07 Attachment 3 - Financial PoliciesA - 35
GENERAL FUND RESERVE POLICY
COUNCIL POLICY MANUAL TITLE: General Fund Reserve Policy POLICY NUMBER: 4-03 EFFECTIVE DATE: 05/16/2011 PAGES: 6 ENABLING ACTIONS: REVISED DATES: 02/21/2017; 05/15/2018; 06/04/2019 APPROVED:
PURPOSE
The purpose of this Policy is to establish a target minimum level of designated reserves in the
General Fund to:
•Reduce the financial impacts associated with a disaster or catastrophic event;
•Respond to the challenges of a changing economic environment, including prolonged
downturns in the local, state, or national economy; and
•Demonstrate continued prudent fiscal management and creditworthiness.
BACKGROUND
The Town of Los Gatos has always maintained a high level of General Fund reserves, which has
contributed to superior ratings by credit rating agencies; provided financial flexibility in
economic downturns; contributed a source of investment income for General Fund operations;
and assured financial coverage in the event of future emergencies.
GUIDING PRINCIPLES
Following sound financial practices and adhering to the Government Finance Officers of
America (GFOA) recommendations, the Town’s designated reserves include reserves for known
and unknown contingencies, which take into consideration the:
•Diversity of revenue base
•Volatility of revenue structure
Small Town Service Community Stewardship Future Focus
ATTACHMENT 3
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GENERAL FUND RESERVE POLICY
• Changes in political environment
• Frequency of operating surpluses/deficits
• Cash flow management practices
The General Fund Reserve Policy is to be reviewed by the Town Council as part of the annual
operating budget review and adoption process.
POLICY
The fund balance is the difference between the assets and liabilities reported in a governmental
fund. Under current accounting standards, there are five separate components of fund
balance, each of which identifies the extent to which the Town is bound to honor constraints on
the specific purposes for which amounts can be spent.
The following components are defined by Governmental Accounting Standards Board (GASB)
Statement No. 54 and shall constitute the Town’s Fund Balance:
• Nonspendable Fund Balance (inherently nonspendable)
• Restricted Fund Balance (externally enforceable limitations on use)
• Committed Fund Balance (self-imposed limitations on use)
• Assigned Fund Balance (limitation resulting from intended use)
• Unassigned Fund Balance (residual net resources)
The first two components listed above are not specifically addressed in this Policy due to the
nature of their restrictions. The example of nonspendable fund balance is inventory. Restricted
fund balance is either imposed by law or constrained by grantors, contributors, or laws or
regulations of other governments. This Policy is focused on financial reporting of unrestricted
fund balance, or the last three components listed above. These three components are further
defined below.
The accounting policies of the Town consider restricted fund balance spent first when
expenditure is incurred for purposes for which both restricted and unrestricted fund balance is
available. Similarly, when an expenditure is incurred for purposes for which amounts of the
unrestricted classifications of fund balance could be used, the Town considers committed
amounts to be reduced first, followed by assigned amounts and then unassigned amounts.
Committed Fund Balance
The Town Council, as the Town’s highest level of decision-making authority, may commit fund
balance for specific purposes pursuant to constraints imposed by formal action taken, such as
an ordinance or resolution. These committed amounts cannot be used for any other purpose,
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GENERAL FUND RESERVE POLICY
unless the Town Council removes or changes the specific use through the same type of formal
action taken to establish the commitment. The Town Council action to commit fund balance
needs to occur within the fiscal reporting period; however, the amount can be determined
subsequently at the final close of the fiscal year.
The Town currently sets aside funds into four committed reserves to address unforeseen
emergencies or disasters, significant changes in the economic environment, unfunded pension
and Other Post-Employment Benefits (OPEB) obligations, and key infrastructure and capital
projects. These include the Catastrophic Reserve, Budget Stabilization Reserve, Pension (OPEB)
Reserve and Almond Grove Street Projects Reserve.
Catastrophic Reserve
Funds reserved under this category shall be used to mitigate costs associated with unforeseen
emergencies, such as a disaster or catastrophic event. Should unforeseen and unavoidable
events occur that require the expenditure of Town resources beyond those provided for in the
annual budget, the Town Manager or designee shall have authority to approve Catastrophic
Reserve appropriations. The Town Manager or designee shall then present to the Town Council
a budget amendment confirming the nature of the emergency and authorizing the
appropriation of reserve funds.
The Town currently commits to maintaining this reserve at a minimum of 12.5% of General
Fund ongoing operating expenditures (minus one-time expenditures).
Should a catastrophic disaster occur, the required reserve level should be adequate to meet the
Town’s immediate financial needs. For example, in the event of natural disaster, the
Catastrophic Reserve would provide necessary coverage for basic operating expenses, including
salary and benefits for safety and non-safety Town employees, while still meeting debt service
obligations for approximately 60 days. This time frame would enable the Town to explore other
available cash alternatives, including the use of internal service funds.
