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HomeMy WebLinkAbout06-20-07 FPAC Minutes ~ ~HILLS Minutes Upstairs Conference Room, Arden Hills City Hall FINANCIAL PLANNING & ANALYSIS COMMITTEE WEDNESDAY, June 20, 2007 6:00 P.M. I. CALL MEETING TO ORDER AND ROLL CALL The meeting was called to order by committee chair, Scott Bronson at 6:05pm MEMEBERS PRESENT: Scott Bronson, Jeff Johnson, Jim Ostlund, Maurice Gieske OTHERS PRESENT: Stan Harpstead, Mayor; Sue Iverson, Finance Director; Joe Rueb, Accounting Analyst MEMEBERS NOT PRESENT: Al Hilgers; David Grant, City Council Liaison II. APROV AL OF AGENDA m. APPROVAL OF MAY 23, 2007 MINUTES Motioned: Jeff Johnson Seconded: Jim Ostlund All in favor. IV. CITY COUNCIL UPDATE - Mayor Harpstead The City is currently working on a 5 year Capital Improvement Plan (CIP); taking one step at a time. The CIP includes; looking at a new fire station (3 years out), new fire truck (current), and new roads. The EDC is reviewing options for the Red Fox/Grey Fox area. Wellington Management is working on making changes to current buildings, adding two new buildings, and adding a Walgreens. Changes to the Holiday Inn are coming soon. Mayor Harpstead mentioned that the city doesn't want to use city money or residential money for new business development. The Chesapeake properties are looking to do some development. Approximately 400,000 sq ft of commercial buildings valued at approximately $180 per sq ft. Development is encouraged sooner than later as this property is part of the 1990 TIP District that may only have 4 years left. Additional information not directly associated with Arden Hills right now: Additional entrance to the TCAAP property is being reviewed; one entrance would be off of 35W and the other off ofHwy 10. The cost associated with these entrances, $20 million for the 35W entrance and $35 City of Arden Hills 1245 West Highway 96. Arden Hills Minnesota 55112 Phone 651.634.5120 . Fax 651.634.5137 www.ci.arden-hills.mn.us ~ ~HILLS million for the Hwy 10 redevelopment. The Armory is looking to add two new buildings, a community center, some temporary housing units, and redo the existing garage/workshop area. Mayor Harpstead also invited the members of the committee to attend any of the Master Development Agreement (MDA) Council work sessions. These concern TCAAP and the next meeting is June 25, 2007 at 6 p.m. before the regular City Council meeting. Jeff Johnson has requested a list of all on-going projects for the city. The current CIP will be included in the next packet for all members. V. INVESTMENT POLICY DISCUSSION The current policy is very similar to White Bear Township's policy and a number of other Cities's which were provided for the committee as reference material in their packets. A concern was had over making decisions when they did not have any performance or financial information. Some committee members wanted more time to research and have more input to the policy decisions. Mayor Harpstead stated that policies can be modified at anytime with City Council approval and that we are in need of an updated policy so our staff can work on the investment portfolio. His recommendation was to approve a policy tonight and if later the committee decides that they would like changes or we find that we have problems we can amend it at that time. Current policy was updated in 1996 and is now out of date; statutes have changed. Our investment and cash portfolio currently totals approximately $11.4 million. Certificates of Deposits (CDs) cannot be more than $98,000 per issuer. We need to make sure all investors have records of who we are invested in as we cannot have multiple investments in one company or we will not be covered by the FDIC insurance. Mayor Harpstead mentioned that the policy needs to be restrictive and conservative. All bonds must have an "A" rating or better. There was a discussion on "Timing Risks" and was decided that "held to maturity" would stay in place after Finance Director Iverson explained how cities handle investments and report them. The City does not do active trading. Long term investments are usually invested for duration of three to five years. Maurice Gieske stated that safety is a primary key and suggests reviewing how other cities invest. Finance Director Iverson stated that the City current practice is much like other cities of similar size. The 4M Fund used by the city was set-up by the League of Minnesota Cities. Administration fees are charged back to the fund. The committee decided to benchmark the City's portfolio return against the 4M Plus Fund; the 4M Fund is a sweep account where as the 4M Plus Fund is a 30 day account. The City Council approves all investment brokers. Various changes were incorporated in the draft policy. The City will not purchase derivatives. Cash flow was discussed and Finance Director Iverson stated that she projects cash flow based on two years of expenditure history as recommended by the GFOA and any construction and capital expenditures per on- going construction contracts. The consensus of the committee was to put concentration risk at no more City of Arden Hills ~ ~HILLS 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 an external investment pool. The committee also wanted a "Counter Signature" policy for individual protection. Counter Signature must be one of the following: City Administrator, Asst. City Administration, Mayor, FP AC Chair, or Council Liaison. The draft policy will be emai1ed to all committee members with the discussed changes for approval and then presented to the City Council at the July 9th meeting for Council approval. VI. NEXT MEETING AGENDA The committee decided to change its meeting date from the third Wednesday of each month to the second Tuesday of each month. This will enable items to be brought forward to the City Council for approval or presentation at their second meeting of the month instead of having to wait until the next month. The next meeting will be July loth if this is acceptable to all members. Finance Director Iverson will check with the missing members and if acceptable will change the date on the City's calendars. The next policy will be Fund Balance policies. This will include reviewing the CIP, the assessment policy, and assessing what we can and cannot afford to do. This will be based on cash flows; some of this will be done in the future when we work on tax rates and other long-range policies. Currently our City works on the basis of pay as you go. Jeff Johnson requested reports with the last five years of critical funds balances within the CIP. VII. JOINT MEETING WITH PTRC, EDC AND PLANNING COMMISSION The committee is invited to a joint meeting with the Parks, Trails, and Recreation Commission; Economic Development Commission, and the Planning Commission on July 17, 2007, at the Cummings Park Pavilion, at 6:00 p.rn. A BBQ will be held first and meeting to follow VIII. ADJOURN Meeting adjourned at 8:20pm. Motioned: Jim Ostlund Seconded: Jeff Johnson ~~ Scott Bronson, FP AC Chair ~~/ ;/ Susan K. Iverson, Finance Director City of Arden Hills • 2^.RDEN jilLLS MEMORANDUM DATE: June 14, 2007 TO: Financial Planning and Analysis Committee FROM: Sue Iverson, Finance Director ' " SUBJECT: Investment Policy Discussions BACKGROUND: At our last meeting we discussed the Council expectations of this group. One of them 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. I have completed a draft policy which has been designed to incorporate all the current State Statute requirements as well as the current GASB 40 requirements. A number of cities have used this draft, but we need to customize it to Arden Hills. I have included a copy of the draft, the current investment policy, and a number of examples from other cities. I have included dates on most of them as many are revising their policies or already have to be in compliance. I have also included some of the Government Finance Officers Association of United States and Canada's (GFOA) best practices and some information on the 4M Fund which we use as our sweep account with out checking account. RECOMMENDED ACTION: Adoption of an investment policy for recommendation to the City Council. • PraFf 414, • CITY OF DEPARTMENT OF FINANCE STATEMENT OF INVESTMENT POLICY 1. POLICY 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 governing the investment of public funds. 2. SCOPE This investment policy applies to all financial assets of the City of (the "City") except those (if any) which are governed in another manner by specific reference in federal, state and/or local statutes. All assets to which this policy applies are accounted for in the City's comprehensive annual financial report and include: • General Fund Special Revenue Funds Debt Service Funds Capital Project Funds Enterprise Funds Trust and Agency Funds Internal Service Funds Any other newly created fund 3. STANDARDS The Finance Director is responsible for implementing this policy. The standard of prudence to be used shall be the "Prudent Investor rule," an will be applied in the context of managing an overall portfolio: "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." City employees meeting this standard will 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 appropriate action is taken to control adverse developments. 1 The Finance Director and the investment committee shall not knowingly engage in any • personal business activities which could impair their ability to make impartial investment decisions. Bonding of the Finance Director shall be required.The City Manager will establish specific bonding levels. 4. AUTHORIZED INVESTMENTS Investment instruments authorized and permitted by this policy are as follows: A. Obligations of the Untied States or its agencies under a repurchase agreement if the margin agreement under the repurchase agreement is 101 percent and with any of the following institutions. 1) a bank qualified as depository of public funds, 2) any national or state bank in the United States which is a member of the Federal Reserve System and whose combined capital and surplus equals or exceeds $10,000,000, 3) a primary reporting dealer in the United States government securities to the Federal Reserve Bank of New York, 4) a securities broker-dealer having its principal executive office in Minnesota, licensed pursuant to 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. B. Governmental bonds, notes, bills, mortgages and other securities, which are direct obligations or are guaranteed or insured issues of the 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: 1) interest-only or principal-only mortgage-backed securities, 2) 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 immediate 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 41111 • 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. C. Shares of an investment company registered under the Federal Investment company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and whose only investments are in: 1) securities described in "B" above, (with the exception that "high-risk" mortgage- backed securities are permissible investments for an investment company), 2) general obligation tax-exempt securities rated A or better by a national bond rating service, and 3) repurchase or reverse repurchase agreements fully collateralized by securities described above if the agreements are only entered into with an entity which is: a) a primary reporting dealer to the Federal Reserve Bank of New York, or b) one of the 100 largest U.S. commercial banks. D. State and local government obligation as follows: 1) an obligation of the State of Minnesota or any of its municipalities, 2) 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. 3) general obligations of the Minnesota Housing Finance Agency that are rated"A" or better by a national agency. 4) General obligations of housing finance 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, 5) general of revenue obligation of any agency or authority of the State of Minnesota other than those found in 3 or 4 above (Housing finance Agency) that are rated "AA" or better by a national bond rating service. E. Banker's acceptances of United States Corporation or their Canadian subsidiaries that is rated "Al" by Moody's Investors Service and/or P1 by Standard and Poor's Corporation and matures in 270 days or less. F. Commercial paper issued by United States corporations or their Canadian subsidiaries that is rated "Al" by Moody's Investors Service and/or "P1" by Standard and Poor's Corporation and matures in 270 days or less G. Guaranteed investment contact (gic) issued or guaranteed by a United States commercial bank or domestic branch of a foreign bank or a United States insurance company or its Canadian or United States subsidiary provided it ranks • 3 on a parity with the senior unsecured debt obligations of the issuer or guarantor. And 1) if it is a long-term gic, either: a) the long-term senior unsecured debt of the issuer or guarantor is rated, or obligations backed by letters of credit of the issuer or guarantor if forming the primary basis of a rating of such obligations would be rated, in the highest or next highest rating category of Standard & Poor's Corporation, Moody's Investors Service, Inc., or a similar nationally recognized rating agency, or b) if the issuer is a bank with headquarters in Minnesota, the long-term senior unsecured debt of the issuer is rated, or obligations backed by Ietters of credit of the issuer if forming the primary basis of a rating of such obligations would be rated in one of the three highest rating categories of Standard & Poor's Corporation, Moody's Investor Service, Inc., or a similar nationally recognized rating agency. 2) if it is a short-term gic, the short-term unsecured debt of the issuer or guarantor is rated, or obligations backed by letters of credit of the issuer or guarantor if forming the primary basis of a rating of such obligations would be rated, in the highest two rating categories of Standard & Poor's corporation, Moody's Investors Service, Inc., or similar nationally recognized rating agency. H. 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 Federal Savings and Loan Insurance Corporation or shall be secured in the manner set forth in Minnesota statute 118.005. 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. The Finance Director 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. J. The Finance Director will not purchase securities that could expose the City to foreign currency risk. 5. SAFEKEEPING AND CUSTODY Investments may be held in safekeeping with: 4 A. Any Federal Reserve Bank, B. 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, C. A primary reporting dealer in United States government securities to the Federal Reserve Bank of New York, or D. A securities broker-dealer having its principal executive office in Minnesota, licensed pursuant to 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 may 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. 6. CONCENTRATION OF CREDIT RISK The City will limit investments to avoid over concentration in securities from a specific issuer or business sector (excluding U.S. Treasuries and pools) by purchasing less than 5% per issuer. OR 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 an external investment pool. 7. SECURITY DEALERS, INSTITUTIONS, AND CONSULTANTS The Finance Director shall maintain a list of security dealers and financial institutions authorized to provide investment services to the City of . The Finance Director shall develop appropriate criteria, when necessary, for the further evaluation and selection of specific broker-dealers, institutions, consultants and/or external money managers. Prudence, rating services, analysis of current financial statement, key ratios and other statistical data compilation and/or specific other knowledge are expected to be utilized as components of the evaluation and 5 selection criteria. A current financial statement of each broker-dealer, institution, consultant • and/or external money manager which the City is using in execution of this policy must be kept on file by the Finance Director. Prior to completing an initial transaction with a broker-dealer, the Finance Director shall provide to the broker-dealer a written statement of investment restrictions which shall include a provision that all future investments are to be made in accordance with Minnesota Statutes governing the investment of public funds as well as this statement of investment policy. The broker-dealer must acknowledge receipt of the statement of investment restrictions in writing and agree to handle the municipality's account in accordance with these restrictions. The City may not enter into a transaction with a broker until the broker has provided this written agreement to the City. A. Qualified broker-dealers will be those security broker-dealers who maintain an office in the state and whoa re selected according to credit worthiness and approved by the Finance Director and the investment advisory committee. Only broker- dealers who are recognized as "primary dealers" by the Market Reports Division of the Federal Reserve Bank of New York and/or regional dealers that qualify under Securities and Exchange Commission Rule 15C=1 (uniform net capital rule) may be used for City investment placement. B. Qualified institutions will be those banks, savings banks and saving and loans institutions which are generally recognized by applicable federal, state and local statutes as being authorized to receive investments from the City. Approved • institutions will be those named generally above, whom also meet further selection criteria developed by the city. Approval is to be determined jointly by the Finance Director and the investment advisory committee. C. External consultants may be engaged and used when necessary and prudent to further a/or enhance the execution of this policy. A consultant is defined for the purposes of this policy as being an individual or firm having expertise relative to execution of this policy who may be engaged to serve in and advisory role without the purpose of receiving investment deposits from the City for the further purpose of generating a return on the placement. Approval of a consultant must be given jointly by the Finance Director and the investment advisory committee. No funds are to be placed directly with a consultant. D. External money managers may be engaged and used in the execution of this policy as long as the external money manager(s) is limited to investment activities within the confines of this policy. An external money manager must maintain appropriate diversification as noted later in this policy. Any external money manager engaged by the City will be required to provide an accounting and performance report to the Finance Director at a frequency not less than quarterly. External money managers must be approved by the Finance Director and the investment advisory committee. • 6 • 8. INVESTMENT OBJECTIVES The preservation of principal shall be the paramount objective of the investment program of the City of _. Investments shall be selected in a manner that will attempt to ensure the safety of the City's capital. This will be accomplished through a program of diversification and maturity limitations for each individual pool or fund of investments. These limitations will be determined by the Finance Director and the investment advisory committee and will be kept on file with the Finance Director. Proceeds from the issuance of tax-exempt debt securities shall be invested, recorded and reported in the manner set forth by the U.S. Treasury Department and the Internal Revenue Service so as to preserve the tax-exempt status of the debt securities. 9. QUARTERLY REPORTING AND REVIEW This investment policy, the schedule of diversification and maturity limitations by pool or group of investable funds, authorized broker-dealers, authorized investments and all other aspects of this investment policy will be reviewed on a quarterly basis. The reporting method chosen to report interest rate sensitivity in a manner consistent with the portfolio's risk guidelines is segmented time distibutions (or chosen method). The Finance Director shall prepare by the 20th of the month following the end of each calendar quarter, a report of investments held, investment activity and projected portfolio investment returns. The Finance Director and the investment • advisory committee made up of the City Manager, Assistant City Manager and the Assistant Finance Director, will review the information and make any proposed modifications. The scheduled quarterly process shall not inhibit desirable modifications to the policy at other times during the year. 2007 Investment Policy 7 0.ttritki- poi • CITY OF ARDEN HILLS - INVESTMENT POLICY Policy: It is the policy of the City of Arden Hills(the City)to invest funds in a manner which will provide the highest investment return consistent with the maximum security,while meeting the daily cash flow requirements of the City and conforming to all state and local statutes governing investments of public funds. Scope: This investment policy applies to all financial assets of the City. These funds are accounted for in the City's Annual Financial Report and include: Funds: General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds • Objective: The primary objectives, in priority order,of the City's investment activities shall be: Safety: Safety of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. Liquidity: The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated while still remaining cognizant of yield. Return of Investment:The City's investment portfolio shall be designed with the objective of obtaining a market rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio. Through investment laddering techniques, the portfolio shall attempt to outperform the benchmark two-year Treasury Note rate. • 1 Risks and Prudence: 110 This policy recognizes that risk is inherent in the investment world. Investment risks can result from issuer defaults or market price changes. The Minnesota Statutes governing permissible investments is designed to control risk to some degree. The Treasurer is expected to display prudence in the selection of securities,as a way to minimize default risk. No individual transaction shall be undertaken which jeopardizes the total capital position of the overall portfolio. In the event of a default by a specific issuer,the Treasurer shall review,and if appropriate,proceed to liquidate securities having comparable credit risks. • Investment officers acting in accordance with written procedures,the investment policy, and appropriate state regulations shall be relieved of personal responsibility for individual credit risk or market price changes,provided that reasonable action is taken to control adverse developments and all reporting requirements as stated herein are complied with. Ethics and Conflict of Interest: Officers and employees involved in the investment process,or in reviewing same,shall refrain from personal activity that could conflict with proper execution of the investment program,or which could impair their ability to make impartial investment decisions. Employees, investment officials,City Council and members of the Finance Committee shall disclose to the City Council any material financial interest in brokerage firms or other financial institutions that conduct business with the City,and they shall furtherID disclose any large personal financial/investment positions that could be related to the performance of the City's portfolio,Employees and officers shall subordinate their personal investment transactions to those of the City,particularly with regard to the time of purchases and sales. DeIetation of Authority: Authority to manage the City's investment program is derived from M.S. 412.141. (Treasurer's Duties)and M.S.471.56(Municipal Funds). Management responsibility for the investment program is hereby delegated to the Treasurer who shall,on behalf of the City Council,establish written procedures for the operation of the investment program consistent with this investment policy. In the absence of the Treasurer,the City staff so designated in the procedure shall exercise the same authority,with the exception of extending maturities. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Treasurer. • 2 • Authorized Financial Dealers and Institutions: The City of Arden Hills will conduct its investment transactions with 1)financial institutions located in the State of Minnesota that are designated as depositories by the City Council and 2)only brokers and dealers of government securities that report directly to the New York Federal Reserve Bank. The City will conduct its investment business with the most reputable firms. At the first Council meeting of each year,the Treasurer shall offer to the City Council a list of financial dealers and institutions to be authorized in an appropriate resolution,to provide investment service. Authorized and Suitable Investments: The City is empowered to invest only in securities which are permissible under Minnesota Statute Section 475.66. These securities include Federal Debt,Mutual Funds, State and Local Debt Banker's Acceptances,Commercial Paper,Guaranteed Investment Contracts,Mortgage Backed Securities and Repurchase and Reverse Repurchase Agreements. However,the intent of this policy,with the sole exception of permissible securities held in money market funds,is to limit the City's investments to Federal Debt • obligations. Federal Debt: • Government bonds,notes,bills,mortgages,and other securities,whichare direct obligations or are guaranteed or insured issues of the United States, its agencies, its instrumentalities,or organizations created by an Act of Congress,excluding mortgage backed securities defined as high risk as defined by MN Statute 475.66 Subd. 5 and derivative products. Diversification: Assets held in the investment portfolio shall be diversified to minimize the risk of loss resulting from over-concentration of assets in a specific maturity(maturities shall be staggered in a way that avoids undue concentration of assets in a specific maturity sector),a specific issuer or a specific class of securities. Single transactions in the excess of$1 million require prior approval of the City Council. Investment target goals by security category will be 15%in cash or cash equivalents 65%of fixed rate instruments and 20%in zero coupon instruments. • 3 • i Maximum Maturities: To the extent possible,the City 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 years from the date of purchase. At any point,no more than 50%of the portfolio will be invested in maturities greater than three years. Internal Control: i The City shall continue its annual process of independent review by an external auditor. This review will provide internal control by assuring compliance with policies and procedures. Internal control is the City's responsibility and such internal control procedures will be established and maintained throughout the year. Performance Standards: The investment portfolio will be designed to obtain a market average rate of return during budgetary and economic cycles,taking into account the City's investment risk constraints and cash flow needs. Reporting: II/ The investment reporting function shall include requirements for: budgetary q g ry reporting, interim reporting, internal reporting and annual reporting. Budgetary Reporting: As part of the annual budget,interest income shall be estimated for all funds based on a cash flow forecast. This forecast shall take into account the historical pattern of inflows and outflows of cash and any other pertinent factors affecting cash flow. The budget document shall explicitly state the assumptions of the cash flow forecast and the assumed interest rate for the entire investment portfolio. Interim Reporting: The investment portfolio of the City shall be provided to the Council along with the Budget versus Actual reports monthly. The portfolio shall be sequenced by maturity date and shall state the type of investment,cost,rate and yield percentages and shall indicate an annualized rate of return based on the daily interest strategy or anticipated variances from the investment income budgeted. • 4 • • Internal Reporting: The City Accountant will develop and maintain procedures that will ensure that the investment portfolio is maintained on the City's computer system on a daily basis and • that this information is available to both management and the City Council at any time. Annual Reporting: Within 90 days of the end of the fiscal year,the Treasurer shall submit a written comprehensive annual report on the investment program and investment activity. This report shall summarize the investment strategies,describe the portfolio in terms of securities,maturities,risk characteristics and other features. This report shall explain the total investment return and compare the return with budgetary expectations. This report shall contain a detailed comparison of total rate of return with other benchmarks. Benchmarks for comparison may include: the Minnesota Municipal Money Market Fund, treasury bill rates that are indicative of a strictly passive investment strategy or any other • index that may be deemed appropriate. And finally,the report should contain a discussion of the outlook for interest rates and the economic trend for the upcoming year, investment strategies to be implemented and budgetary expectations for investment income. Investment Policy Adoption: • The City's investment policy shall be adopted by a resolution of the City Council. The policy shall be reviewed on an annual basis by both the City Council and the Treasurer, and prior to becoming effective,any modifications made thereto must be approved by the City Council. • (updated 1/20/96) 5 • CITY OF APPLE VALLEY DEPARTMENT OF FINANCE STATEMENT OF INVESTMENT POLICY 1. POLICY 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 governing the investment of public funds. 2. SCOPE This investment policy applies to all financial assets of the City of Apple Valley (the "City") except those (if any) which are governed in another manner by specific reference in federal, state and/or local statutes.All assets to which this policy applies are accounted for in the City's comprehensive annual financial report and include: General Fund Special Revenue Funds Debt Service Funds Capital Project Funds Enterprise Funds Trust and Agency Funds Internal Service Funds Any other newly created fund 3. STANDARDS The Finance Director is responsible for implementing this policy. The standard of prudence to be used shall be the "Prudent Investor rule," an will be applied in the context of managing an overall portfolio: "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." City employees meeting this standard will 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 appropriate action is taken to control adverse developments. 410 The Finance Director and any other responsible person shall not knowingly engage in any personal business activities which could impair their ability to make • impartial investment decisions. Bonding of the Finance Director shall be required. The City Administer will establish specific bonding levels. 4. AUTHORIZED INVESTMENTS Investment instruments authorized and permitted by this policy are as follows: A. Obligations of the Untied States or its agencies under a repurchase agreement if the margin agreement under the repurchase agreement is ioi percent and with any of the following institutions. i) a bank qualified as depository of public funds, 2) any national or state bank in the United States which is a member of the Federal Reserve System and whose combined capital and surplus equals or exceeds $10,000,000, 3) a primary reporting dealer in the United States government securities to the Federal Reserve Bank of New York, 4) a securities broker--dealer licensed pursuant to Chapter 8oA regulated by the Securities and Exchange commission and maintaining a combined capital and surplus of $40,000,000 or more, exclusive of subordinated debt. B. Governmental bonds, notes, bills, mortgages and other securities, which • are direct obligations or are guaranteed or insured issues of the 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: 1) interest--only or principal-only mortgage-backed securities, 2) 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 immediate and sustained parallel shift in the yield curve of plus 30o 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 30o 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 30o basis points. IIP C. Shares of an investment company registered under the Federal Investment 11111 company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and whose only investments are in: 1) securities described in "B" above, (with the exception that "high-risk" mortgage-backed securities are permissible investments for an investment company), 2) general obligation tax-exempt securities rated A or better by a national bond rating service, and 3) repurchase or reverse repurchase agreements fully collateralized by securities described above if the agreements are only entered into with an entity which is: a) a primary reporting dealer to the Federal Reserve Bank of New York, or b) one of the 100 largest U.S. commercial banks. D. State and local government obligation as follows: 1) an obligation of the State of Minnesota or any of its municipalities, 2) 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. 3) general obligations of the Minnesota Housing Finance Agency that are rated"A"or better by a national agency. • 4) General obligations of housing finance 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, 5) general of revenue obligation of any agency or authority of the State of Minnesota other than those found in 3 or 4 above (Housing finance Agency)that are rated "AA" or better by a national bond rating service. E. Banker's acceptances of United States Corporation or their Canadian subsidiaries that is rated "Al" by Moody's Investors Service and/or P1 by Standard and Poor's Corporation and matures in 27o days or less. F. Commercial paper issued by United States corporations or their Canadian subsidiaries that is rated "Al" by Moody's Investors Service and/or"Pi"by Standard and Poor's Corporation and matures in 270 days or less G. Guaranteed investment contact (gic) issued or guaranteed by a United States commercial bank or domestic branch of a foreign bank or a United States insurance company or its Canadian or United States subsidiary provided it ranks on a parity with the senior unsecured debt obligations of the issuer or guarantor.And 1) if it is a long-term gic, either: • 3 a) the long-term senior unsecured debt of the issuer or guarantor is rated, or obligations backed by letters of credit of the issuer III or guarantor if forming the primary basis of a rating of such obligations would be rated, in the highest or next highest rating category of Standard & Poor's Corporation, Moody's Investors Service, Inc., or a similar nationally recognized rating agency, or b) if the issuer is a bank with headquarters in Minnesota, the long-term senior unsecured debt of the issuer is rated, or obligations backed by letters of credit of the issuer if forming the primary basis of a rating of such obligations would be rated in one of the three highest rating categories of Standard & Poor's Corporation, Moody's Investor Service, Inc., or a similar nationally recognized rating agency. 2) if it is a short-term gic, the short-term unsecured debt of the issuer or guarantor is rated, or obligations backed by letters of credit of the issuer or guarantor if forming the primary basis of a rating of such obligations would be rated, in the highest two rating categories of Standard & Poor's corporation, Moody's Investors Service, Inc., or similar nationally recognized rating agency. H. 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 . Federal Savings and Loan Insurance Corporation or shall be secured in the manner set forth in Minnesota statute 118.005. 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. I. The Finance Director 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. J. The Finance Director will not purchase securities that could expose the City to foreign currency risk. 5. SAFEKEEPING AND CUSTODY Investments may be held in safekeeping with: A. Any Federal Reserve Bank, 1110 B. 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, C. A primary reporting dealer in United States government securities to the Federal Reserve Bank of New York, or D. A securities broker-dealer licensed pursuant to Chapter 8oA 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 may 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. 6. 