HomeMy WebLinkAboutAdopt Resolution No. 2020-09 Approving the 2020 Investment P _fin, —r c,1i,J Z-
*IppwQED -7-0
City of Huntington Beach
File #: 20-1353 MEETING DATE: 2/3/2020
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Oliver Chi, City Manager
PREPARED BY: Alisa Backstrom, City Treasurer
Subiect:
Adopt Resolution No. 2020-09 approving the 2020 Investment Policy
Statement of Issue:
Pursuant to California Government Code, the Treasurer of the local agency may render an annual
statement of investment policy to the legislative body for consideration and adoption. The City
Treasurer, with the assistance of the Investment Advisory Board, has prepared an updated
investment policy.
Financial Impact:
Not Applicable.
Recommended Action:
Adopt Resolution No. 2020-09, "A Resolution of the City Council of the City of Huntington Beach
Approving the Statement of Investment Policy 2020."
Alternative Action(s):
Do not adopt Resolution No. 2020-09.
Analysis:
The City Treasurer is responsible for the administration of the investments of City of Huntington
Beach. The purpose of the Investment Policy is to establish cash management and investment
guidelines for the investment of the City's unexpended cash balances, which exclude employee
retirement funds, funds governed by bond indenture agreements, and other funds managed
separately. This policy shall apply to each investment transaction and the entire portfolio, which must
comply with the California Government Code, Sections 53600 through 53683, and all other
applicable laws and regulations.
The City's Investment Policy may be rendered annually to the City Council to ensure its consistency
with the overall objectives of preservation of principal, liquidity, and return. The attached Investment
City of Huntington Beach Page 1 of 2 Printed on 1/29/2020
powerettJ LegistarT.
File #: 20-1353 MEETING DATE: 2/3/2020
Policy has been reviewed by the City's Investment Advisory Board and approved as to form by the
City Attorney.
There is one minor update to the Investment Policy for 2020. The California State Treasurer's Office
has increased the Maximum Allowable Investment Amount in the Local Agency Investment Fund
(LAIF) from $65 Million to $75 Million. This increase to the allowable investment amount has been
added. The Investment Policy has been certified by the California Municipal Treasurers Association
stating that it complies with the current State statutes governing the investment practices of local
government entities located within the state of California.
Environmental Status:
Not Applicable
Strategic Plan Goal:
Strengthen long-term financial and economic sustainability
Attachment(s):
1. Resolution No. 2020-09 of the City Council of the City of Huntington Beach adopting the 2020
Investment Policy
2. 2020 Investment Policy
City of Huntington Beach Page 2 of 2 Printed on 1/29/2020
powerelI24 LegistarTM
RESOLUTION NO. 2020-09
A RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF HUNTINGTON BEACH APPROVING THE
STATEMENT OF INVESTMENT POLICY 2020
WHEREAS, the City Council of the City of Huntington Beach is required to
approve an annual statement of investment policy; and
The duly elected City Treasurer has recommended approval of the City of
Huntington Beach Statement of Investment Policy, attached hereto as Exhibit"A" and
incorporated herein by this reference; and
The duly appointed Investment Advisory Board has reviewed the City Treasurer's
recommended policy and also recommends approval thereof; and
The policy is consistent with California Government Code §53600, et seq.
NOW, THEREFORE, the City Council of the City of Huntington Beach does
hereby resolve as follows:
The City Council of the City of Huntington Beach hereby approves and adopts the
attached City of Huntington Beach Statement of Investment Policy for 2020 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 3rd day of February , 2020.
or
VI D ROVED: APPROVED
City Manager City Attorney
ITIATED AND APPROVED:
City Treasurer
20-8379/223303
�E50 AZ. Z40ZO -�
CITY OF HUNTINGTON BEACH
STATEMENT OF INVESTMENT POLICY
2020
i
e
0
1
CITY OF HUNTINGTON BEACH
STATEMENT OF INVESTMENT POLICY
2020
TABLE OF CONTENTS
SECTION
1.0 Purpose.....................................................................................................................3
2.0 Policy........................................................................................................................3
3.0 Scope.........................................................................................................................3
4.0 Prudence..................................................................................................................4
5.0 Objective..................................................................................................................4
6.0 Investment Advisory Board...................................................................................5
7.0 Delegation of Authority..........................................................................................5
8.0 Ethics and Conflicts of Interest.............................................................................6
9.0 Authorized Financial Dealers & Institutions.......................................................6
10.0 Authorized & Suitable Investments......................................................................7
11.0 Portfolio Adjustment............................................................................................13
12.0 Collateralization....................................................................................................13
13.0 Safekeeping and Custody.....................................................................................14
14.0 Diversification .......................................................................................................14
15.0 Maximum Maturities............................................................................................15
16.0 Internal Control....................................................................................................15
17.0 Performance Standards........................................................................................16
18.0 Reporting...............................................................................................................17
19.0 Investment Policy Adoption................................................................................ 18
Glossary.................................................................................................................19
2
CITY OF HUNTINGTON BEACH
Statement of Investment Policy
1.0 Purpose:
This policy is intended to provide guidelines for the prudent investment of the City's
unexpended cash balances,and to outline the policies to assist in maximizing the efficiency
of the City's cash management system while meeting the daily cash flow demands of the
City.