Budget Stabilization Reserve
Funds reserved under this category shall be used to mitigate annual revenue shortfalls (actual
revenues less than projected revenues) due to changes in the economic environment and/or
one-time uses that will result in future efficiencies and/or budgetary savings. Examples of
“economic triggers” and one-time uses include, but are not limited to:
An unplanned, major event such as a catastrophic disaster requiring expenditures
which exceed the General Fund Catastrophic Reserve;
Drop in projected/actual revenue of more than five percent in property or sales tax,
or other economically sensitive revenues;
Budgeted revenue taken over by another entity exceeding $100,000;
Loss of businesses considered to be significant sales tax generators;
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Reductions in projected/actual revenue of more than five percent due to actions by
the state/federal government;
Workflow/technical system improvements to reduce ongoing, personnel costs and
enhance customer service;
One-time maintenance of service levels due to significant economic/budget
constraints; and
One-time transitional costs associated with organizational restructuring to secure
long-term personnel cost savings.
The Town currently commits to maintaining this reserve at a minimum of 12.5% of General
Fund ongoing operating expenditures (minus one-time expenditures).
Should a loss of the Town’s single highest source of sales tax revenue occur, the required
reserve level should be adequate to meet the Town’s immediate financial needs. For example,
the reserve level in the Budget Stabilization Fund would provide for an approximate 3-year
transition period, giving the Town adequate time to realign its operating costs with available
resources, while minimizing service impacts.
Pension/OPEB Reserve
Funds reserved under this category shall be used to further mitigate costs associated with
pension and OPEB unfunded obligations. These funds will be used as a funding source for
potential additional discretionary payments to pay down unfunded pension and other post-
employment obligations, or held in the reserve account to be used as a supplemental funding
source for unanticipated increases to the annual pension and other post-employment costs
resulting from future actuarial assumptions and investment market volatility.
This Policy requires the Town to set aside additional annual discretionary payments (ADPs) to
reduce the effective amortization period of the Town’s pension unfunded actuarial liabilities
from approximately 30 years to 20 years. To facilitate the implementation of this Policy, staff
shall update the estimated unfunded amortization schedules in conjunction with the Town’s
and CalPERS actuaries. This process will coincide with the annual proposed budget process to
determine the additional annual discretionary payment levels required to maintain the goal of
lowering the amortization period from a 30-year to a 20-year amortization period for all prior
year actuarial bases through FY 18/19. The ADP is currently projected at $390,000 for FY
2018/19 (subject to annual updates provided by CalPERS actuaries). Per Council direction ADPs
will either be allocated directly to CalPERS, the Town’s Pension IRS 115 Trust Fund, or the OPEB
IRS 115 Trust Fund.
As part of the proposed budget for each forthcoming fiscal year, staff shall annually
appropriate, to the extent possible, the amount of annual discretionary payments necessary to
maintain the unfunded pension liability amortization shortening from 30 to 20 years.
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GENERAL FUND RESERVE POLICY
In the event the annual amount required for additional discretionary payments is not available
from operating revenues, the ADP shall be funded by a first lien on any one-time excess
revenues above expenditures once other General Fund required reserve levels have been
established at the appropriate levels as per the Town’s General Fund Reserve Policy. If in any
given year neither budgetary appropriations or a first lien on one-time excess revenues are
sufficient to fund the annual ADP, that years ADP will be accrued to the following year until
paid.
Additionally, effective upon the close of fiscal year 2015/16 and thereafter, if sufficient General
Fund year-end savings are available and targeted reserve levels of 25% (12.5% for Catastrophic
Reserve and 12.5% for Budget Stabilization Reserve) of the next fiscal year’s operating budget
and the funding the following year’s proposed budget ADP have been met, upon final close of
the fiscal year, a minimum of $300,000 annually shall be deposited into the Pension/OPEB
Reserve fund. In addition, Council can assign additional amount deposited to the Pension/OPEB
Reserve with a formal Council action from available year end savings.
Almond Grove Street Project Reserve
Funds reserved under this category shall be used to reconstruct the 10 streets identified in the
Almond Grove Street Rehabilitation Project specification.
The Council awarded the bid in April 2017 allowing for $2.9 million savings within the project.
The Council reappropriated the use of the savings through the FY 2017/18 budget process. The
Almond Grove Reserve should be reduced by the identified $2.9 million savings. The Almond
Grove Street Reserve balance will be reduced at each fiscal year end by the funds expended on
the Almond Grove Street Rehabilitation Project during the fiscal year.
Assigned Fund Balance
Amounts that are constrained by the Town’s intent to be used for specific purposes, but are
neither restricted nor committed, should be reported as assigned fund balance. This Policy
hereby delegates the authority to assign amounts to be used for specific purposes to the Town
Manager for the purpose of reporting to assign amounts in the annual financial statements. A
few examples of assigned fund balance follow.
• Encumbrances – material s and services on purchase order and contracts which are
unperformed.
• Reappropriations – appropriated by the Council for specific projects or programs that
were not completed and not encumbered by year end.