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 an external investment pool. 7. SECURITY DEALERS, INSTITUTIONS, AND CONSULTANTS The Finance Director shall maintain a list of security dealers and financial institutions authorized to provide investment services to the City of Apple Valley. The Finance Director shall develop appropriate criteria, when necessary, for the further evaluation and selection of specific broker-dealers, institutions, consultants and/or external money managers. Prudence, rating services, analysis of current financial statement, key ratios and other statistical data compilation and/or specific other knowledge are expected to be utilized as components of the evaluation and selection criteria. A current financial statement of each broker-dealer, institution, consultant and/or external money manager which the City is using in execution of this policy must be kept on file by the Finance Director. Prior to completing an initial transaction with a broker-dealer, the Finance Director shall provide to the broker-dealer a written statement of investment restrictions which shall include a provision that all future 5 investments are to be made in accordance with Minnesota Statutes governing the investment of public funds as well as this statement of investment policy. The broker- dealer must acknowledge receipt of the statement of investment restrictions in writing and agree to handle the municipality's account in accordance with these restrictions. The City may not enter into a transaction with a broker until the broker has provided this written agreement to the City. A. Qualified broker-dealers will be those security broker-dealers who are selected according to credit worthiness and approved by the Finance Director and approved by the City Council. Only broker-dealers who are recognized as "primary dealers" by the Market Reports Division of the Federal Reserve Bank of New York and/or regional dealers that qualify under Securities and Exchange Commission Rule 15C=1 (uniform net capital rule) may be used for City investment placement. B. Qualified institutions will be those banks, savings banks and saving and loans institutions which are generally recognized by applicable federal, state and local statutes as being authorized to receive investments from the City. Approved institutions will be those named generally above, whom also meet further selection criteria developed by the city. Approval is to be determined by the Finance Director and have the approval of the City Council. C. External consultants may be engaged and used when necessary and prudent to further a/or enhance the execution of this policy. A consultant • is defined for the purposes of this policy as being an individual or firm having expertise relative to execution of this policy who may be engaged to serve in and advisory role without the purpose of receiving investment deposits from the City for the further purpose of generating a return on the placement. Approval of a consultant must be given by the Finance Director and approved by the City Council. No funds are to be placed directly with a consultant. D. External money managers may be engaged and used in the execution of this policy as long as the external money manager(s) is limited to investment activities within the confines of this policy. An external money manager must maintain appropriate diversification as noted later in this policy. Any external money manager engaged by the City will be required to provide an accounting and performance report to the Finance Director at a frequency not less than quarterly. External money managers must be approved by the Finance Director and the City Council. 8. INVESTMENT OBJECTIVES The preservation of principal shall be the paramount objective of the investment program of the City of Apple Valley. Investments shall be selected in a manner that will attempt to ensure the safety of the City's capital. This will be accomplished through a • program of diversification and maturity limitations for each individual pool or fund of 6 investments. These limitations will be determined by the Finance Director and will be • kept on file with the Finance Director. Proceeds from the issuance of tax-exempt debt securities shall be invested, recorded and reported in the manner set forth by the U.S. Treasury Department and the Internal Revenue Service so as to preserve the tax-exempt status of the debt securities. 9. MONTHLY REPORTING AND REVIEW This investment policy, the schedule of diversification and maturity limitations by pool or group of investable funds, authorized broker-dealers, authorized investments and all other aspects of this investment policy will be reviewed on a monthly basis. The reporting method chosen to report interest rate sensitivity in a manner consistent with the portfolio's risk guidelines is segmented time distributions (or chosen method). The Finance Director shall prepare, by the loth of the month, a report of investments held, investment activity and projected portfolio investment returns to the City Council. 2007 Investment Policy • • 7 MettIO7 TOWN OF WHITE BEAR INVESTMENT POLICY 1. Purpose It is the policy of the Town 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. Standards 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 of this 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 Township. C. Delegation of Authority—Authority to manage the investment portfolio is granted to the Town's Finance Officer, who shall act in accordance with established procedures and internal controls for the operation of the 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 Officer • shall be responsible for all transactions undertaken and shall establish a system of control. 1 3. Investment Objectives 111 The Town 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 Township 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 Township 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 largely 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 designed 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. 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. 4. Pooling of Funds The Township 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 Town of White Bear will invest only in securities authorized by Minnesota Statute 475.66. . 2 • 1. Governmental bonds,notes,bills,mortgages and other securities, which are direct • obligations or are guaranteed or insured issues of the 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 grater than ten years, b) has an expected average life that: i) will extend by more than four years as the result of an immediate 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 of the 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 of the 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 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. State and local government obligation as follows: A) an obligation of the State of Minnesota or any of its municipalities, 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 finance agencies of other states, provided: • a) they include a moral obligation of the state, and 3 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 118.005. 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"Al"by Moody's Investors Service and/or P1 by Standard and Poor's Corporation and matures in 270 days or less. Banker's Acceptances can only be purchased if the 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 "Al" by Moody's Investors Service and/or"P1" 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 Town 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. 9. The Town will not purchase securities that could expose the Town to foreign currency risk. 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, . 4 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 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 Town'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 Town shall not invest in securities that are both uninsured and not registered in the name of the Town and are held by either: A. The counterparty or B. The counterparty's trust department or agent,but not in the name of the Town. • The Finance Officer shall establish a system of internal controls,which shall be reviewed with the independent auditor of the Township. 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 Township. 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 an external investment pool. 8. Investment Depositories and Authorized Dealers Annually, the Town Board will designate depositories, security dealers and financial institutions authorized to provide banking and investment services to the Town. Prior to completing an initial transaction each year wit a broker/dealer, the Town shall provide to the broker/dealer a copy of the Town's Investment Policy and a copy of the Notification to Broker and Certification by Broker as required by Minnesota Statute 118A.04. The broker/dealer must sign and return the Notification to Broker and Certification by Broker and agree to handle the Town's account in accordance with the Town's Investment Policy and provide a copy of their broker's insurance coverage for their firm. • 5 9. Investment Earnings • Interest earnings will be credited to the source of the invested funds at the end of each quarter based on the average cash balances during the quarter. The Town's General Fund will receive 7.5%of investment earnings as an administrative fee for staffs time to administer the Town's investments. This fee shall be subtracted from interest earning before allocating interest each quarter. 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 of the Town's investment portfolio shall be included in the financial report to the Town Board at the end of each fiscal quarter. The list should include date of purchase and maturity, type of investment, firm invested at, yield, and interest rate. In addition a report on the Town's investments for the previous fiscal year shall be provided as part of the Town's Annual Board of Audit. 11. Exemption Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirement of this 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 the Town Board and any future changes to the policy must be approved by the Town Board. The Town Board shall review the investment policy annually, as part of the Township's Annual Board of Audit meeting. • 6 Ntid 97 Pf _ '' Inve stment Policy Purpose The purpose of this policy is to establish specific guidelines the City of Oak Grove will use in the investment of City funds. It will be the responsibility of the Finance Director/ Treasurer to invest City funds in a manner which will provide the highest investment return with minimum risk while meeting the daily cash flow demands of the City and conforming to all federal, state and local regulations governing the investment of public funds. Investment portfolio risk will be minimized to ensure that liquidity and marketability are maintained. The City will not invest in instruments that it cannot hold to maturity. The city will invest in securities that match the City's cash flow needs and debt service requirements. Scope The Finance Director/Treasurer is responsible for the investing of all funds in the custody of the City, including,but not necessarily limited to, the General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, Agency Funds, and excluding pension funds. Prudence The standard of prudence to be used by investment officials shall be the "prudent investor", and shall be applied in the context of managing the overall portfolio. Investment officers acting in accordance with this policy and with Minnesota Statute 118A and exercising due diligence shall be relieved of personal liability for an individual security's credit risk or market price changes,provided that reasonable action is taken to control adverse developments and unexpected deviations are reported in a timely manner. Objectives There are three main objectives of all investment activities that are prioritized as follows: A. Safety—Safety of principal is the foremost objective of the City. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of principal 0 Page 1 of 6 mi--../„,„,,40.74,v 1 , Investment Policy • in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. Credit risk is the risk of loss due to failure of the security issuer or backer. Credit risk will be minimized by: • Limiting investments to the types of securities listed under authorized and suitable investments of this investment policy. • Qualifying the financial institutions,broker/dealers with which the City will do business in accordance with the authorized financial institute and dealer section of this policy. • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. Insurance or collateral may be required to ensure return of principal per the collateralization section of this policy. Interest rate risk is the risk that the market value of securities in the portfolio will fall due to changes in market interest rates. Interest rate risk will be minimized by: • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations,thereby avoiding the need to sellIP securities on the open market prior to maturity. • Investing operating funds primarily in shorter-term securities,money market mutual funds, or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy. B. Liquidity—The investment portfolio shall remain sufficiently 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. C. Return on investment—The investment portfolio of the City of Oak Grove shall be designed to attain a market-average rate of return through budgetary and economic cycles,taking into consideration the City's investment risk constraints, cash flow characteristics of the portfolio and prudent investment principles. Subject to requirements of the above objectives, it is the policy of the City of Oak Grove to offer financial institutions and companies within the City of Oak Grove the opportunity to bid on investments; however, the City of Oak Grove will seek the best investment yields. • Page 2 of 6 , . , ) -, 4,-( 4, il 0-4"*. .1 , M Investment Policy Delegation of Authority Management responsibility for the investment program is hereby delegated from the City Council to the City Finance Director/Treasurer, who shall establish procedures for the operation of the investment program, consistent with this investment policy. Such procedures shall include delegation of authority to persons responsible for investment transactions. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of internal controls designed to prevent losses from fraud and employee error. Conflict of Interest Any City official (elected or appointed) 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 his/her ability to make impartial investment decisions. II Authorized Financial Institute and Dealer In accordance with Minnesota Statute 118.005, the responsibility for conducting investment transactions resides with the City Council of the City of Oak Grove. Also, the Council shall authorize the City Finance Director/Treasurer to exercise the powers of the Council in designating a depository of the Funds. In selecting depositories, the credit worthiness of the institutions under consideration shall be examined by the Finance Director. Only approved security broker/dealers selected by creditworthiness shall be utilized (minimum capital requirement $10,000,000 and at least five years of operation). These may include "primary"dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15c3-1 (uniform net capital rule). All financial institutions and broker/dealers must supply the following as appropriate: • Audited financial statements • Proof of National Association of Securities Dealers (NASD) certification • Proof of state registration • Completed broker/dealer questionnaire for firms who are not major regional or national firms • • Certification of having read the City's investment policy Page 3 of 6 I AIL Investment Policy • Broker Representations Municipalities must obtain from their brokers certain representations regarding future investments. Minnesota Statutes, Section 118A,requires municipalities to provide each broker with information regarding the municipality's investment restrictions. Before engaging in investment transactions with the City of Oak Grove, the supervising officer at the securities broker/dealer shall submit a certification annually according to Minnesota Statutes 118.05. The document will state that the officer has reviewed the investment policies and objectives, as well as applicable state law, and agrees to disclose potential conflicts of interest or risk to public funds that might arise out of business transactions between the firm and the City of Oak Grove. All financial institutions shall agree to undertake reasonable efforts to preclude imprudent transactions involving the City's funds. Authorized and Suitable Investment • Minnesota Statutes, Section 118A.04, lists all permissible investments for municipalities. This list establishes the maximum investment risk permitted for a Minnesota municipality. Even though Minnesota Statutes 118A provides for more instruments to be used for investing purposes, the following is a listing of investments the City of Oak Grove will be authorized to invest in: 1) United States securities: Instruments such as governmental bonds, notes,bills, mortgages (excluding high-risk mortgage-backed securities as defined in MN Statute 118A.04, Subdivision 6), and other securities which are direct obligations or are guaranteed or insured issues of the United States, its agencies, its instrumentalities, or organizations created by an act of Congress. 2) Time deposits: . Funds may be invested in time deposits that are fully insured by the Federal Deposit Insurance Corporation(FDIC) or bankers acceptances of United States banks. 3) Commercial papers: Funds may be invested in commercial paper issued by United States corporations or their Canadian subsidiaries that is rated in the highest quality category(e.g., A-1, P-1,F-1, or D-1 or higher)by at least two nationally recognized rating agencies and matures in 270 days or less. 4) State and local securities: a) any security which is a general obligation of any state or local government with taxing powers which is rated "A"or better by a national bonds rating service; • Page 4 of 6 y r Investment Policy b) any security which is a revenue obligation of any state or local government with taxing powers which is rated "AA"or better by a national bond rating service; and c) a general obligation of the Minnesota housing finance agency which is a moral obligation of the state of Minnesota and is rated "A" or better by a national bond rating agency. 5) Repurchase agreements: Repurchase agreements consisting of collateral allowable in items 1 thru 4 above,may be entered into with any of the entities per Minnesota Statute 118A.05, Subdivision 2. 6) Statewide investment pools which invest in authorized instruments according to MN Statutes 118A, and restricted to itemsl thru 5 above. 7) Money market mutual funds which invest in authorized instruments according to MN Statutes 188A, and restricted to items 1 thru 5 above. Interest-bearing deposits in authorized depositories must be fully insured or collateralized. Collateralization • Collateralization will be required on two ty pes ypes of investments, Certificates of Deposit and Repurchase Agreements. In order to anticipate market changes and provide a level of security for all funds, the Collateralization level will be 110 percent of the market value of principal and accrued interest. When the pledged collateral consists of notes secured by first mortgages, the collateral level will be 140% of the market value of principal and accrual interest. Collateral shall be deposited in the name of the City of Oak Grove subject to release by the City's Finance Director. All Certificates of Deposit and Repurchase Agreements purchased by the City shall be held in third party safe keeping by an institution designated as primary agent. The primary agent shall issue a safekeeping receipt to the City listing the specific instrument, rate,maturity and other pertinent information. All deposits will be insured or collateralized in accordance with Minnesota Statutes 118A.03. Safekeeping and Custody When investments purchased by the City are held in safekeeping by a broker/dealer, they must provide asset protection of$500,000 through the Securities Investor Protection Corporation (SIPC) and at least another$10,000,000 supplemental insurance protection. • Page 5 of 6 Investment Policy • Diversification The City of Oak Grove will attempt to diversity its investments according to type and maturity. The portfolio, as much as possible,will contain both short-term and long-term investments. The City will attempt to match its investments with anticipated cash flow requirements. Extended maturities may be utilized to take advantage of higher yields; however, no more than 50% of the total investments as of December 31 each year, should extend beyond five (5) years and in no circumstance should any extend beyond 10 years. Investment Reporting The City Administrator shall prepare an investment report at least quarterly, including a management summary that provides a clear picture of the status of the current investment portfolio and transactions made over the last quarter. Conclusion • The intent of this policy is to ensure the safety of all City funds. The main goal of the City will be to achieve a market rate of return while maintaining the safety of its principal. Approved by the Oak Grove City Council Date: September 29, 1997 Revised by City Council on April 30, 2007 • Page 6 of 6 City of Mounds View Investment Policy • The purpose of this investment policy isguide the p y City Council and officials of the City in the conduct of the investment program so as to obtain a reasonable rate of return on the investments while minimizing risk and maintaining the public's trust. The Treasurer shall seek to act responsibly as a custodian of the public trust and shall avoid any transaction that might impair public confidence in the City,the City Council, or the Administration. I. Governing Authority Legality The investment program shall be operated in conformance with federal, state, and other legal requirements, including Minnesota Statutes Chapter 118A. II. Scope This policy applies to the investment of all funds. 1. Pooling of Funds Except for cash in certain restricted and special funds,the City will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. 2. Personnel The personnel authorized to conduct banking and investment transactions on behalf of the City shall be named in the Annual Resolution Appointing Official Newspaper, Acting Mayor, Official Depository, and Treasurer. Within this policy, use of the title Finance Director shall mean the person appointed to that position by the City Council. The use of the title Treasurer shall mean any of the persons named in the Annual Resolution Appointing Official Newspaper, Acting Mayor, Official Depository, and Treasurer as being authorized to conduct banking and investment transactions on behalf of the City. Duties of the Treasurer will predominantly be carried out by the Finance Director,but may be carried out by any of the other named persons in the Finance Director's absence. Treasurer shall mean any person carrying out the duties of the Treasurer. III. General Objectives The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield: • 1. Safety Safety of principal is the foremost objective of the investment program. Investments shall be • undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk 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,by: • Limiting investments to the types of securities listed in Section VII of this Investment Policy • Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisers with which the City will do business in accordance with Section V • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. 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 market interest rates, by: • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity • Investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy(see section VIII). 2. Liquidity The investment portfolio shall remain sufficiently 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 (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools, which offer same-day liquidity for short-term funds. 3. Yield The investment portfolio shall be designed 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. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. 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 with the following exceptions: • A security with declining credit may be sold early to minimize loss of principal. • A security swap would improve the quality, yield, or target duration in the portfolio. • Liquidity needs of the portfolio require that the security be sold. • IV. Standards of Care 1. Prudence The standard of prudence to be used by the Treasurer shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. The Treasurer 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 out in accordance with the terms of this 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." 2. Ethics and Conflicts of Interest The Treasurer 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. The Treasurer shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. The Treasurer shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. 3. Delegation of Authority Authority to manage the investment program is granted to the Treasurer and derived from the following: Annual Resolution Appointing Official Newspaper, Acting Mayor, Official Depository, and Treasurer. Responsibility for the operation of the investment program is hereby delegated to the Treasurer, who shall act in accordance with established written procedures and internal controls for the operation of the investment program consistent with this investment policy. Procedures should include references to: safekeeping, delivery vs. payment, investment accounting, repurchase agreements,wire transfer agreements, and collateral/depository agreements. [Please refer to GFOA 's Investment Procedures Manual, 2003.] No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Treasurer. The Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. V. Authorized Financial Institutions, Depositories, and Broker/Dealers 1. Authorized Financial Institutions, Depositories, and Broker/Dealers A list will be maintained of financial institutions and depositories authorized to provide • investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least five years of operation). These may include "primary" dealers or • regional dealers that qualify under Securities and Exchange Commission (SEC)Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: • Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines • Proof of National Association of Securities Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties) • Proof of state registration • Completed broker/dealer questionnaire (not applicable to Certificate of Deposit counterparties) • Certification of having read and understood and agreeing to comply with the [entity's] investment policy. • Evidence of adequate insurance coverage. An annual review of the financial condition and registration of all qualified financial institutions and broker/dealers will be conducted by the Treasurer. (See Appendix for the GFOA Recommended Practice on "Governmental Relationships with Securities Dealers.") VI. Internal Controls • 1.Internal Controls The Finance Director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. Details of the internal controls system shall be documented in an investment procedures manual and shall be reviewed and updated annually. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1)the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by management. The internal controls structure shall address the following points: • Avoidance of physical delivery securities • Written confirmation of transactions for investments and wire transfers • Password protected authorizations of wire transfers • Development of a wire transfer agreement with the lead bank Accordingly, the investment officer shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures or alternatively, compliance should be assured through the City's annual independent audit. • VII. Suitable and Authorized Investments • 1. Investment Types Consistent with the GFOA Policy Statement on State and Local Laws Concerning Investment Practices,the following investments will be permitted by this policy and are those defined by state and local law where applicable: • U.S. Treasury obligations which carry the full faith and credit guarantee of the United States government and are considered to be the most secure instruments available; • U.S. government agency and instrumentality obligations that have a liquid market with a readily determinable market value; • Certificates of deposit and other evidences of deposit at financial institutions, • Bankers'acceptances; • Commercial paper, rated in the highest tier(e.g., A-1, P-1, F-1, or D-1 or higher)by a nationally recognized rating agency; • Money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities; and • Local government investment pools either state-administered or developed through joint powers statutes and other intergovernmental agreement legislation. Investment in derivatives of the above instruments shall not be allowed. 2. Collateralization • Where allowed by state law and in accordance with the GFOA Recommended Practices on the Collateralization of Public Deposits, full collateralization will be required on all demand deposit accounts, including checking accounts and non-negotiable certificates of deposit. (See GFOA Recommended Practices.) VIII. Investment Parameters 1. Diversification The investments shall be diversified by: • limiting investments to avoid overconcentration in securities from a specific issuer or business sector(excluding U.S. Treasury securities), • limiting investment in securities that have higher credit risks, • investing in securities with varying maturities, and • continuously investing at least 10 percent of the portfolio in readily available funds such as local government investment pools (LGIPs), money market funds to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. (See the GFOA Recommended Practice on "Diversification of Investments in a Portfolio") • never investing more than 20 percent of the portfolio in securities with final maturities greater than five years. . 2. Maximum Maturities To the extent possible,the City shall 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 ten(10)years from the date of purchase • or in accordance with state and local statutes and ordinances. The City shall adopt weighted average maturity limitations (which often range from 90 days to 3 years), consistent with the investment objectives. Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as local government investment pools or money market funds to ensure that appropriate liquidity is maintained to meet ongoing obligations. 3. Competitive Bids The Treasurer shall obtain competitive bids from at least two brokers or financial institutions on all purchases of investment instruments purchased on the secondary market. IX. Reporting 1. Reporting The Finance Director shall submit quarterly an investment report that summarizes recent market conditions, economic developments and anticipated investment conditions. The report shall summarize the investment strategies employed in the most recent quarter, and describe the portfolio in terms of investment securities, maturities, • risk characteristics and other features. The report shall explain the quarter's total investment return and compare the return with budgetary expectations. The report shall include an appendix that discloses all transactions during the past quarter: The report shall be in compliance with state law and shall be distributed to the investment committee and others as required by law. Each quarterly report shall indicate any areas of policy concern and suggested or planned revision of investment strategies. 2. Performance Standards The City's cash management portfolio shall be designed with the objective of regularly meeting or exceeding a selected performance benchmark, which shall be the average return on three-month U.S. Treasury bills. 3. Marking to Market The market value of the portfolio shall be calculated at least quarterly and a statement of the market value of the portfolio shall be issued at least quarterly. This will ensure that review of the investment portfolio, in terms of value and price volatility,has been performed consistent with the GFOA Recommended Practice on "Mark-to-Market Practices for State and Local Government Investment Portfolios and Investment Pools." (See GFOA Recommended Practices.) In defining market value, considerations should be given to the GASB Statement 31 pronouncement. • X. Policy Considerations 1. Exemption Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirements of this policy. At maturity or liquidation, such monies shall be reinvested only as provided by this policy. 2. Amendments This policy shall be reviewed on an annual basis. Any changes must be approved by the investment officer and any other appropriate authority, as well as the individuals charged with maintaining internal controls. XI. Approval of Investment Policy The investment policy shall be formally approved and adopted by the governing body of the City and reviewed annually. XII. List of Attachments The following documents, as applicable, are attached to this policy: • • Listing of authorized personnel, see Annual Appointing Resolution • Relevant investment statutes and ordinances, see MN Statutes, Chapter 118A • Listing of authorized broker/dealers and financial institutions, see Annual Appointing Resolution • Internal Controls see Section VI of the draft investment policy • 900 CITY OF FOREST LAKE } INVESTMENT POLICY • Dated: May 10, 2006 CITY OF FOREST LAKE • INVESTMENT POLICY PURPOSE The purpose of this policy is to establish specific guidelines the City of Forest Lake will use in the investment of City funds, including: ➢ Investment objectives, ➢ Investment reporting practices, ➢ Designation of appropriate investment instruments, ➢ Criteria for selection of banks and dealers, ➢ Requirements regarding maturities and diversification, ➢ Principles of risk,prudence and ethics, ➢ Responsibilities for the investment function, ➢ Internal controls related to investments. It will be the responsibility of the Finance Director and/or City Administrator to invest City funds in order to attain a market rate of return while preserving and protecting the capital of the overall portfolio. Investments will be made, based on statutory constraints, in safe, low-risk instruments. SCOPE • The Finance Director and/or City Administrator are responsible for the investing of all funds in the custody of the City, including but not necessarily limited to, the General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds and Agency Funds. Unless specified by the City Council, investments of the City's monies will be pooled and invested, with the resultant investment income accruing to the benefited fund. PRUDENCE The standard of prudence to be used by investment officials shall be the "prudent investor," and shall be applied in the context of managing the overall portfolio. Investment officers acting in accordance with this policy, and with Minnesota Statutes §427.01, et. seq. and Minnesota Statutes §118A.01, et. seq., and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that reasonable action is taken to control adverse developments and unexpected deviations are reported in a timely manner. The Finance Director is expected to display prudence in the selection of securities, as a way to minimize default risk. No individual transaction shall be undertaken which jeopardizes the total capital position of the overall portfolio. • - 1 - OBJECTIVES There are five main objectives of all investment activities that are prioritized as follows: 1. Safety Safety of principal is the foremost objective of the City. Each investment transaction shall seek to first insure that capital losses are avoided. The objective will be to mitigate credit risk and interest rate risk. Credit risk shall be defined as the risk of loss due to failure of the security issuer or backer. Interest rate risk shall be defined as the risk that the market value of securities in the portfolio will fall due to changes in general interest rates. 2. Liquidity The investment portfolio shall remain sufficiently 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. It shall be the policy of the City to emphasize liquidity over yield to meet disbursement requirements. 3. Diversification To diversify the investment portfolios by individual financial institution, government agency, or by corporation in the case of commercial paper to reduce the exposure to risk or loss. Investment maturity dates should vary in • order to ensure that the City will have money available when needed. 4. Yield The investment portfolio of the City of Forest Lake shall be designed to attain a market-average rate of return through budgetary and economic cycles, taking into consideration the city's investment risk constraints, cash flow characteristics of the portfolio and prudent investment principles. 