF INVESTMENT POLICY
2018
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HB -121- Ltem 6. - 4
CITY OF HUNTINGTON BEACH
STATEMENT OF INVESTMENT POLICY
2018
TABLE OF CONTENTS
SECTION
1.0 Purpose.....................................................................................................................3
2.0 Policy........................................................................................................................3
3.0 Scope.........................................................................................................................3
4.0 Prudence..................................................................................................................4
5.0 Objective..................................................................................................................4
6.0 Investment Advisory Board...................................................................................5
7.0 Delegation of Authority..........................................................................................5
8.0 Ethics and Conflicts of Interest.............................................................................6
9.0 Authorized Financial Dealers & Institutions .......................................................6
10.0 Authorized & Suitable Investments......................................................................7
1.1.0 Portfolio Adjustment............................................................................................ 13
12.0 Collateralization....................................................................................................1.3
13.0 Safekeeping and Custody..................................................................................... 1.4
14.0 Diversification .......................................................................................................14
15.0 Maximum Maturities............................................................................................ 1.5
16.0 Internal Control.................................................................................................... 15
17.0 Performance Standards........................................................................................ 16
18.0 Reporting............................................................................................................... 17
19.0 Investment Policy Adoption................................................................................ 18
Glossary ................................................................................................................. 19
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CITY OF HUNTINGTON BEACH
Statement of Investment Policy
1.0 Purpose:
This policy is intended to provide guidelines for the prudent investment of the City's
unexpended cash balances, and to outline the policies to assist in maximizing the
efficiency of the City's cash management system while meeting the daily cash flow
demands of the City.
2.0 Policy:
The investment practices and policies of the City of Huntington Beach are based upon
California state law and prudent money management.
3.0 Scope:
This investment policy applies to all financial assets as indicated in Section 3.1 below of
the City of Huntington Beach. These funds are accounted for in the City's
Comprehensive Annual Financial Report.
3.1 Funds:
The City Treasurer is responsible for investing the unexpended cash in the City Treasury
for all funds, except for the employee's pension funds, which are invested separately by
CALPERS, those funds which are invested separately by the City Treasurer under bond
indenture agreements, and funds which are invested separately by the City Treasurer or
trustees under other agreements approved by Council such as the Retiree Medical Trust,
the Post-Employment Section 115 Trust and the Supplemental Pension Trust. The City
Treasurer will strive to maintain the level of investment of this cash (that is not to be
utilized for operating cash flow in the next six months), as close as possible to 100%.
These funds are described in the City's annual financial report and include:
3.1.1 General Fund
3.1.2 Special Revenue Funds
3.1.3 Capital Project Funds
3.1.4 Enterprise Funds
3.1.5 Trust and Agency Funds
3.1.6 Debt Service Funds
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HB -123- Item 6. - 6
3.1.7 Infrastructure Funds
3.1.8 Capital Improvement Reserve Funds
3.1.9 Any new fund created by the legislative body, unless specifically exempted
This investment policy applies to all transactions involving the financial assets and
related activity of the foregoing funds. It is the City's policy to pool funds for investment
purposes to provide efficiencies and economies of scale. Investing through a pooled
account will provide for greater use of funds by allowing for a more efficient cash flow, a
reduction in transaction costs and a greater access to the market.
4.0 Prudence:
The standard of prudence to be used by the City Treasurer shall be the "prudent
investor" standard. This shall be applied in the context of managing an overall portfolio.
The "Prudent Investor Rule" provides, pursuant to California Government Code
Section 53600.3, that investments shall be made with judgment and care—under
circumstances then prevailing—which persons of prudence, discretion and intelligence
exercise in the management of their own affairs, not for speculation, but for investment,
considering the probable safety of their capital as well as the probable income to be
derived. The City Treasurer and any designee of the City Treasurer, as investment
officers acting in accordance with written procedures and the investment policy and
exercising due diligence, shall be relieved of personal responsibility for an individual
security's credit risk or market price changes, provided deviations from expectations are
reported to the City Council in a timely fashion and appropriate action is taken to control
adverse developments.
5.0 Objective:
Consistent with this aim, investments are made under the terms and conditions of
California Government Code Section 53600, et seq. Criteria for selecting investments
and the absolute order of priority are:
5.1 Safety:
Safety of principal is the foremost objective of the investment program. Investments of
the City of Huntington Beach shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio.
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5.2 Liquidity:
The investment portfolio will remain sufficiently liquid to enable the City of Huntington
Beach to meet all reasonably anticipated operating requirements and to maintain
compliance with any indenture agreement, as applicable. Liquidity is essential to the
safety of principal. Furthermore, since all possible cash demands cannot be anticipated,
the portfolio will invest primarily in securities with active secondary and resale markets.
