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HomeMy WebLinkAbout2001/2002 Investment Policy - Res 2001-96 - RDA Res 328 - 20 Council/Agency Meeting Held: 2r D Deferred/Continued to: pproved ❑ Conditionally Approved ❑ Denied City Clerk's SignaturAO Council Meeting Date: July 21, 2003 Department ID Number: CT 03-16 CITY OF HUNTINGTON BEACH REQUEST FOR ACTION o SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCI MEMBERS -- SUBMITTED BY: SHARI L. FREIDENRICH, City Treasu PREPARED BY: SHARI L. FREIDENRICH, City Treas L, SUBJECT: ADOPT RESOLUTION AUTHORIZING THE CITY TREASURER SHARI L. FREIDENRICH TO MAKE DEPOSITS AND WITHDRAWALS IN THE STATE TREASURER'S LOCAL AGENCY INVESTMENT FUND (LAIF) & , Nd, a003 _S [statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachment(s) G2loa3 Statement of Issue: Should the City Council adopt Resolution No. S5' authorizing the City Treasurer, Shari L. Freidenrich, to order deposits or withdrawals of money in the Local Agency Investment Fund (LAIF). Funding Source: N/A Recommended Action: Adopt Resolution No.200L3--,,6- a resolution of the City Council of the City of Huntington Beach authorizing Shari L. Freidenrich to order deposits or withdrawals in the State of California Local Agency Investment Fund (LAIF). Alternative Action(s): Do not approve and do not authorize the City Treasurer, Shari L. Freidenrich, to order deposits and withdrawals in the State Treasurer's Local Agency Investment Fund (LAIF). � 3 2C3' Zoo 3-54 R-+}: 2 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. y 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. 0203 invpol.doc 3 12es Zoo —54 44 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. 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: 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. 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 require by the Political Reform Act and related 0203 invpol.doc 4 regulations, being Government Code Sections 81000 and the Fair Political Practices Commission (FFPC)). 9.0 Authorized Financial Dealers and Institutions: The City Treasurer will maintain a list of the financial institutions and broker/dealers authorized to provide investment and depository services and will perform an 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 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 0203 invpol.doc 5 RCS: 2003 - S`t Rif 7. a 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). 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/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 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 Moody's Investor Services, Standard & Poor's and Fitch Financial Services. The issuing corporation must be organized and operating within the United States, with total assets in excess of$500 million and shall issue debt, other than commercial paper, that is rated"A"or higher by Moody's, S&P and Fitch. Split ratings(i.e.A2/P 1)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 0203 invpol.doc 6 kes ' 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: (A)The security to be sold on reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale. (B) The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio. (C) The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security. (D) Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty by way of a reverse repurchase agreement or securities lending agreement,shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, 0203 invpol.doc 7 R CS� 3,003 -54 unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum a arning o r s pread f or t he e ntire p eriod between t he s ale o f a s ecurity 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. 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 national rating agencies,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. 0203 invpol.doc 8 Res.No.2001-96 Ex.A required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 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. 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: 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. 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 0102 investment policy.doc 4 October 15,2001 Res.No.2001-96 Ex.A 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 (FFPQ. 9.0 Authorized Financial Dealers and Institutions: The City Treasurer will maintain a list of the financial institutions and broker/dealers authorized to provide investment and depository services and will. perform an 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 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. 0102 investment policy.doc 5 October 15,2001 Res.No.2001-96 Ex.A 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). 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/PI and a long-terns 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 A1/P1 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 raring as provided for by Moody's Investor Services, Standard & Poor's and Fitch Financial Services. The issuing corporation must be organized and operating within the United States,with total assets in excess of$500 million and shall issue debt, other than commercial paper, that is rated "A" or 0102.investment policy.doc 6 October 15,2001 Res.No.2001.96 Ex.A higher by Moody's, S&P and Fitch. 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 a"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 which 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 (FINMA'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 which 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, «°hen 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: (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 fora minimum of 30 days prior to sale. (B) The total of.all reverse repurchase agreements and securities lending agreements on investments oN ned by the local agency does not exceed 20 percent of the base value of the portfolio. 0102 investment policy.doc 7 October 15,2001 Res.No.2001-96 Ex.A (C) The agreement does not exceed a term of 92 days, unless the agreement includes a %'. itten 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. 0102 investment policy.doc 8 October 15, 2001 Res.No.2001-96 Ex.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) i4o 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 national rating agencies,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 (LATE) Is a special fund of the California State Treasury through which any local government may pool investments. The city may invest up to $20,000,000 per agency 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 0102 investment policy.doc 9 October 15,2001 Res.No.2001-96 Ex.A 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. 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 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 $100,000 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 shall be safe kept with the city itself or with a qualified financial institution, contracted by the city as a third party. All agreements and statements will be subject to review annually by external auditors in conjunction with their audit. In the event that the City has a financial institution hold the securities, a separate custodial agreement shall be required. 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 0102 investment policy.doc 10 October 15,2001 Res.No.2001-96 Ex.A securities to the counterparty bank's customer book entry account may be used for book entry delivery. 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 60% of the total 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. 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 0102 investment policy.doc 11 October 15,2001 Res.No.2001-96 Ex.A 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. 16.0 Internal Control: 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: 1. City Treasurer 2. Deputy City Treasurer 3. Finance Officer 4. Director of Administrative Services 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. Market average will be considered.for benchmark purposes to be the 1-3 Year Merrill Lynch Treasuries/Agencies Index. While the city will not make investments for the purpose of trading or speculation as the dominant criterion, the City 0102 investment policy.doc 12 October 15, 2001 Res.No.2001-96 Ex.A 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 Officer 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 the Statement of Investment Policy 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 0102 investment policy.doc 13 October 15,2001 Res.No.2001-96 Ex.A 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 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.. 0102 investment policy.doc 14 October 15,2001 Res.No.2001-96 Ex.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' ACCEPTAINCE (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%) 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. COMMERCIAL PAPER: Short term unsecured promissory note issued by a corporation to raise working capital. These negotiable instruments are purchased at a 0102 investment policy.doc 15 October 15,2001 Res.No.2001-96 Ex.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,BankAmerica, etc. 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 with an exchange of a signed receipt for the securities. 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). 