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HomeMy WebLinkAboutFY 2006/2007 STATEMENT OF INVESTMENT POLICY - ADOPT RES. 200 Council/Agency Meeting Held: �' o20a6 Deferred/Continued to: VApproved ❑ Conditionally Approved ❑ Denied Ci ler ' Sign re Council Meeting Date: 12/18/2006 Departme D Number: CT07-02 CITY OF HUNTINGTON BEACH REQUEST FOR CITY COUNCIUREDEVELOPMENT AGENCY ACTION SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS SUBMITTED BY: SHARI L. FREIDENRICH, CITY TREASU 44:::�* PREPARED BY: SHARI L. FREIDENRICH, CITY TREASU2f!!56 SUBJECT: APPROVE AND ADOPT THE 2006/2007 INVESTMENT POLICY [jEatem:,:n:t:of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachments) Statement of issue: Pursuant to California Government Code, the Treasurer of the local agency shall render an annual statement of investment policy to the_ legislative body for acceptance. The City Treasurer,with the assistance of the Investment Advisory Board, has prepared an updated investment policy. of &V44.U7)0 N Funding Source: Not applicable Aa&A'- IT e5. 36S City Council Recommended Action: Motion to approve and adopt the attached Resolution of the City Council of the City of Huntington Beach, approving the 2006/2007 Investment Policy. Redevelopment Agency Recommended Action: Motion to approve and adopt the attached Resolution of the Redevelopment Agency of the City of Huntington Beach, approving the 2006/2007 Investment Policy. Alternative Action(s): Do not approve attached Resolution and Investment Policy and advise staff how to proceed. Analysis: The City Treasurer is required to annually obtain approval of the City's Investment Policy prior to the last day of the first quarter of each fiscal year (December 31,,2006). The attached investment Policy has been reviewed by the City's Investment Advisory Board and approved by the City Attorney to be in compliance with the Government Code Section 53601. Environmental Status: Not Applicable (2 _ 3 REQUEST FOR ACTION MEETING DATE: DEPARTMENT ID NUMBER: CT07-02 1 /18/2006_ Attachment(s): City Clerk's Page Number No. Description 1. Resolution of the City Council of the City of 'Huntington Beach approving the 2006/2007 Investment Policy No. Res . #2 0 0 6-8 0 2. Resolution of the Redevelopment Agency of the City of Huntington Beach approving the 2006/2007 Investment Policy No.-Res . #3 6 3. 2006/2007 Investment Policy Power Point Presentation G:\Kati\RCA\RCA FY 06-07\07-02 FY 06-07 Investment Policy.doc -2- 12/4/2006 5:05 PM ATTACHMENT # 1 RESOLUTION NO. 2 0 0 6-8 0 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH APPROVING THE STATEMENT OF INVESTMENT POLICY FOR 2006/2007 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 hereby approves and adopts the attached City of Huntington Beach Statement of Investment Policy for Fiscal Year 2006/2007 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 18 t h day of December 200 6 Mayo REVIEWED AND APPROVED: APPROVED AS TO FORM: Citl Administrator City A orney - la-)-tc INITIATED AND APPROVED: C ty Tr s rer 06-698/6025 Resolution No. 2006-80 Exhibit"A" CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY FISCAL YEAR 2006/2007 TABLE OF CONTENTS SECTION 1.0 Purpose.. . ........ ....... . ......... ......... ......... . ........ ......... ........ ......... ....... . ...........2 2.0 Policy. ... ....... .. ................. ......... .......... ...... . ......... ......... ......... ......... ..........2 3.0 Scope...... ......... .......... ........ ......... .................. . ......... ........ ........ .......... ..........2 4.0 Prudence ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ...........3 5.0 Objective .......... ........ ......... ....... . ......... .................. ......... ......... ......... ...........3 6.0 Investment Advisory Board......... ............ .....: ......... ......... ......... ......... ...........4 7.0 Delegation of Authority...... ......... ......... .................. ....... ..., ......... ......... ...........4 8.0 Ethics and Conflicts of Interest.. . ..... ... ......... ......... .......... ...... .. ........ ...........5 9.0 Authorized Financial Dealers &Institutions. ......... . ......... ........ ......... ...........5 10.0 Authorized &Suitable Investments....... ......... ......... ......... ......... ......... ...........6 11.0 Portfolio Adjustment .......... ........ ......... ......... ......... ......... ......... ......... ........ ..9 12.0 Collateralization........... ...... .......:. ......... .......:. ......... ......... ......... ......... .........10 13.0 Safekeeping and Custody... ......... .......... .......: ......... ......... ......... ......... .........10 14.0 Diversification. ........: ......... ......... ......... ......... ......... ......... ..... ... .......... ........11 15.0 Maximum Maturities ......... ......... ......... .......... . ....... ........... ....... ........ ........ 11 16.0 Internal Control........ ......... ......... ......... ......... ........... ....... ......... ......... .........12 17.0 Performance Standards....... ......... ......... ......... ......... ......... ..... ... .......... ........12 18.0 Reporting......... ........ ......... ......... ......... ....... . ......... ......... .......... ....... ........ 13 19.0 Investment Policy Adoption.. ....... ......... ......... ......... ......... ........: .......... ........14 Glossary. ......... ......... ......... ......... ......... ......... ........ ......... ......... ................ 15 Appendix A—Investment Guidelines................. ..................................i 0607 investment policy l Resolution No. .2006-80 Exhibit"A" 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 cash balances, and outline the policies to assist 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 state law and prudent money management. The primary goals of these practices are: A. To assure compliance with all Federal, State,and local laws governing the investment of public funds under the control of the City Treasurer. B. To protect the principal moneys entrusted to this office. C. Achieve a reasonable rate of return within the "parameters of prudent risk management while minimizing the potential for capital losses arising from market changes or issuer default. 3.0 Scope: This investment policy applies to all financial assets as indicated in 3.1 below of the City of Huntington Beach. These funds are accounted for in the city's Comprehensive Annual Financial Report and include: 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 retirement funds, which are administered separately and those funds which are managed separately by trustees appointed under indenture agreements. The City'Treasurer will strive to maintain the level of investment of this cash 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 0607 investment policy 2 Resolution No.>2006-80 Exhibit«A" 3.1.5 Trust and Agency Funds 3.1.6 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. 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. 4.1 The City Treasurer and the Deputy 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. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio 0607 investment policy 3 Resolution No. 2006=80 Exhibit«A„ 5.2 Liquidity: The City of Huntington's Beach's investment portfolio will remain sufficiently liquid to enable the City of Huntington Beach to meet all operating requirements which might be reasonably anticipated 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 City of Huntington Beach's 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 may appoint "Huntington Beach residents, professional, and non professional people, to serve on an Investment Advisory Board for the purpose of advising the City Treasurer on the City's investment program and at least quarterly, review the investment portfolio for compliance with the adopted investment policy. Exceptions: Items in the Investment Policy that require City Council approval will first`be reviewed by the Investment Advisory Board. 