5. Responsibility To maintain public confidence in the City of Forest Lake, all participants in the investment process shall seek to act responsibly and avoid any transaction that might impair the credibility of the City. Subject to requirements of the above objectives, it is the policy of the City of Forest Lake to offer financial institutions and companies within the City of Forest Lake the opportunity to bid on investments; however, the City of Forest Lake will seek the best investment yields. DELEGATION OF AUTHORITY Management responsibility for the investment program is hereby delegated from the City Council to the Finance Director and/or City Administrator, who shall establish • procedures for the operation of the investment program consistent with this investment -2 - policy. Such procedures shall include delegation of authority to persons responsible for investment transactions. The Finance Director and/or City Administrator shall be • responsible for all transactions undertaken and shall establish a system of internal controls designed to prevent losses from fraud, employee error, unanticipated changes in financial markets and imprudent actions by employees and officers of the City. CONFLICT OF INTEREST Any City official (elected or appointed) involved in the investment process shall refrain from personal business activity that could conflict, or give the appearance of a conflict, with proper execution of the investment program or which could impair his/her ability to make impartial investment decisions. AUTHORIZED FINANCIAL INSTITUTE AND DEALER In accordance with Minnesota Statutes §118.02, the responsibility for conducting investment transactions resides with the City Council of the City of Forest Lake. Also, the Council shall be responsible for designating the depositories of the funds. Depositories shall be selected through a banking services procurement process, which shall include a comprehensive review of credit characteristics and financial history by the Finance Director or reliance on selection criteria by an independent third party. In selecting depositories, the creditworthiness of the institutions under consideration shall be examined. The City Council shall designate depositories after a recommendation from staff. • Only approved security broker/dealers selected by creditworthiness shall be utilized (minimum capital requirement $10,000,000 and at least five years of operation.) These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15c3-1 (uniform net capital rule.) All financial institutions and broker/dealers must supply the following as appropriate: ➢ audited financial statements; ➢ proof of National Association of Securities Dealers(NASD) certification, ➢ proof of state registration; ➢ completed broker/dealer questionnaire for firms who are not major regional or national firms; ➢ certification of having read the City's investment policy. BROKER REPRESENTATIONS Municipalities must obtain from their brokers certain representations regarding future investments. The City of Forest Lake will provide each broker with information regarding the municipality's investment restrictions. Before engaging in investment transactions with the City of Forest Lake the supervising officer at the securities broker/dealer shall submit a certification stating that the officer has reviewed the • - 3 - investment policies and objectives, as well as applicable state laws, and agrees to disclose potential conflicts of interest or risk to public funds that might arise out of business transactions between the firm and the City of Forest Lake. All financial institutions shall agree to undertake reasonable efforts to preclude imprudent transactions involving the city's funds. AUTHORIZED AND SUITABLE INVESTMENTS MN Statutes, §118A.04, lists all permissible investments for municipalities. This list establishes the maximum investment risk permitted for a Minnesota municipality. Even though MN Statutes §118A.04 provides for more instruments to be used for investing purposes, the following is a listing of investments the City will be authorized to invest in: 1. Government Securities Direct obligations of the federal government or its agencies, with the principal fully guaranteed by the U.S. Government or its agencies. 2. Certificate of Deposit A negotiable or nonnegotiable instrument issued by commercial banks and insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). 3. Repurchase Agreement An investment that consists of two simultaneous transactions, where an investor purchases securities from a bank or dealer. At the same time, the selling bank or dealer agrees to repurchase the securities at the same price plus interest at some agreed-upon future date. The security purchased is the collateral protecting the investment. 4. Prime Commercial Paper An investment used by corporations to finance receivables. A short-term (matures in 270 days or less) unsecured promissory note is issued for a maturity specified by the purchaser. Corporations market their paper through dealers who in turn market the paper to investors. The City will only purchase commercial paper issued by U.S corporations or their Canadian subsidiaries that has been rated highest quality(Al, P1 and Fl)by two of three rating agencies. 5. State or Local Government Securities Any Security that is a General Obligation of the State of Minnesota or any of its Municipalities. 6. Statewide Investment Pools Statewide investment pools that invest in authorized instruments according to Minnesota Statutes §118A.04, such as the Minnesota Municipal Money Market (4M)Fund. • - 4 - 7. Money Market Mutual Funds Money market mutual funds that invest in authorized instruments according to • Minnesota Statutes §118A.04. Interest-bearing deposits in authorized depositories must be fully insured or collateralized. COLLATERALIZATION The City funds must be deposited in financial institutions that provide $100,000 in government insurance protection. At no time will deposits in any one institution exceed $100,000 unless such excesses are protected by pledged securities. Pledged securities, computed at market value, will be limited to the following: 1. United States Treasury bills, notes or bonds that mature within five years; 2. Issues of United States government agencies guaranteed by the United States government; 3. General obligation securities of any state or local government with taxing powers which is rated "A" or better, or revenue obligation securities of any state or local government with taxing powers which is rated is rated AA or better, provided no single issue exceeds $200,000 with maturities not exceeding five years; 41111 4. Irrevocable standby letters of credit issued by Federal Home Loan Banks accompanied by written evidence that the bank's public debt is rated AA or better, 5. Time deposits that are fully insured by any federal agency. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110 percent (110%) of the market value of principal and accrued interest. Collateral shall be deposited in the name of the City of Forest Lake, subject to release by the City's Finance Director. All certificates of deposit and repurchase agreements purchased by the City shall be held in third-party safekeeping by an institution designated as primary agent. The primary agent shall issue a safekeeping receipt to the City listing the specific instrument rate maturity and other pertinent information. All deposits will be insured or collateralized in accordance with Minnesota Statutes Chapter 118. No other collateral except as designated above will be authorized for use as collateral for City funds. • - 5 - SAFEKEEPING AND CUSTODY When investments purchased by the City are held in safekeeping by a broker/dealer, they must provide asset protection of $500,000 through the Securities Investor protection Corporation (SIPC) and at least another$2,000,000 supplemental insurance protection. DIVERSIFICATION It is the policy of the City to diversify its investment portfolios to eliminate the risk of loss resulting from the over concentration of assets in a specific maturity, a specific issuer, or a specific class of maturities. The portfolio, as much as possible, will contain both short-term and long-term investments. The City will attempt to match its investments with anticipated cash flow requirements. Liquidity is necessary to pay for recurring operations. Maturities should not be extended beyond the dates necessary to meet these projected liquidity needs and should be staggered in such a way that avoids over concentration in a specific maturity sector. Extended maturities may be utilized to take advantage of higher yields; however, no more than 20% of the total investment portfolio should extend beyond five (5) years and in no circumstance should any extend beyond ten (10) years. The portfolio will reflect diversity by class of maturity and issuer. The following limits are imposed for investments of a specific class: 1. Commercial Paper At any one time, no more than 20% of the total portfolio shall consist of commercial paper investments. Maximum holdings for any one issuer of commercial paper will be 5% of the total portfolio. 2. Certificates of Deposit At any one time, no more than 50% of the total portfolio shall consist of certificates of deposit. Maximum holdings for any one issuer of a certificate of deposit will be $100,000, or the amount insured by the Federal Deposit Insurance Corporation (FDIC), unless collateral is provided in accordance with this policy and Minnesota Statute Chapter 118. Maximum holdings for any one issuer of collateralized certificates of deposit will be 5% of the total portfolio. 3. Government Securities At any one time, no more than 60% of the total portfolio shall be invested in obligations of the federal government or its agencies. 4. Repurchase Agreements At any one time, no more than 5% of the total portfolio shall be invested in repurchase agreements. 11111 - 6- 5. State or Local Government Securities At any one time, no more than 20% of the total portfolio shall be invested in State or local government securities. Maximum holdings for any one issuer of state or local government securities will be 5% of the total portfolio. 6. Money Market Funds At any one time, no more than 20% of the total portfolio shall be invested in authorized money market mutual funds. INVESTMENT REPORTING The Finance Director shall prepare an investment report at least quarterly, including a management summary that provides a clear picture of the status of the current investment portfolio and transactions made over the last quarter. The investment reporting function shall include requirements for budgetary reporting, interim reporting, internal reporting, and annual reporting. 1. Budgetary Reporting As part of the annual budget, interest income shall be estimated for all funds based on a formal cash flow forecast. This forecast shall take into account the historical pattern of inflows and outflows of general fund cash, the adopted fiscal policies and any other pertinent factors affecting cash flow. The budget document shall explicitly state the assumptions of the cash flow forecast, the assumed interest rate on short-term investment and the interest estimated for any long-term investments. 2. Interim Reporting The investment portfolios for the City funds shall be provided to the Council with the periodic budget versus actual reports that they receive monthly. These reports shall be sequenced by maturity and shall state the type of investment, annualized rate of return based on the daily interest amount. The Finance Director shall summarize any changes in investment strategy or anticipated variances from the investment income budgeted as part of monthly reporting process. 3. Internal Reporting Finance Department procedures shall ensure that investment portfolios are maintained on the City computer system on a daily basis and available to management or the City Council at any time. Management shall be provided investment portfolios monthly together with their budget versus actual reports. 4. Annual Reporting Within 90 days of the City's fiscal year end, the Finance Director shall prepare a written comprehensive fiscal report on the investment program and investment activity. This report shall include: • - 7 - 4110 a. A summary of the investment activity and rate of return for the fiscal year then ended; b. A discussion of how the year's investment activity compares to the stated objectives and the budgeted amount; c. A detailed comparison of total rate of return with other benchmarks. Benchmarks for comparison may include: the Minnesota Municipal Money Market fund; other state investment pools that have similar investment restrictions; treasury bill rates that are indicative of a strictly passive investment strategy; performance indexes, as set forth in the Government Finance Officers' monthly publication of the Public Investor (e.g. the 10 bill index); or any other index that may be deemed appropriate; d. A discussion of the outlook for interest rates and the economic trend for the upcoming year, investment strategies to be implemented, and budgetary expectations for investment income. INVESTMENT COMMITTEE The City Council may appoint an investment committee to serve at its pleasure. The • mission of the committee shall be to monitor the City's investment portfolio and make recommendations to the Finance Director and/or City Administrator regarding the same. The committee shall consist of five members defined as follows: the City Finance Director, the City Administrator, two City Council members, and one member of the community who has a background in public finance and no financial connection with the City. The Finance Director shall serve as the facilitator of the committee. The committee shall meet as often as it sees fit, but no less than once per year and no more than once per quarter. CONCLUSION The intent of this policy is to ensure the safety of all City funds. The main goal of the City will be to achieve a market rate of return while maintaining the safety of its principal. Amended this 10th day of May, 2006 by the City Council of the City of Forest Lake. APPROVED: ATTEST: • Mayor Clerk/Administrator - 8 - Wr INVESTMENT POLICY PURPOSE:The investment policy is a guide for the City Council and officials of the City in the conduct of the investment program so as to obtain a reasonable rate of return on the investments while minimizing risk and maintaining the public's trust. The Treasurer shall seek to act responsibly as a custodian of the public trust and shall avoid any transaction that might impair public confidence in the City, the City Council, or the Administration. I. GOVERNING AUTHORITY Legality The investment program shall be operated in conformance with federal, state, and other legal requirements,including Minnesota Statutes Chapter 118A. II. SCOPE This policy applies to the investment of all funds. 1. Pooling of Funds Except for cash in certain restricted and special funds, the City will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing,safekeeping and administration.Investment income will be11111 allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. 2. Personnel The personnel authorized to conduct banking and investment transactions on behalf of the City shall be named in the Annual Resolution Appointing Official Newspaper,Acting Mayor, Official Depository,and Treasurer. Within this policy,use of the title Finance Director shall mean the person hired in that position by the City Council. The use of the title Treasurer shall mean any of the persons named in the Annual Resolution Appointing Official Newspaper, Acting Mayor,Official Depository,and Treasurer as being authorized to conduct banking and investment transactions on behalf of the City.Duties of the Treasurer will predominantly be carried out by the Finance Director, but may be carried out by any of the other named persons in the Finance Director's absence.Treasurer shall mean any person carrying out the duties of the Treasurer. • Page 1 of 8 ILL GENERAL OBJECTIVES • The primaryobjectives,in priorityorder, of investment activities shall be safety,liquidity, and yield: 1. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk 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,by: • Limiting investments to the types of securities listed in Section VII of this Investment Policy; • Pre-qualifying the financial institutions,broker/dealers,intermediaries,and advisers with which the City will do business in accordance with Section V;and • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. 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 market interest rates,by: • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations,thereby avoiding the need to sell securities on the open market prior to maturity;and • Investing operating funds primarily in shorter-term securities,money market mutual funds,or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy (see Section VIII). 2. Liquidity The investment portfolio shall remain sufficiently 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 (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Alternatively,a portion of the portfolio may be placed in money market mutual funds or local government investment pools (LGIPs),which offer same-day liquidity for short-term funds. • Page 2 of 8 3. Yield The investment portfolio shall be designed 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. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. 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 with the following exceptions: • A security with declining credit may be sold early to minimize loss of principal; • A security swap would improve the quality,yield,or target duration in the portfolio; or • Liquidity needs of the portfolio require that the security be sold. IV. STANDARDS OF CARE 1. Prudence The standard of prudence to be used by the Treasurer shall be the"prudent person"standard and shall be applied in the context of managing an overall portfolio. The Treasurer 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 out in accordance with the terms of this 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." 2. Ethics and Conflicts of Interest The Treasurer 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. The Treasurer shall disclose any material interests in fmancial institutions with which they conduct business. They shall further disclose any personal fmancial/investment positions that could be related to the performance of the investment portfolio. The Treasurer shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. 3. Delegation of Autholity Authority to manage the investment program is granted to the Treasurer and derived from the following: Annual Resolution Appointing Official Newspaper, Acting Mayor, Official Depository, and Treasurer. Responsibility for the operation of the investment program is hereby delegated to the Treasurer, who shall act in accordance with established written procedures and internal controls for the operation of the investment program consistent with this investment policy. Procedures should include references to: safekeeping, delivery vs. payment, investment accounting, repurchase agreements, wire transfer agreements, and 41111 Page 3 of 8 • collateral/depository agreements, including but not limited to reference of GFOA's 4111 Investment Procedures Manual,2003. No engage may in an investment transaction except as provided under the terms of this policy and the procedures established by the Treasurer. The Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. V. AUTHORIZED FINANCIAL INSTITUTIONS,DEPOSITORIES,AND BROKER/DEALERS 1. Authori<ed Financial Institutions, Depositories, and Broker/Dealers A list will be maintained of financial institutions and depositories authorized to provide investment services. In addition,a list will be maintained of approved security broker/dealers selected by creditworthiness (e.g.,a minimum capital requirement of$10,000,000 and at least five years of operation). These may include"primary"dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: • Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines; • Proof of National Association of Securities Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties); • • Proof of state registration; • Completed broker/dealer questionnaire (not applicable to Certificate of Deposit counterparties); • Certification of having read and understood and agreeing to comply with the City of Medina's investment policy;and • Evidence of adequate insurance coverage. An annual review of the financial condition and registration of all qualified financial institutions and broker/dealers will be conducted by the Treasurer. VI. INTERNAL CONTROLS 1. Internal Controls The Finance Director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. Details of the internal controls system shall be documented in an investment procedures manual and shall be reviewed and updated annually. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived,and(2)the valuation of costs and benefits requires estimates and judgments by management. 41111 The internal controls structure shall address the following points: Page 4 of 8 • Avoidance of physical delivery securities; • • Written confirmation of transactions for investments and wire transfers; • Password protected or dual authorization for all wire transfers outside of our own entity;and • Development of a wire transfer agreement with the lead bank. Accordingly,the Finance Director shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures or alternatively, compliance should be assured through the City's annual independent audit. VII. SUITABLEAND AUTHORIZED INVESTMENTS 1. Investment Types Consistent with the GFOA Policy Statement on State and Local Laws Concerning Investment Practices,the following investments will be permitted by this policy and are those defined by state and local law where applicable: • U.S. Treasury obligations which carry the full faith and credit guarantee of the United States government and are considered to be the most secure instruments available; • U.S. government agency and instrumentality obligations that have a liquid market with a readily determinable market value; 110 • Certificates of deposit and other evidences of deposit at financial institutions; • Bankers' acceptances; • Commercial paper,rated in the highest tier(e.g.,A-1,P-1,F-1,or D-1 or higher)by a nationally recognized rating agency; • Page 5 of 8 • Money market mutual funds regulated by the Securities and Exchange Commission • and whose portfolios consist only of dollar-denominated securities;and • LGIPs either state-administered or developed through joint powers statutes and other intergovernmental agreement legislation. Investment in derivatives of the above instruments shall not be allowed. 2. Collateralkation Where allowed by state law and in accordance with the GFOA Recommended Practices on the Collateralization of Public Deposits, full collateralization will be required on all demand deposit accounts,including checking accounts and non-negotiable certificates of deposit. VIII. INVESTMENT PARAMETERS 1. Diversification The investments shall be diversified by: • Limiting investments to avoid over concentration in securities from a specific issuer or business sector (excluding U.S. Treasury securities); • Limiting investment in securities that have higher credit risks; • Investing in securities with varying maturities; • Continuously investing at least 10 percent of the portfolio in readily available funds • such as LGIPs, money market funds to ensure that appropriate liquidity is maintained in order to meet ongoing obligations;and • Never investing more than 20 percent of the portfolio in securities with final maturities greater than five years. 2. Maximum Maturities To the extent possible, the City shall 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 ten (10)years from the date of purchase or in accordance with state and local statutes and ordinances. The City shall adopt weighted average maturity limitations (which often range from 90 days to 3 years), consistent with the investment objectives. Because of inherent difficulties in accurately forecasting cash flow requirements,a portion of the portfolio should be continuously invested in readily available funds such as LGIPs or money market funds to ensure that appropriate liquidity is maintained to meet ongoing obligations. 3. Competitive Bids The Treasurer shall obtain competitive bids from at least two brokers or financial institutions on all purchases of investment instruments purchased on the secondary market. 410 IX. REPORTING Page 6 of 8 • 1. Reporting • The Finance Director shall submit annually an investment report that summarizes recent market conditions, economic developments and anticipated investment conditions. The report shall summarize the investment strategies employed in the most recent quarter,as well as the past year, and describe the portfolio in terms of investment securities,maturities,risk characteristics and other features. The report shall explain the quarter's total investment return and compare the return with budgetary expectations. The report shall include an appendix that discloses all transactions during the past year. The report shall be in compliance with state law and shall be distributed to the City Council and others as required by law. Each report shall indicate any areas of policy concern and suggested or planned revision of investment strategies. 2. Performance Standards The City's cash management portfolio shall be designed with the objective of regularly meeting or exceeding a selected performance benchmark,which shall be the average return on three-month U.S.Treasury bills. 3. Marking to Market The market value of the portfolio shall be calculated at least quarterly and a statement of the market value of the portfolio shall be issued at least quarterly. This will ensure that review of the investment portfolio,in terms of value and price volatility,has been performed consistent with the GFOA Recommended Practice on "Mark-to-Market Practices for State and Local Government Investment Portfolios and Investment Pools." In defining market value, considerations should be given to the GASB Statement 31 pronouncement. X. POLICY CONSIDERATIONS 1. Exemption Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirements of this policy. At maturity or liquidation,such monies shall be reinvested only as provided by this policy. • Page 7 of 8 2. Amendments • This policy shall be reviewed on an annual basis. Any changes must be approved by the Treasurer and any other appropriate authority, as well as the individuals charged with maintaining internal controls. XI. APPROVAL OF INVESTMENT POLICY The investment policy shall be formally approved and adopted by the governing body of the City and reviewed annually. XII. LIST OF ATTACHMENTS The following documents, as applicable, are attached to this policy: • Listing of authorized personnel, see Annual Appointing Resolution; • Listing of authorized broker/dealers and financial institutions,see Annual Appointing Resolution; • Relevant investment statutes and ordinances, see MN Statutes, Chapter 118A;and • Internal Controls see Section VI of the draft investment policy. • Council Approved July 5,2006 Page 8 of 8 INVESTMENT POLICY 4/24/2005 • L Scope This policy applies to the investment of long term and short term operating funds of the City of St. Anthony. Individual investments are purchased using the polled approach for efficiency and maximum investment opportunity. The City will consolidate cash balances from all funds to maximize investment earnings. Each individual fund's cash balance will continue to be reported separately in the general ledger system. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. II. Objective The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield. A. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. • 1. Credit risk. The City will minimize credit risk. Credit risk is the risk of loss due to the failure of the security issuer or backer by: a. Limiting investments to those types of securities allowable by Minnesota Statute and set forth as Authorized Investments. b. Diversifying the investment portfolio so that potential losses on individual securities will be minimized. c. Refrain from investments/instruments or holdings that are speculative in nature. 2. Interest rate risk. The City will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates by: a. Structuring the investment portfolio so that securities will mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities prior to maturity. b. . Investing funds in those securities allowable by Minnesota Statue#118A. • INVESTMENT POLICY B. Liquidity The investment portfolio shall remain sufficiently 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 some securities with the greatest liquidity. A portion of the portfolio may be placed in money market funds that offer same day liquidity for short-term funds and are invested in those securities allowable by Minnesota Statue. C. Yield The investment portfolio shall be designed 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 core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall be held to maturity with the following exceptions: 1. A security with declining value may be sold early to minimize loss of principal. 2. A capital gain in principal can be realized. 3. A security swap would improve the quality, yield or target duration in the portfolio. 4. Liquidity needs of the portfolio require that a security be sold. III. Standards of Care The standard of care to be used by the investment official shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers, 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 out in accordance with the terms of the City's Investment Policy attachment to the broker notification and certification form. Investments shall be made with judgment and care, under economic circumstances then prevailing with discretion and intelligence. • 2 INVESTMENT POLICY IV. Ethics and Conflicts of Interest Officers and 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 and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the City. V. Delegation of Authority Authority to manage the investment program is granted to the Finance Director who shall be designated as the investment officer. The Finance Director shall develop and maintain administrative procedures for the operation of the investment program. When410 appropriate, the procedures will include a bidding process for commercial paper, monitoring diversification and risk as well as a system of controls to regulate the activities of subordinate officials. The Finance Director is authorized, as allowed under Minnesota Statute, to make transactions with designed depositories and designate broker- dealers for City funds. In the Finance Directors absence, the City Manager shall be authorized to complete transactions as the investment official. VI. Authorized Financial Dealers and Institutions The Finance Director will maintain a list of financial institutions to provide investment services to the City. All broker-dealers who desire to become qualified bidders for investment transactions must supply the Finance Director with audited financial statements,proof of National Association of Securities Dealers certification,proof of Minnesota registrations and completion of broker notification and certification form as required by the Minnesota Statue#118A prior to any investment transactions with the City. • 3 INVESTMENT POLICY VII. Authorized Investments The city is authorized under Minnesota Statute#118A to invest in the following securities: A. United States securities. Public funds may be invested in governmental bonds, notes,bills, (excluding mortgage backed securities) and other securities, which are direct obligations or are guaranteed or insured issues of the United States, its agencies, its instrumentalities, or organizations created by an act of Congress. B. State and local securities. Funds may be invested in the following: 1. Any security which is a general obligation of any state or local government with taxing powers which is rated "A"or better by a national bond rating service. 2. Any security, which is a revenue obligation of any state or local government with taxing,powers which is rated"AA"or better by a • national bond rating service. 3. General obligations of the Minnesota housing finance agency,which is a moral obligation of the state of Minnesota and is rated "A" or better by a national bond-rating agency. C. Commercial papers. Funds may be invested in commercial paper issued by United States corporation or their Canadian subsidiaries that is rated in the highest quality category by at least two nationally recognized rating agencies and mature in 270 days or less. D. Certificates of Deposits. Funds may be invested in certificate of deposits that are fully insured by the Federal Deposit Insurance Corporation or bankers acceptances of United States banks (not to exceed $100,000 in any one institution). Any change to the State Stature will be incorporated into this policy. VIII. Insurance Coverage Full insurance coverage will be required on investment accounts at a minimum of $10,000,000 total per account. The insurance coverage may be a combination of FDIC and SIPC insurance. The level of insurance coverage will be adjusted upward to cover • the full value of the account, if the account exceeds$10,000,000. 4 • INVESTMENT POLICY IX. Safekeeping Securities purchased shall be retained at the institution where the securities are purchased. X. Investment Parameters The City's investments shall be diversified as to specific maturity, issuer and institution in order to minimize overall risk to the portfolio. Investments shall be purchased to match expected cash flow needs, minimizing the market risk associated with selling an investment before its maturity date. To the extent possible,the City shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow,the City will directly invest in securities with a stated maturity of less than seven years. Reserve funds and other longer-term investments may be invested insecurities exceeding • seven years if the maturity of such an investment is make to coincide as nearly as practicable with the expected use of such funds. Because of the inherent difficulties associated with accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds, such as money market funds. XI. Reporting and Review The investment officer shall prepare a monthly investment report and will be presented to the City Council as part of their packet materials. The City auditor shall review all City investments and report his findings in the City's annual financial statements. • 5 CITY OF MOUND RESOLUTION NO. STATE OF MINNESOTA COUNTY OF HENNEPIN CITY OF MOUND RESOLUTION ESTABLISHING A CITY INVESTMENT POLICY WHEREAS, effective cash management and investment policies are recognized as essential to good fiscal management; and WHEREAS, investment policies must be well founded and uncompromisingly applied in their legal, vendor and administrative aspects; and WHEREAS, the laws of Minnesota prescribe procedures to be followed in the investment of public funds and it is the City's intent to adhere to these procedures. NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF MOUND, HENNEPIN COUNTY, MINNESOTA, THAT: the City Council hereby authorizes the following: 1. Establishment of an investment policy as shown in attachment Exhibit A, to be • followed by all City officials responsible for the investment of City funds. 2. The investment policy will be reviewed and updated as needed. Adopted by the City Council of the City of Mound, Hennepin County, Minnesota, this 14th day of December, 2004. Pat Meisel, Mayor ATTEST: Bonnie Ritter City Clerk EXHIBIT A • CITY OF MOUND INVESTMENT POLICY PURPOSE: The purpose of this investment policy is to set forth the investment and operational policies for the management of the public funds of the City of Mound. These policies are designed to ensure the prudent management of public funds, the availability of operating funds when needed and a market sensitive return on invested funds. OBJECTIVES: The investment policy of the City of Mound shall be to: 1. Assure the safety of the invested funds of the City. 2. Maintain sufficient liquidity to provide adequate and timely working funds. 3. Attain the highest possible rate of return while providing necessary protection of principal consistent with City cash flow operating requirements. 4. Match the maturity of investment instruments to the monthly cash flow requirements. 5. Diversify investments as to maturity, instruments, and financial institutions where permitted under State Law. 6. Maintain a buy to hold investment philosophy with the ability to sell before maturity if the move is in the interest of the preservation of the City's portfolio integrity and preservation of capital directive. 7. Avoid investment for speculation. • AUTHORIZED INVESTMENTS: • The City Treasurer shall serve as the investment officer of the City and shall invest City funds in those investments authorized for Minnesota public sector entities under state statutes, chapters 118A.04, 118A.05, and 118A.06. 1. U.S. Government obligations (Bills, Notes, and Bonds). 2. U.S. Government Agency Securities and Instrumentalities of Government sponsored corporations. 3. Municipal bonds which are rated by a national bond rating service: - General Obligation of any state or local government with taxing powers which is rated A or better. - Revenue Bond rated "AA" or better. - Minnesota Housing Finance Bonds rated A or better. 4. Commercial Paper issued by U.S. Corporations or their Canadian subsidiaries that is rated in the highest quality category by at least two. nationally recognized rating agencies and matures 270 days or less. 5. Bankers Acceptances of US Banks eligible for purchase by the Federal. Reserve System. 6. Certificates of Deposits that are fully insured by the Federal Deposit Insurance Corporation or collateralized as required by law. 7. Repurchase Agreements. 8. Local Government Investment Pool (4m Fund). 9. Money Market funds rated by at least one nationally recognized agency. • In the absence of the City Treasurer, the City Manager or the City Clerk will serve as the investment officer. CERTIFICATES OF DEPOSIT: Bids for certificates of deposit may be solicited orally, in writing, electronically, or in any combination of those methods. OTHER INVESTMENTS: All other investments selected for purchase will only be those allowed under public sector entities statutes. SAFETY AND INVESTMENT MANAGEMENT: The City Treasurer shall exhibit prudence and discretion in the selection and management of City investments. Safety of principal is the first priority in investing City • funds. Skill and judgment shall be exercised in order that no individual or group of • transactions undertaken would jeopardize the total capital sum of the overall portfolio. LIQUIDITY AND DIVERSITY: The total cash assets of the City shall be invested in instruments whose maturities conform to the cash flow needs of the City. The investment portfolio shall be diversified to reduce the risk of loss investment income from over-concentration of assets in a specific issue, a specific issue size, or a specific class of securities. COLLATERILIZATION: All City funds must be deposited in financial institutions which provide $100,000 in governmental insurance protection. At no time, will deposits in any one institution exceed $100,000 unless such excesses are protected by pledged securities, and will be limited to the following: 1. U.S. Treasury Bills, Notes or Bonds all of which mature within five (5) years. 