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HomeMy WebLinkAbout5.F.5. Revised Investment Policy-Res. No. 6541 CITY OF SHAKOPEE 5.F:S'; Memorandum TO: Mayor and Council CO~JSEf~r Mark McNeill, City Administrator FROM: Gregg Voxland, Finance Director .. SUBJ: Revised Investment Policy Res. No. 6541 DATE: November 27, 2006 Introduction The attached investment policy is brought to Council just for a general updating of the policy. There are no substantive changes to the policy. Action Offer Resolution No. 6541, A Resolution Adopting An Investment Policy And Repealing Resolution No. 5220 and move its adoption. Gre/i'Joxland Finance Director h:\finance\cash\invest06.doc RESOLUTION No. 6541 A Resolution Adopting An Investment Policy And Repealing Resolution No. 5220 WHEREAS, City Council has previously adopted Resolution No. 5220 A Resolution Adopting An Investment Policy And Repealing Resolution No. 4374, and, WHEREAS, it is in the best interest of the City to amend and update the investment policy, NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SHAKOPEE, MINNESOTA, that Resolution No. 5220, A Resolution Adopting An Investment Policy And Repealing Resolution No. 4374 is hereby by repealed. BE IT FURTHER RESOLVED that the attached Investment Policy dated November, 2006 is hereby adopted. Adopted in session of the City Council of the City of Shakopee, Minnesota, held this day of December, 2006. Mayor of the City of Shakopee ATTEST: City Clerk CITY OF SHAKOPEE, MINNE.SOTA INVESTMENT POLICY November 2006 I. Scope II. objective 1- Safety 2. Liquidity 3. Yield III. Standards of Care 1. Prudence 2. Ethics and Conflicts of Interest 3. Delegation of Authority IV. Safekeeping and Custody 1. Authorized Financial Dealer and Institution 2. Internal Controls 3. Deli very vs. Payment (DVP) V. Suitable and Authorized Investments 1. Investment Types 2. Collateralization 3. Repurchase Agreements VI. Investment Parameters 1. Diversification 2. Maximum Maturities VII. Reporting 1. Methods 2. Marking to Market VIII. Policy IX. Investment Pools 1. Definition 2. Questionnaire X. Depositories 1 I. Scope This policy applies to the investment portfolio under the authority and control of the City Treasurer/Finance Director of the City of Shakopee. For purposes of investing,. this portfolio is separated between the Short- Term Operating funds and Longer-Term funds and is limited by the objectives and restrictions of this investment policy. Excluded are funds of the Fire Relief Association and Shakopee Public Utility Commission which are controlled by their own boards, funds held in escrow by agents which are normally covered by the terms of the escrow agreement and investment pools such as the 4M Fund, state Board of Investment and the cash flow pooling of the safe keeping agent (see section IX on investment pools) . pooling of Funds Except for cash in certain restricted and special funds, the City of Shakopee 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. II. General Objectives The primary objectives, in priority order, on investment activities shall be: 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 of Shakopee will minimize credit risk, the risk of loss due to failure of the security issuer or backer, by: . Limiting investments to the safest types of securities; . Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisors with which the city will do business; . Diversifying the investment portfolio so that the potential losses on individual securities will be minimized. B. Interest Rate Risk The City of Shakopee will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates, by: . Structuring the Short-Term 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 Short-Term funds primarily in shorter-term securities, money market mutual funds, or similar investment pools. . Evaluating the Longer-Term investment portfolio against an agreed upon benchmark that meets the risk tolerances of the City of Shakopee and its investment policy. 2 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 can not be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). A portion of the portfolio also 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 investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities should not be sold prior to maturity with the following exceptions: 1) A security with declining credit may be sold early to minimize the loss of principal. 2) A security swap would improve the quality, yield, or target duration in the portfolio. 3) Liquidity needs of the portfolio require that the security be sold. 4) There is a definite economic benefit to be realized. II J:. 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. 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 3 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 City of Shakopee. 3. Delegation of Authority Authority and responsibility for the operation of the investment program is hereby delegated to the Finance Director/Treasurer, who shall carry out 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, collateral/depository agreements and banking services contracts. 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 Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. IV. Safekeeping and custody 1. Authorized Financial Dealer and Institution A list will be maintained of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by creditworthiness (minimum capital requirement $10,000,000 and at least five years of operation). These may include uprimary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEe) Rule lSC3-1 (uniform net capital rule) . All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the following as appropriate: . 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 From time to time, the City may choose to invest in instruments offered by minority and community financial institutions. These financial institutions may not meet all the criteria under paragraph 1. All terms and relationships will be fully disclosed prior to purchase and will be reported to the City Council on a consistent basis and should be consistent with state or local law. Also, these types of investment purchases should be approved by the Council in advance. 2. Internal Controls The Finance Director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City of Shakopee 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 of reasonable assurance recognizes that (1) the cost of a 4 control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. AcCordingly, the Finance Director shall establish a process for annual independent review by an external auditor (as part of the audit) to assure compliance with policies and procedures. The internal controls shall address the following points: a. Control of Collusion. Collusion is a situation where two or more employees are working in conjunction to defraud their employer. b. Separation of transaction authority from accounting and record keeping. By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties in achieved. c. Custodial safekeeping. Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping. d. Avoidance of physical delivery securities. Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physical delivered securities. e. Clear delegation of authority to subordinate staff members. Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff position and their respective responsibilities. f. written confirmation of telephone transactions for investments. Due to the potential of error and improprieties arising from telephone transactions, all telephone transaction should be supported by written communications. written communications may be via fax or Email if the safekeeping institution has a list of authorized signatures. 3. Delivery vs. Payment All trades where applicable will be executed by delivery vs. payment (DVP) . This ensures that securities are deposited with the custodian prior to the release of funds. Securities will be held by a third party custodian as evidenced by monthly statements. v. suitable and Authorized Investments 1- Investment Types Consistent with the GFOA (Government Finance Officers Association) 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 law where applicable; a. U.S. Government obligations, u.s. Government agency obligations, and u.s. Government instrumentality obligations, which have.. a liquid market with a readily determinable market value. 5 This includes mortgage-backed pass-through securities issued by any U.s. Government agency. b. Canadian government obligations (payable in local currency) . c. Certificates of deposit and other evidences of deposit at financial institutions, bankers' acceptances I and commercial paper, rated A-l, P-l/ F-l or higher by at least two nationally recognized rating agencies. d. Investment-grade obligations of state and local governments and public authorities. e. Repurchase agreements whose underlying purchased securities consist of the foregoing. f. Money market mutual funds regulated by the security and Exchange Commission and whose portfolios consist only of dollar- denominated securities. g. Local government investment pools, either state-administered or through joint powers statutes and other intergovernmental agreement legislation. Investment in derivatives or high-risk mortgage-backed securities is not authorized. High-risk mortgage-backed securities are defined as: 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; 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 (iii) 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. Collateralization In accordance with state law and the GFOA Recommended Practices on the Collateralization of Public Deposits, full collateralization will be required on certificates of deposits to the extent the deposits exceed the available FDIC insurance. 3. Repurchase Agreements Repurchase agreements shall be consistent with state statutes and GFOA Recommended Practices on Repurchase Agreements. VI. Investment Parameters 1- Diversification The aggregate investment portfolio 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 a portion of the portfolio in readily available funds such as local government investment pools (LGIPS) I money market funds or repurchase agreements to ensure 6 that appropriate liquidity is maintained in order to meet ongoing obligations. . All investments other than in direct obligations or agencies of the United states, secured by collateral, or repurchase agreements, shall not exceed fifty percent of the aggregate investment portfolio. Mortgage-backed securities shall not exceed thirty-five percent of the aggregate investment portfolio, at time of purchase. This limitation is determined by type of investment, i.e. commercial paper or bankers acceptance. . Investment in anyone corporation shall not exceed ten percent of the aggregate investment portfolio and five percent of the corporation's assets. 2. Maximum Maturities Short-term operating funds To the extent possible, the City of Shakopee shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City of Shakopee 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 City of Shakopee shall adopt a maximum weighted average maturity of 3 years for these funds. Longer-term funds Longer-term funds shall not be invested in securities exceeding 10 years in modified duration, at time of purchase. VII. Reporting 1. Methods The Finance Director shall prepare an investment report at least quarterly. Included in the report shall be. the following: . A listing of individual securities held at the end of the reporting period listed by maturity date. . The carrying basis, the current calculated accreted basis and the current market value. . weighted average yield to maturity. . Percentage of total portfolio by type of investment. . Total return performance measured against the selected benchmark for the Longer-Term funds. 2. Performance Standards The Short-Term operating funds shall be managed in accordance with the parameters specified within this policy and shall obtain an average money market rate of return. The Longer-Term Core funds shall be managed in accordance with the parameters specified within this policy and shall be regularly evaluated against a benchmark. The benchmark will be a custom index blend of eighty percent of the Merrill Lynch 1-5 Year U.S. Treasury index and twenty percent of the Merrill Lynch Mortgage, GNMA, All 15 Year index. This benchmark shall, at a minimum, be reviewed every three years to ensure consistency with the City of Shakopee's investment policy and risk tolerances. 7 2. 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 with the above report. 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." VIII. Policy Considerations 1. Amendment This policy shall be reviewed on an annual basis. Any changes must be approved by the Finance Director and the City Council. IX. Investment Pools 1. Def ini tion The purpose of an investment pool is to allow political subdivisions to pool available funds in order to achieve a potentially higher yield. There are basically three types of pools, 1) state run pools; 2) pools operated by a political subdivision where allowed by law and the political subdivision is the trustee; and 3) pools that are operated for profit by third parties. Prior to the city being involved with any type of pool, a through investigation of the pool and its policies and procedures must be reviewed. 