0102 investment policy.doc 16 October 15,2001 Res.No.2001-96 Ex.A 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: 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. FEDERAL INTERNIEDIATE 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 0102 investment policy.doc 17 October 15,2001 Res.No.2001-96 Ex.A 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. 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-throughs"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. 0102 investment policy.doc 18 October 15, 2001 Res.No.2001-96 Ex.A LOCAL GOVERNMENT INVESTMENT (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. MARKET 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. 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. 0102 investment policy.doc 19 October 15,2001* Res.No.2001-96 Ex.A 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 which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. 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. 0102 investment policy.doc -)o October 15,2001 Res.No.2001-96 Ex.A 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: 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 150-1: See"Uniform Net Capital Rule". 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. 0102 investment policy.doc 21 October 15, 2001 Res.No.2001-96 Ex.A 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, 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. 0102 investment policy.doc 22 October 15, 2001 Res.No.2001-96 Ex.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 Office 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. 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. 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: i Res.No.2001-96 Ex.A 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/36.5, 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. 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 third-party custodian. b) ABA number of safekeeping agent. c) Safekeeping account number. ii Res.No.2001-96 Ex.A d) Amount of transaction. e) Settlement date. f) CUSIP number of security,if applicable. S 5. Settlement& Follow-through The City Treasurer should forward to the custodian a confirmation of the transaction which should include: a)Name of third-party custodian. b)ABA number of safekeeping agent. c) Safekeeping account number. d)Amount of transaction. e) Settlement date. f) CUSIP number of security, if applicable. g) Provision of receipt or disbursement of funds. h)Notification of discrepancy prior to acceptance or rejection of the transaction. i) Immediate notification if a fail has occurred: by broker if they are responsible, by safekeeping agent if they are responsible. iii Res. No. 2001-96 STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss: CITY OF HUNTINGTON BEACH ) I, CONNIE BROCKWAY, the duly elected, qualified City Clerk of the City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do hereby certify that the whole number of members of the City Council of the City of Huntington Beach is seven; that the foregoing resolution was passed and adopted by the affirmative vote of at least a majority of all the members of said City Council at a regular meeting thereof held on the 17th day of December, 2001 by the following vote: AYES: Garofalo, Dettloff, Bauer, Cook, Houchen, Green, Boardman NOES: None ABSENT: None ABSTAIN: None City Clerk and ex-officio Clerk of the City Council of the City of Huntington Beach, California Resolution of the Redevelopment Agency of the City of Huntington Beach approving the 2001/2002 Investment Policy Attachment 2 RESOLUTION NO. A RESOLUTION OF THE REDEVELOPMENT AGENCY OF THE CITY OF HUNTINGTON BEACH APPROVING THE INVESTMENT POLICY FOR FISCAL YEAR 2001/2002 WHEREAS, the City Council of the City of Huntington Beach is required to approve an annual statement of investment policy, and the Redevelopment Agency of the City of Huntington Beach,by virtue of Resolution No. 1 applies City policies, rules and regulations wherever practicable; and The duly elected City Treasurer has recommended approval of the City of Huntington Beach 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 Investment Policy for Fiscal Year 2001/2002 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 17th day of December , 2001_. ATTEST: dmz� Agency Secretary rl 2&-01 Chairperson _ REVIEWED AND APPROVED: APPROVED AS TO FORM: Execu e Director Agency Counsel a 15 10 INITIATED AND APPROVED: i Tre er 01 reso/agency invest policyi 12/5/01 Res.No.328 Ex.A CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY FISCAL YEAR 2001/2002 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............................................................................ 4 9.0' Authorized Financial Dealers & Institutions ...................................................... 5 10.0 Authorized & Suitable Investments..................................................................... 6 11.0 Portfolio Adjustment............................................................................................. 8 12.0 Collateralization..................................................................................................... 8 13.0 Safekeeping and Custody...................................................................................... 8 14.0 Diversification ........................................................................................................ 9 15.0 Maximum Maturities.............................................................................................9 16.0 Internal Control................................................................................................... 10 17.0 Performance Standards....................................................................................... 10 18.0 Reporting.............................................................................................................. 11 19.0 Investment Policy Adoption...........................................................................:.... 12 Glossary.................................................................................................................13 Appendix A_Investment Guidelines................. ....................................i 0102 investment policy.doc ] October 15, 2001 Res.No.328 Ex.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 0102 investment policy.doc 2 October 15,2001 Res.No.328 Ex.A 3.1.4 Enterprise Funds 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 0102 investment policy.doc 3 October 15,2001 Res.No.328 Ex.A required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 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. 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: 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. 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 0102 investment policy.doc 4 October 15, 2001 Res.No.328 Ex.A make impartial investment decisions. Employees and investment officers are required to file annual disclosure statements as required for "public officials who manage public investments" (as defined and required by the Political Reform Act and related regulations, being Government Code Sections 81000 and the Fair Political Practices Commission (FFPC)). 9.0 Authorized Financial Dealers and Institutions: The City Treasurer will maintain a list of the financial institutions and broker/dealers authorized to provide investment and depository services and will perform an 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 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. 0102 investment policy.doc 5 October 15, 2001 Res.No.328 Ex.A 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 financiaf 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). 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 A1/P1 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. 111aximum term 270 days. Commercial paper of prime quality of the highest ranking or of the highest letter and number rating as provided for by Moody's Investor Services, Standard & Poor's and Fitch Financial Services. The issuing corporation must be organized and operating within the United States,N%ith total assets in excess of S500 million and shall issue debt, other than commercial paper, that is rated "A" or 0102 investment policy.doc 6 October 15,2001 Res.No.328 Ex.A higher by Moody's, S&P and Fitch. 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 a"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 which 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 which 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: (A)The security to be sold on reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale. (B) The total of all reverse repurchase agreements and securities lending agreements on investments oN ned by the local agency does not exceed 20 percent of the base value of the portfolio. 0102 investment policy.doc 7 October 15,2001 Res.No.328 Ex.A (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 d: 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. 0102 investment policy.doc $ October 15,2001 Res.No.328 Ex.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 mo fu re than 10 percent of the agency's surplus nds 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 national rating agencies,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 (LATE) Is a special fund of the California State Treasury through which any local government may pool investments. The city may invest up to $20,000,000 per agency 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 «rithin 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 0102 investment policy.doc 9 October 15,2001 Res.No.328 Ex.A 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. 