5.3 Return on Investments:
The investment portfolio shall be designed with the objective of attaining a market-
average rate of return throughout budgetary and economic cycles (market interest rates),
within the City of Huntington Beach's investment policy's risk parameters and the cash
flow needs of the City. See also Section 17.0.
6.0 Investment Advisory Board:
By City Charter, the City Treasurer is the custodian of all public funds of the City of
Huntington Beach. The City Council members may each appoint one Huntington Beach
resident to serve on an Investment Advisory Board for the purpose of advising the City
Treasurer and the City Council on the City's investment program. The Investment
Advisory Board will review the investment portfolio for compliance with the adopted
investment policy on a quarterly basis and will prepare an Annual Report.
7.0 Delegation of Authority:
In accordance with the State of California Government Code § 53607, the City Council
delegates investment authority to the City Treasurer for a period of one year and such
investment authority must be renewed annually. Adoption of this policy constitutes
delegation of investment authority to the City Treasurer for the following year unless
revoked in writing. Within the City Treasurer's office, the responsibility for the day to
day investment of City funds will be the City Treasurer and may be delegated to such
deputy chosen by the City Treasurer in the absence of the City Treasurer (as allowable
per State of California Government Code § 41006). The City Treasurer shall be
responsible for all transactions undertaken and shall establish a system of controls to
regulate the activities of subordinate officials.
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HB -1-25- Item 6. - 8
8.0 Ethics and Conflicts of Interest:
In addition to state and local statutes relating to conflicts of interest, all persons 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. Employees and investment officers are required to
file annual disclosure statements as required for "public officials who manage public
investments" (as defined and required by the Political Reform Act and related
regulations, being Government Code Sections 81000 and the Fair Political Practices
Commission (FFPC)).
9.0 Authorized Financial Dealers and Institutions:
The City Treasurer will maintain a list of the financial institutions and broker/dealers
authorized to provide investment and depository services and will perform an amlual
review of the financial condition and registrations of such qualified providers. The City
Treasurer will also require annual audited financial statements to be on file for each
company. The City shall annually send a copy of the current investment policy to all
financial institutions and broker/dealers approved to do business with the City.
As far as feasibly possible, all money belonging to, or in the custody of, a local agency,
including money paid to the City Treasurer or other official to pay the principal, interest,
or penalties of bonds, shall be deposited for safekeeping in national or state chartered
banks, savings associations, federal associations, credit unions, or federally insured
industrial loan companies in this state selected by the City Treasurer or other official
having legal custody of the money; or may be invested in the investments set forth in
Section 10.0. To be eligible to receive local agency money, a bank, savings association,
federal association, or federally insured industrial loan company shall have received an
overall rating of not less than "satisfactory" in its most recent evaluation by the
appropriate federal financial supervisory agency of its record of meeting the credit needs
of California's communities, including low- and moderate-income neighborhoods.
In order to be approved by the City, the dealer must be a "primary" dealer or regional
dealer that qualifies under Securities and Exchange Commission Rule 15C3-1 (Uniform
Net Capitol Rule). The institution must have an office in California. The dealer must be
experienced in institutional and public fund trading practices and familiar with the
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Item 6. - 9 HB -126-
California Government Code as related to investments appropriate for the City; and, other
criteria as may be established in the investment procedures. All broker/dealers and
financial institutions who desire to become qualified bidders for investment transactions
must submit a "Broker/Dealer Application" and related documents relative to eligibility
including a current audited annual financial statement, U4 form for the broker, proof of
state registration, proof of Financial Industry Regulatory Authority, Inc. ("FINRA")
certification and a certification of having read and understood the City's investment
policy and agreeing to comply with the policy. Capital requirements for registered
government securities brokers and dealers shall meet or exceed the requirements as set
forth by the Securities and Exchange Commission Rule 15C3-1 (Uniform Net Capitol
Rule). Such companies shall also have a minimum of five years of operation.
10.0 Authorized and Suitable Investments:
The City is authorized by California Government Code Section 53600, et. seq. to invest
in specific types of securities. Investments not specifically listed below are deemed
inappropriate and are prohibited:
A. BANKERS ACCEPTANCES, maximum 25% of portfolio (up to 40% with
City Council approval). Maximum term of 180 days.
Banks must have a short term rating of at least Al/Pl and a long-term rating of"A" or higher as
provided by a nationally recognized statistical rating organization ("NRSRO"). No more than 10
percent of the agency's money may be invested in the bankers acceptances of any one commercial
bank pursuant to this section.