2. U.S. Agency securities created by an act of Congress. 3. Repurchase Agreements, with maturities not exceeding one (1) year, secured by U.S. Government Bills, Notes or Bonds. • 4. Municipal general Obligation Bonds, Rated "A" or better by Moodys, with maturities not exceeding five (5) years. INTERNAL CONTROLS: A system of internal controls shall be followed and shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by employees and officers of the City. Controls deemed most important shall include: 1. Custodial safekeeping, when appropriate. 2. Clear delegation of authority. 3. Written confirmation of telephone transactions. 4. Limiting the number of authorized investment officials. 5. Documentation of transactions and strategies. 6. Quarterly investment reporting to the City Manger and City Council. • These controls shall be reviewed by the City's independent auditing firm. • SAFEKEEPING AND CUSTODY: Hold all fund deposits in the appropriate accounts, and provide highly secure safekeeping of securities, to minimize risk of loss due to theft, fire, or accident. To protect against potential fraud and embezzlement, the cash and investments of the city shall be secured through third-party custody, when appropriate. Investment officials shall be bonded. ORDER EXECUTION AND BROKER/DEALER ASSOCIATION: The following guidelines will be utilized. 1. Before doing business and prior to establishing an account, the City will secure a questionnaire from the specific broker/dealer which will serve to identify any potential problems of ethics and malpractice on the part of the broker/dealer. 2. Prior to doing business with any broker/dealer, the City shall receive, in writing, a statement from that broker/dealer stating that they have read the City's investment policy and will adhere to its parameters. • • CITY OF MOUND • BROKER/DEALER QUESTIONNAIRE PROPOSED VENDOR COMPANY DESIGNATED CONTACT PERSON BRANCH MANAGER HOME OFFICE INSTITUTIONAL CONTACT LOCAL ADDRESS TELEPHONE HOME OFFICE MAILING INFORMATION • TELEPHONE QUALIFICATIONS: Please provide at least five (5) references and contacts of other municipal entities that are similar to the City of Mound, which you have worked for a period longer than two (2) years. • Please provide us with you firm's most recent financial information. • Does this local representative of your firm have any current or recent legal disputes with any Public Sector entity over investment related issues? If so, please detail This shall serve as notice that the firm of and the representatives of said company attest that they have read and understand all of the State Investment Laws pertaining to the City of Mound, Minnesota, and agree to adhere to these guidelines and will not seek to sell the City of Mound, Minnesota, any investments which do not fall into these parameters. Furthermore, we have read the individual investment policy of the City of Mound, Minnesota, and will adhere to its provisions above and beyond any covered by state statutes. Finally, we will not attempt to sell any security to the City of Mound, Minnesota, which does not conform to the cash flow forecast of the City of Mound, Minnesota. • Branch Manager— Date Broker Representative • !lW U MINNESOTA Feb 3, 2003 CITY OF MOORHEAD INVESTMENT POLICY 411 � I 1.0 Purpose. The purpose of this policy is to establish specific guidelines the City of Moorhead (City) will use in the investment of City funds. Investment of City funds will be made in a manner that will provide a market-average rate of return while preserving and protecting the capital of the overall portfolio while meeting the daily cash flow demands of the entity and conforming to all State and local statutes governing the investment of public funds. The City investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed on an annual basis by the Investment Committee and City Council. Any modifications made thereto must be approved by the City Council. 2.0 Scope. This investment policy applies to activities of the City with regard to investing the financial assets of all funds. These funds are accounted for in the City's Audited Financial Report and include the following: 2.1 Funds. • General Fund • Special Revenue Funds • Capital Project Funds • • Debt Service Funds • Enterprise Funds (excluding Elec. & Water) • Special Assessment Funds • Internal Service Funds • Tax Increment Funds • Trust and Agency Funds • Any New Fund Created by the City • Council, Unless Specifically Exempted 3.0 Prudence. The standard of prudence to be applied by the investment officials shall be the "prudent investor" rule which states, "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." 3.1 The prudent investor rule shall be applied in the context of managing the overall portfolio. The investment officials acting in accordance with written procedures, 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 in a timely fashion and appropriate action is taken to control adverse developments. 1 4.0 Obj1ectives. The primary objectives, in priority order, of the City's investment activities Ill shall be: 4.1 Safety. Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. 4.1.1 Credit Risk • Credit Risk is the risk of loss due to the failure of the security issuer or backer. Credit risk may be mitigated by: • Limiting investments to the safest types of securities; • Pre-qualify the financial institutions broker/dealers, intermediaries, and advisors with which an entity will do business; and • Diversifying the investment portfolio so that potential losses on individual securities will be minimized. 4.1.2 Interest Rate Risk • Interest rate risk is the risk that the market value of securities in the portfolio will fall due to changes in general interest rates. Interest rate risk may be mitigated by: II • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity, and • Investing operating funds primarily in shorter term securities. 4.2 Liquidity. The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. 4.3 Yield. The City's investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. • 2 5.0 Delegation of Authority. IllAuthority to manage the City's investment program is derived from this policy. Management responsibility for the investment program is hereby delegated to the Finance Director, who shall establish procedures for the operation of the investment program consistent with this investment policy. Procedures should include reference to: safekeeping, Public Securities Association (PSA) repurchase agreements, wire transfer agreements, collateral/depository agreements and banking service contracts. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The City Council shall appoint an investment committee consisting of the City Manager, Finance Director and a council member,which shall have the responsibility of ratifying certain investment transactions and reviewing investment policies and procedures. The Finance Director shall be authorized to make all transactions up to $500,000. Transactions greater than $500,000, but not exceeding $1,000,000 shall have the approval of the City Manager. All transactions exceeding $1,000,000 shall be ratified by the investment committee. 6.0 Ethics and Conflicts of Interest. Officers and employees 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 officials shall disclose to • the Director of Administrative Services any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/ investment positions that could be related to the performance of the City's portfolio. City employees shall not give priority to their personal investment transactions to those of the City, particularly with regard to the timing of purchases and sales. 7.0 Authorized Financial Dealers and Institutions. The Finance Director will maintain a list of financial institutions authorized by the City Council to provide investment services. No public deposit shall be made except in a qualified public depository as established by State laws. All depositories and broker/dealers who desire to become qualified bidders for investment transactions will be required to supply the Finance Director with information that allows the City to determine the economic viability and qualifications of the institution. A current audited financial statement is required to be on file for each depository and broker/dealer with which the City does business. A Broker Certification Form is required to be on file for each depository and broker/dealer with which the City does business. • 3 8.0 Authorized and Suitable Investments. City officials are allowed to invest its funds in those obligations permitted by • Minnesota Statute Chapter 118A.04. Permissible investments are outlined as follows: 1. Direct U.S. government obligations. a. Treasury Bills b. Certificates of Indebtedness c. Treasury Notes d. Treasury Bonds 2. Federal agency issues (not directly guaranteed by U.S. government). a. Federal Home Loan Banks b. Federal National Mortgage Association c. Federal Land Banks d. Federal Intermediate Credit Banks e. Banks for Cooperatives f. Other Federal agency issues allowed by State Statute 3. Shares in mutual funds investing exclusively in U.S. government and agency issues. 4. High quality obligations of the State of Minnesota or Minnesota municipalities. • 5. Bankers' acceptances of United States banks eligible for purchase by the Federal Reserve System. 6. Highest quality commercial paper having a rating of either A-1, P-1 or F-1 issued by United States corporations or their Canadian subsidiaries when the paper matures in 270 days or less. 7. Insured, interest-bearing deposits. 8. Repurchase agreements or reverse repurchase agreements. If a repurchase agreement is used, a master repurchase agreement must be signed with the bank or dealer. 9.0 Collateralization. If the amount deposited by the City in an authorized depository exceeds the amount protected by federal insurance ($100,000), the excess must be protected by a pledged collateral furnished by the depository. Pledged collateral shall be set to follow the guidelines outlined in the City investment procedures titled, "Deposits". All security transactions, including collateral for repo agreements, entered into by the City shall be conducted on a delivery versus payment basis. Securities will be held by a third-party custodian designated by the Finance 111 Director and evidenced by safekeeping receipts. 4 10.0 Safekeeping and Custody. All security transactions, including collateral for repurchase agreements, entered into by the City shall be conducted on a delivery versus payment basis. Securities are to be held by a third-party • custodian designated by City officials. In some cases, the third-party custodian may be the parent bank of a local lead depository used by the City. 11.0 Employee Bonding. City employees are bonded in order to protect the taxpayers against embezzlement or misconduct. 12.0 Diversification. It is the policy of the City to diversify its investment portfolio. The investment portfolio shall be diversified to eliminate the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer or a specific class of securities. Diversification strategies shall be determined and revised periodically by the investment committee. 13.0 Maturities. To the extent possible, the City will attempt to match investments with anticipated cash requirements. Investment maturities shall be set to follow the guidelines outlined in the City's investment procedures titled, "Investment Maturities" and "Investment of Bond Proceeds." 14.0 Internal Control. • The Finance Director will be responsible for establishing and documenting a system of internal controls governing this investment policy. The system of established internal controls shall be reviewed annually by the City's independent auditors. Additionally, an investment committee shall be appointed by the City Council to periodically review investment policies and procedures. 15.0 Performance Standards. The City investment portfolio shall be designed to obtain a market-average rate of return. 16.0 Reporting. The Finance Director shall provide a monthly report to the City Council which includes investment activity, a list of assets, interest earnings, location of investments, yield, etc. PASSED BY THE CITY COUNCIL - RESOLUTION # 95-955 SEPT 18, 1995 AMENDED BY THE CITY COUNCIL - RESOLUTION # 99-102E JAN 4, 1999 AMENDED BY THE CITY COUNCIL - RESOLUTION # 99-150B JAN 19, 1999 AMENDED BY THE CITY COUNCIL - RESOLUTION # 03-157 JAN 21, 2003 • 5 • 90,3 • INVESTMENT POLICY STATEMENT OF THE CITY OF SAINT PAUL Adopted JULY 9, 2003 TABLE OF CONTENTS I. SCOPE AND PURPOSE 2 II. CONTEXT 3 III. STANDARDS OF CARE 3-4 IV. AUTHORITY AND RESPONSIBILITY 4-8 V. ADMINISTRATIVE AND REVIEW PROCEDURES 8-10 VI. GENERAL INVESTMENT OBJECTIVES AND CONSTRAINTS 10-11 VII. GUIDELINES FOR INVESTMENTS IN SPECIAL PROJECTS OR PROGRAMS 12 . VIII. COMPONENT PORTFOLIOS: OBJECTIVES AND AUTHORIZED INVESTMENTS DAILY PORTFOLIO 12-13 SHORT TERM PORTFOLIO 14 INTERMEDIATE TERM PORTFOLIO 15-16 IX. INVESTMENT MANAGER SELECTION 16-17 X. INVESTMENT MANAGER TERMINATION 17 EXHIBIT A:MINNESOTA STATUTES CHAPTER 118A EXHIBIT B:BENCHMARK DESCRIPTIONS • • SCOPE AND PURPOSE This Investment Policy Statement governs the investment portfolio(the"Portfolio")of the City of Saint Paul (the"City") including the assets of the General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds,Trust Funds,Agency Funds, Internal Service Funds and any new fund created by the City Council and the Mayor. This Investment Policy Statement("IPS")is intended to serve the following purposes: A. Provide written documentation of expectations regarding the investment of City assets. B. Reflect investment objectives, guidelines and standards that are consistent with the financial objectives of various City funds. . C. Define and assign responsibilities for investment decisions and actions. D. Establish criteria and benchmarks for the ongoing evaluation of performance results and policy compliance. E. Establish a framework for review and revision of investment policies as warranted by changing circumstances. This policy supercedes all previous City investment policies and shall be reviewed on an annual basis by the Director of the Office of Financial Services. Any significant revisions shall be approved by the City Council and the Mayor. Any exceptions to this policy must be approved prior to trade execution by the Director of the Office of Financial Services, and reported to the Mayor and City Council. • 2 • II. CONTEXT The Portfolio provides funding for current and future operating expenses, a reserve to cover unplanned shortfalls and investment income to support the activities of the City. The Portfolio is managed in three components ("Component Portfolios")as follows: A. Daily Portfolio: The"daily"component("Daily Portfolio")represents current operating funds on which draws are made frequently, requiring daily liquidity and preservation of principal. The Daily Portfolio is managed internally by the Cash Manager. B. Short Term Portfolio:A short-term component(Short Term Portfolio") serves as a cushion to provide liquidity for possible shortfalls in the Daily Portfolio. Draws against the short-term portfolio are expected to be infrequent. The Short Term Portfolio is managed internally by the Cash Manager. C. Intermediate Term Portfolio: The balance of the Portfolio represents the intermediate • term component("Intermediate Term Portfolio")which serves as a reserve for unplanned shortfalls. In general,the Intermediate Term Portfolio is not expected to experience withdrawals. A portion of the Intermediate Term Portfolio is managed internally by the Treasury Manager and the balance is managed by external managers. III. STANDARDS OF CARE A. Prudence The standard of prudence to be used by investment officials shall be the"prudent investor rule"and shall be applied in the context of managing the overall portfolio. Investment officers 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 purchase and sale of securities are carried out in accordance with the terms of this policy. • 3 • Investments shall be made with judgment and care under the 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. B. Ethics and Conflicts of Interest Officers and 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. All investment officials shall disclose any material interests in financial institutions with which they conduct business. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. IV. AUTHORITY AND RESPONSIBILITIES • The City of Saint Paul's Administrative Code, Chapter 2,Article 1, Section 2.02, as amended, empowers the Director of the Office of Financial Services,which includes a Treasury Section,with the investment responsibility for the City. Responsibility for the operation of the investment program is delegated to the Treasury Manager,who shall act in accordance with written procedures and internal controls for the operation of the investment program consistent with the IPS. The Treasury Manager is assisted by the Cash Manager. No person may engage in an investment transaction,except as provided under the terms of this policy. A. Director of the Office of Financial Services The duties and responsibilities of the Director of the Office of Financial Services under this IPS are to: I. Recommend to the City Council adoption and amendment of the IPS. 2. On a quarterly basis, review and approve the recommendations of the Treasury Manager regarding: • 4 a. Compliance of investments with the IPS • b. Performance results c. Changes in investment managers d. Sufficiency of funds in the Portfolio to satisfy planned expenditures. B. Treasury Manager The duties and responsibilities of the Treasury manager under this IPS are to: 1. Invest the internally-managed portion of the Intermediate Term Portfolio. 2. Monitor the performance of the total Portfolio and each separately-managed portfolio against benchmarks established in the IPS and report to the Director of the Office of Financial Services and the City Council. 3. Maintain a projection of monthly cash inflows and outflows("Cash Flow Projection") for determining the appropriate minimum and maximum range to maintain in the Daily and Short Term Portfolios. 4. Review the allocation of the Portfolio among the Component Portfolios and make •any adjustments indicated under this IPS. 5. Review the investment activity reports for the Daily and Short Term Portfolios prepared by the Cash Manager. 6. Review compliance of the Portfolio, as well as the individual investment managers/mutual funds,with IPS standards and guidelines and report any noncompliance to the Director of the Office of Financial Services. 7. Make recommendations to the Director of the Office of Financial Services regarding additions, deletions or changes in investment managers, mutual funds, custodians, consultants and other service providers. 8. Review all investment costs and expenses and report to the Director of the Office of Financial Services,the Mayor and the City Council on an annual basis. 9. Develop and maintain the administrative procedures manual ("Administrative Procedures Manual.") 410 • C. Cash Manager The duties and responsibilities of the Cash Manager under this IPS are to: 1. Invest the assets of the Daily Portfolio and the Short Term Portfolio in accordance with IPS standards and guidelines. 2. Prepare cash flow projections to determine daily excess cash to invest in short term securities or money market funds for operating needs. 3. Obtain competitive bids and offerings of securities to be purchased or sold. 4. Verify investment activity in the bank accounts. 5. Maintain and balance the Treasury subsidiary investment ledger. 6. Verify broker confirmations to the subsidiary investment ledger. 7. Allocate interest earnings to the accounts participating in the pooled investment program. 8. Report investment activity to the Treasury Manager. • 9. Prepare annual reports in compliance with GASB standards. D. Investment Consultant An Investment Consultant may be retained by the City to provide investment advice and assistance regarding the investments. Specific responsibilities of the Investment Consultant may include: I. Assist with the development and periodic review of investment policies and procedures. 2. Conduct searches for investment managers or mutual funds. 3. Quarterly,measure and evaluate performance results for the total portfolio and for each separately-managed portfolio. 4. Evaluate compliance of investments with IPS guidelines and report results to the Treasurer. 5. Analyze investment expenses and negotiate any investment management or custodial fees as requested. • 6 • 6. Provide other information or reports as requested by the Treasury Manager,the Director of the Office of Financial Services,the Mayor or the City Council. 7. Prepare Investment Manager Guidelines. E. Investment Managers Any investment manager retained by the City assumes the following responsibility as P a fiduciary of the funds: I. Compliance with the stated objectives and guidelines herein, as well as Minnesota State Statutes. 2. Written acknowledgment of the IPS and specific account guidelines("Manager Guidelines")which reflect the investment manager's strategy, discipline and performance benchmark. 3. Quarterly statement for the funds under management showing the market value and cost basis of individual holdings as well as the following information relative to the investment manager's designated portfolio performance benchmark: a. Performance b. Duration(to absolute and to worst) c. Yield to Maturity d. Asset/Sector Distribution e. Average Maturity(absolute and to worst) f. Average credit quality F. Custodian Bank The custodian bank("Custodian") shall assume the following responsibilities: I. Safekeeping of Securities: Hold all fund deposits in the appropriate accounts, and provide highly secure safekeeping of securities to minimize the risk of loss due to theft, fire or accident. 7 • • 2. Manage a securities lending program by lending securities to approved borrowers, arranging the terms and conditions of loans,monitoring market values of the securities lent and the collateral received,reporting earnings and directing the investment of the cash collateral. 3. Settlement of Trades: All trades,where applicable,will be executed delivery vs. payment(DVP). This ensures that securities are deposited in the eligible financial institution prior to the release of funds. Securities will be held by a third party custodian, as evidenced by safekeeping receipts. 4. Collection of Income: Provide for receipt and prompt crediting of all dividend and interest payments received as a result of the Portfolio holdings. Monitor income receipts to ensure that income is received when due and institute an investigative process to track and correct late or insufficient payments, including reimbursements for any interest lost due to custodian error. 5. Reporting: Providing monthly reports showing individual asset holdings with sufficient descriptive detail to include units, unit price, cost, market value,cusip number(where available)and any other information requested by the City. V. ADMINISTRATIVE AND REVIEW PROCEDURES The following administrative and review procedures are intended to control risk and ensure policy compliance: A. A quarterly report prepared by the Treasury Manager will be provided to the Director of the Office of Financial Service,the Mayor,the City Council and the Board of Water Commissioners. B. An annual review of investment operations performed by the State Auditor. C. A desk procedures manual ("Administrative Procedures Manual")will be developed and maintained to include legal authority, policies,job responsibilities, processing investment transactions, eligible security dealers and financial institutions, and • securities descriptions. 8 • D. Review Procedures for Performance Monitoring and Policy Compliance: 1. Review of Policy: At least annually, the policies,objectives and guidelines set forth in this document will be reviewed by the Treasury Manager and the Director of the Office of Financial Services. Any changes will be brought to the Mayor and City Council for approval. Key occurrences that could result in a recommendation for policy modification include: a. Significant changes in the Cash Flow Projections or liquidity needs that may warrant policy change(s). b. Changes in long-term fixed income market trends and patterns that are materially different than those assumptions used to set the policy(see Exhibit B). c. Significant growth (or reduction) in the assets of the Portfolio. •2. Review of Investment Results: The Treasury Manager will measure and evaluate performance at least quarterly with the external managers. The elements to be included in these reviews are as follows: a. Evaluation of the total time-weighted return for quarterly and annual periods of the Total Portfolio,each Component Portfolio, and each separate account against benchmarks established in the IPS and the Manager Guidelines. b. Evaluation of risk adjusted returns, using Standard Deviation as a measure of risk, relative to the respective Performance Benchmark(s). c. Evaluation of yield for quarterly and annual periods relative to the respective Performance Benchmark(s). d. Compliance of investments with the guidelines and standards in this IPS for diversification and quality, as well as with statutory guidelines. 411/ • e. Review of the balances in the Component Portfolios for sufficiency in relation to the Cash FIow Projection. 3. Review of Investment Managers:The Treasury Manager will meet with the Investment Managers annually to review strategy and confirm that the managers continue to satisfy Investment Manager selection criteria in this IPS. 4. Review of Investment Fees and Expenses: The fees and expenses associated with the investment program will be reviewed at least annually to ensure they are reasonable and competitive. VI. GENERAL INVESTMENT OBJECTIVES,CONSTRAINTS AND GUIDELINES The goals of the City for the Portfolio are to preserve financial assets for future operating expenses, maintain reserves to fund unplanned shortfalls and generate income to support the activities of the City. The investment objectives in support of these goals are as follows: • A. Safety: Safety of principal,by mitigating credit risk and interest rate risk, is the foremost objective of the investment program. 1. Credit Risk: Credit risk(the risk of loss due to the failure of the security issuer or backer)will be minimized by: a. Limiting investments to issues of(or backed by)the U.S.Government, its agencies or instrumentalities, States and Municipalities. b. Using only those financial institutions, broker/dealers, intermediaries and advisers approved by the City. c. Diversifying investments so that potential losses on individual securities of a single issuer will be minimized. • 10 • 2. Interest Rate Risk: Interest rate risk(the risk of a loss in market value due to general changes in interest rates)will be controlled through: a. Investing operating funds primarily in shorter term securities, money market mutual funds or similar investment pools(matching maturities with cash requirements). b. Establishing maximum guidelines for portfolio duration B. Liquidity: The Portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated, including matching maturities with cash requirements. However, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary resale markets. C. Return: The investment portfolio shall be managed with the objective of attaining a rate of return throughout budgetary and economic cycles consistent with the objectives of principal preservation, liquidity(in A and B above)and avoidance of realized losses. Return on investment is of secondary importance compared to safety • and liquidity. The total annualized return for each Component Portfolio is expected to exceed the total return of the performance benchmark established in this IPS for each Component, while maximizing the portion of return derived from current income. The return for the Total Portfolio is expected to exceed the total return on the Composite Benchmark(representing the dollar-weighted composite of the three Component Portfolio benchmarks). D. Loss Avoidance: Investment transactions shall seek to ensure that capital losses are avoided. In the event of a need to liquidate any security prior to maturity, consideration shall be given to selecting securities that avoid or minimize the realization of capital losses. Exceptions due to credit deterioration may be acceptable if such transactions were executed under guidelines listed herein and notification is made to the Director of the Office of Financial Services,the Mayor and City Council. 11 • • VII. GUIDELINES FOR INVESTMENTS IN SPECIAL PROJECTS OR PROGRAMS The City, from time to time,may authorize projects or special purpose financings to further a particular social or economic development program through the use of City funds as capital, collateral or financing. A typical program may entail depositing funds at local banks to support neighborhood lending or low-income housing. To carry out such projects or programs, City funds may be allocated to investments in local banking institutions or other investments that otherwise fall outside of this policy statement. The Treasury Manager is authorized to implement investment strategies in support of such projects or programs upon direction from the Director of the Office of Financial Services, with notification made to the City Council. All investments purchased under such programs must comply with Minnesota Statutes 118A, and investments that fall outside of this policy's portfolio weighting constraints require notification made to the Mayor and City Council prior to trade execution. VIII. COMPONENT PORTFOLIOS: OBJECTIVES,CONSTRAINTS AND AUTHORIZED INVESTMENTS • A. Daily Portfolio: The Daily Portfolio provides liquidity for operating expenses and other expenditures reflected in the annual Cash Flow Projection maintained by the Treasury Manager. The objectives are preservation of principal, liquidity to meet daily needs and a competitive yield as measured by the performance benchmark for the Daily Portfolio. 1. Minnesota Statutes: Investments shall satisfy Minnesota Statutes governing municipal investment, specifically Minnesota Statutes Chapter 118A, a copy of which is attached as Exhibit A. 2. Time Horizon: The Daily Portfolio is intended to fund daily withdrawals as well as planned withdrawals within a 12-month period. 3. Liquidity: Investments must provide liquidity as needed on a daily basis. 4. Risk Tolerance: Investments must satisfy liquidity requirements without risk of principal loss. • 12 • 5. Return: Investments should generate total returns that are competitive within the parameters(above)for liquidity and risk tolerance. 6. Performance Benchmark: 30-day T Bill. 7. Authorized Investments and Guidelines: Subject to Minnesota Statutes Chapter 118A,the following investments are authorized: Weighting Constraints Commercial Paper Up to 100% Maximum of$SMM in a single issuer Bankers Acceptances Up to 50% Maximum of$SMM in a single issuer Certificates of Up to $10MM* Collateralized at Deposit 110%; one year maximum term Repurchase Up to 100% A Master Repurchase Agreement must Agreements be executed with the counter party. 102%collateral required. Treasury Bills Up to 100% Agency Notes Up to 100% No more than 20%of total portfolio per agency Money Market Funds Up to 100% S.E.C. Rule 2a7 *The maximum holding of CDs in the total portfolio, including the daily and intermediate, shall not exceed $10 million. 8. Diversification: Subject to the guidelines in A 7 (above),the Daily Portfolio should be diversified to eliminate the risk of loss resulting from over- concentration of assets in a specific issuer,maturity or class of securities. 9. Commercial Paper: At the time of purchase, securities from a single issuer shall not exceed 5%(or the lesser of$5MM per issuer) of the total daily portfolio and shall be rated the highest credit quality by two of the following rating agencies: Standard and Poor(A-1),Fitch (F 1), and Moody's(P-1). In the event that the 5% a issuer guideline is exceeded through trading activities,written notification shall be made to the Director of the Office of Financial Services and made available to the City Council and Mayor. • 13 • B. Short Term Portfolio: The Short Term Portfolio serves as a cushion to cover operating expenses or unplanned shortfalls that occur in the Daily Portfolio. The investment objectives are principal preservation, liquidity to fund cash outflows when needed and a return that exceeds the performance benchmark established in this IPS. 1. Minnesota Statutes: Investments shall satisfy Minnesota Statutes governing municipal investment, specifically Minnesota Statutes Chapter 118A, a copy of which is attached as Exhibit A. 2. Time Horizon: The Short Term Portfolio is intended to fund occasional shortfalls in the Daily Portfolio. Since the potential outflows are expected to be infrequent, the time horizon for investments is between one and three years. 3. Liquidity: Investments must provide liquidity as directed. 4. Risk Tolerance: Investments should satisfy liquidity requirements without risk of principal loss. 5. Duration: To satisfy the parameters for liquidity and risk tolerance(above),the maximum duration of the portfolio is 130%of the benchmark duration. 6. Return: The total return should exceed the total return of the Performance Benchmark, with emphasis on current income. 7. Performance Benchmark: Lehman 1-3 Year Government Index 8. Authorized Investments and Guidelines: Subject to Minnesota Statutes Chapter 118A,the following investments are authorized: Weighting Constraints U.S. Treasury Up to 100% Maximum maturity of 36 months Securities Agency Securities Up to 100% Maximum maturity of 36 months 9. Diversification: Subject to the guidelines in B 8 (above),the Short Term Portfolio should be diversified to eliminate the risk of loss resulting from over- concentration of assets in a specific maturity. • 14 • C. Intermediate Term Portfolio:The Intermediate Term Portfolio serves as a reserve to fund unplanned shortfalls or capital needs. The investment objectives are principal preservation, liquidity to fund cash outflows that may be unplanned and a total return that exceeds the Performance Benchmark. 1. Minnesota Statutes: Investments shall satisfy Minnesota Statutes governing municipal investment, specifically Minnesota Statutes Chapter 118A, a copy of which is attached as Exhibit A. 2. Time Horizon: The Intermediate Term Portfolio serves as a reserve for unplanned shortfalls or capital requirements. Withdrawals are generally not anticipated; therefore,the time horizon for investments is longer than three years. 3. Liquidity: Investments must provide liquidity as needed. 4. Risk Tolerance: Investments should satisfy liquidity requirements with the objective of minimizing any realized principal loss. 5. Duration:To satisfy the parameters for liquidity and risk tolerance(above),the maximum duration of the portfolio is 125%of the benchmark duration. 6. Return: Investments should generate total returns that exceed the total return of the Performance Benchmark,with an emphasis on yield maximization. 7. Performance Benchmark: External Managers: 80%Lehman Intermediate Government Index/20% 15- year MBS Index Internal Portfolio: 100%Lehman Intermediate Government Index 8. Authorized Investments and Guidelines: Subject to Minnesota Statutes 1 18A,the following investments are authorized: • 15 Weighting Constraints U.S. Treasury Up to 100% Securities Agency Securities Up to 100% No more than 20%in a single issue Structured Agency Up to 80% No more than 20%in a single issue Notes Agency Pass Up to 40% No more than 10%in a single issue Throughs Agency CMOs Up to 20% No more than 5% in a single issue Municipal Securities Up to 25% No more than 5%in a single issue Certificates of Up to $10 MM* Collateralized at Deposit 110%;three year maximum term *The maximum holding of CDs in the total portfolio, including the daily and intermediate, shall not exceed $10 million. 9. Diversification: Subject to the guidelines in C 8 (above), the Intermediate Term Portfolio should be diversified to eliminate the risk of loss resulting from over- concentration of assets in a specific issuer,maturity or class of securities. IX. SELECTION OF EXTERNAL INVESTMENT MANAGERS FOR INTERMEDIATE TERM PORTFOLIO Criteria for selection of Investment Managers and Mutual Funds are: A. Adherence to a clearly-articulated investment strategy and discipline. B. A minimum five-year performance track record: A Manager's performance will be compared to the appropriate benchmark designated in this IPS. Performance will be evaluated on a risk-adjusted basis considering annual returns, cumulative annualized returns, standard deviation of returns and a measure of performance in down-market cycles. C. History of the firm: Organizational structure, assets under management,clientele in the municipal and government sector and the tenure of key portfolio manager(s) responsible for the performance track . 16 • D. Negotiated Fees E. Firm Insurance. F. Contributions and distributions can be accommodated without materiallyaffecting g performance. G. Ability to comply with Minnesota Statutes Chapter 118A. XI.TERMINATION OF EXTERNAL INVESTMENT MANAGERS FOR THE INTERMEDIATE TERM PORTFOLIO A. Investment managers will be reviewed forpossible replacement on an ongoing basis. g P g g Reasons for replacement may include,but are not limited to,the following: • 1. Failure to outperform the designated benchmark on a risk adjusted basis, after fees, over the investment Time Horizon or a market cycle. 