HomeMy WebLinkAbout07-30-07 Item 4E, Investment Policy as Recommended by FPAC
~
~HILLS
Request for Council Action
Prepared By: Sue Iverson
Dept.: --Finance
Council Mtg. Date:""'"
Final Action Needed By:
.~
Agenda Item:
4E
..~~iij():rlfo7
..July 30, 2007
""S"udgetedAmount:"""" -" - "------
Actual Amount: ,.
Funding Source: _n.._........ ......."""_______ __._......."...."."~~__________
N/A
uf.j1A
N/A
.........."...."----
!~~i[0~~tlg~~lf~!Ii~g~_1lifd1r;.51g~ ___ ______ ________ n.............__________ .__._____________ ...........__._____________
I Motion to approve the City of Arden Hills Investment Policy as recommended by the Financial Planning and Analysis Committee.
~ta1fl1f~wj}]}i~t~m1ffw~Rm1r81illESiiSEl,..,..,._______________________m_m..................._._____________..........."."..........._._________________"..........................___.____n______________..m".".._.n.n______nn___.._..........."...._._"_____________n_._......"."........."_______n________.
i Staff recommends a motion to approve the attached policy as recommended by the Financial Planning and Analysis Committee..
X Memo dated July 24, 2007
No:
No.:
Recommendation:
Recommendation:
X O;h~;: City of Arden Hills Investment Policy
r;~rtGJaJdF!1i1r!if1'rdi~]ill~1~BI~fi11?lt ______________ ... _____
. This policy will further incorporate safeguards to protect City assets.
None.
~
--A~HILLS
MEMORANDUM
DATE:
July 24, 2007
4E
TO: Honorable Mayor and City Council
Michelle Wolfe, City Administrator
FROM: Sue Iverson, Finance Director
SUBJECT: Investment Policy
Background:
On March 12, 2007, the Council approved formation of the Financial Planning and Analysis
Committee. The Council expectation of this group was to work on Financial Policies. The
Investment Policy was identified as being the first policy to be worked on.
Discussion:
Our current policy is from 1996 and is out dated and not current with State Statutes. The
completed draft policy has been designed to incorporate all the current State Statute requirements
as well as the current GASB 40 requirements. The committee also incorporated system controls
(transaction sign-offs), a benchmark yield (4M Plus Fund annual rate of return), and
concentration of credit risk (no more than 5% of the overall portfolio may be invested in the
securities of a single issuer or more than 25% with any individual counter party in an investment
pool).
The City Attorney has reviewed the attached draft policy and has no further recommended
changes.
Staff Recommendation:
Staff recommends approval of the attached Investment Policy being recommended by the
Financial Planning and Analysis Committee.
CITY OF ARDEN HILLS
INVESTMENT POLICY
1. Purpose
It is the policy of the City to invest public funds in a manner which maximizes return and
provides maximum security in preserving and protecting funds while meeting the daily cash flow
demands and conforming to all applicable federal, state and/or local statutes government the
investment of public funds.
2. Staudards of Care
A. Prudence - The standard of prudence to be used shall be the "prudent person"
standard and shall be applied in the context of managing an overall portfolio.
Individuals acting in accordance with written procedures and this 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 in a timely fashion and the liquidity and the sale of
securities are carried our in accordance with the terms ofthis policy.
The "prudent person" standard 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."
B. Ethics and Conflicts of Interest - Employees involved in the investment process
shall refrain from personal business activity that could conflict with the proper
execution and management of the investment program, or that could impair their
ability to make impartial decisions. Employees shall disclose any material
interests in financial institutions with which they conduct business. They shall
further disclose any person financial/investment positions that could be related to
the performance of the investment portfolio. Employees shall refrain from
undertaking personal investment transactions with the same individual with whom
business is conducted on behalf of the City.
C. Delegation of Authority - Authority to manage the investment portfolio is granted
to the City's Finance Director/Treasurer, who shall act in accordance with
established procedures and internal controls for the operation ofthe investment
portfolio consistent with this investment policy. No person may engage in an
investment transaction except as provided under the terms of this policy. The
Finance Director shall be responsible for all transactions undertaken and shall
I
establish a system of control. Each transaction will be acknowledged in writing
by one ofthe following officials within 48 hours:
1) City Administrator
2) Mayor or Acting Mayor
3. Investment Objectives
The City will invest idle funds based on the following objectives:
A. Safety - The primary objective is the preservation of capital and the
safeguarding of public funds by mitigating credit and interest rate risk.
a. Credit Risk - The City will minimize credit risk, which is the risk
of loss due to the failure of the security issuer or backer.
b. Interest Rate Risk - The City will minimize interest rate risk,
which is the risk that the market value of securities in the portfolio
will fall due to changes in the market interest rates.