2.0 Policy:
The investment practices and policies of the City of Huntington Beach are based upon
California state law and prudent money management.
3.0 Scope:
This investment policy applies to all financial assets as indicated in Section 3.1 below of
the City of Huntington Beach. These funds are accounted for in the City's Comprehensive
Annual Financial Report.
3.1 Funds:
The City Treasurer is responsible for investing the unexpended cash in the City Treasury
for all funds, except for the employee's pension funds, which are invested separately by
CALPERS, those funds which are invested separately by the City Treasurer under bond
indenture agreements, and funds which are invested separately by the City Treasurer or
trustees under other agreements approved by Council such as the Retiree Medical Trust,
the Post-Employment Section 115 Trust and the Supplemental Pension Trust. The City
Treasurer will strive to maintain the level of investment of this cash (that is not to be
utilized for operating cash flow in the next six months),as close as possible to 100%. These
funds are described in the City's annual financial report and include:
3.1.1 General Fund
3.1.2 Special Revenue Funds
3.1.3 Capital Project Funds
3.1.4 Enterprise Funds
3.1.5 Trust and Agency Funds
3.1.6 Debt Service Funds
3
3.1.7 Infrastructure Funds
3.1.8 Capital Improvement Reserve Funds
3.1.9 Any new fund created by the legislative body, unless specifically exempted
This investment policy applies to all transactions involving the financial assets and related
activity of the foregoing funds. It is the City's policy to pool funds for investment purposes
to provide efficiencies and economies of scale. Investing through a pooled account will
provide for greater use of funds by allowing for a more efficient cash flow, a reduction in
transaction costs and a greater access to the market.
4.0 Prudence:
The standard of prudence to be used by the City Treasurer shall be the"prudent investor"
standard. This shall be applied in the context of managing an overall portfolio.
The"Prudent Investor Rule"provides, pursuant to California Government Code Section
53600.3, that investments shall be made with judgment and care—under circumstances
then prevailing—which persons of prudence, discretion and intelligence exercise in the
management of their own affairs, not for speculation, but for investment, considering the
probable safety of their capital as well as the probable income to be derived. The City
Treasurer and any designee of the City Treasurer, as investment officers acting in
accordance with written procedures and the investment policy and exercising due
diligence, shall be relieved of personal responsibility for an individual security's credit risk
or market price changes, provided deviations from expectations are reported to the City
Council in a timely fashion and appropriate action is taken to control adverse
developments.
5.0 Objective:
Consistent with this aim, investments are made under the terms and conditions of
California Government Code Section 53600, et seq. Criteria for selecting investments and
the absolute order of priority are:
5.1 Safety:
Safety of principal is the foremost objective of the investment program. Investments of
the City of Huntington Beach shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio.
4
5.2 Liquidity:
The investment portfolio will remain sufficiently liquid to enable the City of Huntington
Beach to meet all reasonably anticipated operating requirements and to maintain
compliance with any indenture agreement,as applicable. Liquidity is essential to the safety
of principal. Furthermore, since all possible cash demands cannot be anticipated, the
portfolio will invest primarily in securities with active secondary and resale markets.
5.3 Return on Investments:
The investment portfolio shall be designed with the objective of attaining a market-average
rate of return throughout budgetary and economic cycles(market interest rates), within the
City of Huntington Beach's investment policy's risk parameters and the cash flow needs
of the City. See also Section 17.0.
6.0 Investment Advisory Board:
By City Charter, the City Treasurer is the custodian of all public funds of the City of
Huntington Beach. The City Council members may each appoint one Huntington Beach
resident to serve on an Investment Advisory Board for the purpose of advising the City
Treasurer and the City Council on the City's investment program. The Investment
Advisory Board will review the investment portfolio for compliance with the adopted
investment policy on a quarterly basis and will prepare an Annual Report.
7.0 Delegation of Authority:
In accordance with the State of California Government Code § 53607, the City Council
delegates investment authority to the City Treasurer for a period of one year and such
investment authority must be renewed annually. Adoption of this policy constitutes
delegation of investment authority to the City Treasurer for the following year unless
revoked in writing. Within the City Treasurer's office,the responsibility for the day to day
investment of City funds will be the City Treasurer and may be delegated to such deputy
chosen by the City Treasurer in the absence of the City Treasurer (as allowable per State
of California Government Code § 41006). The City Treasurer shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the activities of
subordinate officials.