2. Significant under-performance relative to the designated Performance Benchmark over a two-to three-year period or a market cycle. 3. Change in firm ownership or loss of key personnel. 4. A real or perceived change in investment style or discipline. 5. A violation of the standards and guidelines in this IPS or the Manager Guidelines. 17 • Exhibit B Benchmark Descriptions 30 Day Treasury Bill Definition: Returns are provided by the Federal Reserve. Lehman Brothers 1-3 Year Government Index Definition: Securities in the U.S. Government Index with a maturity from I up to(but not including) 3 years. Lehman Brothers 15 Year Mortgage Backed Securities Index or Merrill Lynch 15 Year Mortgage Backed Securities Index Definition: Pass-through securities with an original maturity of 15 years. Lehman Brothers Intermediate Government Index Definition: Securities issued by the U.S. Government(Treasury and Agency securities)having a maturity from 1 up to, but not including I Oyears. • Return and Risk (1993 to 2002) Return 8 15 Year MB% 7 Intermediate Golt7 6 — 13 Year Govt. 80Int Gov/20 15YrMB 5 4 _ •30 Day TBill 3 1 0 1 2 3 Risk Return Risk 30 Day TBill 4.18 0.35 1-3 Year Govt 6.08 1.64 Intermediate Govt 6.91 2.98 15 Year MBS 7.24 2.89 80 Int Gov/20 15YrMB 6.98 2.92 • 18 • City of Sauk Rapids Investment Policy Purpose The purpose of this policy is to establish specific guidelines the City of Sauk Rapids will use in the investment of City funds. It will be the responsibility of the Finance Director or City Administrator to invest City funds in order to attain a market rate of return while preserving and protecting the capital in the overall portfolio. Investments will be made,based on statutory constraints, in safe, low risk investments. Scope The Finance Director is responsible for the investing of all funds in the custody of the City, including, but not necessarily limited to, the General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, Agency Funds, and various Housing and Redevelopment Funds. Prudence The standard of judgement to be used by investment officials shall be the "prudent investor", and shall be applied in the context of managing the overall portfolio. Persons acting in accordance with this policy and with MN Statute 118A, and exercising prudent judgement and due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that reasonable action is taken in a timely manner to control adverse • developments and unexpected deviations are reported to the City Council as soon as possible. Objective There are three main objectives of all investment activities that are prioritized as follows: Safety Safety of principal is the foremost objective of the City. Each investment transaction shall seek to first insure that capital losses are avoided. The objective will be to mitigate credit risk and interest rate risk. Credit Risk is the risk of loss due to failure of the security issuer or backer. Interest Rate Risk is the risk that the market value of securities in the portfolio will fall due to changes in general interest rates. Liquidity The investment portfolio shall remain sufficiently liquid to meet all cash 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. Yield The investment portfolio of the City of Sauk Rapids shall be designed to attain a market-average rate of return through budgetary and economic cycles, taking into consideration the city's investment risk constraints, cash flow characteristics of the portfolio and prudent investment principles. Subject to requirements of the above objectives, it is the policy of the City of Sauk Rapids to . offer local financial institutions and companies within the City of Sauk Rapids the opportunity to bid on investments; however, the City of Sauk Rapids will seek the best investment yields in the United States. Delegation of Authority The City Council has authority over the investment portfolio and the Finance Director will process all investment transactions undertaken and establish a system of internal controls approved by the City Council designed to prevent losses from fraud and employee error. Conflict of Interest Any City official (elected or appointed) 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 his/her ability to make impartial investment decisions. Authorized Financial Institutions and Dealers In accordance with Minnesota Statute 118A.005, the responsibility for conducting investment transactions resides with the City Council of the City of Sauk Rapids. A list of depositories will be submitted annually to the City Council for approval. In selecting depositories, the credit worthiness of the institutions under consideration shall be examined by the Finance Director. Only approved security broker/dealers selected by creditworthiness shall be utilized (minimum capital requirement $10,000,000 and at least five years of operation). These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15c3-1 (uniform net capital rule). All financial institutions and broker/dealers must supply the minimum information: audited financial statements proof of National Association of Securities Dealers (NASD)certification proof of state registration certification of having read the City's investment policy The finance director will strive to place the City's investments with a variety of broker/dealers and local banks with no more than 50%being placed with any particular broker or bank at one time. Broker Representations Municipalities must obtain from their brokers certain representations regarding future investments. Minnesota Statutes, Section 118A, Subdivision 6, requires municipalities to provide each broker with information regarding the municipality's investment restrictions. Before engaging in investment transactions with the City of Sauk Rapids the supervising officer at the securities broker/dealer shall submit a Broker Acknowledgement Certification annually according to MNSS 118A.05. The document will state that the officer has reviewed the investment policies and objectives, as well as applicable state law, and agrees to disclose potential conflicts of interest or risk to public funds that might arise out of business transactions between the firm and the City of Sauk Rapids. All financial institutions shall agree to undertake • reasonable efforts to stop imprudent transactions involving the City's funds. Authorized and Suitable Investment Minnesota Statutes, Section 118A, Subdivision 3, lists all permissible investments for municipalities. This list establishes the maximum investment risk permitted for a Minnesota municipality. Even though MN Statutes 118A provides for more instruments to be used for investing purposes; the following is a listing of investments the City will be authorized to invest in: Government Securities Instruments such as bonds,notes,bills, mortgages and other securities which are direct obligations of the federal government or its agencies,with the principal fully guaranteed by the U.S. Government or its agencies. Certificate of Deposit(CD) A negotiable or nonnegotiable instrument issued by commercial banks and insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). Brokered CD's will be purchased at a discount or less than $100,000 to insure safety of interest income as well as principal. Repurchase Agreements An investment which consists of two simultaneous transactions, where an investor purchases securities from a bank or dealer. At the same time, the selling bank or dealer agrees to repurchase the securities at the same price plus interest at some agreed-upon future date. The security purchased is the collateral protecting the investment. Prime Commercial Paper An investment used by corporations to finance receivables. A short-term (matures in 270 days or less)unsecured promissory note is issued for a maturity specified by the purchaser. Corporations market their paper through dealers who in turn market the paper to investors. Any security which is a general obligation of the State of Minnesota or any of its municipalities. Statewide investment pools which invest in authorized instruments according to MN Statutes 118A Money market mutual funds which invest in authorized instruments according to MN Statutes 118A. Interest bearing deposits in authorized depositories must be fully insured or collateralized. • Collateralization • Collateralization will be required on two types of investments - Certificates of Deposit and Repurchase Agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110 percent of the market value of principal and accrued interest. When the pledged collateral consists of notes secured by first mortgages, the collateral level will be 140%of the market value of principal and accrued interest. Deposits in excess of deposit insurance shall require an authorizing resolution by the financial institution's Board of Directors perfecting the City's collateral. Collateral shall be deposited in the name of the City of Sauk Rapids, subject to release by the City's Finance Director. Safekeeping and Custody When investments purchased by the City are held in safekeeping by a broker/dealer, they must provide asset protection of$500,000 through the Securities Investor Protection Corporation (SIPC), at least another$2,000,000 supplemental insurance protection (an industry standard), and additional supplemental insurance to cover the account balance. Diversification The City will attempt to diversify its investments according to type and maturity. The portfolio, as much as possible, will contain both short-term and long-term investments. The City will attempt to match its investments with anticipated cash flow requirements. Extended maturities may be utilized to take advantage of higher yields; however, no more than 30%of the total investments should extend beyond 5 years and in no circumstances should any extend beyond 10 years. Investment Reporting The Finance Director shall prepare an investment report quarterly, including any management summaries that provide a clear picture of the status of the current investment portfolio and transactions made over the last quarter. Conclusion The intent of this policy is to ensure the safety of all City funds. The main goal of the City will be to achieve a market rate of return while maintaining the safety of its principal. Approved by City Council 2000. filename:INVESTMENT POLICY .ten City of St. Louis Park updatti5 • Investment Policy June 5, 2000• Resolution #00-074 POLICY It is the policy of the City of St. Louis Park to establish guidelines for the investment of all public funds. This policy is designed to ensure the prudent management of public funds, the availability of operating and capital funds when needed and providing the highest investment return with maximum security and minimum risk. SCOPE This policy applies to all financial assets of the City of St. Louis Park. While separate investment funds are created to accommodate reporting on certain bonded indebtedness, individual investments are purchased using a pooled approach for efficiency and maximum investment opportunity. The City's funds are defined in the City's Comprehensive Annual Financial Report and include: • General Fund; • Special Revenue Funds; • • Debt Service Funds; • Capital Project Funds; • Enterprise Funds; • Trust and Agency Funds • Any new funds created by the City. II. OBJECTIVES The primary objectives, in priority order of the City's investment activities will be: A. Safety of Principal Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure preservation of capital in the overall portfolio. B. Liquidity The investment portfolio will remain sufficiently liquid to enable the City to meet all operating and capital requirements that might reasonably be anticipated. A portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity. • 1 City of St. Louis Park Investment Policy June 5, 2000 Resolution #00-074 • C. Yield The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account investment risk and liquidity needs. III. STANDARDS OF CARE The prudent person standard shall be applied to the management of the portfolio. This standard states: "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 expected income to be derived." Investment officers 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 out in accordance with the terms of this policy. • IV. INVESTMENT AUTHORIZATION The Director of Finance/Treasurer is designated as the Investment Officer of the City and is responsible for investment management decisions and activities. The Director of Finance/Treasurer shall carryout established written procedures and internal controls for the operation of the investment program consistent with this investment policy. The Director of Finance/Treasurer is authorized, as allowed under the State Statute, to designate depositories and broker-dealers for City Funds. V. CONFLICT OF INTEREST Any city official 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 his/her ability to make impartial investment decisions. Employees shall disclose any material interests in financial institutions with which they conduct business. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the City. . 2 City of St. Louis Park Investment Policy June 5, 2000 • Resolution #00-074 VI. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS The Director of Finance/Treasurer will maintain a list of financial institutions authorized to provide investment services to the City. All broker/dealers who desire to become qualified bidders for investment transactions must supply the Director of Finance/Treasurer with: • Audited financial statements and proof of National Association of Security Dealers (NASD) certification; • Proof of Minnesota Registration Broker Notification and Certification form required by Minnesota Statutes 118A prior to any investment transactions with the City. The Broker Notification must be updated annually. • The Official Broker/Dealer Questionnaire must be on file for each broker the City is currently doing business with. • Certification of having read the City's investment policy and agreement to conduct investment transactions in accordance with the policy and objectives, as well as state statutes. • Written agreement to disclose potential conflicts of interest or risk to public funds that might arise out of business transactions between the firm and the City. 110 Authorized institutions must maintain an investment office within the Twin Cities metropolitan area and have other Minnesota local government clients. VII. AUTHORIZED INVESTMENTS The City is authorized,under State Law Chapter 118A,to invest the securities listed in Exhibit A. VIII. COLLATERALIZATION Full collateralization will be required on non-negotiable certificates of deposit. All deposits will be insured or collateralized in accordance with Minnesota Statutes Chapter 118. IX. SAFEKEEPING Investments shall be kept at the broker/dealers in the City's name. Certificates will be held at the financial institution in the City's name. All securities should be a risk category one according to the Government Accounting Standard No. 3. 4110 The broker/dealer must provide asset protection of$500,000 through the 3 City of St. Louis Park Investment Policy June 5, 2000 Resolution #00-074 1110 Securities Investor Protection Corporation (SIPC) and at least another$2,000,000 supplemental insurance protection. X. INVESTMENT PARAMETERS The City's investment shall be diversified as to specific maturity, issuer and institution in order to minimize the risk to the portfolio. Investments should be purchased to match expected cash flow needs, minimizing the market risk associated with the early sale of the investments. XI. REPORTING AND REVIEW A. The investment portfolio will be managed in accordance with the parameters outlined in this policy. The portfolio will be designed with the objective of obtaining a rate of return throughout budgeting and economic cycles, commensurate with the investment risk constraints and cash flow needs. B. The City's investment policy shall be adopted by resolution by the City Council. The City's investments and investment practices shall be reported to the City Council. Quarterly information shall be reported to the City Council and include: 1. A listing of individual securities held at end of reporting period. 2. A listing of investments by maturity date. 3. The percentage of the total portfolio in each type of investment. 4. Rate of return for quarter. 5. Market to market analysis. C. Interest earned on investments shall be allocated to various funds based on each fund's average monthly cash balance. XII. STATUTORY AUTHORITY Specific investment parameters for the investment of public funds by the City are found in Minnesota Statutes Chapters 118A. XIII. POLICY CONSIDERATIONS A. Exemption Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirements of this policy. At410 4 City of St. Louis Park Investment Policy June 5, 2000 it 40 Resolution #00-074 maturity or liquidation, such monies shall be reinvested only as provided by this policy. I i 5 City of St. Louis Park Investment Policy June 5, 2000 Resolution #00-074 B. Amendments This policy shall be reviewed on an annual basis. Any changes must be approved by the City Council resolution. C. Interest Allocation The general fund shall be allocated a management fee equal to three percent of the total net investment earnings of the investment pool, excluding investments related to the Economic Development Authority. Approved by: Charles W. Meyer, City Manager Date • 6 City of St. Louis Park Investment Policy June 5, 2000 1110 Resolution #00-074 EXHIBIT A MAXIMUM PER MAXIMUM PER MINIMUM CREDIT MAXIMUM INVESTMENT TYPE ISSUE INVESTMENT QUALITY MATURITY US Treasuries No more than No limit. N/A Five years. If beyond 15%of the total five years,should be portfolio. related to the specific debt payments. US Governmental No more than No limit. N/A Five years. If beyond Agencies and Federally 15%of the total five years,should be Sponsored Agency portfolio. related to specific Securities. To include debt payments. callables and step-ups Commercial Paper- No more than No limit. Any two of the 270 days. issued by United States 15%of the total following national corporations or their portfolio. ratings: Al, P1, F1 Canadian subsidiaries or D1. Repurchase Agreements No more than No limit. Provided they are 30 days. or Reverse Repurchase 15%of the total fully collaterized at Agreements portfolio. 102%of market value by US Treasuries or Agencies. Bankers Acceptances- No more than No limit. Any two of the 270 days. Fed eligible United 15%of the total following ratings: Al, States banks portfolio. P1, F1 or D1. Certificates of Deposit No more than No limit. Provided it is Five years. If beyond 15% of the total guaranteed by the five years,should be portfolio. FDIC, FSLIC or is related to specific backed by collateral debt payments. as required by M.S. 118A. Guaranteed Investment No more than The issuer's or Contracts-issued or 15% of the total guarantor's short- guaranteed by United portfolio. term and long term States commercial banks unsecured debt must domestic branches of be rated in one of foreign banks, United the two highest States Insurance categories by a Companies,or their nationally recognized Canadian subsidiaries. rating agency. • Should the issuer's or guarantor's credit quality be down- graded below"A", 7 City of St. Louis Park Investment Policy June 5, 2000 Resolution #00-074 0 MAXIMUM PER MAXIMUM PER MINIMUM CREDIT MAXIMUM INVESTMENT TYPE ISSUE INVESTMENT QUALITY MATURITY General Obligations of No more than No more than Rated"A"or better Five years. If beyond state or local government 15%of the total 50%of the by a national bond five years,should be with taxing powers. portfolio. portfolio. rating service. related to specific debt payments. Revenue Obligation of No more than No more than Rated"AA"or better Five years. If beyond any state or local govern- 15%of the total 50%of the by a national bond five years,should be ment with taxing powers portfolio. portfolio. rating service. related to specific debt payments. General Obligation of the No more than No more than Rated"A"or better Five years. If beyond Minnesota Housing 15%of the total 50%of the by a national bond five years, should be Finance Agency which is portfolio. portfolio. rating service. related to specific a moral obligation of debt payments. the State of Minnesota Money Market Mutual No limit. No limit. Invested primarily in N/A Funds the securities allowed by this policy. • 41110 4)A a CeXtl1 all— c7 aiocletti CITY OF SHOREVIEW,MINNESOTA INVESTMENT POLICY Effective January 1, 1999 SCOPE: This investment policy applies to all financial assets of the City of Shoreview, Minnesota. These funds are accounted for in the City's annual financial report and include: • General Fund • Special Revenue Funds • Debt Service Funds • Capital Project Funds • Enterprise Funds(Water, Sewer, Surface Water) • Internal Service Funds • Trust and Agency Funds This investment policy applies to all transactions involving the financial assets of the foregoing funds. Except for cash in certain restricted and special funds, the City will consolidate cash balances from all funds to maximize investment earnings. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. 40 OBJECTIVES: Investments of the City of Shoreview shall be in accordance with Minnesota Statutes Chapter 118A, or as amended. The primary objectives, in priority order, of investment activities shall be safety, liquidity and yield. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses in the value of individual securities do not exceed the income generated from the remainder of the portfolio. The investment portfolio shall remain sufficiently 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 needs cannot be anticipated the portfolio should consist of investments with active secondary or resale markets. The investment portfolio of the City shall be designed to attain a market- average rate of return throughout the budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio. The City will seek to place its deposits and investments with Minnesota depositories and/or brokers or dealers. All participants in the investment process shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction that might impair public confidence in the City's ability to govern effectively. Investment officials shall recognize that the investment portfolio is subject to public review and evaluation. The overall program shall be designed and managed with a degree of professionalism worthy of the • public trust. The governing body, however, recognizes that in a diversified portfolio, occasional measured losses are inevitable and must be considered within the context of the overall portfolio's investment return, provided adequate diversification has been implemented. DELEGATION OF AUTHORITY: In accordance with Minnesota Statutes Chapter 118A,the responsibility for conducting investment transactions resides with the treasurer. Management responsibility for the investment program is hereby delegated to the treasurer and assistant finance director (hereafter referred to as investment officers), who are authorized to make investments of public funds. No person may engage in an investment transaction except as provided under the terms of this policy. PRUDENCE: Investments shall be made with judgement 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 investment officers, acting in accordance with 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 that appropriate action is taken to control adverse developments. ETHICS AND CONFLICT OF INTEREST: Investment officers 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. Investment officials shall disclose any material interest in financial institutions with40 which they conduct business. Investment officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. INTERNAL CONTROL: The investment officers are responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept or reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of cost and benefits, requires estimates and judgements by management. Accordingly, the investment officers shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points: • Control of collusion • Separation of transaction authority from accounting and record-keeping • Custodial safekeeping • Avoidance of physical delivery securities • Written confirmation of transactions for investments and wire transfers • Documentation of transactions • REPORTING: The investment officers shall generate monthly reports for the City • Council that will include data on investment instruments being held. PARTICULAR PROVISIONS OR RESTRICTIONS: In selecting depositories, the credit worthiness of the institution shall be considered and the investment officers shall conduct a comprehensive review of prospective depository credit, characteristics, services available, and financial history. Selection will be in accordance with Minnesota Statutes Chapter 118A. Prior to completing an initial investment transaction and annually thereafter, the supervising officer at the financial institution shall submit a broker certification in accordance with Minnesota Statutes 118A.04. The investment officers shall annually prepare a list of authorized financial institutions and broker/dealers, which shall be approved by the City Council. INSTRUMENTS: The City will only invest in instruments, which are in accordance with Minnesota Statutes Chapter 118A. CUSTODIAL RISK: The Investment officers shall structure all investments and deposits so that the custodial risk is at all times in Category #1 or #2 under GASB Statement#3. DIVERSIFICATION/MATURITIES: It is the policy of the City to diversify its investment portfolios to eliminate the risk of loss resulting from over-concentration of assets in a specific maturity, a specific issuer or a specific class of securities. The maturities selected shall provide for stability of income and reasonable liquidity. LIST OF ATTACHMENTS: • Minnesota Statutes Chapter 118A • CITY OF WHITE BEAR LAKE • INVESTMENT POLICY JANUARY 1, 1998 I. PURPOSE This policy established the standards, direction, and oversight to achieve the following fundamental objectives for investment of City funds; principal protection, liquidity to maintain adequate cash flows,while producing acceptable rate of return for all funds reported in the City's Comprehensive Annual Financial Report except for any employee retirement funds. II. POLICY It is the investment policy of White Bear Lake to protect the capital in the overall portfolio. Liquidity and yield are also important considerations but secondary to capital preservation. Funds will be invested to gain the highest investment return from investment vehicles which have the lowest risk of principal loss,while meeting the daily cash flow demands of the City and conforming to all federal, state and local statutes governing the investment of public funds. III. DELEGATION OF AUTHORITY Management of the City's investment portfolio is delegated to the Finance Director or the Assistant Finance Director with the direction of strict compliance with this policy. IV. PRUDENCE Investments shall be made with judgment and care under prevailing circumstances, 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 from investing the City's overall portfolio. Investment personnel acting in accordance with written procedures 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 appropriate action is taken to control adverse developments. Employees 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. V. CASH FLOWS The City will annually develop a cash flow budget based upon anticipated revenue • in flows and expenditure out flows to obtain projections of cash balances for investment purposes and updated quarterly. Utilizing the last in/first out cash management philosophy, the cash flow budget should establish the City's core funds (those funds not required to be utilized within a twelve month period)and the amount of reserve required (two weeks set aside for operational expenditures). Funds not classified as core funds or part of the reserve requirement should be invested to mature during periodic times when revenue receipts do not match expenditure requirements. It is anticipated that these investments would be spread out to meet long term expenditures or positioned to achieve a favorable investment rate at the time the transaction was completed. VI. PRACTICE/STRATEGY/PERFORMANCE Based upon limited portfolio management personnel, it is anticipated that the City will participate in a buy and hold investment philosophy. Once the investment is completed, the instrument will be held until maturity. It is anticipated this investment practice should provide the City with annualized earnings between 50 to 80 basis points greater than the annualized 90 day treasury bill. • With City Council approval, the City may enter into a contractual agreement with independent investment managers. An independent investment manager would invest in accordance with guidelines and objectives of the investment policy as well as state statutes. The independent manager, unlike the City, would be expected to buy and sell investments based upon market conditions rather than operating on a buy and hold philosophy. Independent investment manager's ability to buy and sell based upon changing market conditions should out-perform the City's investment practice. Independent investment managers would have to return to the City all earnings which are equal to or less than 80 basis points above the annualized 90 day treasury bill rate. Interest earnings between 80 basis points and 200 basis points would be shared equally. Earnings greater than 200 basis points above the annualized 90 day treasury bill rate would be divided 65% to the investment company and 35% to the City. VII. INVESTMENT INSTRUMENTS S The City, consistent with legal requirements as presented in Exhibit A, may invest its • funds in the following: 1. U.S. Treasury Obligations - which have the full faith and credit of the U.S. Government pledged for repayment. 2. Federal Agencies-these agencies are created and supervised by the federal government so that, for all practical purposes, there is an absence of credit risk. 3. General Obligation of the State of Minnesota or any of its subsidiaries that is rated by at least one national rating agency with a rating level of at least the following rating: - general obligation rated "A" or better - revenue obligation rated "AA" or better - general obligations of the Minnesota Housing Finance Agency rated "A" or better 4. Certificates of Deposits-collaterized by FDIC or FSLIC insurance. Deposits exceeding $100,000 insurance shall be covered by a surety bond or collaterized with U.S. Treasury or agency securities computed at its market value which shall be at least ten percent more than the amount of each deposit in excess of the insured portions. Collateral consisting of first mortgages shall be at least forty percent more than the amount of deposit in excess of the insured portion. All collateral shall be assigned to the City from the depository. 5. Commercial paper issued by the U.S. Corporations or their Canadian subsidiaries that is of the highest quality(Al, P1)and matures in 270 days or less. 6. Bankers Accceptances shall be restricted to those of U.S. banks eligible for purchases by the Federal Reserve System. 7. Repurchase agreements - must be from a national or state bank in the U.S. that is a member of the Federal Reserve system and whose capital and surplus is at least $10,000,000 or is primary reporting dealer in U.S. government securities to the Federal Reserve Bank of New York. 8. Mutual Funds - The City may purchase shares in mutual fund holding pursuant to M.S. 118A.04. The City will monitor the market value of the fund(s) to ensure against potential losses. The City will not invest in the following instruments: • 1. Reverse Repurchase agreements 2. Mortgage-Back securities 3. Future Contracts • 4. Options 5. Guaranteed investment contracts VIII. INVESTMENT COMPANIES White Bear Lake will conduct its investment transaction with financial institutions that act responsibly as custodians of the City's funds. These institutions shall avoid any transactions which might damage public confidence in the City's ability to govern effectively. The City will conduct its investment transactions with financial institutions designated by the City Council. These institutions will meet the following criteria: 1. Financial institutions located in the State of Minnesota 2. Security dealers who are on the Federal Reserve Bank's list as primary dealers 3. Security dealers that are subsidiaries of financial institutions that are designated by the City 4. Security dealers registered under the Federal Investment Company Act of 1940, and have its shares registered under the Federal Securities Act of • 1933 All brokers will provide the City with a Broker/Dealer Certification stating that they will do business with White Bear Lake according to Minnesota Statute and White Bear Lake Investment Policy. This Broker/Dealer Certification will be signed by an officer of the company. IX. BIDDING The City will request competitive bids from approved financial institutions. Selection of the maturity date(s)would be based upon the City's projection of cash flow needs or strategic placement of the City's core funds. Bids will be requested from qualified and approved financial institutions and investment companies for various options with regard to term and instrument. The City will accept the bid which provides the highest rate of return within the parameters of this policy by the firm with sufficient financial strength and the ability to provide consistent service. The City may may reject the most favorable bid if it is deemed the bid requires the City to assume excessive risk due to concentration, does not fit the City's cash flow needs, or the potential marginal gain does not offset transaction costs. • X. DIVERSIFICATION• The City's portfolio diversification strategy shall be to stagger maturities which will avoid undue concentration of assets in specific maturity sector while providing stability of income and reasonable liquidity. Xl. DISTRIBUTION The City shall distribute investment earnings on a monthly basis based upon the following criteria: 1. Funds budgeted to receive interest earnings would be allocated 1/12 of the budgeted amount. 2. Investment earnings over budgetary projections would be distributed annually in December based upon average cash balance in all funds. 3. Trust funds required to receive a minimum interest rate would be excluded from excess interest distribution until all funds received an equal interest rate distribution. XII. INVESTMENT REVIEW COMMITTEE • An Investment Review Committee shall consist of the City Manager, Finance Director, and the Assistant Finance Director and a member appointed by the Mayor. The Investment Review Committee should meet at least semi-annually to review the investment reports, and discuss such topics as: economic outlook, portfolio diversification and maturity structure, potential risks of the City's funds, authorized brokers and dealers. Proposed investment policy changes will be recommended to the City Council by the Investment Review Committee. XII. REPORTING The City will provide a monthly investment report which includes current status of the its investment portfolio. This investment report will include at a minimum the following information on each investment: 1. Type of investment 2. Financial institution involved in the transaction 3. Actual yield on the instrument 4. Purchase date 5. Maturity date 6. Amount invested XII. EFFECTIVE DATE This policy was prepared under the authority of the City Manager and is based on • current White Bear Lake practice. This policy shall be effective immediately for all new investments and shall be reviewed periodically. A copy of this policy shall be distributed to all brokers wishing to do business with White Bear Lake. • • City of Eagan INVESTMENT POLICY Approved by City Council on October 21, 1997 The purpose of this Policy Statement is to establish standards governing the investment of City funds. It is the City's policy that available funds be invested in a manner which will provide the highest investment return, with the maximum security, while meeting the daily cash flow demands of the City and conforming to all Minnesota statutes governing the investment of public funds. Scope This policy applies to all investments made by the City. Prudence The standard of prudence to be used by investment officials of the City shall be the "prudent person" standard which states: "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 prudent investor rule shall be applied in the context of managing the overall portfolio. The investment officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific security's credit risk or market price changes, provided that these deviations from expectations are reported immediately and that appropriate action is taken to control adverse developments. Delegation of Authority In accordance with Minnesota Statutes 118A.02, the City Council authorizes the Finance Director to designate depositories and make investments for the City. The Assistant Finance Director is also authorized to make investments for the City. In the absence of both the Finance Director and the Assistant Finance Director, the Accountant II is authorized to make investments. • 1 Objectives • The City's primary investment objectives, in order of priority, are as follows: Safety: Safety of principal is the foremost objective. Investments shall be undertaken so as to insure the preservation of capital in the overall portfolio. Diversification of investments is required to limit potential losses. Liquidity: The City's portfolio will be structured to be sufficiently liquid to meet all operating requirements that might be reasonably anticipated. It is essential that funds are available when needed. Return on investment: The City's investment portfolio shall be designed to attain a market-average rate of return during budgetary and economic cycles, taking into account the City's investment risk constraint and the cash flow characteristics of the portfolio. All City staff participating in the investment process shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction that might impair public confidence in the City's ability to govern effectively. • Authorized Investments The City will invest only in instruments permitted by Minnesota Statutes 118A.04-.05, which are categorized as follows: (1) United States securities—governmental bonds, notes, bills, mortgages (excluding high-risk mortgage-backed securities), and other securities, which are direct obligations or are guaranteed or insured issues of the United States, its agencies, its instrumentalities, or organizations created by an act of Congress. (2) State and Local securities—general obligation securities of any state or local government rated "A" or better; revenue obligation securities of any state or local government rated "AA" or better; and a general obligation of the Minnesota housing finance agency which is a moral obligation of the State and is rated "A" or better. (3) Commercial paper—unsecured promissory notes issued by United States corporations or their Canadian subsidiaries having maturities of 270 days or less, and rated A-1 (Moody's), P-1 (Standard & Poors), or F-1 (Fitch) by at least two of these three rating services. (4) Time deposits—certificates of deposit fully insured by the Federal Deposit Insurance Corporation or bankers acceptances of United States banks. 