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 the City fiends will be the City Treasurer and is delegated to the Deputy . City Treasurer in the absence of the City Treasurer. The City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 0607 investment policy 4 Resolution No. 2006-80 Exhibit`"A„ 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)). 90 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 annual review of the financial condition and registrations of qualified bidders and require annual audited financial statements to be on file for each company. The City will utilize Moody's Securities, Sheshunoff bank and savings and loan ratings, or other such services to determine financially sound institutions with which to do business. 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 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 state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in this state selected`by the City Treasurer; 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. To provide for the optimum yield in the investment of city funds, the city's investment procedures shall encourage competitive bidding on transactions from approved 0607 investment policy 5 Resolution No. 2006-80 Exhibit"A" brokers/dealers. 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 trading practices and familiar with the 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 National Association of Securities Dealers certification and a certification of having read and understood the City's investment policy and agreeing to comply with the policy. The City Treasurer shall determine if they are adequately capitalized (ie. minimum capital requirements of $10,000,000 and five years of operation). 10.0 Authorized & Suitable Investments: The City is authorized by California Government Code Section 53600, et. seq. to invest specific types of securities. Investments not specifically listed below are deemed inappropriate and prohibited: A. BANKERS ACCEPTANCES,maximum 25% of portfolio(up to 40% with Council approval). Maximum term 180 days. Banks must have a short term rating of at least Al/P1 and a long-term rating of A or higher as provided by Moody's Investors Service or Standard and Poor's Corp. No more than 30 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 three(3)years,(Up to five=(5)years with Council approval). Banks must have a short term rating of Al/PI and a long term rating of at least a single A from a nationally recognized authority on ratings. C. COMMERCIAL PAPER, maximum 25% of portfolio. Maximum term 270 days. Commercial paper of"prime"quality of the highest ranking or of the highest letter and number rating as provided for by nationally recognized statistical-rating organization+(NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph(1)or paragraph(2): (1)The entity meets the following criteria: 0607 investment policy 6 Resolution No. 2006-80 Exhibit«A» (A)Is organized and operating in the United States as a general corporation. (B)Has total assets in excess of five hundred million dollars($500,000,000). (C)Has debt other than commercial paper,if any,that is rated"A"or higher by a nationally recognized statistical-rating organization(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 programwide credit enhancements including,but not limited to, overcollateralization,letters of credit,or surety bond. (C)Has commercial paper that is rated"A-1"or higher,or the equivalent,by a nationally recognized statistical-rating organization(NRSRO). Split ratings (i.e. A2/Pi) are not allowable. No more than 10 percent of the outstanding commercial paper of any single corporate issue maybe purchased. D. BONDS ISSUED BY THE CITY OR ANY LOCAL AGENCY WITHIN THE STATE OF CALIFORNIA. Bonds must have an"A rating or better E. OBLIGATIONS OF THE UNITED STATES TREASURY United States Treasury Notes,bonds, bills or certificates of indebtedness, or those 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. . F. FEDERAL AGENCIES Debt instruments issued by agencies of the Federal government. Though not general obligations of the U.S.Treasury,such securities are-sponsored by the government or related to the government and,therefore,have high safety ratings., The following are authorized Federal Intermediate Credit Bank (FICB's), Federal Land Bank (FLB's), Federal Home Loan Bank (FHLB's), Federal National Mortgage Association (FNMA's), Federal Home Loan Mortgage 'Corporation (FHLMC's), Government National Mortgage Association (GNMA's), Tennessee Valley Authorities (TVA's), Student Loan Association Notes (SLMA's) and Small Business Administration(SBA's). There is no limit on the percentage of the portfolio that can be invested in this category. G. REPURCHASE AGREEMENT, maximum term 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 months. A Master Repurchase Agreement must be signed with the bank or broker/dealer who is selling the securities to the City. H. 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: 0607 investment policy 7 Resolution No. 2006-80 Exhibit"A" (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 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 thebase 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. I. MEDIUM-TERM CORPORATE NOTES, maximum 20% of portfolio (30% with Council approval), with a maximum remaining maturity of five years or less, Notes eligible for investment shall be "A" rated or its equivalent or better as determined by a nationally recognized rating service. J. TIME DEPOSITS-CERTIFICATES OF DEPOSIT (non-negotiable certificates of deposit.) (maximum of 3 years) Deposits must be made with banks or savings & loan that have a short term rating of A1/P1 or a long term rating of at least a single A from a generally recognized authority on ratings. 0607 investment policy 8 Resolution No. 2006-80 Exhibit"A„ K. OBLIGATIONS OF THE STATE OF CALIFORNIA Obligations must be"A"rated or better from a nationally recognized authority on ratings. L. MONEY MARKET FUNDS, maximum 15% of portfolio. (Requires City' Council approval for each transaction) 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 US Treasury bills, notes and bonds, and repurchase agreements with a weighted average of 60 days or less. They must have the highest rating from two nationally recognized statistical-rating organization (NRSRO), 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) Is a special fund of the California State Treasury through which any local government may pool investments. The city may invest up to $40,000000 in this fund. Currently, the city has established two(2)agency funds through which the Treasurer may invest the unexpended cash for all funds: The City of Huntington Beach City Fund, and the Huntington Beach Redevelopment Agency Funds. Investments in LAIF are highly liquid and may be converted to cash within 24 hours. 10.1 Investment Pools: 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. LAIF 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: Should any investment listed in section 10.0 exceed a percentage-of-portfolio 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 shall consider reconstructing the portfolio basing his/her decision on the expected length of time the portfolio will be unbalanced. If this occurs,the City Council shall be notified. 0607 investment policy 9 Resolution No. 2006-80 Exhibit"A„ 120 Collateralization: Under provisions of the California Government Code, California banks, and savings and loan associations 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. 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 up to $100000 by the Federal Deposit Insurance Corporation. The right of collateral substitution is granted. 130 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. 