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 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 $100,000 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 shall be safe kept with the city itself or with a qualified financial institution, contracted by the city as a third party. All agreements and statements will be subject to review annually by external auditors in conjunction with their audit. In the event that the City has a financial institution hold the securities, a separate custodial agreement shall be required. 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 0102 investment policy.doc 10 October 15,2001 Res.No.328 Ex.A securities to the counterparty bank's-customer book entry account may be used for book entry delivery. 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 60% of the total 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. 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 insecurities 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 0102 investment policy.doc 11 October 15,2001 Res.No.328 Ex.A 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. 16.0 Internal Control: 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: 1. City Treasurer 2. Deputy City Treasurer 3. Finance Officer 4. Director of Administrative Services 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. Market average will be considered for benchmark purposes to be the 1-3•Year Merrill Lynch Treasuries/Agencies Index. While the city will not make investments for the purpose of trading or speculation as the dominant criterion, the City 0102 investment policy.doc 12 October 15,2001 Res.No:328 Ex.A 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 Officer 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 the Statement of Investment Policy 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 0102 investment policy.doc 13 October 15,2001 Res.No.328 Ex.A 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 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. 0102 investment policy.doc 14 October 15,2001 Res.No.328 Ex.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%) 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. COMMERCIAL PAPER: Short term unsecured promissory note issued by a corporation to raise working capital. These negotiable instruments are purchased at a 0102 investment policy.doc 15 October 15,2001 Res.No.328 Ex.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,BankAmerica, etc. 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 t,vo 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 sided receipt for the securities. 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). 0102 investment policy.doc 16 October 15,2001 Res.No.328 Ex.A 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: 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. 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 (FNINIA): 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 0102 investment policy.doc 17 October 15,2001 Res.No.328 Ex.A 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. 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 frill faith and credit of the US Government. Ginnie Mae securities are backed by the FHA, VA or FMHM mortgages. The term "pass-throughs"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. 0102 investment policy.doc 1 g October 15, 2001 Res.No.328 Ex.A LOCAL GOVERNMENT INVESTMENT (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. MARKT 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. 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 FOVMC 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. 0102 investment policy.doc 19 October 15, 2001' Res.No.328 Ex.A 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 which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. 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. 0102 investment policy.doc -)0 October 15,2001 Res.No.328 Ex.A 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.. 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COVI`i ISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See"Uniform Net Capital Rule". 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. 0102 investment policy.doc 1 October 15, 2001 Res.No.328 Ex.A 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, 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. 0102 investment policy.doc 22 October 15, 2001 Res.No.328 Ex.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 Office 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. 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. 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: i Res.No.328 Ex.A 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 wh_ en-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. 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 third-party custodian. b)ABA number of safekeeping agent. c) Safekeeping account number. ii Res.No.328 Ex.A d)Amount of transaction. e) Settlement date. f)CUSIP number of security,if applicable. S. Settlement&Follow-through The City Treasurer should forward to the custodian a confirmation of the-transaction which should include: a)Name of third-party custodian. b)ABA number of safekeeping agent. c) Safekeeping account number. d)Amount of transaction. e) Settlement date. f) CUSIP number of security,if applicable. g)Provision of receipt or disbursement of funds. h)Notification of discrepancy prior to acceptance or rejection of the transaction. i) Immediate notification if a fail has occurred: by broker if they are responsible, by safekeeping agent if they are responsible. iii REQUEST FOR ACTION MEETING DATE: July 21, 2003 DEPARTMENT ID NUMBER: CT 03-16 Analysis: The State of California's Treasurer's office has requested an updated resolution from the City. The Local Agency Investment Fund (LAIF), a voluntary program created by statute, began in 1977 as.an investment alternative for California's local governments and special districts. The enabling legislation for the LAIF is Government Code Section 16429.1,2,3,4 of the California Government Code that authorizes local governments to invest in LAIF. It has been determined that the State of California cannot declare bankruptcy under Federal regulations, thereby allowing the Government Code Section 16429.3 to stand. This Section states "money placed with the State Treasurer for deposit in the LAIF shall not be subject to impoundment or seizure by any State official or State agency." During the 2002 session, California Government Code 16429.4 was added to the LAIF's enabling legislation. The Section states that "the right of a city, county, city and county, special district, nonprofit corporation, or qualified quasi-governmental agency, to withdraw its deposited money from the LAIF upon demand may not be altered, impaired, or denied in any way by any state official or state agency based upon the State's failure to adopt a State Budget by July 1 of each new fiscal year. In addition, the City's investment policy, which is annually reviewed and accepted by City Council, also authorizes the City to invest in LAIF under Section 10.0 Authorized and Suitable Investments. Environmental Status: N/A Attachment(s): City Clerk's • - Number No. Description 1. Resolution No. , a resolution of the City Council of the City of Huntington Beach authorizing Shari L. Freidenrich to order deposits or withdrawals in the State of California Local Agency Investment Fund (LAIF) 2. City of Huntington Beach Investment Policy 3. Government Code Section 16429.1-16429.4 G:\TREAS\RCA\RCA 2002-03\RCACT03-16 Resolution for LAIF.doc -2- July 7,2003 12:41 PM A Resolution of the. City Council of the City of Huntington Beach Authorizing Shari L. Freidenrich to Order Deposits or Withdrawals in the State Local Agency Investment Fund (LAIF) Attachment 1 RESOLUTION NO. 2003-54 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH EXPRESSING ITS INTENTION TO PARTICIPATE IN THE STATE TREASURER'S LOCAL AGENCY INVESTMENT FUND AND AUTHORIZING THE CITY TREASURER TO MAKE DEPOSITS AND WITHDRAWALS FROM SAID FUND WHEREAS, Section 16429.1, of the Government Code created a Local Agency Investment Fund in the State Treasury for the deposit of money of a local agency for purposes of investment by the State Treasurer; and With the approval of its governing body, any local government agency having money in its treasury not required for immediate needs may remit such money to the State Treasury for deposit in the Local Agency Investment Fund for the purpose of investment; and Money in the fund shall be invested to achieve the objective of maximum return consistent with safe and prudent treasury management; and Before any deposits will be accepted, the local government agency must file a resolution with the State Treasurer; and The City Council does hereby find that the deposit and withdrawal of money in.the Local Agency Investment Fund in accordance with the provisions of Government Code Section 16429.1 for the purposes of investment as stated therein is in the best interests of Huntington Beach, NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Huntington Beach that it desires to participate in the State Treasurer's Local Agency Investment Fund and does hereby authorize the deposit and withdrawal of Huntington Beach monies in the Local Agency Investment Fund in the State Treasury in accordance with the provisions of Section 16429.1 of the Government Code for the purpose of investment as stated therein, and verification by the State Treasurer's office of any banking information . provided in that regard. BE IT FURTHER RESOLVED that Shari Freidenrich, City Treasurer of the City of Huntington Beach, is hereby authorized to order the deposit or withdrawal of monies the Local Agency Investment Fund. 03reso/local agency/7/2/03 1 The City Clerk is directed to send a certified copy of this resolution to the Treasurer of the State of California. PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a regular meeting thereof held on the 21 day of July , 2003. Mayor ATTEST: APPROVED AS TO FORM: City Clerk 3 !