40 Authorized Investments (cont'd) • (5) Repurchase agreements (Repos)—contracts whereby a holder of securities sells the securities to an investor and agrees to repurchase them at a fixed price on a fixed date. The City in effect lends money to another party and holds the security as collateral until it is repurchased by the other party. (6) Money market mutual funds—shares of a Minnesota joint powers investment trust whose investments are restricted to securities described in (1) through (5) above, or shares of an investment company that meets the requirements of Minnesota Statutes 118A.05, subd. 4. Authorized Financial Institutions The City will conduct its investment transactions with several legal, competing, reputable investment securities dealers or banks located in Minnesota. The City will obtain a completed "Notification to Broker and Certification by Broker" statement of investment restrictions from each dealer in accordance with Minnesota Statutes 118A.04. Speculative Investments Not Allowed The City will not purchase investments which, at the time of investment, are not intended to be held to maturity, or which the City would not be able to hold to maturity because of cash flow requirements. This does not mean that an investment cannot be sold prior to maturity. The City will not invest in securities, other than money market mutual funds, without a fixed maturity and fixed interest or discount rate. Maximum Maturities The City will attempt to match its investments with cash flow needs. Unless directly matched to a specific cash flow, the City will not invest in securities maturing more than ten years from the date of purchase. Terms of Transactions All investment transactions will be "delivery vs. payment," which means that payment for the investment will be made only upon delivery of the security to the safekeeping institution designated by the City. This type of transaction provides the maximum amount of security to the City. 3 Diversification • The City will diversify its investments by security type as shown below: Maximum Holdings United States Treasury obligations (bills, notes and bonds) 100% United States governmental agency and instrumentality securities 100% State and local securities 20% Commercial paper * 40% Certificates of deposit/repurchase agreements 1 0% Bankers acceptances 10% Repurchase agreements 5% Money market mutual funds investing in State authorized securities 20% * Maximum holdings for any one issuer of commercial paper are 7%. Competitive Selection of Investment Purchases For each investment opportunity, when possible, bids will be solicited from at least three authorized financial institutions for options with regards to term and instrument. The City will accept the bid that it determines best complies with the • investment Objectives and Diversification constraints described in this Policy. • 4 Cash Management and Related Recordkeeping Procedures • Cash management is essential to a good investment program. The Finance Department has responsibility to organize and establish procedures for effective cash management and the recordkeeping therefor, based on the following guidelines: 1. Cash flow projections for the following twelve-month period will be prepared at the beginning of each month. 2. Each morning, available cash balances will be determined and reviewed for investment opportunities. 3. Investment records will be updated and reviewed as investments mature or are purchased. 4. Each month, the investment records will be balanced to the financial records and to the safekeeping institution's monthly statement. 5. Each quarter, the Finance Director will submit a current listing of the City's investments to the City Council. 6. Interest earnings will be allocated on a monthly basis to the various City ifunds based on investment balances in the funds at the end of the month. 7. A management fee equal to two percent of the investment earnings will be allocated to the General Fund. 5 • Investment Guidelines for Minnesota Cities (MN Statutes Section 118A) Compliments of the 4M FUND Spoeuorrd the league c%A-11nne3ota Cities J Yields for Today. Protection for Tomorrow. The 4M Fund. • i 4M FUND Sponsored hy the League of Minnesota Cates J The 4M Fund is committed to serving the investment needs of Minnesota's cities and their instrumentalities. With both the 4M and 4M Plus Fund, communities have a range of investment options to meet their operating. The following are just a few of the benefits of joining the 4M fund: 0 • Web account access I Free checking • Lock box services in ACH payment option • No minimum balance requirements • Phone or fax transactions • Multiple account options For more information, please contact Pat Harris at (800) 553-2143 or by e-mail at pharris@voyageur.net 40 • Deposit and Investment of Local Government Funds Section 118A.01 Definitions. Subdivision 1-Application.The definitions in this section apply to sections 1 18A.01 to 118A.06. Subd. 2. Government entity. "Government entity"means a county, city, town, school district,hospital district,public authority,public corporation,public commission,special district, any other political subdivision, except an entity whose investment authority is specified under chapter 11 A or 356A.For the purposes of sections 1 18A.02 and 118A.03 only, the term includes an American Indian tribal government entity located within a federally recognized American Indian reservation. Subd. 3. Financial institution. "Financial institution" means a savings association, commercial bank,trust company,credit union,or industrial loan and thrift company. Subd.4. Public funds."Public funds"means all general, special, permanent, trust, and other funds,regardless of source or purpose,held or administered by a government entity, unless otherwise restricted. HIST: 1996 c 399 art 1 s 2; • Section 118A.02 Depository named;investment requirements;liability. Subdivision 1.Designation;delegation.The governing body of each government entity shall designate, as a depository of its funds, one or more financial institutions. The governing body may authorize the treasurer or chief financial officer to: (1)designate depositories of the funds; (2)make investments of funds under sections 1 18A.01 to 118A.06 or other applicable law;or (3) both designate depositories and make investments as provided in this subdivision. Subd.2. Sale;proceeds;no personal liability.The treasurer or chief financial officer of a government entity may at any time sell obligations purchased pursuant to this section and the money received from such sale,and the interest and profits or loss on such investment shall be credited or charged,as the case may be,to the fund from which the investment was made.Neither such official nor government entity,nor any other official responsible for the custody of such funds, shall be personally liable for any loss sustained from the deposit or investment of funds in accordance with the provisions of sections 118A.04 and 1 18A.05.HIST: 1996 c 399 art 1 s 3 • Section 118A.03 When and what collateral required. Subdivision 1.To the extent that funds deposited are in excess of available federal deposit insurance,the government entity shall require the financial institution to furnish collateral security or a corporate surety bond executed by a company authorized to do business in the state. Subd.2.In lieu of surety bond.The following are the allowable forms of collateral in lieu of a corporate surety bond: (1)United States government treasury bills,treasury notes,treasury bonds; (2)issues of United States government agencies and instrumentalities as quoted by a recognized industry quotation service available to the government entity; (3)general obligation securities of any state or local government with taxing powers which is rated"A"or better by a national bond rating service, or revenue obligation securities of any state or local government with taxing powers which is rated"AA"or better by a national bond rating service; (4) irrevocable standby letters of credit issued by Federal Home Loan Banks to a municipality accompanied by written evidence that the bank's public debt is rated"AA" or better by Moody's Investors Service,Inc.,or Standard&Poor's Corporation;and (5)time deposits that are fully insured by the Federal Deposit Insurance Corporation. • Subd.3.Amount.The total amount of the collateral computed at its market value shall be at least ten percent more than the amount on deposit plus accrued interest at the close of the business day.The financial institution may furnish both a surety bond and collateral aggregating the required amount. Subd. 4. Assignment. Any collateral pledged shall be accompanied by a written assignment to the government entity from the financial institution. The written assignment shall recite that, upon default, the financial institution shall release to the government entity on demand, free of exchange or any other charges, the collateral pledged.Interest earned on assigned collateral will be remitted to the financial institution so long as it is not in default.The government entity may sell the collateral to recover the amount due.Any surplus from the sale of the collateral shall be payable to the financial institution,its assigns,or both. Subd. 5.Withdrawal of excess collateral. A financial institution may withdraw excess collateral or substitute other collateral after giving written notice to the governmental entity and receiving confirmation.The authority to return any delivered and assigned collateral rests with the government entity. Subd. 6. Default. For purposes of this section, default on the part of the financial institution includes, but is not limited to, failure to make interest payments when due, failure to promptly deliver upon demand all money on deposit,less any early withdrawal penalty that may be required in connection with the withdrawal of a time deposit, or 2 S • • closure of the depository.If a financial institution closes,all deposits shall be immediately due and payable.It shall not be a default under this subdivision to require prior notice of withdrawal if such notice is required as a condition of withdrawal by applicable federal law or regulation. Subd.7. Safekeeping.All collateral shall be placed in safekeeping in a restricted account at a Federal Reserve Bank,or in an account at a trust department of a commercial bank or other financial institution that is not owned or controlled by the financial institution furnishing the collateral.The selection shall be approved by the government entity.HIST: 1996 c 399 art 1 s 4 Section 118A.04 Investments. Subdivision 1.Any public funds,not presently needed for other purposes or restricted for other purposes,may be invested in the manner and subject to the conditions provided for in this section. Subd.2. United States securities. Public funds may be invested in governmental bonds, notes, bills, mortgages (excluding high-risk mortgage-backed securities), and other securities, which are direct obligations or are guaranteed or insured issues of the United States,its agencies,its instrumentalities,or organizations created by an act of Congress. Subd.3.State and local securities. Funds may be invested in the following: • (1) any security which is a general obligation of any state or local government with taxing powers which is rated"A"or better by a national bond rating service; (2) any security which is a revenue obligation of any state or local government with taxing powers which is rated"AA"or better by a national bond rating service;and (3) a general obligation of the Minnesota housing finance agency which is a moral obligation of the state of Minnesota and is rated "A" or better by a national bond rating agency. Subd. 4. Commercial papers. Funds may be invested in commercial paper issued by United States corporations or their Canadian subsidiaries that is rated in the highest quality category by at least two nationally recognized rating agencies and matures in 270 days or less. Subd.5.Time deposits. Funds may be invested in time deposits that are fully insured by the Federal Deposit Insurance Corporation or bankers acceptances of United States banks. Subd. 6. High-risk mortgage-backed securities. For the purposes of this section and section 1 18A.05,"high-risk mortgage-backed securities"are: (a)interest-only or principal-only mortgage-backed securities;and (b)any mortgage derivative security that: (1)has an expected average life greater than ten years; 3 . • (2)has an expected average life that: (i) will extend by more than four years as the result of an immediate 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 (3) 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. Subd.7.Temporary general obligation bonds.Funds may be invested in general obligation temporary bonds of the same governmental entity issued under section 429.091, subdivision 7,469.178,subdivision 5,or 475.61,subdivision 6. Subd.8. Debt service funds.Funds held in a debt service fund may be used to purchase any obligation,whether general or special,of an issue which is payable from the fund,at such price,which may include a premium,as shall be agreed to by the holder,or may be used to redeem any obligation of such an issue prior to maturity in accordance with its terms.The securities representing any such investment may be sold by the governmental entity at any time,but the money so received remains part of the fund until used for the purpose for which the fund was created.Any obligation held in a debt service fund from which it is payable may be canceled at any time unless otherwise provided in a resolution • or other instrument securing obligations payable from the fund. Subd.9.Broker;statement and receipt. (a) For the purpose of this section and section 118A.05, the term"broker"means a broker-dealer,broker,or agent of a government entity,who transfers,purchases,sells, or obtains securities for,or on behalf of,a government entity. (b) Prior to completing an initial transaction with a broker, a government entity shall provide annually to the broker a written statement of investment restrictions which shall include a provision that all future investments are to be made in accordance with Minnesota Statutes governing the investment of public funds. (c) A broker must acknowledge annually receipt of the statement of investment restrictions in writing and agree to handle the government entity's account in accordance with these restrictions. A government entity may not enter into a transaction with a broker until the broker has provided this written agreement to the government entity. (d)The state auditor shall prepare uniform notification forms which shall be used by the government entities and the brokers to meet the requirements of this subdivision. HIST: 1996 c 399 art 1 s 5 4 • • Section 118A.05 Contracts and agreements. Subdivision 1.In addition to other authority granted in sections 1 18A.01 to 1 18A.06, government entities may enter into contracts and agreements as follows. Subd. 2. Repurchase agreements. Repurchase agreements consisting of collateral allowable in section 1 18A.04, and reverse repurchase agreements may be entered into with any of the following entities: (1)a financial institution qualified as a"depository"of public funds of the government entity; (2)any other financial institution which is a member of the Federal Reserve System and whose combined capital and surplus equals or exceeds$10,000,000; (3) a primary reporting dealer in United States government securities to the Federal Reserve Bank of New York;or (4) a securities broker-dealer licensed pursuant to 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. Reverse agreements may only be entered into for a period of 90 days or less and only to meet short-term cash flow needs.In no event may reverse repurchase agreements be entered into for the purpose of generating cash for investments, except as stated in Ssubdivision 3. Subd.3.Securities lending agreements.Securities lending agreements,including custody agreements,may be entered into with a financial institution meeting the qualifications of subdivision 2, clause (1) or (2), and having its principal executive office in Minnesota. Securities lending transactions may be entered into with entities meeting the qualifications of subdivision 2 and the collateral for such transactions shall be restricted to the securities described in this section and section l 18A.04. Subd.4. Minnesota joint powers investment trust. Government entities may enter into agreements or contracts for: (1) shares of a Minnesota joint powers investment trust whose investments are restricted to securities described in this subdivision, subdivision 2, and section 118A.04; (2) units of a short-term investment fund established and administered pursuant to regulation 9 of the Office of the Comptroller of the Currency,in which investments are restricted to securities described in this section and section 1 I 8A.04; (3)shares of an investment company which is registered under the Federal Investment Company Act of 1940 and which holds itself out as a money market fund meeting the conditions of rule 2a-7 of the Securities and Exchange Commission and is rated in one of the two highest rating categories for money market funds by at least one nationally recognized statistical rating organization;or S • • 1111 (4)shares of an investment company which is registered under the Federal Investment Company Act of 1940,and whose shares are registered under the Federal Securities Act of 1933,as long as the investment company's fund receives the highest credit rating and is rated in one of the two highest risk rating categories by at least one nationally recognized statistical rating organization and is invested in financial instruments with a final maturity no longer than 13 months. Subd. 5. Guaranteed investment contracts. Agreements or contracts for guaranteed investment contracts may be entered into if they are issued or guaranteed by United States commercial banks, domestic branches of foreign banks, United States insurance companies,or their Canadian subsidiaries.The credit quality of the issuer's or guarantor's short- and long-term unsecured debt must be rated in one of the two highest categories by a nationally recognized rating agency. Should the issuer's or guarantor's credit quality be downgraded below"A",the government entity must have withdrawal rights. HIST: 1996 c 399 art I s 6; I997 c 219 s I Section 118A.06 Safekeeping;acknowledgements. Investments,contracts,and agreements 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 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 under chapter 80A,or an affiliate of it, and regulated by the Securities and Exchange Commission; provided that the government entity's ownership of all securities is evidenced by written acknowledgments identifying the securities by the names of the issuers,maturity dates,interest rates, CUSIP number,or other distinguishing marks. HIST: 1996 c 399 art 1 s 7 Section 118A.07 Additional investment authority. Subdivision 1.Authority provided.As used in this section,"governmental entity"means a city with a population in excess of 200,000 or a county that contains a city of that size. If a governmental entity meets the requirements of subdivisions 2 and 3,it may exercise additional investment authority under subdivisions 4,5,and 6. Subd. 2.Written policies and procedures. Prior to exercising any additional authority under subdivisions 4, 5, and 6, the governmental entity must have written investment policies and procedures governing the following: 6 • • (1) the use of or limitation on mutual bond funds or other securities authorized or permitted investments under law; (2)specifications for and limitations on the use of derivatives; (3)the final maturity of any individual security; (4)the maximum average weighted life of the portfolio; (5)the use of and limitations on reverse repurchase agreements; (6) credit standards for financial institutions with which the government entity deals;and (7)credit standards for investments made by the government entity. Subd.3. Oversight process. Prior to exercising any authority under subdivisions 4, 5,and 6,the governmental entity must establish an oversight process that provides for review of the government entity's investment strategy and the composition of the financial portfolio. This process shall include one or more of the following: (1)audit reviews; (2)internal or external investment committee reviews;and (3)internal management control.Additionally,the governing body of the governmental • entity must, by resolution, authorize its treasurer to utilize the additional authorities under this section within their prescribed limits,and in conformance with the written limitations,policies,and procedures of the governmental entity. If the governing body of a governmental entity exercises the authority provided in this section,the treasurer of the governmental entity must annually report to the governing body on the findings of the oversight process required under this subdivision. If the governing body intends to continue to exercise the authority provided in this section for the following calendar year, it must adopt a resolution affirming that intention by December 1. Subd. 4. Repurchase agreements. A government entity may enter into repurchase agreements as authorized under section 118A.05, provided that the exclusion of mortgage-backed securities defined as "high-risk mortgage-backed securities" under section 1 18A.04, subdivision 6, shall not apply to repurchase agreements under this authority if the margin requirement is 101 percent or more. Subd. 5. Reverse repurchase agreements. Notwithstanding the limitations contained in section 118A.05, subdivision 2, the county may enter into reverse repurchase agreements to: (1)meet cash flow needs;or (2) generate cash for investments, provided that the total securities owned shall be limited to an amount not to exceed 130 percent of the annual daily average of general 7 • • investable monies for the fiscal year as disclosed in the most recently available audited financial report.Excluded from this limit are: (i)securities with maturities of one year or less;and (ii) securities that have been reversed to maturity.There shall be no limit on the term of a reverse repurchase agreement. Reverse repurchase agreements shall not be included in computing the net debt of the governmental entity, and may be made without an election or public sale, and the interest payable thereon shall not be subject to the limitation in section 475.55. The interest shall not be deducted or excluded from gross income of the recipient for the purpose of state income,corporate franchise, or bank excise taxes, or if so provided by federal law, for the purpose of federal income tax. Subd. 6. Options and futures. A government entity may enter into futures contracts, options on futures contracts,and option agreements to buy or sell securities authorized under law as legal investments for counties,but only with respect to securities owned by the governmental entity, including securities that are the subject of reverse repurchase agreements under this section that expire at or before the due date of the option agreement. HIST: 1996 c 399 art 1 s 8 Section 118A.08 No superseding effect. • Except as provided in Laws 1996, chapter 399, article 1, section 11, sections l 18A.01 to 1 18A.06 shall not supersede any general or special law relating to the deposit and investment of public funds. HIST: 1996 c 399 art 1 s 9 8 . . q�`�;'. �f •,.,.� "!. .>', ":Y�'=- •tae*' -Y' +, ,`'".;_,... :. y fir,;-;, 7.7_* tea ",w f "`a.,' q' 71,..<;� ;� ..=�3 "? � 8,:,=z.=. ; a.' T_F. 'z.,,-.. ; , y. Via. 4M FUND Spen,u.m b,the L.gy.f,Nsncmm Cm, 1 WOPat Harris Voyageur Asset Management Inc. 90 South Seventh Street, Suite 4300 Minneapolis, MN 55402 • 1-800-553-2143 pharris@voyageur.net I -;^ F, , 4 .' per;; xx r > . ;g4' A ”„'z:4.:,k-:t4V.- f... ""- ,; ems.';; ' .., tea .\F s ti,, -. '-,�``. ,x: n4 °^: am;, c. .�"',£ };=:�e � ': • The Minnesota Municipal • Money Market Fund Program INFORMATION STATEMENT A Comprehensive Financial Service for Municipalities Sponsored by the League of Minnesota Cities This booklet provides detailed information about the Funds. Please read it carefully and retain it for future reference. • TABLE OF CONTENTS The Trust and the Funds 3 Investment Objectives and Policies 3 Withdrawals from the PLUS Fund 6 Trustees and Officers 6 Investment Advisor 7 Administrator 7 Custodian 7 Technical Advisory Board 8 Legal Counsel 8 Expenses 8 Daily Income Allocations 9 Computation of Yield 9 Determination of Net Asset Value 10 Portfolio Transactions 11 Reports to Participants 11 Taxes 11 Declaration of Trust 12 Fixed Rate Program 13 411 -2- THE TRUST AND THE FUNDS The 4M Liquid Asset Fund and the 4M PLUS Fund (each a "Fund" and, together, the "Funds") are distinct investment portfolios within the Minnesota Municipal Money Market Fund (the "Trust"), a common law trust organized and existing in accordance with the Minnesota Joint Powers Act(Minnesota Statutes, Section 471.59) (the"Joint Powers Act"). The Trust and the Liquid Asset Fund were created in 1987, and the PLUS Fund was created in November 1996. Each Fund is independent of the other. Neither the Liquid Asset Fund nor the PLUS Fund constitutes security or collateral for obligations of the other,except as may be described in the Declaration of Trust. Only "Municipalities" (defined to include Minnesota cities, counties, towns, public authorities, public corporations,public commissions, special districts and public instrumentalities, each as defined in the Joint Powers Act)are permitted to open accounts and become participants("Participants")in either or both Funds. The address of the Trust is: Minnesota Municipal Money Market Fund c/o Voyageur Asset Management 100 South Fifth Street Suite 2300 Minneapolis,MN 55402-1240 INVESTMENT OBJECTIVES AND POLICIES Investment Objectives • Each Fund seeks to provide Participants with safety and stability of principal,liquidity and within the stringent investment policies and limitations set forth below,a competitive yield. No assurance can be given that either Fund will achieve its investment objective or that any benefits described in this Information Statement will result from placement of assets in either Fund. Each Fund will employ the same investments and investment techniques. However, the PLUS Fund's objective will be to provide Participants with a somewhat enhanced investment yield (compared with that of the Liquid Asset Fund)by having a longer average portfolio maturity than the Liquid Asset Fund. The PLUS Fund will seek to achieve a longer average portfolio maturity by requiring that Participants agree to an initial 14-day investment period with respect to each investment. Participants in the Liquid Asset Fund will not have to agree to an initial 14-day investment period. Each Fund seeks to maintain a stable net asset value of$1.00 per share; however,there can be no assurance that either Fund will be able to continually achieve this goal. An investment in either Fund is not a deposit or obligation of, or guaranteed or endorsed by, any bank and is not insured or guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other federal or state agency or instrumentality. For a discussion of the expenses to which Participants of each Fund are indirectly subject, please refer to the"Expenses"section of this document. • -3- • Fund Investments Each Fund is specifically designed for Minnesota Municipalities. Accordingly, each Fund may invest only in securities and instruments in which Municipalities are permitted to invest directly, as delineated in Minnesota Statutes, Section 118A("Deposit and Investment of Local Government Funds"). Permitted Investments include: (a) United States securities.Public funds may be invested in governmental bonds,notes,bills and other securities which are direct obligations or are guaranteed or insured issues of the United States, its agencies,its instrumentalities,or organizations created by an Act of Congress. (b) Commercial papers. Funds may be invested in commercial paper issued by United States corporations or their Canadian subsidiaries that is rated in the highest quality category by at least two nationally recognized rating agencies and that matures in 270 days or less. (c) Any security which is a general obligation of the State of Minnesota or any of its municipalities. (d) Bankers' acceptances of United States banks eligible for purchase by the Federal Reserve System. (e) Deposits in a national bank or in a state bank or thrift institution insured by the Federal Deposit Insurance Corporation, provided that any such deposit shall be insured, bonded, or collateralized as required by law and that any such bank or thrift institution shall meet criteria designated from time to time by the Trustees. • (f) Repurchase Agreements with "broker-dealers" (as more fully described below) and with "banks"(as more fully described below). I. Broker/Dealers: a. The Funds may only enter into repurchase agreements with broker- dealers which, in the judgment of the Investment Advisor (as defined below), have a reputation for sound management and ethical business practices. b. Each broker/dealer must be registered with the Securities and Exchange Commission and be a primary reporting dealer to the Federal Reserve Bank of New York. c. Broker/dealers must have at least $50 million in "Excess Capital." "Excess Capital" is that portion of a firm's permanent capital which is in excess of the minimum capital required under the Uniform Net Capital Rule of the Securities and Exchange Commission. Broker/dealer subsidiaries of companies having at least $1 billion in net worth shall also be considered creditworthy, in the event of a lack of publicly available financial information. The Investment Advisor will use its best efforts to monitor the creditworthiness of broker/dealers. d. Broker/dealers must have short-term, unsecured debt ratings of"Al" by Standard & Poor's Corporation ("S&P") or"P1" by Moody's Investors Service, Inc. ("Moody's"). • -4- • 2. Banks: a. The Funds may only enter into repurchase agreements with banks whose short-term,unsecured debt is rated"Al"by S&P or"P1"by Moody's. b. The Funds may only enter into repurchase agreements with banks that are among the 100 largest United States commercial banks. (g) Any other investment instruments now or hereafter designated as a Permitted Investment under applicable law. Investment Restrictions Each Fund may buy and sell, and enter into agreements to buy and sell Permitted Investments subject to the restrictions described below. These restrictions are considered to be fundamental to the operation and activities of each Fund and may not be changed without the affirmative vote of a majority of the Participants. Each Fund: (a) May not make any investment other than a Permitted Investment; (b) May not purchase any Permitted Investment which has a maturity date more than 397 days from the date of purchase, unless it is subject at the time of purchase to an irrevocable agreement on the part of a responsible party to repurchase it from the Fund within 397 days; (c) May not purchase any Permitted Investment if the effect of such purchase would result in IIIIII the Fund's portfolio weighted average maturity to exceed ninety days (in determining the effect of a purchase on the average portfolio maturity, any Permitted Investment which is subject to an irrevocable agreement of the nature referred to in the preceding clause(b)is deemed to mature on the day on which the Fund is obligated to sell such Permitted Investment back to the responsible party); (d) May not borrow money or incur indebtedness whether or not the proceeds thereof are intended to be used to purchase Permitted Investment,except as a temporary measure to facilitate withdrawal requests which might otherwise require unscheduled disposition of portfolio investments; and (e) May not purchase securities or shares of investment companies or any entities similar to either Fund. III -5- • WITHDRAWALS FROM THE PLUS FUND All investments in the PLUS Fund must be deposited for a minimum of 14 calendar days. Withdrawals prior to the 14-day restriction period will be subject to a penalty equal to 7 days interest on the amount withdrawn (calculated using the dividend rates in effect for the 7-day period immediately preceding the withdrawal date). The penalty will be payable even if the amount withdrawn had not been invested in the PLUS Fund for the full 7-day period preceding the withdrawal. In determining whether an amount is eligible for withdrawal from a Participant account without the payment of a penalty, the first- in/first-out method will be used. In determining whether an amount is eligible for withdrawal from a Participant account without the payment of a penalty,the first-in/first-out method will be used. There are no restrictions on withdrawals from the Liquid Asset Fund,which may be effected on a same-day basis. TRUSTEES AND OFFICERS Subject to the power of the Participants to amend the Declaration of Trust,the Board of Directors of the League of Minnesota Cities serves as the Board of Trustees of the Trust. Appointments and vacancies are filled in accordance with the by-laws of the League of Minnesota Cities and the Declaration of Trust. The Trustees have full, exclusive, and absolute control and authority over the business and affairs of the Trust and each Fund, in all cases subject to the rights of the Participants as provided in the • Declaration of Trust. The Trustees may perform such acts as in their sole judgment and discretion are necessary and proper for conducting the business and affairs of the Trust or promoting the interests of the Trust. The Trustees duties include, but are not limited to, overseeing, reviewing and supervising the activities of all consultants and professional Advisors to the Fund (including,but not limited to, the Investment Advisor, the Administrator,the Sub-Administrator,if any,and the Custodian). The Trustees serve without compensation but are reimbursed by the Trust for reasonable travel and other out-of-pocket expenses incurred in connection with their duties as Trustees. The Trustees are not required to devote their entire time to the affairs of the Trust. The officers of the League of Minnesota Cities serve also as officers of the Trust. The executive director of the League of Minnesota Cities serves as the Trust's Secretary and as an ex-officio, non-voting member of the Board of Trustees. The Trustees may elect or appoint such other officers or agents who, subject to the Declaration of Trust and Bylaws of the Trust, shall have such powers, duties and responsibilities as the Trustees may deem to be advisable and appropriate. The Trustees are responsible for the general investment policy and program of each Fund and for the general supervision and administration of the business and affairs of the Trust. However, the Trustees are not required personally to conduct all of the business of the Trust and, consistent with their ultimate responsibility, the Trustees have appointed the Administrator and Investment Advisor, a Sub- Administrator,the Custodian,and a Technical Advisory Board. • -6- INVESTMENT ADVISOR • Voyageur Asset Management("Voyageur"or the"Investment Advisor"),a division of RBC Damn Rauscher("RBC Damn"),has been appointed by the Trustees as each Fund's investment Advisor. In such capacity, Voyageur provides investment advice to, and supervises the investment program of, each Fund. The agreement pursuant to which Voyageur serves as each Fund's investment Advisor will remain in effect with respect to each Fund until September 30, 1997, and thereafter from year to year if approved annually by the Board of Trustees or by a majority of the applicable Fund's Participants. The agreement may be terminated without penalty on sixty days' written notice at the option of the Fund or the Investment Advisor. The Fund does not engage in the trading of investment instruments with or through RBC Dain Rauscher,a registered full-service broker-dealer. ADMINISTRATOR The Trustees also have appointed Voyageur as each Fund's administrator (the "Administrator"). PMA Financial