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HomeMy WebLinkAboutAdopt Resolution No 2023-03 Approving the 2023 Investment Po APt9e40VED 9--6 .61 h' 2000 Main Street, (, ;�..ti� . Huntington Beach,CA 92648 City of Huntington Beach ten.. 'Ot 54 4?cFDUNTV Os\'\��Q File #: 22-916 MEETING DATE: 1/17/2023 REQUEST FOR CITY COUNCIL ACTION SUBMITTED TO: Honorable Mayor and City Council Members SUBMITTED BY: Al Zelinka, City Manager PREPARED BY: Alisa Backstrom, City Treasurer Subject: Adopt Resolution No. 2023-03 approving the 2023 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. 2023-03, "A Resolution of the City Council of the City of Huntington Beach Approving the Statement of Investment Policy 2023." Alternative Action(s): Do not adopt Resolution No. 2023-03. 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 Policy has been reviewed by the City's Investment Advisory Board and approved as to form by the City of Huntington Beach Page 1 of 3 Printed on 1/11/2023 powered LegistarTM File #: 22-916 MEETING DATE: 1/17/2023 City Attorney. The investment policy has previously been reviewed and certified by the California Municipal Treasurers Association, which was founded in 1958 and whose mission is to lead in promoting and enhancing the fiduciary responsibility and integrity of individuals responsible for public funds. The Investment Advisory Board reviewed the policy at its meeting of October 20, 2022. There are two updates to the Investment Policy for 2023, both in Section 10. Authorized and Suitable Investments. 1) Section 10.(n) With the sharp upward trend in interest rates throughout 2022, longer-term portfolios lag the market interest rates as securities within the portfolio are typically held until maturity to avoid losses. The result is that such funds are not available for reinvestment at the current market rates. Shorter-term investment options became more attractive and the City moved some funds to the California Asset Management Program ("CAMP"). CAMP is a California Joint Powers Authority ("JPA") established in 1989 to provide California public agencies with professional investment services. The CAMP account provides daily liquidity and is rated AAAm, the highest rating, by Standard & Poor's. It is a permitted investment for all local agencies under California Government Code Section 53601(p) and within the City's Investment Policy. Previously, the maximum allowable amount for this type of investment (Joint Powers Authority pools) according to the City's Investment Policy was $20 million. However, there is no limit according to the State code. In order to more properly match the allowable amounts for pools within the City's Investment Policy, the limit for this type of investment has been raised to $75 million. This matches the allowable investment amount in the policy for both the State of California's LAIF account and the Orange County Investment Pool. For further information on the California Asset Management Program, please go to: <https://www.camponline.com/> 2) Section 10.(o) According to the California Government Code Section 53601(q), obligations of the International Bank for Reconstruction and Development ("IBRD"), International Finance Corporation ("IFC"), or Inter-American Development Bank ("IADB"), as a category referred to as "Supranationals," shall not exceed 30 percent of the agency's moneys. In order to allow for flexibility and diversification within the portfolio, as well as to match the government code, the allowable percentage shall be increased from 10 percent to 30 percent of the City's total portfolio. As such investments must be rated in a rating category of"AA" or its equivalent or better (and currently all such allowable investments are rated "AAA"), it is deemed reasonable to allow this 30 percent limit. Environmental Status: Not applicable. Strategic Plan Goal: Financial Sustainability, Public Safety or Other Attachment(s): 1. Resolution No. 2023-03 of the City Council of the City of Huntington Beach adopting the 2023 Investment Policy 2. City of Huntington Beach Investment Policy 2023 City of Huntington Beach Page 2 of 3 Printed on 1/11/2023 powered34 Leg star'" File #: 22-916 MEETING DATE: 1/17/2023 3. PowerPoint presentation City of Huntington Beach Page 3 of 3 Printed on 1/11/2023 powered3 Legistar-' RESOLUTION NO. 2023-03 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH APPROVING THE STATEMENT OF INVESTMENT POLICY 2023 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 2023 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 January , 2023. I L'___________1_to -) Mayor ' - IE E i• ND PPROV' D: APPROVED 6 FORM: \ II\ City Attorney Cit n; ag liff INITIATED AND APPROVED: City Treasurer 22-12074/294690 Resolution No. 2023-03 Exhibit "A" CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY 2023 jr r (5, tik r -"' sram' . wy 00 17. ,„,„ A Au, or vikk CITY OF HUNTINGTON BEACH STATEMENT OF INVESTMENT POLICY 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 14 12.0 Collateralization 14 13.0 Safekeeping and Custody 15 14.0 Diversification 15 15.0 Maximum Maturities 16 16.0 Internal Control 16 17.0 Performance Standards 17 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 provides guidelines for the prudent investment of the City's cash balances in order to maximize 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 Annual Comprehensive Financial Report. 3.1 Funds: The City Treasurer is responsible for investing the 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 3.1.7 Infrastructure Funds 3 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 Standard" 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 agreements, 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 Section 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 Section 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 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 California Government Code as related to investments appropriate for the City; and, other 6 criteria as may be established in the investment procedures. All broker/dealers and financial institutions who desire to become qualified bidders for investment transactions must submit a "Broker/Dealer Application" and related documents relative to eligibility including a current audited annual financial statement, U4 form for the broker, proof of state registration, proof of Financial Industry Regulatory Authority, Inc. ("FINRA") certification and a certification of having read and understood the City's investment policy and agreeing to comply with the policy. Capital requirements for registered government securities brokers and dealers shall meet or exceed the requirements as set forth by the Securities and Exchange Commission Rule 15C3-1 (Uniform Net Capitol Rule). Such companies shall also have a minimum of five years of operation. 10.0 Authorized and Suitable Investments: The City is authorized by California Government Code Section 53600, et. seq. to invest in specific types of securities. Investments not specifically listed below are deemed inappropriate and are prohibited: A. BANKERS ACCEPTANCES, maximum 25% of portfolio (up to 40% with City Council approval). Maximum term of 180 days. Banks must have a short term rating of at least Al/P1 and a long-term rating category 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 A l/P 1 and a long term rating category 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. 