• GASB 31 Adjustments – unrealized investment gains that have been recorded in the
financial statements in accordance with GASB 31.
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GENERAL FUND RESERVE POLICY
Capital and Special Projects Reserve
Funds reserved under this category are designated for key infrastructure and capital/special
projects as identified in the Town 5-year Capital Improvement Plan, as there is no ongoing
funding source to support the Town’s capital needs.
Unassigned Fund Balance
At the end of each fiscal year, the Finance Department reports on the audited year-end
budgetary fiscal results. Should actual General Fund revenues exceed expenditures and
encumbrances, a year-end operating surplus shall be reported. Any year-end surplus which
results in the General Fund balance exceeding the level required by this Reserve Policy shall be
available for allocation for the following, subject to Council approval:
Offset projected future deficits
Anticipated intergovernmental fiscal impacts
One-time funding, non-recurring needs
Upon funding any of the above reserve levels pursuant to this General Fund Reserve Policy, any
remaining surplus of fiscal year revenues above expenditures shall be placed in the Capital and
Special Projects Reserve for appropriation within the Capital Improvement Program budget.
Replenishment of Unreserved Fund Balance
In keeping with the principles discussed in this Policy, when either fund is used, Town Council
will develop a 1 to 5 year reserve replenishment plan to meet the minimum threshold of 25% of
General Fund ongoing, operating expenditures, excluding one-time expenditures.
/S/ Robert Schultz, Town Attorney
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LONG TERM DEBT POLICY
COUNCIL POLICY MANUAL TITLE: Long Term Debt Policy POLICY NUMBER: 4-01 EFFECTIVE DATE: 11/2/16 PAGES: 3 ENABLING ACTIONS: 2016-062 REVISED DATES: APPROVED:
PURPOSE
The Long Term Debt Policy sets forth certain debt management objectives for the Town and
establishes overall parameters for issuing and administering the debt for which the Town is
financially obligated or is responsible for managing.
SCOPE
The following long term debt policy sets the considerations for issuing debt and provides
guidance in the timing and structuring of long term debt commitments.
POLICY
GENERAL PRACTICES
1. The Town will seek to maintain and improve the current bond rating in order to
minimize borrowing costs and preserve access to credit.
2. Bond issue proposals are to be accompanied by an analysis defining how the new issue,
combined with current debt, impacts the Town’s debt capacity and conformance with
Town debt policies.
3. Debt Service costs [General Obligation (GO) Bond, Certificate of Participation (COP),
Revenue Bond, and Contractual Debt] are not to exceed 25% of the Town’s operating
revenue.
4. A ratio of current assets to current liabilities of at least 2/1 will be maintained to ensure
the Town’s ability to pay short-term obligations.
Small Town Service Community Stewardship Future Focus
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LONG TERM DEBT POLICY
THE TOWN WILL CONSIDER THE ISSUANCE OF LONG TERM OBLIGATIONS UNDER
THE FOLLOWING CONDITIONS:
1. The Town will use debt financing only for one-time capital improvement projects and
unusual equipment purchases, and only under the following circumstances:
a. When the project is included in the Town’s five-year capital improvement
program and is in conformance with the Town’s General Plan.
b. When the project is not included in the Town five-year capital improvement
plan, but it is an emerging critical need whose timing was not anticipated in the
five-year capital improvement program, or it is a project mandated immediately
by State or Federal requirements.
c. When the project’s useful life, or the projected service life of the equipment, will
be equal to or exceed the term of the financing.
d. When there are designated revenues sufficient to service the debt, whether
from project revenues, other specified and reserved resources, or infrastructure
cost-sharing revenues.
e. Debt financing (other than tax and revenue anticipation notes) is not considered
appropriate for any recurring purpose such as current operating and
maintenance expenditures.
2. The costs of developing and maintaining the Successor Agency to the Town of Los Gatos
Redevelopment Agency (Agency) long term debt policy will be borne by the Agency and
will be developed in conjunction with amendments to existing redevelopment project
area plans and/or new proposals to issue debt by the Successor Agency to the Town of
Los Gatos Redevelopment Agency.
3. The Town will follow all State and Federal regulations and requirements regarding bond
provisions, issuance, taxation and disclosure.
4. Costs incurred by the Town, such as bond counsel and financial advisor fees, printing,
underwriters’ discount, and project design and construction costs, will be charged to the
bond issue to the extent allowable by law.
5. The Town will monitor compliance with bond covenants and adhere to federal arbitrage
and disclosure regulations.
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LONG TERM DEBT POLICY
PROCEDURES
This Long Term Debt Policy shall be adopted by resolution of the Town Council. The Treasurer
shall present this Long Term Debt Policy as needed to the Town Council for review to ensure its
consistency with the Town’s long term debt objectives, and current law. Any amendments to
this Long Term Debt Policy shall be approved by the Town Council.