�mey REV}EWED A PP OVED: INITIATED AND APPROVED: City Administrator Tre ur 03reso/localagency/7/2/03 2 Res. No. 2003-54 STATE OF CALIFORNIA ) COUNTY.OF ORANGE ) ss: CITY OF HUNTINGTON BEACH ) I, CONNIE BROCKWAY, the duly elected, qualified City Clerk of the City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do hereby certify that the whole number of members of the City Council of the City of Huntington Beach is seven; that the foregoing resolution was passed and adopted by the affirmative vote of at least a majority of all the members of said City Council at a regular meeting thereof held on the 21th day of July, 2003 by the following vote: AYES: Sullivan, Coerper, Green, Boardman, Cook , Houchen, Hardy NOES: None ABSENT: None ABSTAIN: None City Clerk and ex officio Clerk of the City Council of the City of Huntington Beach, California City of Huntington Beach Investment Policy Attachment 2 aoo3 CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY FISCAL YEAR 2002 / 2003 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.............................................................................4 9.0 Authorized Financial Dealers & Institutions.......................................................5 10.0 Authorized & Suitable Investments......................................................................6 11.0 Portfolio Adjustment..............................................................................................8 12.0 Collateralization......................................................................................................8 13.0 Safekeeping and Custody.......................................................................................8 14.0 Diversification .........................................................................................................9 15.0 Maximum Maturities..............................................................................................9 16.0 Internal Control....................................................................................................10 17.0 Performance Standards........................................................................................10 18.0 Reporting...............................................................................................................11 19.0 Investment Policy Adoption.................................................................................12 Glossary.................................................................................................................13 Appendix A—Investment Guidelines................. ..................................i 0203 invpol.doc 1 Q.s; zoo 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 0203 invpol.doc 2 a003-5q 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 I 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. 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 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, 0203 invpol.doc 9 Res ! aOD3 -sY R-*:a 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 $100,000 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 shall be safe kept with the city itself or with a qualified financial institution, contracted by the city as a third party. All agreements and statements will be subject to review annually by external auditors in conjunction with their a udit. In t he event t hat t he C ity has a f inancial i nstitution h old t he s ecurities, a separate custodial agreement shall be required. 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. 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 60% of the total 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. 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. 0203 invpol.doc 10 ZQs , a003 -54 -: a 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. 16.0 Internal Control: 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: 1. City Treasurer 2. Deputy City Treasurer 3. Finance Officer 4. Director of Administrative Services 0203 invpol.doc 11 12e s aovl -5 L� A-H-t 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 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 Officer and the Investment Advisory 0203 invpol.doc 12 fZes : ao03 -sue ► ; 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 the Statement of Investment Policy 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 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. 0203 invpol.doc 13 12es 1 ao 0 3 -54 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%) 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. COMMERCIAL PAPER: Short term unsecured promissory note issued by a corporation to raise working capital. T hese 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, BankAmerica, etc. 0203 invpol.doc 14 R e s 1 z o O 1 -5� R4+, 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 d ealer, a s o pposed t o a b roker, a cts a s a p rincipal i n a 11 t ransactions, 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 w ith an exchange of money for the securities. Delivery v ersus receipt is delivery of securities with an exchange of a signed receipt for the securities. 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. 0203 invpol.doc 15 oes ; aoo3 - 5T ": a 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: 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. 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. T hese b onds are i ssued at i rregular t imes for v arious in aturities 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 0203 invpol.doc 16 OZe s : ID o3 —s Y- R+fi a 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 R eserve g uidelines r egarding p urchases a nd s ales o f G overnment S ecurities i n the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: T he c entral b ank o f t he U nited S tates c reated b y 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. 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 (LGIP): the aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. 0203 invpol.doc 17 "?es aoo3 -s� �� MARKET VALUE: The price at which a security is trading and could presumable be purchased or sold. MARKET 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. 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 0203 invpol.doc 18 Res: 3o03-0 a 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. 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 a nd v aluables of a 11 t ypes a nd d escriptions a re h eld i n t he b ank's v aults f or protection. 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. 0203 invpol.doc 19 ke-s , aQD3 -5q 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See "Uniform Net Capital Rule". 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, 0203 invpol.doc 20 ( es : dQ03-5y ►y*( including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. L iquid c apital 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. 0203 invpol.doc 21 Res: a003 -5�- ►=f: d 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 Office 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. 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. 4. Purchasing an Investment Establish w ith w hom t he j urisdiction i s g oing t o t ransact b usiness o n a n a nnual b asis. This should be accomplished through the use of a broker-dealer questionnaire, which helps provide the following evaluation: i Res : a003 -54 a 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. ii 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 iii Government Code Section 19429.1-16429.4 Attachment 3 WAIS Document Retrieval 2�S _�� Page 1 of 3 CALIFORNIA CODES GOVERNMENT CODE SECTION 16429.1-16429.4 16429.1. (a) There is in the State Treasury the Local Agency Investment Fund, which fund is hereby created. Notwithstanding Section 13340, all money in the fund is hereby appropriated without regard to fiscal years to carry out the purpose of this section. The Controller shall maintain a separate account for each governmental unit having deposits in this fund. (b) Notwithstanding any other provisions of law, a local governmental official, with the consent of the governing body of that agency, having money in its treasury not required for immediate needs, may remit the money to the Treasurer for deposit in the Local Agency Investment Fund for the purpose of investment. (c) Notwithstanding any other provisions of law, an officer of any nonprofit corporation whose membership is confined to public agencies or public officials, or an officer of a qualified quasi-governmental agency, with the consent of the governing body of that agency, having money in its treasury not required for immediate needs, may remit the money to the Treasurer for deposit in the Local Agency Investment Fund for the purpose of investment. (d) Notwithstanding any other provision of law or of this