Network,Inc. of Warrenville,Illinois has been appointed by the Administrator to serve as each Fund's Sub-Administrator. The agreements pursuant to which the Administrator and the Sub- Administrator serve each Fund will remain in effect from year to year if approved annually by the Board of Trustees or by a majority of the applicable Fund's Participants. Each agreement may be terminated without penalty on sixty days written notice at the option of non-terminating party. The Administrator or the Sub-Administrator services all Participant accounts; determines and • allocates income of each Fund;provides certain written confirmation of the investment and withdrawal of monies by Participants; determines the net asset value of each Fund on a daily basis; provides administrative personnel and facilities to the Trust and each Fund;bears certain expenses of the Trust and each Fund; and performs other related administrative services for the Trust and each Fund. On a quarterly basis, the Administrator provides the Trustees with a detailed evaluation of the performance of each Fund compared against money market mutual funds and various indices of money market securities. CUSTODIAN US Bank serves as Custodian for each Fund pursuant to a Custodian Agreement with the Trust. The Custodian acts as a safekeeping agent for each Fund's investment portfolio and serves as the depository in connection with the direct investment and withdrawals of each Fund. The Custodian does not participate in either Fund's investment decision-making process. Each Fund may invest in obligations of the Custodian,and the Custodian may buy and sell Permitted Investments from and to each Fund. TECHNICAL ADVISORY BOARD The Trustees have appointed a Technical Advisory Board to assist and advise the Board of Trustees in developing policies and overseeing and reviewing the activities of the Trust and each Fund. The Technical Advisory Board consists of individuals skilled in the area of municipal finance and investments. LEGAL COUNSEL -7- • Legal counsel of the League of Minnesota Cities serves as General Counsel to the Trust pursuant to the direction of the Board of Trustees. EXPENSES Administrative and Investment Advisory Expenses Under its Administrative and Investment Advisory Agreement with Voyageur, each Fund has agreed to pay Voyageur a fee at an annual rate equal to 0.28% of the Fund's average daily net assets. This fee is computed daily and paid monthly. Of the amount so received,Voyageur has agreed to pay to the League of Minnesota Cities for its sponsorship and administrative services an amount equal to 0.06% of the Fund's average daily net assets. This fee likewise will be calculated daily and paid monthly. The Sub-Administrator is compensated by the Administrator. The Administrator or the Sub-Administrator is responsible for administrative costs of serving as Administrator or Sub-Administrator(as applicable) of the Fund, such as postage, telephone charges and computer time. Additionally, the Administrator is responsible for paying all costs associated with marketing the Fund. Custodial Expenses Under its agreement with the Custodian, the Fund compensates the Custodian based on the • following schedule(calculated daily and paid monthly): Annual Administration Fee: $7,200.00 Custodian Fee: The Fund will pay a fee computed at an annual average rate equal to 0.00333%of the Fund's monthly market value. The market value of the Fund is determined in accordance with Section 6.02 as of the close of business of the last Minnesota working day of the month. The fee is computed and paid monthly. Transaction Charges: DTC Book Entry Trade Transaction: $10.00 Fed Book Entry Trade Transaction: $10.00 Physical Trade Transaction: $25.00 Trust Account Overdraft Fee: The Custodian's fees for Trust Account overdrafts shall be the overdraft amount multiplied by U.S.Bank's fed funds rate divided by 360. The fees shall be calculated at the time of occurrence. Other Expenses In addition, each Fund pays all of its other operating and other expenses not expressly assumed by the Administrator and the Sub-Administrator, including, without limitation, its legal costs, insurance 4111 -8- costs and the cost of promotional material including Information Statements, Application Forms, • brochures and meeting materials for Participants. DAILY INCOME ALLOCATIONS Each Fund's net income is determined as of the close of business on each Minnesota banking day (and at such other times as the Trustees may determine) and is credited monthly on a pro rata basis to each Participant's account. Such accrued income is reinvested in additional Fund shares at their net asset value (generally, $1.00 per share). Although daily income accruals are not automatically transmitted in cash,Participants may obtain cash by withdrawing shares at their net asset value without charge. Each Fund's net income for each income period consists of(1) all accrued interest income on Fund assets, (2)plus or minus all realized gains or losses on Fund assets and any amortized purchase discount or premium,and(3)less the Fund's accrued expenses applicable to that income period. Each Fund expects to have net income each day. If for any reason there is a net loss on any day, the applicable Fund will reduce the number of its outstanding shares by having each Participant contribute its pro rata portion of the total number of shares required to be canceled in order to maintain the net asset value per share at a constant value of$1.00. Each Participant will be deemed to have agreed to such a contribution in these circumstances by its adoption of the Declaration of Trust and its investment of monies into the Fund. COMPUTATION OF YIELD The"daily rate"and"7-day yield"of each Fund may,from time to time,be quoted in reports, literature and information published by the Trust. The daily rate of each Fund is computed by taking daily investment income,plus or minus any purchased discount or premium less all accrued expenses, including realized capital gains or losses,and dividing by the total shares in the Fund,multiplied by 365. Each Fund will also report a "7-day yield"which refers to the income that would have been generated by a Participant's investment in the relevant Portfolio for the preceding seven days.The 7-day yield is calculated by multiplying the unannualized seven-day period return by 365 divided by 7. Each Fund may also quote from time to time a 7-day effective average yield by adding 1 to the unannualized seven-day period return,raising the sum to a power equal to 365 divided by 7,and subtracting I from the result. Each Fund's yield from time to time may be quoted on other bases for the information of its Participants. Each Fund's yield may vary over time, and, therefore,the yields quoted from time to time should not be considered an indication of future investment results. Actual yields will depend not only on the type, quality, and maturities of the investments held by each Fund and changes in interest rates on such investments,but also on changes in the Fund's expenses during the period. Yield information may be useful in reviewing the performance of each Fund and for providing a basis for comparison with other investment alternatives. However, each Fund's yield will fluctuate, unlike certificates of deposit or other investments which typically pay a fixed yield for a stated period of time. DETERMINATION OF NET ASSET VALUE • -9- • • The net asset value per share of each Fund for the purpose of calculating the price at which each Fund's shares are issued and redeemed is determined by the Administrator as of the close of business on each Minnesota banking day. The value of each Fund's investments are determined using the amortized cost method. The amortized cost method of valuation involves valuing an investment instrument at its cost at the time of purchase and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the applicable Fund would receive if it sold the instrument. During such periods,the yield to Participants may differ somewhat from that which would be obtained if the applicable Fund used the market value method for all its portfolio investments. For example, if the use of amortized cost resulted in a lower(higher)aggregate portfolio value on a particular day, a prospective Participant would be able to obtain a somewhat higher(lower)yield than would result if the applicable Fund used the market value method, and existing Participants would receive less (more) investment income. The purpose of this method of calculation is to attempt to maintain a constant net asset value per share of$1.00. The Board of Trustees has adopted procedures with respect to each Fund's use of the amortized cost method to value its portfolio. These procedures are designed and intended (taking into account market conditions and each Fund's investment objectives) to stabilize net asset value per share as computed for the purpose of investment and redemption at $1.00 per share. The procedures include a periodic review by the Board of Trustees, in such manner as they deem appropriate and at such intervals as are reasonable in light of current market conditions, of the relationship between net asset value per share based upon the amortized cost value of each Fund's investments and the net asset value per share • based upon available indications of market value with respect to such portfolio investments. The Board of Trustees will consider steps,if any,that should be taken in the event of a difference of more than 1/2 of 1% between the two methods of valuation. The Board of Trustees will take such steps as they consider appropriate (such as shortening the average portfolio maturity or realizing gains or losses) to minimize any material dilution or other unfair results which might arise from differences between the two methods of valuation. The Trust has adopted policies on behalf of each Fund to (1) maintain a dollar weighted average portfolio maturity (which will not be more than ninety days) appropriate to the objective of maintaining a stable net asset value of$1.00 per share, and (2) not purchase any instrument with a remaining maturity of more than one year (unless such investment is subject at the time of its purchase to an irrevocable agreement on the part of a responsible person to purchase such investment from the applicable Fund within one year). Should the disposition of a portfolio investment result in a dollar weighted average portfolio maturity of more than ninety days,available cash will be invested in such a manner as to reduce such average portfolio maturity to ninety days or less as soon as reasonably practicable. PORTFOLIO TRANSACTIONS Subject to the general supervision of the Board of Trustees,the Investment Advisor is responsible for the investment decisions and the placing of the orders for portfolio transactions for each Fund. Each Fund's portfolio transactions occur primarily with major dealers in money market instruments acting as principals. Such transactions are normally on a net basis which do not involve payment of brokerage commissions. Transactions with dealers normally reflect the spread between bid and asked prices. • -10- The Investment Advisor places order for all purchases and sales of portfolio securities. Although • neither Fund ordinarily seeks profits from short-term trading,the Investment Advisor may,on behalf of a Fund,dispose of any portfolio investment prior to its maturity if it believes such disposition is advisable. The Investment Advisor seeks to obtain the best net price and most favorable execution of orders for the purchase and sale of portfolio securities. Where price and execution offered by more than one dealer are comparable, the Investment Advisor may, in its discretion, purchase and sell investments through dealers which provide research, statistical and other information to the Investment Advisor or to the Trust. Such supplemental information received from a dealer is in addition to the services required to be performed by the Investment Advisor under its agreement with each Fund, and the expenses of the Investment Advisor will not necessarily be reduced as a result of the receipt of such information. Fund investments will not be purchased from or sold to the Investment Advisor or the Administrator or any affiliate of the Investment Advisor or the Administrator. REPORTS TO PARTICIPANTS Participants in each Fund receive transaction advise subsequent to all investments and wire withdrawals that they make. Each Participant receives annual reports providing financial information regarding each applicable Fund (including a statement of net income) as well as a monthly statement of the Participant's account. The annual report includes audited financial statements of the Funds. Each Fund's fiscal year ends on December 31 of each year. Potential Participants are advised to review the financial reports of the Funds that are made available to them. The Trust answers inquiries at any time during business hours (8:00 a.m. through 4:00 p.m., Minneapolis time) from a Participant concerning the status of its account(number of shares,etc.)and the • current yield available through the Fund's investment program. Such inquiries can be made by telephoning(866)922-2849. TAXES In the opinion of Counsel to the Trust,neither Fund is subject to federal or Minnesota income tax upon the income realized by it, and the Participants are not subject to tax upon distributions to them of such income. Counsel to the Trust is further of the opinion that the Participants are not subject to taxation as a result of their investment of municipal monies in either Fund. DECLARATION OF TRUST Each prospective Participant is given a copy of the Declaration of Trust before becoming a Participant. Certain portions of the Declaration of Trust are summarized in this Information Statement. The following summary is qualified in its entirety by reference to the text of the Declaration of Trust, as amended. Description of Shares. The Declaration of Trust provides that the beneficial interests of Participants in the net assets of each Fund are, for convenience of reference,divided into shares which are used as units to measure the proportionate allocation of beneficial interest among the Participants of such Fund. The Declaration of Trust authorizes an unlimited number of full and fractional shares for each Fund, as well as adjustments in the total number of shares outstanding from time to time in order to permit each Fund to maintain a constant net asset value of$1.00 per share. • -11- • Shares of each Fund are of the same class. Each Fund share has equal rights with respect to dividends and distributions of such Fund The shares have no preference, conversion, exchange, or preemptive rights. For all matters requiring a vote of Participants, each Participant is entitled to one vote with respect to each matter,without regard to the number of shares held by the Participant. It is not necessary for a Participant to hold any minimum number of shares to be entitled to vote. Separate votes are taken by each Fund except with respect to matters pertaining to the Trust as a whole,in which case Participants vote together, irrespective of the Fund in which such Participant participates. Shares have non- cumulative voting rights. No shares may be transferred to any person other than the respective Fund's portfolios from which it originated at the time of withdrawal of monies by a Participant. Participant Liability. The Declaration of Trust provides that Participants shall not be subject to any individual liability for the acts or obligations of the Trust and provides that every written undertaking made by the Trust shall contain a provision that such undertaking is not binding upon any of the Participants individually. In the opinion of the Board of Trustees,no individual liability will attach to the Participants under any undertaking containing such a provision. The Trustees intend to conduct the operations of the Trust and each Fund, with advice of counsel, in such a way as to avoid ultimate liability of the Participants for liabilities of the Trust or any Fund. Responsibility of Trustees,Officers and Agents. No Trustee,officer,employee,or agent of the Trust is individually liable to the Trust or any Fund, a Participant, an officer, an employee or an agent of • the Trust for any action or failure to act unless it is taken or omitted in bad faith or constitutes willful misfeasance, reckless disregard of duty, or gross negligence. All third parties shall look solely to the property of the applicable Fund for the satisfaction of claims arising in connection with the affairs of the Fund. The Trust will indemnify each Trustee, officer, employee, or agent of the Trust designated by the Trustees to receive such indemnification to the extent permitted by law, against all claims and liabilities to which they may become subject by reason of serving in such capacities for the Trust, except in certain circumstances set forth in the Declaration of Trust. Termination of the Declaration of Trust. Either or both Funds and/or the Trust may be terminated by the affirmative vote of a majority of the Trustees and consented to by a majority of the Participants entitled to vote. Upon the termination of any Fund or the Trust, and after paying or adequately providing for the payment of all of the Fund's or Trust's (as applicable) liabilities, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Fund or Trust property, in cash or in kind,or partly in cash and partly in kind, among the Participants according to their respective proportionate beneficial interests. Amendment of the Declaration of Trust. The Declaration of Trust may be amended by the affirmative vote of a majority of the Participants entitled to vote or by an instrument in writing, signed by a majority of the Trustees and consented to by not less than a majority of the Participants entitled to vote. The Trustees may, from time to time, by a two-thirds vote of the Trustees, and after fifteen days prior written notice to the Participants, amend the Declaration of Trust without the vote or consent of the Participants,to the extent they deem necessary to conform the Declaration of Trust to the requirements of applicable laws or regulations,or any interpretation thereof by a court or other governmental agency,but the Trustees shall not be liable for failing to do so. • -12- • The name. "The Minnesota Municipal Money Market Fund" is the designation of the Trust under the Declaration of Trust. The Declaration of Trust is filed in the Office of the Secretary of State of Minnesota and provides that the name of the Fund refers to the Participants jointly in such capacity and not personally or as individuals. All persons dealing with a Fund must look solely to the property of such Fund for the enforcement of any claims against the Trust with respect to such Fund, since neither the Trustees, officers, agents, nor Participants assume any personal liability for obligations entered into on behalf of a Fund. FIXED RATE PROGRAM The League of Minnesota Cities has endorsed RBC Dain Rauscher as a dealer and provider of various fixed income securities (including Certificates of Deposit and various other fixed rate instruments) and related financial services to the Participants. As a condition to the League's endorsement of RBC Dain Rauscher for this program, RBC Dain Rauscher has agreed that its compensation in connection with any trade shall not exceed 0.25% of the total purchase price of each fixed rate security. Of the amount so received, RBC Damn Rauscher has agreed to pay the League of Minnesota Cities an amount generally equal to 0.03% of the total purchase price of each fixed rate security. Any Participant that also wishes to participate in the Fixed Rate Program should contact Pat Harris of Voyageur Asset Management at (612) 376-7017 or toll free at (800) 553-2143. Other than the eligibility of Participants to participate in this fixed rate investment program with RBC Damn Rauscher, the fixed rate program is unrelated to the Trust. • • -13- GFOA Sample Investment Policy • The purpose of this sample investment policy is to aid the general membership of the Government Finance Officers Association(GFOA) in the preparation of an investment policy. This sample policy is not intended to supplant an existing policy;rather,it is presented as a model to help investing entities customize a policy to fit their particular needs, constraints and capabilities.In order to accommodate the varying needs of government entities and in order to stimulate conversation at the local level, certain sections of the attached policy include examples of alternative language. These alternative examples may be used in place of or in addition to the first paragraph presented for that section,depending on the goals and objectives of the particular investing entity. For additional information,please read Chapter Three of Investing Public Funds, second edition, a text authored by Girard Miller,with M. Corinne Larson and W.Paul Zorn,and published by the Government Finance Officers Association of the United States and Canada. You are also invited to contact current staff of the GFOA Standing Committee on Cash Management for assistance in modifying and/or writing your government's investment policy.Governments should obtain counsel to ensure compliance with state and local laws,regulations, and other policies concerning the investment of public funds. I. Governing Authority Legality The investment program shall be operated in conformance with federal, state, and other legal requirements, including[insert applicable citations governing the investment of public funds]. 411 II. Scope This policy applies to the investment of all funds,excluding the investment of employees'retirement funds. Proceeds from certain bond issues, as well as separate foundation or endowment assets, are covered by a separate policy.[This section should be modified to specify which assets are excluded from this policy] 1. Pooling of Funds Except for cash in certain restricted and special funds,the [entity]will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. [This paragraph refers to the pooling offunds within a single governmental entity and implies no reference to local government investment pools. This GFOA Sample Investment Policy is not specifically designed for use by local government investment pools, although certain portions of this sample policy may apply.] III. General Objectives The primary objectives, in priority order,of investment activities shall be safety, liquidity, and yield: • 1. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. a. Credit Risk The [entity]will minimize credit risk,which is the risk of loss due to the failure of the security issuer or backer,by: • Limiting investments to the types of securities listed in Section VII of this Investment Policy • Pre-qualifying the financial institutions,broker/dealers, intermediaries,and advisers with which the [entity]will do business in accordance with Section V • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. b. Interest Rate Risk The [entity] will minimize interest rate risk,which is the risk that the market value of securities in the portfolio will fall due to changes in market interest rates,by: • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity • Investing operating funds primarily in shorter-term securities,money market mutual funds, or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy(see section VIII). 2. Liquidity The investment portfolio shall remain sufficiently 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(static liquidity). Furthermore, since all possible cash demands cannot be anticipated,the portfolio should consist largely of securities with active secondary or resale markets(dynamic liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds. 3. Yield The investment portfolio shall be designed 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. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. 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 with the following exceptions: • A security with declining credit may be sold early to minimize loss of principal. • A security swap would improve the quality,yield,or target duration in the portfolio. • Liquidity needs of the portfolio require that the security be sold. Alternative sample language: The[entity's] cash management portfolio shall be designed with the objective of regularly meeting or exceeding a performance benchmark,which could be the average return on three-month U.S. Treasury bills,the state investment pool, a money market mutual fund(specify)or the average rate on Fed funds, whichever is higher. These indices are considered benchmarks for lower risk investment transactions and therefore comprise a minimum standard for the portfolio's rate of return. The • investment program shall seek to augment returns above this threshold, consistent with risk limitations identified herein and prudent investment principles. (See Section IX on performance standards and • selecting a benchmark.) 4. Local Considerations Where possible, funds maybe invested for the betterment of the local economy or that of local entities within the State. The[entity]may accept a proposal from an eligible institution which provides for a reduced rate of interest provided that such institution documents the use of deposited funds for community development projects. Alternative sample language: The[entity] seeks to promote local economic development through various programs and activities. Included is a program of rewarding local financial institutions that increase their commitments to private economic growth and local housing investment. The government's governing board recognizes that our Linked Deposit Program might diminish short-term investment yields by xx basis points(.xx percent)in exchange for potential expansion of the tax base. IV. Standards of Care 1. Prudence The standard of prudence to be used by investment officials shall be the"prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers 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 out in accordance with the terms of this 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." 2. Ethics and Conflicts of Interest Officers and 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 and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the [entity]. 3. Delegation of Autholity Authority to manage the investment program is granted to [designated official,hereinafter referred to as investment officer] and derived from the following: [insert code citation, ordinances,charters or statutes]. Responsibility for the operation of the investment program is hereby delegated to the investment officer,who shall act in accordance with established written procedures and internal • controls for the operation of the investment program consistent with this investment policy. Procedures should include references to: safekeeping, delivery vs.payment,investment accounting, repurchase agreements,wire transfer agreements,and collateral/depository agreements. [Please refer to GFOA's Investment Procedures Manual, 2003.1 No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the investment officer. The investment officer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. V. Authorized Financial Institutions,Depositories,and Broker/Dealers 1. Authorized Financial Institutions,Depositories, and Broker/Dealers A list will be maintained of financial institutions and depositories authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness(e.g., a minimum capital requirement of$10,000,000 and at least five years of operation). These may include "primary"dealers or regional dealers that qualify under Securities and Exchange Commission(SEC)Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: • Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines • Proof of National Association of Securities Dealers(NASD)certification(not applicable to Certificate of Deposit counterparties) • Proof of state registration • Completed broker/dealer questionnaire(not applicable to Certificate of Deposit counterparties) • Certification of having read and understood and agreeing to comply with the [entity's] investment • policy. • Evidence of adequate insurance coverage. An annual review of the financial condition and registration of all qualified financial institutions and broker/dealers will be conducted by the investment officer. (See Appendix for the GFOA Recommended Practice on"Governmental Relationships with Securities Dealers.") 2. Minority and Community Financial Institutions From time to time, the investment officer may choose to invest in instruments offered by minority and community financial institutions. In such situations, a waiver to certain parts of the criteria under Paragraph 1 may be granted. All terms and relationships will be fully disclosed prior to purchase and will be reported to the appropriate entity on a consistent basis and should be consistent with state or local law. These types of investment purchases should be approved by the appropriate legislative or governing body in advance. VI. Safekeeping and Custody 1. Delivery vs. Payment All trades of marketable securities will be executed by delivery vs.payment(DVP)to ensure that securities are deposited in an eligible financial institution prior to the release of funds. 2. Safekeeping Securities will be held by a [centralized] independent third-party custodian selected by the entity as • evidenced by safekeeping receipts in the[entity's]name. The safekeeping institution shall annually provide a copy of their most recent report on internal controls(Statement of Auditing Standards No. • 70,or SAS 70). 3. Internal Controls The investment officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the [entity]are protected from loss,theft or misuse. Details of the internal controls system shall be documented in an investment procedures manual and shall be reviewed and updated annually. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that(1)the cost of a control should not exceed the benefits likely to be derived and(2)the valuation of costs and benefits requires estimates and judgments by management. The internal controls structure shall address the following points: • Control of collusion • Separation of transaction authority from accounting and recordkeeping • Custodial safekeeping • Avoidance of physical delivery securities • Clear delegation of authority to subordinate staff members • Written confirmation of transactions for investments and wire transfers • Dual authorizations of wire transfers • Development of a wire transfer agreement with the lead bank and third-party custodian Accordingly,the investment officer shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures or alternatively,compliance should • be assured through the [entity] annual independent audit. Alternative sample language. The investment officer shall establish a system of internal controls,which shall be documented in writing. The internal controls shall be reviewed by the investment committee,where present, and with the independent auditor. The controls shall be designed to prevent the loss of public funds arising from fraud,employee error,misrepresentation by third parties,unanticipated changes in financial markets,or imprudent actions by employees and officers of the [entity.] VII. Suitable and Authorized Investments 1. Investment Types Consistent with the GFOA Policy Statement on State and Local Laws Concerning Investment Practices,the following investments will be permitted by this policy and are those defined by state and local law where applicable: • U.S.Treasury obligations which carry the full faith and credit guarantee of the United States government and are considered to be the most secure instruments available; • U.S.government agency and instrumentality obligations that have a liquid market with a readily determinable market value; • Canadian government obligations(payable in local currency); • Certificates of deposit and other evidences of deposit at financial institutions, • Bankers'acceptances; • Commercial paper,rated in the highest tier(e.g.,A-1,P-1,F-1, or D-1 or higher)by a nationally recognized rating agency; • Investment-grade obligations of state,provincial and local governments and public authorities; • Repurchase agreements whose underlying purchased securities consist of the aforementioned • instruments; • Money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities; and • Local government investment pools either state-administered or developed through joint powers statutes and other intergovernmental agreement legislation. Investment in derivatives of the above instruments shall require authorization by the appropriate governing authority. (See the GFOA Recommended Practice on "Use of Derivatives by State and Local Governments,"2002.) 2. Collateralization Where allowed by state law and in accordance with the GFOA Recommended Practices on the Collateralization of Public Deposits, full collateralization will be required on all demand deposit accounts, including checking accounts and non-negotiable certificates of deposit. (See GFOA Recommended Practices in Appendix.) 3. Repurchase Agreements Repurchase agreements shall be consistent with GFOA Recommended Practices on Repurchase Agreements. (See GFOA Recommended Practices in Appendix.) VIII.Investment Parameters 1. Diversification • The investments shall be diversified by: • limiting investments to avoid overconcentration in securities from a specific issuer or business sector(excluding U.S.Treasury securities), • limiting investment in securities that have higher credit risks, • investing in securities with varying maturities,and • continuously investing a portion of the portfolio in readily available funds such as local government investment pools(LGJPs),money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. (See the GFOA Recommended Practice on "Diversification of Investments in a Portfolio" in Appendix.) Alternative samples: 1. Diversification It is the policy of the [entity] to diversify its investment portfolios. To eliminate risk of loss resulting from the over-concentration of assets in a specific maturity,issuer, or class of securities, all cash and cash equivalent assets in all [entity] funds shall be diversified by maturity, issuer, and class of security. Diversification strategies shall be determined and revised periodically by the investment committee/investment officer for all funds except for the employee retirement fund. In establishing specific diversification strategies,the following general policies and constraints shall apply: Portfolio maturities shall be staggered to avoid undue concentration of assets in a specific maturity sector. Maturities selected shall provide for stability of income and reasonable liquidity. • For cash management funds: • • Liquidity shall be assured through practices ensuring that the next disbursement date and payroll date are covered through maturing investments or marketable U.S. Treasury bills. • Positions in securities having potential default risk(e.g., commercial paper) shall be limited in size so that in case of default,the portfolio's annual investment income will exceed a loss on a single issuer's securities. • Risks of market price volatility shall be controlled through maturity diversification such that aggregate price losses on instruments with maturities exceeding one year shall not be greater than coupon interest and investment income received from the balance of the portfolio. • The investment committee/investment officer shall establish strategies and guidelines for the percentage of the total portfolio that may be invested in securities other than repurchase agreements,Treasury bills or collateralized certificates of deposit. The committee shall conduct a quarterly review of these guidelines and evaluate the probability of market and default risk in various investment sectors as part of its considerations. AND/OR The following diversification limitations shall be imposed on the portfolio: • Maturity: No more than xx percent of the portfolio may be invested beyond 12 months, and the weighted average maturity of the portfolio shall never exceed one year. • • Default risk: No more than xx percent of the overall portfolio may be invested in the securities of a single issuer,except for securities of the U.S.Treasury. No more than xx percent of the portfolio may be invested in each of the following categories of securities: a) Commercial paper, b) Negotiable certificates of deposit, c) Bankers' acceptances, d) Any other obligation that does not bear the full faith and credit of the United States government or which is not fully collateralized or insured and e) No more than xx percent of the total portfolio may be invested in the foregoing instruments at any time. • Liquidity risk: At least xx percent of the portfolio shall be invested in overnight instruments or in marketable securities which can be sold to raise cash in one day's notice. 2. Maximum Maturities To the extent possible,the [entity] shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow,the [entity]will not directly invest in securities maturing more than five(5)years from the date of purchase or in accordance with state and local statutes and ordinances.The [entity] shall adopt weighted average maturity limitations (which often range from 90 days to 3 years), consistent with the investment objectives. Reserve funds and other funds with longer-term investment horizons may be invested in securities exceeding five(5)years if the maturities of such investments are made to coincide as nearly as • practicable with the expected use of funds. The intent to invest in securities with longer maturities shall be disclosed in writing to the legislative body. (See the GFOA Recommended Practice on "Maturities of Investments in a Portfolio"in Appendix.) Because of inherent difficulties in accurately forecasting cash flow requirements,a portion of the • portfolio should be continuously invested in readily available funds such as local government investment pools,money market funds,or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing obligations. 