/S/ Robert Schultz, Town Attorney
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INVESTMENT POLICY
COUNCIL POLICY MANUAL TITLE: Investment Policy POLICY NUMBER: 4-02 EFFECTIVE DATE: 11/1/16 PAGES: 8 ENABLING ACTIONS: 2016-063 REVISED DATES: 5/16/17;5/15/2019; 9/3/2019 APPROVED:
PURPOSE
The Town of Los Gatos (the “Town”), incorporated in 1887, is located approximately 60 miles
south of San Francisco, in the southwestern portion of Santa Clara County. The Town operates
under the Council/Manager form of government. The Town Council is the legislative body for
the Town. It has five members elected to serve staggered four year terms. The Town Manager
is appointed by the Town Council.
The Town Council has adopted this Investment Policy in order to establish the investment
scope, objectives, delegation of authority, standards of prudence, reporting requirements,
internal controls, eligible investments and transactions, diversification requirements, risk
tolerance, and safekeeping and custodial procedures for the investment of the funds of the
Town. All Town funds will be invested in accordance with this Investment Policy and with
applicable sections of the California Government Code.
This Investment Policy was originally adopted by the Town Council of the Town of Los Gatos
November 1, 2016. Town Council adopted revisions replace any previous investment policy or
investment procedures of the Town.
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
Small Town Service Community Stewardship Future Focus
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INVESTMENT POLICY
Special Revenue Funds
Capital Project Funds
Debt Service Funds
Enterprise Fund
Internal Service Funds
Fiduciary Funds
Specifically excluded from this Investment 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 the Town's
Deferred Compensation Plan. These investments are directed by each employee participant in
accordance with the rules of the Deferred Compensation Plan.
POLICY
OBJECTIVES
The Town’s funds shall be invested in accordance with all applicable Town policies and codes,
State statutes, and Federal regulations, and in a manner designed to accomplish the following
objectives, which are listed in priority order:
1. Preservation of capital and protection of investment principal.
2. Maintenance of sufficient liquidity to meet anticipated cash flows.
3. Attainment of a market value rate of return.
4. Diversification to avoid incurring unreasonable market risks.
DELEGATION OF AUTHORITY Management responsibility for the Town’s investment program is delegated annually by the
Town Manager to the Town Treasurer/Finance Director (the “Treasurer”) pursuant to California
Government Code Section 36510. The Treasurer may delegate the authority to conduct
investment transactions and to manage the operation of the investment portfolio to other
specifically authorized staff members. The Treasurer shall maintain a list of persons authorized
to transact securities business for the Town. No person may engage in an investment
transaction except as expressly provided under the terms of this Investment Policy.
The Treasurer shall develop written administrative procedures and internal controls, consistent
with this Investment Policy, for the operation of the Town's investment program. Such
procedures shall be designed to prevent losses arising from fraud, employee error,
misrepresentation by third parties, or imprudent actions by employees.
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INVESTMENT POLICY
The Town may engage the support services of outside investment advisors in regard to its
investment program, so long as it can be demonstrated that these services produce a net
financial advantage or necessary financial protection of the Town's financial resources.
PRUDENCE
The standard of prudence to be used for managing the Town's investments shall be California
Government Code Section 53600.3, the prudent investor standard which states, “When
investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a
trustee shall act with care, skill, prudence, and diligence under the circumstances then
prevailing, including, but not limited to, the general economic conditions and the anticipated
needs of the agency, that a prudent person acting in a like capacity and familiarity with those
matters would use in the conduct of funds of a like character and with like aims, to safeguard
the principal and maintain the liquidity needs of the agency.”
The Town's overall investment program shall be designed and managed with a degree of
professionalism that is worthy of the public trust. The Town recognizes that no investment is
totally without risk and that the investment activities of the Town are a matter of public record.
Accordingly, the Town recognizes that occasional measured losses may occur in a diversified
portfolio and shall be considered within the context of the overall portfolio's return, provided
that adequate diversification has been implemented and that the sale of a security is in the best
long-term interest of the Town.
The Treasurer and authorized 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 that the deviations from
expectations are reported in a timely fashion to the Town Council and appropriate action is
taken to control adverse developments.
ETHICS AND CONFLICTS OF INTEREST
Elected officials and Town employees involved in the investment process shall refrain from
personal business activity that could conflict with proper execution of the investment program
or could impair or create the appearance of an impairment of their ability to make impartial
investment decisions. Elected officials and Town employees shall disclose to the Town Council
any business interests they have in financial institutions that conduct business with the Town
and they shall subordinate their personal investment transactions to those of the Town. In
addition, the Town Manager and the Treasurer shall file a Statement of Economic Interests
each year pursuant to California Government Code Section 87203 and regulations of the Fair
Political Practices Commission.
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INVESTMENT POLICY
SOCIALLY RESPONSIBLE INVESTING
In addition to and subordinate to the objectives set forth above, investment of funds should be
guided by the following socially responsible investment goals when investing in corporate
securities and depository institutions. Investments shall be made in compliance with the
responsible investment goals to the extent that such investments achieve substantially
equivalent safety, liquidity and yield compared to other investments permitted by state law.