0607 investment policy 10 Resolution No. 2006-80' Exhibit"A" 14.0 Diversification: The city's investment portfolio will be'diversified to avoid incurring unreasonable and avoidable risks associated with concentrating investments in 'specific security types, maturity segment, or in individual financial institutions. With the exception of U.S. Treasury securities and authorized pools no more than 50% of the investment portfolio will be invested in a single security type or with a single financial institution. In addition, no more than 10% of the investment portfolio shall be in securities of any one issuer except for U.S. Treasuries and US Government Agency issues. Investments may be further limited by specific language relating to each type as state in Section 10.0 of the Policy. 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. 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 ;at the same time that major cash outflows occur, thus eliminating 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. 150 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 30% of its investment portfolio to be invested in securities with maturities over three years. 0607 investment policy 11 Resolution No. 2006-80 Exhibit«A„ 16.0 Internal Control: The City Treasurer 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 terms 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 investments to fund balances shall be performed 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: l. City Treasurer 2. Deputy City Treasurer 3. Finance Director 4. Fiscal;Services Manager 170 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 objective of preservation of principal, liquidity, and return, and its relevance to current law and financial and economic trends. All 'financial assets of all other funds shall be administered in accordance with the provisions of this policy. The moneys entrusted to the City Treasurer will be 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 0607 investment policy 12 Resolution No. 2006-80 Exhibit«A» requirements of investment safety and liquidity have been met. Because the investment portfolio is designed to operate on a `hold-to-maturity' premise (or passive investment style) and because of the safety, liquidity, and yield priorities, the performance benchmark that will be used by the Treasurer to determine whether market yields, are being achieved shall be the average of the monthly'LAIF rate and the 12-month rolling average 2-Year Constant Maturity Treasury (CMT) rate. While the city will not make investments for the purpose of trading or speculation as the dominant criterion, the City Treasurer shall seek to enhance total portfolio return by means of ongoing portfolio 'and cash management. 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. 18.0 Reporting: The City Treasurer shall submit a monthly investment report and a quarterly report to the City Council, City Administrator, and Finance Director and the Investment Advisory Board within 30 days following the end of the quarter. This report will include the following elements: 18.1 Type of investment 18.2. Institution/Issuer 18.3 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 188 Rate of interest 189 Interest earnings 1810 Statement relating the report to its compliance with the Statement of Investment Policy or the manner in which the portfolio is not in compliance 0607 investment policy 13 Resolution No. 2006-80 Exhibit«A» 18.11 Statement on availability of funds to meet the next six month's obligations 18.12 Monthly and Year to date 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 monthly/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, pursuant to Section 53646 of the Government Code, a copy of the quarterly investment report and investment policy to the California Debt and Investment Advisory Commission (CDIAC) for both the second and fourth calendar quarters within sixty days following the end of the quarter. In addition,the City Treasurer shall annually submit to CDIAC a copy of the adopted investment policy within sixty days following the end of the quarter that the policy was amended. 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 fiscal year. 0607 investment policy 14 Resolution No. 2006-80 Exhibit«A» GLOSSARY AGENCIES: Federal agency securities. ASKED: The price 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%o) 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 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. 0607 investment policy 15 Resolution No. 2006-80 Exhibit«A„ 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 conformity with GAAP. 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 own account. DEBENTURE: A bond secured 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 withan 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 derived from an underlying index or security (intrest rates, foreign exchange rates, equities or commodities). 0607 investment policy 16 Resolution No. 2006-80 Exhibit"A" 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 also 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 $100,000 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 HOME LOAN BANKS (FHLB), The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to > that played by the Federal Reserve Banks vis-a-vis member commercial banks. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Created to promote the development of a nationwide secondary market:in mortgages. It does this by purchasing residential mortgages from financial institutions insured by an agency of the federal government and selling its interest in them through mortgage backed securities. The interest and principal payments from the mortgages pass through to the investors either monthly, semiannually or annually. 0607 investment policy 17 Resolution No. 2006-80 Exhibit«A„ FEDERAL INTERMEDIATE CREDIT BANK(FICB): Loans to lending institutions used to finance the short ;term and intermediate needs of farmers, such as seasonal production. FEDERAL LAND BANK(FLB): Long term mortgage credit provided to farmers by Federal Land Banks. These bonds are issued at irregular times for various maturities ranging from a few months to ten years. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a Federal corporation working under the auspices of the Department of Housing and Urban Development(HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called,is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and'second loans, in addition to fixed-rate mortgages. FNMA's securities are highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. 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. 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 about 5700 commercial banks are member of the system. 0607 investment policy 18 Resolution No. 2006-80 Exhibit"A" GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA OR GINNIE MAE): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan association's and other institutions. Security holder is protected by full faith and credit of the US Government. Ginnie Mae securities are backed by the FHA, VA or FMHM mortgages. The term"pass-through" is often used to describe Ginnie Maes. 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 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 presumable 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. 0607 investment policy 19 Resolution No. 2006-80 Exhibit"A" 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 firths. 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 0607 investment policy 20 Resolution No. 2006-80 Exhibit"A" 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. Dealers use RP extensively to finance their position. Exception: When the Fed is said to be doing RP, it is lending money that is, increasing bank reserves. 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 (FHLB, 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. 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. 