section, a local agency, with the approval of its governing body, may deposit in the Local Agency Investment Fund proceeds of the issuance of bonds, notes, certificates of participation, or other evidences of indebtedness of the agency pending expenditure of the proceeds for the authorized purpose of their issuance. In connection with these deposits of proceeds, the Local Agency Investment Fund is authorized to receive and disburse moneys, and to provide information, directly with or to an authorized officer of a trustee or fiscal agent engaged by the local agency, the Local Agency Investment Fund is authorized to hold investments in the name and for the account of that trustee or fiscal agent, and the Controller shall maintain a separate account for each deposit of proceeds. (e) The local governmental unit, the nonprofit corporation, or the quasi-governmental agency has the exclusive determination of the length of time its money will be on deposit with the Treasurer. (f) The trustee or fiscal agent of the local governmental unit has the exclusive determination of the length of time proceeds from the issuance of bonds will be on deposit with the Treasurer. (g) The Local Investment Advisory Board shall determine those quasi-governmental agencies which qualify to participate in the Local Agency Investment Fund. (h) The Treasurer may refuse to accept deposits into the fund if, in the judgment of the Treasurer, the deposit would adversely affect the state's portfolio. (i) The Treasurer may invest the money of the fund in securities prescribed in Section 16430. The Treasurer may elect to have the money of the fund invested through the Surplus Money Investment Fund as provided in Article 4 (commencing with Section 16470) of Chapter 3 of Part 2 of Division 4 of Title 2 . (j) Money in the fund shall be invested to achieve the objective of the fund which is to realize the maximum return consistent with safe and prudent treasury management. (k) All instruments of title of all investments of the fund shall remain in the Treasurer's vault or be held in safekeeping under http://www.leginfo.ca.gov/cgi-bin/waisgate?WAISdocID=27636714586+12+0+0&WAISaction=retrieve 7/3/2003 WAIS Document Retrieval �-e 4 �'p0 3_� I�V�Page 2 of 3 control of the Treasurer in any federal reserve bank, or any branch thereof, or the Federal Home Loan Bank of San Francisco, with any trust company, or the trust department of any state or national bank. (1) Immediately at the conclusion of each calendar quarter, all interest earned and other increment derived from investments shall be distributed by the Controller to the contributing governmental units or trustees or fiscal agents, nonprofit corporations, and quasi-governmental agencies in amounts directly proportionate to the respective amounts deposited in the Local Agency Investment Fund and the length of time the amounts remained therein. An amount equal to the reasonable costs incurred in carrying out the provisions of this section, not to exceed a maximum of one-half of 1 percent of the earnings of this fund, shall be deducted from the earnings prior to distribution. The amount of this deduction shall be credited as reimbursements to the state agencies, including the Treasurer, the Controller, and the Department of Finance, having incurred costs in carrying out the provisions of this section. (m) The Treasurer shall prepare for distribution a monthly report of investments made during the preceding month. (n) As used in this section, "local agency, " "local governmental unit, " and "local governmental official" includes a campus or other unit and an official, respectively, of the California State University who deposits moneys in funds described in Sections 89721, 89722, and 89725 of the Education Code. 16429.2 . There is created the Local Investment Advisory Board consisting of five members. The chairman shall be the State Treasurer or his or her designated representative. Two members who are qualified by training and experience in the field of investment or finance, shall be appointed by the State Treasurer. Two members who are treasurers, finance or fiscal officers or business managers, employed by any county, city or local district or municipal corporation of this state, shall be appointed by the Treasurer. The term of office of each appointed member of the board is two years, but each appointed member serves at the pleasure of the appointing authority. A vacancy in the appointed membership, occurring other than by expiration of term, shall be filled in the same manner as the original appointment, but for the unexpired term only. Members of the board who are not state officers or employees shall not receive a salary, but shall be entitled to a per diem allowance of fifty dollars ($50) for each day's attendance at a meeting of the board, not to exceed three hundred dollars ($300) in any month. All members shall be entitled to reimbursement for expenses incurred in the performance of their duties under this part, including travel and other necessary expenses. The board's primary purpose shall be to advise and assist the State Treasurer in formulating the investment and reinvestment of moneys in the Local Agency Investment Fund, and the acquisition, retention, management, and disposition of investments of the fund. The board, from time to time, shall review those policies and advise therein as it considers necessary or desirable. The board shall advise the State Treasurer in the management of the fund and consult the State Treasurer on any matter relating to the investment and reinvestment of ,moneys in the fund. http://www.leginfo.ca.gov/cgi-bin/waisgate?WAISdocID=27636714586+12+0+0&WAISaction=retrieve 7/3/2003 I aoo 3 -5(f AJ+:3 WAIS Document Retrieval Page 3 of 3 16429.3. Moneys placed with the Treasurer for deposit in the Local Agency Investment Fund by cities, counties, special districts, nonprofit corporations, or qualified quasi-governmental agencies shall not be subject to either of the following: (a) Transfer or loan pursuant to Sections 16310, 16312, or 16313. (b) Impoundment or seizure by any state official or state agency. 16429.4 . The right of a city, county, city and county, special district, nonprofit corporation, or qualified quasi-governmental agency to withdraw its deposited moneys from the Local Agency Investment Fund, upon demand, may not be altered, impaired, or denied, in any way, by any state official or state agency based upon the state's failure to adopt a State Budget by July 1 of each new fiscal year. http://www.leginfo.ca.gov/cgi-bin/waisgate?WAISdocID=27636714586+12+0+0&WAISaction=retrieve 7/3/2003 i RCA ROUTING INITIATING DEPARTMENT: City Treasurer SUBJECT: Local Agency Investment Fund (LAIF) Resolution COUNCIL MEETING DATE: July 21 , 2003 RCA ATTACHMENTS STATUS Ordinance (w/exhibits & legislative draft if applicable) Not Applicable Resolution (w/exhibits & legislative draft if applicable) Attached Tract Map, Location Map and/or other Exhibits Not Applicable Contract/Agreement (w/exhibits if applicable) Signed in full by the City Attorney) Not Applicable Subleases, Third Party Agreements, etc. Approved as to form by City Attomeyj Not Applicable Certificates of Insurance (Approved by the City Attorney) Not Applicable Financial Impact Statement (Unbudget, over $5,000) Not Applicable Bonds (If applicable) Not Applicable Staff Report (If applicable) Not Applicable Commission, Board or Committee Report (If applicable) Not Applicable Findings/Conditions for Approval and/or Denial Not Applicable EXPLANATION FOR MISSING ATTACHMENTS REVIEWED RETURNED FORWARDED Administrative Staff Assistant City Administrator Initial City Administrator (Initial) City Clerk EXPLANATION FOR RETURN OF ITEM: SpaceOnly) RCA Author: CIYY OF HUNTINGTON BEACH MEETING DATE: December 16, 2002 DEPARTMENT ID NUMBER: CT 03-05 Council/Agency Meeting Held: gprred/Continued to:proved 0 Conditionally Approved ❑ Denied City Clerk's Sign re Council Meeting Date: December 16, 2002 Department ID Number: CT 03-05 `7-a CITY OF HUNTINGTON BEACH REQUEST FOR COUNCIUREDEVELOPMENT AGENCY ACTIOf SUBMITTED TO: HONORABLE MAYOR/CHAIRMAN AND CITY COUNCIL MEMBERS/REDEVELOPMENT AGENCY MEMBERS 7D SUBMITTED BY: SHARI L. FREIDENRICH, City Treaszu oe c PREPARED BY: SHARI L. FREIDENRICH, City Treasurers /UO� cy tia. j`'oc SUBJECT: APPROVE AND ADOPT THE 2002/2003 INVESTMENT POLICY Statement 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. Funding Source: Not applicable. City Council Recommended Action: Motion to: 1. Approve and adopt the attached Resolution of the City Council of the City of Huntington Beach, approving the 2002/2003 Investment Policy. Redevelopment Agency Recommended Action: Motion to: 1. Approve and adopt the attached Resolution of the Redevelopment Agency of the City of Huntington Beach, approving the 2002/2003 Investment Policy. Alternative Action(s): Do not approve attached Resolution and Investment Policy and advise staff how to proceed. RCACT 05 Investment Policv for 02-03.DOC -x December 2.2002 9:54 AM REQUEST FOR COUNCIL/REDEVELOPMENT AACY ACTION MEETING DATE: December 16, 2002 DEPARTMENT ID NUMBER: CT 03-05 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, 2002). 