5
8.0 Ethics and Conflicts of Interest:
In addition to state and local statutes relating to conflicts of interest, all persons involved
in the investment process shall refrain from personal business activity that could conflict
with proper execution of the investment program, or which could impair their ability to
make impartial investment decisions. Employees and investment officers are required to
file annual disclosure statements as required for "public officials who manage public
investments" (as defined and required by the Political Reform Act and related regulations,
being Government Code Sections 81000 and the Fair Political Practices Commission
(FFPC)).
9.0 Authorized Financial Dealers and Institutions:
The City Treasurer will maintain a list of the financial institutions and broker/dealers
authorized to provide investment and depository services and will perform an annual
review of the financial condition and registrations of such qualified providers. The City
Treasurer will also require annual audited financial statements to be on file for each
company. The City shall annually send a copy of the current investment policy to all
financial institutions and broker/dealers approved to do business with the City.
As far as feasibly possible, all money belonging to, or in the custody of, a local agency,
including money paid to the City Treasurer or other official to pay the principal, interest,
or penalties of bonds, shall be deposited for safekeeping in national or state chartered
banks, savings associations, federal associations, credit unions, or federally insured
industrial loan companies in this state selected by the City Treasurer or other official having
legal custody of the money;or may be invested in the investments set forth in Section 10.0.
To be eligible to receive local agency money, a bank, savings association, federal
association, or federally insured industrial loan company shall have received an overall
rating of not less than "satisfactory" in its most recent evaluation by the appropriate federal
financial supervisory agency of its record of meeting the credit needs of California's
communities, including low-and moderate-income neighborhoods.
In order to be approved by the City,the dealer must be a"primary"dealer or regional dealer
that qualifies under Securities and Exchange Commission Rule 15C3-1 (Uniform Net
Capitol Rule). The institution must have an office in California. The dealer must be
experienced in institutional and public fund trading practices and familiar with the
6
California Government Code as related to investments appropriate for the City; and, other
criteria as may be established in the investment procedures. All broker/dealers and
financial institutions who desire to become qualified bidders for investment transactions
must submit a "Broker/Dealer Application" and related documents relative to eligibility
including a current audited annual financial statement, U4 form for the broker, proof of
state registration, proof of Financial Industry Regulatory Authority, Inc. ("FINRA")
certification and a certification of having read and understood the City's investment policy
and agreeing to comply with the policy. Capital requirements for registered government
securities brokers and dealers shall meet or exceed the requirements as set forth by the
Securities and Exchange Commission Rule 150-1 (Uniform Net Capitol Rule). Such
companies shall also have a minimum of five years of operation.
10.0 Authorized and Suitable Investments:
The City is authorized by California Government Code Section 53600, et. seq.to invest in
specific types of securities. Investments not specifically listed below are deemed
inappropriate and are prohibited:
A. BANKERS ACCEPTANCES, maximum 25% of portfolio (up to 40% with
City Council approval). Maximum term of 180 days.
Banks must have a short term rating of at least A]/PI and a long-term rating of"A"or higher as
provided by a nationally recognized statistical rating organization("NRSRO"). No more than 10
percent of the agency's money may be invested in the bankers acceptances of any one commercial
bank pursuant to this section.
B. NEGOTIABLE CERTIFICATES OF DEPOSIT, maximum 30% of portfolio.
Maximum term of 3 years (up to 5 years with City Council approval).
May be issued by a nationally or state-chartered bank,a savings association or a federal association
(as defined by Section 5102 of the Financial Code),a state or federal credit union,or by a federally-
licensed or state-licensed branch of a foreign bank. Issuer must have a short term rating of Al/PI
and a long term rating of"A"or higher as provided by an NRSRO. No more than 10 percent of the
agency's money may be invested in negotiable certificates of deposit of any one issuer.
C. COMMERCIAL PAPER, maximum 25% of portfolio. Maximum term of 270
days.
Commercial paper must be of"prime" quality of the highest ranking or of the highest letter and
number rating as provided by an NRSRO. The entity that issues the commercial paper shall meet
all of the following conditions in either paragraph(1)or paragraph(2):
7
(1)The entity meets the following criteria:
(A)is organized and operating in the United States as a general corporation.
(B)Has total assets in excess of five hundred million dollars($500,000,000).
(C)Has debt other than commercial paper,if any,that is rated"A"or higher by an NRSRO.
(2)The entity meets the following criteria:
(A) Is organized within the United States as a special purpose corporation, trust, or limited
liability company.
(B)Has program-wide credit enhancements including,but not limited to,overcollateralization,
letters of credit,or surety bond.
(C)Has commercial paper that is rated"A-1"or higher,or the equivalent,by an NRSRO.
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.
No more than 10 percent of the agency's money may be invested in Commercial Paper of any one
issuer.
D. BONDS ISSUED BY THE STATE OF CALIFORNIA OR ANY OF THE
OTHER 49 UNITED STATES. Maximum term of 5 years.