B. Term - Investments will be scheduled to cover all expenditures.
Investments will not be longer than one year for cash flow and all excess
funds may be invested for longer than one year.
C. Liquidity - The portfolio shall remain liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by
structuring the portfolio so that securities mature concurrent with cash
needs to meet anticipated demands. Furthermore, since all possible cash
demands cannot be anticipated, the portfolio should consist of securities
with active secondary or resale markets. Alternatively, a portion of the
portfolio may be placed in money market mutual funds or government
investment pools which offer same-day liquidity for short-term funds.
D. Yield - The investment portfolio shall be desigued with the objective of
attaining a market rate of return throughout budgetary and economic
cycles, taking into account the investment risk constraints and liquidity
needs. The benchmark to be used will be the 4M Plus Fund annual rate of
return. Return on investment is of secondary importance compared to the
safety and liquidity objectives. The core of investments are limited to
relatively low risk securities in anticipation of earning a fair return relative
to the risk being assumed. Securities shall generally be held until
maturity.
2
4. Pooling of Funds
The City will consolidate (pool) cash and reserves balances from all funds, except for
those legally restricted by statutes, to maximize investment earnings and to increase efficiencies
with regard to investment pricing, safekeeping and administration.
5. Authorized Investments
The City of Arden Hills will invest only in securities authorized by Minnesota Statute S 118A.04
and S1l8A.05.
1. Governmental bonds, notes, bills, mortgages and other securities, which are direct
obligations or are guaranteed or insured issues ofthe United States, its agencies,
its instrumentalities, or organizations created by an act of Congress, excluding
mortgage-backed securities defined as "high risk" (as defined below) or in
certificates of deposit secured by letters of credit issued by Federal Home Loan
Banks.
High risk mortgage-backed securities are as follows:
A) interest - only or principal- only mortgage-backed securities,
B) any mortgage derivative security that:
a) has an expected average life greater than ten years,
b) has an expected average life that:
i) will extend by more than four years as the result of
an irnmediate and sustained parallel shift in the
yield curve of plus 300 basis points: or
ii) will shorten by more than six years as the result of
an immediate and sustained parallel shift in the
yield curve of minus 300 basis points: or
c) will have an estimated change in price of more than 17
percent as the result of an immediate and sustained parallel
shift in the yield curve of plus or minus 300 basis points.
2. Obligations of the United States or its agencies under a repurchase agreement if
the margin agreement under the repurchase agreement is 101 percent and with any
ofthe following institutions:
A) a bank qualified as depository of public funds,
B) any national or state bank in the United States which is a member ofthe
Federal Reserve System and whose combined capital and surplus equals or
exceeds $10,000,000,
C) a primary reporting dealer in the United States government securities to
the Federal Reserve Bank of New York,
D) a securities broker/dealer having its principal executive office in
Minnesota, licensed pursuant to Minnesota Statues Chapter 80A, or an
affiliate of it, regulated by the Securities and Exchange Commission and
maintaining a combined capital and surplus of$40,000,000 or more,
exclusive of subordinated debt.
3
3. State and local government obligation as follows:
A) an obligation of the State of Minnesota or any of its municipalities:
a) that have taxing power, and
b) are rated "A" or better by a national bond rating service.
B) obligation of other state and local governments:
a) that have taxing power, and
b) are rated "A" or better by a national bond rating service.
C) general obligations of the Minnesota Housing Finance Agency that are
rated "A" or better by a national bond rating service.
D) general obligations of housing fmance agencies of other states, provided:
a) they include a moral obligation of the state, and
b) they are rated "A" or better by a national bond rating service,
E) general revenue obligation of any agency or authority of the State of
Minnesota other than those found in C or D above (Housing Finance
Agency) that are rated "AA" or better by a national bond rating service.
