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HomeMy WebLinkAboutRES-96-5788 (INVESTMENT POLICY/1996)1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RESOLUTION NO. 96-5788 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HERMOSA BEACH, CALIFORNIA, ACKNOWLEDGING THE RECEIPT AND FILING OF THE ANNUAL STATEMENT OF INVESTMENT POLICY FOR THE YEAR 1996 WHEREAS, the California State Legislature passed legislation during the 1984 session requiring the filing of an annual Statement of Investment Policy by local public agencies; and WHEREAS, the Governor of the State of California signed such legislation into law effective January 1, 1985 (Chapter 1226); and WHEREAS, the City Treasurer of the City of Hermosa Beach declares the annual Statement of Investment Policy to be as follows: PURPOSE: This statement is intended to provide a guideline for the prudent investment of temporary idle cash, trust funds and restricted monies and to outline a policy for maximizing the efficiency. of the cash management system. Ultimate investment goals include the enhancement of economic status and the protection of pooled cash investments. OBJECTIVE: The cash management system of the City of Hermosa Beach is designed to accurately monitor and forecast expenditures and revenues, thus insuring the investment of monies to the fullest extent possible. Attempts to obtain highest interest yields possible are statement of fact as long as investments meet the criteria required for safety and liquidity. POLICY: The City of Hermosa Beach operates its investment program with State and self- imposed constraints. It does not buy stocks; it does not speculate; it does not deal in futures, options or security loan agreements. With regard to investment companies, the City will deal only with investment companies registered with the Securities and Exchange Commission. The City Treasurer will have sole discretion over Security Trading, except the state of California and Los Angeles County Investment Be 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 pool. Longer term investments (over one year) are generally limited to maturities of 3 years or less, but will never exceed five years. CRITERIA FOR SELECTING INVESTMENTS and the absolute order of priority are: 1. Safe : The safety and risk associated with an investment refers to the potential loss of principal, interest or a combination of these amounts. Since it is the primary duty and responsibility of the Treasurer to protect, preserve and maintain cash and investments placed in his/her trust on behalf of the citizens of the City, Hermosa Beach only invests in those instruments that are considered very safe. 2. Li uidi : This refers to the ability to "cash in" at any moment in time with minimal chance of losing some portion of the principal or interest. An adequate percentage of the portfolio should be maintained in liquid short-term investments which can be converted to cash if necessary to meet disbursement requirements. Since all cash requirements cannot be anticipated, investments in securities with active secondary or resale markets is highly recommended. Emphasis should be on marketable securities with low sensitivity to market risk. 3. Yield: yield is the potential dollar earnings an investment can provide, and sometimes is described as the rate of return. It should become a consideration only after the basic requirements of safety and liquidity have been met. The City's investment philosophy is to insure the safety of principle and to provide money when needed. A high dollar yield on investments, though important, ranks third in the priority of investment strategy. Depository Services Money must be deposited in state or national banks, state or federal savings associations, or state or federal credit unions in the state. It may be in inactive deposits, active deposits or interest -bearing active deposits. The deposits cannot exceed the amount of the bank's or savings and loam's paid up capital and surplus. We require that each financial institution submit current financial statements which are evaluated prior to the investment of funds. We use the following criteria: 1. The institution must have been in business at least three years. -2- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2. The institution must submit audited financial statements. 3. In addition, examination is made of the Reserve for Loan Losses category to evaluate the financial trend of the institution's asset base. 4. Whenever possible, the use of several years' financial data is evaluated to present a trend of activity in the institution. 5. We also require the interest be paid to the City on a monthly basis (current state law only requires quarterly payment). Authorized Investments Generally, investments shall be made in the context of "prudent man" rule, which states 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 is further governed by the California Government Code, Sections 53600 et seq. Within the context of these limitations, the following investments are authorized, as further limited herein: TCD's (Time Certificates of Deposits) which are insured for $100,000 by FDIC or FSLIC or fully collateralized as required by state law if over $100,000 are purchased. Not more than 5% of the City's portfolio is invested in any one institution. Time Certificates of Deposits are safekept in a legally acceptable safekeeping account. Total purchases are not to exceed 30% of surplus funds. An institution must meet the following criteria to be considered by the City: 1. The institution must be located in California. 2. The institution must have current financial information, signed contract and waiver on file with the City. 3. The institution must maintain a net worth to asset ratio of a least 5%, and have a positive earnings record. 4. The institution must be at least 3 years old. U. S. TREASURY's are direct obligations of the United States Government. -3- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 U.S. TREASURY BILLS are issued weekly with maturity dates up to one year. They are issued and traded on a discount basis and the interest is figured on the 360 day basis, actual number of I days. They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly liquid security. U.S. TREASURY NOTES are initially issued with two to ten years maturities. They are actively traded in a large secondary market and are very liquid. The Treasury may issue note issues with a minimum of $5,000.00. MEDIUM -TERM NOTES (MTNs) are corporate notes. Issuers include well recognized banks and bank holding companies, insurance companies, finance companies and industrial corporations. A large percentage of MTNs are unsecured senior debt obligations, although a number of recent issues have come to market on a collateralized or secured basis. Maturity bonds are from 9 months to one year, one year to 1 months, 18 months to 2 years, and annually thereafter. Typically, rates are established at a positive spread over a Treasury security of comparable maturity. Credit ratings on MTNs are established by nationally recognized rating services such as: Standard and