B. NEGOTIABLE CERTIFICATES OF DEPOSIT, maximum 30% of portfolio.
Maximum term of 3 years (up to 5 years with City Council approval).
May be issued by a nationally or state-chartered bank, a savings association or a federal
association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or
by a federally-licensed or state-licensed branch of a foreign bank. tssuer must have a short term
rating of Al/P I and a long term rating of"A"or higher as provided by an NRSRO. No more than
10 percent of the agency's money may be invested in negotiable certificates of deposit of any one
issuer.
C. COMMERCIAL PAPER, maximum 25% of portfolio. Maximum term of
270 days.
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HB -127- Item 6. - 10
Commercial paper must be of"prime" quality of the highest ranking or of the highest letter and
number rating as provided by an NRSRO. The entity that issues the commercial paper shall meet
all of the following conditions in either paragraph(1)or paragraph(2):
(l)The entity meets the following criteria:
(A)Is organized and operating in the United States as a general corporation.
(B)Has total assets in excess of five hundred million dollars(S500,000,000).
(C)Has debt other than commercial paper, if any,that is rated "A" or higher by an NRSRO.
(2)The entity meets the following criteria:
(A) Is organized within the United States as a special purpose corporation, trust, or limited
liability company.
(B) Has program-wide credit enhancements including, but not limited to,
overcollateralization, letters of credit, or surety bond.
(C)Has commercial paper that is rated "A-'I" or higher, or the equivalent, by an NRSRO.
Split ratings (i.e. A2/P1) are not allowable. No more than 10 percent of the outstanding
commercial paper of any single corporate issue may be purchased.
No more than 10 percent of the agency's money may be invested in Commercial Paper of any one
issuer.
D. BONDS ISSUED BY THE STATE OF CALIFORNIA OR ANY OF THE
OTHER 49 UNITED STATES. Maximum term of 5 years.
Bonds must have an"A" rating or higher by an NRSRO. No more than 10 percent of the agency's
money may be invested in state bonds of any one issuer.
E. BONDS ISSUED BY THE CITY OR ANY LOCAL AGENCY WITHIN
THE STATE OF CALIFORNIA. Maximum term of 5 years.
Bonds must have an "A"rating or higher by an NRSRO. No more than 10 percent of the agency's
money may be invested in city or local agency bonds of any one issuer.
F. OBLIGATIONS OF THE UNITED STATES TREASURY. Maximum term
of 5 years.
United States Treasury bills, bonds and notes or certificates of indebtedness, for which the faith
and credit of the United States are pledged for the payment of principal and interest. There is no
limit on the percentage of the portfolio that can be invested in this category.
G. U.S. GOVERNMENT AGENCY SECURITIES (FEDERAL AGENCIES).
Maximum term of 5 years.
Obligations, participations or other instruments of or issued by a federal agency or a United States
government-sponsored enterprise. There is no limit on the percentage of the portfolio that can be
invested in this category.
H. REPURCHASE AGREEMENT. Maximum term of 3 months.
Investments in repurchase agreements may be made, on any investment authorized in this section,
when the term of the agreement does not,exceed 3 months.
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Item 6. - I I HB -128-
A Master Repurchase Agreement must be signed with the bank or broker/dealer who is selling the
securities to the City.
I. REVERSE-REPURCHASE AGREEMENTS. (Requires City Council
approval for each transaction).
Reverse repurchase agreements or securities lending agreements may be utilized only when all of
the following conditions are met:
(A) The security to be sold on reverse repurchase agreement or securities lending agreement has
been owned and fully paid for by the local agency for a minimum of 30 days prior to sale.
(B) The total of all reverse repurchase agreements and securities lending agreements on
investments owned by the local agency does not exceed 20 percent of the base value of the
portfolio.
(C) The agreement does not exceed a term of 92 days, unless the agreement includes a written
codicil guaranteeing a minimum earning or spread for the entire period between the sale of a
security using a reverse repurchase agreement or securities lending agreement and the final
maturity date of the same security.
(D) Funds obtained, or funds within the pool of an equivalent amount to that obtained from
selling a security to a counterparty(by way of a reverse repurchase agreement or securities lending
agreement), shall not be used to purchase another security with a maturity longer than 92 days
from the initial settlement date of the reverse repurchase agreement or securities lending
agreement, unless the reverse repurchase agreement or securities lending agreement includes a
written codicil guaranteeing a minimum earning or spread for the entire period between the sale of
a security using a reverse repurchase agreement or securities lending agreement and the final
maturity date of the same security.