7 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): (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 in a rating category of"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 a rating category of"A"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 a rating category of"A" 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. 8 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). Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met: (1) 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. (2) 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. (3) 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. 9 (4) 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. 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. J. MEDIUM-TERM CORPORATE NOTES, maximum 30% of portfolio with a maximum remaining maturity of 5 years or less. Notes eligible for investment must have a rating category of "A" or higher by an NRSRO. No more than 10 percent of the agency's money may be invested in medium- term corporate notes of any one issuer. K. TIME DEPOSITS-CERTIFICATES OF DEPOSIT (non-negotiable certificates of deposit). Maximum term of 3 years. Deposits must be made with banks or savings & loan that have a short term rating of Al/P1 or have a long-term rating category of"A" or higher by an NRSRO. No more 10 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 category 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. JOINT POWERS AUTHORITY INVESTMENTS 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 $75,000,000 per joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria: (1) The adviser is registered or exempt from registration with the Securities and Exchange Commission. (2) The adviser has not less than 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). 11 O. SUPRANATIONALS 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 have a rating category of"AA"or better by an NRSRO and shall not exceed 30 percent of the agency's moneys that may be invested pursuant to this section. P. ORANGE COUNTY INVESTMENT POOL (OCIP) As provided for in California Government Code Section 53684, the local agency may invest excess funds which are not required for immediate use. The OCIP is a pooled fund managed by the Orange County Treasurer pursuant to California Government Code Sections 53601 and 53635. The City may invest up to seventy-five million $75,000,000 in the OCIP. 12 MAXIMUM MAXIMUM SPECIFIED%OF MINIMUM INVESTMENT TYPE MATURITY PORTFOLIO/MAXIMUM PER QUALITY ISSUER REQUIREMENTS Bankers'Acceptances 180 days 25%(up to 40%with Council Al/P1, "A" Rating approval)/10% Category 3 years(Up to 5 Negotiable Certificates of years with ° ° Al/P1, "A" Rating Deposit Council 30/o/10/o Category approval) Commercial Paper 270 days 25%/10% Al,"A" Rating Category State Obligations--CA And 5 years None/10% "A" Rating Category Others City/Local Agency of CA 5 years None/10% "A" Rating Category Obligations U.S.Treasury Obligations 5 years None None U.S.Government Agency Obligations 5 years None None Supranationals: ° "AA" Rating IBRD,IFC,IDB 5 years 30/o Category Repurchase Agreements 3 Months None None Reverse Repurchase 20%of the base value of the Agreements 92 days portfolio.Requires City Council None Approval Medium Term Corporate 5 years 30%/10% "A" Rating Category Notes Non-negotiable Certificates of 3 years None/10% Al/P1, "A" Rating Deposit Category Money Market Mutual Funds 60 days 15%/10% "AAA" Rating Category Local Agency Investment N/A Up to$75,000,000 None Fund(LAIF) Orange County Investment N/A Up to$75,000,000 None Pool(OCIP) Joint Powers Authority N/A None/$75,000,000 See 10.0N above 13 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. The Orange County Investment Pool is maintained for the County and other non-County entities for the purpose of benefiting from economies of scale through pooled investment activities and is authorized by Government Code Section 27130. The County is authorized by Government Code Section 53600 et seq. to invest in specific types of securities. These codes are the same as are applicable to investment by the City. 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 (settlement date). 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 at the discretion of the City Treasurer. The City Treasurer may consider reconstructing/rebalancing 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 14 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(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, Joint Powers Funds, Orange County Investment Pool, 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. 15 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 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 (specifically,the settlement date), 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. 16 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. 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 45 days following the end of the quarter. 17 Per California Government Code Section 53646, this report shall include the type of investment, issuer, date of maturity, par and dollar amount invested on all securities, investments and moneys held by the local agency, and shall additionally include a description of any of the local agency's funds, investments, or programs,that are under the management of contracted parties, including lending programs. With respect to all securities held by the local agency, and under management of any outside party that is not also a local agency or the State of California Local Agency Investment Fund, the report shall also include a current market value as of the date of the report, and shall include the source of this same valuation. Additionally: (1) The quarterly report shall state compliance of the portfolio to the statement of investment policy, or manner in which the portfolio is not in compliance. (2) The quarterly report shall include a statement denoting the ability of the local agency to meet its pool's expenditure requirements for the next six months, or provide an explanation as to why sufficient money shall, or may, not be available. This quarterly report shall be placed on the City Council Agenda for Council and public review. In addition, per California Government Code Section 53607, the City Treasurer shall provide a monthly report of investment transactions to the legislative body. 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 portfolio'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. 2023-03 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 January 17, 2023 by the following vote: AYES: Kalmick, Moser, Van Der Mark, Strickland, McKeon, Bolton, Burns NOES: None ABSENT: None RECUSE: None 421,4141, €671-442 City Clerk and ex-officio Clerk of the City Council of the City of Huntington Beach, California Co CD CO N 0 N Ce 0 U- cn w 4 CPCH bF jb` 0 .,� w a. / ©�. , _Ama`s*� = L . a kk , 5 D . 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