(1) Environmental, Social Responsibility and Governance Concerns
Investments are encouraged in entities that support community well-being through safe and
environmentally sound practices and fair labor practices. Investments are encouraged in
entities that support equality of rights regardless of sex, race, age, disability or sexual
orientation. All corporate securities within the portfolio will be monitored by an independent
third-party who will provide the Town with an ESG (Environmental, Social Responsibility, and
Governance) rating. The Town will prefer companies when appropriate that maintain a higher
ESG rating as opposed to those companies that have a lower ESG Rating.
(2) Community Investments
Investments are encouraged in entities that promote community economic development, and
investments are discouraged in entities that finance high-cost check-cashing and deferred
deposit (payday-lending) businesses. Investments are encouraged in entities that have a
demonstrated involvement in the development or rehabilitation of low-income affordable
housing and have a demonstrated commitment to reducing predatory mortgage lending and
increasing the responsible servicing of mortgage loans. Securities investments are encouraged
in financial institutions that have a Community Reinvestment Act (CRA) rating of either
Satisfactory or Outstanding, as well as financial institutions that are designated as a Community
Development Financial Institution (CDFI) by the United States Treasury Department, or
otherwise demonstrate commitment to community economic development.
AUTHORIZED SECURITIES AND TRANSACTIONS
All investments and deposits of the Town shall be made in accordance with California
Government Code Sections 16429.1, 53600-53609 and 53630-53686, except that pursuant to
California Government Code Section 5903(e), proceeds of bonds and any moneys set aside or
pledged to secure payment of the bonds may be invested in securities or obligations described
in the ordinance, resolution, indenture, agreement, or other instrument providing for the
issuance of the bonds. Any revisions or extensions of these code sections will be assumed to be
part of this Investment Policy immediately upon being enacted. However, in the event that
amendments to these sections conflict with this Investment Policy and past Town investment
practices, the Town may delay adherence to the new requirements when it is deemed in the
best interest of the Town to do so. In such instances, after consultation with the Town’s
attorney, the Treasurer will present a recommended course of action to the Town Council for
approval. All investment limits specified in the Policy are calculated at the time of investment.
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The Town has further restricted the eligible types of securities and transactions as follows:
1. United States Treasury bills, notes, bonds, or certificates with a final maturity not exceeding
five years from the date of trade settlement.
2. Federal Agency Obligations for which the faith and credit of the United States are pledged
for the payment of principal and interest and which have a final maturity not exceeding five
years from the date of trade settlement. There is no limit on the percentage of the
portfolio that can be invested in this category, however, no more than 20% of the town’s
total portfolio shall be invested in the combination of Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home
Loan Mortgage Corporation (FHLMC) mortgage-backed securities.
3. Federal Instrumentality (government sponsored enterprise) debentures, discount notes,
callable securities, step-up securities, and mortgage-backed securities (including FNMA and
FHLMC) with a final maturity not exceeding five years from the date of trade settlement.
There is no limit on the percentage of the portfolio that can be invested in this category,
however, no more than 20% of the town’s total portfolio shall be invested in the
combination of GNMA, FNMA, and FHLMC mortgage-backed securities.
4. Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade
settlement with the highest ranking or of the highest letter and number rating as provided
for by a nationally recognized statistical-rating organization (NRSRO). The entity that issues
the commercial paper shall meet all of the following conditions in either sub-paragraph A.
or sub-paragraph B. below:
A. The entity shall (1) be organized and operating in the United States as a
general corporation, (2) have total assets in excess of five hundred million dollars
($500,000,000) and (3) Have debt other than commercial paper, if any, that is
rated “A” or higher by a NRSRO.
B. The entity shall (1) be organized within the United States as a special purpose
corporation, trust, or limited liability company, (2) have program wide credit
enhancements, including, but not limited to, over collateralization, letters of
credit or surety bond and (3) have commercial paper that is rated “A-1” or
higher, or the equivalent, by a NRSRO.
Purchases of eligible commercial paper shall not exceed:
• 10% of the outstanding commercial paper of any single corporate issuer,
• 5% of the Town’s total portfolio in the commercial paper of any one issuer, and
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• 25% of the Town’s total portfolio.
5. Eligible Bankers Acceptances with a maturity not exceeding 180 days from the date of trade
settlement, issued by a state or national bank with combined capital and surplus of at least
$250 million, whose deposits are insured by the FDIC, and whose senior long-term debt is
rated at least A or the equivalent by a NRSRO at the time of purchase. No more than 5% of
the Town’s total portfolio shall be invested in banker’s acceptances of any one issuer, and
the aggregate investment in banker’s acceptances shall not exceed 30% of the Town’s total
portfolio.