Investments in reverse repurchase agreements, securities lending agreements, or similar
investments in which the local agency sells securities prior to purchase with a simultaneous
agreement to repurchase the security, shall only be made with primary dealers of the Federal
Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a
significant banking relationship with a local agency.
(A) For purposes of this chapter, "significant banking relationship" means any of the following
activities of a bank:
(i)Involvement in the creation, sale, purchase, or retirement of a local agency's bonds, warrants,
notes, or other evidence of indebtedness.
(ii) Financing of a local agency's activities.
(iii) Acceptance of a local agency's securities or funds as deposits.
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KB -1219- Item 6. - 12
J. MEDIUM-TERM CORPORATE NOTES, maximum 30% of portfolio with a
maximum remaining maturity of 5 years or less.
Notes eligible for investment must be rated "A" or higher by an NRSRO. No more than 10
percent of the agency's money may be invested in medium-term corporate notes of any one issuer.
K. TIME DEPOSITS-CERTIFICATES OF DEPOSIT (non-negotiable
certificates of deposit). Maximum term of 3 years.
Deposits must be made with banks or savings & loan that have a short term rating of Al/PI or a
long-term rating of at least an"A"rating or higher by an NRSRO. No more than 10 percent of the
agency's money may be invested in time-deposits of any one issuer
L. MONEY MARKET FUNDS, maximum 15% of portfolio.
No more than 10 percent of the agency's surplus funds may be invested in shares of beneficial
interest of any one Money Market fund. Local agencies may invest in "shares of beneficial
interest" issued by diversified management companies which invest only in direct obligations in
U.S. Treasury bills, notes and bonds, U.S. Government Agencies and repurchase agreements with
a weighted average of 60 days or less. They must have the highest rating from at least two
NRSROs, must maintain a daily principal per share value of$1.00 per share and distribute interest
monthly, and must have a minimum of$500 million in assets under management. The purchase
price of the shares may not include commission.
M. THE LOCAL AGENCY INVESTMENT FUND (LAIF)
LAIF is a special fund of the California State Treasury through which any local government may
pool investments. The City may invest up to the maximum allowable by the State Treasurer's
Office (currently $65,000,000). Investments in LAIF are highly liquid and may be converted to
cash within 24 hours.
N. Shares of beneficial interest issued by a joint powers authority organized pursuant to Section
6509.7 that invests in the securities and obligations authorized in subdivisions(a)to(q), inclusive.
Each share shall represent an equal proportional interest in the underlying pool of securities owned
by the joint powers authority. The City may invest up to $20,000,000 per joint powers authority.
To be eligible under this section, the joint powers authority issuing the shares shall have retained
an investment adviser that meets all of the following criteria:
(1)The adviser is registered or exempt from registration with the Securities and Exchange
Commission.
(2)The adviser has not less than live years of experience investing in the securities and obligations
authorized in subdivisions(a) to(q), inclusive.
(3)The adviser has assets under management in excess of five hundred million dollars
($500,000,000).
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O. United States dollar denominated senior unsecured unsubordinated obligations issued or
unconditionally guaranteed by the International Bank for Reconstruction and Development
(IBRD), International Finance Corporation (IFC), or biter-American Development Bank (IDB),
with a maximum remaining maturity of five years or less,and eligible for purchase and sale within
the United States, Investments under this subdivision shall be rated "AA" or better by an NRSRO
and shall not exceed 10 percent of the agency's moneys that may be invested pursuant to this
section,
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HB -13 1- Item 6. - 14
MAXIMUM SPECIFIED MINIMUM QUALITY
INVESTMENT TYPE MAXIMUM MATURITY %OF PORTFOLIO/ REQUIREMENTS
MAXIMUM PER ISSUER
Bankers'Acceptances 180 days 25%(up to 40%with Al/P1, "A" Rating
Council approval)/10%
Negotiable Certificates of 3 years(Up to 5 years
Deposit with Council approval) 30%/10% Al/P1, "A" Rating
Commercial Paper 270 days 25%/10% A10"A" Rating
State Obligations--CA And
5 years None/10% "A" Rating
Others
City/Local Agency of CA 5 years None/10/ "A" Rating
Obligations
U.S.Treasury Obligations 5 years None None
U.S. Government Agency
5 years None None
Obligations
IBRD, IFC, IDB 5 years 10% "AA" Rating
Repurchase Agreements 3 Months None None
Reverse Repurchase 20%of the base value
Agreements 92 days of portfolio. Requires None
City Council Approval
Medium-Term Corporate
5 years 30%/10% "A" Rating
Notes
Non-negotiable Certificates
3 years None/10% Al/P1, "A" Rating
of Deposit
Money Market Mutual " "
60 days 15//10/ "AAA' Rating
Funds
Local Agency Investment N/A Up to$65,000,000 None
Fund (LAIF)
Joint Powers Authority N/A None/$20,000,000 See 10.ON above
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Item 6. - 15 HB -132-
10.1 Investment Pools/Money Market funds:
The City Treasurer or designee shall be required to investigate all local government
investment pools and money market mutual funds prior to investing and performing at
least a quarterly review thereafter while the City is invested in the pool or the money
market fund. LALF is authorized under provisions in Section 16429.1 of the California
Government Code as an allowable investment for local agencies even though some of the
individual investments of the pool are not allowed as a direct investment by a local
agency.