Bonds must have an"A"rating or higher by an NRSRO. No more than 10 percent of the agency's
money may be invested in state bonds of any one issuer.
E. BONDS ISSUED BY THE CITY OR ANY LOCAL AGENCY WITHIN
THE STATE OF CALIFORNIA. Maximum term of 5 years.
Bonds must have an"A"rating or higher by an NRSRO. No more than 10 percent of the agency's
money may be invested in city or local agency bonds of any one issuer.
F. OBLIGATIONS OF THE UNITED STATES TREASURY. Maximum term
of 5 years.
United States Treasury bills,bonds and notes or certificates of indebtedness,for which the faith and
credit of the United States are pledged for the payment of principal and interest. There is no limit
on the percentage of the portfolio that can be invested in this category.
G. U.S. GOVERNMENT AGENCY SECURITIES (FEDERAL AGENCIES).
Maximum term of 5 years.
Obligations,participations or other instruments of or issued by a federal agency or a United States
government-sponsored enterprise. There is no limit on the percentage of the portfolio that can be
invested in this category.
H. REPURCHASE AGREEMENT. Maximum term of 3 months.
Investments in repurchase agreements may be made,on any investment authorized in this section,
when the term of the agreement does not exceed 3 months.
A Master Repurchase Agreement must be signed with the bank or broker/dealer who is selling the
securities to the City.
I. REVERSE-REPURCHASE AGREEMENTS. (Requires City Council
approval for each transaction).
8
Reverse repurchase agreements or securities lending agreements may be utilized only when all of
the following conditions are met:
(A)The security to be sold on reverse repurchase agreement or securities lending agreement has
been owned and fully paid for by the local agency for a minimum of 30 days prior to sale.
(B) The total of all reverse repurchase agreements and securities lending agreements on
investments owned by the local agency does not exceed 20 percent of the base value of the portfolio.
(C) The agreement does not exceed a term of 92 days, unless the agreement includes a written
codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security
using a reverse repurchase agreement or securities lending agreement and the final maturity date of
the same security.
(D)Funds obtained,or funds within the pool of an equivalent amount to that obtained from selling
a security to a counterparty (by way of a reverse repurchase agreement or securities lending
agreement),shall not be used to purchase another security with a maturity longer than 92 days from
the initial settlement date of the reverse repurchase agreement or securities lending agreement,
unless the reverse repurchase agreement or securities lending agreement includes a written codicil
guaranteeing a minimum earning or spread for the entire period between the sale of a security using
a reverse repurchase agreement or securities lending agreement and the final maturity date of the
same security.
Investments in reverse repurchase agreements,securities lending agreements,or similar investments
in which the local agency sells securities prior to purchase with a simultaneous agreement to
repurchase the security, shall only be made with primary dealers of the Federal Reserve Bank of
New York or with a nationally or state-chartered bank that has or has had a significant banking
relationship with a local agency.
(A) For purposes of this chapter, "significant banking relationship" means any of the following
activities of a bank:
(i) Involvement in the creation,sale,purchase,or retirement of a local agency's bonds,warrants,
notes,or other evidence of indebtedness.
(ii)Financing of a local agency's activities.
(iii)Acceptance of a local agency's securities or funds as deposits.
9
J. MEDIUM-TERM CORPORATE NOTES, maximum 30% of portfolio with a
maximum remaining maturity of 5 years or less.
Notes eligible for investment must be rated"A"or higher by an NRSRO. No more than 10 percent
of the agency's money may be invested in medium-term corporate notes of any one issuer.
K. TIME DEPOSITS-CERTIFICATES OF DEPOSIT (non-negotiable
certificates of deposit). Maximum term of 3 years.
Deposits must be made with banks or savings & loan that have a short term rating of AI/Pl or a
long-term rating of at least an"A"rating or higher by an NRSRO. No more than 10 percent of the
agency's money may be invested in time-deposits of any one issuer
L. MONEY MARKET FUNDS, maximum 15% of portfolio.
No more than 10 percent of the agency's surplus funds may be invested in shares of beneficial
interest of any one Money Market fund. Local agencies may invest in"shares of beneficial interest"
issued by diversified management companies which invest only in direct obligations in U.S.
Treasury bills, notes and bonds, U.S. Government Agencies and repurchase agreements with a
weighted average of 60 days or less. They must have the highest rating from at least two NRSROs,
must maintain a daily principal per share value of$1.00 per share and distribute interest monthly,
and must have a minimum of$500 million in assets under management. The purchase price of the
shares may not include commission.
M. THE LOCAL AGENCY INVESTMENT FUND (LAIF)
LAIF is a special fund of the California State Treasury through which any local government may
pool investments. The City may invest up to the maximum allowable by the State Treasurer's Office
(currently$75,000,000). Investments in LAIF are highly liquid and may be converted to cash within
24 hours.
N. Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7
that invests in the securities and obligations authorized in subdivisions (a)to (q), inclusive. Each
share shall represent an equal proportional interest in the underlying pool of securities owned by the
joint powers authority. The City may invest up to $20,000,000 per joint powers authority. To be
eligible under this section, the joint powers authority issuing the shares shall have retained an
investment adviser that meets all of the following criteria:
(I)The adviser is registered or exempt from registration with the Securities and Exchange
Commission.
(2)The adviser has not less than five years of experience investing in the securities and obligations
authorized in subdivisions(a)to(q),inclusive.
(3)The adviser has assets under management in excess of five hundred million dollars
($500,000,000).
10
O. United States dollar denominated senior unsecured unsubordinated obligations issued or
unconditionally guaranteed by the International Bank for Reconstruction and Development(IBRD),
International Finance Corporation (IFC), or Inter-American Development Bank (IDB), with a
maximum remaining maturity of five years or less, and eligible for purchase and sale within the
United States. Investments under this subdivision shall be rated"AA"or better by an NRSRO and
shall not exceed 10 percent of the agency's moneys that may be invested pursuant to this section.
11
MAXIMUM SPECIFIED MINIMUM QUALITY
INVESTMENT TYPE MAXIMUM MATURITY %OF PORTFOLIO/ REQUIREMENTS
MAXIMUM PER ISSUER
Bankers'Acceptances 180 days 25%(up to 40%with Al/P1,"A"Rating
Council approval)/10%
Negotiable Certificates of 3 years(Up to 5 years o 0
Deposit with Council approval) 30%/10% Al/P1,"A"Rating
Commercial Paper 270 days 25%/10% Al/Pl,"A" Rating
State Obligations--CA And o
5years None/10% "A"Rating
Others
City/Local Agency of CA
5years None/10% "A"Rating
Obligations
U.S.Treasury Obligations 5 years None None
U.S.Government Agency
5years None None
Obligations
IBRD, IFC, IADB 5years 10% "AA" Rating
Repurchase Agreements 3 Months None None
Reverse Repurchase 20%of the base value
Agreements 92 days of portfolio.Requires None
City Council Approval
Medium-Term Corporate o 0
5years 30%/10% "A" Rating
Notes
Non-negotiable Certificates o
3 years None/SO% Ai/P1,"A" Rating
of Deposit
Money Market Mutual o 0
60 days 15/0/10% "AAA" Rating
Funds
Local Agency Investment
N/A Up to$75,000,000 None
Fund(LAIF)
Joint Powers Authority N/A None/$20,000,000 See 10.ON above
12
10.1 Investment Pools/Money Market funds:
The City Treasurer or designee shall be required to investigate all local government
investment pools and money market mutual funds prior to investing and performing at least
a quarterly review thereafter while the City is invested in the pool or the money market
fund. 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:
California government code section 53601 states that if a percentage limitation for a
particular category of investment is specified,then that percentage is applicable only at the
date of purchase. Should any investment listed in section 10.0 exceed a percentage-of-
portfolio limitation or a percentage-by-issuer limitation due to an incident such as
fluctuation in portfolio size,the affected securities may be held to maturity to avoid losses.
When no loss is indicated, the Treasurer may consider reconstructing the portfolio basing
his/her decision on the expected length of time the portfolio will be unbalanced. As well,
the credit criteria listed herein refers to the credit rating at the time the security is purchased.
If a security held in the portfolio is downgraded by an NRSRO to a level below the quality
required by this investment policy, the City Treasurer will review the credit and make a
determination as to whether to sell or retain such security. The City Treasurer will review
the portfolio for such compliance no less than quarterly.
12.0 Collateralization:
Under provisions of the California Government Code, California banks, and other
depository institutions are required to secure the City's deposits by pledging government
securities with a value of 110 % of principal and accrued interest. California law also
allows financial institutions to secure City deposits by pledging first trust deed mortgage
notes having a value of 150%of City's total deposits. Collateral will always be held by an
independent third party. A clearly marked evidence of ownership (safekeeping receipt)
must be supplied to the City and retained. The market value of securities that underlay a
repurchase agreement shall be valued at 102 percent or greater of the funds borrowed
against those securities and the value shall be adjusted no less than quarterly. Since the
market value of the underlying securities is subject to daily market fluctuations, the
13
investments in repurchase agreements shall be in compliance if the value of the underlying
securities is brought back up to 102 percent no later than the next business day. The City
Treasurer, at his/her discretion, may waive the collateral requirement for deposits that are
fully insured(current limit is$250,000)by the Federal Deposit Insurance Corporation. The
right of collateral substitution is granted. The City Treasurer or designee shall ensure that
all demand deposits that exceed the FDIC limit (currently $250,000) shall be fully
collateralized with securities authorized under state law and this Investment Policy.
