Loading...
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 A - 36  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, A - 37  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; A - 38  GENERAL FUND RESERVE POLICY   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. A - 39  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. A - 40  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 A - 41 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 A - 42  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. A - 43  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 A - 44 A - 45 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 A - 46  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. A - 47  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. A - 48  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. A - 49  INVESTMENT POLICY  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 A - 50  INVESTMENT POLICY  • 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- A - 51  INVESTMENT POLICY  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 A - 52  INVESTMENT POLICY  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. A - 53  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 A - 54  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 A - 55 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 A - 56  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. A - 57  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. A - 58  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