0607 investment policy 21 Resolution No. 2006-80 Exhibit"A" 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. STUDENT LOAN ASSOCIATION NOTES (SALLIE MAE): A US Corporation and instrumentality of the US Government. Through its borrowings, funds are targeted for loans to students in higher education institutions. SLMA's securities are highly liquid and are widely accepted. TENNESSEE VALLEY AUTHORITIES (TVA): A US Corporation created in the 1930's to electrify the Tennessee Valley area; currently a major utility headquartered in Knoxville, Tennessee. TVA's securities are highly liquid and are widely accepted. TREASURY BILLS: A non-interest bearing discount security issued by the US Treasury to finance the national debt. Most bills are issued to mature in three months, six months,or one year. TREASURY BOND: Long-term US Treasury securities having initial maturities of more than 10 years. TREASURY NOTES: Intermediate-term coupon bearing US Treasury having initial maturities of from one year to ten years. 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, 0607 investment policy 22 Resolution No. 2006-80 Exhibit«A„ 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. 0607 investment,policy 23 Resolution No. 2006-80 Exhibit"A" Appendix`A City of Huntington Beach-Investment Guidelines 1. Purpose The purpose of these guidelines is to help create a Procedures Manual to assist the City of Huntington Beach Treasurer's Department staff with the day-to-day investment operations. These guidelines are an outline, with individual items to be added or deleted as necessary or appropriate. 2.Cash Review The-City Treasurer or his/her delegate (hereafter`referred to as Deputy City Treasurer) must review the cash balances and investment portfolio daily, or as needed. Items to be reviewed should include: a)Primary bank account balances. b)Maturing investments c)Large,periodic receipts (State of California,County of Orange,Utility Users Tax) d) Bond and coupon payments (debt service) and other large periodic cash disbursements. e) Liquidity-type investments (such as LAIF or money market funds). 3. Investment Selection The City Treasurer determines how much of the cash balance is available for investment and determines where money is needed in the short-term or can be invested long-term based on cash forecasting worksheets. In determining the maturity date, the City Treasurer should consider liquidity, expected revenue, expected expenditures and cash-flow projections. A review of some of the following sources should be made to determine whether the investments should be placed to match projected expenditures or shorter, or to take advantage of current and expected interest rate environments: a)Input from approved broker/dealers. b)Wall Street Journal or similar daily business publication. c)Publications on general trends of economic statistics. 0607 HB Investment Guidelines Resolution No. 2006-80 Exhibit"A" 4. Purchasing an Investment Establish with whom the jurisdiction is going to transact business,on an annual basis. This should be accomplished through the use of a broker-dealer questionnaire, which helps provide the following evaluation: a)Financial condition, strength and capability to fulfill commitments. b) Overall reputation with other dealers and investors. c)Regulatory status of the broker/dealer(providers). d)Background and expertise of the individual representative. e)A satisfactory rating through an industry standard rating publication. The City Treasurer should be as specific as possible in requesting the investment options. If a particular type of investment or a particular issuing agency is to be excluded due to policy limitations,that should be stated to the providers. The following must be determined prior to contacting the providers: a) Settlement— cash, regular(next day), corporate (3 business days) or when-issued if anew issue. b)Amount-either par value or total dollars to be invested. c)Type of security to be purchased, or type to be excluded. d) Targeted maturity,or maturity range. If choosing an external pool or fund as the preferred investment vehicle, the following should be available for inspection prior to purchase and at any reasonable time thereafter: a) Written investment policy, if a government-run investment pool. b)Prospectus for money-market funds,mutual Tunds or bank-managed funds. c) Schedule of the types of reports and the frequency of distribution. d)Clear description of how interest rates are calculated(30/360, actual/365, etc.) e)Schedule of when and how income is distributed. In addition, they should be-reviewed for the following: Are pool or fund types of investments restricted to your own legal,policy and maturity limits? Before concluding the transaction, the City Treasurer should validate the following: a) The security selected for purchase meets all criteria in the approved Investment Policy, including portfolio diversification, collateralization (if appropriate) and maturity. If the security has any imbedded options such as call provisions or coupon adjustments,these should also be reviewed. b)Yield calculations should be verified. c), Total purchase cost (incl. accrued interest) does not exceed funds available for investment. d) Advise the successful provider that their offering has been selected for purchase and receive a trade ticket from the broker. 0607 1113 Investment Guidelines lI Resolution No. 2006-80 Exhibit«A„ e) After confirmation of the purchase, as a courtesy, notify the other broker/dealers that you have placed the investment. Best price may be disclosed, if you choose. After consummation of the transaction, and before settlement date, the City Treasurer will send to the broker a confirmation that should include the following: a)Name of safekeeping institution b)Amount of transaction c) Settlement date. d) CUSIP number of security, if applicable. e)Signed by City Treasurer 5. Settlement &Follow-through The City Treasurer should forward to the custodian a confirmation of the transaction, which should include: a)Name of Dealer. b) Safekeeping account number. c)Amount of transaction. d) Settlement date. e)CUSIP number of security, if applicable. f)Notification of discrepancy prior to acceptance or rejection of the transaction. g) Immediate notification if a fail has occurred: by broker if they are responsible, by safekeeping agent if they are responsible. h)_Signed by City Treasurer The City Treasurer, in conjunction with the Deputy City Treasurer, should establish the following: a) Formats for monthly, quarterly and annual reports, which will be provided to the City Council, City Administrator, Finance Director, and the Investment Advisory Board. b) Financial information as required for the city's Comprehensive Annual Financial Reporting c) A benchmark to measure the performance of the investment program. This benchmark should be representative of the makeup of the investment portfolio, and as such should be subject to change as the structure of the portfolio changes. d) A program to ensure: 1) compliance with generally accepted accounting 'principles of the Government Accounting Standards Board and compliance with the investment policy 2) establishment of a system of written internal controls designed to detect fraud, error,misrepresentation 3) proper authorization for all investment activities 4) review of investment operations by an external auditor annually e)'The City Treasurer should make available to those in their jurisdiction concerned with ethics information about the investment program,which may be of interest to them. -0607 1113 Investment Guidelines 111 Res. No.2006-80 STATE OF CALIFORNIA COUNTY OF ORANGE ) ss: CITY OF HUNTINGTON BEACH ) 1, JOAN L. FLYNN 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 an regular meeting thereof held on the 18th day of December, 2006 by the following vote_ AYES: Bohr, Carchio,, Cook, Coerper, Green, Hansen, Hardy NOES. None ABSENT: None ABSTAIN: None CitVClerk and ex-officiolVierk of the City Council of the City of Huntington Beach, California ATTAC HM ENT #2 RESOLUTION NO. 365 A RESOLUTION OF THE REDEVELOPMENT AGENCY OF THE CITY OF HUNTINGTON BEACH APPROVING THE STATEMENT OF INVESTMENT POLICY FOR 2006/2007 WHEREAS, the Redevelopment Agency 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 Redevelopment Agency of the City of Huntington Beach hereby approves and adopts the attached City of Huntington Beach Statement of Investment Policy for Fiscal Year 2006/2007 so long as applied in a manner consistent with state and local law as amended from time to time. PASSED AND ADOPTED by the Redevelopment Agency of the City of Huntington Beach at a regular meeting thereof held on the 18 t h day of December 200 6 • Chairp ;n REVIEWED AND APPROVED: APPROVED AS TO FORM: xecutive Director C, Agenc Attorney INITIATED AND APPROVED: Q�,(ity T asurer 06-698/602 Redevelopment Agency Resolution No. 365 Exhibit"A" CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY FISCAL YEAR 2006/2007 TABLE OF CONTENTS SECTION 1.0 Purpose.. .......... ......... ........... ....... ......... ......... ......... ......... ......... ......... .. .........2 2.0 Policy...:. ......... ......... ........ ........... ....... ......... ......... ........... ....... ...... .. ...........2 3.0 Scope.. .. .. .. .. .. .2 4.0 Prudence....... . ......... ......... ......... ........, .... .. ........... ..................., ........ ...........3 5.0 Objective. .. .... .3 6.0 Investment Advisory Board..... .. ... .4 7.0 Delegation of Authority....... ......... ........ ......... ......... ......... ......... ...... .. ...........4 8.0 Ethics and Conflicts of Interest... .. .. . ... .5 9.0 Authorized Financial Dealers &Institutions.. ......... ......... ....... . ......... ...........5 10.0 Authorized & Suitable Investments..... ......... ......... ......... ......... ........: ...........6 11.0 Portfolio Adjustment ......... ......... ...... .. ......... ......... ......... ......... ......... ...........9 12.0 Collateralization........ ......... ......... ......... ......... ......... ......... ......... ........: ....... .10 13.0 Safekeeping and Custody... ......... ......... ......... ......... ......... ........., ........ .........10 14.0 Diversification. ......... ....... ... ....... ......... ...... :: ......... ......... ......... .......... ........11 15.0 Maximum Maturities ......... ......... ..... ... ..... .... ........ ........: ......... ......... .........11 16.0 Internal Control........ ......... ......... ......... ...... .. ......... ......... ......... ......... ........ 12 17.0 Performance Standards...... ......... ......... ......... ......... ............ ....... ........ .........12 18.0 Reporting......... ...... .. ........ ......... ......... .......... ......:. ......... ......... ......... .........13 19.0 Investment Policy Adoption. ........... .... . ......... ......... ....... . ......... ......... ....... .14 Glossary ......... ......... .......... ......... ......... ......... ......... ......... ...... .. ......... .........15 Appendix A—Investment Guidelines................. ..................................i 0607 investment policy 1 Redevelopment Agency Resolution No. 365 Exhibit"A„ CITY OF HUNTINGTON BEACH Statement of Investment Policy 10 Purpose: This policy is intended to provide guidelines for the prudent investment of the city's cash balances, and outline the policies to assist 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 state law and prudent money management. The primary goals of these practices are: A. 'To assure compliance with all Federal, State, and local laws governing the investment of public funds under the control of the City Treasurer. B. To protect the:principal moneys entrusted to this office. C. Achieve a reasonable rate of return within the parameters of prudent risk management while minimizing the potential for capital losses arising from market changes or issuer default. 3.0 Scope: This investment policy applies to all financial assets as indicated in 3.1 below of the City of Huntington"Beach. These funds are accounted' for in the city's Comprehensive Annual Financial Report and include: 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 retirement funds, which are administered separately and those funds which are managed separately by trustees appointed under indenture agreements. The`City Treasurer will strive to maintain the level of investment of this cash 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 0607 investment policy 2 Redevelopment Agency Resolution No. 365 Exhibit"A" 3.1.5 Trust and Agency Funds 3.1.6 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. 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: 4.1 The City Treasurer and the Deputy 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. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 0607 investment policy 3 Redevelopment Agency Resolution No. 365 Exhibit"A" 5.2 Liquidity: The City of Huntington's Beach's investment portfolio will remain sufficiently liquid to enable the City of Huntington Beach to meet all operating requirements which might be reasonably anticipated 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 City of Huntington Beach's 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 may appoint` Huntington Beach residents, professional, and non professional people, to serve on an Investment Advisory Board for the purpose of advising the City Treasurer on the City's investment program and at least quarterly, review the investment portfolio for compliance with the adopted investment policy. Exceptions: ; Items in the Investment Policy that require City Council approval will first be reviewed by the Investment Advisory Board. 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 the City funds will be the City Treasurer and is delegated to the Deputy City Treasurer in the absence of the City Treasurer. The City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 0607 investment policy 4 Redevelopment Agency Resolution No. 365 Exhibit"A" 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)). 90 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 annual review of the financial condition and registrations of qualified bidders and require annual audited financial statements to be on file for each company.; The City will utilize Moody's Securities, Sheshunoff bank and savings and loan ratings, or other such services to determine financially sound institutions with which to do business'. 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 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 state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in this state selected by the City Treasurer 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. To provide for the optimum yield in the investment of city funds, the city's investment procedures shall encourage competitive bidding on transactions`'from approved 0607 investment policy 5 Redevelopment Agency Resolution No. 365 Exhibit"A" brokers/dealers. 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 150-1 (Uniform Net Capitol Rule). The institution must have an office in California. The dealer must be experienced in institutional trading practices and familiar with the 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 National Association of Securities Dealers certification and a certification of having read and understood the City's investment policy and agreeing to comply with the policy. The City Treasurer shall determine if they are adequately capitalized (i.e. minimum; capital requirements of $10,000,000 and five; years of operation). 