11.0 Portfolio Adjustments:
California government code section 53601 states that if a percentage limitation for a
particular category of investment is specified, then that percentage is applicable only at
the date of purchase. Should any investment listed in section 10.0 exceed a percentage-
of-portfolio limitation or a percentage-by-issuer limitation due to an incident such as
fluctuation in portfolio size, the affected securities may be held to maturity to avoid
losses. When no loss is indicated, the Treasurer may consider reconstructing the
portfolio basing his/her decision on the expected length of time the portfolio will be
unbalanced. As well, the credit criteria listed herein refers to the credit rating at the time
the security is purchased. if a security held in the portfolio is downgraded by an NRSRO
to a level below the quality required by this investment policy, the City Treasurer will
review the credit and make a determination as to whether to sell or retain such security.
The City Treasurer will review the portfolio for such compliance no less than quarterly.
12.0 Collateralization:
Under provisions of the California Government Code, California banks, and other
depository institutions are required to secure the City's deposits by pledging government
securities with a value of 110 % of principal and accrued interest. California law also
allows financial institutions to secure City deposits by pledging first trust deed mortgage
notes having a value of 150% of City's total deposits. Collateral will always be held by
an independent third party. A clearly marked evidence of ownership (safekeeping
receipt) must be supplied to the City and retained. The market value of securities that
underlay a repurchase agreement shall be valued at 102 percent or greater of the funds
borrowed against those securities and the value shall be adjusted no less than quarterly.
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HB -133- Item 6. 16
Since the market value of the underlying securities is subject to daily market fluctuations,
the investments in repurchase agreements shall be in compliance if the value of the
underlying securities is brought back up to 102 percent no later than the next business
day. The City Treasurer, at his/her discretion, may waive the collateral requirement for
deposits that are fully insured (current limit is $250,000) by the Federal Deposit
Insurance Corporation. The right of collateral substitution is granted. The City Treasurer
or designee shall ensure that all demand deposits that exceed the FDIC limit (currently
$250,000) shall be fully collateralized with securities authorized under state law and this
Investment Policy.
13.0 Safekeeping and Custody:
All City investments shall have the City of Huntington Beach as its registered owner, and
all interest and principal payments and withdrawals shall indicate the City of Huntington
Beach as the payee. All securities will be held with a qualified financial institution,
contracted by the City as a third party custodian with a separate custodial agreement
(does not apply to insured Certificates of Deposit, money market funds, or the Local
Agency Investment Fund). All agreements and statements will be subject to review
annually by external auditors in conjunction with their audit. All securities shall be
acquired by the safekeeping institution on a "Delivery-Vs-Payment" (DVP) basis. For
Repurchase Agreements, the purchase may be delivered by book entry, physical delivery
or by third-party custodial agreement consistent with the Government Code. The transfer
of securities to the counterparty bank's customer book entry account may be used for
book entry delivery. The City Treasurer or designee shall require a Broker Trade
confirmation for all trades.
14.0 Diversification:
The City's investment portfolio will be diversified to mitigate incurring unreasonable and
avoidable risks associated with concentrating investments in specific security types,
maturity segment, or in individual financial institutions.
A. Credit risk, defined as the risk of loss due to failure of the insurer of a security, shall
be mitigated by investing in those securities with an "A" or above rating and
approved in the investment policy and by diversifying the investment portfolio so that
the failure of any one issuer would not unduly harm the City's cash flow.
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Item 6. - 17 HB -134-
B. Market risk, defined as the risk of market value fluctuations due to overall changes
in the general level of interest rates, shall be mitigated by structuring the portfolio so
that securities mature as much as possible in conjunction with major cash outflows,
thus minimizing the need to sell securities prior to their maturity. It is explicitly
recognized herein, however, that in a diversified portfolio, occasional measured
losses are inevitable and must be considered within the context of overall investment
return. The City's investment portfolio will remain sufficiently liquid to enable the
City to meet all operating requirements which might be reasonably anticipated.