6. Medium Term Notes (Corporate Notes) issued by corporations organized and operating
within the United States or by depository institutions licensed by the United States or any
state and operating within the United States, with a final maturity not exceeding five years
from the date of trade settlement and rated at least “A” or the equivalent by a NRSRO. No
more than 5% of the Town’s total portfolio shall be invested in the medium-term notes of
any one issuer and the aggregate investment in medium term notes shall not exceed 30% of
the Town’s total portfolio.
7. Municipal & State Obligations:
A. Municipal bonds including registered notes or bonds of any of the 50 states, including
bonds payable solely out of the revenues from a revenue-producing property owned,
controlled, or operated by a state or by a department, board, agency, or authority of
any of the 50 states.
B. In addition, bonds, notes, warrants, or other evidences of indebtedness of any local
agency in California, including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, operated by the local agency, or by a
department, board, agency, or authority of the local agency.
Municipal bonds must be rated at least “A” or the equivalent by a NRSRO with maturities
not exceeding five years from the date of the trade settlement. No more than 5% of the
Town’s total portfolio shall be invested in “A” rated bonds or in the bonds of any one
municipality. In addition, the aggregate investment in municipal bonds may not exceed
30% of the total portfolio.
8. Certificates of Deposit with a final maturity not exceeding five years from the date of trade
settlement. The aggregate investment in certificates of deposit shall not exceed 30% of the
Town’s portfolio, and no more than 5% of the portfolio shall be held in any one deposit or
allocated to any one issuer. Certificates of Deposit shall be issued by a nationally or state-
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chartered bank or a state or federal savings and loan association or by a state-licensed
branch of a foreign bank or by a federally licensed branch of a foreign bank provided that
the senior debt obligations of the issuing institution are rated at least “A” or the equivalent
by a NRSRO.
Negotiable certificates of deposit issued by a nationally or state-chartered bank, or by a
federally licensed or state-licensed branch of a foreign bank. Purchases of negotiable
certificates of deposits are subject to the limitations of Section 53601(i), shall be fully
insured by the FDIC with a corresponding FDIC certification number, and shall be delivered
through the Depository Trust Company.
Non-Negotiable certificates of deposit issued by a nationally or state-chartered bank, or by
a federally licensed or state-licensed branch of a foreign bank. Purchases of non-negotiable
certificates of deposit are subject to the limitations of Sections 53601(n) and 53638 and
shall be fully insured by the FDIC with a corresponding FDIC certification number.
Private sector entities may be used to place certificates of deposit subject to the limitations
of Section 53601.8.
9. State of California’s Local Agency Investment Fund (LAIF), pursuant to California
Government Code Section 16429.1. The aggregate amount invested in LAIF shall not exceed
the maximum allowed by the fund.
10. Money Market Funds registered under the Investment Company Act of 1940 that (1) are
“no-load” (meaning no commission or fee shall be charged on purchases or sales of shares);
(2) have a constant net asset value per share of $1.00; (3) invest only in government
securities, and (4) have a rating of at least AAA or the equivalent by at least two NRSROs.
No more than 10% of the Town’s total portfolio shall be invested in money market funds of
any one issuer, and the aggregate investment in money market funds shall not exceed 20%
of the Town’s total portfolio.
Securities that have been downgraded to a level that is below the minimum ratings described
herein may be sold or held at the Town’s discretion. The portfolio will be brought back into
compliance with Investment Policy guidelines as soon as is practical.
The foregoing list of authorized securities and transactions shall be strictly interpreted. Any
deviation from it must be preapproved by resolution of the Town Council.
PORTFOLIO MATURITIES AND LIQUIDITY
To the extent possible, investments shall be matched with anticipated cash flow requirements and
known future liabilities. The Town will not invest in securities maturing more than five years from the
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date of trade settlement, unless the Town Council has by resolution granted authority to make such an
investment at least three months prior to the date of investment.
SELECTION OF BROKER/DEALERS
The Treasurer shall maintain a list of broker/dealers approved for investment purposes, and it
shall be the policy of the Town to purchase securities only from those authorized firms. To be
eligible, a firm must meet at least one of the following criteria:
• Be recognized as a Primary Dealer by the Federal Reserve Bank of New York or have a
primary dealer within their holding company structure; or
• Report voluntarily to the Federal Reserve Bank of New York; or
• Qualify under Securities and Exchange Commission (SEC) Rule 15c3-1 (Uniform Net Capital
Rule).
In addition, authorized broker/dealers must be licensed by the State of California as a
broker/dealer as defined in Section 25004 of the California Corporations Code.
The Town may engage the services of investment advisory firms to assist in the management of
the portfolio and investment advisors may utilize their own list of approved broker/dealers.
Such broker/dealers will comply with the selection criteria above and the list of approved firms
shall be provided to the Town on an annual basis or upon request.
In the event that an external investment advisor is not used in the process of recommending a
particular transaction in the Town’s portfolio, authorized broker/dealers shall attest in writing
that they have received and reviewed a copy of the this Investment Policy and shall be required
to submit and annually update a Town approved Broker/Dealer Information request form,
which includes the firm’s most recent financial statements.