100 Authorized & Suitable Investments: The City is authorized by California Government Code Section 53600, et. seq. to+invest specific types of securities. Investments not;specifically listed below are deemed inappropriate and prohibited: A. BANKERS ACCEPTANCES, maximum 25% of portfolio (up to 40% with Council approval). Maximum term 180 days. Banks must have a short term rating of at least AI/PI and a long-term rating of A-or higher as provided by Moody's Investors Service or Standard and Poor's Corp. No more than 30 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 three(3)years,(Up to five(5)years with Council approval). Banks must have a short term rating of AI/PI and along term rating of at least a single A from a nationally recognized authority on ratings. C. COMMERCIAL PAPER, maximum 25% of portfolio. Maximum term 270 days. Commercial paper of"prime"quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization(NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph(1)or paragraph(2): (1)The entity meets the following criteria: 0607 investment policy 6 Redevelopment Agency Resolution No. 365 Exhibit"A" (A)Is organized and operating in the United States as a general corporation. (B)Has total assets in excess of five hundred mullion dollars($500,000,000). (C)Has debt other than commercial paper,if any,that is rated"A"or higher by nationally recognized statistical-rating organization(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 programwide credit enhancements including,but not limited to, overcollateralization,letters of credit,or surety bond. (C)Has commercial paper that is rated"A-1"or higher,or the equivalent,by a nationally recognized statistical-rating organization(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. D. BONDS ISSUED BY THE CITY OR ANY LOCAL AGENCY WITHIN THE STATE OF CALIFORNIA. Bonds must have an"A"rating or better E. OBLIGATIONS OF THE UNITED STATES TREASURY United,States Treasury Notes,bonds, bills or certificates of indebtedness, or those 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. . F. FEDERAL AGENCIES Debt instruments issued by agencies of the Federal government. Though not general obligations of the U.S.Treasury,such securities are sponsored by the government or related to the government and,therefore,have high safety ratings. The following are authorized Federal Intermediate Credit Bank (FICB's), Federal Land Bank (FLB's), Federal Home Loan Bank (FHLB's), Federal National Mortgage Association (FNMA's), Federal Home Loan Mortgage Corporation (FHLMC's), Government National Mortgage Association (GNMA's), Tennessee Valley Authorities (TVA's), Student Loan Association Notes (SLMA's) and Small Business Administration(SBA's). There is no limit on the percentage of the portfolio that can be invested in this category. G. REPURCHASE AGREEMENT, maximum term 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. A Master Repurchase Agreement must be signed with the bank or broker/dealer who is selling the securities to the City. H. 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: 0607 investment policy 7 Redevelopment Agency Resolution No. 365 Exhibit"A„ (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 of30 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. I. MEDIUM-TERM CORPORATE NOTES, maximum 20% of portfolio (30% with Council approval), with a maximum remaining maturity of five years or less. Notes eligible for investment shall be "A" rated or its equivalent or better as determined by a nationally recognized rating service. J. TIME DEPOSITS-CERTIFICATES OF DEPOSIT (non-negotiable certificates of deposit.) (maximum of 3 years) Deposits must be made with banks or savings &loan that have a short term rating of Al/P1 or a long term rating of at least a single A from a generally recognized authority on ratings. 0607 investment policy 8 Redevelopment Agency Resolution No. 365 Exhibit"A„ K. OBLIGATIONS OF THE STATE OF CALIFORNIA Obligations must be"A"rated or better from a nationally recognized authority on ratings. L. MONEY MARKET FUNDS, maximum 15% of portfolio. (Requires City Council approval for each transaction) No more than 10 percent of the agency's surplus funds may 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 US Treasury bills, notes and bonds, and repurchase agreements with a weighted average of 60 days or less. They must have the highest rating from two nationally recognized statistical-rating organization (NRSRO), 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) Is a special fund of the<California State Treasury through which any local government may pool investments. The city may invest up to $40,000,000 in this fund. Currently,:the city has established two(2)agency funds through which the Treasurer may invest the unexpended cash for all funds: The City of Huntington Beach City Fund, and the Huntington Beach Redevelopment Agency Funds. Investments in LAIF are highly liquid and may be converted to cash within 24 hours. 10.1 Investment Pools: 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. LAIF 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: Should any investment listed in section 10.0 exceed a percentage-of-portfolio 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 shall consider reconstructing the portfolio basing his/her decision on the expected length of time the portfolio will be unbalanced. If this occurs,the City Council shall be notified. 0607 investment policy 9 Redevelopment Agency Resolution No. 365 Exhibit"A" 12.0 Collateralization: Under provisions of the California Government Code, California banks, and savings and loan associations are required to secure the city's deposits by pledging government securities with a value of 1-10 % 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. 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 up to $100000 by the Federal Deposit Insurance Corporation. The right of collateral substitution is granted. 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. 0607 investment policy 10 Redevelopment Agency Resolution No. 365 Exhibit«A„ 14.0 Diversification: The city's investment portfolio will be diversified to avoid incurring unreasonable and avoidable risks associated with concentrating investments in specific security types, maturity segment, or in individual financial institutions. With the exception of U.S. Treasury securities and authorized pools no more than 50% of the investment portfolio will be invested in a single security type or with a single financial institution. In addition, no more than 10% of the investment portfolio shall be in securities of any one issuer except for U.S. Treasuries and US Government Agency issues. Investments may be further limited by specific language relating to each type as state in Section 10.0 of the Policy. 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. 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 at the same time that major cash outflows occur, thus eliminating 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 30% of its investment portfolio to be invested in securities with maturities over three years. 0607 investment policy 11 Redevelopment Agency Resolution No. 365 Exhibit"All 16.0 Internal Control: The City Treasurer 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 terms of this policy and the procedure established by City Treasurer. The external auditors shall annually review the investments with respect to the investment policy. This review will provide internal controlby 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 investments to fund balances shall be performed by the Finance Department and approved by 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: 1. City Treasurer 2. Deputy City Treasurer 3 Finance Director 4 Fiscal Services 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 objective of preservation of principal, liquidity, and return, and its relevance to current law and financial and economic trends. All financial assets of all other funds` shall be administered in accordance with the provisions of this policy. The moneys entrusted to the City Treasurer will be 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 0607 investment policy 12 Redevelopment Agency Resolution No. 365 Exhibit`°A„ requirements of investment safety and liquidity have been met. Because the investment portfolio is designed to operate on a `hold-to-maturity' premise (or passive investment style) and because -of the safety, liquidity, and yield priorities, the performance benchmark that will be used by the Treasurer to determine whether market yields are being achieved shall be the average of the monthly LAIF rate and the 12-month rolling average ;2-Year Constant Maturity Treasury (CMT)rate. ` While the city will not make investments for the purpose of trading or speculation as the dominant criterion, the City Treasurer shall seek to enhance total portfolio return by means of ongoing portfolio and cash management. 