15.0 Maximum Maturities:
To the extent possible, the City of Huntington Beach will attempt to match its
investments with anticipated cash flow requirements. Unless matched to a specific cash
flow, the City will not directly invest in securities maturing more than five (5) years from
the date of purchase, unless the legislative body has granted express authority to make
that investment either specifically, or as a part of an investment program approved by the
City Council. The City of Huntington Beach shall not permit more than 50% of its
investment portfolio to be invested in securities with maturities over four years.
16.0 Internal Control:
The City Treasurer and the Finance Department shall establish a system of internal
controls designed to prevent loss of public funds due to fraud, employee error,
misrepresentation by third parties, or unanticipated market changes. No investment
personnel may engage in an investment transaction except as provided for under the
teens of this policy and the procedure established by the City Treasurer. The external
auditors shall annually review the investments with respect to the investment policy.
This review will provide internal control by assuring compliance with policies and
procedures for the investments that are selected for testing. Additionally, account
reconciliation and verification of general ledger balances relating to the purchasing or
maturing of investments and allocation of interest on investments to fund balances shall
be perforined by the Finance Department and approved by the City Treasurer. To
provide further protection of City funds, written procedures prohibit the wiring of any
City funds without the authorization of at least two of the four designated City officials:
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HB -135- Item 6. - 18
1. City Treasurer
2. Treasury Manager
3. Chief Financial Officer
4. Accounting Manager
17.0 Performance Standards:
This investment policy shall be reviewed at least annually by the Investment Advisory
Board and the City Council to ensure its consistency with the overall objectives of
preservation of principal, liquidity, and return, and its relevance to current law and
financial and economic trends. The moneys entrusted to the City Treasurer will be
primarily a passively managed portfolio. However, the City Treasurer will make best
efforts to observe, review, and react to changing conditions that affect the portfolio.
17.1 Market Yield (Benchmark):
The investment portfolio shall be managed to attain a market-average rate of return
throughout budgetary and economic cycles, taking into account the City's investment risk
constraints and cash flow. Investment return becomes a consideration only after the basic
requirements of investment safety and liquidity have been met. Because the investment
portfolio is designed to operate on primarily a `hold-to-maturity' premise, and because of
the safety, liquidity, and yield priorities, the performance benchmark that will be used by
the Treasurer to detennine whether market yields are being achieved shall be the 12-
month moving average of the interpolated 1.5-Year Constant Maturity Treasury (CMT)
rate. This interpolated rate shall be utilized in order to best match the average duration of
the portfolio. However, since return on investment is the least important objective of the
investment portfolio, the benchmark will be used only as a reference tool. The reporting
of a benchmark does not imply that the City Treasurer will add additional risk to the
investment portfolio in order to attain or exceed the benchmark. The prohibition of
highly speculative investments precludes pursuit of gain or profit through unusual risk
and precludes investments primarily directed at gains or profits from conjectural
fluctuations in market prices. The City Treasurer will not directly pursue any
investments that are leveraged or deemed derivative in nature. However, as long as the
original investments can be justified by their ordinary earning power, trading in response
to changes in market value can be used as part of ongoing portfolio management.
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Item 6. - 19 HB -136-
18.0 Reporting:
The City Treasurer shall submit a quarterly report to the City Council, City Manager,
Chief Financial Officer and the Investment Advisory Board within 30 days following the
end of the quarter. This report will include the following elements pursuant to State law
and Government Accounting Standard Board (GASB) #40:
18.1 Type of investment
18.2. Institution/Issuer
1.8.3 Purchase Date
18.4 Date of maturity
18.5 Amount of deposit or cost of the investment
18.6 Face value of the investment
18.7 Current market value of securities and source of valuation
18.8 Rate of interest
18.9 Interest earnings
18.10 Statement relating the report to its compliance with the Statement of Investment
Policy or the manner in which the portfolio is not in compliance
18.11 Statement on availability of funds to meet the next six month's obligations
18.12 Monthly and Year to date City Treasurer Budget Amounts for Interest Income
18.13 Percentage of Portfolio by Investment Type
18.14 Days to Maturity for all Investments
18.15 Comparative report on Monthly Investment Balances & Interest Yields
18.16 Monthly transactions
This quarterly report shall be placed on the City Council Agenda for Council and public
review. In addition, a commentary on capital markets and economic conditions may be
included with the report. The City Treasurer shall submit to the City Council, City
Manager and Chief Financial Officer a monthly report listing the above stated (18.1 —
18.1.6) financial transactions.