The Town may purchase commercial paper from direct issuers even though they are not on the
approved broker/dealer list as long as they meet the criteria outlined in Item 4 of the
Authorized Securities and Transactions section of this Investment Policy.
COMPETITIVE TRANSACTIONS
Each investment transaction shall be competitively transacted with authorized broker/dealers.
At least three broker/dealers shall be contacted for each transaction and their bid and offering
prices shall be recorded.
If the Town is offered a security for which there is no other readily available competitive
offering, the Treasurer will document quotations for comparable or alternative securities.
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INVESTMENT POLICY
SELECTION OF BANKS
The Treasurer shall maintain a list of banks and savings banks approved to provide banking
services for the Town. To be eligible, a bank must be a member of the Federal Deposit
Insurance Corporation, must qualify as a depository of public funds in the State of California as
defined in California Government Code Section 53630.5 and shall secure deposits in excess of
FDIC coverage in accordance with California Government Code Section 53652.
Authorized banks that accept deposits from the Town shall meet high standards with regard to
liquidity, asset quality, profitability and capital adequacy. The Treasurer shall utilize a
commercial bank rating service to perform credit analysis on banks seeking authorization.
Banks that in the judgment of the Treasurer no longer offer adequate safety to the Town shall
be removed from the Town’s list of authorized banks.
SAFEKEEPING AND CUSTODY
The Treasurer shall select one or more financial institutions to provide safekeeping and
custodial services for the Town. A Safekeeping Agreement shall be executed with each
custodian bank prior to utilizing that bank's safekeeping services.
Custodian banks will be selected on the basis of their ability to provide services for the Town's
account and the competitive pricing of their safekeeping related services.
The purchase and sale of securities and repurchase agreement transactions shall be settled on a
delivery versus payment basis. All securities shall be perfected in the name of the Town.
Sufficient evidence to title shall be consistent with modern investment, banking and
commercial practices.
All investment securities, purchased by the Town, will be delivered by book entry and will be
held in third-party safekeeping by a Town approved custodian bank or its Depository Trust
Company (DTC) participant account.
All Fed wireable book entry securities owned by the Town shall be held in the Federal Reserve
System in a customer account for the custodian bank which will name the Town as “customer.”
All DTC eligible securities shall be held in the custodian bank’s DTC participant account and the
custodian bank shall provide evidence that the securities are held for the Town as “customer.”
PORTFOLIO PERFORMANCE
The investment portfolio shall be designed to attain a market rate of return throughout
budgetary and economic cycles, taking into account prevailing market conditions, risk
constraints for eligible securities, and cash flow requirements. The performance of the Town’s
investments shall be compared to the average yield on the U.S. Treasury security that most
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INVESTMENT POLICY
closely corresponds to the portfolio’s weighted average effective maturity. When comparing
the performance of the Town’s portfolio, its rate of return will be computed net of all fees and
expenses.
REPORTING
No less than quarterly, the Treasurer shall prepare a report of the investment earnings and
performance results of the Town’s investment portfolio. The report shall be submitted to the
Town Clerk within 45 days after the end of each quarter for inclusion as an agenda item at the
next scheduled Town Council meeting. The report shall include the following information:
1. Investment type, issuer, date of maturity, par value and dollar amount invested in all
securities, and investments and monies held by the Town;
2. A market value as of the date of the report (or the most recent valuation as to assets not
valued monthly) and the source of the valuation;
3. Realized and unrealized gains or losses calculated by amortized cost and by fair value.
4. The weighted average maturity of the portfolio and a percentage breakdown of the total
portfolio by maturity.
5. A description of the funds, investments and programs that are under the management of
contracted parties;
6. A statement of compliance with this Investment Policy or an explanation for non-
compliance; and
7. A statement of the ability to meet expenditure requirements for the next six months, and
an explanation of why money will not be available if that is the case.
PROCEDURES
This Investment Policy shall be adopted by resolution of the Town Council. Annually the Town
Manger shall present this Investment Policy to the Town Council for review to ensure its
consistency with the Town’s investment objectives, current law and economic trends. Any
amendments to this Investment Policy shall be approved by the Town Council.
/S/ Robert Schultz, Town Attorney
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IRS SECTION 115 PENSION TRUST AND OPEB
TRUST INVESTMENT POLICY
COUNCIL POLICY MANUAL TITLE: Town of Los Gatos IRS Section 115 Pension Trust and OPEB Trust Investment Policy POLICY NUMBER: 4-04 EFFECTIVE DATE: 11/7/17 PAGES: 3 ENABLING ACTIONS: 2017-062 REVISED DATES: 12/18/2018; 12/03/2019 APPROVED:
PURPOSE
The Town of Los Gatos (the "Town") has established IRS Section 115 Trusts for both pension
and other post-employment benefits (OPEB). The Pension Trust is administered by the CalPERS
California Employers’ Pension Prefunding Trust (the “CEPPT”) and the OPEB trust is
administered by the California Employers’ Retiree Benefit Trust (the “CERBT”), collectively the
“115 Trusts”. The 115 Trusts provide for funding of pension, retiree health and other post-
employment benefits for the City's eligible retirees. The CEPPT acts as an additional investment
vehicle for the overall funding of pension liabilities associated with the Town’s Miscellaneous
and Safety Pension Plans (the “Pension Plans”). Funds in the 115 Pension Trust may be used for
long-term capital accumulation and appreciation, additional discretionary payments (ADPs),
and pension contribution management strategies. The CERBT is the single investment vehicle
for the Town’s OPEB Plan (“OPEB Plan”). The Town has established the 115 Trusts Oversight
Committee (the “Oversight Committee") to oversee the assets of the 115 Trusts and to perform
the duties and responsibilities set forth in this Investment Policy (IP).