13.0 Safekeeping and Custody:
All City investments shall have the City of Huntington Beach as its registered owner, and
all interest and principal payments and withdrawals shall indicate the City of Huntington
Beach as the payee. All securities will be held with a qualified financial institution,
contracted by the City as a third party custodian with a separate custodial agreement(does
not apply to insured Certificates of Deposit, money market funds, or the Local Agency
Investment Fund). All agreements and statements will be subject to review annually by
external auditors in conjunction with their audit. All securities shall be acquired by the
safekeeping institution on a "Delivery-Vs-Payment" (DVP) basis. For Repurchase
Agreements, the purchase may be delivered by book entry, physical delivery or by third-
party custodial agreement consistent with the Government Code. The transfer of securities
to the counterparty bank's customer book entry account may be used for book entry
delivery. The City Treasurer or designee shall require a Broker Trade confirmation for all
trades.
14.0 Diversification:
The City's investment portfolio will be diversified to mitigate incurring unreasonable and
avoidable risks associated with concentrating investments in specific security types,
maturity segment, or in individual financial institutions.
A. Credit risk, defined as the risk of loss due to failure of the insurer of a security, shall
be mitigated by investing in those securities with an "A" or above rating and approved
in the investment policy and by diversifying the investment portfolio so that the failure
of any one issuer would not unduly harm the City's cash flow.
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
14
securities mature as much as possible in conjunction with major cash outflows, thus
minimizing the need to sell securities prior to their maturity. It is explicitly recognized
herein, however, that in a diversified portfolio, occasional measured losses are
inevitable and must be considered within the context of overall investment return. The
City's investment portfolio will remain sufficiently liquid to enable the City to meet all
operating requirements which might be reasonably anticipated.
15.0 Maximum Maturities:
To the extent possible,the City of Huntington Beach will attempt to match its investments
with anticipated cash flow requirements. Unless matched to a specific cash flow, the City
will not directly invest in securities maturing more than five (5) years from the date of
purchase, unless the legislative body has granted express authority to make that investment
either specifically, or as a part of an investment program approved by the City Council.
The City of Huntington Beach shall not permit more than 50% of its investment portfolio
to be invested in securities with maturities over four years.
16.0 Internal Control:
The City Treasurer and the Finance Department shall establish a system of internal controls
designed to prevent loss of public funds due to fraud, employee error, misrepresentation
by third parties, or unanticipated market changes. No investment personnel may engage in
an investment transaction except as provided for under the terms of this policy and the
procedure established by the City Treasurer. The external auditors shall annually review
the investments with respect to the investment policy. This review will provide internal
control by assuring compliance with policies and procedures for the investments that are
selected for testing. Additionally, account reconciliation and verification of general ledger
balances relating to the purchasing or maturing of investments and allocation of interest on
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. Treasury Manager
15
3. Chief Financial Officer
4. Accounting Manager
17.0 Performance Standards:
This investment policy shall be reviewed at least annually by the Investment Advisory
Board and the City Council to ensure its consistency with the overall objectives of
preservation of principal,liquidity,and return,and its relevance to current law and financial
and economic trends. The moneys entrusted to the City Treasurer will be primarily a
passively managed portfolio. However, the City Treasurer will make best efforts to
observe, review, and react to changing conditions that affect the portfolio.
17.1 Market Yield (Benchmark):
The investment portfolio shall be managed to attain a market-average rate of return
throughout budgetary and economic cycles, taking into account the City's investment risk
constraints and cash flow. Investment return becomes a consideration only after the basic
requirements of investment safety and liquidity have been met. Because the investment
portfolio is designed to operate on primarily a `hold-to-maturity' premise, and because of
the safety, liquidity, and yield priorities, the performance benchmark that will be used by
the Treasurer to determine whether market yields are being achieved shall be the 12-month
moving average of the interpolated 1.5-Year Constant Maturity Treasury(CMT)rate. This
interpolated rate shall be utilized in order to best match the average duration of the
portfolio. However, since return on investment is the least important objective of the
investment portfolio, the benchmark will be used only as a reference tool. The reporting
of a benchmark does not imply that the City Treasurer will add additional risk to the
investment portfolio in order to attain or exceed the benchmark. The prohibition of highly
speculative investments precludes pursuit of gain or profit through unusual risk and
precludes investments primarily directed at gains or profits from conjectural fluctuations
in market prices. The City Treasurer will not directly pursue any investments that are
leveraged or deemed derivative in nature. However, as long as the original investments
can be justified by their ordinary earning power, trading in response to changes in market
value can be used as part of ongoing portfolio management.