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HB -137- Item 6. - 20
19.0 Investment Policy Adoption:
By virtue of a resolution of the City Council of the City of Huntington Beach, the
Council shall acknowledge the receipt and filing of this annual statement of investment
policy for the respective year.
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Item 6. - 21 HB -138-
GLOSSARY
AGENCIES: Federal agency securities.
ASKED: Theprice at: which securities are offered. (The price at which a firm will sell a
security to an investor.)
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or
trust company. The accepting institution guarantees payment of the bill, as well as the
issuer. The drafts are drawn on a bank by an exporter or importer to obtain funds to pay
for specific merchandise. An acceptance is a high grade negotiable instrument.
BASIS POINT: One one-hundredth of a percent (i.e. 0.01%)
BENCHMARK: A comparative base for measuring the performance or risk tolerance of
the investment portfolio. A benchmark should represent a close correlation to the level of
risk and the average duration of the porfolio's investments.
BID: The price offered by a buyer of securities. (When you are selling securities, you
ask for a bid.)
BROKER: A broker brings buyers and sellers together for a commission. He/she does
not take a position.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity
evidenced by a certificate. Large-denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property, which a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank. to
secure deposits of public monies.
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HB -139- Item 6. - 22
COMMERCIAL PAPER: Short term unsecured promissory note issued by a
corporation (including limited liability companies) to raise working capital. These
negotiable instruments are purchased at a discount to par value or at par value with
interest bearing. Commercial paper is issued by corporations such as General Motors
Acceptance Corporation, IBM, Bank of America, etc.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
report for the City. It includes combined statements for each individual fund and account
group prepared in confonnity with Generally Accepted Accounting Principles. It also
includes supporting schedules necessary to demonstrate compliance with finance-related
legal and contractual provisions, extensive introductory material and a detailed Statistical
section.
COUPON: a) The annual rate of interest that a bond's issuer promises to pay the
bondholder on the bond's face value. b) A certificate attached to a bond evidencing
interest due on a payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions;
buying and selling for his/her own account.
DEBENTURE: An unsecured bond backed only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities:
delivery versus payment and delivery versus receipt. Delivery versus payment is delivery
of securities with an exchange of money for the securities. Delivery versus receipt is
delivery of securities with an exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived
from, the movement of one or more underlying index or security, and may include a
leveraging factor, or (2) financial contracts based upon notional amounts whose value is
20
Item 6. - 23 HB -140-
derived from an underlying index or security (interest rates, foreign exchange rates,
equities or commodities).
DISCOUNT: The difference between the cost price of a security and its maturity when
quoted at lower than face value. A security selling below original offering price shortly
after sale is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are
issued at a discount and redeemed at maturity for full face value (e.g. US Treasury Bills).
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to
supply credit to various classes of institutions (e.g. S&L's, Small business firms,
students, farmers, farm cooperatives, and exporters).
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal agency
that insures bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This
rate is currently pegged by the Federal Reserve though open-market operations.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members
of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents.
The President of the New York Federal Reserve Bank is a permanent member, while the
other presidents serve on a rotating basis. The committee periodically meets to set
Federal Reserve guidelines regarding purchases and sales of Government Securities in
the open market as a means of influencing the volume of bank credit and money.
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HB -141- Item 6. - 24
FEDERAL RESERVE SYSTEM: The central bank of the United States created by
congress and consisting of a seven-member Board of Governors in Washington, D.C.; 12
regional banks and approximately 38 percent of the 8,039 commercial banks in the
United States are members of the Federal Reserve System. National banks must be
members; state-chartered banks may join if they meet certain requirements.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash
without a substantial loss of value. In the money market, a security is said to be liquid if
the spread between bid and asked prices is narrow and a reasonable size can be done at
those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds
from political subdivisions that are placed in the custody of the State Treasurer for
investment and reinvestment.
MARKET VALUE: The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase-reverse agreements that establish each
party's rights in the transactions. A master agreement will often specify, among other
things, the right of the buyer-lender to liquidate the underlying securities in the event of
default by the seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment
becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (bills,
commercial paper, bankers' acceptances, etc.) are issued and traded.
22
Item 6. - 25 HB -142-
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION
("NRSRO"): Finns that review and assess the creditworthiness of an obligor as an entity
or with respect to specific securities or money market instruments and express their
opinion in the form of a letter rating. A credit rating agency may apply to the SEC for
registration as a nationally recognized statistical rating organization ("NRSRO"). The
primary rating agencies are Standard & Poor's Corporation, Moody's Investor Services,
Inc. and Fitch, Inc.