Poor's, Moody's Investors Service and Fitch Investors Service. Credit supported MTNs typically carry the Aaa/AAA long term rating, based on the credit -worthiness of the support entity. Collateralized MTNs receive the same rating based on the overcollateralization limits set by Standard and Poor's and Moody's. Although a rating of A is required for Municipal investment as per sections 53601 and/or 53635, this agency, as policy, will only consider investments with Aa/aa or better. There can be only 30% of the total surplus funds used for MTN investment as per section 53635. MTNs offer safety, yield and liquidity through a strong secondary market. BANKERS ACCEPTANCES are negotiable time drafts drawn to finance the export, import, shipment or storage of goods, and they are termed "Accepted" when a bank guarantees to pay the face value at maturity. A Banker's Acceptance constitutes an irrevocable obligation of the accepting bank and a contingent obligation of the drawer and of any endorsees whose names appear upon it. The bank is protected by its customer's agreement to provide the necessary funds in advance of the maturity of the Acceptance and also by the pledge of documents such as bills of lading, independent warehouse of Cl 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 terminal receipts, and other documents evidencing ownership and the insurance of the goods so financed. Cities and other local agencies are authorized to purchase Banker's Acceptances subject to several restrictions. First, the Banker's Acceptance must be eligible for purchase by Federal Reserve Systems. Second, purchases of Banker's Acceptances must not exceed two hundred seventy (270) days' maturity or 40% of the City's surplus money invested under Sections 53601 and/or 53635. Finally, no more than 5% of the agency's surplus funds may be invested in the Banker's Acceptances of any one commercial bank per Government Code Sections 53601 (D and/or 53635 (0. LOCAL AGENCY INVESTMENT FUND is a special fund in the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum of $15,000,000 for any agency. The City is restricted to a maximum of eight transactions per month. It offers high liquidity because deposits can be converted to cash in twenty-four hours and no interest is lost. All interest is distributed to those agencies participating on a proportionate share determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly via a check or warrant. The State keeps an amount for reasonable costs of making the investments, not to exceed one - quarter of one percent of the earnings. The interest rates are fairly high because of the pooling of the State surplus cash with the surplus cash deposited by local governments. This creates a multi -billion dollar money pool and allows diversified investments. In a high interest rate market, we do better than LAIF, but in times of low interest rates, LAIF yields are higher. The City continually invests in the Local Agency Investment Fund (Government Code Section 16429). LOS ANGELES COUNTY POOL INVESTMENT FUND California Government Code ("Government Code") Section 53684 allows local agencies in the County of Los Angeles (the "County") to deposit excess funds in the Los Angeles County Treasury Pool for the purpose of investment by the treasurer and tax Collector of the County (the "Treasurer") pursuant to Government Code Sections 53601 and 53635. The County keeps an amount for reasonable costs of making the investments, not to exceed 16 basis points per month. The number of monthly transactions are not restricted. -5- I Safekeeping 2 Certificate of Deposits or Receipts of Public Funds must be mailed or delivered to the City. No 3 safekeeping provisions are provided. 4 Banker's acceptances are actual "physical" securities, meaning they are evidenced by actual 5 certificates. All Treasuries, term notes and most Agency securities are "book entry" securities, meaning 6 they are held at the Federal Reserve where only a book entry is used to denote ownership. 7 Collateral for time deposits in banks and savings and loans are held by the Federal Home Loan 8 Bank (FHLB) or an approved Agency of Depository of the financial institution. 9 Securities purchased from broker/dealers shall be held in third party safekeeping. 10 Public Trust 11 All participants in the investment process shall act as custodians of the public trust. Investment 12 officials shall recognize that the investment portfolio is subject to public review and evaluation. The 13 overall program shall be designed and managed with a degree of professionalism that is worthy of the 14 public trust. In a diversified portfolio it must be recognized that occasional measurement losses are 15 inevitable, and must be considered within the context of the overall portfolio's investment return, 16 provided that adequate diversification has been implemented. 17 Risk Tolerance 18 The City Council recognizes that investment risks can result from issued defaults, market price 19 changes or various technical complications leading to temporary illiquidity. Portfolio diversification is 20 employed as a way to control risk. Investment Managers are expected to display prudence in the 21 selection of securities, as a way to minimize default risk. No individual investment transaction shall be 22 undertaken which jeopardizes the total capital position of the overall portfolio. The Treasurer shall' 23 periodically establish guidelines and strategies to control risks of default, market price changes, and 24 illiquidity. 25 Reporting 26 The Treasurer or his deputy shall submit a monthly investment report to the City Council. This 27 report will include all required elements of the monthly report as prescribed by Government Code 28 Section 53646. 1 2 3 4 5 6 7 8 9 MOOR 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Required elements of the monthly report include: a. Type of investment b. Name of institution C. Date of investment d. Date of maturity e. Amount of deposit or cost of the security f. Current market value g. Asking price h. Rate of Interest NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF HERMOSA BEACH DOES HEREBY RESOLVE AS FOLLOWS: That an annual Statement of Investment Policy for the City of Hermosa beach has been filed by the City Treasurer for calendar year 1996 in compliance with Section 53646 (A) of the Government Code of the State of California. PASSEDPJr'•ROVED'�nd ADOPTErkNS 9gday of January, 1996 ATTEST: City Clerk of the City Council and MAYOR of the City of Hermosa Beach, California. APPROVED AS TO FORM: City Attorney -7- STATE OF CALIFORNIA COUNTY OF LOS ANGELES CITY OF HERMOSA BEACH I, Naoma Valdes, Deputy City Clerk of the City Council of the City of Hermosa Beach, California, do hereby certify that the foregoing Resolution No. 96-5788 was duly and regularly passed, approved and adopted by the City Council of the City of Hermosa Beach at a Regular Meeting of said Council at the regular place thereof on January 9, 1996. The vote was as follows: AYES: Benz, Oakes, Reviczky, Mayor Bowler NOES: None ABSTAIN: None ABSENT: Edgerton DATED: January 10, 1996 r Deputy City Clerk