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 Government Code Section 53601. Environmental Status: Not applicable. Attachment(s): City Clerk's Page Number No. Description Resolution of the City Council of the City of Huntington Beach approving the 2002/2003 Investment Policy No. 42gs, /L6 aoo,2 2 2 Resolution of the Redevelopment Agency of the City of Huntington Beach approving the 2002/2003 Investment Policy No. 3. Exhibit A: As% v• `� � 2002/2003 Statement of Investment Policy RCACT 05 Investment Policv for 02-03.1130C December 2,2002 9:54 AM RESOLUTION NO. 2002-128 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH APPROVING THE STATEMENT OF INVESTMENT POLICY FOR 2002/2003 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 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 2002/2003 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 16th day of December ,2002. ATTEST: �J�y City Clerk Mayor REVIEWED AND APPROVED: APPROVED AS TO FORM: City dministrator AginAttorney INITIATED AND APPROVED: Ci 1rufer GARESOLUTN\2002\invest policy.doc Res.342 Ex.A CITY OF HUNTINGTON BEACH Res.No.2002-128 STATEMENT OF INVESTMENT POLICY Ex.A FISCAL YEAR 2002 /2003 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.......................................................................... 4 9.0 . Authorized Financial Dealers & Institutions..................................................... 5 . 10.0 Authorized & Suitable Investments....................................................:............. 6 11.0 Portfolio Adjustment.......................................................................................... 8 12.0 Collateralization ................................................................................................. 8 13.0 Safekeeping and Custody................................................................................... 8 14.0 Diversification..................................................................................................... 9 15.0 Maximum Maturities.......................................................................................... 9 16.0 Internal Control.................................................................................................10 17.0 Performance Standards.....................................................................................10 18.0 Reporting...........................................................................................................11 19.0 Investment Policy Adoption..............................................................................12 Glossary .............................................................................................................13 Appendix A Investment Guidelines.......... ... ................ ...............i 0203 invpol 1 Res.342 Ex.A CITY OF HUNTINGTON BEACH Res.No.2002-128 Ex.A 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 izing 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 0203 invpol 2 Res.342 Ex.A 3.1.5 Trust and Agency Funds Res.No.2002-128 Ex.A 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 iri 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. 0203 invpol 3 Res.342 Ex.A 5.2 Liquidity: Res.No.2002-128 Ex.A 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. 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: 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. 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 0203 invpol 4 Res.342 Ex.A regulations, being Government Code Sections 81000 and the Fair QoWe k-'eractices Ex.A Commission(FFPC)). 9.0 Authorized Financial Dealers and Institutions: The City Treasurer will maintain a list of the financial institutions and broker/dealers authorized to provide investment and depository services and will perform an 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 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 0203 invpol 5 Res.No.2002-128 Res.342 Ex.A Ex.A 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). 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 A1/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 Moody's Investor Services, Standard & Poor's and Fitch Financial Services. The issuing corporation must be organized and operating within the United States,with total assets in excess of$500 million and shall issue debt, other than commercial paper, that is rated"A"or higher by Moody's, S&P and Fitch. Split ratings(i.e.A2/P1)are not allowable. No more than 10 percent of the outstanding commercial paper of any single corporate issue may be purchased. D. -BONDS ISSUED BY THE CITY OR ANY LOCAL AGENCY WITHIN THE STATE OF CALIFORNIA. - Bonds must have an "A"rating or better 0203 invpol 6 Res.342 Res.No.2002-128 Ex.A Ex.A E. OBLIGATIONS OF THE UNITED STATES TREASURY United States Treasury Notes, bonds, bills or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. There is no limit on the percentage of the portfolio that can be invested in this category. . F. FEDERAL AGENCIES Debt instruments issued by agencies of the Federal government. Though not general obligations of the U.S.Treasury,such securities are sponsored by the government or related to the government and,therefore,have high safety ratings. The following are authorized Federal Intermediate Credit Bank (FICB's), Federal Land Bank. (FLB'.$), 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: (A)The security to be sold on reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale. (B) The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio. (C) The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security. (D) Funds obtained or funds within the pool of an equivalent amount to.that obtained.from selling a security to a counterparty by way of a reverse repurchase agreement or securities lending agreement,shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, 0203 invpol 7 Res.342 Res.No.2002-128 Ex.A Ex.A 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/PI or a long term rating of at least a single A from a generally recognized authority on ratings. 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 national rating agencies,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. 0203 invpol 8 Res.No.2002-128, Res.342Ex.A Ex.A 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 LAW 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. 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 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, 0203 invpol 9 Res.No.2002-128 Ex A 2 Ex.A 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 $100,000 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 shall be safe kept with the city itself or with a qualified financial institution, contracted by the city as a third party. All agreements and statements will be subject to review annually by external auditors in conjunction with their audit. In the event that the City has a financial institution hold the securities, a separate custodial agreement shall be required. 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. 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 60% of the total 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. 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. 0203 invpol 10 Res.342 Res.No.2002-128 Ex.A Ex.A 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. 16.0 Internal Control: 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: 1. City Treasurer 2. Deputy City Treasurer 3. . . Finance Officer 4. Director of Administrative Services 0203 invpol 11 Res.No.2002-12& Res.342 Ex.A Ex.A 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 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 LAW 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 Officer and the Investment Advisory 0203 invpol 12. Res.No.2002-128 Res.342 Ex.A Ex.A 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 the Statement of Investment Policy 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 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. 0203 invpol 13 Res.No.2002-12$ Res.342 Ex.A Ex.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%) 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. COMMERCIAL PAPER:, Short :term unsecured promissory note issued by:.a. corporation 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, BankAmerica, etc. 0203 invpol 14 Res.No.2002-128 Res.342 Ex.A Ex.A 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 with an exchange of a signed receipt for the securities. DISCOUNT: . The difference between the cost price of a security and its maturity when quoted at .Iower 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. 0203 invpol 15 Res.No.2002-128 Res.342 Ex.A Ex.A 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: 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. 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 fined-rate mortgages. FNMA's 0203 invpol 16 Res.No.2002-128 Res.342 Ex.A Ex A 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. 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 (LGIP): the aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for_investment and reinvestment. 0203 invpol 17 Res.No.2002-128 Ex.A Res.342 Ex.A MARKET VALUE: The price at which a security is trading and could presumable be purchased or sold. MARKET 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. 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 0203 invpol 18 Res.No.2002-128 Ex.A Res.342 Ex.A 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. 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.faced 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. 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. 0203 invpol 19 Res.No.2002-128 Ex.A Res.342 Ex.A 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See "Uniform Net Capital Rule". 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, 0203 invpol 20 Res.No.2002-128 R� 342 Ex.A Ex.