NEGOTIABLE CERTIFICATES OF DEPOSIT: Unsecured obligations of the
financial institution, bank or savings and loan, bought at par value with the promise to
pay face value plus accrued interest at maturity. They are high-grade negotiable
instruments, paying a higher interest rate than regular certificates of deposit.
OFFER: The price asked by a seller of securities. (When you are buying securities, you
ask for an offer.) See "Asked" and "Bid".
OPEN MARKET OPERATIONS: Purchases and sales of government and certain
other securities in the open market by the New York Federal Reserve Bank as directed by
the FOMC in order to influence the volume of money and credit in the economy,
Purchases inject reserves into the bank system and stimulate growth of money and credit:
Sales have the opposite effect. Open market operations are the Federal Reserve's most
important and most flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily
reports of market activity and positions and monthly financial statements to the Federal
Reserve Bank of New York and are subject to its informal oversight. Primary dealers
include Securities and Exchange Commission (SEC)-registered securities broker/dealers,
banks and a few unregulated firms.
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HB -143- Item 6. - 26
PRUDENT PERSON RULE: An investment standard. In some states, the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected by
the custody state—the so-called "legal list". In other states, the trustee may invest in a
security if it is one that would be bought by a prudent person of discretion and
intelligence who is seeking a reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes under
the laws of this state, which has segregated for the benefit of the commission eligible
collateral having a value of not less than its maximum liability and which has been
approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity; on a bond, the
current income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed date. The
security "buyer" in effect lends the "seller" money for the period of the agreement, and
the terms of the agreement are structured to compensate him for this.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults for
protection.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHL.B,
FNMA, FHLMC, etc.) and Corporations, which have imbedded option (e.g. call features,
step-up coupons, floating rate coupons, derivative-based returns) into their debt structure.
Their market performance is impacted by the fluctuation of interest rates, the volatility of
the imbedded options and shifts in the shape of the yield curve.
24
Item 6. - 27 H B -144-
SECONDARY MARKET: A market made for the purchase and sale of outstanding
issues following the initial distribution.
SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to
protect investors in securities transactions by administering securities legislation.
SEC RULE 15C3-1: See "Uniform Net Capital Rule".
SMALL BUSINESS ADMINISTRATION (SBA): The portion of these securities
which are guaranteed by Federal government to provide financial assistance through
direct loans and loan guarantees to small businesses. Cash flows from these instruments
may not be in equal installments because of prepayments.
SUPRANATIONAL SECURITIES: United States dollar denominated senior unsecured
unsubordinated obligations issued or unconditionally guaranteed by the International
Bank for Reconstruction and Development (IBRD), International Finance Corporation
(I.FC), or ,Inter-American Development Bank (IDB), with a maximum remaining maturity
of five years or less, and eligible for purchase and sale within the United States.
Investments under this subdivision shall be rated "AA" or better by an NRS RO and shall
not exceed 10 percent of the agency's moneys that may be invested pursuant to this
section.
TREASURY BILLS: A non-interest bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to mature in three months, six
months, or one year.
TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of
more than 10 years.
TREASURY NOTES: Intermediate-term coupon bearing U.S. Treasury having initial
maturities of from one year to ten years.
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HB -1 45- Item 6. - 28
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission
requirement that member firms as well as nonmember broker/dealers in securities
maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net
capital rule and net capital ratio. Indebtedness covers all money owed to a firm,
including margin loans and commitments to purchase securities, one reason new public
issues are spread among members of underwriting syndicates. Liquid capital includes
cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
(a) Income Yield is obtained by dividing the current dollar income by the current market
price for the security. (b) Net Yield or Yield to .Maturity is the current income yield
minus any premium above par or plus any discount from par in purchase price, with the
adjustment spread over the period from the date of purchase to the date of maturity of the
bond.
26
Item 6. - 29 HB -t 46-
Res. No. 2018-06
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH )
I, ROBIN ESTANISLAU the duly elected, qualified City Clerk of the
City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do
hereby certify that the whole number of members of the City Council of the City of
Huntington Beach is seven; that the foregoing resolution was passed and adopted
by the affirmative vote of at least a majority of all the members of said City Council
at a Regular meeting thereof held on February 5, 2018 by the following vote:
AYES: O'Connell, Semeta, Peterson, Posey, Delgleize, Hardy, Brenden
NOES: None
ABSENT: None
RECUSE: None
City Clerk and ex-officio Clerk of the
City Council of the City of
Huntington Beach, California