3. Competitive Bids The investment officer shall obtain competitive bids from at least two brokers or financial institutions on all purchases of investment instruments purchased on the secondary market. IX. Reporting 1. Methods The investment officer shall prepare an investment report at least quarterly[or monthly], including a management summary that provides an analysis of the status of the current investment portfolio and the individual transactions executed over the last quarter[or month]. This management summary will be prepared in a manner which will allow the [entity] to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report should be provided to the entity's chief administrative officer,the legislative body,the investment committee and any pool participants. The report will include the following: • Listing of individual securities held at the end of the reporting period. • Realized and unrealized gains or losses resulting from appreciation or depreciation by listing the cost and market value of securities over one-year duration that are not intended to be held until maturity(in accordance with Governmental Accounting Standards Board(GASB) • requirements). • Average weighted yield to maturity of portfolio on investments as compared to applicable benchmarks. • Listing of investment by maturity date. • Percentage of the total portfolio which each type of investment represents. Alternative sample: 1. The investment officer shall submit quarterly an investment report that summarizes recent market conditions, economic developments and anticipated investment conditions. The report shall summarize the investment strategies employed in the most recent quarter, and describe the portfolio in terms of investment securities,maturities,risk characteristics and other features. The report shall explain the quarter's total investment return and compare the return with budgetary expectations. The report shall include an appendix that discloses all transactions during the past quarter: The report shall be in compliance with state Iaw and shall be distributed to the investment committee and others as required by law. Each quarterly report shall indicate any areas of policy concern and suggested or planned revision of investment strategies. Copies shall be transmitted to the independent auditor. Within 40 days of the end of the fiscal year, the investment officer shall present a comprehensive annual report on the investment program and investment activity. The annual report shall include 12-month and separate quarterly comparisons of return and shall suggest • policies and improvements that might be made in the investment program. Alternatively,this report may be included within the [entity] annual Comprehensive Annual Financial Report. 11111 2. Performance Standards The investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. A series of appropriate benchmarks shall be established against which portfolio performance shall be compared on a regular basis. The benchmarks shall be reflective of the actual securities being purchased and risks undertaken, and the benchmarks shall have a similar weighted average maturity as the portfolio. Alternative sample: The[entity's] cash management portfolio shall be designed with the objective of regularly meeting or exceeding a selected performance benchmark,which could be the average return on three-month U.S.Treasury bills,the state investment pool,a money market mutual fund [specify] or the average rate of Fed funds. These indices are considered benchmarks for lower risk investment transactions and therefore comprise a minimum standard for the portfolio's rate of return. 3. Marking to Market The market value of the portfolio shall be calculated at least quarterly[or monthly] and a statement of the market value of the portfolio shall be issued at least quarterly[or monthly]. This will ensure that review of the investment portfolio,in terms of value and price volatility,has been performed consistent with the GFOA Recommended Practice on "Mark-to-Market Practices for State and Local Government Investment Portfolios and Investment Pools." (See GFOA Recommended Practices in Appendix.)In defining market value,considerations should be given to the GASB Statement 31 • pronouncement. X. Policy Considerations 1. Exemption Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirements of this policy. At maturity or liquidation, such monies shall be reinvested only as provided by this policy. Alternative sample: Any investment currently held that does not meet the guidelines of this policy shall be temporarily exempted from the requirements of this policy. Investments must come in conformance with the policy within six months of the policy's adoption or the governing body must be presented with a plan through which investments will come into conformance. 2. Amendments This policy shall be reviewed on an annual basis. Any changes must be approved by the investment officer and any other appropriate authority, as well as the individuals charged with maintaining internal controls. XI. Approval of Investment Policy The investment policy shall be formally approved and adopted by the governing body of the [entity] and • reviewed annually. XII. List of Attachments • The following documents, as applicable,are attached to this policy: • Listing of authorized personnel, • Relevant investment statutes and ordinances, • Listing of authorized broker/dealers and financial institutions, • Internal Controls • Glossary XIII. Other Documentation • Master Repurchase Agreement, other repurchase agreements and to-party agreements, • Broker/Dealer Questionnaire, • Credit studies for securities purchased and fmancial institutions used, • Safekeeping agreements, • Wire transfer agreements, • Sample investment reports, • Methodology for calculating rate of return, • GFOA Recommended Policies. III III • • Government Finance Officers Association Recommended Practice Use of Commercial Paper(2001 and 2007) (CASH) Background. Commercial paper is a short-term,unsecured promissory note issued by corporations for working capital, for general cash flow,and for financing receivables. Commercial paper has maturities ranging anywhere from 1 to 270 days. By federal law,commercial paper issues are exempt from registration with the U.S. Securities and Exchange Commission. Nationally recognized statistical rating organizations(NRSROs)routinely rate commercial paper and regularly review the strength of the credit quality. Commercial paper may be sold directly to investors by the issuing company(direct issued)or by the underwriting brokerage firm (dealer placed). Commercial paper is used by many government entities as a short-term investment for funds not immediately required,and to provide diversification and competitive rates of return. Typically, governments purchase commercial paper with a buy and hold until maturity strategy;however,there is a secondary market that can be utilized for sales prior to maturity. State statutes vary as to the extent or ability of governments to utilize commercial paper. Recommendation. The Government Finance Officers Association(GFOA)recommends that if commercial paper is used as part of an investment program of state and local governments, government • investors are highly encouraged to develop policies and procedures to appropriately manage the risk of such investments. To protect public funds invested in commercial paper, government investors should consider practices such as: • diversification by industry sector or type • limitation on percentage of portfolio comprised of commercial paper • limitation on percentage of commercial paper issued by any one issuer,industry, or type • limitation of investments to shorter maturities reflecting the most active part of the commercial paper market and providing the least opportunity for credit quality changes • recognizing different types of commercial paper, such as corporate promissory notes,asset- backed paper, funding paper,or extendible paper(also called liquidity notes or structured notes) and determining the appropriateness of each for the government's portfolio • limitation to first tier short-term credit ratings by two NRSROs(for example,A-1,P-1,F-1 or better) • evaluation of underlying credit enhancements such as bank lines of credit or insurance in addition to the dual credit ratings • maintenance of information on each commercial paper issue in the portfolio • monitoring of ratings and rating outlook analyses • References • • GFOA Sample Investment Policy,2003. • Investing Public Funds, Second Edition,Girard Miller with M. Corinne Larson and W.Paul Zorn, GFOA, 1998. • An Elected Official's Guide to Investing,M. Corinne Larson, GFOA, 1996. Approved by the GFOA's Executive Board on March 2, 2007. • • Government Finance Officers Association Recommended Practice Diversification of Investments in a Portfolio (2002 and 2007) (CASH) Background. Government investors have a fiduciary responsibility to protect public funds and to prudently manage their investments in order to achieve the investment objectives of safety,liquidity,and return. Generally,greater risk in a portfolio increases the opportunity for higher returns. However, greater risk also increases the volatility of the returns,which is another definition of risk. The effective management of risk in a portfolio is critical for achieving an entity's investment objectives. A useful strategy for managing risk in a portfolio is through diversification. To this end, a government should establish a target risk profile. In establishing a risk profile, an entity considers its investment objectives and constraints,risk tolerances,liquidity requirements and the current risk/reward characteristics of the market. The profile should be adjusted as needed to changes in any of those considerations. Such a profile provides a framework and discipline for making individual investment decisions that manage the risk and create the structure of a portfolio. The government entity's risk profile, in turn,helps it determine appropriate levels of diversification. Diversification of investments in a portfolio is based on the different types of risk—primarily interest rate or market risk,liquidity risk and credit risk. Diversification is achieved by investing in a variety of securities with dissimilar risk characteristics that respond differently to changes in the market. Areas where diversification can be achieved include the maturity distribution in a portfolio(market and liquidity risk), sector allocation(credit risk), issuer allocation(credit risk), and the structures(non- callable vs. callable)of securities(market and liquidity risk). Recommendation. The Government Finance Officers Association(GFOA)recommends that state and local governments properly manage the risk in their portfolios to achieve their investment objectives and comply with their investment constraints. GFOA further recommends the use of diversification in a portfolio as an important strategy for managing risk. Diversification strategies can be implemented through the following steps: • carefully and clearly defining what the objectives safety, liquidity and return mean to the government entity • preparing a cash flow projection to determine liquidity needs and the level and distribution of risk that is appropriate for the portfolio • considering political climate, stakeholders' view toward risk, and risk tolerances • ensuring liquidity to meet ongoing obligations by investing a portion of the portfolio in readily available funds, such as Local Government Investment Pools(LGIPs),money market funds,or overnight repurchase agreements • establishing limits on positions in specific securities to protect against default risk • establishing limits on specific business sectors • developing strategies and guidelines for investments in single class of securities(such as commercial paper or bankers acceptances) • • limiting investments in securities that have higher credit and/or market risks(such as derivatives) • limiting particular structures (i.e. optionality, amortizing components, coupons,issue sizes); • defining parameters for maturity/duration ranges • establishing a targeted risk profile for the portfolio based on investment objectives and constraints,risk tolerances, liquidity requirements and the current risk/reward characteristics of the market. References • GFOA Sample Investment Policy, 2003. • Investing Public Funds, Second Edition,Girard Miller with M. Corinne Larson and W. Paul Zorn, GFOA, 1998. • An Elected Official's Guide to Investing, M. Corinne Larson,GFOA, 1996. Approved by the GFOA's Executive Board, March 2,2007. • • • • G Government Finance Officers Association Recommended Practice Use of Local Government Investment Pools (LGIPs) (2007)(CASH) Background. In many states,the state treasurer or an authorized governing board(a local government such as a county)oversees a pooled investment fund that operates like a mutual fund for the exclusive benefit of governments within that state. These state pools typically combine the cash of participating jurisdictions and invest the cash in securities allowed under the state's laws regarding government investments. By pooling funds,participating governments benefit from economies of scale,full-time portfolio management,diversification,and liquidity(especially in the case of pools that seek a constant net asset value of$1.00). Interest is normally apportioned to the participants on a daily basis, proportionate to the size of the investment. Most pools offer a check-writing or wire transfer feature that adds value as a cash management tool. Government Sponsored versus Joint Powers Agreement Pools:Local government investment pools (LGIPs)may be authorized under state statutes and sponsored by the state or local governments or may be set up through intergovernmental agreements known as"joint powers"agreements. Government investment pools operated for local governments generally are authorized by statutes and permit the • state or local treasurer or appropriate agency to pool investments and distribute income to the participating local governments. In some cases, state funds are commingled with local government funds; in other cases,the pools consist only of local government funds. Generally,the pool's portfolio manager may purchase only the same investment instruments permitted for state and local governments in that state. A few states permit a broader list of allowable instruments. Joint-powers agreement pools have been established in several states by local governments joining together to sponsor the creation of LGIPs that operate independent of the state government. The investment authorization to pool funds is generally derived from state statutes that allow governments to perform collectively any service or administrative function that they may undertake individually. A board of trustees,normally made up of public officials,oversees these pools and typically selects a financial services firm to provide services such as the following: investment management,custodial services,participant record keeping,independent audits,and legal services. These pools may invest only in securities otherwise allowed to individual governments. Not All Pools Are the Same: Although there are many similarities between the various LGIPs,there are also many differences. One such significant difference among pools that must be understood before placing money in them are their investment objectives. When LGIPs were first created,most emulated money market mutual funds with the objectives of maintaining a"constant"Net Asset Value(NAV)of $1.00 and providing excellent liquidity for the investor. Such LGIPs invest in short-term securities with average maturities sufficiently short to avoid market price risk. The"constant"NAV pools are appropriate investments for funds that must be liquid and have virtually no price volatility. i By comparison,there are also government investment pools with the investment objective of maximizing return. These pools invest in longer-term securities, subjecting their portfolios and their • participants to greater market price volatility. These pools are variable Net Asset Value(NAV)pools and introduce market risk to the investor through a fluctuating NAV. The principal invested in the pool may not be the same principal returned to the investor depending on the movement of interest rates. These pools would not be appropriate for funds that must be liquid and stable. They may be appropriate for lo nger-term strategies. Some other differences among pools include their legal structure,authorized investments,procedures for depositing and withdrawing money, and their services. Each pool has a process that a participant must complete,including documents to be signed and banking information to be provided,in order to establish an account. Sources of information for evaluating pools may include a pool offering statement, investment policy or audited financial statements. Ratings for LGIPs: Investors should remember that LGIPs are not registered with the Securities and Exchange Commission(SEC) and are exempt from SEC regulatory requirements because they fall under a governmental exclusion clause. While this exemption allows pools greater flexibility,it also reduces investor protection. Investments in these pools are not insured or guaranteed and substantial losses have occurred in the past. Some rating agencies rate LGIPs using the same criteria as money market mutual funds. These ratings are based on safety of principal and ability to maintain a NAV of$1. Pool ratings can provide an additional method of due diligence. Recommendation. The Government Finance Officers Association(GFOA)makes the following recommendations to government investors when using Local Government Investment Pools(LGIPs): 1. Government investors should confirm LGIPs are eligible investments under governing law • and the government's investment policy. 2. Government investors should fully understand the investment objectives, legal structure and operating procedures of the investment pool before they place any money in the pool. When evaluating an LGIP, investors should read the pool's offering statement,investment policy, audited financial statements carefully. 3. Particular attention must be paid to the investment objectives of a pool to determine whether a pool seeks to maintain a constant NAV of$1.00 or could have a fluctuating NAV. This information is essential in order to determine which pools are appropriate for liquidity strategies(constant NAV) and which ones are only appropriate for longer-term strategies (fluctuating NAV). 4. The pool's list of eligible securities should be reviewed to determine compliance with the participating government's investment policy. Portfolio maturity restrictions and diversification policies should be evaluated to determine potential market and credit risks. 5. Portfolio pricing practices should be evaluated. 6. Custodial policies(e.g.,delivery versus payment) should be reviewed. 7. The qualifications and experience of the portfolio manager,management team and/or investment adviser should be evaluated. 8. The earnings performance history should be studied and reviewed relative to other investment alternatives. On constant NAV LGIP funds,the current yield of the portfolio can be compared with competitive institutional money market funds,or overnight repurchase agreement rates. Standard& Poor's releases an index of LGIPs on a weekly basis that reports the average 7-and 30-day yields and average maturities of LGIPs holding its highest ratings i • (AAAm and AAm). Any pool with above-average yields or longer maturities should be further evaluated for risk. 9. Variable NAV LGIPs should be evaluated in relation to appropriate benchmarks. 10. Although ratings are not mandatory at this time, governments should seek LGIPs with the highest ratings,where possible. 11. Procedures for establishing an account,making deposits and withdrawals, and allocating interest earnings should be fully understood. There may be limits to the number of deposits and withdrawals in a month. There may also be dollar limits to deposits,withdrawals and balances. Deposits or withdrawals may require advanced notification, especially if they are large. If so, investors should be aware of the deadlines. 12. Any additional services offered by an LGIP should be considered. For example: checking, wire transfers,issuing paying agent services, setting up multiple accounts for an entity,and arbitrage accounting for bond funds. 13. Government investors should confirm that an LGIP provides regular,detailed reporting to pool participants and follows generally accepted reporting standards. References • Investing Public Funds, Second Edition, Girard Miller with M. Corinne Larson and W. Paul Zorn, GFOA, 1998 • An Elected Officials Guide to Investing,Edition, M. Corinne Larson, GFOA, 1996 • Standard&Poor's Guide to LGIPs Approved by the GFOA's Executive Board on March 2,2007. • • GFOA Recommended Practice • Use of Derivatives by State and Local Governments for Cash Operating and Reserve Portfolios(1994 and 2002) Background. Derivative products are financial instruments created from or whose value depends on (is derived from) the value of one or more underlying assets or indexes of asset values. Derivatives include instruments or features such as collateralized mortgage obligations (CMOs), interest-only (IOs) and principal-only (POs) securities, forwards, futures, currency and interest rate swaps, options, floaters/inverse floaters, and caps/floors/collars. It still remains the responsibility of each government to determine what constitutes a derivative product and what is allowable by policy and statute. Recommendation. The Government Finance Officers Association (GFOA) urges state and local government finance officers to exercise extreme caution in the use of derivatives and to consider their use only when they have developed a sufficient understanding of the products and the expertise to manage them. Because new derivative products are increasingly complex, state and local governments should use these instruments only if they can evaluate the following factors, among others, to determine their appropriateness: 1. Governmental entities must observe the objectives of sound asset and liability management policies that ensure safety, liquidity, and yield within legally allowable investments. Because of the risks involved, the use of derivatives by governmental entities should receive particular scrutiny. Certain derivative products may not be appropriate for all governmental investors. Characteristics of such products can • include high price volatility, illiquid markets, products that are not market-tested, highly leveraged products, products requiring a high degree of sophistication to manage, and products that are difficult to value. 2. Governmental entities should understand that state and local laws may not specifically address the use of derivatives and examine such considerations as • the constitutional and statutory authority of the governmental entity to execute derivative contracts, • the potential for violating constitutional or statutory provisions limiting the entity's authority to incur debt resulting from the transaction, and • the application of the governmental entity's procurement statutes to derivative transactions. 3. Governmental entities should be aware of all the risks associated with use of derivatives, including counterparty credit, custodial, market, settlement, and operating risk. 4. Governmental entities should establish internal controls for each type of derivative in use to ensure that these risks are adequately managed. For example, • the entity should provide a written statement of purpose and objectives for derivative use; • written procedures should be established that provide for periodic monitoring of derivative instruments; • • • managers should receive periodic training and have sufficient expertise and technical resources to oversee derivative programs; • recordkeeping systems should be sufficiently detailed to allow governing bodies, auditors, and examiners to determine if the program is functioning in accordance with established objectives; managers should report regularly on the use of derivatives to their governing body and appropriate disclosure should be made in official statements and other disclosure documents; and • reporting on derivative use should be in accordance with generally accepted accounting principles, and because use of these instruments is a complex matter, early discussion with public accountants is essential to determine if specialized reporting may be required. 5. Governmental entities should be aware if their broker/dealer is merely acting as an agent or intermediary in a derivatives transaction or is taking a proprietary position. Possible conflicts of interest should be taken into consideration before entering into a transaction. 6. Governmental entities should be aware that there may be little or no pricing information or standardization for some derivatives. Competitive price comparisons are recommended before entering into a transaction. 7. Governmental entities should exercise caution in the selection of broker/dealers or investment managers and ensure that these agents are knowledgeable about, understand and provide disclosure regarding the use of derivatives, including • benefits and risks. The entity should secure written acknowledgment from broker/dealers that they have received, read, and understood the entity's debt and investment policies, including whether derivatives are currently authorized under the entity's investment policy and that the broker/dealer or investment manager has ascertained that the recommended product is suitable for the governmental entity. 8. Governmental entities are responsible for ensuring this same level of safeguards when derivative transactions are conducted by a third party acting on behalf of the governmental entities. 9. Government Entities should analyze the materiality of a transaction closely to determine if it might affect a bond or other credit— related rating of such entity. Rating agencies should be notified at the appropriate time, before a transaction is completed. References • A Public Investor's Guide to Money Market Instruments, Second Edition, edited by M. Corinne Larson, GFOA, 1994. • An Elected Official's Guide to Investing, M. Corinne Larson, GFOA, 1995. Approved by the Committee on Cash Management,June 15, 2002 Approved by the Executive Committee,October 25,2002. • GD Government Finance Officers Association Recommended Practice Managing Market Risk in a Portfolio(2007) (CASH) (formerly known as Maturities of Investments in a Portfolio- 1997 and 2002) Background.Fixed-income securities are investment instruments that provide a stream of cash flows in the form of coupon and principal payments. Typically, they are issued with maturities ranging from overnight to 30 years. A security's stated maturity is the date on which its final interest and principal payments are due. There are several general structures for fixed-income securities: • Bullet securities—the principal payment will be paid in one payment at maturity. They are - issued without any option that could cause redemption prior to the stated maturity; • Securities with options—issued with 1 of 2 options that could change the stream of cash flows. Call options give the issuer the right to redeem bonds prior to maturity in accordance with the call schedule. Put options give the investor the right to submit a bond for redemption prior to maturity in accordance with the rules of the put; and • Amortizing securities—pay a portion of the principal with each interest payment throughout • the life of the bond (e.g.—mortgage securities, asset-backed securities). They have a stated final maturity and an average maturity, and can also have early redemption options. Market risk refers to the effect that changing interest rates have on the value of a fixed-income security. There is an inverse relationship between interest rates and price. As interest rates rise,the value of a security falls. The reverse is true as interest rates fall. The extent of price change is a function of the length of term to maturity, the level of interest rates and the size of the coupon. Of these factors,the most important is the length of term to maturity. Generally, the longer the maturity of a security,the greater its market risk as measured by price volatility. Longer maturities have greater volatility because as the time to maturity increases, each change in interest rates has a greater impact on the present value of a security. The size of a security's coupon will also impact price volatility. When analyzing securities with the same maturity, securities with low coupons will have greater price volatility than securities with high coupons. The security with the greatest price volatility for any given maturity is a zero coupon security. Market risk is generally the greatest risk that a government investor manages. Therefore,it is important to understand fully the maturity structure of securities before investing. To ensure appropriate liquidity and to reduce interest rate risk in operating portfolios, most state and local governments: 1. Limit the maximum maturity for securities they purchase; 2. Ensure that funds are available for scheduled disbursement by developing cash flow projections and properly structuring the maturities in a portfolio according to the expected cash flows; and 3. Ensure that a security can be sold with ease and minimal cost(price disruption)to the investor by investing in high grade, actively traded fixed-income securities. • Maximum maturity and weighted average maturity limits relate directly to an entity's statute and policy constraints,investment objectives and cash flow projections. Although setting maximum maturity constraints may help limit the market risk in a portfolio, it is not generally considered to be the most effective way for managing market risk and understanding the potential price volatility of either an individual security or an entire portfolio. A widely used measure of market risk in the investment industry is modified duration. Durations can be obtained from professional market resources such as Bloomberg. For governments without access to these resources,broker-dealers may send documentation of the durations. Duration is more comprehensive and accurate in measuring market risk than the maturity of a security for two important reasons. First, duration takes into consideration all cash flows(interest and principal payments)of a fixed-income security using their present values. Maturity as a market risk measure only considers the principal payment of a security using its future value. Second,modified duration is a multiplier that measures the approximate percentage change in the value of a security or portfolio given a 1% (100 basis points)move in interest rates. For example,if a security has a modified duration of 1.74 and interest rates rose by 50 basis points,the security would experience approximately a-0.87%change in value. Formula and calculation: (basis points change in yield %change in market value=(-1)*x(modified duration)x 100 -0.87%_(-1)x(1.74)x( 100 ) * multiplied by -1 because of inverse relationship between price and interest rates With this type of price volatility analysis, a government investor can determine more accurately the amount of market risk in a security or portfolio. Weighted average maturity and weighted average duration in a portfolio are calculated using the maturity and duration values of all the securities in a portfolio. Weighted average maturity allows a government to verify compliance with investment constraints since most investment policies and state statutes have maximum weighted average maturity limitations. Weighted average duration is considered industry wide as an acceptable measure of market risk in a portfolio. As such,it can provide the government investor with valuable information for managing the market risk in a portfolio. The Governmental Accounting Standards Board(GASB)in GASB Statement No. 40 requires a disclosure of all risks associated with a government entity's portfolio, including market risk. Weighted average maturity and weighted average duration are two of five accepted methods for disclosing a portfolio's market risk. (A description of the other three is beyond the scope of this Recommended Practice.) In accordance with the GASB fair market value reporting requirements in GASB Statement No. 31, a government entity's portfolio could show unrealized losses or gains for any reporting period. Recommendation. The Government Finance Officers Association(GFOA)makes the following specific recommendations to government investors with respect to managing market risk in their operating portfolios: II/ 1. State and local governments must comply with applicable sections of the legislative statutes • pertaining to investing public funds along with all investment policy constraints. 2. It is recommended that cash flow projections be developed and updated regularly in order to determine what dollar amount of the portfolio needs to remain liquid to meet disbursement obligations within a six month period,as well as what dollar amount is available for longer-term investing to the maximum maturity as stated in the investment policy. 3. The portfolio should be structured to provide sufficient liquidity for anticipated cash flow requirements by continuously investing a portion of the portfolio in money market type investments such as local government investment pools,money market mutual funds,overnight repurchase agreements and money market securities. 4. The maturity structure of a security should be fully understood. Prior to purchase,the government should confirm compliance with its investment constraints and overall investment strategy. If a security has options associated with it such as call options,the structure of the option should be analyzed to determine its potential impact on market risk through an analysis such as option adjusted spread(OAS) analysis. The stated maturity date should always be used to determine compliance with maximum maturity constraints,not any potential call dates unless an official announcement of a call has been released. 5. Governments should adopt weighted average maturity limitations and/or weighted average duration targets, which often range from 90 days to three years, consistent with the government's investment objectives,constraints, cash flow needs and risk tolerances. The weighted average maturity limitations can be used to limit the market risk in a portfolio consistent with the constraints in the governing state statutes and the investment policy. The weighted average duration targets can be used to manage market risk in a portfolio. 6. Unless matched to a specific cash requirement and permitted by a government's investment policy,governments should not directly invest in securities with maturities greater than five ID years. The maturities of such investments should coincide as nearly as practicable with the expected use of funds. The government should follow the process identified in its investment policy, including adhering to procedures for authorizing longer-term investments and for providing any disclosures that may be required. References • GFOA Sample Investment Policy, 2003. • Investing Public Funds, Second Edition,Girard Miller with M.Corinne Larson and W. Paul Zorn, GFOA, 1998. • www.GASB.org for GASB Statement No. 31 and Statement No. 40 Approved by the GFOA's Executive Board,March 2,2007. • Market Risk(Volatility) Ratings(1995) Background. State and local governments have long relied on credit ratings as an independent analytical source to gauge the credit risk of an investment option. However, credit risk analysis alone is not sufficient to safeguard against the assumption of other risk components, including market, interest rate, and liquidity risks. Through the securitization and structuring process,AAA rated securities and funds also may carry extreme market and other risks that are wholly unaddressed by credit ratings. Rating agencies now provide market risk ratings that evaluate the volatility of the security under a wide range of potential interest rate and mortgage prepayment scenarios. Risk components, such as interest rate,prepayment, credit, spread and liquidity, and currency risks are analyzed to assess how aggressively a fund uses derivatives and leveraging, and what risks their use presents to fund managers and investors in the fund. Results indicate the degree of potential variability in the prospective fund performance. Historical performance and volatility of fund returns relative to appropriate benchmarks also are evaluated. When applied to individual collateralized mortgage obligations (CMOs), market risk ratings provide a useful benchmark to governmental entities as they establish guidelines for prudent management of derivative investments. • Recommendation. The Government Finance Officers Association (GFOA) encourages state and local governments to augment information they receive from brokers,dealers, or advisors with independent research when conducting due diligence of potential investments. Information sources include historical trading ranges, trend and volume data, brokerage firm research,cash flow and present value analysis, and credit ratings and research. • GFOA encourages investment in only those CMOs and funds that seek market risk ratings from rating agencies to provide comprehensive disclosure of risks to public investors. 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