2. Pool Questionnaire Prior to entering a pool, the following questions and issues should be considered. Securities Government pools may invest in a broader range of securities than permitted by city policy. Deviation from the policy is permitted for pools to the extent that securities are authorized by state statute and the Finance Director/Treasurer is aware of and comfortable with those securities. 1. Does the pool provide a written statement of investment policy and objectives? 2. Does the statement contain: a. A description of eligible investment instruments? b. The credit standards of investments? c. The allowable maturity range of investments? d. The maximum allowable dollar weighted average portfolio maturity? e. The limits of portfolio concentration permitted for each type of security? f. The policy on reverse repurchase agreements? 3. Are changes in the policies communicated to the pool participants? Interest Interest is not reported in a standard format, so it is important to know how interest is quoted, calculated and distributed so that you can make comparisons with other investment alternatives. 8 Interest Calculations 1. Does the pool disclose the following about yield calculations: a. The methodology used to calculate interest (simple maturity, yield to maturity, etc.)? b. The frequency of interest. payments? c. How interest is paid (credited to principal at the end of the month, each quarter; mailed)? d. How are gains/losses reported - factored monthly or only when realized? Reporting 1. Is the yield reported to participants of the pool monthly? 2. Are expenses of the pool deducted before quoting the yield? 3. Is the yield generally in line with the market yield for securities in which would otherwise be purchased? 4. How often does the pool report, and does that report include the market value of securities? Security The following questions are designed to assist in safeguarding funds from loss of principal and loss of market value. 1. Does the pool disclose the safekeeping practices? 2. Is the pool subject to audit by an independent auditor? 3. Is a copy of the audit report available to participants? 4. Who makes portfolio decisions? 5. How does the manager monitor the credit risk of the securities in the pool? 6. Is the pool monitored by someone on the board of a separate neutral party external to the investment function to ensure compliance with written policies? 7. Does the pool have specific policies with regards to the various investment vehicles? a. What are the different investment alternatives? b. What are the policies for each type of investment? 8. Does the pool mark the portfolio to its market value? 9. Does the pool disclose the following about how portfolio securities are valued: a. The frequency with which the portfolio securities are valued? b. The method used to value the portfolio (cost, current value, or some other method)? Operations The answers to these questions will help determine if a pool meets the operational needs of the city. 1. Does the pool limit eligible participants? 2. What entities are permitted to invest in the pool? 3. Does the pool allow multiple accounts and/or sub-accounts? 4. Is there a minimum or maximum account size? 5. Does the pool limit the number of transactions each month? What is the number of transactions permitted each month? 6. Is there a limit on transaction amounts for withdrawals and deposits? a. What is the minimum and maximum withdrawal amount permitted? b. What is the minimum and maximum deposit amount permitted? 7. How much notice is required for withdrawals/deposits? 8. What is the cutoff time for deposits and withdrawals? 9. Can withdrawals be denied? 10. Are funds 100% able to be withdrawn at any time? 11. What are procedures for making deposits and withdrawals? 9 a. What is the paperwork required, if any? b. What is the wiring process? 12. Can an account remain open with a zero balance? 13. Are confirmations sent following each transaction? statements It is important to received statements monthly for documentation and reconciliation purposes. 1. Are statements for each account sent to participants? a. What are the fees? b. How are they passed? c. How are they paid? d. Are there additional fees for wiring funds (what is the fee)? 2. Are expenses deducted before quoting the yield? Questions To Consider For Bond Proceeds It is important to know (1) whether the pool accepts bond proceeds and (2) whether the pool qualifies with the U.S. Department of the Treasury as an acceptable commingled fund for arbitrage purposes. 1. Does the pool accept bond proceeds subject to arbitrage rebate? 2. Does the pool provide accounting and investment records suitable for proceeds of bond issuance subject to arbitrage rebate? 3. will the yield calculation reported by the pool be acceptable to the IRS or will it have to be recalculated? 4. Will the pool accept transaction instructions from a trustee? 5. Is the city allowed to have separate accounts for each bond issue so that the city does not have to commingle the interest earnings of funds subject to rebate with funds not subject to . regulations? x. Depositories Pursuant to Minnesota Statures, section 118.005, the Finance Director is authorized to designate as a depository of city funds such national, insured state banks or thrift institutions as defined in section 51A.02, Subdivision 23, as deemed proper. The Finance Director shall inform City Council whenever a change is made in the list of designated depositories. Any bank, trust company or thrift institution authorized to do business in this state, designated as a depository of city funds may, in lieu of a corporate or personal surety bond required to be furnished to receive the funds, assign to or deposit with the City Finance Director/Treasurer legally authorized investments or securities as collateral. The Finance Director is authorized by City Council to approve of the arrangements for safekeeping of pledged collateral in accordance with MSA 118.01. The total amount of the collateral computed at its market value shall be at least te~ percent more than the amount of deposit in excess of any insured portion. The depository may at its discretion furnish both a bond and collateral aggregating the required amount. The City will not accept mortgages as collateral. Pursuant to section 471.56, Subdivision 1, any city funds not presently needed for other purposes may be deposited or invested in the manner and subject to the conditions provided in Section 475.66. 10 Updated: November 2006 Designated Depositories Wells Fargo Bank Klein Bank ' Voyager Bank Authorized Financial Dealers and Institutions Norwest Investment Services Inc. Salomon smith Barney, Inc. piper Jaffray, Inc. RBC Dain Bosworth, Inc. Northshore Advisors LLC Goldman Sachs and Co. paineWebber Inc. 11