COMPOSITION
The membership of the Oversight Committee is composed of the entire Town Council.
FIDUCIARY DUTIES AND RESPONSIBILITIES
1. The Oversight Committee has exclusive control of the investments of the 115 Trusts.
The Oversight Committee will manage the funds under the Trusts:
Small Town Service Community Stewardship Future Focus
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IRS SECTION 115 PENSION TRUST AND OPEB TRUST INVESTMENT POLICY
a) solely in the interest of, and for the exclusive purposes of providing for
funding of benefits for participants and their beneficiaries, minimizing employer
contributions thereto, and defraying reasonable expenses of administering the
Trusts;
b) with the care, skill, prudence and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity and familiar with these
matters would use in the conduct of an enterprise of a like character and with
like aims; and
c) by diversifying the investments of the Trusts so as to minimize the risk of loss
and to maximize the rate of return, unless under the circumstances it is clearly
prudent not to do so.
2. The work of the Oversight Committee shall be consistent with written statement of
Investment Policy (i.e., this Investment Policy for the Trusts). At least once every three
years, the Oversight Committee will evaluate the appropriateness of the Investment
Policy and, based on such evaluation, either confirm the tenets of the Investment Policy
as then in effect, or amend the 115 Trusts Investment Policy as appropriate. The
Investment Policy must include the following:
a) document investment objectives, performance expectations and investment
guidelines for assets under the Trusts;
b) establish an appropriate investment strategy for managing all assets under
the Trusts, including an investment time horizon, risk tolerance ranges and asset
allocation to provide sufficient diversification and overall return over the long-
term time horizon of the Trusts; and
d) establish periodic performance reporting requirements that will effectively
monitor investment results and ensure that the investment policy is being
followed.
INVESTMENT OBJECTIVES
1. The primary objective of the 115 Trusts investment portfolios is to satisfy the Pension
Plans and OPEB Plan obligations to pay benefits to members and their beneficiaries. To
do so, the 115 Trusts will seek to achieve long-term net returns in excess of the actuarial
investment return assumption while maintaining a reasonable level of investment risk.
2. The funds will be managed as an ongoing concern with a long-term investment horizon,
consistent with demographic profile of the members and beneficiaries of the plans.
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IRS SECTION 115 PENSION TRUST AND OPEB TRUST INVESTMENT POLICY
3. A range of risks will be managed in connection with the trusts, with an emphasis on the
following:
a) The impact of the investment decisions on the funded status of the plans and
the resulting volatility of contributions.
b) Risk of loss of plan assets.
4. In determining the investment strategies of the 115 Trusts, various factors will be
considered including, but not limited to:
a) The structure and duration of the Pension Plans and OPEB Plan liabilities.
b) Modern Portfolio Theory.
c) The liquidity needs of Pension Plans and OPEB Plan.
INVESTMENT STRATEGY/ASSET ALLOCATION
The Oversight Committee has delegated the investment management function to third parties.
These third parties offer multiple asset allocation options with varying degrees of risk return
profiles. The Oversight Committee has the sole discretion to select the asset allocation which
best aligns with the aforementioned fiduciary standards and investment objectives.
The Oversight Committee will review the selected asset allocations annually. However, the
Oversight Committee can review the current asset allocation selections at any time in light of
market conditions.
MONITORING AND REPORTING
1. Monitor the 115 Trusts investment managers on an ongoing basis and may be
terminated by Oversight Committee at any time due to performance or other
developments that call into question the investment manager’s ability to continue to
effectively manage assets of the 115 Trusts.
2. Review and assess the performance of any Investment Manager(s) appointed by the
Oversight Committee to perform services related to the Trusts quarterly.
3. Measure and evaluate the annual and quarterly performance of investment managers
relative to appropriate long-term performance benchmark.
4. Measure and evaluate annual and quarterly fees.
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IRS SECTION 115 PENSION TRUST AND OPEB TRUST INVESTMENT POLICY
5. Review quarterly cash flow statements associated with the Trusts.
6. Review the actuarial pension evaluation annually.
7. Review the actuarial OPEB evaluation biennially.
8. Monitor compliance with this Investment Policy for the Trusts.
/S/ Robert Schultz, Town Attorney