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2000-147-Authorizing The Town Council To Accept The Existing Investment Policy Dated December 15, 1997RESOLUTION 2000 -147 RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF LOS GATOS AUTHORIZING THE TOWN COUNCIL TO ACCEPT THE EXISTING INVESTMENT POLICY DATED DECEMBER 15,1997 WHEREAS: A. The Investment Policy of the Town must be annually adopted by the legislative body of local governments in a public meeting. B. The Town's existing Investment Policy was redrafted in December 1997 by the Town Treasurer and is attached here as Exhibit A. C. The Town Council did review and approve this investment policy on December 15, 1997 and no additional changes to this policy are recommended and accepted and approved the existing Investment Policy on December 15, 1997. D. The Town Council reviewed and approved the exising Investment Policy on December 21,1998, and on 'December 7, 1999. RESOLVED: The Town Council has reviewed and approves the existing Investment Policy dated December 15, 1997. PASSED AND ADOPTED at a regular meeting of the Town Council of the Town of Los Gatos, California held on the 18' day of December, 2000 by the following vote: COUNCIL MEMBERS: AYES: Randy Attaway, Steven Blanton, Sandy Decker, Steve Glickman, Mayor Joe Pirzynski. NAYS: None ABSENT: None ABSTAIN: None SIGNED MAYOR OF THE TOWN OF LOS GATOS LOS GATOS, CALIFORNIA ATTEST: 72 C �j CLERK OF THE TOWN OF LOS GATOS LOS GATOS, CALIFORNIA Investment Policy for the Town of Los Gatos Revised December 15, 1997 I. Scope This investment policy applies to all of the Town's short-term operating funds. These funds are described in the Town's annual financial report and include, but are not limited to: • General Fund • Special Revenue Funds • Capital Project Funds • Debt Service Funds .. • Enterprise Fund • Internal Service Funds • Fiduciary Funds Specifically excluded from this policy are amounts which are held by a trustee or fiscal agent and pledged as payment or security for bonds or other indebtedness, obligations under a lease, or obligations under certificates of participation Such funds are invested in accordance with statutory provisions, ordinance, resolution, or indenture governing the issuance of the obligations. In addition, this investment policy is not applicable to Town's Deferred Compensation Plan. These investments are directed by the each employee participant in accordance with the rules of the Deferred Compensation Plan. II. Investment Objectives The primary, investment objectives, in prioritized order, shall be safety, liquidity, and yield: 1. Safety. Safety of principal is the foremost objective of the investment program. Investments shall be made in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective the Town will endeavor to mitigate credit risk and interest rate risk. A. Credit Risk. The Town will minimize credit risk, the risk of doss due to the failure.,Ar the security issuer or backer, by: Limiting investments to the safest types of securities Pre -qualifying the financial institutions and broker/dealers with which -the Town will do business Diversifying the investment portfolio among security types and issuers, so that potential losses on any particular security are limited page 1 of 7 EXHIBIT a B. Interest Rate Risk. The Town will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates, by: • Limiting the maturity of allowable investments to 5 years from the date purchased. • Limiting the Weighted average Maturity of the portfolio to 500 days. • Investing primarily in shorter -term securities, money market mutual funds, or similar investment pools such as the Local Agency Investment Fund which have limited exposure to interest rate fluctuations. • Targeting the maturity profile of the portfolio as follows: ■ Less than one year - 60% ■ One to two years - 20% ■ Two to five years - 20% • Laddering securities with longer maturities to prevent undue concentration in any given matuuity. 2. Liquidity. The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. However, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets. In addition, a portion of the portfolio also should be placed in money market mutual funds or the Local Agency Investment Fund which offer same day liquidity.. 3. Yieid. 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 secondam importance compared to the spfrny and liquidity objectives described above. The investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. The Town shall pursue a passive "buy and hold" investment strategy rather than a more aggressive active management strategy. In general, securities shall not be sold prior to maturity with the following -exceptions: • A security with declining credit may be sold early to minimize toss of principal to • Liquidity needs of the portfolio require that the security be sold. III. Standards of Care page 2 of 7 t 1. Prudence. The standard of care 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 principal 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 relationships or personal 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 Town. 3. Delegation of Authority. Under Los Gatos Town Code Section 2.30.025(c) the Town Council is responsible for the delegation of authority for management of the Town's investment program. This authority is hereby delegated to the Town Treasurer, who shall develop and 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, wire transfer agreements, and collateral/depository agreements. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Town Treasurer. The Town Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of any subordinate officials. N. Safekeeping and Custody 1. Authorized Financial Dealers and Institutions. A. Broket/Dealem In order to do business with the Town, a securities dealer must be primary dealer reporting to the Nevv York Federal Rderve and have assets of at least $ billion.. All financial institutions and broker/dealers vno desire to become qualified for investment transactions must also supply the following • Audited financial statements (submitted annually) page 3 of 7 Proof of National Association of Securities Dealers registration • Proof of state registration • Certification of having read the Town's investment policy, including a statement that the dealer shall make a good faith effort to conform to this policy. B. Financial Institutions. The Town shall maintain demand deposits and time deposits only with commercial banks and savings banks which meet exceptionally high statndards for safety and soundness. Specifically, all banks which accept deposits from the Town shall meet standards with regard to capital strength, assets , earnings, and liquidity which allows them to earn the highest ranking (blue/three stars) from the bank rating company veribanc, Inc, In addition, the institution must have an office in California and that office must perform all transactions with the Town. 2. Internal Controls. The Town Treasurer, in conjunction with the Town's Finance Director, shall establish and maintain an internal control structure designed to ensure that the invested assets of the Town 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 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 Town Treasurer shall facilitate an annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points: i Control of collusion • Separation of transaction authority from accounting and record keeping • Custodial safekeeping Avoidance of physical delivery of securities • Clear delegation of authority to subordinate staff members Written confirmation of transactions for investments and wire transfers 3. Delivery vs. Payment. All securities trades where applicable will be executed by delivery vs. payment (DVP) to ensure that securities are delivered into safekeeping with the Town's third party custodian prior to the release of funds. The Town's third -party custodian will be independent from the broker/dealer handling the security transaction to ensure proper, timely delivery and payment. page 4 of 7 4. Coilateralization. Collateralization is required on all Certificates of Deposits and deposits in excess of FDIC insurance limits. :In order to anticipate market changes, the required collateralization level is 110% of market value of principal and accrued interest for government securities pledged as collateral, or 150% for First deeds of trust pledged as collateral. Such collateral will be held by an independent third parry custodian. V. Suitable and Authorized Investments 1. investment Types. California Government Code Sections 33601, 53631.5 and 53635 place limitations on allowable investments by local governments. This investment policy further restricts allowable investments. The following investments will be permitted by this policy: Maximum Maximum % Quality Investment Type Maturity of Portfolio Reauirementa US Treasury Obligations 5 years None N/A US Agency Obligations 5 yew None Active Market Bankers Acceptances 270 days 15%• Multiple Medium Term Corporate Notes 3 years/5 years 15% AA rating/AAA Money Market Funds N/A 15%, Multiple; Collateralized CD's 5 yew 15% Multiple• CA Local Agency Investment Fund N/A 65% N/A Commercial Paper 180 days 15% A1/P`1 rating' Limited to US Agency Obligations with liquid markets and readily determinable fWr market value including obligations issued by the Federal Farm Credit Bank (FFCB) the Federal Home Loan Bank the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Association (Freddie Mac), the Federal Land Bank, and the Tennessee Valley Authority (TVA), Bankers Acceptances mast be p► me acceptances issued by one of the top 13 US money center acceptance banks. Limited to $1,000,000 with any single institution. 3 Money market itmds mast hxvve a weighted average 9 of 90 days oc lea consist only of dollar denominated securities, be regulated by the Seaaities and Exchange Commission, possess the highest rating by 2 of the 3 largest nationally recognized rating savices, and maimain fund asseti of at least $300 million. Veribanc, Inc. highest rating (bluehhm stars). Limited to SlmiUion per institution S Issuers must be US corporations with assets of at last $500 miMm. Pmthases may not represent more than 10% of the outstanding commercial paper of the issuer. 2. Prohibited Investments. Prohibited investments are any investments not. specifically identified above, including but not limited to: page 5 of 7 • Derivatives of the above instruments :* Repurchase agreements • Reverse repurchase agreements Negotiable certificates of deposit Inverse floaters Range notes Interest only strips Any security which could result in zero interest accrual if held to maturity VT. Reporting 1. Methods. The Town Treasurer shall prepare a monthly investment report, including a management summary that provides an analysis of the status of the current investment; portfolio. This management summary will be prepared in a manner which will allow the Town to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report should be submitted to the Town Clerk within 30 days after the end of each month for inclusion as an agenda item at the next scheduled Town Council meeting. The report shall include the following: • Detailed listing of individual securities held at the and of the reporting period includbig, issuer, purchase date, maturity date, and yield to maturity.. Realizedandunrealized gains or losses resulting from appreciation or depreciation by listing the amortized cost and market value of each security. • Average weighted yield to maturity of the portfolio as compared to the average weighted yield of the Local Agency Investment Fund •' Weighted Average Maturity of the portfolio and percentage breakdown of the total portfolio by maturity (e.g., % less than 1 year, l - Z years, 3 - 5 years) • Summary of interest income for the month and fiscal year to date. • A statement of compliance with the Investment Policy. • A statement regarding the adequacy of cash flows for the nett six months. Z. Marking to Market. When "marking the portfolio to market' (i.e., calculating the market value of the portfolio), the Treasurer shall obtain independent valuation of the portfolio from the Town's safekeeping or custody service. Investments in LAEF shall be valued as shown on the month -end statements received from the California State Treasurer. Due to a lack of *—Ile market value data, investments in Certificates of Deposit shall be shown at cost provided that the page 6 of 7 s , • co fair market value of the Certificates of Deposit are not significantly affected by the impairment of the credit standing of the issuer. VU. 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. Adoption. The Town's investment policy shall be adopted by resolution of the Town Council at a public meeting. 3. Amendments. This policy shall be reviewed on an annual ba-As. Any changes must be approved by the Town Treasurer and the Town Council page 7 of 7