16
18.0 Reporting:
The City Treasurer shall submit a quarterly report to the City Council,City Manager,Chief
Financial Officer and the Investment Advisory Board within 30 days following the end of
the quarter. This report will include the following elements pursuant to State law and
Government Accounting Standard Board (GASB) #40:
18.1 Type of investment
18.2. Institution/Issuer
18.3 Purchase Date
18.4 Date of maturity
18.5 Amount of deposit or cost of the investment
18.6 Face value of the investment
18.7 Current market value of securities and source of valuation
18.8 Rate of interest
18.9 Interest earnings
18.10 Statement relating the report to its compliance with the Statement of Investment
Policy or the manner in which the portfolio is not in compliance
18.11 Statement on availability of funds to meet the next six month's obligations
18.12 Monthly and Year to date City Treasurer Budget Amounts for Interest Income
18.13 Percentage of Portfolio by Investment Type
18.14 Days to Maturity for all Investments
18.15 Comparative report on Monthly Investment Balances & Interest Yields
18.16 Monthly transactions
This quarterly report shall be placed on the City Council Agenda for Council and public
review. In addition, a commentary on capital markets and economic conditions may be
included with the report. The City Treasurer shall submit to the City Council, City
Manager and Chief Financial Officer a monthly report listing the above stated (18.1 —
18.16) financial transactions.
17
19.0 Investment Policy Adoption:
By virtue of a resolution of the City Council of the City of Huntington Beach, the Council
shall acknowledge the receipt and filing of this annual statement of investment policy for
the respective year.
18
GLOSSARY
AGENCIES: Federal agency securities.
ASKED: The price at which securities are offered. (The price at which a firm will sell a
security to an investor.)
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or
trust company. The accepting institution guarantees payment of the bill, as well as the
issuer.The drafts are drawn on a bank by an exporter or importer to obtain funds to pay for
specific merchandise. An acceptance is a high grade negotiable instrument.
BASIS POINT: One one-hundredth of a percent (i.e. 0.01%)
BENCHMARK: A comparative base for measuring the performance or risk tolerance of
the investment portfolio. A benchmark should represent a close correlation to the level of
risk and the average duration of the porfolio's investments.
BID: The price offered by a buyer of securities. (When you are selling securities,you ask
for a bid.)
BROKER: A broker brings buyers and sellers together for a commission. He/she does
not take a position.
CERTIFICATE OF DEPOSIT(CD): A time deposit with a specific maturity evidenced
by a certificate. Large-denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property, which a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure
deposits of public monies.
19
COMMERCIAL PAPER: Short term unsecured promissory note issued by a corporation
(including limited liability companies) to raise working capital. These negotiable
instruments are purchased at a discount to par value or at par value with interest bearing.
Commercial paper is issued by corporations such as General Motors Acceptance
Corporation, IBM, Bank of America, etc.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
report for the City. It includes combined statements for each individual fund and account
group prepared in conformity with Generally Accepted Accounting Principles. It also
includes supporting schedules necessary to demonstrate compliance with finance-related
legal and contractual provisions, extensive introductory material and a detailed Statistical
section.
COUPON: a) The annual rate of interest that a bond's issuer promises to pay the
bondholder on the bond's face value. b)A certificate attached to a bond evidencing interest
due on a payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions;
buying and selling for his/her own account.
DEBENTURE: An unsecured bond backed only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities:
delivery versus payment and delivery versus receipt. Delivery versus payment is delivery
of securities with an exchange of money for the securities. Delivery versus receipt is
delivery of securities with an exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived
from, the movement of one or more underlying index or security, and may include a
leveraging factor, or (2) financial contracts based upon notional amounts whose value is
20
derived from an underlying index or security (interest rates, foreign exchange rates,
equities or commodities).
DISCOUNT: The difference between the cost price of a security and its maturity when
quoted at lower than face value. A security selling below original offering price shortly
after sale is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are
issued at a discount and redeemed at maturity for full face value (e.g. US Treasury Bills).
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply
credit to various classes of institutions(e.g. S&L's, Small business firms,students,farmers,
farm cooperatives, and exporters).
FEDERAL DEPOSIT INSURANCE CORPORATION(FDIC): A Federal agency that
insures bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate
is currently pegged by the Federal Reserve though open-market operations.
FEDERAL OPEN MARKET COMMITTEE(FOMC): Consists of seven members of
the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The
President of the New York Federal Reserve Bank is a permanent member, while the other
presidents serve on a rotating basis. The committee periodically meets to set Federal
Reserve guidelines regarding purchases and sales of Government Securities in the open
market as a means of influencing the volume of bank credit and money.
21
FEDERAL RESERVE SYSTEM: The central bank of the United States created by
congress and consisting of a seven-member Board of Governors in Washington, D.C.; 12
regional banks and approximately 38 percent of the 8,039 commercial banks in the United
States are members of the Federal Reserve System.National banks must be members;state-
chartered banks may join if they meet certain requirements.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash
without a substantial loss of value. In the money market, a security is said to be liquid if
the spread between bid and asked prices is narrow and a reasonable size can be done at
those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds
from political subdivisions that are placed in the custody of the State Treasurer for
investment and reinvestment.