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, 180 Reporting: The City Treasurer shall submit a monthly investment report and a quarterly report to the City Council, City Administrator, and Finance Director and the Investment Advisory Board within 30 days following the end of the quarter. This report will include the following elements: 18.1 Type of investment 18.2. Institution/Issuer 18.3 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 0607 investment policy 13 Redevelopment Agency Resolution No. 365 Exhibit"A" 18.11 Statement on availability of funds to meet the next six month's obligations 18.12 Monthly and Year to date 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 monthly/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 included with the report. The City Treasurer shall submit, pursuant to Section 53646 of the Government Code, a copy of the quarterly investment report and investment policy to the California Debt and Investment Advisory Commission (CDIAC) for both the second and fourth calendar quarters within sixty days following the end of the quarter. In addition,the City Treasurer shall annually submit to CDIAC a copy of the adopted investment policy within sixty days following the end of the quarter that the policy was amended. 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 fiscal year. 0607 investment policy 14 Redevelopment Agency Resolution No 365 Exhibit«A» GLOSSARY AGENCIES: Federal agency securities. ASKED: The price 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 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. 0607 investment policy 15 Redevelopment Agency Resolution No. 365 Exhibit"A" 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 conformity with GAAP. 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 alltransactions, buying and selling for his own account. DEBENTURE: A bond secured only by 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 derived from an underlying index or security (intrest rates, foreign exchange rates, equities or commodities). 0607 investment policy 16 Redevelopment Agency Resolution No. 365` Exhibit"A" 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 also 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 $100,000 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 HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-a-vis member commercial banks.` FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Created to promote the development of a nationwide secondary market in mortgages. It does this by purchasing residential mortgages from financial institutions insured by an agency of the federal government and selling its interest in them through mortgage backed securities. The interest and principal payments from the mortgages pass through to the investors either monthly,semiannually or annually. 0607 investment policy 17 Redevelopment Agency Resolution No. 365 Exhibit"A" FEDERAL INTERMEDIATE CREDIT BANK(FICB): Loans to lending institutions used to:finance the shod term and intermediate needs of farmers, such as seasonal production. FEDERAL LAND BANK (FLB): Long term mortgage credit,,provided to farmers by Federal Land Banks. These bonds are issued at irregular times for various maturities ranging from a few months to ten years. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a Federal corporation working under the auspices 'of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called,;is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (FOMQ: 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. 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 about 5700 commercial banks are member of the system. 0607 investment policy 18 Redevelopment Agency Resolution No. 365 Exhibit"A" GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA OR GINNIE MAE): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers,>commercial banks, savings and loan association's and other institutions. Security holder is protected by full faith and credit of the US Government. Ginnie Mae securities are backed by the FHA, VA or FMHM mortgages. The term"pass.-through" is often'used to describe Ginnie Maes. 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 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 presumable be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase-reverse agreements that establish each parry'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. 0607 investment policy 19 Redevelopment Agency Resolution No. 365 Exhibit"A" 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 priceasked 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. 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 0607 investment policy 20 Redevelopment Agency Resolution No. 365 Exhibit"A" 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. Dealers use RP extensively to finance their position. Exception: When the Fed is said to be doing RP, it is lending money that is, increasing bank reserves. 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 (FHLB, 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. 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. 0607 investment policy 21 Redevelopment Agency Resolution No. 365 Exhibit"A" 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 in equal installments because of prepayments. STUDENT LOAN ASSOCIATION NOTES (SALLIE MAE): A US Corporation and instrumentality of the US Government.` Through its borrowings, funds are targeted for loans to students in higher education institutions. SLMA's securities are highly liquid and are,widely accepted. TENNESSEE VALLEY AUTHORITIES (TVA): A US Corporation created in the 1930's to electrify the Tennessee Valley area; currently a major utility headquartered in Knoxville, Tennessee. TVA's securities are highly liquid and are widely accepted. TREASURY BILLS: A non-interest bearing discount security issued by the US Treasury to finance the national debt. Most bills are issued to mature in three months, six months,or one year. TREASURY BOND: Long-term US'Treasury securities having initial maturities of more than 10 years. TREASURY NOTES: Intermediate-term-coupon bearing US Treasury having initial maturities of from one year to ten years. 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, 0607 investment policy 22 Redevelopment Agency Resolution No. 365' Exhibit"A" 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. 0607 investment policy 23 Redevelopment Agency Resolution No. 365 Exhibit"A" Appendix A City of Huntington Beach Investment Guidelines 1. Purpose The purpose of these guidelines is to help create a Procedures Manual to assist the City of Huntington Beach Treasurer's Department staff with the day-to-day investment operations. These guidelines are an outline,with individual items to be added or deleted as necessary or appropriate. 2. Cash Review The City Treasurer or his/her delegate (hereafter referred to as Deputy City Treasurer) must review the cash balances and investment portfolio daily, or as needed. Items to be reviewed should include: a)Primary bank account balances: b)Maturing investments c)Large,periodic receipts(State of California,County of Orange,Utility Users Tax) d) Bond' and coupon payments (debt service) and other large periodic cash disbursements. e) Liquidity-type investments (such as LAIF or money market funds). 