4. Certificates of deposit at state and federally chartered banks and savings and loan
associations. All investments made under this subsection shall be limited to the
amount of Federal Deposit Insurance Corporation or the manner set forth in
Minnesota statute gI18A.05. The certificate of deposit should be in the form of a
discounted security maturing in the amount not to exceed the insurance coverage
or in the amount so that at any time the face amount together with any accrued
interest does not exceed the insurance coverage.
5. Banker's Acceptances of United States Corporation or their Canadian subsidiaries
that are rated "AI" by Moody's Investors Service and/or PI by Standard and
Poor's Corporation and matures in 270 days or less. Banker's Acceptances can
only be purchased ifthe yield is greater than the United States Treasury
obligations or Federal Agency issues.
6. Commercial Paper issued by United States corporations or their Canadian
subsidiaries that are rated "AI" by Moody's Investors Service and/or "PI" by
Standard and Poor's Corporation and matures in 270 days or less.
7. Money Market Funds consisting of United States Treasury Obligations and/or
Federal Agency Issues.
8. The City will not purchase securities that are considered highly sensitive. A
highly sensitive investment is a debt instrument with contract terms that make the
investment's fair value highly sensitive to interest rate changes. Examples
include range notes and index amortizing notes, step-up notes and bonds,
variable-rate investments with coupon multipliers, and coupons that vary
inversely with a benchmark index.
4
9. The City will not purchase securities that could expose the City to foreign
currency risk.
10. The City will not purchase derivatives.
6. Safekeeping and Custody
Investments may be held in safekeeping with:
1. Any Federal Reserve Bank,
2. Any bank authorized under the laws of the United States or any state to exercise
corporate trust powers, including but not limited to the bank from which the
investment is purchased,
3. A primary reporting dealer in the United States government securities to the
Federal Reserve Bank of New York, or
4. A securities broker-dealer having its principal executive office in Minnesota,
Licensed pursuant to Minnesota Statutes Chapter 80A, or an affiliate of it,
regulated by the securities and exchange commission and maintaining a combined
capital and surplus of $40,000,000 or more, exclusive of subordinated debt.
The City's ownership of all securities in which the fund is invested should be evidenced
by written acknowledgments identifying the securities by:
A. The names of issuers,
B. The maturity dates,
C. The interest rates,
D. Any serial numbers or other distinguishing marks.
The City shall not invest in securities that are both uninsured and not registered in the
name of the City and are held by either:
A. The counterparty or
B. The counterparty's trust department or agent, but not in the name of the
City.
The Finance Director shall establish a system of internal controls, which shall be
reviewed with the independent auditor of the City. The controls shall be designed to prevent the
loss of public funds arising from fraud, employee error, and misrepresentation by third parties,
unanticipated changes in financial markets, or imprudent actions by employees and officers of
the City.
5
7. Concentration of Credit Risk
No more than 5% of the overall portfolio may be invested in the securities of a single
issuer, except for the securities of the U.S. Government, or a maximum of25% with any
individual counter party in an external investment pool.
8. Investment Depositories and Authorized Dealers
Annually, the City Council will designate by resolution depositories, security dealers and
financial institutions authorized to provide banking and investment services to the City. Prior to
completing an initial transaction each year with a broker/dealer, the City shall provide to the
broker/dealer a copy ofthe City's Investment Policy and a copy of the Notification to Broker and
Certification by Broker as required by Minnesota Statutes Chapter 80A. The broker/dealer must
sign and return the Notification to Broker and Certification by Broker and agree to handle the
City's account in accordance with the City's Investment Policy and provide a copy of their
broker's insurance coverage for their firm.
9. Investment Earnings
Interest earnings will be credited to the source ofthe invested funds at the end of each
month based on the average daily cash balances during the month. Market value adjustments
and interest accruals will be allocated at the end of the fiscal year based on the average cash
balances during the fiscal year.
10. Reporting and Review
A listing ofthe City's investment portfolio shall be included in the financial report to the
City Council at the end of each fiscal quarter. The list should include date of purchase and
maturity, type of investment, firm invested at, yield, interest rate, and comparison to the
benchmark set forth in this policy.
11. Exemption
Any investment currently held that does not meet the guidelines of this policy shall be
exempted from the requirement ofthis policy. Upon maturity, if funds are re-invested the new
securities must conform to this policy.
12. Review and Approval
The investment policy shall be formally approved and adopted by resolution the City
Council and any future changes to the policy must be approved by the City Council.
6