MARKET VALUE: The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase-reverse agreements that establish each
party's rights in the transactions. A master agreement will often specify, among other
things, the right of the buyer-lender to liquidate the underlying securities in the event of
default by the seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes
due and payable.
MONEY MARKET: The market in which short-term debt instruments(bills,commercial
paper, bankers' acceptances, etc.) are issued and traded.
22
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION
("NRSRO"): Firms that review and assess the creditworthiness of an obligor as an entity
or with respect to specific securities or money market instruments and express their opinion
in the form of a letter rating. A credit rating agency may apply to the SEC for registration
as a nationally recognized statistical rating organization ("NRSRO"). The primary rating
agencies are Standard & Poor's Corporation, Moody's Investor Services, Inc. and Fitch,
Inc.
NEGOTIABLE CERTIFICATES OF DEPOSIT: Unsecured obligations of the
financial institution, bank or savings and loan, bought at par value with the promise to pay
face value plus accrued interest at maturity. They are high-grade negotiable instruments,
paying a higher interest rate than regular certificates of deposit.
OFFER: The price asked by a seller of securities. (When you are buying securities, you
ask for an offer.) See "Asked"and "Bid".
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of money and credit in the economy. Purchases
inject reserves into the bank system and stimulate growth of money and credit: Sales have
the opposite effect. Open market operations are the Federal Reserve's most important and
most flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily
reports of market activity and positions and monthly financial statements to the Federal
Reserve Bank of New York and are subject to its informal oversight. Primary dealers
include Securities and Exchange Commission (SEC)-registered securities broker/dealers,
banks and a few unregulated firms.
23
PRUDENT PERSON RULE: An investment standard. In some states, the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected by
the custody state—the so-called "legal list". In other states, the trustee may invest in a
security if it is one that would be bought by a prudent person of discretion and intelligence
who is seeking a reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes under
the laws of this state, which has segregated for the benefit of the commission eligible
collateral having a value of not less than its maximum liability and which has been
approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity;on a bond,the current
income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed date. The security
"buyer" in effect lends the "seller" money for the period of the agreement, and the terms
of the agreement are structured to compensate him for this.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities
and valuables of all types and descriptions are held in the bank's vaults for protection.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB,
FNMA, FHLMC, etc.) and Corporations, which have imbedded option (e.g. call features,
step-up coupons, floating rate coupons, derivative-based returns) into their debt structure.
Their market performance is impacted by the fluctuation of interest rates, the volatility of
the imbedded options and shifts in the shape of the yield curve.
24
SECONDARY MARKET: A market made for the purchase and sale of outstanding
issues following the initial distribution.
SECURITIES&EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transactions by administering securities legislation.
SEC RULE 15C3-1: See "Uniform Net Capital Rule".
SMALL BUSINESS ADMINISTRATION(SBA): The portion of these securities which
are guaranteed by Federal government to provide financial assistance through direct loans
and loan guarantees to small businesses. Cash flows from these instruments may not be
in equal installments because of prepayments.
SUPRANATIONAL SECURITIES: United States dollar denominated senior unsecured
unsubordinated obligations issued or unconditionally guaranteed by the International
Bank for Reconstruction and Development (IBRD), International Finance Corporation
(IFC), or Inter-American Development Bank (IDB), with a maximum remaining maturity
of five years or less, and eligible for purchase and sale within the United States.
Investments under this subdivision shall be rated "AA" or better by an NRSRO and shall
not exceed 10 percent of the agency's moneys that may be invested pursuant to this section.
TREASURY BILLS: A non-interest bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to mature in three months, six
months, or one year.
TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of
more than 10 years.
TREASURY NOTES: Intermediate-term coupon bearing U.S. Treasury having initial
maturities of from one year to ten years.
25
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement
that member firms as well as nonmember broker/dealers in securities maintain a maximum
ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital
ratio. Indebtedness covers all money owed to a firm, including margin loans and
commitments to purchase securities, one reason new public issues are spread among
members of underwriting syndicates. Liquid capital includes cash and assets easily
converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
(a) Income Yield is obtained by dividing the current dollar income by the current market
price for the security. (b)Net Yield or Yield to Maturity is the current income yield minus
any premium above par or plus any discount from par in purchase price, with the
adjustment spread over the period from the date of purchase to the date of maturity of the
bond.
26
Res. No. 2020-09
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH )
I, ROBIN ESTANISLAU, the duly elected, qualified City Clerk of the
City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do
hereby certify that the whole number of members of the City Council of the City of
Huntington Beach is seven; that the foregoing resolution was passed and adopted
by the affirmative vote of at least a majority of all the members of said City Council
at a Regular meeting thereof held on February 3, 2020 by the following vote:
AYES: Brenden, Carr, Semeta, Peterson, Posey, Delgleize, Hardy
NOES: None
ABSENT: None
RECUSE: None
City Clerk and ex-officio Clerk of the
City Council of the City of
Huntington Beach, California