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. 0203 invpol 21 Res.No.2002-128 Ex.A Res.342 Ex.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 Office 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. 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. 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: i Res.No.2002-128 Ex.A Res.342 Ex.A 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(30/3% 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. ii Res.No.2002-128 Ex.A Res.342 Ex.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 iii Res. No. 2002-128 STATE OF CALIFORNIA COUNTY.OF ORANGE ) ss: CITY. OF:-HUNTINGTON BEACH ) I, CONNIE BROCKWAY, 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 16th day of December 2002 by the following vote: AYES: Sullivan, Coerper, Green, Boardman, Cook, Houchen, Hardy NOES: None ABSENT: None ABSTAIN: None City Clerk and.ex-officio CIA of the. City Council of the City of Huntington Beach, California RESOLUTION NO. 147 A RESOLUTION OF THE REDEVEOPMENT AGENCY OF THE CITY OF HUNTINGTON BEACH APPROVING THE STATEMENT OF INVESTMENT POLICY FOR 2002/2003 1. 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 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 2002/2003 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 16th day of December , 2002. ATTEST: Agency Clerk Chairperson REVIEWED AND APPROVED: APPROVED AS TO FORM: . Ex utive Director /agency Attorney INITIATED AND APPROVED: C reasurer G:\RESOLUTY\2002\InvestPolicy-Agency.doc Ex A tCa o 3 CITY OF HIINTINGTON BEACH Res.No.2002-128 STATEMENT OF INVESTMENT POLICY a A FISCAL YEAR 2002/2003 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..........................................................................4 9.0 Authorized Financial Dealers & Institutions.....................................................5 10.0 Authorized & Suitable Investments....... . .................... ............ .......... ..6`_ 11.0 Portfolio Adjustment..........................................................................................8 12.0 Collateralization .................................................................................................8 13.0 Safekeeping and Custody...................................................................................8 14.0 Diversification.....................................................................................................9 15.0 Maximum Maturities..........................................................................................9 16.0 Internal Control.................................................................................................10 17.0 Performance Standards.....................................................................................10 18.0 Reporting.......................................... ....... .... .. ......... ....... ......11 19.0 Investment Policy Adoption..............................................................................12 Glossary .............................................................................................................13 Appendix A-Investment Guidelines.................. ..................................i 0203 invpol 1 r.w.- Ex.A CITY OF HUNTINGTON BEACH Res.No.2002-128 Ex.A 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 0203 invpol 2 Ex.A 3.1.5 Trust and Agency Funds Res.No.2002-128 Ex.A 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. 0203invpol 3 Ex.A^� 5.2 Liquidity: Res.No.2002-128 Ex.A 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 prineipaL 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: 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. 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 0203 invpol 4 Res.342 Ex.A regulations, being Government Code Sections 81000 and the Fair &OUsieek-exactices a A Commission(FFPC)). 9.0 Authorized Financial Dealers and Institutions: The City. Treasurer will maintain a list of the financial .institutions and broker/dealers.. authorized to provide investment and:depository services and will perform an 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 maq 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 i procedures shall encourage competitive. bidding on transactions from approved 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 0203 invpol 5 Res.No.2002-128 Ex.A"" Ex.A 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). 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/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 ofAl/P1 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 Moody's Investor Services, Standard & Poor's and Fitch Financial Services.. The issuing corporation must be-organized and operating within the United States,with total assets in excess.of$500 million and shall issue debt, other than commercial paper, that is . rated"A"or higher by Moody's,S&P and Fitch. 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 0203 invpol 6 Res.342 Res.No.2002-128 Ex.A Ex.A 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 C►ty.. .. 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: (A)The security to be sold on reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale. (B) The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio. (C)The agreement does not exceed a term of 92 days,unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security. . (D) Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty by way of a reverse repurchase agreement or securities lending agreement,shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, 0203 invpol 7 Res.No.2002-128 Ex A Ex.A 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 shOl.be "A" rated or.iis..equivalent or better as determimd'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/PI or a long term rating of at least a single A from a generally recognized authority on ratings. 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 national rating agencies,must maintain a daily principal per share value of S 1.00 per share and distribute interest monthly,and must have a minimum of S500 million in assets under management. The purchase price of the shares may not include commission. 0203 invpol 8 Res.No.2002-128, Res.342 E Ex.A x.A M. THE LOCAL AGENCY INVESTMENT FUND (LATE) 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. 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 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, 0203 invpol 9 Res.No.2002-128 �A342 Ex.A 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 $100,000 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 shall be safe kept with the city itself or with a qualified financial institution, contracted by the city as a third party. All agreements and statements will be subject to review annually by external auditors in conjunction with their audit. In the event that the City has a financial institution hold the securities, a separate custodial agreement shall be required. 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. 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 60% of the total 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. 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. 0203 invpol 10 Res.342 Res.No.2002-128 a A Ex.A 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. ' 16.0 Internal Control: 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: 1. City Treasurer 2. Deputy City Treasurer 3. Finance Officer 4. Director of Administrative Services 0203invpol 11 Res.No.2002-12& Res.342 a Ex.A 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 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 Officer and the Investment Advisory 0203 invpol 12 Res.No.2002-1Z8 Res.342 Ex.A Ex A 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 the Statement of Investment Policy 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&c 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 to the California Debt and Investment Advisory Commission (CDIAQ 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. 0203 invpol 13 Res.No.2002-124 Res.342 Ex.A Ex.A GLOSSARY AGENCIES: Federal agency securities. ASKED: The price at which securities are.Offered. (The price at which a,fin 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%) 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. COMMERCIAL PAPER: Short term unsecured .promissory note issued by. a. corporation 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, BankAmerica,etc. 0203 invpol 14 Res.No.2002-128. Res.342 Ex.A Ex.A 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 with an exchange of a signed receipt for the securities. DISCOUNT: .The difference between the cost price of a'security and its maturity when quoted at Iower 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. 0203 invpol 15 Res.No.2002-128 Res.342 Ex.A Ex.A 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: 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. 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 0203 invpol 16 Res.No.2002-128 Res.342 Ex.A Ex.A 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. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA OR GINNIE MAE): Securities influencmg`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 (LGIP): the aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. 0203 invpol 17 Res.No.2002-128 Ex.A Res.342 Ex.A MARKET VALUE: The price at which a security is trading and could presumable be purchased or sold. MARKET REPURCHASE AGREEMENT: A written contract covering all .future transactions between the parties to rep urchase-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. 