3. Investment Selection The City Treasurer determines how much of the cash balance is available for investment -,and determines where money is needed in the short-term or can be invested long-term based on cash forecasting worksheets: In determining the maturity date, the City Treasurer should consider liquidity, expected revenue, expected expenditures; and cash-flow projections. A' review of some of the following sources should be made to determine whether the investments should be placed to match projected expenditures or shorter, or to take advantage of current and expected interest rate environments a)Input from approved broker/dealers. b)Wall Street Journal or similar daily business publication. c)Publications on general trends of economic statistics. 0607 1113 Investment Guidelines i'" Redevelopment Agency Resolution No. 365 Exhibit"All 4. Purchasing an Investment Establish with whom the jurisdiction is going to transact business on an annual basis. This should be accomplished through the use of a broker-dealer questionnaire, which helps provide the following evaluation: a)Financial condition, strength and capability to fulfill commitments. b)Overall reputation with other dealers and investors. c)Regulatory status of the broker/dealer(providers): d)Background and expertise of the individual representative. e)A satisfactory rating through an industry standard rating publication. The City Treasurer should be as specific as possible in requesting the investment options. If a particular type of investment or a particular issuing agency is to be excluded due to policy limitations, that should be stated to the providers. The following must be determined prior to contacting the providers: a) Settlement cash, regular (next day), corporate (3 business days) or when-issued if a new issue. b)Amount—either par value or total dollars to be invested. c)Type of security to be purchased,or type to be excluded. d)'Targeted maturity,or maturity range. If choosing an external pool or fund as the preferred investment vehicle, the following should be available for inspection prior to purchase and at any reasonable time thereafter: a)Written investment policy, if a government-run investment pool: b)Prospectus for money-market funds,mutual.funds or bank-managed funds. c) Schedule of the types of reports and the frequency of distribution. d)Clear description of how interest rates are calculated(30/360, actual/365, etc.) e)Schedule of when and how income is distributed. In addition, they should be reviewed for the following: Are pool or fund types of investments restricted to your own legal,policy and maturity limits? Before concluding the transaction, the City Treasurer should validate the following: a) The security selected for purchase meets all criteria in the approved Investment Policy, including portfolio diversification, collateralization (if appropriate) and maturity. If the security has any imbedded options such as call provisions or coupon adjustments, these should also be reviewed. b)Yield calculations should be verified. c):Total purchase cost (incl. accrued interest) does not exceed funds available for investment. d) Advise the successful provider that their offering has been selected for purchase and receive-a trade ticket from the broker. 0607 HB Investment Guidelines 11 Redevelopment Agency Resolution No. 365 Exhibit"A„ e) After confirmation of the purchase, as a courtesy, notify the other broker/dealers that you have placed the investment. Best price may be disclosed, if you choose. After consummation of the transaction, and before settlement date, the City Treasurer will send to the broker a confirmation that should include the following: a)Name of safekeeping institution b) Amount of transaction c) Settlement date. d)CUSIP number of security, if applicable. e) Signed by City Treasurer 5. Settlement& Follow-through The City Treasurer should forward to the custodian a confirmation of the transaction, which should include: a)Name of Dealer. b) Safekeeping account number. c)Amount of transaction. d) Settlement date. e) CUSIP number of security, if applicable. f)Notification of discrepancy prior to acceptance or rejection of the transaction. g) Irnmediate notification if a fail has occurred: by broker if they are responsible, by safekeeping agent if they are responsible. h)Signed by City Treasurer The City Treasurer, in conjunction with the Deputy City Treasurer, should establish the< following: a) Formats for monthly, quarterly and annual reports, which will be provided to the City Council, City Administrator, Finance Director, and the Investment Advisory Board. b) Financial information as required for the city's Comprehensive Annual Financial Reporting c) A benchmark to measure the,:performance of the investment program. This benchmark should be representative of the makeup of the investment portfolio, and as such should be subject to change as the structure of the portfolio changes. d) A program to ensure: 1) compliance with generally accepted accounting principles of the Government Accounting Standards Board and compliance with the investment policy 2)- establishment of a system of written internal controls designed to`detect fraud, error,misrepresentation 3) proper authorization for all investment activities 4) review of investment operations by an external auditor annually e) The City Treasurer should make available to those in their jurisdiction concerned with ethics information about the investment program,which may be of interest to them. 0607 HB Investment Guidelines 111 Res. No. 365 STATE OF CALIFORNIA COUNTY OF ORANGE ) ss CITY OF HUNTINGTON BEACH 1, JOAN FLYNN, Clerk of the Redevelopment Agency of the City of Huntington Beach, California, DO- HEREBY CERTIFY that the foregoing resolution was duly adopted by the Redevelopment Agency of the City of Huntington Beach at a regular meeting of said Redevelopment Agency 'held on the 18th day of December, 2006 and that it was so adopted by the following vote: AYES: Bohr, Carchio, Cook, Coerper, Green, Hansen, Hardy NOES: None ABSENT: None ABSTAIN: None Cle of the Redevelopme Agency of the City of Huntington Beach, CA ATTACHMENT #3 Treasurer's Report - Shari L. Fredenrich, CPA, CCMT INVESTMENT POLICY 2 2006/ 007 z 1. %. Shari L . Freidenrich , CPA CCMT , CPFA December 18`, 2006 Slide 1 Treasurer's Report - Shari L. Freidenrich, CPA, CCMT Investment Policy 06/07 • Annually updated/approved by IAB • Approved by IAB on Oct. 25 , 2006 Slide 2 Treasurer's Report - Shari L. Freidenrich, CPA, CCMT Investment Policy 06/07 • Updated policy to reflect additional definitions in model policy (in glossary) • Updated internal controls to reflect current City Council. approved signers • Kept req't to submit quarterly reports even though CA code eliminated reporting to legislative bodies (SB 90 mandate gone).. Slide 3 RCA ROUTING SHEET INITIATING DEPARTMENT: City Treasurer SUBJECT: 2006/2007 Investment Policy COUNCIL MEETING DATE: December 18, 2006 N/j 4.- /f;N R`3' - 9Y C •'a ����sr s"r�a6' 2�� Ordinance (w/exhibits & legislative draft if applicable) Attached El Not Applicable Resolution (w/exhibits & legislative draft if applicable) Attached Not Applicable Tract Map, Location Map and/or other Exhibits Attached Not Applicable Attached ❑ Contract/Agreement (w/exhibits if applicable) Not Applicable (Signed in full by the City Attorney) Attached El Subleases, Third Party Agreements, etc. Not Applicable (Approved as to form by City Attorney) Certificates of Insurance (Approved b the City Attorne Attached ( Pp Y Y Y) Not Applicable Attached ❑ Fiscal Impact Statement (Unbudget, over$5,000) Not Applicable Attached Bonds (if applicable) Not Applicable Attached ❑ Staff Report (If applicable) Not Applicable El Commission, Board or Committee Re ort If applicable Attached p ( pp ) Not Applicable s/Conditions for Approval and/or Denial Attached El Findin g pp Not Applicable Administrative Staff Assistant City Administrator Initial ( ) ` City Administrator (Initial) City Clerk (Belowp. For RCA Author: slf