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2002-118-Authorizing The Town Council To Accept The Investment Policy Dated June 24 2002RESOLUTION 2002 -118 RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF LOS GATOS AUTHORIZING THE TOWN COUNCIL TO ACCEPT THE .INVESTMENT POLICY DATED JUNE 24, 2002 WHEREAS: A. The Investment policy of the Town must be annually adopted by the legislative body of local government in a public meeting B. The Town's existing Investment Policy was redrafted in December 1997 by the Town Treasurer. C. The Town Council did review and approve this investment policy this December 15, 1997 .and last .reviewed .and approved the existing Investment Policy on December 18, 2000. D. Minor changes have been made to the Investment Policy .for changes in the state .law and to confirm it .more closely to the model investment policy published by the Municipal Treasurers' Association of the United States and Canada. RESOLVED: The Town Council .has reviewed and .approves the Revised Investment Policy dated .June 24, 2002. 1 .PASSED AND ADOPTED at a regular meeting of the Town Council of the Town of Los Gatos, California, held on the 1St day of Judy, 2002 by the following vote.: COUNCIL MEMBERS.: AYES: Steven Blanton, Sandy Decker, .Steve Glicl~nan, Joe Pirzynski Mayor Randy Attaway. NAYS : None ABSENT: None ABSTAIN: None SIGNED: MAYOR OF THE TOWN OF LOS GATOS LOS GATOS, CALIFORNIA ATTEST.: r -~~; v CLERK OI' 'THE TOWN O LOS GATOS LOS CATOS, CALIFORNIA 2 Investment Policy for the Town of Los Gatos Revised June 24, 2002 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. T11ese investments are directed by 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 of the Town shall be made in a manner that seeles to ensure the preservation of capital in the overall portfolio. To .attain this objective, the Town will diversify its investments by ecurity type .and institution. With the exception of US Treasury securities and the California Local Agency Investment Fund (LAIF), no more than 50% of the Town's total investment portfolio will be invested in a single security type or with a single financial institution. 2. Liquidity. The investment portfolio shall remain sufficiently liquid to meet all operating requirements t11at 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 marl~ets. In addition, a portion of the portfolio should be placed in money marl~et mutual funds or'The Local Agency Investment Fund that offer same day liquidity. 3. Yield. The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, tal~iilg 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 investments are limited to relatively low risl~ securities in anticipation of earning a :fair return relative to the risk being assumed. Page 1 of 6 EXHIBIT A 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 loss of principal • Liquidity needs of the portfolio require that the security be sold. III. Standards of Care 1. Prudence. The standard of care to be used by investment officials shall be t11e "prudent person" and/or "prudent investor" 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 marl~et 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 s11a11 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 refr~tiin 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 which 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 t11e 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 inwestment 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. Page 2 of 6 IV. Safekeeping and Custody 1. Authorized Financial Dealers and Institutions. A. Brol~er/Dealers. In order to do business with the Town, a securities dealer/ brol~erage firm must be designated as a primary government dealer by the Federal Reserve Bank or meet one of the other requirements of California Government Code See. 53601.5. The institution must have assets of at least $1 billion. All financial institutions and broker/dealers who desire to become qualified for investment transactions must also supply the following: • Audited financial statements (to be submitted annually) • 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 mare 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 that meet exceptionally high standards for safety ..and soundness. 'Specifically, all banl~s that accept deposits from the Town shall meet standards with regard to capital strength, assets, earnings, and .liquidity which .allow them to earn the highest ran if rating (blue/three stars) from the bank rating company VeNbc~nc, 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 estahlisll 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 t11at {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, t11e 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: • Separation of transaction authority from accounting and record keeping • Custodial safel~eeping + Avoidance of physical delivery of securities • Clear delegation of authority to subordinate staff members • Written confirnation of transactions for investments and wire transfers Page 3 of 6 3. Delivery vs. Payment All securities trades where applicable will be executed by delivery vs. payment (IDVP) to ensure that securities are delivered into safekeeping with t11e 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 4. Collateralization, Collateralization is required on all Certificates of Deposits and deposits in excess ofFDIC insurance limits. Per Government Code Secs. 53652, the required collateralizatioll level is 110% of market value of principal and accrued interest forgovernment 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 53601, 53631.5 and 5.3635 place limitations on allowable investments by local :governments. Tl1is investment policy further restricts allowable investments. The following investments will be permitted by this policy: Investment Type Maximum Maturity US Treasury Obligations S years LJS Agency Obligations 5 years Banl~ers Acceptances 180 days Commercial Paper 1S0 days Medium teen notes 3 yrs/ 5 yrs Collateralized CD's 5 yrs CA LAIF N/A Money Market Funds N/A Max. % of Quality Portfolio Requirements None N/A None Active Market (1) 15% 15% '.See below (2) 15% AA/ AAA 15% See below (3) 65% N/A 15% See below (4) (1) Limited to US Agency Obligations with liquid markets and readily determinaUle fair market value, including obligations issued by the Federal Home Loan Bank (PHEW), the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Association (Freddie Mac), the Federal Farm Credit Banlc (FFCB), the Federal Land Bank, and the Tennessee Valley Authority (TVA) (2) Conunercial paper must be "prune" quality of the highest ranking as provided by Moody's or S & P and is limited to corporations with assets of at least $500 million. Purchases may not represent more than 10% of the outstanding commercial paper of the issuer. (3) Must.be collateralized per the requirements ofthis investment policy section IV (4) and the institution must meet the Veribanc Ulue/three stars rating. (4) Money market funds must he registered with the SEC under the Investment Company Act of 1940, must .have assets under management in excess of $500 million, have retained an investment advisor registered with the SEC (or exempt from registration) with not less. than 5 years experience managing money market mutual funds, .and have attained the highest ranking provided by not less than two nationally recognized statistical rating organizations. Page 4 of 6 2. Prohibited Investments. Prohibited investments .are any investments not specifically identified above, including but not limited to: • 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 VI. Reporting 1. Methods. The Town Treasurer shall prepare a monthly investment report, including a management summary that provides an analysis of t11e status of the current investment: portfolio. This management summary will be ,prepared in a manner that 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: o Detailed listing of individual securities. held at the end of the reporting period including, issuer, purchase :date, maturity date,. and yield to maturity. o Realized and unrealized gains or losses resulting from appreciation or depreciation by listing t11e amortized cost and marl~et value of each security. o Average weighted yield to .maturity of the portfolio o Weighted Average. Maturity of the portfolio :and percentage breal~down of the total portfolio by maturity (e.g., % less dun 1 year, 1 - 2 years, 3 - S years) o Summary of interest income for the month and fiscal year to date. o A statement of compliance with the Investment Policy. o A statement regarding the adequacy of cash flows for the next six months. Page 5 of 6 2.1VIarl~ing to Market. When "marring 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 LAIF shall be valued as shown on the month-end statements received from the California State Treasurer. Due to a lack of reliable marl~et value data, investments in Certificates of Deposit shall be shown at cost provided that the fair market value of the Certificates of Deposit are not significantly affected by the impairment of the credit standing of the issuer. VII. 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 liduidation, such monies shall be reinvested only as provided by this policy. 2. Adoption. Tl7e 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 basis. Any changes must be approved by the Town Treasurer .and the Town Council Page 6 of 6