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 0203 invpol 18 Res.No.2002-128 Ex.A Res.342 Ex.A 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. 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. 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. 0203 invpol 19 Res.No.2W2-128 Ex.A Res.342 a A 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See"Uniform Net Capital Rule". 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, 0203 invpol 20 Res.No.2002-128 Res.342 Ex A Ex.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. 0203 invpol 21 Res.No.2002-128 Ex.A Res.342 Ex.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 Office 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. 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. 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: i Res.No.2002-128 Ex A Res.342 Ex.A 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 frequencyof distribution. d) Clear description of how interest rates.arecalculated(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. ii Res.No.2002-128 Ex.A Res.342 Ex.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 iii Res. No. 342 .STATE OF CALIFORNIA ) COUNTY OF ORANGE . . ) ss CITY OF HUNTINGTON BEACH ) I, CONNIE BROCKWAY, 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 16th day of December, 2002 and that it was so adopted by the following vote: AYES Sullivan, Coerper, Green, Boardman, Cook, Houchen, Hardy NOES: None ABSENT: None ABSTAIN: None Clerk of the Redevelopmen Agency of the City of Huntington Beach, CA Treasurer's Report - Shari L. Freidenrich, CPA, CCMT, CFMA INVESTMENT POLICY 2002/2003 Shari L . Freidenrich , CPA, CCMT, CFMA December 16, 2002 Slide 1 0 Treasurer's Report - Shari L. Freidenrich, CPA, CCMT, CFMA Investment Policy 02/03 • Approved by IAB on Oct. 23, 2002 • Annually updated/approved • Two major changes • LAIF - Total Limit of $40 million • New Benchmark — average of LAIF and 2 year Treasury Slide 2 (7- ':112D)— 5 b"-4 3�Aj CITY OF HUNTINGTON BEACri MEETING DATE: December 17, 2001 DEPARTMENT ID NUMBER: CT 02-01 Council/Agency Meeting Held: 17'01 Deferred/Continued to: A roved ❑ Con 'tionally Approved ❑ Denied W - CI y CIer ' Signature Council Meeting Date: December 17, 2001 Department ID Number: CT 02-01 /," A-�) boo/- 9,6 CITY OF HUNTINGTON BEACH REQUEST FOR COUNCIL/REDEVELOPMENT AGENCY-ACTION SUBMITTED TO: HONORABLE MAYOR/CHAIRMAN AND CITY COUNCIL g a: MEMBERS/REDEVELOPMENT AGENCY MEMBERS C-) SUBMITTED BY: SHARI L. FREIDENRICH, City Treasurer 00 C:) `= PREPARED BY: SHARI L. FREIDENRICH, City Treasu D DT'^c i SUBJECT: APPROVE AND ADOPT THE 2001/2002 INVESTMENT P01..ICX-) Statement of issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status, Attachment(s) 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. Funding Source: Not applicable. City Council Recommended Action: Motion to: ,6�o ,2-01 1?(,/ 1. Approve and adopt the attached Resolution of the City Council of the City of Huntington Beach, approving the 2001/2002 Investment Policy. Redevelopment Agency Recommended Action: Motion to: 1. Approve and adopt the attached Resolution of the Redevelopment Agency of the City of Huntington Beach, approving the 20001/2002 Investment Policy. Alternative Action(s): Do not approve attached Resolution and Investment Policy and advise staff how to proceed. I V RCACT 01 Investment Policy for 01-02 11/1/01 10:41 AM REQUEST FOR COUNCIL/REDEVELOPMENT AGENCY ACTION MEETING DATE: December 17, 2001 DEPARTMENT ID NUMBER: CT 02-01 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, 2001). 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 Government Code Section 53601. Environmental Status: Not applicable. Attachment(s): City Clerk's Page Number No. Description 1 Resolution of the City Council of the City of Huntington Beach approving the 2001/2002 Investment Policy No. -3Gb/-96 2 Resolution of the Redevelopment Agency of the City of Huntington Beach approving the 2001/2002 Investment Policy No. 3ac? 3. Exhibit A: 2001/2002 Statement of Investment Policy RCACT 01 Investment Policy for 01-02 11/1/01 10:28 AM Resolution of the City Council of the City of Huntington Beach approving the 2001/2002 Investment Policy Attachment 1 RESOLUTION NO. 2001-96 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON-BEACH APPROVING THE INVESTMENT POLICY FOR FISCAL YEAR 2001/2002 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 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 Investment Policy.for Fiscal Year 2001/2002 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 17th day of December 92001 . ATTEST: City Clerk I2-241-o1 Mayor REVIEWED AND APPROVED: APPROVED AS TO FORM: Ci Administrator City Attorney L IZISIo I 12's 61 INITIATED AND APPROVED: ity Tr a rer 01 reso/invest policy/12/5/01 Res.No.2001-96 Ex.A CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY FISCAL YEAR 2001/2002 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............................................................................4 9.0 Authorized Financial Dealers & Institutions ...................................................... 5 10.0 Authorized &Suitable Investments..................................................................... 6 11.0 Portfolio Adjustment............................................................................................. 8 12.0 Collateralization..................................................................................................... 8 13.0 Safekeeping and Custody...................................................................................... 8 14.0 Diversification ........................................................................................................ 9 15.0 Maximum Maturities.............................................................................................9 16.0 . Internal Control.................................................................................................:: 10 17.0 Performance Standards....................................................................................... 10 18.0 Reporting.............................................................................................................. 11 19.0 Investment Policy Adoption.................... Glossary.................................................................................................................13 Appendix A—Investment Guidelines................. ..................................i 0102 investment policy.doc j October 15,2001 Res.No.2001-96 Ex.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 1006/o. 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 0102 investment policy.doc 2 October 15,2001 Res.No.2001-96 Ex.A 3.1.4 Enterprise Funds 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 0102 investment policy.doc 3 October 15,2001 Res. No. 328 STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss CITY OF HUNTINGTON BEACH ) I, CONNIE BROCKWAY, 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 17th day of December, 2001 and that it was so adopted by the following vote: AYES: Garofalo, Dettloff, Bauer, Cook, Houchen, Green, Boardman NOES: None ABSENT: None ABSTAIN: None Clerk of the Redevelopment Agency of the City of Huntington Beach, CA 2001/2002 Statement of Investment Policy 51tzE ems. Nb- 20oI_ qb g, L*JA VV. No, a28 Attachment 3 Exhibit A RCA ROUTING SHEET INITIATING CITY TREASURER DEPARTMENT: SUBJECT: Investment Policy COUNCIL MEETING DATE: December 17, 2001 RCA ATTACHMENTS STATUS Ordinance (w/exhibits & legislative draft if applicable) Not Applicable Resolution (w/exhibits & legislative draft if applicable) Attached Tract Map, Location Map and/or other Exhibits Not Applicable Contract/Agreement (w/exhibits if applicable) (Signed in full by the City Attorney Not Applicable Subleases, Third Party Agreements, etc. (Approved as to form by City Attorney) Not Applicable Certificates of Insurance (Approved by the City Attome Not Applicable Financial Impact Statement (Unbudget, over $5,000) Not Applicable Bonds (If applicable) Not Applicable Staff Report If applicable) Not Applicable Commission, Board or Committee Report (If applicable) Not Applicable Findings/Conditions for Approval and/or Denial Not Applicable EXPLANATION FOR-MISSING ATTACHMENTS REVIEWED RETURNED FORWARDED Administrative Staff Assistant City Administrator Initial City Administrator Initial G City Clerk ce:k-r EXPLANATION FOR RETURN OF ITEM: A- P d' Space . Only) N C o Z_ o O 7-, C_'• Treasurer's Report-Shari L. Freidenrich, CPA, CCMT � �-—+c INVESTMENT POLICY CO JLD r 2001/2002 D >� r � - 7 ' ! - D co Shari L. Freidenrich, CPA, CCMT December 17, 2001 slide 1 Treasurer's Report-Shari L. Freidenrich, CPA, CCMT Investment Policy 01/02 • Approved by IAB on Oct. 17, 2001 • Annually updated/approved • New Legislation Changes *Commercial Paper maximum — from 30% w/restrictions to 25% without any restrictions Slide 2 QMA4MCAT16N ,3b Treasurer's Report-Shari L. Freidenrich, CPA, CCMT Investment Policy 01/02 • New Legislation Changes — cont. • Repurchase Agreement additional language •Authorized Financial Banks •New Satisfactory Ratings Requirement • Req`t to send policy/quarterly report to State Slide 3 Treasurer's Report-Shari L.Freidenrich, CPA, CCMT Investment Policy 01/02 • Benchmark was 1 year Treasury, now 1-3 Year Merrill Lynch Treasuries/Agencies Index Slide 4